<PAGE>
As filed with the Securities and Exchange Commission on June 2, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------
Downey Financial Corp. Downey Financial Capital Trust I
(Exact name of registrant as (Exact name of co-registrant as
specified in its charter) specified in its charter)
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
33-0633413 33-0858330
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
3501 Jamboree Road 3501 Jamboree Road
Newport Beach, California 92660 Newport Beach, California 92660 (949)
(949) 854-0300 854-0300
(Address, including zip code, and (Address, including zip code, and
telephone number, including area telephone number, including area
code, of registrant's principal code, of co-registrant's principal
executive office) executive office)
DANIEL D. ROSENTHAL
President and Chief Executive Officer
---------------
Downey Financial Corp.
3501 Jamboree Road
Newport Beach, California 92660
(949) 854-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
T. HALE BOGGS, ESQ. ERIC S. HAUETER, ESQ.
Manatt, Phelps & Phillips, LLP Brown & Wood LLP
70 Willow Road 555 California Street
Menlo Park, California 94025 San Francisco, California 94104
Telephone: (650) 566-3510 Telephone: (415) 772-1200
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Offering Registration
Securities to be Registered Registered Per Unit (1) Price Fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Securities of Downey Financial 4,000,000
Capital Trust I.......................... shares $25 $100,000,000 $27,800
- ------------------------------------------------------------------------------------------------------------
Junior Subordinated Debentures of Downey
Financial Corp. (2)...................... -- -- -- --
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Guarantee of Downey Financial Corp. with
respect to Capital Securities (3)........ -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Total (4)................................. 4,000,000
shares $25 $100,000,000 $27,800
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(2) The junior subordinated debentures will be purchased by Downey Financial
Capital Trust I with the proceeds from the sale of the capital securities.
These securities may later be distributed for no additional consideration
to the holders of the capital securities of Downey Financial Capital Trust
I under specific circumstances.
(3) No separate consideration will be received for the Downey Financial Corp.
guarantee.
(4) This Registration Statement is deemed to cover the junior subordinated
debentures of Downey Financial Corp., the rights of holders of junior
subordinated debentures of Downey Financial Corp. under the indenture, the
rights of holders of capital securities of Downey Financial Capital Trust
I under the trust agreement and the rights of holders of the capital
securities under the guarantee agreement entered into by Downey Financial
Corp. and specific backup undertakings as described herein, which taken
together, fully, irrevocably and unconditionally guarantee all of the
obligations of Downey Financial Capital Trust I under the capital
securities.
Downey Financial Corp. and Downey Financial Capital Trust I hereby amend
this registration statement on such date or dates as may be necessary to delay
its effective date until they shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or
until the registration statement shall become effective on such date as the
SEC, acting pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. Downey +
+Financial Corp., the trust and the underwriters may not sell these securities +
+until the registration statement filed with the Securities and Exchange +
+Commission is effective. This prospectus is not an offer to sell these +
+securities and it is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued June 2, 1999
$100,000,000
Downey Financial Capital Trust I
% CAPITAL SECURITIES
-----------
guaranteed, to the extent described herein, by
Downey Financial Corp.
-----------
Downey Financial Capital Trust I is offering capital securities that Downey
Financial Corp. will fully and unconditionally guarantee, to the extent
described herein, based on its obligations under a guarantee, a trust
agreement and an indenture.
-----------
We will apply to list the capital securities on the New York Stock
Exchange under the symbol "DSLPr." If approved for listing, we expect
that trading of the capital securities on the New York Stock
Exchange will commence within 30 days after initial
delivery of the capital securities.
-----------
Investing in the capital securities involves risks. See "Risk Factors"
beginning on page 16.
-----------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Discounts and Downey Financial
Price to Public Commissions Capital Trust I
--------------- ------------- ----------------
<S> <C> <C> <C>
Per Capital Security............. $ 25.00 $ $
Total............................ $100,000,000 $ $
</TABLE>
Because the trust will use all of the proceeds from the sale of the capital
securities to purchase junior subordinated debentures of Downey Financial
Corp., Downey Financial Corp. will pay all underwriting discounts and
commissions. If you purchase capital securities after , 1999, you should
add any accumulated distributions from that date to the Price to Public.
These securities are not deposits or other obligations of a bank and are not
insured by the Federal Deposit Insurance Corporation or any other government
agency.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the capital securities to purchasers on
, 1999.
-----------
MORGAN STANLEY DEAN WITTER
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
A WARNING ABOUT FORWARD-LOOKING INFORMATION.............................. 3
WHERE YOU CAN FIND MORE INFORMATION...................................... 4
DOCUMENTS INCORPORATED BY REFERENCE...................................... 4
PROSPECTUS SUMMARY....................................................... 5
RISK FACTORS............................................................. 16
USE OF PROCEEDS.......................................................... 27
CAPITALIZATION........................................................... 27
ACCOUNTING TREATMENT..................................................... 28
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 31
BUSINESS................................................................. 86
DESCRIPTION OF THE CAPITAL SECURITIES.................................... 107
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES............................ 124
BOOK-ENTRY ISSUANCE...................................................... 136
DESCRIPTION OF GUARANTEE................................................. 139
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE GUARANTEE............................................ 141
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. 143
CERTAIN ERISA CONSIDERATIONS............................................. 148
UNDERWRITERS............................................................. 149
LEGAL MATTERS............................................................ 150
EXPERTS.................................................................. 150
</TABLE>
2
<PAGE>
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Downey Financial Corp. and Downey Financial Capital Trust I have each made
forward-looking statements in this prospectus, and in documents that are
incorporated by reference in this prospectus, that are subject to risks and
uncertainties. These statements are based on the beliefs and assumptions of
management and on information currently available to management. Forward-
looking statements include the information concerning possible or assumed
future operating results and financial condition appearing under "Prospectus
Summary," "Risk Factors," "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and statements preceded by,
followed by or that include the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions. Although we believe
that our expectations are based on reasonable assumptions, actual results may
differ materially from our expectations. Factors that could cause actual
results to differ from expectations include those described under "Risk
Factors" and the following:
. General economic or business conditions, either nationally or in
California, may be less favorable than expected, resulting in, among
other things, a deterioration in credit quality or a reduced demand for
credit;
. Because our business is concentrated in California, changes in the
economic conditions of the California market could adversely affect our
operations;
. Changes in the interest rate environment could adversely affect our
banking and real estate investment activities;
. Regulatory changes could have adverse effects on the financial services
industry;
. Competitive pressures among depository and other financial institutions
may increase significantly;
. Our competitors may have greater financial resources that enable them to
compete more successfully than we can;
. Federal monetary policy changes could have adverse effects on the
financial services industry;
. We could experience greater than anticipated losses on our loans because
borrowers, guarantors and related parties may fail to perform in
accordance with the terms of their loans; or
. Potential year 2000 noncompliance by our third party vendors and service
providers, including governmental entities, may impact our efforts to
successfully complete year 2000 compliance for all systems in a timely
fashion.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Actual results may differ from
expectations due to many factors beyond our ability to control or predict,
including those described above and under "Risk Factors." For these
statements, Downey Financial Corp. and Downey Financial Capital Trust I claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
You should rely only on the information contained and incorporated by
reference in this prospectus. We have not authorized anyone to provide you
with information different from that contained or incorporated by reference in
this prospectus. Downey Financial Capital Trust I is offering to sell its
capital securities and seeking offers to buy its capital securities only in
jurisdictions where offers and sales are permitted. The information contained
and incorporated by reference in this prospectus is accurate only as of the
date of this prospectus or the date of the document incorporated by reference,
as the case may be, regardless of the time of delivery of this prospectus or
any sale of the capital securities. In this prospectus, "Downey," "we," "us"
and "our" refer to Downey Financial Corp. and its consolidated subsidiaries
unless otherwise expressly stated or the context otherwise requires, and
"trust" refers to Downey Financial Capital Trust I.
3
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and proxy statements and other
information with the SEC. You may read and copy any document which Downey
Financial Corp. files at the SEC's public reference rooms in Washington, D.C.,
Chicago, Illinois and New York, New York. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference rooms. Our filings with
the SEC are also available to the public over the Internet at a World Wide Web
site maintained by the SEC at http://www.sec.gov. In addition, you may inspect
our reports, proxy statements and other information at the offices of the New
York Stock Exchange.
Downey Financial Corp. and the trust have jointly filed with the SEC a
Registration Statement on Form S-3 under the Securities Act with respect to
the securities offered by this prospectus. This prospectus, which constitutes
a part of the Registration Statement, does not contain all of the information
shown in the Registration Statement. For further information with respect to
Downey Financial Corp., the trust and the securities offered by this
prospectus, reference is made to the Registration Statement and the exhibits
thereto which you may inspect at the public reference facilities of the SEC,
at the address shown above, or through the SEC's Web site.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the
documents listed below and any future filings made by us with the SEC which we
may make under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 until we sell all of the securities offered hereby:
. Annual Report on Form 10-K for the year ended December 31, 1998; and
. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
You may request a copy of these incorporated filings, without charge,
excluding all exhibits unless specifically incorporated by reference as an
exhibit to this prospectus. You may request copies by writing or telephoning
Downey Financial Corp., 3501 Jamboree Road, Newport Beach, California 92660,
Attention: Corporate Secretary, telephone (949) 854-0300.
This prospectus does not contain or incorporate by reference any separate
financial statements of the trust. We do not consider that financial
statements of the trust are material to holders of the capital securities
because the trust is a newly formed special purpose entity, has no operating
history or independent operations and is not engaged in and does not propose
to engage in any activity other than holding the junior subordinated
debentures of Downey Financial Corp. and issuing the capital securities and
the common securities. For more information, see the information under the
captions "Prospectus Summary--Downey Financial Capital Trust I," "Description
of the Capital Securities," "Description of Junior Subordinated Debentures"
and "Description of Guarantee." In addition, we do not expect that the trust
will be filing reports under the Securities Exchange Act of 1934 with the SEC.
4
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus. It may not
contain all the information that is important to you. You should carefully read
this entire prospectus, as well as the documents incorporated by reference in
this prospectus, before making a decision about whether to invest in the
capital securities. You should pay special attention to the "Risk Factors" to
determine whether an investment in the capital securities is appropriate for
you.
Downey Financial Corp.
Downey is a California-based savings and loan holding company. Our principal
subsidiary is Downey Savings and Loan Association F.A., which we refer to as
the "Bank." The Bank:
. is one of the largest financial institutions headquartered in Southern
California, based on total assets;
. was formed in 1957 as a California-licensed savings and loan and
converted to a federal charter in 1995;
. at March 31, 1999, operated through more than 95 retail branches,
including 33 full-service in-store branches in California, and two loan
origination offices outside of California, one each in Arizona and
Washington; and
. experienced the best year in its 42-year history in 1998, with record
net income of $58 million and record loan production of $4.1 billion.
For the year ended December 31, 1998, we had:
. net income of $58 million, or $2.05 per share on a diluted basis, an
increase of 28% from 1997;
. asset growth of $435 million, to $6.3 billion; and
. non-performing assets of $27 million, or 0.44% of total assets, at
December 31, 1998, down from $52 million, or 0.89% of total assets, at
December 31, 1997.
At March 31, 1999, we had:
. total assets of $6.6 billion;
. total deposits of $5.2 billion; and
. total stockholders' equity of $490 million.
Banking Activities
Our primary business is banking. Our banking activities focus on:
. the origination of loans, primarily loans secured by single family
residential properties, which are either retained in our portfolio or
sold in the secondary market;
. the attraction of low-cost deposits through our retail branches;
. providing exceptional customer service; and
. providing innovative new products and services, including an increasing
focus on products offered over the Internet and on-line banking.
5
<PAGE>
The types of loans we offer include:
. adjustable rate residential mortgage loans, with rates tied primarily to
the Eleventh District Cost of Funds Index, including "subprime" loans
which carry higher interest rates;
. fixed rate residential mortgage loans;
. commercial real estate loans, including loans secured by retail
neighborhood shopping centers;
. construction loans; and
. automobile loans, through both a direct lending program and an indirect
program through preapproved auto dealers to finance customer purchases
of new and used automobiles.
We also invest in various securities--primarily short-term obligations--to
satisfy bank regulations regarding minimum levels of liquid assets.
Real Estate Investment Activities
Downey is also involved in real estate investment, which is conducted
primarily through the Bank's subsidiary, DSL Service Company. Activities
include development, construction and property management relating to our
portfolio of projects primarily within California but also in Arizona. Because
of regulatory restrictions that have been placed on real estate investment
activities, we have reduced the amount of this business in recent years. Net
income from our real estate investment and real estate joint venture activities
was $11 million in 1998.
Operating Strategy
Our operating strategy is to:
. capitalize on our strong position in our core California market and
expand our Internet business;
. broaden our new product offerings and services, including an increasing
focus on higher yielding auto and subprime residential loans;
. maintain our high lending standards and strong asset quality;
. continue to strengthen our retail franchise, including the establishment
of additional in-store branches;
. continue to focus on attracting low cost deposits from our retail
customer base;
. maintain the high quality of our service to depositors and borrowers;
and
. improve our operating efficiency.
Our principal executive offices are located at 3501 Jamboree Road, Newport
Beach, California, 92660, and our telephone number is (949) 854-0300. Our Web
site is www.downeysavings.com.
6
<PAGE>
Downey Financial Capital Trust I
The trust is a business trust formed under Delaware law, which has been
established solely for the following purposes:
. to issue and sell its capital securities to the public, which represent
an undivided beneficial interest in the assets of the trust;
. to issue and sell its common securities to Downey in a total liquidation
amount equal to at least 3% of the total capital of the trust;
. to use the proceeds from the sale of its common securities and capital
securities to acquire junior subordinated debentures from Downey; and
. to engage in other activities that are directly related to the
activities listed above.
Because the trust has been established only for the purposes listed above,
the junior subordinated debentures will be the sole assets of the trust, and
payments on the junior subordinated debentures will be the sole source of
income to the trust. There are five trustees of the trust. Three of them, the
administrative trustees, are officers of Downey. Wilmington Trust Company will
act as the property trustee of the trust and will also act as the Delaware
trustee of the trust.
The common securities will have terms substantially identical to and will
rank equal, and payments will be made thereon pro rata, with the capital
securities. However, if Downey defaults on the junior subordinated debentures,
then cash distributions and liquidation, redemption and other amounts payable
on the common securities will be subordinate to the capital securities in
priority of payment.
The trust has a term of 31 years, but may terminate earlier if specific
conditions are met. The trust's principal offices are located at 3501 Jamboree
Road, Newport Beach, California 92660, and its telephone number is (949) 854-
0300.
7
<PAGE>
Summary Consolidated Financial Data
The following summary presents our selected consolidated financial data as
follows:
. the financial data as of and for the three months ended March 31, 1999
and 1998 has been derived from our unaudited consolidated quarterly
financial statements which, in the opinion of management, include all
adjustments, consisting of only normal, recurring adjustments,
considered necessary for a fair presentation; and
. the financial data as of, and for the years ended, December 31, 1998,
1997, 1996, 1995 and 1994 has been derived from our audited consolidated
financial statements.
You should read the summary selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this prospectus and our
consolidated financial statements and related notes incorporated in this
prospectus by reference. The summary selected consolidated financial data for
the three months ended March 31, 1999 is not necessarily indicative of our
operating results or financial condition to be expected for any future period.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
--------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income... $ 113,894 $ 109,723 $ 440,404 $ 420,418 $ 346,360 $ 318,828 $ 228,970
Total interest expense.. 64,938 67,097 266,057 266,260 211,765 214,238 122,601
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 48,956 42,626 174,347 154,158 134,595 104,590 106,369
Provision for loan
losses................. 2,381 272 3,899 8,640 9,137 9,293 4,211
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 46,575 42,354 170,448 145,518 125,458 95,297 102,158
---------- ---------- ---------- ---------- ---------- ---------- ----------
Other income, net:
Loan and deposit
related fees.......... 4,448 3,169 15,645 10,921 7,435 5,546 5,310
Real estate and joint
ventures held for
investment, net....... 1,165 9,515 22,363 14,222 8,241 11,192 9,530
Net gains (losses) on
sales of:
Loans and mortgage-
backed securities..... 3,987 872 6,462 2,675 1,543 266 114
Investment securities.. 97 68 68 -- 4,473 (15) --
(Provision for)
reduction of loss on
investment in lease
residual.............. -- -- -- -- -- 207 (920)
Other.................. 1,645 1,302 2,815 7,370 3,507 3,403 3,703
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income,
net................... 11,342 14,926 47,353 35,188 25,199 20,599 17,737
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expense:
General and
administrative
expense............... 36,249 26,210 115,890 99,556 86,460 74,470 75,566
SAIF special assessment
(1)................... -- -- -- -- 24,644 -- --
Net operation of real
estate acquired in
settlement of loans... 90 255 260 1,184 2,567 4,206 3,595
Amortization of excess
of cost over fair
value of net assets
acquired.............. 118 132 510 532 532 530 532
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expense............... 36,457 26,597 116,660 101,272 114,203 79,206 79,693
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (1).......... $ 12,348 $ 17,565 $ 57,973 $ 45,234 $ 20,704 $ 21,093 $ 23,532
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Earnings per share--
Basic (1).............. $ 0.44 $ 0.63 $ 2.06 $ 1.61 $ 0.74 $ 0.75 $ 0.84
Earnings per share--
Diluted (1)............ 0.44 0.62 2.05 1.61 0.74 0.75 0.84
Book value per share at
end of period.......... 17.42 15.88 17.08 15.32 13.95 13.68 13.05
Stock price at end of
period................. 18.31 30.83 25.44 27.08 17.80 13.16 8.70
Cash dividends paid..... 0.080 0.076 0.316 0.301 0.290 0.276 0.276
SELECTED FINANCIAL
RATIOS:
Effective interest rate
spread................. 3.23% 3.04% 3.08% 2.83% 2.96% 2.35% 3.02%
Return on average assets
(1).................... 0.78 1.20 0.98 0.79 0.43 0.45 0.62
Return on average equity
(1).................... 10.20 16.13 12.71 11.07 5.33 5.69 6.56
Dividend payout ratio... 18.23 12.19 15.33 18.69 39.35 36.78 33.97
Ratios of earnings to
fixed charges (2):
Excluding interest on
deposits (1)........... 3.19x 5.79x 6.22x 2.96x 2.39x 2.15x 4.11x
Including interest on
deposits (1)........... 1.33x 1.41x 1.36x 1.29x 1.18x 1.18x 1.33x
LOAN ACTIVITY:
Loans originated........ $1,554,924 $ 543,893 $4,071,262 $2,329,266 $1,583,784 $ 637,490 $1,810,096
Loans and mortgage-
backed securities
purchased.............. 302 2,729 7,463 35,828 30,296 44,194 196,255
Loans and mortgage-
backed securities
sold................... 776,518 118,897 1,740,416 557,511 166,503 102,097 45,770
BALANCE SHEET DATA
(END OF PERIOD):
Total assets............ $6,594,092 $5,871,913 $6,270,419 $5,835,825 $5,198,157 $4,656,267 $4,650,651
Total loans and
mortgage-backed
securities............. 6,102,547 5,400,194 5,788,365 5,366,396 4,729,846 4,169,474 4,188,539
Investments and cash
equivalents............ 211,949 213,966 215,086 221,201 222,255 237,904 215,960
Deposits................ 5,205,282 5,108,822 5,039,733 4,869,978 4,173,102 3,790,221 3,557,398
Borrowings.............. 851,315 267,083 703,720 483,735 595,345 436,218 674,776
Stockholders' equity.... 490,406 446,086 480,566 430,346 391,571 384,072 366,187
Loans serviced for
others................. 1,566,677 625,372 1,040,264 612,529 576,044 527,234 468,123
AVERAGE BALANCE
SHEET DATA:
Assets.................. $6,329,170 $5,864,090 $5,918,507 $5,693,869 $4,789,648 $4,717,959 $3,789,709
Loans, net of unearned
income................. 5,818,860 5,313,496 5,345,380 5,174,767 4,269,136 4,175,085 3,241,390
Deposits................ 5,062,152 5,005,049 5,102,045 4,588,320 3,892,981 3,758,948 3,153,777
Stockholders' equity.... 484,108 435,645 456,237 408,473 388,187 370,714 358,748
CAPITAL RATIOS:
Average stockholders'
equity to average
assets................. 7.65% 7.43% 7.71% 7.17% 8.10% 7.86% 9.47%
Bank only--end of period
(3):
Core and tangible
capital............... 6.63 6.83 6.83 6.61 6.56 7.28 7.22
Risk-based capital..... 12.49 12.92 12.88 12.64 12.66 14.25 14.21
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED ASSET QUALITY DATA
(END OF PERIOD):
Non-accrual loans.......... $ 25,085 $ 38,628 $ 22,375 $ 41,699 $ 45,021 $ 78,341 $ 52,037
Other real estate owned and
other foreclosed assets... 5,005 11,102 5,044 10,421 17,006 18,854 13,558
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-performing
assets................... 30,090 49,730 27,419 52,120 62,027 97,195 65,595
Non-performing assets as a
percentage of total
assets.................... 0.46% 0.85% 0.44% 0.89% 1.19% 2.09% 1.41%
Allowance for loan losses:
Amount.................... $ 32,586 $ 31,817 $ 31,517 $ 32,092 $ 30,094 $ 27,943 $ 25,650
As a percentage of non-
performing loans......... 129.90% 82.37% 140.86% 76.96% 66.84% 35.67% 49.29%
</TABLE>
- --------
(1) In 1996, savings associations such as the Bank were assessed a one-time
charge for purposes of recapitalizing the Savings Association Insurance
Fund ("SAIF"). Excluding the SAIF special assessment, 1996 net income would
have been $34.7 million or $1.23 per share on both a basic and diluted
basis, the return on average assets would have been 0.73%, the return on
average equity would have been 8.95%, and the ratio of earnings to fixed
charges would have been 3.28x excluding interest on deposits and 1.30x
including interest on deposits.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income before income taxes, extraordinary items and fixed
charges. Fixed charges represents interest expense, the interest component
of rent expense and capitalized interest.
(3) For more information regarding these ratios, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition for the Quarter Ended March 31, 1999--Regulatory Capital
Compliance" and "--Financial Condition for the Year Ended December 31,
1998--Regulatory Capital Compliance."
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Summary Information Q&A
Q: What are the capital securities?
A: The % capital securities of the trust represent undivided beneficial
interests in the assets of the trust. Each capital security will entitle the
holder to receive cumulative quarterly cash distributions as described below.
The underwriters are offering 4,000,000 shares of capital securities having a
liquidation amount of $25 per share. The capital securities are being offered
at $25 per share plus accumulated distributions, if any, from , 1999.
Q: What are the trust's assets?
A: The trust will sell the capital securities to the public and will sell its
common securities to Downey. The trust will use the proceeds from these sales
to buy a series of % junior subordinated debentures due 2029 from Downey. When
Downey pays interest on the junior subordinated debentures, the trust will pay
distributions on the capital securities at the same rate and at the same times
as Downey pays interest. The trust will use the payments it receives on the
junior subordinated debentures to make the corresponding payments on the
capital securities. Downey will guarantee payments made on the capital
securities to the extent described below.
Q: How will proceeds from the sale of the capital securities be used?
A: The trust will use proceeds from the sale of the capital securities and
common securities to invest in the junior subordinated debentures of Downey.
Downey intends to use the net proceeds from the sale of the junior subordinated
debentures to make investments in the Bank and for other general corporate
purposes.
Q. When will holders of capital securities receive quarterly distributions?
A: Holders of capital securities will be entitled to receive cumulative cash
distributions at the annual rate of % of the liquidation amount of $25 per
capital security. Distributions will accrue from , 1999, the date of
original issuance, and will be paid quarterly in arrears on the 15th day of
March, June, September and December of each year, beginning September 15, 1999,
unless these payments are deferred as described below. The amount of each
quarterly distribution will include amounts accrued to but excluding the date
the distribution payment is due.
Q: When can payment of distributions be deferred?
A: The payment of distributions may be deferred if Downey defers payments of
interest on the junior subordinated debentures. Downey will have the right, on
one or more occasions, to defer payments of interest on the junior subordinated
debentures for up to 20 consecutive quarterly periods. In other words, Downey
may declare up to a five-year interest payment moratorium on the junior
subordinated debentures and may choose to do that on more than one occasion. As
a result, there may be one or more interest deferral periods during the term of
the junior subordinated debentures and the length of those deferral periods may
differ. In addition, if Downey elects to defer payment of interest on the
junior subordinated debentures and if the initial period of the deferral is
less than 20 consecutive quarterly periods, Downey may from time to time extend
that deferral period so long as the original deferral period plus all
extensions does not exceed 20 consecutive quarterly periods. A deferral of
interest payments cannot extend, however, beyond the maturity of the junior
subordinated debentures, even if that maturity date is shortened as described
below. Additionally, Downey cannot begin a new interest deferral period until
it has paid all accrued interest on the junior subordinated debentures from the
previous interest deferral period.
If Downey defers interest payments on the junior subordinated debentures, the
trust will also defer distributions on the capital securities. During the time
Downey defers interest payments, interest on the junior
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<PAGE>
subordinated debentures will continue to accrue and distributions on the
capital securities will continue to accumulate and the deferred interest and
deferred distributions will themselves accrue interest at an annual rate of %,
compounded quarterly, to the extent permitted by applicable law. Once an
interest deferral period terminates and Downey pays all deferred interest
payments on the junior subordinated debentures, with accrued interest, it can
again defer interest payments on the junior subordinated debentures as
described above. For more information, see below under the caption "Description
of the Capital Securities--Distributions--Extension Period" and "Description of
Junior Subordinated Debentures--Option to Defer Interest Payments."
During the time Downey defers interest payments, it will not be permitted,
except as described below, to declare or pay cash distributions on or acquire
its capital stock. Further, Downey may not repurchase less than all of the
junior subordinated debentures and it will not be permitted to make any payment
on or acquire its debt securities that rank equal with or junior to the junior
subordinated debentures. Downey will, however, be permitted to:
. declare or pay any dividend in a form of stock, warrants, options or
other rights where the dividend or the stock issuable upon the exercise
of the warrants, options or other rights is the same stock as that on
which the dividend is being paid or ranks on a parity with or junior to
that stock in right of payment;
. make any declaration of a dividend in connection with the implementation
of a stockholders' rights plan or the issuance of stock under any
stockholders' rights plan in the future, or the redemption or repurchase
of any rights pursuant thereto;
. make payments under the capital securities guarantee, which is described
below; and
. make purchases of common stock related to the issuance of common stock
or rights under any of Downey's benefit plans for its directors,
officers or employees.
If Downey defers payments of interest on the junior subordinated debentures,
the junior subordinated debentures will at that time be treated as being issued
with original issue discount for United States federal income tax purposes.
This means holders of capital securities will be required to accrue income,
even though they will not be receiving any cash distributions on the capital
securities, and include these amounts in their gross income for United States
federal income tax purposes. For more information, see below under the caption
"Description of Junior Subordinated Debentures--Option to Defer Interest
Payments" and "Certain Federal Income Tax Consequences--Interest Income and
Original Issue Discount."
Q: When can the trust redeem the capital securities?
A: The trust's duties to redeem the capital securities depend on Downey's
repayment of the junior subordinated debentures. The trust is required to
redeem all of the outstanding capital securities when the junior subordinated
debentures are repaid at maturity. The junior subordinated debentures are
scheduled to mature on , 2029. However, Downey has the right to shorten the
maturity date to a date not earlier than , 2004.
So long as Downey obtains regulatory approval, if required, Downey can redeem
the junior subordinated debentures before their maturity at a redemption price
of 100% of their principal amount plus accrued and unpaid interest:
. in whole at any time or from time to time in part on or after ,
2004;
. in whole at any time within 90 days after specific special events occur
relating to changes in tax or investment company laws and regulations or
in the treatment of the capital securities for bank regulatory purposes.
These circumstances are more fully described under the caption
"Description of the Capital Securities--Redemption."
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<PAGE>
If Downey redeems any junior subordinated debentures before their maturity,
the trust will use the cash it receives on the redemption of the junior
subordinated debentures to redeem, on a pro rata basis, capital securities and
common securities having an aggregate liquidation amount equal to the aggregate
principal amount of the junior subordinated debentures being redeemed. When the
trust redeems capital securities, holders will be entitled to receive a price
equal to the aggregate liquidation amount of the capital securities plus any
accumulated and unpaid distributions.
Q: Can the junior subordinated debentures' maturity be shortened?
A: Downey will have the right to shorten the maturity of the junior
subordinated debentures to a date not earlier than five years from the date of
issuance or , 2004, subject to any applicable regulatory approval. Downey
will not have the right to shorten the maturity of the junior subordinated
debentures to a date prior to , 2004, unless certain tax or regulatory
events occur. These events are described below under the caption "Description
of Junior Subordinated Debentures--General."
Q: How are the capital securities guaranteed?
A: In connection with the issuance of the capital securities, Downey will
enter into a capital securities guarantee agreement with Wilmington Trust
Company, as guarantee trustee. Under that agreement, Downey will guarantee, on
a subordinated basis and to the extent described in this prospectus, the
payment of all amounts due on the capital securities.
The capital securities guarantee agreement will guarantee to holders of
capital securities the following payments, to the extent not paid by the trust:
. any accumulated and unpaid distributions required to be paid on the
capital securities, to the extent that the trust has funds available for
payment of these distributions;
. the redemption price with respect to any capital securities called for
redemption, to the extent that the trust has funds available for payment
of the redemption price; and
. upon a voluntary or involuntary dissolution, winding-up or liquidation
of the trust--unless the junior subordinated debentures are distributed
to the holders--the lesser of:
. the aggregate of the $25 liquidation amount and all accumulated and
unpaid distributions to the date of payment to the extent that the
trust has funds available; and
. the amount of assets of the trust remaining available for
distribution to the holders after satisfaction of liabilities to
creditors as required by applicable law.
The capital securities guarantee agreement does not cover payments when the
trust does not have sufficient funds to make payments on the capital
securities. In other words, if Downey does not make required payments on the
junior subordinated debentures, the trust will not have sufficient funds to
make payments on the capital securities, and the capital securities guarantee
agreement will not obligate Downey to make those payments on the trust's
behalf. In this situation, a holder of capital securities may institute a legal
proceeding directly against Downey to enforce payment. The holders of at least
a majority in aggregate liquidation amount of the capital securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available under the capital securities guarantee agreement.
For more information about instituting a proceeding, see below under the
caption "Description of Junior Subordinated Debentures--Enforcement of
Specified Rights by Holders of Capital Securities." In addition, Downey's
obligations under the capital securities guarantee agreement are subordinate
and junior in right of payment to its obligations to other creditors to the
same extent as the junior subordinated debentures.
13
<PAGE>
Q: Under what circumstances would the junior subordinated debentures be
distributed to holders of capital securities?
A: Downey will have the right to dissolve the trust at any time, so long as
Downey obtains the prior approval of its primary federal regulator, if that
approval is required under applicable law. If Downey dissolves the trust, or if
the trust automatically dissolves because of other specified events, the trust
will first satisfy its liabilities owed to creditors. After the creditor
liabilities are satisfied, the trust will distribute to the holders of its
capital securities and common securities, on a pro rata basis, junior
subordinated debentures with a principal amount equal to the $25 liquidation
amount of each capital security and common security. If the property trustee
determines that a distribution is impractical, then holders of capital
securities and common securities will be entitled to receive, on a pro rata
basis, out of assets held by the trust, so long as the rights of any creditors
of the trust are already satisfied, an amount equal to the $25 liquidation
amount plus accrued and unpaid distributions. If the trust does not have enough
assets to pay this amount to each holder of capital securities in full,
liquidating distributions will be paid, first to holders of capital securities
on a pro rata basis before holders of common securities will be entitled to
receive any moneys.
Q: How will the capital securities be ranked and how will that ranking affect
the rights of a holder?
A: In general, the capital securities will rank on a parity in right of
payment and payments thereon will be made pro rata with the common securities
of the trust. However, the capital securities will have a preference under
specific circumstances with respect to cash distributions and amounts payable
on liquidation, redemption or otherwise over the common securities, which will
be held by Downey. For more details about these circumstances, see the
information shown below under the caption "Description of the Capital
Securities--Subordination of Common Securities."
As described above, a holder's ability to receive distributions on the
capital securities is linked to Downey's obligations under the junior
subordinated debentures. Downey's obligations under the capital securities
guarantee agreement and the junior subordinated debentures are unsecured.
Additionally, Downey's obligations under the capital securities guarantee
agreement and the junior subordinated debentures are subordinate and junior in
right of payment to its current and future obligations to other creditors,
unless those creditors have obligations that are equal with, or subordinated
to, the junior subordinated debentures. The terms of the junior subordinated
debentures place no limitation on the amount of debt that Downey can issue,
including debt that is senior to the junior subordinated debentures.
Additionally, because Downey is a holding company, substantially all of
Downey's assets consist of the capital stock of its subsidiaries. All
obligations of Downey relating to the junior subordinated debentures will be
effectively subordinated to all existing and future liabilities of Downey's
subsidiaries, including deposit liabilities of the Bank. In that regard, in the
event that a receiver or conservator were appointed for the Bank, the Federal
Deposit Insurance Act would recognize a priority in favor of depositors of the
Bank over general creditors. See "Description of Junior Subordinated
Debentures--General." The terms of the junior subordinated debentures place no
limitation on the amount of liabilities which may be incurred by Downey
subsidiaries, including the Bank. Downey may cause additional capital
securities to be issued by trusts similar to the trust in the future, and there
is no limit on the amount of those securities that may be issued. In this
event, Downey's obligations under the junior subordinated debentures to be
issued to the other trusts may rank equal with Downey's obligation under the
junior subordinated debentures and Downey's guarantees of the payments by those
trusts may rank equal with Downey's obligations under the capital securities
guarantee agreement. For more information, see below under the captions "Risk
Factors--Risk Factors Relating to the Capital Securities--Downey's obligations
under the capital securities guarantee agreement and the junior subordinated
debentures are unsecured and subordinated," "--Downey's status as a holding
company causes it to be dependent on cash dividends from its subsidiaries,
particularly the Bank" and "Description of Junior Subordinated Debentures--
Subordination."
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<PAGE>
Q: What will the voting rights be for holders of capital securities?
A: Holders of capital securities will generally have limited voting rights
relating only to the modification of the capital securities, the dissolution,
winding-up or termination of the trust and other matters described in this
prospectus. For more information, see below under the caption "Description of
the Capital Securities--Voting Rights; Amendment of the Trust Agreement."
Q: Will the capital securities be listed on a stock exchange?
A: Downey and the trust expect that the capital securities will be approved
for listing on the New York Stock Exchange. The listing of the capital
securities will not necessarily ensure that an active trading market will be
available for the capital securities or that holders will be able to sell the
capital securities at the price originally paid for them. For more information,
we urge you to read below under the caption "Risk Factors--Risk Factors
Relating to the Capital Securities--There is no existing market for the capital
securities" and "Underwriters."
Q: In what form will the capital securities be issued?
A: The capital securities will be represented by one or more global
certificates registered in the name of The Depository Trust Company (the
"Depository") or its nominee. This means that holders will not receive a
certificate for their capital securities and the capital securities will not be
registered in their names. Ownership interests in the capital securities will
be shown on, and transfers of the capital securities will be effected only
through, records maintained by participants in the Depository. The Depository
and the paying agent for the capital securities will be responsible for
dividend payments to you. For more details, see the information under the
caption "Book-Entry Issuance."
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<PAGE>
RISK FACTORS
Your investment in the capital securities will involve a number of risks.
You should carefully consider the following discussion of risks, and the other
information included or incorporated by reference in this prospectus, before
buying any capital securities.
Risk Factors Relating to Downey and its Subsidiaries
Changes in market interest rates may adversely affect our performance.
Our results of operations, like that of most other financial institutions,
are primarily dependent on interest rate differentials. Changes in interest
rates will influence the growth of our loans, investments, deposits and
borrowings and will affect the rates we receive on loans and investment
securities and the amount we pay on our deposits and borrowings. In addition,
we are affected by possible interest rate spread compression which would
adversely affect our results of operations if interest rates rise. This is
primarily due to the fact that the interest rates on our adjustable-rate loans
and mortgage-backed securities adjust more slowly than the interest rates on
our liabilities. If interest rates were to increase significantly, the
economic viability and operating results of our real estate investment
activities also could be adversely affected. Interest rates are highly
sensitive to many factors that are beyond our control, like inflation,
recession, government monetary and fiscal policy and unemployment, and the
potential impact of future changes in domestic and foreign economic
conditions. Accordingly, we are unable to predict future interest rates. These
changes in interest rates may have a material adverse effect on our results of
operations, financial condition and ability to make payments on the junior
subordinated debentures and the trust's ability to make payments on the
capital securities.
Our California business focus could adversely affect our operations.
We are headquartered in Southern California, and our operations are
concentrated in Southern and Northern California. In addition, at March 31,
1999, approximately 97% of our real estate loans were secured by real estate
located in California, principally in Los Angeles, Orange, Santa Clara, San
Diego and San Mateo counties. As a result of this geographic concentration,
our results depend largely upon economic conditions in these areas. While the
California economy has recently exhibited positive economic and employment
trends, there is no assurance that these trends will continue. A deterioration
in economic conditions could have a material adverse impact on the quality of
our loan and real estate portfolios and the demand for our products and
services, which, in turn, may have a material adverse effect on our results of
operations, financial condition and ability to make payments on the junior
subordinated debentures and the trust's ability to make payments on the
capital securities. In addition, California has been, and may in the future
be, affected by earthquakes. Neither Downey nor the Bank typically require
that borrowers maintain earthquake insurance on property securing mortgage
loans. Accordingly, earthquake damage to properties securing mortgage loans or
to properties owned by Downey could have a material adverse effect on our
results of operations, financial condition and ability to make payments on the
junior subordinated debentures and the trust's ability to make payments on the
capital securities.
Loans to credit-impaired borrowers may adversely affect our performance.
Loans made to borrowers who cannot obtain financing from traditional lenders
generally entail a higher risk of delinquency and default and higher losses
than loans made to borrowers with better credit. We offer one-to-four unit
residential loans to borrowers who have or, in the case of purchases, will
have equity in their homes but whose credit rating contains exceptions which
preclude them from qualifying for the best market terms. These lower credit
grades--"A-," "B" and "C" loans--commonly referred to as subprime loans, are
characterized by lower loan-to-value ratios and higher average interest rates
than higher credit grade loans--"A" loans. If we experience higher losses than
anticipated on these loans, this event may have a material adverse effect on
our results of operations, financial condition and ability to make payments on
the junior subordinated debentures and the trust's ability to make payments on
the capital securities.
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<PAGE>
If borrowers, guarantors and other parties fail to perform as required by the
terms of their loans, we will sustain losses.
A significant source of risk for us arises from the possibility that we will
sustain losses if borrowers, guarantors and related parties fail to perform as
required by the terms of their loans. We have adopted underwriting and loan
monitoring procedures and credit policies, including the establishment and
review of the allowance for loan losses, through which we intend to reduce
this risk by tracking loan performance, assessing the likelihood of
nonperformance and diversifying our loan portfolio. These policies and
procedures, however, may not prevent losses that may have a material adverse
effect on our results of operations, financial condition and ability to make
payments on the junior subordinated debentures and the trust's ability to make
payments on the capital securities.
Our investments in real estate may adversely affect our performance.
Our real property investments are affected by varying degrees of risk. The
yields available from our equity investments in real estate depend upon the
amount of revenues generated and expenses incurred. If our properties do not
generate revenues sufficient to meet property operating expenses, including
debt service and capital expenditures, our results of operations will be
adversely affected. In addition, our quarterly results of operations may
fluctuate significantly depending upon whether or not we realize gains or
losses on sales of real estate during the period. The performance of the
economy in each of the areas in which our properties are located affects
occupancy, market rental rates and expenses and, consequently, impacts the
revenues from our properties and their underlying values. The financial
results of major local employers also may impact on the revenues and value of
some or all of our properties.
Real estate investments entail risks similar to those our construction and
commercial lending activities present. In addition, California courts have
imposed warranty-like responsibility upon developers of new housing for
defects in structure and the housing site, including soil conditions. This
responsibility is not necessarily dependent upon a finding that the developer
was negligent. Owners of real property also may incur liabilities with respect
to environmental matters, including financial responsibility for clean-up of
hazardous waste or other conditions, under various federal and state laws.
Our business loans, motor vehicle loans, commercial real estate loans and
multi-family residential loans entail greater risk than our single family
residential loans.
Commercial real estate loans and multi-family residential loans are
generally considered to involve a higher degree of risk than single-family
residential lending because these loans typically involve larger loan balances
to a single borrower or group of related borrowers. In addition, the payment
experience on multi-family residential and commercial real estate loans
typically is dependent on the successful operation of the project--as opposed
to a desire by the borrower to continue to occupy the residence--and thus
these loans may be adversely affected to a greater extent by adverse
conditions in the real estate markets or in the economy generally.
Motor vehicle and consumer finance loans entail greater risk than do single
family residential mortgage loans since collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances.
Accordingly, there can be no assurance that our commercial business, motor
vehicle, commercial real estate and multi-family residential loans will not be
adversely affected by these and the other risks related to these loans or that
they will not have a material adverse effect on our results of operations,
financial condition and ability to make payments on the junior subordinated
debentures and the trust's ability to make payments on the capital securities.
17
<PAGE>
Our construction loans entail greater risk than our single family residential
loans.
Construction loans involve risks different from completed project lending
because we advance loan funds based upon the security of the project under
construction. If the borrower defaults on the loan, then we may have to
advance additional funds to finance the project's completion before the
project can be sold. Moreover, construction projects are affected by
uncertainties inherent in estimating:
.construction costs;
.potential delays in construction time;
.market demand; and
.the accuracy of the estimate of value on the completed project.
When providing construction loans, we require the general contractor to,
among other things, carry contractor's liability insurance equal to specific
prescribed minimum amounts, carry builder's risk insurance and have a blanket
bond against employee misappropriation. These policies and procedures,
however, may not prevent losses that may have a material adverse effect on our
results of operations, financial condition and ability to make payments on the
junior subordinated debentures and the trust's ability to make payments on the
capital securities.
Competition may adversely affect our performance.
We operate in an increasingly competitive environment. Increasing levels of
competition in the banking and financial services businesses may reduce our
market share or cause the prices we charge for our services to fall, either of
which may have a material adverse effect on our results of operations,
financial condition and ability to make payments on the junior subordinated
debentures and the trust's ability to make payments on the capital securities.
We face competition both in attracting deposits and in making loans. Our
most direct competition for deposits has historically come from other savings
institutions and from commercial banks located in our principal market areas,
including many large financial institutions based in other parts of the
country or their subsidiaries. In addition, there is additional significant
competition for investors' funds from short-term money market securities and
other corporate and government securities. Our ability to attract and retain
savings deposits depends, generally, on our ability to provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities and the appropriate level of customer service.
We experience competition for real estate loans principally from other
savings institutions, commercial banks, mortgage banking companies and
insurance companies. We compete for these loans principally through the
interest rates and loan fees we charge and the efficiency and quality of
services we provide to borrowers and real estate brokers.
We also experience competition in our real estate development activities,
principally from other real estate development and financing companies. Many
of these companies have greater real estate development resources than we do,
and most are not required to meet the same regulatory requirements that we
must meet in conducting and financing their real estate activities.
Governmental regulation could adversely affect our operations.
The financial services industry is extensively regulated and supervised on
both the federal and the state level. These regulations can sometimes impose
significant limitations on our operations. In addition, these regulations are
constantly evolving and may change significantly over time. Future regulatory
changes may have a material adverse effect on our results of operations,
financial condition and ability to make payments on the junior subordinated
debentures and the trust's ability to make payments on the capital securities.
Further, federal monetary policy, particularly as implemented through the
Federal Reserve System, significantly affects our
18
<PAGE>
ability to obtain credit on favorable terms. Changes in federal monetary
policy might materially change open market operations in United States
government securities, the discount rate for borrowings and reserve
requirements. This, in turn, may have a material adverse effect on our results
of operations, financial condition and ability to make payments on the junior
subordinated debentures and the trust's ability to make payments on the
capital securities.
During the past several years, Congress has considered legislation in
various forms that would require federal thrifts, like the Bank, to convert
their charters to national or state bank charters. The Economic Growth and
Paperwork Reduction Act, adopted in 1996 ("Paperwork Reduction Act"), requires
a merger of the Bank Insurance Fund ("BIF") and the SAIF into a single Deposit
Insurance Fund if Congress enacts legislation to eliminate the federal thrift
charter. While none of the "financial modernization" proposals currently being
debated in Congress would, in fact, eliminate the federal thrift charter, it
is possible that legislation will be introduced that would do so. In that
event, and in the absence of appropriate "grandfather" provisions, legislation
eliminating the thrift charter could have a material adverse effect on us and
the Bank because, among other things, the regulatory, capital and accounting
treatment for national and state banks and savings associations differ
significantly in some areas. We cannot determine whether, or in what form,
this legislation may eventually be enacted and there can be no assurance that
any legislation that is enacted would contain adequate grandfather provisions
for us and the Bank.
DSL Service Company is licensed as a real estate broker under the California
Real Estate Law and as a contractor with the Contractors State License Board.
Thus, the real estate investment activities of DSL Service Company, including
development, construction and property management activities relating to its
portfolio of projects, are governed by a variety of laws and regulations.
Changes in these laws and regulations or their interpretation by agencies and
the courts occur frequently. DSL Service Company must comply with various
federal, state and local laws, ordinances, rules and regulations concerning
zoning, building design, construction, hazardous waste and similar matters.
Environmental laws and regulations also affect the operations of DSL Service
Company, including regulations pertaining to availability of water, municipal
sewage treatment capacity, land use, protection of endangered species,
population density and preservation of the natural terrain and coastlines.
These and other requirements could become more restrictive in the future,
resulting in additional time and expense in connection with DSL Service
Company's real estate activities.
We may incur significant costs if we foreclose on environmentally
contaminated real estate.
If we foreclose on a defaulted mortgage loan to recover our investment in
the mortgage loan, then we may be exposed to environmental liabilities in
connection with the underlying real property. These liabilities could exceed
the fair value of the real property. It is also possible that hazardous
substances or wastes, contaminants, pollutants or their sources, as defined by
state and federal laws and regulations, may be discovered on properties during
our ownership or after they are sold to a third party. If they are discovered
on a property that we have acquired through foreclosure or otherwise, we may
be required to remove those substances and clean up the property. We may have
to pay for the entire cost of any removal and clean-up without the
contribution of any other third parties. These costs may also exceed the fair
value of the property. We may also be liable to tenants and other users of
neighboring properties. In addition, we may find it difficult or impossible to
sell the property before or following any clean-up. These events may have a
material adverse effect on our results of operations, financial condition and
ability to make payments on the junior subordinated debentures and the trust's
ability to make payments on the capital securities.
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<PAGE>
With regard to environmental matters, the construction products industry is
regulated by federal, state and local laws and regulations pertaining to
several areas including human health and safety and environmental compliance.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,
as well as similar laws in some states, create joint and several liability for
the cost of cleaning up or correcting releases to the environment of
designated hazardous substances. Among those who may be held jointly and
several liable are:
.those who generated the waste;
.those who arranged for disposal;
.those who owned or operated the disposal site or facility at the time of
disposal; and
.current owners.
In general, this liability is imposed in a series of governmental
proceedings initiated by the government's identification of a site for initial
listing as a "Superfund site" on the National Priorities List or a similar
state list and the government's identification of potentially responsible
parties who may be liable for cleanup costs. None of the DSL Service Company's
project sites are listed as a "Superfund site."
Year 2000 issues could adversely affect our operations.
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding "year 2000" project awareness. It
is expected that unless financial institutions address the technology issues
relating to the coming of the year 2000, there will be major disruptions in
the operation of financial institutions. We, like most financial
organizations, have many computer systems that identify dates using only the
last two digits of the year. These systems must be prepared to distinguish
dates like 1900 from 2000.
The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 compliance program by
December 31, 1999 may be viewed by the federal banking agencies as an unsafe
and unsound banking practice. If a savings association is deemed to be
engaging in an unsafe and unsound banking practice, a federal agency may
reclassify the savings association as being in a lower capital category and
require it to comply with specific restrictions imposed on financial
institutions so classified. We have established processes to identify,
prioritize, renovate or replace our systems that may be affected by year 2000
dates. However, we rely on third party vendors, including government entities
which may impact our efforts to successfully complete year 2000 compliance for
all systems in a timely fashion. Accordingly, there can be no assurance year
2000 matters will not have a material adverse effect on our results of
operations, financial condition and ability to make payments on the junior
subordinated debentures and the trust's ability to make payments on the
capital securities. For further information regarding our year 2000 compliance
program and its status see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition for the Quarter Ended
March 31, 1999--Year 2000."
Risk Factors Relating to the Capital Securities
Downey's obligations under the capital securities guarantee agreement and the
junior subordinated debentures are unsecured and subordinated.
Downey's obligations under the capital securities guarantee agreement, the
junior subordinated debentures and other documents described in this
prospectus will be unsecured. In addition, Downey's obligations under the
junior subordinated debentures will be subordinate and junior in right of
payment to all existing and future debt of Downey, unless that debt is equal
with, or subordinated to, the junior subordinated debentures, and will be
effectively subordinated to all existing and future liabilities of Downey's
subsidiaries, including the deposit liabilities of the Bank. Downey's
obligations under the capital securities guarantee agreement are subordinated
to the same extent as the junior subordinated debentures. This means that
Downey cannot make any payments
20
<PAGE>
on the junior subordinated debentures or the capital securities guarantee
agreement if Downey is in default on any of its senior debt. The terms of the
junior subordinated debentures place no limitation on the amount of debt that
we can issue, including debt that ranks senior to or equal with the junior
subordinated debentures. For more information about these matters, see below
under the caption "Description of Junior Subordinated Debentures--
Subordination" and "Description of Guarantee--Status of the Guarantee."
Downey's status as a holding company causes it to be dependent on cash
dividends from its subsidiaries, particularly the Bank.
Downey is a holding company which conducts substantially all of its
operations through the Bank. As a result, our ability to make payments on the
junior subordinated debentures, and consequently the trust's ability to pay
distributions on the capital securities and Downey's ability to fulfill its
obligations under the capital securities guarantee agreement, will depend
primarily on the receipt of dividends and other distributions from the Bank.
At March 31, 1999, the Bank could pay approximately $95 million in dividends
to Downey so long as the Bank sent prior notification to the Office of Thrift
Supervision ("OTS"). The Bank's payment of dividends is affected by the Bank's
results of operations, financial condition and capital expenditures and other
cash flow requirements. In addition, the Bank's payment of dividends is
restricted by regulations. In particular, savings associations, like the Bank,
must meet their regulatory capital requirements before and after a proposed
capital distribution. For more information about regulatory capital
requirements, see below under the caption "Business--Regulation--Regulatory
Capital Requirements."
No assurance can be given that the Bank will be able to pay dividends at
past levels, or at all, in the future.
In addition, the right of Downey to participate in any distribution of
assets of any subsidiary, including the Bank, upon the subsidiary's
liquidation or otherwise, and thus the ability of a holder of capital
securities to benefit indirectly from that distribution, will be subordinated
to the prior claims of creditors of that subsidiary, except to the extent that
any claims of Downey as a creditor of that subsidiary may be recognized. As a
result, the junior subordinated debentures will effectively be subordinated to
all existing and future liabilities and obligations of Downey's subsidiaries,
including deposit liabilities of the Bank. For more information about the risk
of the subordination of the junior subordinated debentures, see "--Downey's
obligations under the capital securities guarantee agreement and the junior
subordinated debentures are unsecured and subordinated." At March 31, 1999,
Downey's subsidiaries had outstanding debt and other liabilities, including
deposits, of approximately $6.1 billion.
The capital securities guarantee agreement covers payments only if the trust
has cash available.
The ability of the trust to pay scheduled distributions on the capital
securities, the redemption price of the capital securities and the liquidation
amount of the capital securities is solely dependent upon Downey making the
related payments on the junior subordinated debentures when due.
If Downey defaults on its obligations to pay principal or interest on the
junior subordinated debentures, the trust will not have sufficient funds to
pay distributions, the redemption price or the liquidation amount of each
capital security. In those circumstances, holders of capital securities will
not be able to rely upon the capital securities guarantee agreement for
payment of these amounts.
Instead, holders of capital securities:
.may directly sue Downey or seek other remedies to collect their pro rata
share of payments owed; or
.may rely on the property trustee to enforce the trust's rights under the
junior subordinated debentures.
21
<PAGE>
Downey may redeem the capital securities before , 2004 if special events
occur.
Generally, the junior subordinated debentures, and therefore the capital
securities, may not be redeemed before , 2004. However, if special events
occur relating to changes in tax law or the Investment Company Act of 1940 or
the treatment of the capital securities under guidelines or policies of bank
regulatory authorities, then Downey will be able, so long as it has received
any necessary regulatory approval, to redeem all of the junior subordinated
debentures at a price equal to 100% of their principal amount plus any accrued
but unpaid interest to the date fixed for redemption within 90 days following
the occurrence of a special event. If a redemption happens, the trust must use
the funds it receives to redeem all of the capital securities and common
securities. For more information about the special events, see below under the
caption "Description of the Capital Securities--Redemption."
Regarding a special event that may occur relating to changes in tax law,
Congress and the Clinton Administration have considered proposals denying
interest deductions to be claimed by an issuer for its interest payments on
instruments with characteristics similar to the junior subordinated
debentures. While Congress has not enacted that legislation, and that
legislation is not currently pending, it is possible that Congress may propose
and enact similar legislation after the date of this prospectus, which might
adversely affect the tax treatment of the junior subordinated debentures. This
type of change would be a special event relating to a change in tax law, so
Downey would be able to redeem the junior subordinated debentures. Downey's
redemption would, in turn, cause the trust to redeem all of the capital
securities.
Regarding a special event that may occur relating to changes in guidelines
or policies of bank regulatory authorities, the OTS, which supervises thrift
holding companies such as Downey, currently does not impose any capital
adequacy requirements on Downey itself. Moreover, Downey is not regulated by
the Board of Governors of the Federal Reserve System (the "Federal Reserve")
and is not required to meet the Federal Reserve's risk based capital adequacy
guidelines. Under the Federal Reserve's capital adequacy guidelines, as
currently in effect, securities similar to the capital securities would
qualify as tier 1 capital, subject to the limitations described in the next
sentence. Federal Reserve guidelines for calculation of tier 1 capital limit
the amount of cumulative preferred stock, which would include the capital
securities, which can be included in tier 1 capital to 25% of total tier 1
capital for bank holding companies. While the OTS does not currently impose
any capital adequacy requirements on Downey itself, there is no assurance that
it will not adopt these requirements after the date of this prospectus.
Likewise, if federal legislation to eliminate the thrift charter is enacted
and the Bank were converted to a commercial bank charter, Downey could become
subject to the Federal Reserve's capital adequacy guidelines for bank holding
companies. If Downey were to become required to meet the capital adequacy
guidelines and the applicable regulatory agency were to determine that the
capital securities did not qualify as tier 1 capital of Downey, or if it were
determined that proceeds realized from the sale of the junior subordinated
debentures that are invested in the Bank would no longer qualify as tier 1
capital for the Bank, Downey would be able to redeem the junior subordinated
debentures. Downey's redemption would, in turn, cause the trust to redeem all
of the capital securities.
Downey's ability to defer interest payments has tax consequences for you and
may affect the trading price of the capital securities.
As long as the junior subordinated debentures are not in default, Downey
will have the right, on one or more occasions, to defer interest payments on
the junior subordinated debentures for a period not exceeding 20 consecutive
quarterly periods, but not beyond the maturity date of the junior subordinated
debentures. Because interest payments on the junior subordinated debentures
fund the distributions on the capital securities, each deferral would result
in a corresponding deferral of distributions on the capital securities.
Downey currently does not intend to defer interest payments on the junior
subordinated debentures. However, if it does do so in the future, holders of
capital securities will be required to accrue interest income for United
States federal income tax, and possibly other, purposes in respect of their
proportionate share of the accrued but unpaid interest on the junior
subordinated debentures held by the trust, even if the holders normally
22
<PAGE>
report income when received. As a result, holders of capital securities will
be required to include the accrued interest in their gross income for United
States federal income tax purposes before receiving any cash distribution. For
more information, see below under the caption "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
If Downey defers interest payments on the junior subordinated debentures,
the capital securities may trade at a price that does not reflect fully the
value of the accrued but unpaid distributions. Additionally, the market price
for the capital securities may be more volatile than that of other securities
not being subject to a right to defer interest. If holders of capital
securities dispose of the capital securities while interest payments are being
deferred, they might not receive the same return on their investment as an
investor that continues to hold the capital securities.
Holders of capital securities may receive junior subordinated debentures upon
liquidation of the trust so investing in the capital securities requires an
investment decision regarding the junior subordinated debentures;
distribution of junior subordinated debentures may have an adverse effect on
trading price.
Downey will have the right at any time to dissolve the trust. If Downey
decides to exercise its right to dissolve the trust, the trust will, after
satisfaction of liabilities to creditors of the trust as required by
applicable law, cause the junior subordinated debentures to be distributed to
holders of capital securities in liquidation of the trust. Because holders of
capital securities may receive junior subordinated debentures in liquidation
of the trust and because distributions on the capital securities are otherwise
limited to payments on the junior subordinated debentures, you are also making
an investment decision with regard to the junior subordinated debentures. We
urge you to carefully review all information included and incorporated by
reference in this prospectus regarding Downey, which is solely responsible for
payments on the junior subordinated debentures. We also urge you to review the
terms of the junior subordinated debentures. For more information, see below
under the caption "Description of the Capital Securities--Liquidation
Distribution Upon Dissolution" and "Description of Junior Subordinated
Debentures."
Under current United States federal income tax law and interpretations and
assuming, as set forth in an opinion of counsel to Downey, the trust is
classified as a grantor trust, a distribution of the junior subordinated
debentures to holders of capital securities upon a liquidation of the trust
should not be a taxable event to the holders. However, if a special event
occurs relating to changes in the tax law which would cause the trust to pay
United States federal income tax with respect to income received or accrued on
the junior subordinated debentures, the trust's distribution of the junior
subordinated debentures could be a taxable event to both the trust and holders
of capital securities. For more information about a redemption of the capital
securities relating to changes in the tax law, see below under the caption
"Description of the Capital Securities--Redemption." For more information
about the tax consequences, see below under the caption "Certain Federal
Income Tax Consequences--Distribution of Junior Subordinated Debentures to
Holders of Capital Securities."
Downey has no current intention of causing the termination of the trust and
the distribution of the junior subordinated debentures. However, there are no
restrictions on its ability to do so at any time. Downey anticipates that it
would consider exercising this right if expenses associated with maintaining
the trust were substantially greater than currently expected. This could
happen if special events occur relating to changes in tax law or the
Investment Company Act of 1940 or the treatment of capital securities under
the guidelines or policies of bank regulatory authorities. Downey cannot
predict the other circumstances under which this right would be exercised.
Downey will use its best efforts to list the junior subordinated debentures
on the New York Stock Exchange or any other exchange or organization on which
the capital securities are then listed, if they are distributed. We cannot
assure you, however, that the junior subordinated debentures would be approved
for listing or that a liquid trading market would exist for those securities.
23
<PAGE>
We also can make no assurance as to the market prices for the junior
subordinated debentures that may be distributed in exchange for the capital
securities if Downey exercises its right to terminate the trust. Accordingly,
the junior subordinated debentures that holders may receive in liquidation of
the trust may trade at a discount from the price paid to purchase the capital
securities offered in this prospectus. For more information, see below under
the caption "--There is no existing market for the capital securities."
Shortening of the maturity of the junior subordinated debentures may occur.
Downey will have the right to shorten the maturity of the junior
subordinated debentures to a date not earlier than , 2004. If Downey
shortens the maturity of the junior subordinated debentures, Downey will also
cause the capital securities to be redeemed on the earlier maturity date.
Downey does not currently require approval from the OTS or other bank
regulatory authorities to shorten the maturity of the junior subordinated
debentures. However, if regulatory approval were required, Downey will only
exercise its right to shorten the maturity date of the junior subordinated
debentures upon receiving the prior approval of the appropriate regulator. For
more information, see below under the caption "Description of the Capital
Securities --Redemption."
Holders of capital securities will be limited in their rights to bring direct
actions against Downey and in their rights under the capital securities
guarantee agreement.
Through the capital securities guarantee agreement, Downey promises certain
payments will be made to holders of capital securities by the trust to the
extent that the trust has funds available to make those payments. Holders of
capital securities may institute a legal proceeding directly against Downey to
enforce their rights under the capital securities guarantee agreement without
first instituting a legal proceeding against the trust or any other person or
entity.
If Downey defaults on its obligation to pay amounts payable under the junior
subordinated debentures, the trust will lack funds for the payment of
distributions or amounts payable on redemption of the capital securities. The
capital securities guarantee agreement does not cover payments when the trust
does not have sufficient funds to make payments on the capital securities.
Accordingly, in the event of a default, holders of capital securities will not
be able to rely upon the capital securities guarantee agreement for payment of
these amounts. Instead, holders may institute a legal proceeding directly
against Downey for enforcement of payment of the principal of and interest on
junior subordinated debentures having a principal amount equal to the $25
liquidation amount of each capital security held. In connection with the
direct legal proceeding, Downey will be subrogated to the rights of any holder
of the capital securities under the trust agreement to the extent of any
payment made by Downey to any holder of capital securities in the direct legal
proceeding. Except as described in this prospectus, holders will not be able
to exercise directly any other remedy available to the holders of the junior
subordinated debentures or assert directly any other rights in respect of the
junior subordinated debentures. For more information, see below under the
caption "Description of Junior Subordinated Debentures--Enforcement of Certain
Rights by Holders of Capital Securities" and "Description of Guarantee."
The deductibility of interest on the junior subordinated debentures is
uncertain.
Downey's ability to deduct the interest paid on the junior subordinated
debentures will depend upon whether the junior subordinated debentures are
characterized as debt instruments for United States federal income tax
purposes, taking all the relevant facts and circumstances into account.
Downey's counsel has rendered an opinion to Downey that the junior
subordinated debentures are debt instruments for United States federal income
tax purposes. Accordingly, Downey intends to deduct interest on the junior
subordinated debentures for United States federal income tax purposes.
However, a legal opinion is not binding on the tax authorities or the courts.
If the tax authorities or the courts determine that Downey is not able to
deduct interest on the junior subordinated debentures, Downey would have
significant additional income tax liabilities. This tax liability may have a
material adverse effect on our results of operations, financial condition and
ability to make payments on the junior subordinated debentures and the trust's
ability to make payments on the capital securities.
24
<PAGE>
There are only limited covenants restricting Downey's activities.
The agreements Downey will enter into with respect to the trust and the
junior subordinated debentures do not contain covenants restricting Downey's
business or operations, except to the limited extent described in this
prospectus. As a result, these agreements will not protect holders of capital
securities in the event of a material adverse change in the financial
condition or results of operation of Downey or its subsidiaries. In addition,
these agreements do not limit the ability of Downey or any subsidiary to incur
additional indebtedness. Therefore, holders of capital securities should not
consider the provisions of these agreements in evaluating whether Downey will
be able to comply with its obligations under the junior subordinated
debentures or the capital securities guarantee agreement.
Holders of capital securities will have limited voting rights with respect to
the capital securities.
Holders of capital securities will have limited voting rights relating only
to the modification of the capital securities, the dissolution, winding-up or
liquidation of the trust, and the exercise of the trust's rights as holder of
junior subordinated debentures. In particular, Downey, as holder of the common
securities, can elect or remove any of the trustees of the trust. If, however,
Downey defaults on the junior subordinated debentures, holders of a majority
in liquidation amount of the outstanding capital securities will be able to
remove the property trustee or the Delaware trustee.
Additionally, the property trustee, the administrative trustees and Downey
may amend the trust agreement without the consent of the holders of capital
securities to ensure that the trust will be classified for United States
federal income tax purposes as a grantor trust or to ensure that the trust
will not be required to register as an investment company, even if this
adversely affects the interests of the holders. For more information, see
below under the caption "Description of the Capital Securities--Voting Rights;
Amendment of the Trust Agreement" and "--Removal of Trustees."
There is no existing market for the capital securities.
Although the trust anticipates the capital securities will be approved for
listing on the New York Stock Exchange, there is no existing market for the
capital securities. The trust cannot assure you that the capital securities,
if approved for listing, will continue to be listed on the New York Stock
Exchange. However, if approved for listing, we expect that the trading of the
capital securities on the New York Stock Exchange will commence within 30 days
after initial delivery of the capital securities. In addition, a listing does
not guarantee that a trading market for the capital securities will develop
or, if a trading market does develop, the depth of that market or the ability
of holders to sell their capital securities easily.
The trading price of the capital securities could widely fluctuate in
response to variations in operating results, general market price movements,
interest rates, developments specifically related to the consumer finance
industry, and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations.
As discussed above, Downey will have the right to dissolve the trust and to
distribute the junior subordinated debentures to holders of capital
securities. Under those circumstances, Downey will use its best efforts to
list the junior subordinated debentures on the New York Stock Exchange or any
other exchange or organization on which the capital securities are then
listed. However, there is no existing market for junior subordinated
debentures and, if distributed to holders of capital securities, the junior
subordinated debentures will be affected by the risk factors similar to those
described in the two preceding paragraphs.
25
<PAGE>
The ability to receive distributions on the capital securities will be
affected by the capital securities being represented by a global certificate
The capital securities will be represented by one or more global
certificates registered in the name of the Depository or its nominee. The
trust's obligations, as well as the obligations of its trustee and those of
any third parties employed by the trust or the trustees, run only to persons
who are registered as holders of capital securities. For example, once the
trust makes distributions to the registered holder, the trust has no further
responsibility for the distribution even if that holder is legally required to
pass the distribution along to you--as an indirect holder--but does not do so.
As an indirect holder, your rights relating to a global capital security will
be governed by the account rules of your financial institution and of the
Depository, as well as general laws relating to capital securities transfers.
You should be aware that when the trust issues capital securities in the
form of a global capital security:
. you cannot have capital securities registered in your own name;
. you cannot receive physical certificates for your interest in the
capital securities;
. you must look to your own bank or brokerage firm for payments on the
capital securities and protection of your legal rights relating to the
capital securities; and
. the Depository's policies will govern payments, transfers, exchanges and
other matters relating to your interest in the global capital security.
The trust and its trustees have no responsibility for any aspect of the
Depository's actions or for its records of ownership interests in the
global capital security. The trust and its trustees also do not
supervise the Depository in any way.
26
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of capital securities will be invested by
the trust in the junior subordinated debentures. The net proceeds to Downey
from the sale of the junior subordinated debentures are estimated to be $96
million, net of estimated underwriting discounts and commissions and other
estimated offering expenses. Downey intends to use the net proceeds to make
investments in the Bank and for other general corporate purposes.
CAPITALIZATION
The following table sets forth our consolidated capitalization at March 31,
1999, and as adjusted to give effect to the issuance of the capital securities
offered by the trust. The following information should be read in conjunction
with our consolidated financial statements and notes thereto incorporated in
this prospectus by reference.
<TABLE>
<CAPTION>
March 31, 1999
---------------------
As
Actual Adjusted
---------- ----------
(Dollars in
thousands)
<S> <C> <C>
Federal Home Loan Bank advances.......................... $ 842,677 $ 842,677
Other borrowings......................................... 8,638 8,638
Downey obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures (1)............................. -- 100,000
Preferred stock, $0.01 par value: 5,000,000 shares
authorized, none issued................................. -- --
Common stock, $0.01 par value: 50,000,000 shares
authorized, 28,146,342 shares outstanding............... 281 281
Additional paid-in capital............................... 92,357 92,357
Accumulated other comprehensive income: unrealized gains
on securities available for sale........................ 305 305
Retained earnings........................................ 397,463 397,463
---------- ----------
Total stockholders' equity............................. 490,406 490,406
---------- ----------
Total capitalization................................. $1,341,721 $1,441,721
========== ==========
</TABLE>
- --------
(1) The trust will hold the junior subordinated debentures issued by Downey as
the trust's sole asset. The aggregate principal amount of the junior
subordinated debentures issued to the trust will be $103,092,800. The
capital securities are issued by the trust.
27
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, the trust will be treated as Downey's
subsidiary and, accordingly, the accounts of the trust will be included in our
consolidated financial statements. The capital securities will be presented as
a separate line item in our consolidated balance sheet under the caption
"Downey Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures." For financial reporting
purposes, we will record distributions payable on the capital securities as an
interest expense in our consolidated statements of income.
In our future reports that we file under the Securities Exchange Act of
1934, we will include a footnote to the financial statements stating that:
. the trust is wholly owned by Downey;
. the sole assets of the trust are the junior subordinated debentures and
specifying the principal amount, interest rate and maturity date of the
junior subordinated debentures; and
. Downey's obligations under the capital securities guarantee agreement,
together with its obligations under the junior subordinated debentures
and the related indenture and the trust agreement in the aggregate,
constitute a full and unconditional guarantee on a subordinated basis by
Downey of the obligations of the trust under the capital securities.
The trust will not provide separate reports under the Securities Exchange
Act of 1934.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary presents our selected consolidated financial data as
follows:
. the financial data as of and for the three months ended March 31, 1999
and 1998 has been derived from our unaudited consolidated quarterly
financial statements which, in the opinion of management, include all
adjustments, consisting of only normal, recurring adjustments,
considered necessary for a fair presentation; and
. the financial data as of, and for the years ended, December 31, 1998,
1997, 1996, 1995 and 1994 has been derived from our audited consolidated
financial statements.
You should read the summary selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", included elsewhere in this prospectus and our
consolidated financial statements and related notes incorporated in this
prospectus by reference. The summary selected consolidated financial data for
the three months ended March 31, 1999 is not necessarily indicative of our
operating results or financial condition to be expected for any future period.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
----------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income... $113,894 $109,723 $440,404 $420,418 $346,360 $318,828 $228,970
Total interest expense.. 64,938 67,097 266,057 266,260 211,765 214,238 122,601
-------- -------- -------- -------- -------- -------- --------
Net interest income.... 48,956 42,626 174,347 154,158 134,595 104,590 106,369
Provision for loan
losses................. 2,381 272 3,899 8,640 9,137 9,293 4,211
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses........... 46,575 42,354 170,448 145,518 125,458 95,297 102,158
-------- -------- -------- -------- -------- -------- --------
Other income, net:
Loan and deposit
related fees.......... 4,448 3,169 15,645 10,921 7,435 5,546 5,310
Real estate and joint
ventures held for
investment, net....... 1,165 9,515 22,363 14,222 8,241 11,192 9,530
Net gains (losses) on
sales of:
Loans and mortgage-
backed securities..... 3,987 872 6,462 2,675 1,543 266 114
Investment securities.. 97 68 68 -- 4,473 (15) --
(Provision for)
reduction of loss on
investment in lease
residual.............. -- -- -- -- -- 207 (920)
Other.................. 1,645 1,302 2,815 7,370 3,507 3,403 3,703
-------- -------- -------- -------- -------- -------- --------
Total other income,
net................... 11,342 14,926 47,353 35,188 25,199 20,599 17,737
-------- -------- -------- -------- -------- -------- --------
Operating expense:
General and
administrative
expense............... 36,249 26,210 115,890 99,556 86,460 74,470 75,566
SAIF special assessment
(1)................... -- -- -- -- 24,644 -- --
Net operation of real
estate acquired in
settlement of loans... 90 255 260 1,184 2,567 4,206 3,595
Amortization of excess
of cost over fair
value of net assets
acquired.............. 118 132 510 532 532 530 532
-------- -------- -------- -------- -------- -------- --------
Total operating
expense............... 36,457 26,597 116,660 101,272 114,203 79,206 79,693
-------- -------- -------- -------- -------- -------- --------
Net income (1).......... $ 12,348 $ 17,565 $ 57,973 $ 45,234 $ 20,704 $ 21,093 $ 23,532
PER SHARE DATA
Earnings per share--
Basic (1).............. $ 0.44 $ 0.63 $ 2.06 $ 1.61 $ 0.74 $ 0.75 $ 0.84
Earnings per share--
Diluted (1)............ 0.44 0.62 2.05 1.61 0.74 0.75 0.84
Book value per share at
end of period.......... 17.42 15.88 17.08 15.32 13.95 13.68 13.05
Stock price at end of
period................. 18.31 30.83 25.44 27.08 17.80 13.16 8.70
Cash dividends paid..... 0.080 0.076 0.316 0.301 0.290 0.276 0.276
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
RATIOS:
Effective interest rate
spread................. 3.23% 3.04% 3.08% 2.83% 2.96% 2.35% 3.02%
Return on average assets
(1).................... 0.78 1.20 0.98 0.79 0.43 0.45 0.62
Return on average equity
(1).................... 10.20 16.13 12.71 11.07 5.33 5.69 6.56
Dividend payout ratio... 18.23 12.19 15.33 18.69 39.35 36.78 33.97
Ratios of earnings to
fixed charges (2):
Excluding interest on
deposits (1).......... 3.19x 5.79x 6.22x 2.96x 2.39x 2.15x 4.11x
Including interest on
deposits (1).......... 1.33x 1.41x 1.36x 1.29x 1.18x 1.18x 1.33x
LOAN ACTIVITY:
Loans originated........ $1,554,924 $ 543,893 $4,071,262 $2,329,266 $1,583,784 $ 637,490 $1,810,096
Loans and mortgage-
backed securities
purchased.............. 302 2,729 7,463 35,828 30,296 44,194 196,255
Loans and mortgage-
backed securities
sold................... 776,518 118,897 1,740,416 557,511 166,503 102,097 45,770
BALANCE SHEET SUMMARY
(END OF PERIOD):
Total assets............ $6,594,092 $5,871,913 $6,270,419 $5,835,825 $5,198,157 $4,656,267 $4,650,651
Total loans and
mortgage-backed
securities............. 6,102,547 5,400,194 5,788,365 5,366,396 4,729,846 4,169,474 4,188,539
Investments and cash
equivalents............ 211,949 213,966 215,086 221,201 222,255 237,904 215,960
Deposits................ 5,205,282 5,108,822 5,039,733 4,869,978 4,173,102 3,790,221 3,557,398
Borrowings.............. 851,315 267,083 703,720 483,735 595,345 436,218 674,776
Stockholders' equity.... 490,406 446,086 480,566 430,346 391,571 384,072 366,187
Loans serviced for
others................. 1,566,677 625,372 1,040,264 612,529 576,044 527,234 468,123
AVERAGE BALANCE SHEET
DATA:
Assets.................. $6,329,170 $5,864,090 $5,918,507 $5,693,869 $4,789,648 $4,717,959 $3,789,709
Loans, net of unearned
income................. 5,818,860 5,313,496 5,345,380 5,174,767 4,269,136 4,175,085 3,241,390
Deposits................ 5,062,152 5,005,049 5,102,045 4,588,320 3,892,981 3,758,948 3,153,777
Stockholders' equity.... 484,108 435,645 456,237 408,473 388,187 370,714 358,748
CAPITAL RATIOS:
Average stockholders'
equity to average
assets................. 7.65% 7.43% 7.71% 7.17% 8.10% 7.86% 9.47%
Bank only--end of period
(3):
Core and tangible
capital............... 6.63 6.83 6.83 6.61 6.56 7.28 7.22
Risk-based capital..... 12.49 12.92 12.88 12.64 12.66 14.25 14.21
SELECTED ASSET QUALITY
DATA
(END OF PERIOD):
Non-accrual loans....... $ 25,085 $ 38,628 $ 22,375 $ 41,699 $ 45,021 $ 78,341 $ 52,037
Other real estate owned
and other foreclosed
assets................. 5,005 11,102 5,044 10,421 17,006 18,854 13,558
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-performing
assets................ 30,090 49,730 27,419 52,120 62,027 97,195 65,595
Non-performing assets as
a percentage of total
assets................. 0.46% 0.85% 0.44% 0.89% 1.19% 2.09% 1.41%
Allowance for loan
losses:
Amount................. $ 32,586 $ 31,817 $ 31,517 $ 32,092 $ 30,094 $ 27,943 $ 25,650
As a percentage of non-
performing loans...... 129.90% 82.37% 140.86% 76.96% 66.84% 35.67% 49.29%
</TABLE>
- -------
(1) In 1996, savings associations such as the Bank were assessed a one-time
charge for purposes of recapitalizing the SAIF. Excluding the SAIF special
assessment, 1996 net income would have been $34.7 million or $1.23 per
share on both a basic and diluted basis, the return on average assets
would have been 0.73%, the return on average equity would have been 8.95%
and the ratio of earnings to fixed charges would have been 3.28x excluding
interest on deposits and 1.30x including interest on deposits.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income before income taxes, extraordinary items and fixed
charges. Fixed charges represents interest expense and the interest
component of rent expense and capitalized interest.
(3) For more information regarding these ratios, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition for the Quarter Ended March 31, 1999--Regulatory Capital
Compliance" and "--Financial Condition for the Year Ended December 31,
1998--Regulatory Capital Compliance."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW FOR THE QUARTER ENDED MARCH 31, 1999
Our net income for the first quarter of 1999 totaled $12.3 million or $0.44
per share on a diluted basis. This compares to our net income in the first
quarter of 1998 of $17.6 million or $0.62 per share on a diluted basis.
The decline in net income between first quarters primarily reflects two
factors.
. First, year-ago net income benefited from the settlement of a number of
loan and real estate investment obligations of a former joint venture
partner. That settlement added $2.9 million to net income. The pre-tax
amount of the settlement was $5.1 million of which:
. $1.4 million represented the recovery of a prior loan charge-off
thereby reducing provision for loan loses;
. $2.6 million was recorded as a reduction of loss on real estate
and joint ventures;
. $0.8 million was recorded in miscellaneous other income; and
. $0.3 million was recorded as a reduction to professional fees
within general and administrative expense.
. Second, the remaining net income attributable to real estate investment
activities declined $3.1 million. The decline was due to there being no
sales of real estate assets in the current period compared to several
sales a year ago which resulted in pre-tax gains of $5.4 million.
Excluding those two factors, net income would have increased by $0.8
million, up 6.8% from a year ago. Our banking operations generated this
adjusted increase which reflects several factors. Net interest income
increased $6.3 million or 14.9% due to increases in both average earning
assets and the effective interest spread. In addition, the quarter-to-quarter
improvement reflected increases of $3.1 million in net gains on the sale of
loans, $1.3 million in loan and deposit related fees, and $0.4 million in loan
servicing fees. A $9.7 million increase in adjusted general and administrative
expense and a $0.7 million increase in the adjusted provision for loan losses
partially offset these positive factors. The increase in general and
administrative expense was due to significantly higher lending volumes, branch
expansion and increased expense related to year 2000 compliance efforts.
For the first quarter of 1999, our return on average assets was 0.78% and
our return on average equity was 10.20%.
At March 31, 1999, our assets totaled $6.6 billion, up $722 million or 12.3%
from a year ago. Our single family loan originations totaled a record $1.424
billion in the first quarter of 1999, more than triple the $453 million we
originated in the first quarter of 1998. Of the current quarter total, $647
million represented originations of loans for sale and $189 million
represented originations for portfolio of subprime credits as part of our
strategy to enhance the portfolio's net yield. In addition to single family
loans, we originated $131 million of other loans in the quarter including $60
million of construction and land loans and $50 million of automobile loans.
Our borrowings increased $584 million between first quarters and represented
the primary source of funding for our asset growth. That increase primarily
occurred during the fourth quarter of 1998 when we took advantage of the low
interest rate environment and borrowed $480 million of long-term Federal Home
Loan Bank ("FHLB") advances. In addition to higher borrowings, our deposits
increased $96 million or 1.9% and also funded asset growth. At quarter-end,
our deposits totaled $5.2 billion. During the quarter, we opened five new in-
store branches and closed one traditional branch, bringing total branches at
quarter end to 95 of which 33 are in-store. A year ago, branches totaled 89.
Our non-performing assets increased $3 million during the quarter to $30
million or 0.46% of total assets.
At March 31, 1999, the Bank had core and tangible capital ratios of 6.63%
and a risk-based capital ratio of 12.49%. These capital levels are well above
the "well capitalized" standards of 5% for core and tangible capital and 10%
for risk-based capital, as defined by regulation.
31
<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999
Net Interest Income
Our net interest income totaled $49.0 million in the first quarter of 1999,
up $6.3 million or 14.9% from the same period last year. The improvement
between first quarters reflected increases in both average earning assets and
the effective interest rate spread. Our average earning assets increased by
$440 million or 7.8% between first quarters to $6.1 billion. The effective
interest rate spread of 3.23% in the current quarter was up from both the
year-ago quarter level of 3.04% and from the fourth quarter 1998 level of
3.14%. See "Results of Operations for the Year Ended December 31, 1998--Net
Interest Income" for definitions of net interest income, interest-earning
assets and interest-bearing liabilities.
The following table presents for the periods indicated the total dollar
amount of:
. interest income from average interest-earning assets and the resultant
yields; and
. interest expense on average interest-bearing liabilities and the
resultant costs, expressed as rates.
The table also sets forth the net interest income, the interest rate spread
and the effective interest rate spread. The effective interest rate spread
reflects the relative level of interest-earning assets to interest-bearing
liabilities and equals:
. the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities, divided by
. average interest-earning assets for the period.
The table also sets forth the net interest-earning balance--the difference
between the average balance of interest-earning assets and the average balance
of interest-bearing liabilities--for the periods indicated. We included non-
accrual loans in the average interest-earning assets balance. We included
interest from non-accrual loans in interest income only to the extent that we
received payments and to the extent that we believe we will recover the
remaining principal balance of the loan. We computed average balances for the
quarter using the average of each month's daily average balance during the
period indicated.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
--------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $5,818,860 $110,731 7.61% $5,480,840 $107,065 7.81% $5,313,496 $105,345 7.93%
Mortgage-backed
securities............ 30,599 464 6.07 35,794 580 6.48 47,970 808 6.74
Investment securities.. 205,844 2,699 5.32 307,643 4,257 5.49 253,926 3,570 5.70
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning
assets................ 6,055,303 113,894 7.52 5,824,277 111,902 7.69 5,615,392 109,723 7.82
Non-interest-earning
assets................ 273,867 262,408 248,698
---------- ---------- ----------
Total assets........... $6,329,170 $6,086,685 $5,864,090
========== ========== ==========
Interest-bearing
liabilities:
Deposits............... $5,062,152 $ 55,489 4.45% $5,077,632 $ 59,557 4.65% $5,005,049 $ 61,538 4.99%
Borrowings............. 715,572 9,449 5.36 466,624 6,601 5.61 351,068 5,559 6.42
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities........... 5,777,724 64,938 4.56 5,544,256 66,158 4.73 5,356,117 67,097 5.08
Non-interest-bearing
liabilities............ 67,338 67,999 72,328
Stockholders' equity.... 484,108 474,430 435,645
---------- ---------- ----------
Total liabilities and
stockholders' equity.. $6,329,170 $6,086,685 $5,864,090
========== ========== ==========
Net interest
income/interest rate
spread................. $ 48,956 2.96% $ 45,744 2.96% $ 42,626 2.74%
Excess of interest-
earning assets over
interest-bearing
liabilities............ $ 277,579 $ 280,021 $ 259,275
Effective interest rate
spread................. 3.23 3.14 3.04
</TABLE>
32
<PAGE>
Changes in our net interest income are a function of both changes in rates
and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
our interest income and expense for the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, we have provided
information on changes attributable to:
. changes in volume--changes in volume multiplied by comparative period
rate;
. changes in rate--changes in rate multiplied by comparative period
volume; and
. changes in rate-volume--changes in rate multiplied by changes in volume.
Interest-earning asset and interest-bearing liability balances used in the
calculations represent quarterly average balances computed using the average
of each month's daily average balance during the period indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 versus March 31, 1998
Changes Due To
-----------------------------------------
Rate/
Volume Rate Volume Net
---------- --------- -------------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans............................... $ 10,019 $ (4,231) $ (402) $ 5,386
Mortgage-backed securities.......... (292) (81) 29 (344)
Investment securities............... (676) (241) 46 (871)
--------- --------- ------- ---------
Change in interest income.......... 9,051 (4,553) (327) 4,171
--------- --------- ------- ---------
Interest expense:
Deposits............................ 702 (6,675) (76) (6,049)
Borrowings.......................... 5,392 (1,707) 205 3,890
--------- --------- ------- ---------
Change in interest expense......... 6,094 (8,382) 129 (2,159)
--------- --------- ------- ---------
Change in net interest income........ $ 2,957 $ 3,829 $ (456) $ 6,330
========= ========= ======= =========
</TABLE>
Provision for Loan Losses
Provision for loan losses was $2.4 million in the current quarter compared
to $0.3 million in the first quarter of 1998. The increase reflects higher
loan growth during the current quarter, as well as the year-ago quarter
included a $1.4 million recovery of a prior loan charge-off as a result of the
previously mentioned settlement. For information regarding our allowance for
loan losses, see "Financial Condition for the Quarter Ended March 31, 1999--
Asset Quality--Valuation Allowances."
Other Income
Total other income was $11.3 million in the first quarter of 1999, down $3.6
million or 24.0% from the year-ago quarter. The decrease between first
quarters was primarily in our income from real estate and joint ventures held
for investment which declined by $8.4 million. The majority of that decline is
attributable to our year-ago first quarter results containing $5.4 million of
gains from the sale of joint venture investments compared to none in the
current quarter, as well as $2.6 million from the previously mentioned
settlement which was reflected as a reduction to the provision for losses.
Increases of $3.1 million in net gains on sales of loans, $1.3 million in loan
and deposit related fees and $0.4 million in loan servicing fees partially
offset the decline in income from real estate and joint ventures held for
investment. The other category was essentially unchanged between first
quarters even though the year-ago quarter included $0.8 million from the
previously mentioned settlement.
33
<PAGE>
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations. The above mentioned $5.4
million joint venture gains in the year-ago quarter are included in equity in
net income from joint ventures.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net
of expenses.......... $ 981 $ 688 $ 894 $1,260 $ 881
Equity in net income
from joint ventures.. 47 256 2,605 1,116 5,226
Interest from joint
venture advances..... 190 182 380 336 686
------ ------ ------ ------ ------
Total operations,
net................ 1,218 1,126 3,879 2,712 6,793
Net gains on sales of
wholly owned real
estate................. -- 2,487 -- 70 --
Reduction of (provision
for) losses on real
estate and joint
ventures............... (53) 214 139 2,221 2,722
------ ------ ------ ------ ------
Income from real
estate and joint
venture operations... $1,165 $3,827 $4,018 $5,003 $9,515
====== ====== ====== ====== ======
</TABLE>
Operating Expense
Operating expense totaled $36.5 million in the current quarter, compared to
$26.6 million in the first quarter of 1998. The increase was due to higher
general and administrative costs which increased $10.0 million or 38.3%, as
our costs associated with the net operation of real estate acquired in
settlement of loans declined by $0.2 million. A $0.3 million reduction to
professional fees due to the previously mentioned settlement was included
within general and administrative expense in the year-ago quarter. The
increase in general and administrative expense reflected our higher lending
volumes, branch expansion and expenses related to year 2000 compliance. Year
2000 related costs totaled $0.5 million in the current quarter, up from $0.2
million a year ago.
Provision for Income Taxes
Income taxes for the current quarter totaled $9.1 million, resulting in an
effective tax rate of 42.5%, compared to $13.1 million and 42.8% for the like
quarter of a year ago.
Business Segment Reporting
The previous sections of the Results of Operations for the Quarter Ended
March 31, 1999 discussed our consolidated results. The purpose of this section
is to present data on the results of operations of our two business segments--
banking and real estate investment. For a description of these business
segments, see "Business".
34
<PAGE>
The following table presents net income by business segment for the period
indicated, followed by a discussion of the results of operations of each
segment.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
June
30,
March 31, December 31, September 30, 1998 March 31,
1999 1998 1998 (1) 1998 (2)
--------- ------------ ------------- ------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Banking................. $12,029 $10,791 $10,870 $12,405 $12,670
Real estate investment.. 319 1,861 1,898 2,583 4,895
------- ------- ------- ------- -------
Total net income...... $12,348 $12,652 $12,768 $14,988 $17,565
======= ======= ======= ======= =======
</TABLE>
- --------
(1) The net income impact of a settlement with a former joint venture partner
totaled $1.8 million, of which $0.5 million was in banking and $1.3
million was in real estate investment.
(2) The net income impact of a settlement with a former joint venture partner
totaled $2.9 million, of which $1.4 million was in banking and $1.5
million was in real estate investment.
Banking
Net income from banking operations for the first quarter of 1999 totaled
$12.0 million, down from $12.7 million in the first quarter of 1998. The
previously mentioned settlement benefited year-ago net income by $1.4 million.
The pre-tax amount was $2.5 million of which:
. $1.4 million represented the recovery of a prior loan charge-off thereby
reducing provision for loan losses;
. $0.8 million was recorded in other income; and
. $0.3 million was recorded as a reduction to professional fees within
operating expense.
Excluding the settlement benefit from year ago results, net income from
banking would have increased by $0.8 million or 6.8%.
35
<PAGE>
The increase in adjusted net income reflected several factors. Net interest
income increased $6.1 million or 14.3% due to increases in both average
earning assets and the effective interest rate spread. Other income increased
an adjusted $5.6 million. The increase in adjusted other income reflected
increases in net gains on sales of loans, loan and deposit related fees and
loan servicing fees. Adjusted increases of $10.0 million in operating expense
and $0.8 million in provision for loan losses partially offset the favorable
impact of these items. The increase in adjusted operating expense reflected
significantly higher lending volumes, branch expansion and expenses related to
resolving year 2000 compliance issues. The table below sets forth our banking
operational results and selected financial data for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
---------- ------------ ------------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net interest income..... $ 48,948 $ 45,953 $ 42,889 $ 43,318 $ 42,807
Provision for loan
losses................. 2,381 1,180 985 1,520 233
Other income............ 10,110 6,881 5,561 6,864 5,311
Operating expense....... 35,839 33,057 28,270 27,077 25,550
Net intercompany income
(expense).............. 82 (18) (48) 80 (121)
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 20,920 18,579 19,147 21,665 22,214
Income taxes............ 8,891 7,788 8,277 9,260 9,544
---------- ---------- ---------- ---------- ----------
Net income............ $ 12,029 $ 10,791 $ 10,870 $ 12,405 $ 12,670
========== ========== ========== ========== ==========
At period end:
Assets:
Loans................. $6,102,547 $5,788,365 $5,387,843 $5,328,291 $5,400,194
Other................. 473,310 463,960 500,294 481,463 449,917
---------- ---------- ---------- ---------- ----------
Total assets........ 6,575,857 6,252,325 5,888,137 5,809,754 5,850,111
---------- ---------- ---------- ---------- ----------
Equity.................. 490,406 480,566 470,815 458,962 446,086
</TABLE>
36
<PAGE>
Real Estate Investment
Net income from our real estate investment operations totaled $0.3 million
in the first quarter of 1999, down from $4.9 million in the year-ago quarter.
The previously mentioned settlement benefited year-ago net income by $1.5
million. We reflected the pre-tax amount of $2.6 million as a reduction of
loss on real estate and joint ventures in the other income category. Excluding
the settlement, net income would have declined by $3.1 million. The adjusted
decline primarily reflected lower gains from the sale of real estate assets.
In the year-ago first quarter, gains totaled $5.4 million from sales
associated with residential and shopping center joint venture projects. Those
gains appear in the other income category. There were no sales in the first
quarter of 1999. The table below sets forth real estate investment operational
results and selected financial data for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- ------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net interest income
(expense).............. $ 8 $ (209) $ (102) $ (128) $ (181)
Provision for (reduction
of) loan losses........ -- -- -- (58) 39
Other income............ 1,232 3,925 4,111 5,085 9,615
Operating expense....... 618 777 679 203 1,047
Net intercompany income
(expense).............. (82) 18 48 (80) 121
------- ------- ------- ------- -------
Income before income
taxes.................. 540 2,957 3,378 4,732 8,469
Income taxes............ 221 1,096 1,480 2,149 3,574
------- ------- ------- ------- -------
Net income............ $ 319 $ 1,861 $ 1,898 $ 2,583 $ 4,895
======= ======= ======= ======= =======
At period end:
Assets:
Real estate held for
investment........... $52,155 $49,447 $47,918 $41,880 $41,123
Other................. 7,564 9,841 13,790 17,892 15,496
------- ------- ------- ------- -------
Total assets........ 59,719 59,288 61,708 59,772 56,619
------- ------- ------- ------- -------
Equity.................. 41,484 41,194 39,266 37,424 34,817
</TABLE>
Our investment in real estate and joint ventures amounted to $52 million at
March 31, 1999, compared to $49 million at December 31, 1998, and $41 million
at March 31, 1998.
For information on valuation allowances associated with real estate and
joint venture loans, see "Financial Condition for the Quarter Ended March 31,
1999--Asset Quality--Valuation Allowances."
37
<PAGE>
FINANCIAL CONDITION FOR THE QUARTER ENDED MARCH 31, 1999
Loans and Mortgage-Backed Securities
Total loans and mortgage-backed securities, including those held for sale,
increased $314 million during the first quarter to a total of $6.1 billion or
92.5% of assets at March 31, 1999. The increase primarily occurred in the
single family loan portfolio, which increased $429 million or 9.2% during the
quarter. Of that increase, $182 million represented fixed rate loans, while
subprime loans increased $168 million. In addition, our adjustable rate
portfolio increased by $79 million, the first increase in over a year. A $137
million decline in loans held for sale partially offset the increase in the
single family loan portfolio.
The following table sets forth loans originated, including purchases, for
investment and for sale.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March
March 31, December 31, September 30, June 30, 31,
1999 1998 1998 1998 1998
---------- ------------ ------------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans originated for
investment:
Residential, one-to-
four units:
Adjustable........... $ 568,891 $ 436,960 $ 383,483 $309,468 $190,490
Fixed................ 208,504 181,717 6,921 6,824 4,791
Other................. 131,045 111,484 102,319 88,013 93,672
---------- ---------- ---------- -------- --------
Total loans
originated for
investment.......... 908,440 730,161 492,723 404,305 288,953
Loans originated for
sale (1)............... 646,786 740,837 571,146 592,931 257,669
---------- ---------- ---------- -------- --------
Total loans
originated........... $1,555,226 $1,470,998 $1,063,869 $997,236 $546,622
========== ========== ========== ======== ========
</TABLE>
- --------
(1) One-to-four unit residential loans, primarily fixed.
Originations of one-to-four unit residential loans totaled $1.424 billion in
the first quarter of 1999, of which $777 million were for portfolio and $647
million were for sale. This was 5% higher than the $1.360 billion we
originated in the fourth quarter of 1998, and more than triple the $453
million we originated in the year-ago quarter. Of the current quarter total,
$189 million represented originations of subprime credits as part of our
strategy to enhance the portfolio's net yield. During the current quarter, 76%
of our residential one-to-four unit originations represented refinancings of
existing loans. This is down slightly from 77% during the 1998 fourth quarter,
but up from 70% in the year-ago first quarter. In addition to single family
loans, we originated $131 million of other loans in the current quarter
including $60 million of construction and land loans and $50 million of
automobile loans.
During the current quarter, loan originations for investment consisted
primarily of adjustable rate mortgages tied to the Eleventh District Cost of
Funds Index ("COFI"), an index which lags the movement in market interest
rates. This experience is similar to that of recent quarters. Increasingly,
the majority of adjustable rate mortgage originations reprice monthly;
however, we also originate adjustable rate mortgage loans which reprice semi-
annually and annually. With respect to adjustable rate mortgages that
primarily adjust monthly, there is a lifetime interest rate cap, but no other
specified limit on periodic interest rate adjustments. Instead, monthly
adjustment adjustable rate mortgages have a periodic cap on changes in the
required monthly payments, which payments adjust annually. Monthly adjustment
adjustable rate mortgages allow for negative amortization. Negative
amortization is the addition to loan principal of accrued interest that
exceeds the required loan payment. There is a limit on the amount of negative
amortization allowed, expressed as a percentage of principal plus the amount
added relative to the original loan amount. That limit has been 110%, but was
increased to 125% in 1998 on loans having a loan to value ratio of 80% or
less. At March 31, 1999, $3.2 billion of the adjustable rate mortgages in our
loan portfolio were subject to negative amortization, of which $53 million
represented the amount of negative amortization included in the loan balance.
38
<PAGE>
We also continue to originate residential fixed interest rate mortgage loans
to meet consumer demand, but we intend to sell the majority of these loans. We
sold $777 million of loans in the first quarter of 1999, compared to $559
million for the previous quarter and $119 million for the first quarter of
1998. All were secured by residential one-to-four unit property and at March
31, 1999, loans held for sale totaled $310 million.
At March 31, 1999, we had commitments to fund loans amounting to $807
million, of which $419 million were fixed rate one-to-four unit residential
loans being originated for sale in the secondary market, loans in process of
$123 million, undrawn lines of credit of $77 million, commitments to purchase
loans of $53 million and letters of credit of $1 million. We believe our
current sources of funds will enable us to meet these obligations while
exceeding all regulatory liquidity requirements.
39
<PAGE>
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment Portfolio:
Loans originated:
Loans secured by real
estate:
Residential:
One-to-four units:
Adjustable........... $ 382,562 $ 303,291 $ 283,468 $ 229,106 $ 127,871
Adjustable--
subprime............ 186,329 133,409 100,015 78,845 60,017
--------- --------- --------- --------- ---------
Total adjustable.... 568,891 436,700 383,483 307,951 187,888
Fixed................ 205,758 179,786 5,351 3,980 3,319
Fixed--subprime...... 2,444 1,684 1,535 1,329 1,472
Five or more units:
Adjustable........... -- -- -- -- 875
Fixed................ -- -- 13,229 -- --
--------- --------- --------- --------- ---------
Total residential... 777,093 618,170 403,598 313,260 193,554
Commercial real
estate................ 6,398 6,149 -- -- 4,214
Construction........... 30,587 45,339 17,266 19,023 29,906
Land................... 29,081 9,983 23,640 6,883 7,851
Non-mortgage:
Commercial............. 2,925 700 645 4,421 610
Automobile............. 50,294 43,330 40,158 46,153 45,552
Other consumer......... 11,760 5,983 7,016 10,738 4,537
--------- --------- --------- --------- ---------
Total loans
originated........... 908,138 729,654 492,323 400,478 286,224
Real estate loans
purchased (1).......... 302 507 400 3,827 2,729
--------- --------- --------- --------- ---------
Total loans originated
and purchased......... 908,440 730,161 492,723 404,305 288,953
Loan repayments......... (434,796) (489,912) (490,358) (498,516) (376,371)
Other net changes (2)... (18,824) (8,211) 553 (11,740) (14,747)
--------- --------- --------- --------- ---------
Net increase (decrease)
in loans held for
investment............ 454,820 232,038 2,918 (105,951) (102,165)
--------- --------- --------- --------- ---------
Sale Portfolio:
Residential, one-to-four
units:
Originated whole
loans................. 646,786 740,837 571,146 592,931 257,669
Loans transferred from
(to) the investment
portfolio............. (7,095) (3,822) -- 162 604
Originated whole loans
sold.................. (176,139) (266,812) (354,371) (429,434) (79,686)
Loans exchanged for
mortgage-backed
securities............ (600,379) (291,940) (153,175) (124,505) (39,211)
Other net changes...... (622) (3,794) (2,851) (1,369) (97)
--------- --------- --------- --------- ---------
Net increase
(decrease) in loans
held for sale......... (137,449) 174,469 60,749 37,785 139,279
--------- --------- --------- --------- ---------
Mortgage-backed
securities, net:
Received in exchange
for loans............. 600,379 291,940 153,175 124,505 39,211
Sold................... (600,379) (293,222) (153,175) (124,505) (39,211)
Repayments............. (3,235) (4,143) (4,242) (3,724) (3,020)
Other net changes...... 46 (560) 127 (13) (296)
--------- --------- --------- --------- ---------
Net decrease in
mortgage-backed
securities available
for sale.............. (3,189) (5,985) (4,115) (3,737) (3,316)
--------- --------- --------- --------- ---------
Net increase
(decrease) in loans
and mortgage-backed
securities held for
sale and available
for sale.............. (140,638) 168,484 56,634 34,048 135,963
--------- --------- --------- --------- ---------
Total net increase
(decrease) in loans
and mortgage-backed
securities............ $ 314,182 $ 400,522 $ 59,552 $ (71,903) $ 33,798
========= ========= ========= ========= =========
</TABLE>
- --------
(1) Primarily one-to-four unit residential loans. Includes five or more unit
residential loans of $0.4 million in the three months ended September 30,
1998, $0.2 million in the three months ended June 30, 1998 and $0.1 million
in the three months ended March 31, 1998. Also includes commercial real
estate loans of $0.6 million in the three months ended June 30, 1998.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or from (to) the held for sale
portfolio, and interest capitalized on loans (negative amortization).
40
<PAGE>
The following table sets forth the composition of our loan and mortgage-
backed securities portfolios at the dates indicated. At March 31, 1999,
approximately 97% of our real estate loans were secured by real estate located
in California, principally in Los Angeles, Orange, Santa Clara, San Diego and
San Mateo counties.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
---------- ------------ ------------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment Portfolio:
Loans secured by real
estate:
Residential:
One-to-four units:
Adjustable........... $3,800,552 $3,721,728 $3,791,187 $3,892,221 $4,027,520
Adjustable--
subprime............ 745,843 580,232 461,646 372,608 303,058
Fixed................ 507,357 325,454 153,408 155,741 161,518
Fixed--subprime...... 10,932 8,719 7,516 5,993 4,672
---------- ---------- ---------- ---------- ----------
Total one-to-four
units.............. 5,064,684 4,636,133 4,413,757 4,426,563 4,496,768
Five or more units:
Adjustable........... 18,516 18,617 18,707 18,802 30,129
Fixed................ 7,904 21,412 22,436 8,934 8,748
Commercial real
estate:
Adjustable............ 39,641 39,360 44,215 47,045 73,013
Fixed................. 111,606 101,430 112,687 114,379 118,476
Construction.......... 147,246 127,761 92,779 95,664 89,989
Land.................. 74,959 44,859 39,222 29,857 32,510
Non-mortgage:
Commercial............ 28,182 28,293 27,710 27,298 25,478
Automobile............ 363,168 357,988 355,955 356,504 350,316
Other consumer........ 40,607 41,894 44,026 44,530 45,529
---------- ---------- ---------- ---------- ----------
Total loans held for
investment........... 5,896,513 5,417,747 5,171,494 5,169,576 5,270,956
Increase (decrease)
for:
Undisbursed loan
funds................ (133,785) (108,414) (88,213) (85,367) (78,888)
Net deferred costs and
premiums............. 33,515 31,021 24,962 21,408 19,581
Allowance for
estimated loss....... (32,586) (31,517) (31,444) (31,736) (31,817)
---------- ---------- ---------- ---------- ----------
Total loans held for
investment, net...... 5,763,657 5,308,837 5,076,799 5,073,881 5,179,832
---------- ---------- ---------- ---------- ----------
Sale Portfolio, Net:
Loans held for sale
(all one-to-four
units):
Adjustable............ -- 7,975 9,480 13,692 10,019
Fixed................. 309,933 439,407 263,433 198,472 164,360
---------- ---------- ---------- ---------- ----------
Total loans held for
sale................. 309,933 447,382 272,913 212,164 174,379
Mortgage-backed
securities available
for sale:
Adjustable............ 9,887 10,996 12,795 14,575 16,135
Fixed................. 19,070 21,150 25,336 27,671 29,848
---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities available
for sale............. 28,957 32,146 38,131 42,246 45,983
---------- ---------- ---------- ---------- ----------
Total loans and
mortgage-backed
securities held for
sale and available
for sale............. 338,890 479,528 311,044 254,410 220,362
---------- ---------- ---------- ---------- ----------
Total loans and
mortgage-backed
securities........... $6,102,547 $5,788,365 $5,387,843 $5,328,291 $5,400,194
========== ========== ========== ========== ==========
</TABLE>
We carry loans for sale at the lower of cost or market. At March 31, 1999,
no valuation allowance was required as the market value exceeded book value on
an aggregate basis.
41
<PAGE>
We carry mortgage-backed securities available for sale at fair value which,
at March 31, 1999, reflected an unrealized gain of $0.2 million. The current
quarter-end unrealized gain, less the associated tax effect of $0.1 million,
is reflected within a separate component of other comprehensive income until
realized.
Deposits
At March 31, 1999, our deposits totaled $5.2 billion, up $96 million or 1.9%
from the year-ago quarter end, and up $166 million or 3.3% from year-end 1998.
Compared to the year-ago period, our transaction accounts--i.e., checking,
regular passbook and money market--increased $306 million or 30.4%, while
certificates of deposits decreased $210 million or 5.1%. The following table
sets forth information concerning our deposits and average rates paid at the
dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 September 30, 1998 June 30, 1998 March 31,1998
------------------- ------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction
accounts.......... 2.34% $1,313,707 2.30% $1,238,062 2.18% $1,080,734 2.17% $1,021,428 2.10% $1,007,323
Certificates of
deposit:
Less than 3.00%... 2.60 23,324 2.62 25,126 2.63 26,686 2.63 27,290 2.63 29,543
3.00-3.49......... 3.01 323 3.01 593 3.03 449 3.02 677 3.01 581
3.50-3.99......... 3.91 47,813 3.88 51,474 3.91 40,115 -- -- -- --
4.00-4.49......... 4.39 604,692 4.39 428,316 4.16 14,754 4.13 59,708 4.20 60,410
4.50-4.99......... 4.80 1,004,947 4.80 668,204 4.88 468,922 4.90 208,774 4.89 134,194
5.00-5.99......... 5.41 2,015,702 5.53 2,421,333 5.57 3,162,420 5.60 3,072,092 5.63 2,947,539
6.00-6.99......... 6.06 192,320 6.06 204,065 6.06 382,502 6.05 778,300 6.06 925,762
7.00 and greater.. 7.24 2,454 7.24 2,560 7.25 2,798 7.24 3,107 7.21 3,470
---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- ----------
Total certificates
of deposit....... 5.09 3,891,575 5.26 3,801,671 5.50 4,098,646 5.61 4,149,948 5.66 4,101,499
---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- ----------
Total deposits.... 4.40% $5,205,282 4.53% $5,039,733 4.81% $5,179,380 4.93% $5,171,376 4.96% $5,108,822
==== ========== ==== ========== ==== ========== ==== ========== ==== ==========
</TABLE>
Borrowings
During the 1999 first quarter, our borrowings increased $148 million to $851
million, primarily reflecting increases in FHLB advances. This followed an
increase of $494 million during the fourth quarter of 1998 when we took
advantage of obtaining long-term advances from the FHLB at attractive
borrowing rates. The following table sets forth information concerning our
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances........... $842,677 $695,012 $197,935 $123,347 $209,854
Other borrowings:
Commercial paper....... -- -- -- 19,982 44,517
Other borrowings....... 8,638 8,708 12,166 12,256 12,712
-------- -------- -------- -------- --------
Total borrowings...... $851,315 $703,720 $210,101 $155,585 $267,083
======== ======== ======== ======== ========
Weighted average rate on
borrowings during
the period............. 5.36% 5.61% 5.91% 6.60% 6.42%
Total borrowings as a
percentage of
total assets........... 12.91 11.22 3.55 2.67 4.55
</TABLE>
42
<PAGE>
Asset/Liability Management and Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our market risk arises primarily from interest rate risk in
our lending and deposit taking activities. This interest rate risk occurs to
the degree that our interest-bearing liabilities reprice or mature more
rapidly or on a different basis than our interest-earning assets. Since our
earnings depend primarily on our net interest income, which is the difference
between the interest and dividends earned on interest-earning assets and the
interest paid on interest-bearing liabilities, one of our principal objectives
is to actively monitor and manage the effects of adverse changes in interest
rates on net interest income while maintaining asset quality. There has been
no significant change in our market risk since December 31, 1998. See
"Financial Condition for the Year Ended December 31, 1998--Asset/Liability
Management and Market Risk."
The following table sets forth the repricing frequency of our major asset and
liability categories as of March 31, 1999, as well as other information
regarding the repricing and maturity differences between interest-earning
assets and interest-bearing liabilities in future periods. We refer to these
differences as "gap." We have determined the repricing frequencies by
reference to projected maturities, based upon contractual maturities as
adjusted for scheduled repayments and "repricing mechanisms"--provisions for
changes in the interest and dividend rates of assets and liabilities. We
assume prepayment rates on substantially all of our loan portfolio based upon
our historical loan prepayment experience and anticipated future prepayments.
Repricing mechanisms on a number of our assets are subject to limitations,
like caps on the amount that interest rates and payments on our loans may
adjust. Accordingly, these assets do not normally respond to changes in market
interest rates as completely or rapidly as our liabilities. The interest rate
sensitivity of our assets and liabilities illustrated in the table would vary
substantially if we used different assumptions or if actual experience
differed from the assumptions shown.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------------------
Within 7-12 2-5 6-10 Over Total
6 Months Months Years Years 10 Years Balance
---------- ----------- -------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities
and FHLB stock........ (1) $ 111,157 $ 10,064 $ 90,169 $ -- $ -- $ 211,390
Loans and mortgage-
backed securities:
Mortgage-backed
securities........... (2) 15,047 4,638 8,542 684 46 28,957
Loans secured by real
estate:
Residential:
Adjustable.......... (2) 4,462,219 106,564 9,648 -- -- 4,578,431
Fixed............... (2) 372,615 52,856 243,085 106,924 61,709 837,189
Commercial real es-
tate................ (2) 44,942 7,486 88,244 5,771 1,896 148,339
Construction......... (2) 52,916 -- -- -- -- 52,916
Land................. (2) 41,073 34 293 448 224 42,072
Non-mortgage:
Commercial........... (2) 17,053 -- -- -- -- 17,053
Consumer............. (2) 120,240 75,286 202,064 -- -- 397,590
---------- ----------- -------- --------- -------- ----------
Total loans and
mortgage-backed
securities............ 5,126,105 246,864 551,876 113,827 63,875 6,102,547
---------- ----------- -------- --------- -------- ----------
Total interest-earning
assets............... $5,237,262 $ 256,928 $642,045 $ 113,827 $ 63,875 $6,313,937
========== =========== ======== ========= ======== ==========
Deposits and borrowings:
Interest-bearing depos-
its:
Fixed maturity
deposits............. (1) $2,328,096 $ 1,274,626 $288,853 $ -- $ -- $3,891,575
Transaction accounts.. (3) 1,152,738 -- -- -- -- 1,152,738
Non-interest-bearing
transaction accounts.. 160,969 -- -- -- -- 160,969
---------- ----------- -------- --------- -------- ----------
Total deposits........ 3,641,803 1,274,626 288,853 -- -- 5,205,282
Borrowings............. 301,471 17,744 101,100 431,000 -- 851,315
---------- ----------- -------- --------- -------- ----------
Total deposits and
borrowings........... $3,943,274 $ 1,292,370 $389,953 $ 431,000 $ -- $6,056,597
========== =========== ======== ========= ======== ==========
Excess (shortfall) of
interest-earning assets
over interest-bearing
liabilities............ $1,293,988 $(1,035,442) $252,092 $(317,173) $ 63,875 $ 257,340
Cumulative gap.......... 1,293,988 258,546 510,638 193,465 257,340
Cumulative gap--as a %
of total assets:
March 31, 1999......... 19.62% 3.92% 7.74% 2.93% 3.90%
December 31, 1998...... 23.84 7.48 9.07 3.40 4.00
March 31, 1998......... 25.50 2.57 2.70 3.65 4.07
</TABLE>
- -------
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment
and prepayments of principal.
(3) Subject to immediate repricing.
43
<PAGE>
Our six-month gap at March 31, 1999, was a positive 19.62%. This means that
more interest-earning assets reprice within six months than interest-bearing
liabilities. This compares to a positive six-month gap of 23.84% at December
31, 1998, and 25.50% at March 31, 1998. We continue to pursue our strategy of
emphasizing the origination of adjustable rate mortgages. For the twelve
months ended March 31, 1999, we originated and purchased for investment $2.0
billion of adjustable rate loans and mortgage-backed securities which
represented approximately 80% of all loans and mortgage-backed securities we
originated and purchased for investment during the period.
At March 31, 1999, 97% of our interest-earning assets mature, reprice or are
estimated to prepay within five years, down slightly from 98% at both December
31, 1998 and March 31, 1998. At March 31, 1999, loans and mortgage-backed
securities with adjustable interest rates represented 79% of our loans and
mortgage-backed securities portfolios. During the first quarter of 1999, we
continued to offer residential fixed rate loan products to our customers
primarily for sale in the secondary market. We price and originate fixed rate
mortgage loans for sale into the secondary market to increase opportunities
for originating adjustable rate mortgages and generate fee and servicing
income. We also originate fixed rate loans for portfolio to facilitate the
sale of real estate acquired in settlement of loans and which meet specific
yield and other approved guidelines.
At March 31, 1999, $5.3 billion or 86% of our total loan portfolio,
including mortgage-backed securities, consisted of adjustable rate loans,
construction loans, and loans with a due date of five years or less, compared
to $5.0 billion or 92% at December 31, 1998, and $5.1 billion or 92% at March
31, 1998.
The following table sets forth on a consolidated basis the interest rate
spread on our interest-earning assets and interest-bearing liabilities as of
the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loans and mortgage-
backed securities.... 7.59% 7.72% 7.82% 7.91% 7.94%
FHLB stock............ 5.29 5.44 5.86 5.88 5.89
Investment
securities........... 5.61 5.40 5.77 5.81 5.83
---- ---- ---- ---- ----
Earning assets
yield.............. 7.52 7.65 7.73 7.82 7.86
---- ---- ---- ---- ----
Weighted average cost:
Deposits.............. 4.40 4.53 4.81 4.93 4.96
Borrowings:
FHLB advances....... 5.30 5.47 5.85 6.18 6.17
Other borrowings.... 8.70 8.69 8.36 6.56 6.19
---- ---- ---- ---- ----
Combined borrowings... 5.33 5.51 6.00 6.26 6.17
---- ---- ---- ---- ----
Combined funds........ 4.53 4.66 4.86 4.97 5.02
---- ---- ---- ---- ----
Interest rate spread.... 2.99% 2.99% 2.87% 2.85% 2.84%
==== ==== ==== ==== ====
</TABLE>
The period end weighted average yield on our loan and mortgage-backed
securities portfolios at March 31, 1999, was 7.59%, down from 7.72% at
December 31, 1998, and 7.94% at March 31, 1998. At March 31, 1999, our single
family adjustable rate mortgage portfolio, including mortgage-backed
securities, totaled $4.6 billion with a weighted average rate of 7.35%,
compared to $4.3 billion with a weighted average rate of 7.53% at December 31,
1998, and $4.4 billion with a weighted average rate of 7.65% at March 31,
1998.
44
<PAGE>
Problem Loans and Real Estate
Non-Performing Assets
Non-performing assets consist of loans on which we have ceased the accrual
of interest, which we refer to as non-accrual loans, and real estate acquired
in settlement of loans. Non-performing assets increased during the quarter by
$3 million to $30 million at March 31, 1999 or 0.46% of total assets. The
increase primarily occurred in single family subprime credits, which totaled
0.58% of these loans. Non-performing assets at quarter end include non-accrual
loans aggregating $1 million which were not contractually past due, but were
deemed non-accrual due to our assessment of the borrower's ability to pay.
The following table summarizes our non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential, one-to-
four units........... $16,579 $15,571 $15,397 $19,047 $17,736
Residential, one-to-
four units--
subprime............. 4,379 1,975 2,479 1,107 832
Other................. 4,127 4,829 20,677 20,259 20,060
------- ------- ------- ------- -------
Total non-accrual
loans.............. 25,085 22,375 38,553 40,413 38,628
Real estate acquired in
settlement of loans.... 4,686 4,475 5,423 7,576 10,414
Repossessed
automobiles............ 319 569 611 764 688
------- ------- ------- ------- -------
Gross non-performing
assets............. $30,090 $27,419 $44,587 $48,753 $49,730
======= ======= ======= ======= =======
Allowance for loan
losses (1):
Amount................ $32,586 $31,517 $31,444 $31,736 $31,817
As a percentage of
non-performing
loans................ 129.90% 140.86% 81.56% 78.53% 82.37%
Non-performing assets as
a percentage of total
assets................. 0.46 0.44 0.75 0.84 0.85
</TABLE>
- --------
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
At March 31, 1999, the recorded investment in loans for which we recognized
impairment totaled $13 million. The total allowance for possible losses
related to these loans was $1 million. During the first quarter of 1999, total
interest recognized on the impaired loan portfolio was $0.5 million.
Delinquent Loans
During the 1999 first quarter, our delinquencies decreased by $2 million or
4.9%. The decrease occurred primarily in our one-to-four unit residential and
automobile categories, which both declined by $2 million. An increase in the
one-to-four units subprime category of $3 million partially offset those
declines, with total subprime delinquencies equaling 0.64% of related loans.
As a percentage of total loans outstanding, total delinquencies were 0.58% at
the end of the 1999 first quarter, compared to 0.65% at year-end 1998 and
0.78% a year ago.
45
<PAGE>
The following table indicates the amounts of our past due loans at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------------- ----------------------------------
30-59 60-89 90+ 30-59 60-89 90+
Days Days Days (1) Total Days Days Days (1) Total
------- ------ -------- ------- ------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units...... $ 8,463 $4,700 $13,180 $26,343 $ 9,841 $6,014 $12,832 $28,687
One-to-four units--
subprime.............. 1,177 2,281 1,385 4,843 244 784 947 1,975
Five or more units..... -- -- -- -- -- -- 155 155
Commercial real
estate................ -- -- -- -- -- -- -- --
Construction........... -- -- -- -- -- -- -- --
Land................... -- -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ ------- -------
Total real estate
loans................ 9,640 6,981 14,565 31,186 10,085 6,798 13,934 30,817
Non-mortgage:
Commercial............. -- -- -- -- -- -- -- --
Automobile............. 3,248 383 1,000 4,631 4,650 888 1,048 6,586
Other consumer......... 144 76 226 446 334 45 344 723
------- ------ ------- ------- ------- ------ ------- -------
Total loans........... $13,032 $7,440 $15,791 $36,263 $15,069 $7,731 $15,326 $38,126
======= ====== ======= ======= ======= ====== ======= =======
Delinquencies as a
percentage of total
loans.................. 0.21% 0.12% 0.25% 0.58% 0.26% 0.13% 0.26% 0.65%
<CAPTION>
September 30, 1998 June 30, 1998
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units...... $10,601 $4,302 $12,408 $27,311 $12,500 $5,271 $14,497 $32,268
One-to-four units--
subprime.............. 741 1,334 505 2,580 535 -- 762 1,297
Five or more units..... 155 -- -- 155 -- -- -- --
Commercial real
estate................ -- -- -- -- -- -- -- --
Construction........... -- -- -- -- -- -- -- --
Land................... -- -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ ------- -------
Total real estate
loans................ 11,497 5,636 12,913 30,046 13,035 5,271 15,259 33,565
Non-mortgage:
Commercial............. -- -- -- -- -- -- -- --
Automobile............. 5,330 1,105 990 7,425 4,795 860 819 6,474
Other consumer......... 119 143 496 758 222 208 227 657
------- ------ ------- ------- ------- ------ ------- -------
Total loans........... $16,946 $6,884 $14,399 $38,229 $18,052 $6,339 $16,305 $40,696
======= ====== ======= ======= ======= ====== ======= =======
Delinquencies as a
percentage of total
loans.................. 0.31% 0.13% 0.26% 0.70% 0.34% 0.12% 0.30% 0.76%
<CAPTION>
March 31, 1998
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units...... $14,532 $6,096 $14,487 $35,115
One-to-four units--
subprime.............. 287 359 186 832
Five or more units..... 222 -- -- 222
Commercial real
estate................ 241 -- -- 241
Construction........... -- -- -- --
Land................... -- -- -- --
------- ------ ------- -------
Total real estate
loans................ 15,282 6,455 14,673 36,410
Non-mortgage:
Commercial............. -- -- -- --
Automobile............. 4,005 946 716 5,667
Other consumer......... 73 57 457 587
------- ------ ------- -------
Total loans........... $19,360 $7,458 $15,846 $42,664
======= ====== ======= =======
Delinquencies as a
percentage of total
loans.................. 0.35% 0.14% 0.29% 0.78%
</TABLE>
- --------
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
46
<PAGE>
Allowance for Losses on Loans and Real Estate
We establish valuation allowances for losses on loans and real estate on a
specific and general basis. We determine specific allowances based on the
difference between the carrying value of the asset and our net fair value. We
determine general valuation allowances based on historical loss experience,
current and anticipated levels and trends of delinquent and non-performing
loans and the economic environment in our market areas.
Allowances for losses on all assets were $41 million at March 31, 1999, $40
million at December 31, 1998 and $51 million at March 31, 1998.
Our total allowance for possible loan losses was $33 million at March 31,
1999, compared to $32 million at both December 31, 1998, and at March 31,
1998. Included in our current quarter-end total allowance was $32 million of
general loan valuation allowances, of which $3 million represents an
unallocated portion. These general loan valuation allowances may be included
as a component of risk-based capital, up to a maximum of 1.25% of our risk-
weighted assets. Net charge-offs totaled $1.3 million in the 1999 first
quarter, compared to $0.5 million in the year-ago quarter. The year-ago
quarter included a $1.4 million recovery from the previously mentioned
settlement. Adjusting year-ago results to exclude that recovery, net charge-
offs would have been down $0.6 million between first quarters. Included in the
current quarter net charge-offs were $0.1 million associated with one-to-four
unit residential loans and $1.2 million associated with automobile loans.
The following table is a summary of the activity of our allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $31,517 $31,444 $31,736 $31,817 $32,092
Provision............... 2,381 1,180 985 1,462 272
Charge-offs............. (1,520) (1,574) (1,540) (1,877) (2,381)
Recoveries (1).......... 208 467 263 334 1,834
------- ------- ------- ------- -------
Balance at end of
period................. $32,586 $31,517 $31,444 $31,736 $31,817
======= ======= ======= ======= =======
</TABLE>
- --------
(1) The first quarter of 1998 includes a $1.4 million recovery of a prior
commercial real estate loan charge-off due to the previously mentioned
settlement.
47
<PAGE>
The following table indicates our allocation of the total valuation allowance
for loan losses to the various categories of loans for the dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 September 30, 1998
------------------------------- ------------------------------- -------------------------------
Gross Allowance Gross Allowance Gross Allowance
Loan Percentage Loan Percentage Loan Percentage
Portfolio to Loan Portfolio to Loan Portfolio to Loan
Allowance Balance Balance Allowance Balance Balance Allowance Balance Balance
--------- ---------- ---------- --------- ---------- ---------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units..... $15,735 $5,064,684 0.31% $14,299 $4,636,133 0.31% $13,603 $4,413,757 0.31%
Five or more units.... 299 26,420 1.13 401 40,029 1.00 409 41,143 0.99
Commercial real
estate............... 2,729 151,247 1.80 2,632 140,790 1.87 3,656 156,902 2.33
Construction.......... 1,732 147,246 1.18 1,508 127,761 1.18 1,087 92,779 1.17
Land.................. 944 74,959 1.26 568 44,859 1.27 498 39,222 1.27
Non-Mortgage:
Commercial............ 202 28,182 0.72 218 28,293 0.77 204 27,710 0.74
Automobile............ 7,566 363,168 2.08 8,344 357,988 2.33 8,349 355,955 2.35
Other consumer........ 579 40,607 1.43 747 41,894 1.78 838 44,026 1.90
Not specifically
allocated............. 2,800 -- -- 2,800 -- -- 2,800 -- --
------- ---------- ---- ------- ---------- ---- ------- ---------- ----
Total loans held for
investment.......... $32,586 $5,896,513 0.55% $31,517 $5,417,747 0.58% $31,444 $5,171,494 0.61%
======= ========== ==== ======= ========== ==== ======= ========== ====
<CAPTION>
June 30, 1998 March 31, 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units..... $14,143 $4,426,563 0.32% $13,960 $4,496,768 0.31%
Five or more units.... 309 27,736 1.11 399 38,877 1.03
Commercial real
estate............... 3,766 161,424 2.33 4,118 191,489 2.15
Construction.......... 1,137 95,664 1.19 1,072 89,989 1.19
Land.................. 382 29,857 1.28 415 32,510 1.28
Non-mortgage:
Commercial............ 199 27,298 0.73 192 25,478 0.75
Automobile............ 8,272 356,504 2.32 8,105 350,316 2.31
Other consumer........ 728 44,530 1.63 756 45,529 1.66
Not specifically
allocated............. 2,800 -- -- 2,800 -- --
------- ---------- ---- ------- ---------- ----
Total loans held for
investment.......... $31,736 $5,169,576 0.61% $31,817 $5,270,956 0.60%
======= ========== ==== ======= ========== ====
</TABLE>
The following table is a summary of the activity of our allowance for real
estate held for investment for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $7,717 $8,151 $ 9,558 $18,140 $21,244
Provision (reduction)... 53 (214) (139) (2,221) (2,722)
Charge-offs............. -- (220) (1,268) (6,361) (382)
Recoveries.............. -- -- -- -- --
------ ------ ------- ------- -------
Balance at end of
period................. $7,770 $7,717 $ 8,151 $ 9,558 $18,140
====== ====== ======= ======= =======
</TABLE>
48
<PAGE>
In addition to losses charged against the allowance for loan losses, we have
recorded losses on real estate acquired in settlement of loans by direct
write-off to net operations of real estate acquired in settlement of loans and
against an allowance for losses specifically established for these assets. The
following table is a summary of the activity of our allowance for real estate
acquired in settlement of loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $533 $582 $ 671 $ 898 $ 839
Provision (reduction)... 26 (14) 160 5 304
Charge-offs............. (12) (35) (249) (232) (245)
Recoveries.............. -- -- -- -- --
---- ---- ----- ----- -----
Balance at end of
period................. $547 $533 $ 582 $ 671 $ 898
==== ==== ===== ===== =====
</TABLE>
See "Financial Condition for the Year Ended December 31, 1998--Problem Loans
and Real Estate--Allowance for Losses on Loans and Real Estate" for further
information as to how we establish valuation allowances.
Capital Resources and Liquidity
Our primary sources of funds generated in the first quarter of 1999 were
principal repayments, including prepayments, but excluding our refinances on
loans and mortgage-backed securities held for investment and available for
sale of $387 million and net increases in our deposits of $166 million and
borrowings of $148 million. In addition, loans held for sale declined by $137
million.
We used these funds primarily to originate loans held for investment of $855
million, net of our refinances of $52 million.
At March 31, 1999 and December 31, 1998, the Bank's ratio of regulatory
liquidity was 4.0%, compared to 4.6% at March 31, 1998.
Stockholders' equity totaled $490 million at March 31, 1999, compared to
$481 million at December 31, 1998, and $446 million at March 31, 1998.
Regulatory Capital Compliance
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of March 31, 1999. The core and tangible
capital ratios were 6.63% and the risk-based capital ratio was 12.49%. The
Bank's capital ratios exceed the "well capitalized" standards of 5% for core
and 10% for risk-based, as defined by regulation.
49
<PAGE>
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-Based Capital
------------------- --------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- -------- ----- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity.... $ 480,040 $480,040 $ 480,040
Adjustments:
Deductions:
Investment in
subsidiary, primarily
real estate........... (42,477) (42,477) (42,477)
Goodwill............... (4,425) (4,425) (4,425)
Non-permitted mortgage
servicing rights...... (1,571) (1,571) (1,571)
Additions:
Unrealized gains on
securities available
for sale.............. (305) (305) (305)
General loss
allowance--investment
in DSL
Service Company....... 1,451 1,451 1,451
Loan general valuation
allowances (1)........ -- -- 32,164
---------- ------ -------- ---- ---------- -------
Regulatory capital...... 432,713 6.63% 432,713 6.63% 464,877 12.49%
Well capitalized
requirement............ 97,898 1.50 (2) 326,327 5.00 372,277 10.00 (3)
---------- ------ -------- ---- ---------- -------
Excess.................. $ 334,815 5.13% $106,386 1.63% $ 92,600 2.49%
========== ====== ======== ==== ========== =======
</TABLE>
- --------
(1) Limited to 1.25% of risk-weighted assets.
(2) Represents the minimum requirement for tangible capital, as no "well
capitalized" requirement has been established for this category.
(3) A third requirement is Tier 1 capital to risk-weighted assets of 6%, which
the Bank met and exceeded with a ratio of 11.62%.
Year 2000
Risks of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to represent the calendar year--e.g., "99"
for "1999". Software so developed, and not corrected, could produce inaccurate
or unpredictable results or system failures commencing January 1, 2000, when
dates present a lower two digit year number than dates in the prior century.
These occurrences may have a material adverse effect on our financial
condition, results of operations, business or business prospects, as Downey,
like most financial organizations, is significantly impacted by the potential
year 2000 issue due to the nature of financial information. Potential impacts
to us may arise from software, computer hardware, and other equipment both
within our direct control and outside our ownership, yet with which we
electronically or operationally interface. Financial institution regulators
have intensively focused upon year 2000 exposures, issuing guidance concerning
the responsibilities of management and the board of directors. Year 2000
testing and certification is being addressed as a key safety and soundness
issue in conjunction with regulatory exams and the OTS has authority to bring
enforcement actions against any institution under its supervision which it
believes is not properly addressing year 2000 compliance issues.
State of Readiness
We have established a four-phase process to address the year 2000 issue. In
addition, our board of directors oversees the year 2000 compliance project's
progress through monthly status reports and quarterly reviews with the year
2000 project manager.
50
<PAGE>
As part of the first phase, which is now completed, we inventoried all of
our data systems to determine which are most critical to support customer
transaction processing and provide customer services. This inventory not only
included in-house systems, but those third party vendors provide as well. We
prioritized systems as being:
.mission critical;
.high risk;
.moderate risk; or
.low risk.
From this system we developed modification plans which place priority
emphasis on those systems requiring change and classified mission critical or
high risk. We contacted third party vendors during this phase to determine
their process and timeline in correcting any year 2000 compliance issues. In
addition, we also contacted our commercial loan borrowers to determine the
extent of their preparations for year 2000 and any potential impact year 2000
may have on their businesses and ability to repay loan obligations to us.
Commercial lending does not represent a significant portion of our loan
portfolio--i.e., approximately 0.3%; therefore, we believe the year 2000
preparedness of our commercial loan borrowers does not pose a significant
risk.
Phase two of the process consists of making appropriate year 2000
programming changes to our in-house systems, while phase three consists of
acceptance testing and sign-off of both our in-house and vendor provided
systems. The fourth and final phase of the year 2000 compliance project
includes installation of the system modifications into our daily operation.
The fourth phase is scheduled to occur once a system has been successfully
tested and determined to be year 2000 compliant.
By the end of 1998, we completed programming and substantially completed
acceptance testing for our in-house mainframe system. At the end of first
quarter 1999, we completed acceptance testing and installation of the in-house
mainframe system, which performs all significant loan, deposit, and general
ledger accounting processes.
For our developed PC-based systems classified mission critical, we have
completed all programming changes and acceptance testing. We expect to
complete programming and acceptance testing of all other of our developed PC-
based systems by the end of second quarter 1999, as well as the installation
of year 2000 modifications.
The timing of year 2000 acceptance testing and installation of all third
party vendor changes is dependent upon when their systems become available to
us. We have in place a process to monitor third party vendor progress in
making required year 2000 corrections and, when completed, this process
requires third party vendors to represent that their systems are year 2000
compliant. Although we request vendor representations, we do not intend to
rely solely upon them. Rather, we intend to test vendor programs or review
testing conducted by others for year 2000 compliance.
In addition to the computer systems utilized by us, we have also inventoried
other essential services that year 2000 issues may impact like
telecommunications and utilities. We are monitoring these essential service
providers to determine their progress and how they are addressing year 2000
issues. To date, no information exists to suggest these essential services
will not be year 2000 compliant.
Costs to Address the Year 2000 Issue
Currently, we estimate that year 2000 project costs will approximate $6.5
million. This cost is in addition to existing personnel who are working on the
year 2000 compliance project and includes estimates for hardware and software
renovation or replacement, as well as additions to existing staff who will be
specifically devoted to the project. Approximately 50% of the year 2000
compliance project cost represents costs to migrate to a new personal computer
environment and to replace specific older automated teller machines, both of
which we might
51
<PAGE>
otherwise have implemented or replaced during the period notwithstanding the
year 2000 issue. Thus, that portion of year 2000 costs will be amortized over
the useful life of the equipment. Of the estimated total expense,
approximately $2.4 million has been incurred to date, $0.1 million in 1997,
$1.8 million in 1998 and $0.5 million during the first three months of 1999.
The table below summarizes by year the estimated amount and anticipated timing
of the planned year 2000 expense.
<TABLE>
<CAPTION>
1997 1998 1999 2000 Thereafter Total
---- ---- ---- ---- ---------- -----
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Estimated year 2000 expense............... $0.1 $1.8 $2.8 $1.0 $0.8 $6.5
</TABLE>
As we progress in addressing the year 2000 compliance project and additional
information becomes available, estimates of costs could change. At this time,
no significant data system projects have been delayed as a result of our year
2000 compliance effort.
Contingency Plans
We believe our year 2000 compliance project should enable us to be
successful in modifying our computer systems to be year 2000 compliant. As
previously stated, we completed acceptance testing and installation with
respect to our in-house mainframe system which performs all significant loan,
deposit and general ledger accounting processes by the end of first quarter
1999. In addition to year 2000 compliance system modification plans, we have
also developed contingency plans for all other systems classified as mission
critical and high risk. Our contingency plans provide timetables to pursue
various alternatives based upon the failure of a system to be adequately
modified or sufficiently tested and validated to ensure year 2000 compliance.
However, there can be no assurance that either the compliance process or our
contingency plans will avoid partial or total system interruptions or the
costs necessary to update hardware and software would not have a material
adverse effect upon our financial condition, results of operation, business or
business prospects.
52
<PAGE>
OVERVIEW FOR THE YEAR ENDED DECEMBER 31, 1998
Our income for 1998 totaled a record $58.0 million or $2.05 per share on a
diluted basis, up 28.2% from the prior year's $45.2 million or $1.61 per
share.
The settlement of litigation regarding obligations of a prior joint venture
partner benefited net income in 1998 by $4.8 million. The pre-tax amount
totaled $8.4 million and was comprised of the following items:
. $1.4 million represented the recovery of a prior loan charge-off thereby
reducing provision for loan losses;
. $4.4 million in income from real estate and joint venture operations of
which $4.3 million was a reduction of loss;
. $1.0 million in miscellaneous other income; and
. $1.6 million as a reduction to professional fees within general and
administrative expense.
Excluding the settlement, 1998 net income would have been $53.2 million or
$1.89 per share on a diluted basis, up 17.7% from the prior year.
The increase in 1998 adjusted net income primarily reflected higher net
interest income. Net interest income increased $20.2 million or 13.1% due to
increases in both average earning assets and the effective interest spread. An
adjusted $6.8 million increase in other income and declines of $3.3 million in
adjusted provision for loan losses and $1.0 million in net operation of real
estate acquired in satisfaction of loans also contributed to the increase in
net income between years. The increase in adjusted other income reflected
increases of $4.7 million in loan and deposit related fees, $3.8 million in
net gains on sales of loans, and $3.7 million in adjusted income from real
estate held for investment. Those favorable other income items were partially
offset by declines of $4.5 million in the all other category, as 1997 included
a gain from the sale of an asset obtained as part of the 1988 acquisition of
Butterfield Savings, and a $1.0 million decline in loan servicing fees
primarily due to additions made to the valuation allowance for mortgage
servicing rights. Higher general and administrative expense partially offset
the favorable impact of higher net interest and other income, and lower
provision for loan losses and cost of net operation of real estate acquired in
settlement of loans. The $17.9 million adjusted increase in general and
administrative expense reflected significantly higher lending volumes, branch
expansion and expense related to resolving year 2000 compliance issues.
Assets increased $435 million or 7.4% during 1998 to $6.3 billion at year
end, following a 12.3% increase during 1997. Asset growth slowed in 1998 even
though our loan originations reached a record level, as the low interest rate
environment prevalent during the year resulted in a high level of loan
prepayments as borrowers refinanced into low, fixed rate loans. Single family
loan originations increased from $2.0 billion in 1997 to $3.7 billion in 1998,
of which we originated $2.2 billion for sale in the secondary market. In
addition to single family loans, we originated $396 million of other loans,
including $175 million of auto loans and $160 million of construction and land
loans.
Our asset growth was funded by an increase of $220 million in borrowings,
primarily long-term FHLB advances, and $170 million in deposits. Deposits
totaled $5.0 billion at December 31, 1998, up 3.5% from year-end 1997.
Non-performing assets totaled $27 million or 0.44% of assets at December 31,
1998, down from $52 million or 0.89% of assets at December 31, 1997. The
decline in our non-performing assets was primarily in the commercial real
estate loan category, as we returned several loans to accrual status following
an extended period of satisfactory payment performance. We perform a detailed
review of all criticized, classified, watch and non-performing assets at least
semi-annually. We review all assets greater than $1 million annually. The
combined provisions for loan and real estate losses, including real estate
held for investment and acquired in settlement of loans, resulted in a $0.9
million reduction of expense for 1998, primarily due to the aforementioned
settlement, which included $5.7 million of settlement proceeds as a reduction
to the provision for losses. Excluding this
53
<PAGE>
item, the combined provisions would have been $4.7 million in 1998, $6.6
million in 1997 and $7.5 million in 1996.
At December 31, 1998, the Bank met and exceeded all three regulatory capital
tests, with capital-to-asset ratios of 6.83% in tangible and core capital and
12.88% in risk-based capital. These capital levels are well above the "well
capitalized" standards defined by the federal banking regulators of 5% for
core and tangible capital and 10% for risk-based capital. For further
information, see "Business--Regulation--Regulation of the Bank--Insurance of
Deposit Accounts," "Financial Condition for the Year Ended December 31, 1998--
Investments in Real Estate and Joint Ventures" and "Regulatory Capital
Compliance."
54
<PAGE>
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
Net Interest Income
Net interest income is the difference between the interest and dividends
earned on loans, mortgage-backed securities and investment securities--
"interest-earning assets"--and the interest paid on deposits and borrowings--
"interest-bearing liabilities." The spread between the yield on interest-
earning assets and the cost of interest-bearing liabilities and the relative
dollar amounts of these assets and liabilities principally affects net
interest income.
Our net interest income was $174.3 million in 1998, up $20.2 million or
13.1% from 1997 and $39.8 million or 29.5% greater than 1996. The 1998
improvement over 1997 primarily reflected increases in both average earning
assets and the effective interest rate spread. Average earning assets
increased by $217 million or 4.0% to $5.7 billion. The effective interest rate
spread averaged 3.08% in 1998, up from 2.83% in 1997 and 2.96% in 1996. The
1998 effective interest rate spread improved over 1997 as our yield on earning
assets increased 6 basis points, while our cost of funding those earnings
assets declined by 16 basis points.
The following table presents for the periods indicated the total dollar
amount of:
. interest income from average interest-earning assets and the resultant
yields; and
. interest expense on average interest-bearing liabilities and the
resultant costs, expressed as rates.
The table also sets forth the net interest income, the interest rate spread
and the effective interest rate spread. The effective interest rate spread
reflects the relative level of interest-earning assets to interest-bearing
liabilities and equals:
. the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities, divided by
. average interest-earning assets for the period.
55
<PAGE>
The table also sets forth the net earning balance--the difference between
the average balance of interest-earning assets and the average balance of
interest-bearing liabilities--for the periods indicated. We include non-
accrual loans in the average interest-earning assets balance. We include
interest from non-accrual loans in interest income only to the extent that we
received payments and to the extent that we believe we will recover the
remaining principal balance of the loan. We computed average balances using
the average of each month's daily average balance during the period indicated.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $5,345,380 $421,942 7.89% $5,174,767 $404,081 7.81% $4,269,136 $329,746 7.72%
Mortgage-backed
securities............ 42,075 2,780 6.61 55,045 3,633 6.60 64,957 4,317 6.65
Investment securities.. 276,139 15,682 5.68 217,272 12,704 5.85 215,364 12,297 5.71
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning
assets................ 5,663,594 440,404 7.78 5,447,084 420,418 7.72 4,549,457 346,360 7.61
Non-interest-earning
assets................. 254,913 246,785 240,191
---------- ---------- ----------
Total assets........... $5,918,507 $5,693,869 $4,789,648
========== ========== ==========
Interest-bearing
liabilities:
Deposits............... $5,102,045 $248,337 4.87% $4,588,320 $227,521 4.96% $3,892,981 $184,402 4.74%
Borrowings............. 292,044 17,720 6.07 638,661 38,739 6.07 457,890 27,363 5.98
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities........... 5,394,089 266,057 4.93 5,226,981 266,260 5.09 4,350,871 211,765 4.87
Non-interest-bearing
liabilities............ 68,181 58,415 50,590
Stockholders' equity.... 456,237 408,473 388,187
---------- ---------- ----------
Total liabilities and
stockholders' equity.. $5,918,507 $5,693,869 $4,789,648
========== ========== ==========
Net interest
income/interest rate
spread................. $174,347 2.85% $154,158 2.63% $134,595 2.74%
Excess of interest-
earning assets over
interest-bearing
liabilities............ $ 269,505 $ 220,103 $ 198,586
Effective interest rate
spread................. 3.08 2.83 2.96
</TABLE>
56
<PAGE>
Changes in our net interest income are a function of both changes in rates
and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
our interest income and expense for the years indicated. For each category of
interest-earning asset and interest-bearing liability, we have provided
information on changes attributable to:
. changes in volume--changes in volume multiplied by comparative period
rate;
. changes in rate--changes in rate multiplied by comparative period
volume; and
. changes in rate-volume--changes in rate multiplied by changes in volume.
Interest-earning asset and interest-bearing liability balances used in the
calculations represent average balances computed using the average of each
month's daily average balance during the period indicated.
<TABLE>
<CAPTION>
1998 versus 1997 1997 versus 1996
Changes Due To Changes Due To
----------------------------------- ---------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- ------- ------ -------- ------- ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans.................. $ 13,322 $ 4,394 $ 145 $ 17,861 $69,951 $ 3,617 $ 767 $74,335
Mortgage-backed
securities............ (856) 4 (1) (853) (659) (30) 5 (684)
Investment securities.. 3,442 (365) (99) 2,978 109 295 3 407
-------- ------- ----- -------- ------- ------- ------ -------
Change in interest
income................ 15,908 4,033 45 19,986 69,401 3,882 775 74,058
-------- ------- ----- -------- ------- ------- ------ -------
Interest Expense:
Deposits............... 25,474 (4,189) (469) 20,816 32,937 8,639 1,543 43,119
Borrowings............. (21,019) -- -- (21,019) 10,801 412 163 11,376
-------- ------- ----- -------- ------- ------- ------ -------
Change in interest
expense............... 4,455 (4,189) (469) (203) 43,738 9,051 1,706 54,495
-------- ------- ----- -------- ------- ------- ------ -------
Change in net interest
income................. $ 11,453 $ 8,222 $ 514 $ 20,189 $25,663 $(5,169) $ (931) $19,563
======== ======= ===== ======== ======= ======= ====== =======
</TABLE>
Provision for Loan Losses
Provision for loan losses was $3.9 million in 1998, down from $8.6 million
in 1997 and $9.1 million in 1996. The decline in provision for loan losses in
1998 reflects a $1.4 million recovery of a prior loan charge-off as a result
of the previously mentioned settlement, as well as less growth in our loan
portfolio than in 1997.
For further information, see "Financial Condition for the Year Ended
December 31, 1998--Problem Loans and Real Estate--Allowance for Losses on
Loans and Real Estate."
Other Income
Other income totaled $47.4 million in 1998, up from $35.2 million in 1997
and $25.2 million in 1996. The increase in 1998 reflected several factors.
Increases of $8.1 million in income from real estate held for investment, $4.7
million in loan and deposit related fees, and $3.8 million in net gains from
the sale of loans and mortgage-backed securities ("MBSs") favorably impacted
other income. Those favorable items were partially offset by declines of $3.5
million in the other category and $1.0 million in loan servicing fees. Below
is a further discussion of the major other income categories.
57
<PAGE>
Loan and Deposit Related Fees
Loan and deposit related fees totaled $15.6 million in 1998, up from $10.9
million in 1997 and $7.4 million in 1996. As depicted in the following table,
our loan related fees increased by $3.4 million in 1998 due primarily to
higher prepayment and wire transfer fees from funding a higher volume of
loans, while our deposit related fees increased by $1.3 million.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Loan related fees....................................... $ 7,225 $ 3,837 $2,496
Deposit related fees.................................... 8,420 7,084 4,939
------- ------- ------
Total loan and deposit related fees................... $15,645 $10,921 $7,435
======= ======= ======
</TABLE>
Real Estate and Joint Venture Operations Held for Investment
Income from our real estate and joint venture operations totaled $22.4
million in 1998, up from $14.2 million in 1997 and $8.2 million in 1996. The
table below sets forth the key components comprising income from real estate
and joint venture operations.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Operations, net:
Rental operations, net of expenses.................... $ 3,723 $ 2,317 $2,417
Equity in net income from joint ventures.............. 9,203 3,931 55
Interest from joint venture advances.................. 1,584 1,880 2,071
------- ------- ------
Total operations, net............................... 14,510 8,128 4,543
Net gains on sales of wholly owned real estate.......... 2,557 2,904 392
Reduction of losses on real estate and joint ventures... 5,296 3,190 3,306
------- ------- ------
Income from real estate and joint venture
operations......................................... $22,363 $14,222 $8,241
======= ======= ======
</TABLE>
Favorably impacting 1998 was $4.4 million of proceeds from the previously
mentioned settlement, of which we recorded $4.3 million as a recovery of
losses on real estate and joint ventures. The balance of the 1998 increase
primarily reflected higher gains on sale associated with residential and
shopping center joint venture projects, which appears within the category of
equity in net income from joint ventures.
For additional information, see "Financial Condition for the Year Ended
December 31, 1998--Investments in Real Estate and Joint Ventures," "Financial
Condition for the Year Ended December 31, 1998--Problem Loans and Real
Estate--Allowance for Losses on Loans and Real Estate."
Secondary Marketing Activities
Sales of loans and MBSs we originated increased in 1998 to $1.7 billion from
$558 million in 1997 and $167 million in 1996. Net gains associated with loan
and MBS sales totaled $6.5 million in 1998, up from $2.7 million in 1997 and
$1.5 million in 1996. The net gains include $7.3 million in 1998, $1.2 million
in 1997 and $1.0 million in 1996 related to the capitalization of mortgage
servicing rights.
Loan servicing fees from our portfolio of loans serviced for others totaled
$0.3 million for 1998, down from $1.3 million in 1997 and $1.4 million in
1996. The decline in 1998 reflects an addition to the valuation allowance for
mortgage servicing rights due to higher than expected prepayments from the low
interest rate environment that existed during the year. At December 31, 1998,
we serviced $1.0 billion of loans for others, compared to $613 million at
December 31, 1997, and $576 million at December 31, 1996.
58
<PAGE>
Other Category
The all other category of other income totaled $2.6 million in 1998, down
from $6.1 million in 1997 but up from $2.1 million in 1996. We included $1.0
million of proceeds from the previously mentioned settlement in the 1998
total. Excluding that amount, the adjusted decline from 1997 would have been
$4.5 million. That decrease primarily reflects that 1997 included a gain from
the sale of an asset obtained as part of the 1988 acquisition of Butterfield
Savings.
Operating Expenses
Operating expenses totaled $116.7 million in 1998, up from $101.3 million in
1997 and $114.2 million in 1996 which included a one-time SAIF assessment of
$24.6 million. The current year increase was due to higher general and
administrative expense, as the net operation of real estate acquired in
settlement of loans declined by $0.9 million to $0.3 million. General and
administrative expense increased $16.3 million or 16.4% in 1998 due to
significantly higher lending volumes, branch expansion and expense related to
year 2000 costs. Year 2000 related costs totaled $1.8 million for 1998, up
from $0.1 million in 1997. We included a $1.6 million reduction to
professional fees due to proceeds from the previously mentioned settlement
within general and administrative expense in the current year, while we
included $1.4 million of expense associated with the departure of a former
chief executive in the prior year.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Salaries and related costs......................... $ 66,152 $ 54,366 $ 45,811
Premises and equipment costs....................... 16,834 15,272 12,640
Advertising expense................................ 5,954 6,847 4,071
Professional fees.................................. 2,867 5,113 2,985
SAIF insurance premiums and regulatory
assessments....................................... 3,832 3,439 8,949
Other general and administrative expense........... 20,251 14,519 12,004
-------- -------- --------
Total general and administrative expense......... 115,890 99,556 86,460
SAIF special assessment............................ -- -- 24,644
Net operation of real estate acquired in settlement
of loans.......................................... 260 1,184 2,567
Amortization of excess of cost over fair value of
net assets acquired............................... 510 532 532
-------- -------- --------
Total operating expense.......................... $116,660 $101,272 $114,203
======== ======== ========
</TABLE>
For further information regarding the potential expense impact of the year
2000 compliance issue, see "Financial Condition for the Quarter Ended March
31, 1999--Year 2000."
Provision for Income Taxes
Our effective tax rate for 1998 was 42.7%, similar to 43.1% in 1997 and
43.2% in 1996.
Business Segment Reporting
The previous sections of the Results of Operations for the Year Ended
December 31, 1998 discussed our consolidated results. The purpose of this
section is to present data on the results of operations of our two business
segments--banking and real estate investment. For a description of these
business segments, see "Business."
59
<PAGE>
The following table presents by business segment net income for 1998, 1997
and 1996, followed by a discussion of the results of operations of each
segment.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Banking.............................................. $46,736 $38,662 $17,191(1)
Real estate investment............................... 11,237 6,572 3,513
------- ------- -------
Total net income................................... $57,973 $45,234 $20,704(1)
======= ======= =======
</TABLE>
- --------
(1) Excluding the SAIF special assessment, net income for banking would have
been $31.2 million and the total would have been $34.7 million.
Banking
Net income from our banking operations totaled $46.7 million in 1998, up
from $38.7 million in 1997 and $17.2 million in 1996. The previously mentioned
settlement benefited net income in 1998 by $1.9 million. Excluding that
amount, 1998 net income would have been $44.8 million, up $6.1 million or
15.8% from a year ago. Adjusting for the settlement, the increase in 1998 net
income primarily reflected higher net interest income. Net interest income
increased $20.2 million or 13.0% due to increases in both average earning
assets and the effective interest rate spread. An adjusted $3.2 million
decline in provision for loan losses and an adjusted $3.0 million increase in
other income also contributed to the increase in net income between years. The
increase in adjusted other income reflected increases in loan and deposit
related fees and net gains on sales of loans, partially offset by a decline in
loan servicing fees and the fact that 1997 results included a gain from the
sale of an asset obtained as part of the 1988 acquisition of Butterfield
Savings. Higher operating expense partially offset the favorable impact of
these items. The $16.0 million adjusted operating expense increase reflected
significantly higher lending volumes, branch expansion and expense related
towards resolving year 2000 compliance issues. The table below sets forth
banking operational results for the periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Net interest income...................... $ 174,967 $ 154,799 $ 134,808
Provision for loan losses................ 3,918 8,522 9,026
Other income............................. 24,617 20,783 16,956
Operating expense........................ 113,954 98,803 87,275
SAIF special assessment.................. -- -- 24,644
Net intercompany expense................. (107) (357) (574)
---------- ---------- ----------
Income before income tax expense......... 81,605 67,900 30,245
Income tax expense....................... 34,869 29,238 13,054
---------- ---------- ----------
Net income............................. $ 46,736 $ 38,662 $ 17,191(1)
========== ========== ==========
At December 31:
Assets:
Loans.................................. $5,788,365 $5,366,396 $4,729,846
Other.................................. 463,960 449,174 446,975
---------- ---------- ----------
Total assets......................... 6,252,325 5,815,570 5,176,821
---------- ---------- ----------
Equity................................... 480,566 430,346 391,571
</TABLE>
- --------
(1) Excluding the SAIF special assessment, net income would have been $31.2
million.
Real Estate Investment
Net income from our real estate investment operations totaled $11.2 million
in 1998, up from $6.6 million in 1997 and $3.5 million in 1996. The previously
mentioned settlement benefited net income in 1998 by $2.9
60
<PAGE>
million. Adjusting for the settlement, adjusted 1998 net income would have
been $8.3 million, up $1.7 million or 25.8% from 1997. The adjusted increase
primarily reflected higher gains on sale associated with residential and
shopping center joint venture projects which appears in the other income
category. The table below sets forth real estate investment operational
results for the periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Net interest expense................................ $ (620) $ (641) $ (213)
Provision (reduction) for loan losses............... (19) 118 111
Other income........................................ 22,736 14,405 8,243
Operating expense................................... 2,706 2,469 2,284
Net intercompany income............................. 107 357 574
------- ------- -------
Income before income tax expense.................... 19,536 11,534 6,209
Income tax expense.................................. 8,299 4,962 2,696
------- ------- -------
Net income......................................... $11,237 $ 6,572 $ 3,513
======= ======= =======
At December 31:
Assets:
Real estate held for investment................... $49,447 $41,356 $46,498
Other............................................. 11,224 14,455 14,514
------- ------- -------
Total assets.................................... 60,671 55,811 61,012
------- ------- -------
Equity.............................................. 42,577 35,556 39,676
</TABLE>
For a further discussion regarding income from real estate investment, see
"Results of Operations for the Year Ended December 31, 1998--Other Income--
Real Estate and Joint Venture Operations Held For Investment," and for
information regarding related assets see "Financial Condition for the Year
Ended December 31, 1998--Investments in Real Estate and Joint Ventures."
61
<PAGE>
FINANCIAL CONDITION FOR THE YEAR ENDED DECEMBER 31, 1998
Loans and Mortgage-Backed Securities
Loans and mortgage-backed securities, including those we hold for sale,
totaled $5.8 billion, or 92.3% of assets at December 31, 1998. This represents
an increase of $422 million or 7.9% from the $5.4 billion at December 31,
1997. The increase primarily represents a higher level of loans held for sale.
Our loan originations, including loans purchased, totaled a record $4.1
billion in 1998, up from $2.4 billion in 1997 and $1.6 billion in 1996. This
increase primarily reflected an increase in originations of one-to-four unit
residential loans. Due to the low interest rate environment prevalent during
1998, borrower preference for these loans was primarily fixed rate. Therefore,
of the $3.7 billion of one-to-four unit residential loans we originated,
approximately two-thirds or $2.3 billion were fixed rate, all but $198 million
of which we originated for sale in the secondary market. In addition, we
originated $380 million of subprime loans in 1998, up from $221 million in
1997.
The table below presents information regarding interest rates and fees
collected on loans originated during the periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average interest rate on new
loans............................ 6.45% 6.04% 6.06% 6.99% 4.94%
Average total loan origination
fees on new loans................ 0.75 0.80 0.79 1.08 0.85
Total loan fees (net of costs) and
discounts (net of premiums)
deferred during the year......... $(30,621) $(11,505) $(4,525) $880 $(7,861)
</TABLE>
We originate one-to-four unit residential adjustable rate mortgages both
with and without loan origination fees. In adjustable rate mortgage
transactions for which we charged no origination fees, we receive a larger
margin over the index to which the loan pricing is tied than in those in which
we charge fees. In addition, a prepayment fee on these loans is generally
required if prepaid within the first three years. This trend towards loans
with no origination fees has generally resulted in deferrable loan origination
costs exceeding loan origination fees except in 1995, which included increases
in interest buydowns, or discounts, on new real estate loans.
Residential one-to-four unit adjustable rate mortgage originations,
including loans purchased, were $1.4 billion during 1998, compared to $1.7
billion in 1997 and $1.1 billion in 1996. Refinancing activities related to
residential one-to-four unit loans, including new loans to refinance loans
which we and other lenders originated, increased during 1998, constituting 71%
of originations during the year compared to 45% during 1997 and 43% during
1996. As market interest rates began to rise in 1994 and 1995, one-to-four
unit residential borrower preference changed from being predominantly
interested in adjustable rate mortgages tied to the one-year constant maturity
Treasury ("CMT") index, a market rate index, to adjustable rate mortgages tied
to COFI, an index which lags the movement in market interest rates. For the
year, 74% of one-to-four unit originations for investment represented monthly
adjusting COFI adjustable rate mortgages which provide for negative
amortization and 11% represented COFI adjustable rate mortgages which reprice
every six months but do not provide for negative amortization, with the
balance represented by a variety of other pricing terms. At December 31, 1998,
$3.0 billion of our one-to-four unit adjustable rate mortgages were subject to
negative amortization of which $47 million represented the amount of negative
amortization added to the unpaid loan balance. For further information, see
"Business--Banking Activities--Lending Activities--Residential Real Estate
Lending."
Our origination of commercial real estate loans, including loans purchased,
totaled $11 million in 1998, compared to $8 million in 1997 and $2 million in
1996. Most of our commercial real estate lending in these years was to
facilitate the sale of real estate investments by the Bank and DSL Service
Company. Originations of loans secured by multi-family properties, including
loans purchased, totaled $15 million in 1998, compared to $6 million in 1997
and $20 million in 1996.
62
<PAGE>
During 1998, we originated $112 million of construction loans, principally
for entry level and first time move-up residential tracts. This compares to
$80 million in 1997 and $72 million in 1996. Our origination of land
development loans totaled $48 million in 1998, compared to $20 million in 1997
and $10 million in 1996.
Originations of non-mortgage commercial loans decreased to $6 million in
1998 from $14 million in 1997. Virtually all of these originations represented
secured loans.
In 1995, we augmented our direct automobile lending program with the
commencement of an indirect lending program through preapproved automobile
dealers to finance consumer purchases of new and used automobiles. These loans
are fixed rate with maturities generally up to five years. Originations of
automobile loans totaled $175 million in 1998, compared to $259 million in
1997 and $201 million in 1996.
63
<PAGE>
The following table sets forth the origination, purchase and sale activity
relating to loans and MBSs during the periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ----------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment Portfolio:
Loans originated:
Loans secured by real
estate:
Residential:
One-to-four units:
Adjustable.......... $ 943,736 $ 1,384,442 $1,026,812 $ 396,111 $1,673,822
Adjustable--
subprime........... 372,286 218,399 33,030 -- --
---------- ----------- ---------- --------- ----------
Total adjustable... 1,316,022 1,602,841 1,059,842 396,111 1,673,822
Fixed............... 192,436 22,265 33,073 13,888 7,411
Fixed--subprime..... 6,020 2,786 545 -- --
Five or more units:
Adjustable.......... 875 4,600 17,409 128 18,385
Fixed............... 13,229 -- 2,253 419 953
---------- ----------- ---------- --------- ----------
Total residential.. 1,528,582 1,632,492 1,113,122 410,546 1,700,571
Commercial real
estate............... 10,363 7,830 1,548 10,629 18,900
Construction.......... 111,534 80,014 71,678 28,931 14,785
Land.................. 48,357 20,295 10,468 12,906 --
Non-mortgage:
Commercial............ 6,376 14,336 11,835 1,115 1,605
Automobile............ 175,193 259,040 200,966 62,234 1,869
Other consumer........ 28,274 25,988 14,226 17,633 39,945
---------- ----------- ---------- --------- ----------
Total loans
originated.......... 1,908,679 2,039,995 1,423,843 543,994 1,777,675
Real estate loans
purchased (1).......... 7,463 35,828 223 44,194 145,117
---------- ----------- ---------- --------- ----------
Total loans originated
and purchased......... 1,916,142 2,075,823 1,424,066 588,188 1,922,792
Loan repayments......... (1,855,157) (1,130,357) (832,713) (538,217) (631,836)
Other net changes (2),
(3).................... (34,145) (319,183) (39,978) (50,544) (38,330)
---------- ----------- ---------- --------- ----------
Net increase (decrease)
in loans held for
investment............ 26,840 626,283 551,375 (573) 1,252,626
---------- ----------- ---------- --------- ----------
Mortgage-backed
securities held to
maturity, net:
Repayments............. -- -- -- (5,588) (11,917)
Transferred to
mortgage-backed
securities available
for sale.............. -- -- -- (33,555) --
---------- ----------- ---------- --------- ----------
Net decrease in
mortgage-backed
securities, net...... -- -- -- (39,143) (11,917)
---------- ----------- ---------- --------- ----------
Net increase
(decrease) in loans
and mortgage-backed
securities held for
investment.......... 26,840 626,283 551,375 (39,716) 1,240,709
---------- ----------- ---------- --------- ----------
Sale Portfolio:
Residential, one-to-four
units:
Originated whole
loans................. 2,162,583 289,271 159,941 93,496 32,421
Loans transferred from
(to) the investment
portfolio (3)......... (3,056) 290,558 1,791 (100) --
Originated whole loans
sold (3).............. (1,130,303) (467,989) (135,426) (80,725) (45,770)
Loans exchanged for
mortgage-backed
securities............ (608,831) (89,522) (26,452) -- --
Other net changes...... (8,111) (83) (48) (10) (16)
---------- ----------- ---------- --------- ----------
Net increase
(decrease) in loans
held for sale........ 412,282 22,235 (194) 12,661 (13,365)
---------- ----------- ---------- --------- ----------
Mortgage-backed
securities, net:
Received in exchange
for loans............. 608,831 89,522 26,452 -- --
Purchased.............. -- -- 30,073 -- 51,138
Transferred from
mortgage-backed
securities held to
maturity.............. -- -- -- 33,555 --
Sold................... (610,113) (89,522) (31,077) (21,372) --
Repayments............. (15,129) (12,560) (15,661) (6,862) (5,263)
Other net changes...... (742) 592 (596) 2,669 (1,789)
---------- ----------- ---------- --------- ----------
Net increase
(decrease) in
mortgage-backed
securities available
for sale............. (17,153) (11,968) 9,191 7,990 44,086
---------- ----------- ---------- --------- ----------
Net increase in loans
and mortgage-backed
securities held for
sale and available
for sale............. 395,129 10,267 8,997 20,651 30,721
---------- ----------- ---------- --------- ----------
Total net increase
(decrease) in loans
and mortgage-backed
securities........... $ 421,969 $ 636,550 $ 560,372 $ (19,065) $1,271,430
========== =========== ========== ========= ==========
</TABLE>
- --------
(1) Primarily one-to-four unit residential loans. We included in 1998 $0.7
million of five or more unit residential loans and $0.6 million of
commercial loans. We included in 1997 $1.3 million of five or more unit
residential loans.
(2) Primarily includes borrowings against and repayments of lines of credit
and construction loans, changes in loss allowances, loans transferred to
real estate acquired in settlement of loans or held for sale portfolio,
and interest capitalized on loans (negative amortization).
(3) Includes $290.5 million of one-to-four unit residential adjustable rate
mortgages transferred from the held for investment portfolio during 1997
and sold servicing released.
64
<PAGE>
The following table sets forth the composition of our loan and mortgage-
backed securities portfolio at the dates indicated. At December 31, 1998,
approximately 99% of our real estate loans were secured by real estate located
in California, principally in Los Angeles, Orange, Santa Clara, San Diego and
San Mateo counties.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment Portfolio:
Loans secured by real
estate:
Residential:
One-to-four units:
Adjustable............ $3,721,728 $4,190,160 $3,840,862 $3,486,774 $3,493,435
Adjustable--
subprime............. 580,232 245,749 32,715 -- --
Fixed................. 325,454 168,315 172,328 169,738 194,845
Fixed--subprime....... 8,719 3,321 543 -- --
---------- ---------- ---------- ---------- ----------
Total one-to-four
units............... 4,636,133 4,607,545 4,046,448 3,656,512 3,688,280
Five or more units:
Adjustable............ 18,617 29,246 43,050 44,438 48,782
Fixed................. 21,412 9,032 13,857 12,883 15,000
Commercial real estate:
Adjustable............. 39,360 87,604 158,656 170,498 178,377
Fixed.................. 101,430 114,821 101,953 100,085 116,041
Construction........... 127,761 70,865 66,651 28,593 11,367
Land................... 44,859 25,687 21,177 21,867 9,822
Non-mortgage:
Commercial............. 28,293 26,024 22,136 12,864 12,975
Automobile............. 357,988 342,326 202,186 56,127 3,028
Other consumer......... 41,894 47,735 47,281 50,945 53,241
---------- ---------- ---------- ---------- ----------
Total loans held for
investment........... 5,417,747 5,360,885 4,723,395 4,154,812 4,136,913
Increase (decrease) for:
Undisbursed loan
funds................. (108,414) (64,884) (49,250) (29,942) (13,872)
Net deferred costs and
premiums.............. 31,021 18,088 11,663 7,412 7,468
Allowance for estimated
loss.................. (31,517) (32,092) (30,094) (27,943) (25,597)
---------- ---------- ---------- ---------- ----------
Total loans held for
investment, net...... 5,308,837 5,281,997 4,655,714 4,104,339 4,104,912
---------- ---------- ---------- ---------- ----------
Mortgage-backed
securities held to
maturity, net:
Adjustable............. -- -- -- -- 19,897
Fixed.................. -- -- -- -- 19,246
---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities held to
maturity, net........ -- -- -- -- 39,143
---------- ---------- ---------- ---------- ----------
Total loans and
mortgage-backed
securities held for
investment........... 5,308,837 5,281,997 4,655,714 4,104,339 4,144,055
---------- ---------- ---------- ---------- ----------
Sale Portfolio, Net:
Loans held for sale (all
one-to-four units):
Adjustable............. 7,975 1,617 1,145 238 --
Fixed.................. 439,407 33,483 11,720 12,821 398
---------- ---------- ---------- ---------- ----------
Total loans held for
sale................. 447,382 35,100 12,865 13,059 398
Mortgage-backed
securities available
for sale:
Adjustable............. 10,996 17,751 23,620 34,355 44,086
Fixed.................. 21,150 31,548 37,647 17,721 --
---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities available
for sale............. 32,146 49,299 61,267 52,076 44,086
---------- ---------- ---------- ---------- ----------
Total loans and
mortgage-backed
securities held for
sale and available
for sale............. 479,528 84,399 74,132 65,135 44,484
---------- ---------- ---------- ---------- ----------
Total loans and
mortgage-backed
securities........... $5,788,365 $5,366,396 $4,729,846 $4,169,474 $4,188,539
========== ========== ========== ========== ==========
</TABLE>
65
<PAGE>
The table below sets forth the scheduled contractual maturities of our total
loan and mortgage-backed securities portfolio as of December 31, 1998.
<TABLE>
<CAPTION>
Within 1-2 2-3 3-5 5-10 10-15 Beyond
1 Year Years Years Years Years Years 15 Years Total
-------- -------- -------- -------- -------- -------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units:
Adjustable (1)........ $ 37,087 $ 39,965 $ 43,067 $ 96,418 $314,646 $457,205 $3,321,547 $4,309,935
Fixed (1)............. 9,520 10,251 11,039 24,687 80,353 116,342 521,388 773,580
Five or more units:
Adjustable............ 310 335 361 809 2,645 3,855 10,302 18,617
Fixed................. 2,908 3,165 3,446 7,834 4,059 -- -- 21,412
Commercial real estate:
Adjustable............ 1,294 1,395 1,505 3,371 11,025 16,067 4,703 39,360
Fixed................. 6,051 6,596 7,191 16,386 55,780 9,426 -- 101,430
Construction--
adjustable............ 127,761 -- -- -- -- -- -- 127,761
Land:
Adjustable............ 32,213 11,399 -- -- -- -- -- 43,612
Fixed................. 60 66 73 170 602 276 -- 1,247
Non-mortgage:
Commercial............. 23,272 1,573 1,727 1,721 -- -- -- 28,293
Automobile............. 85,246 94,025 103,709 75,008 -- -- -- 357,988
Other consumer (2)..... 1,904 2,032 2,168 755 35,035 -- -- 41,894
-------- -------- -------- -------- -------- -------- ---------- ----------
Total loans........... 327,626 170,802 174,286 227,159 504,145 603,171 3,857,940 5,865,129
Mortgage-backed
securities, net........ 693 14,237 594 1,333 4,382 4,553 6,354 32,146
-------- -------- -------- -------- -------- -------- ---------- ----------
Total loans and
mortgage-backed
securities............ $328,319 $185,039 $174,880 $228,492 $508,527 $607,724 $3,864,294 $5,897,275
======== ======== ======== ======== ======== ======== ========== ==========
</TABLE>
- --------
(1) Includes loans held for sale.
(2) Includes home equity line of credit loans which are interest only, with
balances due at the end of the term. All or part of the outstanding
balances may be paid off at any time during the term without penalty.
At December 31, 1998, the maximum amount the Bank could have loaned to any
one borrower, and related entities, under regulatory limits was $75 million,
or $124 million for loans secured by readily marketable collateral, compared
to $67 million or $112 million for loans secured by readily marketable
collateral at December 31, 1997. The Bank does not expect that these
regulatory limitations will adversely impact its proposed lending activities
during 1999.
Investment Securities
The following table sets forth the composition of our investment securities
portfolio at the dates indicated. In the 1995 fourth quarter, we transferred
the held to maturity U.S. Treasury and agency portfolio to available for sale
consistent with the "Guide to Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" issued by the Financial Accounting
Standards Board.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Federal funds.................... $ 33,751 $ 6,095 $ 6,038 $ 7,249 $ 6,112
U.S. Treasury and agency
securities:
Held to maturity................ -- -- -- -- 155,109
Available for sale.............. 116,061 159,398 141,999 164,880 --
Municipal bonds--held to
maturity........................ 6,764 6,885 6,997 7,194 --
-------- -------- -------- -------- --------
Total........................... $156,576 $172,378 $155,034 $179,323 $161,221
======== ======== ======== ======== ========
</TABLE>
66
<PAGE>
As of December 31, 1998, the maturities of our investment securities and the
weighted average yield of those securities were as follows.
<TABLE>
<CAPTION>
After 1 Year
1 Year or Less Through 5 Years After 5 Years Total
---------------- ------------------ --------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------- -------- --------- -------- ------ -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds........... $33,751 4.13% $ -- -- % $ -- -- % $ 33,751 4.13%
U.S. Treasury and
agency securities...... -- -- 116,061 5.77 -- -- 116,061 5.77
Municipal bonds (1)..... -- -- -- -- 6,764 5.28 6,764 5.28
------- ---- --------- ---- ------ ---- -------- ----
Total................. $33,751 4.13% $ 116,061 5.77% $6,764 5.28% $156,576 5.40%
======= ==== ========= ==== ====== ==== ======== ====
</TABLE>
- --------
(1) Yield on a fully tax-equivalent basis is 9.26%.
Investments in Real Estate and Joint Ventures
DSL Service Company participates as an owner of, or a partner in, a variety
of real estate development projects, principally retail neighborhood shopping
center developments, most of which are located in California. In addition,
Downey owns one investment in land which it purchased from DSL Service Company
at fair value in 1995. We have completed and substantially leased most of the
real estate development projects--with a weighted average occupancy of 83% for
retail neighborhood shopping centers at December 31, 1998. At December 31,
1998, the Bank had outstanding loans of $47 million to these joint ventures.
In its joint ventures, DSL Service Company is entitled to interest on its
equity invested in the project on a priority basis after third-party debt, and
shares profits and losses with the developer partner, generally on an equal
basis. DSL Service Company has obtained personal guarantees from the
principals of the developer partners in a number of the joint ventures and
generally requires the developer partner to secure any outstanding obligations
to the joint venture, like its portion of operating losses, when the partner
is unable to satisfy its obligations on a current basis. Partnership equity or
deficit accounts are affected by current period results of operations,
additional partner advances, partnership distributions and partnership
liquidations.
As of December 31, 1998, DSL Service Company was involved with five joint
venture partners. Three of these partners were operators of four retail
neighborhood shopping centers, a commercial building, two residential housing
developments and vacant land held for sale. The other two joint venture
partners are separately involved in the development of a new industrial
building and in the rehabilitation of a large apartment complex. DSL Service
Company has ten wholly owned retail neighborhood shopping centers located in
California and Arizona.
The following table sets forth the condensed balance sheets of DSL Service
Company's joint ventures by property type at December 31, 1998, on a
historical cost basis. We included allowances for losses recorded by DSL
Service Company in the following condensed balance sheet. Our internal asset
review process determines these allowances quarterly, see "--Problem Loans and
Real Estate --Allowance for Losses on Loans and Real Estate." To the extent
the fair market value of the real estate assets is less than the carrying
value, then we make a provision to create a valuation allowance for the
difference. If we need a valuation allowance, we reflect it in the investment
accounts for the joint ventures on DSL Service Company's books. Not all of the
joint venture investments have valuation allowances as the fair market value
of the associated property exceeds its carrying value.
67
<PAGE>
<TABLE>
<CAPTION>
Retail
Neighborhood
Shopping Centers Commercial Residential Total
---------------- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Cash......................... $ 445 $ 351 $ 1,980 $ 2,776
Projects under development... -- 707 17,819 18,526
Completed projects........... 20,913 4,796 5,663 31,372
Other assets................. 2,674 316 519 3,509
------- ------- ------- --------
Total assets............. $24,032 $ 6,170 $25,981 $ 56,183
======= ======= ======= ========
Secured notes payable to the
Bank........................ $25,195 $ 903 $20,446 $ 46,544
Secured notes payable to
others...................... -- 3,633 -- 3,633
Other liabilities............ 4,418 1,936 642 6,996
Equity (deficit):
DSL Service Company (1).... 2,057 464 5,362 7,883
Allowance for losses
recorded by DSL Service
Company................... 19 1,393 -- 1,412
Other partners' (2)........ (7,657) (2,159) (469) (10,285)
------- ------- ------- --------
Total liabilities and
equity.................. $24,032 $ 6,170 $25,981 $ 56,183
======= ======= ======= ========
Number of joint venture
projects.................... 4 3 3 10
</TABLE>
- --------
(1) We include in these amounts interest-bearing joint venture advances with
priority interest payments from joint ventures to DSL Service Company.
(2) The aggregate other partners' deficit of $10 million represents their
equity interest in the accumulated retained earnings (deficit) of the
respective joint ventures. Those results include not only the net profit
on sales and the operating results of the real estate assets, but
depreciation expense and funding costs as well. Except for any secured
financing which has been obtained, DSL Service Company has provided all
other financing. As part of our internal asset review process, the fair
value of the joint venture real estate assets is compared to the secured
notes payable to the Bank and others and DSL Service Company's equity
investment. To the extent the fair value of the real estate assets is less
than the aggregate of those amounts, we make a provision to create a
valuation allowance. Those allowances totaled $1 million at December 31,
1998. At December 31, 1998, the fair value of the real estate assets of
some of the joint venture partnerships in which the other partners' equity
was a deficit exceeded the amount of third party notes and DSL Service
Company's investment thereby eliminating the need for a valuation
allowance since the sale of the real estate would allow DSL Service
Company to realize its investment. Thus, the other partners' deficit of
$10 million exceeds the amount of valuation allowances established of $1
million.
The following table sets forth by property type our wholly owned investments
in real estate and related allowances for losses at December 31, 1998.
<TABLE>
<CAPTION>
Retail
Single Family Neighborhood
Developments Shopping Centers Land Total
------------- ---------------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Wholly owned properties:
Investment in wholly
owned projects......... $ -- $27,434 (1) $20,435 (2) $47,869
Allowance for losses.... -- (1,594) (4,711) (6,305)
----- ------- ------- -------
Net investment in wholly
owned projects........... $ -- $25,840 $15,724 $41,564
===== ======= ======= =======
Number of projects........ -- 10 11 21
</TABLE>
- --------
(1) Includes eight free-standing stores that are part of neighborhood shopping
centers totaling $1 million and which we counted as one project.
(2) Includes five properties totaling $20 million.
68
<PAGE>
Real estate investments entail risks similar to those our construction and
commercial lending activities present. In addition, California courts have
imposed warranty-like responsibility upon developers of new housing for
defects in structure and the housing site, including soil conditions. This
responsibility is not necessarily dependent upon a finding that the developer
was negligent. Owners of real property also may incur liabilities with respect
to environmental matters, including financial responsibility for clean-up of
hazardous waste or other conditions, under various federal and state laws.
Deposits
Our deposits increased $170 million or 3.5% in 1998, and totaled $5.0
billion at December 31, 1998. Transaction accounts--checking, regular passbook
and money market--increased $302 million or 32.3%, while higher-rate
certificates of deposits decreased $132 million or 3.4%. Of the total increase
in our deposits, $49 million was associated with 5 new branches we opened
during 1998. The following table sets forth the amount of deposits by
classification.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Rate Amount Rate Amount
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts.... 2.30% $1,238,062 2.15% $ 935,869 2.04% $ 831,598
Certificates of deposit:
Less than 3.00%........ 2.62 25,126 2.64 30,623 2.65 39,061
3.00-3.49.............. 3.01 593 3.02 766 3.03 723
3.50-3.99.............. 3.88 51,474 -- -- 3.99 79
4.00-4.49.............. 4.39 428,316 4.31 60,095 4.39 63,577
4.50-4.99.............. 4.80 668,204 4.87 40,356 4.87 186,576
5.00-5.99.............. 5.53 2,421,333 5.63 2,896,291 5.54 2,489,852
6.00-6.99.............. 6.06 204,065 6.06 901,920 6.17 536,307
7.00 and greater....... 7.24 2,560 7.22 4,058 7.15 25,329
---- ---------- ---- ---------- ---- ----------
Total certificates of
deposit............. 5.26 3,801,671 5.68 3,934,109 5.56 3,341,504
---- ---------- ---- ---------- ---- ----------
Total deposits....... 4.53% $5,039,733 5.00% $4,869,978 4.86% $4,173,102
==== ========== ==== ========== ==== ==========
</TABLE>
The following table shows as of December 31, 1998, certificates of deposit
maturities by interest rate category.
<TABLE>
<CAPTION>
Less
Than 4.00% - 4.50% - 5.00% - 6.00% - 7.00% Percent
4.00% 4.49% 4.99% 5.99% 6.99% And Greater Total (1) of Total
-------- -------- -------- ----------- --------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 3 months......... $ 72,983 $ 12,948 $131,873 $ 986,573 $ 21,349 $ 215 $ 1,225,941 32.25%
3 to 6 months........... 3,025 138,912 169,456 528,986 117,951 206 958,536 25.21
6 to 12 months.......... 769 245,387 279,597 673,641 35,247 601 1,235,242 32.50
12 to 24 months......... 403 30,618 80,316 184,869 12,165 1,538 309,909 8.15
24 to 36 months......... 3 240 1,388 22,163 5,206 -- 29,000 0.76
36 to 60 months......... 10 31 4,394 24,966 12,002 -- 41,403 1.09
Over 60 months.......... -- 180 1,180 135 145 -- 1,640 0.04
-------- -------- -------- ----------- --------- ------- ----------- ------
$ 77,193 $428,316 $668,204 $ 2,421,333 $ 204,065 $ 2,560 $ 3,801,671 100.00%
======== ======== ======== =========== ========= ======= =========== ======
</TABLE>
- --------
(1) Includes jumbo (over $100,000) certificates of deposit of $443 million
with maturities of 3 months or less, $316 million with maturities of 3 to
6 months and $413 million with maturities of 6 to 12 months, and $105
million with a remaining term of over 12 months.
Borrowings
At December 31, 1998, borrowings totaled $704 million, compared to $484
million at December 31, 1997 and $595 million at December 31, 1996. The
increase in 1998 occurred as we took advantage of obtaining long-term advances
from the FHLB at attractive borrowing rates. The following table sets forth
information concerning our FHLB advances and other borrowings at the dates
indicated.
69
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances............... $695,012 $352,458 $386,883 $220,715 $411,800
Other borrowings:
Reverse repurchase
agreements............... -- 34,803 -- 16,099 53,946
Commercial paper.......... -- 83,811 198,113 196,602 197,839
Industrial revenue bonds.. -- -- -- -- 6,421
Real estate notes......... 8,708 12,663 10,349 2,802 4,770
-------- -------- -------- -------- --------
Total borrowings........ $703,720 $483,735 $595,345 $436,218 $674,776
======== ======== ======== ======== ========
Weighted average rate on
borrowings during the
period..................... 6.07% 6.07% 5.98% 6.39% 5.57%
Total borrowings as a
percentage of total
assets..................... 11.22 8.29 11.45 9.37 14.51
</TABLE>
The following table sets forth some information with respect to our short-
term borrowings.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances with original maturities less than
one year:
Balance at end of year......................... $120,000 $214,300 $279,000
Average balance outstanding during the year.... 38,393 328,886 174,380
Maximum amount outstanding at any month-end
during the year............................... 120,000 427,100 279,000
Weighted average interest rate during the
year.......................................... 5.96% 5.83% 5.78%
Weighted average interest rate at the end of
year.......................................... 5.36 5.81 5.70
Securities sold under agreement to repurchase:
Balance at end of year......................... $ -- $ 34,803 $ --
Average balance outstanding during the year.... 1,877 4,029 11,761
Maximum amount outstanding at any month-end
during the year............................... 50,088 34,803 70,015
Weighted average interest rate during the
year.......................................... 5.90% 5.61% 5.19%
Weighted average interest rate at the end of
year.......................................... -- 6.65 --
Commercial paper sold:
Balance at end of year......................... $ -- $ 83,811 $198,113
Average balance outstanding during the year.... 30,589 182,296 174,739
Maximum amount outstanding at any month-end
during the year............................... 103,749 272,818 198,113
Weighted average interest rate during the
year.......................................... 6.32% 5.75% 5.74%
Weighted average interest rate at the end of
year.......................................... -- 5.61 5.45
Total short-term borrowings:
Total average short-term borrowings outstanding
during the year............................... $ 70,859 $515,211 $360,880
Total weighted average rate on borrowings
during the year............................... 6.11% 5.80% 5.74%
</TABLE>
As previously mentioned, we increased our intermediate and long-term
advances from the FHLB during 1998. At year-end, total intermediate and long-
term advances were $575 million, up from $138 million at December 31, 1997.
The weighted average rate on FHLB advances at year-end 1998 was 5.49%. The
following table sets forth the associated maturities at December 31, 1998.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1999.............................................................. $ 43,105
2000.............................................................. 28,796
2001.............................................................. 16,056
2002.............................................................. 55,921
2003.............................................................. 134
Thereafter........................................................ 431,000
--------
Total intermediate and long-term FHLB advances.................. $575,012
========
</TABLE>
70
<PAGE>
Asset/Liability Management and Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our market risk arises primarily from interest rate risk in
our lending and deposit taking activities. This interest rate risk occurs to
the degree that interest-bearing liabilities reprice or mature more rapidly or
on a different basis than interest-earning assets. Since our earnings depend
primarily on our net interest income, which is the difference between the
interest and dividends earned on interest-earning assets and the interest paid
on interest-bearing liabilities, one of our principal objectives is to
actively monitor and manage the effects of adverse changes in interest rates
on net interest income while maintaining asset quality.
Our Asset/Liability Management Committee is responsible for implementing the
interest rate risk management policy which sets forth limits established by
the board of directors on acceptable changes in net interest income and net
portfolio value from specified changes in interest rates. The OTS defines net
portfolio value as the present value of expected net cash flows from existing
assets minus the present value of expected net cash flows from existing
liabilities plus the present value of expected cash flows from existing off-
balance sheet contracts. Our Asset/Liability Management Committee reviews,
among other items, economic conditions, the interest rate outlook, the demand
for loans, the availability of deposits and borrowings, and our current
operating results, liquidity, capital and interest rate exposure. In addition,
our Asset/Liability Management Committee monitors asset and liability
maturities and repricing characteristics on a regular basis and performs
various simulations and other analyses to determine the potential impact of
various business strategies in controlling interest rate risk and the
potential impact of those strategies upon future earnings under various
interest rate scenarios. Based on these reviews, our Asset/Liability
Management Committee formulates a strategy that is intended to implement the
objectives set forth in our business plan without exceeding the net interest
income and net portfolio value limits set forth in the interest rate risk
policy.
One measure of our exposure to differential changes in interest rates
between assets and liabilities is shown in the following table which sets
forth the repricing frequency of our major asset and liability categories as
of December 31, 1998, as well as some information regarding our gap position.
The repricing frequencies have been determined by reference to projected
maturities, based upon contractual maturities as adjusted for scheduled
repayments and "repricing mechanisms"--provisions for changes in the interest
and dividend rates of assets and liabilities. We assume prepayment rates on
substantially all of our loan portfolio based upon our historical loan
prepayment experience and anticipated future prepayments. Repricing mechanisms
on a number of our assets are subject to limitations, like caps on the amount
that interest rates and payments on our loans may adjust, and accordingly,
these assets do not normally respond as completely or rapidly as our
liabilities to changes in market interest rates. The interest rate sensitivity
of our assets and liabilities illustrated in the following table would vary
substantially if we used different assumptions or if actual experience
differed from the assumptions set forth.
71
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------
Within 7-12 2-5 6-10 Over Total
6 Months Months Years Years 10 Years Balance
---------- ----------- -------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities
and FHLB stock........ (1) $ 89,945 $ -- $116,061 $ -- $ -- $ 206,006
Loans and mortgage-
backed securities:
Mortgage-backed
securities............ (2) 16,261 4,725 10,361 745 54 32,146
Loans secured by real
estate:
Residential:
Adjustable........... (2) 4,227,780 106,498 6,720 -- -- 4,340,998
Fixed................ (2) 483,212 36,636 171,606 68,474 35,688 795,616
Commercial real
estate............... (2) 36,528 9,454 80,983 9,087 1,919 137,971
Construction.......... (2) 46,122 -- -- -- -- 46,122
Land.................. (2) 22,430 42 370 568 225 23,635
Non-mortgage:
Commercial............ (2) 19,154 -- -- -- -- 19,154
Consumer.............. (2) 119,718 74,288 198,717 -- -- 392,723
---------- ----------- -------- --------- -------- ----------
Total loans and
mortgage-backed
securities............ 4,971,205 231,643 468,757 78,874 37,886 5,788,365
---------- ----------- -------- --------- -------- ----------
Total interest-
earning assets...... $5,061,150 $ 231,643 $584,818 $ 78,874 $ 37,886 $5,994,371
========== =========== ======== ========= ======== ==========
Deposits and borrowings:
Interest-bearing
deposits:
Fixed maturity
deposits.............. (1) $2,184,477 $ 1,235,242 $380,312 $ 1,640 $ -- $3,801,671
Transaction accounts... (3) 1,082,795 -- -- -- -- 1,082,795
Non-interest-bearing
transaction accounts.. 155,267 -- -- -- -- 155,267
---------- ----------- -------- --------- -------- ----------
Total deposits......... 3,422,539 1,235,242 380,312 1,640 -- 5,039,733
---------- ----------- -------- --------- -------- ----------
Borrowings............. 143,575 22,305 105,142 432,698 -- 703,720
---------- ----------- -------- --------- -------- ----------
Total deposits and
borrowings.......... $3,566,114 $ 1,257,547 $485,454 $ 434,338 $ -- $5,743,453
========== =========== ======== ========= ======== ==========
Excess (shortfall) of
interest-earning assets
Over interest-bearing
liabilities........... $1,495,036 $(1,025,904) $ 99,364 $(355,464) $ 37,886 $ 250,918
Cumulative gap.......... 1,495,036 469,132 568,496 213,032 250,918
Cumulative gap--as a %
of total assets:
December 31, 1998...... 23.84% 7.48% 9.07% 3.40% 4.00%
December 31, 1997...... 24.82 1.35 2.71 3.54 3.93
December 31, 1996...... 16.71 2.68 0.50 1.47 3.04
</TABLE>
- --------
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment
and prepayments of principal.
(3) Subject to immediate repricing.
Our six-month gap at December 31, 1998, was a positive 23.84%. This means
that more interest-earning assets reprice within six months than interest-
bearing liabilities. This compares to a positive six-month gap of 24.82% at
December 31, 1997 and 16.71% at December 31, 1996. Our primary strategy to
manage interest rate risk is to emphasize the origination of adjustable rate
mortgages or loans with relatively short maturities. Interest rates on
adjustable rate mortgages are primarily tied to the CMT or COFI. We originated
and purchased approximately $1.5 billion during 1998, $2.0 billion during 1997
and $1.4 billion during 1996, of loans and mortgage-backed securities with
adjustable interest rates or maturities of five years or less. These loans
represented approximately 80% during 1998, 96% during 1997 and 95% during
1996, of all loans and mortgage-backed securities we originated and purchased
for investment during these periods. Adjustable rate mortgage originations
during those three years were primarily tied to COFI rather than the CMT
index.
At December 31, 1998, 98% of our interest-earning assets mature, reprice or
are estimated to prepay within five years, compared to 99% at December 31,
1997 and 97% at December 31, 1996. At December 31, 1998, loans held for
investment with adjustable interest rates represented 85% of our loan and
mortgage-backed
72
<PAGE>
securities portfolio. During 1999, we will continue to offer residential fixed
rate loan products to our customers to meet customer demand. We primarily
originate fixed rate loans for sale in the secondary market and price them
accordingly to create loan servicing income and to increase opportunities for
originating adjustable rate mortgages. However, we may originate fixed rate
loans for investment when funded with long-term funds to mitigate interest
rate risk, and small volumes to facilitate the sale of real estate acquired
through foreclosure or that meet specific yield and other approved guidelines.
See "Business--Banking Activities--Lending Activities--Secondary Marketing and
Loan Servicing Activities."
We are better protected against rising interest rates with a positive six-
month gap. However, we remain subject to possible interest rate spread
compression, which would adversely impact our net interest income if interest
rates rise. This is primarily due to the lag in the repricing of the indices
to which our adjustable-rate loans and mortgage-backed securities are tied, as
well as the repricing frequencies and periodic interest rate caps on these
adjustable-rate loans and mortgage-backed securities. The amount of interest
rate spread compression would depend upon the frequency and severity of the
interest rate fluctuations. The positive six-month gap could decrease in
future periods due to, among other things, the continued expansion of the auto
and consumer loan portfolios.
In addition to measuring interest rate risk via a gap analysis, we establish
limits on, and measure the sensitivity of, our net interest income and net
portfolio value to changes in interest rates. Changes in interest rates are
defined as instantaneous and sustained movements in interest rates in 100
basis point increments. We utilize an internally maintained asset/liability
management simulation model to make the calculations which, for net portfolio
value, is calculated on a discounted cash flow basis. First, we estimate our
net interest income for the next twelve months and the current net portfolio
value assuming no change in interest rates from those at period end. Once the
base case has been estimated, we make calculations for each of the defined
changes in interest rates, to include any associated differences in the
anticipated prepayment speed of loans. We then compare those results against
the base case to determine the estimated change to net interest income and net
portfolio value due to the changes in interest rates. The following are the
estimated impacts to net interest income and net portfolio value from various
instantaneous, parallel shifts in interest rates based upon our asset and
liability structure as of year-ends 1998 and 1997. Since we base these
estimates upon numerous assumptions, like the expected maturities of our
interest-bearing assets and liabilities and the shape of the period-end
interest rate yield curve, our actual sensitivity to interest rate changes
could vary significantly if actual experience differs from those assumptions
used in making the calculations.
<TABLE>
<CAPTION>
1998 1997
Percentage Change In Percentage Change In
-------------------------- --------------------------
Change in Interest Rates Net Interest Net Portfolio Net Interest Net Portfolio
(In Basis Points) Income(1) Value(2) Income(1) Value(2)
- ------------------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
+200 (10.0)% 1.2% (13.6)% (9.3)%
+100 (4.4) 2.0 (5.7) (3.4)
(100) 2.9 (1.0) 5.5 3.2
(200) 3.9 (0.6) 12.0 9.1
</TABLE>
- --------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the net interest
income in the various rate scenarios.
(2) The percentage change in this column represents the net portfolio value of
the Bank in a stable interest rate environment versus the net portfolio
value in the various rate scenarios.
The following table shows our financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair values at December 31, 1998. This data differs from that in
the gap table as it does not incorporate the repricing characteristics of
assets and liabilities. Rather, it only reflects contractual maturities
adjusted for anticipated prepayments. Market risk sensitive instruments are
generally defined as on and off balance sheet derivatives and other financial
instruments.
73
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date at December 31, 1998(1)
----------------------------------------------------------------------------------------
Total Fair
1999 2000 2001 2002 2003 Thereafter Balance Value
---------- ---------- -------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive
assets:
Investment securities... $ 83,181 $ 40,375 $ 50,448 $ 25,238 $ -- $ 6,764 $ 206,006 $ 205,987
Average interest
rate.................. 5.48% 5.74% 5.37% 6.45% -- % 5.25% 5.62%
Loans held for sale..... 447,382 -- -- -- -- -- 447,382 447,468
Average interest
rate.................. 6.91% -- % -- % -- % -- % -- % 6.91%
Mortgage-backed
securities available
for sale............... 12,772 9,980 2,452 1,716 1,227 3,999 32,146 32,146
Average interest
rate.................. 6.71% 6.59% 7.58% 7.51% 7.44% 7.16% 6.86%
Loans held for
investment:
Loans secured by real
estate:
Residential:
Adjustable............ 1,062,467 844,589 625,298 461,153 339,734 999,782 4,333,023 4,474,114
Average interest
rate................ 7.42% 7.43% 7.41% 7.41% 7.51% 7.38% 7.42%
Fixed................. 79,388 59,790 46,148 36,398 29,270 105,215 356,209 368,737
Average interest
rate................ 8.37% 8.35% 8.27% 8.20% 8.14% 7.68% 8.11%
Other.................. 73,969 20,833 15,368 15,974 16,631 64,953 207,728 210,172
Average interest
rate................ 8.87% 8.81% 8.71% 8.72% 8.72% 7.96% 8.54%
Non-mortgage:
Commercial............. 16,299 1,188 1,322 345 -- -- 19,154 19,154
Average interest
rate................ 8.59% 8.59% 8.59% 8.59% -- % -- % 8.59%
Consumer............... 149,029 121,324 122,370 -- -- -- 392,723 396,421
Average interest
rate................ 9.93% 9.92% 9.29% -- % -- % -- % 9.73%
Interest-bearing
advances to joint
ventures............... 25,540 -- -- -- -- -- 25,540 25,540
Average interest
rate.................. 3.61% -- % -- % -- % -- % -- % 3.61%
Mortgage servicing
assets................. 1,630 1,471 1,282 1,095 927 1,388 7,793 11,976
---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total interest-sensitive
assets................. $1,951,657 $1,099,550 $864,688 $541,919 $387,789 $1,182,101 $6,027,704 $6,191,715
========== ========== ======== ======== ======== ========== ========== ==========
Interest-sensitive
liabilities:
Deposits:
Transaction accounts... $ 226,130 $ 184,827 $151,069 $123,477 $100,924 $ 451,635 $1,238,062 $1,238,062
Average interest
rate.................. 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30%
Certificates of
deposit............... 3,419,719 309,909 29,000 19,863 21,540 1,640 3,801,671 3,804,269
Average interest
rate.................. 5.26% 5.23% 5.69% 5.88% 5.37% 4.96% 5.26%
Borrowings.............. 165,880 31,199 16,743 56,467 733 432,698 703,720 709,223
Average interest
rate.................. 5.62% 6.34% 6.28% 4.97% 8.58% 5.44% 5.51%
---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total interest-sensitive
liabilities............ $3,811,729 $ 525,935 $196,812 $199,807 $123,197 $ 885,973 $5,743,453 $5,751,554
========== ========== ======== ======== ======== ========== ========== ==========
</TABLE>
- --------
(1) Expected maturities are contractual maturities adjusted for prepayments of
principal. We use a number of assumptions to estimate fair values and
expected maturities. For assets, we base expected maturities upon
contractual maturity, projected repayments and prepayments of principal.
The prepayment experience reflected herein is based on our historical
experience. Our average constant prepayment rate ("CPR") is 21.1% on our
fixed-rate portfolio and 27.6% on our adjustable rate mortgage portfolio
for interest-earning assets, excluding investment securities, which do not
have prepayment features. For deposit liabilities, in accordance with
standard industry practice and our own historical experience, we have
applied "decay factors," used to estimate deposit runoff, of 20% per year.
The actual maturities of these instruments could vary substantially if
future prepayments differ from our historical experience.
74
<PAGE>
The following table sets forth the interest rate spread between our
interest-earning assets and interest-bearing liabilities as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loan and mortgage-backed securities............. 7.72% 7.95% 7.77% 7.67% 6.24%
FHLB stock...................................... 5.44 5.88 6.45 5.16 5.69
Investment securities........................... 5.40 5.63 6.02 6.46 6.17
---- ---- ---- ---- ----
Earning assets yield.......................... 7.65 7.87 7.71 7.60 6.24
---- ---- ---- ---- ----
Weighted average cost:
Deposits........................................ 4.53 5.00 4.86 4.81 4.23
Borrowings:
FHLB advances................................. 5.47 6.11 5.80 6.07 6.41
Other borrowings.............................. 8.69 6.15 5.60 5.62 5.88
---- ---- ---- ---- ----
Combined borrowings............................. 5.51 6.12 5.73 5.84 6.20
---- ---- ---- ---- ----
Combined funds.................................. 4.66 5.11 4.97 4.92 4.55
---- ---- ---- ---- ----
Interest rate spread.............................. 2.99% 2.76% 2.74% 2.68% 1.69%
==== ==== ==== ==== ====
</TABLE>
The year-end weighted average yield on our loan portfolio decreased to 7.72%
at December 31, 1998, from 7.95% as of December 31, 1997. The weighted average
rate on new loans we originated during 1998 was 6.45%, during 1997 was 6.04%
and during 1996 was 6.06%. At December 31, 1998, our adjustable rate mortgage
portfolio of single family residential loans, including mortgage-backed
securities, totaled $4.3 billion with a weighted average rate of 7.53%,
compared to $4.5 billion with a weighted average rates of 7.58% at December
31, 1997 and $3.9 billion with a weighted average rate of 7.38% at December
31, 1996.
Problem Loans and Real Estate
Non-Performing Assets
Non-performing assets consist of loans on which we have ceased the accrual
of interest, which we refer to as non-accrual loans, and real estate acquired
in settlement of loans. Non-performing assets totaled $27 million at December
31, 1998, compared to $52 million at December 31, 1997, and $62 million at
December 31, 1996. The decrease in our non-performing assets was primarily
attributable to several loans in the commercial real estate loan category that
we returned to accrual status following an extended period of satisfactory
payment performance. The effective yield on these loans reflects a market rate
of interest and we, therefore, do not consider them troubled debt
restructurings. Of the total, real estate acquired in settlement of loans, net
of allowances, represented $4 million at December 31, 1998, down from $10
million at December 31, 1997, and $16 million at December 31, 1996.
75
<PAGE>
The following table summarizes our non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential, one-to-four
units......................... $15,571 $20,816 $22,885 $25,587 $24,012
Residential, one-to-four
units--subprime............... 1,975 -- -- -- --
Other.......................... 4,829 20,883 22,136 52,754 28,025
------- ------- ------- ------- -------
Total non-accrual loans...... 22,375 41,699 45,021 78,341 52,037
Real estate acquired in
settlement of loans (1)......... 4,475 9,626 16,078 18,854 13,558
Repossessed automobiles.......... 569 795 928 -- --
------- ------- ------- ------- -------
Gross non-performing assets.... $27,419 $52,120 $62,027 $97,195 $65,595
======= ======= ======= ======= =======
Allowance for loan losses (2):
Amount......................... $31,517 $32,092 $30,094 $27,943 $25,650
As a percentage of non-
performing loans.............. 140.86% 76.96% 66.84% 35.67% 49.29%
Non-performing assets as a per-
centage of total assets......... 0.44 0.89 1.19 2.09 1.41
</TABLE>
- --------
(1) Excludes real estate acquired in settlement of loans covered under the
assistance agreement we entered into in connection with our 1988
acquisition of Butterfield Savings. We sold these assets to the Federal
Deposit Insurance Corporation's ("FDIC") Division of Resolution in
December 1995.
(2) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
It is our policy to take appropriate, timely and aggressive action when
necessary to resolve non-performing assets. When resolving problem loans, it
is our policy to determine collectibility under various circumstances which
are intended to result in our maximum financial benefit. We accomplish this by
either working with the borrower to bring the loan current or by foreclosing
and selling the asset. We perform ongoing reviews of loans that display
weaknesses and maintain adequate loss allowances on the loans. For a
discussion on our internal asset review policy, refer to "--Allowance for
Losses on Loans and Real Estate."
All of our non-performing assets at December 31, 1998 were located in
California.
We evaluate the need for appraisals for non-performing assets on a periodic
basis. We will generally obtain a new appraisal when we believe that there may
have been an adverse change in the property operations or in the economic
conditions of the geographic market of the property securing our loans. Our
policy is to obtain new appraisals at least annually for major real estate
acquired in settlement of loans. Throughout 1998, we obtained new appraisals
for non-performing loans and real estate acquired in settlement of loans.
Non-Accrual Loans. It is our general policy to account for a loan as non-
accrual when the loan becomes 90 days delinquent or when collection of
interest appears doubtful. In a number of cases, loans may remain on accrual
status past 90 days when we determine that continued accrual is warranted
because the loan is well-secured and in process of collection. As of December
31, 1998, we had no loans 90 days or more delinquent which remained on accrual
status. We reverse and charge against interest income any interest previously
accrued with respect to non-accrual loans. We recognize interest income on
non-accrual loans to the extent that we receive payments and to the extent
that we believe we will recover the remaining principal balance of the loan.
We restore these loans to an accrual status only if the borrower makes all
past due payments and the borrower has demonstrated the ability to make future
payments of principal and interest. At December 31, 1998, non-accrual loans
aggregating $4 million were less than 90 days delinquent relative to their
contractual terms. Additional loans aggregating $1 million were not
contractually past due, but were deemed non-accrual due to management's
assessment of the borrower's ability to pay.
76
<PAGE>
Impaired Loans. We consider a loan to be impaired when, based upon current
information and events, we believe it is probable that we will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. We carry impaired loans at either the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the net fair value of the collateral
securing the loan. Impaired loans exclude large groups of smaller balance
homogeneous loans that we collectively evaluate for impairment. For us, loans
we collectively review for impairment include all single family loans and
performing multi-family and non-residential loans having principal balances of
less than $1 million.
In determining impairment, we consider large non-homogeneous loans with the
following characteristics: non-accrual loans, debt restructurings, and
performing loans which exhibit, among other characteristics, high loan-to-
value ratios or delinquent taxes. We base the measurement of collateral
dependent impaired loans on the fair value of the loan's collateral. We value
non-collateral dependent loans based on a present value calculation of
expected future cash flows, discounted at the loan's effective rate. We
generally use cash receipts on impaired loans not performing according to
contractual terms to reduce the carrying value of the loan, unless we believe
we will recover the remaining principal balance of the loan. We include
impairment losses in the allowance for loan losses through a charge to
provision for loan losses. We include adjustments to impairment losses due to
changes in the fair value of the collateral of impaired loans in provision for
loan losses. Upon disposition of an impaired loan, we record loss of principal
through a charge-off to the allowance for loan losses. At December 31, 1998,
the recorded investment in loans for which we have recognized impairment
totaled $13 million, compared to $14 million at December 31, 1997. The total
allowance for losses related to these loans was $1 million at December 31,
1998, and 1997.
Troubled Debt Restructurings. We consider a restructuring of a debt a
troubled debt restructuring when we, for economic or legal reasons related to
the borrower's financial difficulties, grant a concession to the borrower that
we would not otherwise grant. Troubled debt restructurings may include
changing repayment terms, reducing the stated interest rate and reducing the
amounts of principal and/or interest due or extending the maturity date. The
restructuring of a loan is intended to recover as much of our investment as
possible and to achieve the highest yield possible. There were no troubled
debt restructurings on accrual status at December 31, 1998 and 1997.
Real Estate Acquired in Settlement of Loans. Real estate acquired in
settlement of loans consists of real estate acquired through foreclosure or
deeds in lieu of foreclosure.
Delinquent Loans
When a borrower fails to make required payments on a loan and does not cure
the delinquency within 60 days, we normally record a notice of default to
commence foreclosure proceedings, so long as we have given any required prior
notice to the borrower. If the loan is not reinstated within the time
permitted by law for reinstatement, which is normally five business days
before the date set for the non-judicial trustee's sale, we may then sell the
property at a foreclosure sale. If we have elected to pursue a non-judicial
foreclosure, we are not permitted under applicable California law to obtain a
deficiency judgment against the borrower, even if the security property is
insufficient to cover the balance owed. At these foreclosure sales, we
generally acquire title to the property. At December 31, 1998, loans
delinquent 30 days or more as a percentage of total loans was 0.65%, down from
0.79% at December 31, 1997 and 0.89% at December 31, 1996.
77
<PAGE>
The following table indicates the amounts of our past due loans at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
30-59 60-89 90+ 30-59 60-89 90+
Days Days Days (1) Total Days Days Days (1) Total
------- ------ -------- ------- ------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units.... $ 9,841 $6,014 $12,832 $28,687 $12,099 $4,101 $18,579 $34,779
One-to-four units--
subprime (2)........ 244 784 947 1,975 185 -- -- 185
Five or more units... -- -- 155 155 -- 222 -- 222
Commercial real
estate................ -- -- -- -- -- -- 279 279
Construction........... -- -- -- -- -- -- -- --
Land................... -- -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ ------- -------
Total real estate
loans............. 10,085 6,798 13,934 30,817 12,284 4,323 18,858 35,465
Non-mortgage:
Commercial............. -- -- -- -- -- -- -- --
Automobile............. 4,650 888 1,048 6,586 4,167 981 961 6,109
Other consumer......... 334 45 344 723 218 54 533 805
------- ------ ------- ------- ------- ------ ------- -------
Total loans........ $15,069 $7,731 $15,326 $38,126 $16,669 $5,358 $20,352 $42,379
======= ====== ======= ======= ======= ====== ======= =======
Delinquencies as a
percentage of total
loans.................. 0.26% 0.13% 0.26% 0.65% 0.31% 0.10% 0.38% 0.79%
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units.... $14,519 $5,502 $18,549 $38,570 $14,047 $6,645 $22,303 $42,995
One-to-four units--
subprime (2)........ 198 -- -- 198 -- -- -- --
Five or more units... -- -- -- -- 89 -- 447 536
Commercial real
estate................ -- -- -- -- -- -- 30,675 30,675
Construction........... -- -- -- -- -- -- -- --
Land................... -- -- 566 566 -- -- 6,516 6,516
------- ------ ------- ------- ------- ------ ------- -------
Total real estate
loans............. 14,717 5,502 19,115 39,334 14,136 6,645 59,941 80,722
------- ------ ------- ------- ------- ------ ------- -------
Non-mortgage:
Commercial............. -- -- -- -- -- -- 115 115
Automobile............. 2,080 328 274 2,682 667 249 540 1,456
Other consumer......... 158 15 181 354 257 410 170 837
------- ------ ------- ------- ------- ------ ------- -------
Total loans........ $16,955 $5,845 $19,570 $42,370 $15,060 $7,304 $60,766 $83,130
======= ====== ======= ======= ======= ====== ======= =======
Delinquencies as a
percentage of total
loans.................. 0.36% 0.12% 0.41% 0.89% 0.36% 0.17% 1.46% 1.99%
<CAPTION>
1994
----------------------------------
<S> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units.... $15,306 $9,273 $20,584 $45,163
Five or more units... -- -- 149 149
Commercial real
estate................ -- -- 1,139 1,139
Construction........... -- -- -- --
Land................... -- -- 836 836
------- ------ ------- -------
Total real estate
loans............. 15,306 9,273 22,708 47,287
Non-mortgage:
Commercial............. -- -- -- --
Automobile............. 22 12 24 58
Other consumer......... 291 171 334 796
------- ------ ------- -------
Total loans........ $15,619 $9,456 $23,066 $48,141
======= ====== ======= =======
Delinquencies as a
percentage of total
loans.................. 0.38% 0.23% 0.55% 1.16%
</TABLE>
- --------
(1) All 90 day or greater delinquencies are on non-accrual status and we report
them as part of non-performing assets.
(2) We commenced one-to-four units subprime lending in the first quarter of
1996.
78
<PAGE>
Allowance for Losses on Loans and Real Estate
We establish valuation allowances for losses on loans and real estate on a
specific and general basis. We determine specific allowances based on the
difference between the carrying value of the asset and our net fair value. We
determine general valuation allowances based on historical loss experience,
current and anticipated levels and trends of delinquent and non-performing
loans and the economic environment in our market areas.
Our Internal Asset Review Department conducts independent reviews to
evaluate the risk and quality of all our assets. Our Internal Asset Review
Committee is responsible for the review and classification of assets. The
Internal Asset Review Committee members include the Chief Internal Asset
Review Officer, Chief Executive Officer, Chief Financial Officer, Chief
Lending Officer, General Counsel, Director of Compliance/Risk Management,
Credit Administrator and Chief Appraiser. The Internal Asset Review Committee
meets quarterly to review and to determine asset classifications and to
recommend any changes to asset valuation allowances. With the exception of
payoffs or asset sales, the classification of an asset, once established, can
be removed or upgraded only upon approval of the Internal Asset Review
Committee. The Chief Internal Asset Review Officer reports quarterly to the
audit committee of the board of directors regarding overall asset quality, the
adequacy of valuation allowances on classified assets and our adherence to
policies and procedures regarding asset classification and valuation.
We adhere to an internal asset review system and loss allowance methodology
designed to provide for timely recognition of problem assets and adequate
general valuation allowances to cover asset losses. Our current asset
monitoring process includes the use of asset classifications to segregate the
assets, largely loans and real estate, into various risk categories. We use
the various asset classifications as a means of measuring risk for determining
the general valuation allowances at a point in time. We currently use a six
grade system to classify our assets. The current grades are:
. pass;
. watch;
. special mention;
. substandard;
. doubtful; and
. loss.
Substandard, doubtful and loss assets are considered "classified assets" for
regulatory purposes. A brief description of these classifications follows:
. The pass classification represents a level of credit quality which
contains no well-defined deficiency or weakness.
. The watch classification is used to identify an asset that currently
contains no well-defined deficiency or weakness, but we determine it to
be desirable to closely monitor the asset -- e.g., loans to facilitate
the sale of real estate acquired in settlement of loans. This category
may also be used for assets upgraded from lower classifications where
continuing monitoring is deemed appropriate.
. A special mention asset does not currently expose us to a sufficient
degree of risk to warrant an adverse classification, but does possess a
correctable deficiency or potential weakness deserving management's
close attention.
. Substandard assets have a well-defined weakness or weaknesses. They are
characterized by the distinct possibility that we will sustain some loss
if we do not correct the deficiencies.
. An asset classified doubtful has all the weaknesses inherent in those
classified substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and
improbable. We consider doubtful to be a temporary classification until
resolution of pending weakness issues enables us to more clearly define
the potential for loss.
79
<PAGE>
. That portion of an asset classified loss is considered uncollectible and
of so little value that its continuance as an asset, without
establishment of a specific valuation allowance, is not warranted. A
loss classification does not mean that an asset has absolutely no
recovery or salvage value, but rather it is not reasonable to defer
writing off or providing for all or a portion of an impaired asset even
though partial recovery may be effected in the future. We will generally
classify as loss the balance of the asset that is greater than the net
fair value of the asset unless we can expect payment from another
source. Therefore, the amount of an asset classified as loss reflects
the total of specific valuation allowances established for the
particular asset. Specific valuation allowances are not includable in
determining the Bank's total regulatory capital.
The OTS has the authority to require us to change our asset classifications.
If the change results in an asset being classified in whole or in part as
loss, a specific allowance must be established against the amount so
classified or that amount must be charged off. OTS guidelines set forth
quantitative benchmarks as a starting point for the determination of
appropriate levels of general valuation allowances. The OTS directs its
examiners to rely on management's estimates of adequate general valuation
allowances if the Bank's process for determining adequate allowances is deemed
to be sound.
Our policy is to provide an allowance for losses on loans and real estate
when it is probable that the value of the asset has been impaired and the loss
can be reasonably estimated. To comply with this policy, we have established a
monitoring system that requires at least an annual review of all assets in
excess of $1 million and a semiannual review of all assets considered
adversely classified or criticized. The monitoring system requires a review of
current operating statements, an evaluation of the property's current and past
performance, an evaluation of the borrower's ability to repay and the
preparation of a discounted cash flow analysis. Based on the results of the
review, we may require a new appraisal.
Our provision for loan losses totaled $3.9 million in 1998, down $4.7
million from 1997. Net loan charge-offs exceeded the provision for loan losses
by $0.6 million resulting in a decrease in the allowance for loan losses to
$31.5 million at December 31, 1998. This decrease reflects an improvement in
overall loan quality. Included in the current year-end allowance was $31.3
million of general valuation allowances of which $2.8 million was not
allocated to any specific loan category.
A summary of activity in the allowances for loan losses is shown below for
the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.... $32,092 $30,094 $27,943 $25,650 $26,835
Provision......................... 3,899 8,640 9,137 9,293 4,211
Charge-offs....................... (7,372) (7,773) (7,660) (8,017) (5,511)
Recoveries........................ 2,898 1,131 674 1,017 115
------- ------- ------- ------- -------
Balance at end of period.......... $31,517 $32,092 $30,094 $27,943 $25,650
======= ======= ======= ======= =======
</TABLE>
80
<PAGE>
Net loan charge-offs were $4.5 million in 1998, down from $6.6 million in
1997 and $7.0 million in 1996. The decline primarily reflected a $1.3 million
decline in net charge-offs of one-to-four unit residential loans and a $1.4
million recovery of a prior commercial real estate loan charge-off due to
proceeds from the previously mentioned settlement. The growth in automobile
loan net charge-offs reflects the growth in that portfolio as the ratio of
automobile net charge-offs to the average of these loans was 1.40% in 1998
compared to 1.58% in 1997 and 1.37% in 1996. Charge-offs, net of recoveries,
by category of loan are as follows for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units (1)............. $ 910 $2,165 $4,982 $5,165 $4,051
Five or more units................ 68 -- 102 469 264
Commercial real estate.............. (1,610) (261) (250) 807 959
Land................................ -- -- -- 4 --
Non-mortgage:
Commercial.......................... -- -- 115 (152) (52)
Automobile.......................... 4,959 4,468 1,791 398 9
Other consumer...................... 147 270 246 309 165
------- ------ ------ ------ ------
Total net loan charge-offs........ $ 4,474 $6,642 $6,986 $7,000 $5,396
======= ====== ====== ====== ======
Net loan charge-offs as a percentage
of average loans and mortgage-backed
securities held to maturity.......... 0.09% 0.13% 0.16% 0.17% 0.16%
</TABLE>
- --------
(1) Includes net charge-offs associated with the January 1994 Northridge
earthquake of $1.0 million in 1996, $1.1 million in 1995 and $0.8 million
in 1994.
81
<PAGE>
The allocation of the allowance for loan losses at the dates indicated is as
shown in the following table.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Gross Allowance Gross Allowance Gross Allowance
Loan Percentage Loan Percentage Loan Percentage
Portfolio to Loan Portfolio to Loan Portfolio to Loan
Allowance Balance Balance Allowance Balance Balance Allowance Balance Balance
--------- ---------- ---------- --------- ---------- ---------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units.... $14,299 $4,636,133 0.31% $14,652 $4,607,545 0.32% $13,241 $4,046,448 0.33%
Five or more units... 401 40,029 1.00 314 38,278 0.82 517 56,907 0.91
Commercial real
estate................ 2,632 140,790 1.87 4,112 202,425 2.03 6,956 260,609 2.67
Construction........... 1,508 127,761 1.18 847 70,865 1.20 773 66,651 1.16
Land................... 568 44,859 1.27 331 25,687 1.29 466 21,177 2.20
Non-mortgage:
Commercial............. 218 28,293 0.77 196 26,024 0.75 236 22,136 1.07
Automobile............. 8,344 357,988 2.33 8,016 342,326 2.34 4,303 202,186 2.13
Other consumer......... 747 41,894 1.78 824 47,735 1.73 802 47,281 1.70
Other................... -- -- -- -- -- -- -- -- --
Not specifically
allocated.............. 2,800 -- -- 2,800 -- -- 2,800 -- --
------- ---------- ---- ------- ---------- ---- ------- ---------- ----
Total loans held for
investment.......... $31,517 $5,417,747 0.58% $32,092 $5,360,885 0.60% $30,094 $4,723,395 0.64%
======= ========== ==== ======= ========== ==== ======= ========== ====
<CAPTION>
1995 1994
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real
estate:
Residential:
One-to-four units.... $12,254 $3,656,512 0.34% $12,404 $3,688,280 0.34%
Five or more units... 895 57,321 1.56 978 63,782 1.53
Commercial real
estate................ 8,456 270,583 3.13 6,814 294,418 2.31
Construction........... 335 28,593 1.17 131 11,367 1.15
Land................... 973 21,867 4.45 862 9,822 8.78
Non-mortgage:
Commercial............. 259 12,864 2.01 472 12,975 3.64
Automobile............. 849 56,127 1.51 42 3,028 1.39
Other consumer......... 1,122 50,945 2.20 1,094 53,241 2.05
Other................... -- -- -- 53 39,143 0.14
Not specifically
allocated.............. 2,800 -- -- 2,800 -- --
------- ---------- ---- ------- ---------- ----
Total loans held for
investment.......... $27,943 $4,154,812 0.67% $25,650 $4,176,056 0.61%
======= ========== ==== ======= ========== ====
</TABLE>
The following table is a summary of the activity in our allowance for real
estate held for investment and non-conforming loans to joint ventures for the
years indicated. In 1998, $4.3 million of the provision reduction and $7.1
million of charge-offs relate to the previously mentioned settlement. We also
included $1.1 million of charge-offs due to sales of undeveloped land in 1998.
The provision reductions in all years presented were due to a continuing
improvement in the real estate market which favorably impacted the valuation
of some neighborhood retail shopping center investments and to a reduction in
the investment in some joint venture investments.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.... $21,244 $30,071 $34,338 $37,198 $38,674
Provision (reduction)............. (5,296) (3,190) (3,306) (2,916) (1,400)
Charge-offs....................... (8,231) (5,637) (1,035) -- (76)
Recoveries........................ -- -- 74 56 --
------- ------- ------- ------- -------
Balance at end of period.......... $ 7,717 $21,244 $30,071 $34,338 $37,198
======= ======= ======= ======= =======
</TABLE>
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<PAGE>
In addition to losses charged against the allowance for loan losses, we have
recorded losses on real estate acquired in settlement of loans by direct
write-off to net operations of real estate acquired in settlement of loans and
against an allowance for losses specifically established for these assets. The
following table is a summary of the activity of our allowance for real estate
acquired in settlement of loans for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $ 839 $ 1,078 $ 1,217 $ 743 $ 747
Provision............................ 455 1,107 1,658 2,498 2,035
Charge-offs.......................... (761) (1,346) (1,797) (2,024) (2,039)
Recoveries........................... -- -- -- -- --
----- ------- ------- ------- -------
Balance at end of period............. $ 533 $ 839 $ 1,078 $ 1,217 $ 743
===== ======= ======= ======= =======
</TABLE>
Capital Resources and Liquidity
Our sources of funds include deposits, advances from the FHLB and other
borrowings, proceeds from the sale of real estate, sales of loans and
mortgaged-backed securities, payments of loans and mortgaged-backed
securities, payments for and sales of loan servicing and income from other
investments. Interest rates, real estate sales activity and general economic
conditions affect significantly repayments on loans and mortgage-backed
securities and deposit inflows and outflows. Loan repayments increased $0.7
billion in 1998 to $1.9 billion and were virtually equal to new loan
originations and purchases for portfolio. In 1997, new loan originations and
purchases for portfolio exceeded repayments by $0.9 billion.
During 1998, aggregate borrowings increased $220 million as we took
advantage of obtaining long-term advances from the FHLB at attractive
borrowing rates to fund fixed-rate loans for investment. We also experienced a
net deposit inflow of $170 million, of which $302 million represented
transaction accounts partially offset by a $132 million decrease in
certificates of deposit.
To the extent 1999 deposit growth falls short of satisfying ongoing
commitments to fund maturing and withdrawable deposits, repay borrowings, fund
existing and future loan and other investment commitments, continue branch
improvement programs and maintenance of regulatory liquidity requirements, we
will utilize borrowing arrangements with the FHLB and other sources. At
December 31, 1998, we had commitments to fund loans amounting to $941 million,
loans in process of $100 million, undrawn lines of credit of $70 million and
letters of credit and other contingent liabilities of $4 million. We believe
our current sources of funds will enable us to meet these obligations while
maintaining our liquidity at appropriate levels.
The principal measure of liquidity in the savings and loan industry is the
regulatory ratio of cash and eligible investments to the sum of withdrawable
savings and borrowings due within one year. Federal regulators reduced the
minimum liquidity ratio in 1997 from 5% to 4%. At December 31, 1998, the
Bank's ratio was 4.04% compared to 4.80% at December 31, 1997 and 5.26% at
December 31, 1996.
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<PAGE>
Regulatory Capital Compliance
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of December 31, 1998. The core and tangible
capital ratios were 6.83% and the risk-based capital ratio was 12.88%. These
levels are up slightly from comparable ratios of 6.61% for core and tangible
capital and 12.64% for risk-based capital at December 31, 1997, and continue
to exceed the "well capitalized" standards of 5% for core and 10% for risk-
based, as defined by regulation. During 1998, the amount of the Bank's non-
includable investment in real estate required to be deducted from regulatory
capital increased by $7 million due to DSL Service Company's growth in
retained earnings.
<TABLE>
<CAPTION>
Risk-
Tangible Capital Core Capital Based Capital
------------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity.... $ 470,504 $470,504 $470,504
Adjustments:
Deductions:
Investment in
subsidiary, primarily
real estate.......... (42,119) (42,119) (42,119)
Goodwill.............. (4,543) (4,543) (4,543)
Non-permitted mortgage
servicing rights..... (779) (779) (779)
Additions:
Unrealized gain on
securities available
for sale............. (753) (753) (753)
General loss
allowance--investment
in DSL Service
Company.............. 1,383 1,383 1,383
Loan general valuation
allowances (1)....... -- -- 31,267
---------- -------- --------
Regulatory capital...... 423,693 6.83% 423,693 6.83% 454,960 12.88%
Well capitalized
requirement............ 93,053 1.50 (2) 310,178 5.00 353,195 10.00 (3)
---------- ------ -------- ---- -------- -----
Excess.................. $ 330,640 5.33% $113,515 1.83% $101,765 2.88%
========== ====== ======== ==== ======== =====
</TABLE>
- --------
(1) Limited to 1.25% of risk-weighted assets.
(2) Represents the minimum requirement for tangible capital, as no "well
capitalized" requirement has been established for this category.
(3) A third requirement is Tier 1 capital to risk-weighted assets of 6%, which
the Bank met and exceeded with a ratio of 12.00% at December 31, 1998.
Current Accounting Issue
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including a number of derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If specific conditions are met, a derivative may be
specifically designated as:
. a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment;
. a hedge of the exposure to variable cash flows of a forecasted
transaction; or
. a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available for
sale security, or a foreign-currency-denominated forecasted transaction.
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<PAGE>
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk.
As part of our secondary marketing activities, we utilize forward sale and
purchase contracts to hedge the value of loans originated for sale against
adverse changes in interest rates. At December 31, 1998, these sales contracts
amounted to approximately $622 million and purchase contracts amounted to
approximately $34 million. These contracts have a high correlation to the
price movement of the loans being hedged. There is no recognition of
unrealized gains and losses on these contracts in the balance sheet or
statement of income. When the related loans are sold, we recognize the
deferred gains or losses from these contracts in our statement of income as a
component of net gains or losses on sales of loans and mortgage-backed
securities.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not anticipate that the financial impact
of this statement will have a material impact on us.
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<PAGE>
BUSINESS
GENERAL
We were incorporated in Delaware on October 21, 1994. On January 23, 1995,
after we obtained necessary stockholder and regulatory approvals, we acquired
100% of the issued and outstanding capital stock of the Bank and the Bank's
stockholders became holders of our stock. Downey was thereafter funded by the
Bank and presently operates as the Bank's holding company. Our stock is traded
on the New York Stock Exchange and Pacific Exchange under the trading symbol
"DSL."
The Bank was formed in 1957 as a California-licensed savings and loan
association and converted to a federal charter in 1995. As of March 31, 1999,
it conducts its business through 95 retail deposit branches, including 33
full-service in-store branches. Residential loans are originated by retail
loan officers who work out of 43 of the Bank's California retail deposit
branches and two loan origination centers outside of California, one each in
Arizona and Washington. Retail loan officers also originate residential loans
through the Internet from four California call centers. Wholesale loans
submitted by mortgage brokers are originated from the Arizona and Washington
loan origination centers and ten California loan origination centers, eight of
which are located in or by a Bank office.
The Bank is regulated or affected by the following governmental entities and
laws as follows:
. As a federally chartered savings association, the Bank's activities and
investments are generally governed by the Home Owners' Loan Act, as
amended, and implementing regulations and policies of the OTS.
. The Bank and Downey are subject to the primary regulatory and
supervisory jurisdiction of the OTS.
. As a federally insured depository institution, the Bank is regulated and
supervised by the FDIC with respect to some of its activities and
investments.
. The Bank is a member of the FHLB of San Francisco, which is one of the
12 regional banks for federally insured depository institutions
comprising the Federal Home Loan Bank System.
. The Bank's savings deposits are insured through the SAIF of the FDIC, an
instrumentality of the United States government.
. The Bank is regulated by the Federal Reserve with respect to reserves
the Bank is required to maintain against deposits and other matters.
Downey Affiliated Insurance Agency was incorporated on January 25, 1995, as
Downey's wholly owned subsidiary. We capitalized Downey Affiliated Insurance
Agency on February 24, 1995 with $400,000. In the 1995 second quarter, Downey
Affiliated Insurance Agency commenced operations at which time representatives
of Downey Affiliated Insurance Agency were available in our branches to offer
annuity products. During 1996, Downey Affiliated Insurance Agency began
offering forced-placed casualty insurance policies on mortgage loans and
stopped offering annuity products. The offering of forced-placed casualty
insurance policies ceased in April 1999.
General economic conditions, the monetary and fiscal policies of the federal
government and the regulatory policies of governmental authorities
significantly influence our operations. Additionally, interest rates on
competing investments and general market interest rates influence our deposit
flows and the costs we incur for interest-bearing liabilities, which
represents our cost of funds. Similarly, market interest rates and other
factors that affect the supply of and demand for housing and the availability
of funds affect our loan volume and our yields on loans and mortgage-backed
securities.
Our primary business is banking and we are also involved in real estate
investment, each of which we discuss further below.
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<PAGE>
BANKING ACTIVITIES
Our primary business is banking. Our banking activities focus on:
. attracting funds from the general public and institutions; and
. originating and investing in loans, primarily residential real estate
mortgage loans, investment securities and mortgage-backed securities.
These mortgage-backed securities include mortgage pass-through securities
issued by other entities and securities issued or guaranteed by government-
sponsored enterprises like the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Government National Mortgage
Association.
Our primary sources of revenue from our banking business are:
. interest we earn on loans and mortgage-backed securities;
. income from investment securities;
. gains on sales of our loans and mortgage-backed securities;
. fees we earn in connection with loans and deposits; and
. income we earn on our portfolio of loans and mortgage-backed securities
we service for investors.
Our principal expenses in connection with our banking business are:
. interest we incur on our interest-bearing liabilities, including
deposits and borrowings; and
. general and administrative costs.
Our primary sources of funds from our banking business are:
. deposits;
. principal and interest payments on our loans and mortgage-backed
securities;
. proceeds from sales of our loans and mortgage-backed securities; and
. borrowings.
Scheduled payments we receive on loans and mortgage-backed securities are a
relatively stable source of our funds. However, the funds we receive from
deposits and prepayment of loans and mortgage-backed securities vary widely.
Below is a detailed discussion of our banking activities.
Lending Activities
Historically, our lending activities have primarily emphasized our
origination of first mortgage loans secured by residential properties and
retail neighborhood shopping centers. To a lesser extent, our lending
activities have emphasized our origination of real estate loans secured by
multi-family and commercial and industrial properties, including office
buildings, land and other properties with income producing capabilities. In
addition, we have provided construction loan financing for single-family and
multi-family residential properties and commercial retail neighborhood
shopping center projects. These construction loan financings have included
loans to joint ventures, which were being engaged in by DSL Service Company or
the Bank with other participants. We also originate loans to businesses
through our commercial banking operations.
We originate our automobile loans directly through our branch network. We
also conduct an indirect auto-lending program through our purchase of new or
used automobile sales contracts from auto dealers in California and other
western states. Downey Auto Finance Corp., a wholly owned subsidiary of the
Bank, operates this indirect auto-lending program.
Our primary focus will continue to be our origination of:
. adjustable rate single family mortgage loans, particularly subprime
loans which carry higher interest rates; and
. consumer loans.
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<PAGE>
We will also continue our secondary marketing activities of selling:
. our production of some fixed rate single family loans; and
. some adjustable rate mortgage loan products.
Given the current low interest rate environment and customer preference for
fixed rate loans, it is likely we may originate more single family loans for
sale in the secondary market than for our portfolio during 1999, as was the
case in 1998. For more information, see below under the caption entitled
"Business--Secondary Marketing and Loan Servicing Activities." For additional
information on the composition of our loan and mortgage-backed securities
portfolio, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition for the Year Ended December 31,
1998--Loans and Mortgage-Backed Securities" and "--Financial Condition for the
Quarter Ended March 31, 1999--Loans and Mortgage-Backed Securities."
Loan and Mortgage-Backed Securities Portfolio
We carry loans receivable at cost. Our net loans receivable are adjusted for
amortization of premiums and accretion of discounts which are recognized in
interest income using the interest method. Our investments in mortgage-backed
securities represent participating interests in pools of first mortgage loans
originated and serviced by the issuers of the securities. We carry mortgage-
backed securities held to maturity at unpaid principal balances, which are
adjusted for unamortized premiums and unearned discounts. We amortize premiums
and discounts on mortgage-backed securities by using the interest method over
the remaining period to contractual maturity, adjusted for anticipated
prepayments.
We identify loans that may be sold before their maturity. In our balance
sheets, we classify these loans as held for sale and record them at the lower
of amortized cost or market value. We recognize net unrealized losses on these
loans, if any, in a valuation allowance by making charges to our income.
We carry mortgage-backed securities available for sale at fair value. We
report net unrealized gains or losses on these securities net of income taxes
and as a separate component of our other comprehensive income until realized.
The residential mortgage loans we originate typically have contractual
maturities at origination of 15 to 40 years. To limit the interest rate risk
associated with these 15- to 40-year maturities, we, among other things,
principally originate adjustable rate mortgages for our own loan portfolio. We
originate fixed-rate loans and sell the majority of them in the secondary
market on a non-recourse basis for cash. However, we occasionally originate
fixed rate loans for our own portfolio to facilitate our sale of real estate
we acquire in settlement of loans and which meet specific yield and other
approved guidelines. For more information, see "Business--Asset/Liability
Management." In addition, the average term of these fixed rate mortgage loans
we originate for our own portfolio historically has been significantly shorter
than their contractual maturity due to loan payoffs as a result of home sales
or refinancings and prepayments.
Residential Real Estate Lending
Our primary lending activity is our origination of mortgage loans secured by
single family residential properties consisting of one-to-four units located
primarily in California. We provide these mortgage loans for borrowers to
purchase residences or to refinance their existing mortgages at lower rates or
upon different terms. Our primary strategy is to originate adjustable rate
mortgages for our portfolio of loans we hold for investment. For more
information, see "Business--Asset/Liability Management." We also originate
residential fixed interest rate mortgage loans to meet consumer demand, but we
intend to sell the majority of all these loans in the secondary market, rather
than hold these loans in our portfolio. We may, however, place residential
fixed rate loans in our portfolio of loans held for investment if fixed rate
loans are funded with long-term funds to mitigate interest rate risk. In
addition, we originate a small volume of fixed rate loans for our own
investment if they meet specific yield and other approved guidelines or to
facilitate our sale of real estate acquired in settlement of
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<PAGE>
loans. For more information, see "Business--Lending Activities--Secondary
Marketing and Loan Servicing Activities."
Our adjustable rate mortgages generally:
. begin with an incentive interest rate, which is an interest rate below
the current market rate, that adjusts to the applicable index plus a
defined spread, subject to periodic and lifetime caps, after one, three,
six or twelve months;
. provide that the maximum interest rate we can charge borrowers cannot
exceed the incentive rate by more than six to nine percentage points,
depending on the type of loan and the initial rate offered; and
. limit interest rate adjustments to 1% per adjustment period for those
that adjust semi-annually.
Most of our adjustable rate mortgages adjust monthly instead of semi-
annually. These monthly adjustable rate mortgages:
. have a lifetime interest rate cap, but no specified periodic interest
rate adjustment cap;
. have a periodic cap on changes in required monthly payments, which
adjust annually; and
. allow for negative amortization, which is the addition to loan principal
of accrued interest that exceeds the required monthly loan payments.
Regarding negative amortization, if a loan incurs significant negative
amortization, then there is an increased risk that the market value of the
underlying collateral on the loan would be insufficient to satisfy fully the
outstanding principal and interest. We impose a limit on the amount of
negative amortization, so that the principal plus the added amount cannot
exceed:
. 125% of the original loan amount on loans having a loan-to-value ratio
of 80% or less; and
. 110% on loans having a loan-to-value ratio over 80%.
A loan-to-value ratio is the ratio of the principal amount of the loan to
the appraised value at origination of the property securing the loan. We
permit adjustable rate mortgages to be assumed by qualified borrowers.
During first quarter 1999, approximately 83% of our one-to-four unit
residential real estate loans were obtained by our wholesale loan
representatives but originated through outside mortgage brokers. We pay our
wholesale loan representatives on a commission basis. We consider the
compensation we pay these mortgage brokers when we set the overall price of
our mortgage loan products. These mortgage brokers do not operate from our
offices and are not our employees. Our retail loan representatives generated
approximately 17% of our one-to-four unit residential loans during first
quarter 1999. We compensate our retail loan representatives on a salary basis
plus a fixed amount per loan they originate. Retail loan representatives
typically receive loan referrals from real estate agents, builders, depositors
and customers obtained from our retail advertising and other sources,
including over the Internet.
We require that our residential real estate loans be approved at various
levels of management, depending upon the amount of the loan. On a single-
family residential loan we originate for our portfolio, the maximum amount we
generally will lend is $1 million. Our average loan size, however, is much
lower. During first quarter 1999, our average loan size was $241,577. We
generally make loans with loan-to-value ratios not exceeding 80%. We will make
loans with loan-to-value ratios of over 80%, but not exceeding 97% of the
value of the property, if borrowers obtain private mortgage insurance to
reduce the effective loan-to-value ratio to between 70% to 78%, consistent
with secondary marketing requirements. In addition, we require that borrowers
obtain hazard insurance for all residential real estate loans covering the
lower of the loan amount or the replacement value of the structure.
In our approval process for the loans we originate or purchase, we assess
both the value of the property securing the loan and the applicant's ability
to repay the loan. Loan underwriters analyze the loan application
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<PAGE>
and the property involved. Qualified appraisers on our staff or outside
appraisers establish the value of the collateral through the use of full
appraisals or alternative valuation formats that meet regulatory requirements.
Our senior staff or approved fee review appraisers selectively review
appraisals performed by these approved appraisers. We also obtain information
about the applicant's income, financial condition, employment, and credit
history. Typically, we will verify an applicant's credit information for loans
originated by our retail loan representatives or our other employees. For
loans from mortgage brokers, we require the mortgage broker to review and
verify the applicant's credit information and employment. In addition, we
obtain credit information about the applicant and perform other underwriting
tests of these mortgage broker originated loans.
On our adjustable rate mortgages we offer with incentive interest rates, we
qualify applicants:
. for loan programs with no negative amortization and having a loan-to-
value ratio of 80% or less, at the higher of:
.the initial incentive interest rate plus 2%; or
.the fully indexed interest rate, with a minimum qualifying rate of 7%.
. for loan programs with no negative amortization and having a loan-to-
value ratio of greater than 80%, at a minimum qualifying interest rate
of 7%.
. for loan programs that include negative amortization and having a loan
to value ratio of 80% or less, at the lesser of:
.the initial incentive interest rate plus 2%; or
.the fully indexed interest rate, with a minimum qualifying rate of 6%.
. for loan programs that include negative amortization and having a loan
to value ratio of greater than 80%, at the minimum qualifying interest
rate of 7%.
Late in 1996, we began offering one-to-four unit residential loans to
borrowers who have or, in the case of purchases, will have equity in their
homes but whose credit rating contains exceptions which preclude them from
qualifying for the best market terms. These lower grade credits or "A-," "B"
and "C" loans are commonly referred to as subprime loans and are characterized
by lower loan-to-value ratios and higher average interest rates than higher
credit grade loans or "A" loans. We believe these lower credit grade borrowers
represent an opportunity for us to earn a higher net return for the risks we
assume. We have developed underwriting guidelines for each classification of
credit.
Secondary Marketing and Loan Servicing Activities
As part of our secondary marketing activities, we originate some residential
real estate adjustable rate mortgages and fixed rate mortgages, which we
intend to sell. Accordingly, we classify these loans as held for sale and
carry them at the lower of cost or market. These loans are secured by first
liens on one-to-four unit residential properties and have:
.15- to 30-year maturities; or
.30-year amortization periods with balloon payments in five or seven years;
or
.other maturities.
We use various hedging programs to manage the interest rate risk of our fixed
rate mortgage origination process. For more information, see "Business--
Asset/Liability Management."
We believe that servicing loans for others can be an important
asset/liability management tool because it produces operating results which,
in response to changes in market interest rates, tend to move opposite to
changes in net interest income. Because adjustable rate mortgages take longer
to adjust to market interest rates,
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<PAGE>
net interest income associated with these loans is expected to decline in
periods of rising interest rates and increase in periods of falling rates. In
contrast, the value of a loan servicing portfolio normally:
.increases as interest rates rise, and loan prepayments decrease; and
.declines as interest rates fall, and loan prepayments increase.
In addition, increased levels of servicing activities can provide us with
additional income with minimal additional overhead costs.
Depending upon market pricing for servicing, we sell loans that are either
servicing retained or servicing released. When we sell loans that are
servicing retained, we record gains or losses from our sale of these loans at
the time of sale. We calculate gains or losses from our sale as the difference
between the net sales proceeds and the allocated basis of the loans sold.
Effective January 1, 1997, we adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," ("SFAS 125") which governs the accounting
treatment of mortgage servicing rights. As required by SFAS 125, we capitalize
mortgage servicing rights we acquire through either our purchase or
origination of mortgage loans we intend to sell with servicing rights
retained. We allocate the total cost of the mortgage loans designated for sale
to both the mortgage servicing rights and to the mortgages loans without
mortgage servicing rights based on their relative fair values. We include our
mortgage servicing rights in our financial statements in the category of
"other assets." We recognize impairment losses on mortgage servicing rights
through a valuation allowance, and record any associated provision as a
component of loan servicing fees. At March 31, 1999, our mortgage servicing
rights totaled $16 million.
We may exchange loans we originate for sale with government agencies for
mortgage-backed securities collateralized by these loans. Our cost for the
exchange is our payment of a monthly guaranty fee, which is expressed as a
percentage of the unpaid principal balance and which we deduct from interest
income. We can use the securities we receive to collateralize various types of
our borrowings at rates that frequently are more favorable than rates on other
types of liabilities and also carry a lower risk-based capital requirement
than whole loans. We carry these mortgage-backed securities available for sale
at fair value. However, we record no gain or loss on the exchange in our
statement of income until the securities are sold to a third party. Before we
sell these securities to third parties, we show all changes in fair value as a
separate component of our comprehensive income, net of income taxes.
Commercial Real Estate and Multi-Family Lending
We have provided permanent loans secured by retail neighborhood shopping
centers and multi-family properties. Our major loan officers conduct our
commercial real estate lending and multi-family activities. We compensate
these officers on a salary basis.
Commercial real estate and multi-family loans generally entail additional
risks as compared to single-family residential mortgage lending. We subject
each loan, including loans to facilitate the sale of real estate we own, to
our underwriting standards, which generally include:
.our evaluation of the creditworthiness and reputation of the borrower; and
. the amount of the borrower's equity in the project as determined on the
basis of appraisal, sales and leasing information on the property and
cash flow projections.
To protect the value of the security for our loan, we require borrowers to
maintain casualty insurance for the loan amount or replacement cost. In
addition, for non-residential loans in excess of $500,000, we require the
borrower to obtain comprehensive general liability insurance. All commercial
real estate loans we originate must be approved by at least two of our
officers, one of whom must be the originating loan account officer and the
other a designated officer with appropriate loan approval authority.
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Construction Lending
We have provided construction loan financing for single family and multi-
family residential properties and commercial real estate projects, like retail
neighborhood shopping centers. Our major loan officers principally originate
these loans. We generally make construction loans at floating rates based upon
the prime or reference rate of a major commercial bank. Generally, we require
a loan-to-value ratio of 75% or less on construction lending and we subject
each loan to our underwriting standards.
Construction loans involve risks different from completed project lending
because we advance loan funds based upon the security of the project under
construction. If the borrower defaults on the loan, then we may have to
advance additional funds to finance the project's completion before the
project can be sold. Moreover, construction projects are affected by
uncertainties inherent in estimating:
. construction costs;
. potential delays in construction time;
. market demand; and
. the accuracy of the estimate of value on the completed project.
When providing construction loans, we require the general contractor to, among
other things, carry contractor's liability insurance equal to specific
prescribed minimum amounts, carry builder's risk insurance and have a blanket
bond against employee misappropriation.
Commercial Lending
We originate commercial loans and revolving lines of credit, and issue
standby letters of credit for our middle market commercial customers. We offer
the various credit products on both a secured and unsecured basis with
interest rates being either fixed or variable. Our portfolio emphasis is
toward secured, floating rate credit facilities. Our commercial banking group
directs these activities and focuses on our long-term-relationship-based
customers. We also utilize our retail branch network as a source of commercial
customers, with the lending to these customers being typically managed by the
branch manager. We believe our commercial borrowers are desirable because
these borrowers generally have lower cost deposit accounts.
Consumer Lending
We originate fixed rate automobile loans primarily through an indirect
lending program of Downey Auto Finance Corp. which uses preapproved automobile
dealers to finance consumer purchases of new and used automobiles. Downey Auto
Finance Corp. has centralized this operation at our headquarters and uses
technology to process and evaluate loan applications, including credit scoring
and the automated retrieval of consumer credit bureau files. In addition to
indirect automobile lending through Downey Auto Finance Corp., the Bank
originates direct automobile loans, home equity loans and lines of credit, and
other consumer loan products. Before we make a consumer loan, we assess the
applicant's ability to repay the loan and, if applicable, the value of the
collateral securing the loan. The risk involved with home equity loans and
lines of credit is similar to the risk involved with residential real estate
loans. We offer customers a credit card through a third party, who extends the
credit and services the loans made to our customers.
Investment Activities
Federal and state regulations require the Bank to maintain a specified
minimum amount of liquid assets invested in particular short-term obligations
and other securities. For additional information regarding liquidity
requirements and the Bank's compliance with the liquidity requirements, see
"Regulation--Regulation of the Bank--Liquidity Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition for the Year Ended December 31, 1998--Capital Resources
and Liquidity", and "--Financial Condition for the Quarter Ended March 31,
1999--Capital Resources and Liquidity." As a federally chartered savings
association, the Bank's ability to make other securities investments
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is prescribed under the OTS regulations and the Home Owners' Loan Act. The
Bank's authorized officers make investment decisions within guidelines
established by the Bank's Board of Directors. The Bank manages these
investments in an effort to produce the highest yield, while at the same time
maintaining safety of principal, minimizing our interest rate risk and
complying with applicable regulations.
We carry securities held for investment at cost. We adjust these costs for
amortization of premiums and accretion of discounts, which we recognize as
interest income using the interest method. We carry securities available for
sale at market value. We exclude unrealized holding gains and losses, or
valuation allowances established for net unrealized losses, from our earnings
and report them as a separate component of our stockholders' equity as
accumulated other comprehensive income, net of income taxes, unless the
security is deemed other than temporarily impaired. If the security is
determined to be other than temporarily impaired, we charge the amount of the
impairment to operations. For further information on the composition of our
investment portfolio, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition for the Year Ended
December 31, 1998--Investment Securities."
Sources of Funds
Deposits
We prefer to use deposits as our principal source of funds for supporting
our lending activities, because the cost of these funds generally is less than
that of borrowings or other funding sources with comparable maturities. We
traditionally have obtained our savings deposits primarily from areas
surrounding the Bank's Southern and Northern California branch offices.
However, we occasionally raise some retail deposits through Wall Street
activities.
General economic conditions affect deposit flows. Funds may flow from
depository institutions like savings associations into direct vehicles like
government and corporate securities or other financial intermediaries. Our
ability to attract and retain deposits will continue to be affected by money
market conditions and prevailing interest rates. Generally, state or federal
regulation does not restrict interest rates we pay on deposits.
In 1996, we began establishing full-service branch facilities in selected
supermarket locations throughout Southern California. Each in-store branch
offers a full range of financial services including checking and savings
accounts as well as residential and consumer loans.
When consistent with our maintenance of appropriate capital levels, we may
consider opportunities to augment our retail branch system and deposit base
through our acquisition of selected branches or deposits.
For further information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition for the
Year Ended December 31, 1998--Deposits" and "--Financial Condition for the
Quarter Ended March 31, 1999--Deposits."
Borrowings
Our principal source of funds has been and continues to be deposits we raise
through our retail branch system. At various times, however, we have utilized
other sources to fund our loan origination and other business activities. We
have at times relied upon our borrowings from the FHLB of San Francisco as an
additional source of funds. The FHLB makes advances to us through several
different credit programs it offers.
In 1994, we initiated a program to sell commercial paper supported by an
irrevocable letter of credit issued by the FHLB of San Francisco. However, we
terminated this program in 1998 because it was no longer cost effective
compared to other funding sources.
From time to time, we obtain additional sources of funds by selling some of
our securities and mortgage loans under agreements to repurchase. These
reverse repurchase agreements are generally short-term, and are
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collateralized by our mortgage-backed or investment securities and our
mortgage loans. We only deal with investment banking firms that are recognized
as primary dealers in U.S. government securities or major commercial banks in
connection with these reverse repurchase agreements. In addition, we limit the
amounts of our borrowings from any single institution.
For further information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition for the
Year Ended December 31, 1998--Borrowings" and "--Financial Condition for the
Quarter Ended March 31, 1999--Borrowings."
Asset/Liability Management
Savings institutions are affected by interest rate risks to the degree that
their interest-bearing liabilities, consisting principally of customer
deposits, FHLB advances and other borrowings, mature or reprice more rapidly,
or on a different basis, than their interest-earning assets, which consist
predominantly of intermediate or long-term real estate loans. While having
liabilities that on average mature or reprice more frequently than assets may
be beneficial in times of declining interest rates, this asset/liability
structure may result in declining net earnings during periods of rising
interest rates. One of our principal objectives is to manage the effects of
adverse changes in interest rates on our net interest income while maintaining
our asset quality and an acceptable interest rate spread. To improve the rate
sensitivity and maturity balance of our interest-earning assets and
liabilities, we have over the past several years emphasized the origination of
loans with adjustable interest rates or relatively short maturities. Loans
with adjustable interest rates have the beneficial effect of allowing the
yield on our assets to increase during periods of rising interest rates,
although these loans have contractual limitations on the frequency and extent
of interest rate adjustments.
For further information see "Business--Lending Activities" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition for the Year Ended December 31, 1998--Asset/Liability
Management and Market Risk" and "--Financial Condition for the Quarter Ended
March 31, 1999--Asset/Liability Management and Market Risk."
Earnings Spread
We determine our net interest income by calculating the difference or the
interest rate spread, between:
. the yields we earn on our interest-earning assets like loans, mortgage-
backed securities and investment securities; and
. the interest we pay on our interest-bearing liabilities like deposits
and borrowings.
Our net interest income is also determined by the relative dollar amounts of
our interest-earning assets and interest-bearing liabilities.
Our effective interest rate spread, which reflects the relative level of our
interest-earning assets to our interest-bearing liabilities, equals:
. the difference between interest income on our interest-earning assets
and interest expense on our interest-bearing liabilities divided by
. our average interest-earning assets for the period.
For information regarding our net income and its components and for
management's analysis of our financial condition and results of operations,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations." For returns on our assets and other selected financial data
see "Selected Consolidated Financial Data."
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REAL ESTATE INVESTMENT ACTIVITIES
In addition to our primary business of banking, which has been described
above, we are also involved in real estate investment activities, which is
conducted primarily through DSL Service Company, a wholly owned subsidiary of
the Bank. DSL Service Company is a diversified real estate development company
which was established in 1966 as a neighborhood shopping center and
residential tract developer, as well as the general contractor for the Bank's
branch locations. Today its capabilities include development, construction and
property management activities relating to its portfolio of projects primarily
within California, but also in Arizona. In addition to DSL Service Company
developing its own real estate projects, it associates with other qualified
developers to engage in joint ventures. The primary revenue sources of our
real estate investment activities include net rental income and gains from the
sale of real estate investments. The primary expenses of our real estate
investment activities are interest expense and general and administrative
expense.
Before Congress passed the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), the Bank conducted real estate development
and joint venture operations directly, in addition to operations conducted
through DSL Service Company. Since FIRREA, however, the Bank's ability to
engage in new real estate development and joint venture activities and to
retain its existing real estate investments has been curtailed dramatically.
In addition, these activities may be economically unfeasible for the Bank
because of the capital requirements FIRREA imposes on these activities. FIRREA
requires, with some limited exceptions, a savings institution like the Bank to
exclude from the Bank's regulatory capital:
. the Bank's investments in, and extensions of credit to, real estate
subsidiaries like DSL Service Company; and
. the Bank's direct equity investments in real estate development and
joint venture operations.
FIRREA also prohibits the Bank from making new investments in real estate
development and joint venture operations.
Since July 1, 1996, the Bank has been required to deduct the full amount of
its investment in DSL Service Company in calculating its applicable ratios
under the core, tangible and risk-based capital standards. Savings
associations generally may invest in service corporation subsidiaries, like
DSL Service Company, to the extent of 2% of the association's assets, plus up
to an additional 1% of assets for investments which serve primarily community,
inner-city or community development purposes. In addition, "conforming loans"
by an association to DSL's joint venture partnerships are limited to 50% of
the association's risk-based capital. "Conforming loans" are those generally
limited to 80% of appraised value, bear a market rate of interest and require
payments sufficient to amortize the principal balance of the loan. We are in
compliance with each of these investment limitations.
To the extent Downey or a subsidiary of Downey, other than the Bank or its
subsidiaries, makes real estate investments, the above-mentioned capital
deductions and limitations do not apply as they only pertain to the specific
investments by savings associations or their subsidiaries.
For further information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition for the
Year Ended December 31, 1998--Investments in Real Estate and Joint Ventures."
COMPETITION
We face competition both in attracting deposits and in making loans. Our
most direct competition for deposits has historically come from other savings
institutions and from commercial banks located in our principal market areas,
including many large financial institutions based in other parts of the
country or their subsidiaries. In addition, we face additional significant
competition for investors' funds from short-term money market securities and
other corporate and government securities. Our ability to attract and retain
savings deposits depends, generally, on our ability to provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities and the appropriate level of customer service.
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We experience competition for real estate loans principally from other
savings institutions, commercial banks, mortgage banking companies and
insurance companies. We compete for loans principally through our interest
rates and loan fees we charge and our efficiency and quality of services we
provide borrowers and real estate brokers.
EMPLOYEES
At March 31, 1999, we had approximately 1,369 full-time employees and 425
part-time employees. We provide our employees with health and welfare benefits
and a retirement and savings plan. Additionally, we offer qualifying employees
participation in our stock purchase plan. Our employees are not represented by
any union or collective bargaining group, and we consider our employee
relations to be good.
REGULATION
General
Federal and state law extensively regulates savings and loan holding
companies and savings associations. This regulation is intended primarily for
the protection of our depositors and the SAIF and not for the benefit of our
stockholders. In the following information, we describe some of the
regulations applicable to Downey and the Bank. We do not claim this discussion
is complete and qualify our discussion in its entirety by reference to
applicable statutory or regulatory provisions.
Regulation of Downey
General
Downey is a savings and loan holding company that holds only one savings and
loan association. Downey is subject to regulatory oversight by the OTS. Thus,
Downey is required to register and file reports with the OTS and is regulated
and examined by the OTS. In addition, the OTS has enforcement authority over
us, which also permits the OTS to restrict or prohibit our activities that it
determines to be a serious risk to the Bank.
Activities Restrictions
As a savings and loan holding company that holds only one savings and loan
association, Downey generally is not limited by OTS activity restrictions,
provided the Bank:
. satisfies the OTS's qualified thrift lender test; or
. meets the definition of a domestic building and loan association in
section 7701 of the Internal Revenue Code of 1986, as amended.
If Downey acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company. As a
multiple savings and loan holding company, our activities, other than the
activities of the Bank or any other SAIF-insured savings association, would
become subject to restrictions applicable to bank holding companies unless
these other savings associations were acquired in a supervisory acquisition
and each also:
. satisfies the qualified thrift lender test; or
. meets the definition of a domestic building and loan association.
For more information, see "Regulation of the Bank--Qualified Thrift Lender
Test."
Restrictions on Acquisitions
Downey must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. The OTS generally prohibits these types of
acquisitions if they result in a multiple savings and loan holding
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company controlling savings associations in more than one state. However, the
OTS permits interstate acquisitions if the acquisition is:
. authorized by specific state authorization; or
. 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 this type of 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.
Regulation of the Bank
As a federally chartered, SAIF-insured savings association, the Bank is
extensively regulated by the OTS and the FDIC. The Bank must ensure that its
lending activities and its other investments comply with various statutory and
regulatory requirements. The Bank is also regulated by the Federal Reserve.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the Bank's Board of Directors to consider with respect to
any deficiencies the OTS or the FDIC finds in the Bank's operations. Federal
and state laws also regulate the relationship between the Bank and its
depositors and borrowers, especially in matters regarding the ownership of
savings accounts and the form and content of mortgage documents the Bank uses.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition. In addition the Bank must obtain
regulatory approvals before it enters into some transactions like mergers with
or acquisitions of other financial institutions. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution may engage and is intended primarily for the protection of the
SAIF and our depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in regulations, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on us,
the Bank and our 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 that a particular institution poses to its deposit insurance fund.
Under this system as of December 31, 1995, SAIF members paid within a range of
23 cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk
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classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. Under the Paperwork Reduction Act,
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF
at the designated reserve level of 1.25% as of October 1, 1996. Based on the
Bank's deposits as of March 31, 1995, the date for measuring the amount of the
special assessment as stated in the Act, the Bank paid a special assessment of
$24.6 million in November 1996 to recapitalize the SAIF. This expense was
recognized during the last quarter of 1996.
Under the Paperwork Reduction Act, the Bank pays, in addition to its normal
deposit insurance premium as a member of the SAIF, which ranges currently from
0 to 27 cents per $100 of domestic deposits, an amount equal to 6.10 cents per
$100 of domestic deposits on an annual basis as of the first quarter of 1999
toward the retirement of financing corporation bonds issued in the 1980s to
assist in the recovery of the savings and loan industry. Members of the BIF,
by contrast, pay, in addition to their normal deposit insurance premium,
approximately 1.22 cents per $100 of domestic deposits on an annual basis as
of the first quarter of 1999.
The Paperwork Reduction Act also provides:
. that the FDIC is not permitted to establish SAIF assessment rates that
are lower than comparable BIF assessment rates;
. that beginning no later than January 1, 2000, the rate paid to retire
the financing corporation bonds will be equal for members of the BIF and
the SAIF; and
. for the merging of the BIF and the SAIF by January 1, 1999, provided
that there are no financial institutions still chartered as savings and
loans by January 1, 1999.
Although legislation to eliminate the savings association charter had been
proposed in prior sessions of Congress, that legislation was not enacted.
Therefore, at January 1, 1999, financial institutions like the Bank are still
chartered as savings associations, and the current "financial modernization"
proposals do not contain provisions that would eliminate the federal
association charter. Should the insurance funds be merged before January 1,
2000, however, the rate paid by all members of this new fund to retire the
financing corporation bonds would be equal.
Regulatory Capital Requirements
OTS capital regulations require savings associations to meet three capital
standards:
. tangible capital equal to 1.5% of total adjusted assets;
. leverage capital, or "core capital," equal to 3% of total adjusted
assets for institutions such as the Bank; and
. risk-based capital equal to 8.0% of total risk-based assets.
The Bank must meet each of these standards 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.
Under OTS regulations, a savings association with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk component in
calculating its total capital for purposes of determining whether it meets its
risk-based capital requirement. Interest rate exposure is measured, generally,
as equal to:
. the decline in an institution's net portfolio value that would result
from a 200 basis point increase or decrease in market interest rates,
whichever would result in a lower net portfolio value, divided by
. the estimated economic value of the savings association's assets.
The interest rate risk component a savings association must deduct from its
total capital is equal to:
. one-half of the difference between an institution's measured exposure
and "normal" interest rate risk exposure, which the OTS defines as 2%,
multiplied by
. the estimated economic value of the institution's assets.
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In August 1995, the OTS indefinitely delayed implementation of its interest
rate risk regulation. However, based on the asset/liability structure of the
Bank, at March 31, 1999, the Bank would not have been required to deduct an
interest rate risk component in calculating its total risk-based capital had
OTS's interest rate risk regulation been in effect.
The OTS views its capital regulation requirements as minimum standards, and
it expects most institutions to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that the OTS may establish
minimum capital levels higher than those provided in the regulations 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:
. a savings association has a high degree of exposure to interest rate
risk, prepayment risk, credit risk, concentration of credit risk, other
risks arising from nontraditional activities, or similar risks or a high
proportion of off-balance sheet risk;
. a savings association is growing, either internally or through
acquisitions, at a rate that supervisory problems are presented that are
not dealt with adequately by OTS regulations; and
. 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 is not required to meet any individual minimum regulatory capital
requirement and the Bank's regulatory capital exceeded all minimum regulatory
capital requirements as of March 31, 1999.
The Home Owners' Loan Act permits savings associations not in compliance
with the OTS capital standards to seek an exemption from penalties or
sanctions for noncompliance. The OTS will grant an exemption only if the
savings association meets strict requirements. In addition, the OTS must deny
the exemption in some circumstances. If the OTS does grant an exemption, the
savings association still may be exposed to enforcement actions for other
violations of law or unsafe or unsound practices or conditions.
Prompt Corrective Action
The OTS's prompt corrective action regulation requires the OTS to take
mandatory actions and authorizes the OTS to take discretionary actions against
a savings association that falls within 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."
The regulation uses an institution's risk-based capital, leverage capital and
tangible capital ratios to determine the institution's capital classification.
At March 31, 1999, the Bank exceeded 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,
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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 restricted with respect to the interest rates that can be paid on these
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
specific restrictions applicable to significantly undercapitalized
institutions.
Loans-to-One-Borrower
Savings associations generally are subject to the lending limits applicable
to national banks. With limited exceptions, the maximum amount that a savings
association or a national bank may lend to any borrower, including some
related entities of the borrower, at one time may not exceed:
. 15% of the unimpaired capital and surplus of the institution, plus
. for loans fully secured by readily marketable collateral, an additional
10% of unimpaired capital and surplus.
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:
. the purchase price of each single-family dwelling in the development
does not exceed $500,000;
. the savings association is in compliance with its capital
requirements;
. the loans comply with applicable loan-to-value requirements; and
. the aggregate amount of loans made under this authority does not
exceed 150% of unimpaired capital and surplus.
At March 31, 1999, the Bank's loans-to-one-borrower limit was $76 million
based upon the 15% of unimpaired capital and surplus measurement.
Qualified Thrift Lender Test
The OTS requires savings associations to meet a qualified thrift lender
test, which may be met as follows:
. either by maintaining a specified level of assets in qualified thrift
investments as specified in the Home Owners' Loan Act; or
. by meeting the definition of a "domestic building and loan association"
in section 7701 of the Internal Revenue Code.
The required percentage of investments under the Home Owners' Loan Act is 65%
of assets while the Internal Revenue Code requires investments of 60% of
assets. An association must be in compliance with the qualified thrift lender
test or the definition of domestic building and loan association on a monthly
basis in nine out of every 12 months. Associations failing to meet the
qualified thrift lender test are generally allowed only to engage in
activities permitted for both national banks and savings associations.
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In connection with the qualified thrift lender test, the Bank will continue
to enjoy full borrowing privileges from the FHLB if the Bank:
. maintains an appropriate level of these specified investments, which are
primarily residential mortgages and related investments, including some
mortgage-related securities, and otherwise qualifies as a qualified
thrift lender; or
. meets the definition of a domestic building and loan association.
As of March 31, 1999, the Bank was in compliance with its qualified thrift
lender test requirement and met the definition of a domestic building and loan
association.
Affiliate Transactions
Transactions between a savings association and its "affiliates" are
quantitatively and qualitatively restricted under Sections 23A and 23B of 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, Sections 23A and 23B and OTS regulations issued in connection
with these sections limit the extent to which a savings association or its
subsidiaries may engage in "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 the association's 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 other specified 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 some 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;
. covered transactions and other specified 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;
and
. with some 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.
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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 decides to treat
these subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that specified 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, like 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;
. be required to file a notice 30 days before the capital distribution; or
. be permitted to make the capital distribution without notice or
application to the OTS.
The OTS regulations require the savings association to file an application
if:
. it is not eligible for expedited treatment of its other applications
under OTS regulations;
. the total amount of all of 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;
. it would not be at least adequately capitalized, under the prompt
corrective action regulations of the OTS following the distribution; or
. the 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.
In addition, a savings association must give the OTS notice of a capital
distribution if the savings association is not required to file an
application, but:
. would not be well capitalized under the prompt corrective action
regulations of the OTS following the distribution;
. the proposed capital distribution would reduce the amount of or retire
any part of the savings association's common or preferred stock or
retire any part of debt instruments like notes or debentures included in
capital, other than regular payments required under a debt instrument
approved by the OTS; or
. 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, the OTS does not require the savings
association to submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital distribution
that would otherwise be permitted if the OTS determines that the distribution
would constitute an unsafe or unsound practice.
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.
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Year 2000 Compliance
The Federal Financial Institutions Examination Council issued an interagency
statement to the chief executive officers of all federally supervised
financial institutions regarding year 2000 project management awareness. It is
expected that unless financial institutions address the technology issues
relating to the coming of the year 2000, there will be major disruptions in
the operations of financial institutions. The statement provides guidance to
financial institutions, providers of data services, and all examining
personnel of the federal banking agencies regarding the year 2000 problem. The
federal banking agencies intend to conduct year 2000 compliance examinations,
and our failure to implement a year 2000 program may be seen by the federal
banking agencies as an unsafe and unsound banking practice. If a federal
banking agency determines that the Bank is operating in an unsafe and unsound
manner, the Bank may be required to submit a compliance plan. The Bank's
failure to submit a compliance plan or to implement an accepted plan may
result in enforcement action being taken, which may include a cease and desist
order and fines.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under the Community Reinvestment
Act 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 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 the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities and the denial of applications. In
addition, an institution's failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in the OTS, other federal regulatory
agencies as well as the Department of Justice taking enforcement actions.
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 loans or advances to
its members in compliance with the policies and procedures established by the
Board of Directors of the individual FHLB.
As an FHLB member, the Bank is required to own capital stock in an FHLB in
an amount equal to the greater of:
. 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;
. 0.3% of total assets; or
. 5% of its FHLB advances or borrowings.
At March 31, 1999, the Bank had $50 million of FHLB stock. The Bank's
required investment in FHLB stock, based on December 31, 1998 financial data,
was $52 million. The Bank has subsequently purchased additional stock, thereby
increasing the Bank's investment to the required amount.
Liquidity Requirements
Under OTS regulations, a savings association is required to maintain an
average daily balance of liquid assets. These liquid assets include cash, some
time deposits and savings accounts, bankers' acceptances, some government
obligations, and other investments. The OTS requires a savings association to
maintain an average daily balance of liquid assets in each calendar quarter of
not less than 4% of either:
. its liquidity base, which consists of some net withdrawable accounts
plus short-term borrowings, as of the end of the preceding calendar
quarter; or
. the average daily balance of its liquidity base during the preceding
quarter.
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The OTS may change this liquidity requirement from time to time to any
amount between 4% and 10%, depending upon factors, including economic
conditions and savings flows of all savings associations. The Bank maintains
liquid assets in compliance with these regulations. The OTS may impose
monetary penalties upon an institution for violations of liquidity
requirements.
Federal Reserve System
The Federal Reserve requires all depository institutions to maintain non-
interest-bearing reserves at specified levels against their transaction
accounts and non-personal time deposits. These transaction accounts include
checking, NOW, and Super NOW checking accounts. The balances a savings
association maintains to meet the reserve requirements imposed by the Federal
Reserve may be used to satisfy the liquidity requirements that are imposed by
the OTS. At March 31, 1999, the Bank was in compliance with these
requirements.
Recent Proposed Legislation
During the past several years, Congress has considered legislation in
various forms that would require federal thrifts, like the Bank, to convert
their charters to national or state bank charters. The Paperwork Reduction Act
requires a merger of the BIF and the SAIF into a single deposit insurance fund
if Congress enacts legislation to eliminate the federal thrift charter. While
none of the "financial modernization" proposals currently being debated in
Congress would, in fact, eliminate the federal thrift charter, it is possible
that legislation will be introduced that would do so. In that event, and in
the absence of appropriate "grandfather" provisions, legislation eliminating
the thrift charter could have a material adverse effect on us and the Bank
because, among other things, the regulatory, capital and accounting treatment
for national and state banks and savings associations differ significantly in
some areas. We cannot determine whether, or in what form, this legislation may
eventually be enacted and there can be no assurance that any legislation that
is enacted would contain adequate grandfather provisions for us and the Bank.
Regulation of DSL Service Company
DSL Service Company is licensed as a real estate broker under the California
Real Estate Law and as a contractor with the Contractors State License Board.
Thus, the real estate investment activities of DSL Service Company, including
development, construction and property management activities relating to its
portfolio of projects, are governed by a variety of laws and regulations.
Changes in the laws and regulations or their interpretation by agencies and
the courts occur frequently. DSL Service Company must comply with various
federal, state and local laws, ordinances, rules and regulations concerning
zoning, building design, construction, hazardous waste, and similar matters.
Environmental laws and regulations also affect the operations of DSL Service
Company, including regulations pertaining to availability of water, municipal
sewage treatment capacity, land use, protection of endangered species,
population density and preservation of the natural terrain and coastlines.
These and other requirements could become more restrictive in the future,
resulting in additional time and expense in connection with DSL Service
Company's real estate activities.
With regard to environmental matters, the construction products industry is
regulated by federal, state and local laws and regulations pertaining to
several areas including human health and safety and environmental compliance.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,
as well as analogous laws in some states, create joint and several liability
for the cost of cleaning up or correcting releases to the environment of
designated hazardous substances. Among those who may be held jointly and
severally liable are:
. those who generated the waste;
. those who arranged for disposal;
. those who owned or operate the disposal site or facility at the time of
disposal; and
. current owners.
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In general, this liability is imposed in a series of governmental
proceedings initiated by the government's identification of a site for initial
listing as a "Superfund site" on the National Priorities List or a similar
state list and the government's identification of potentially responsible
parties who may be liable for cleanup costs. None of the DSL Service Company's
project sites are listed as a "Superfund site."
In addition, California courts have imposed warranty-like responsibility
upon developers of new housing for defects in structure and the housing site,
including soil conditions. This responsibility is not necessarily dependent
upon a finding that the developer was negligent.
As a licensed entity, DSL Service Company is also examined and supervised by
the California Department of Real Estate and the Contractors State License
Board.
Taxation
Federal
A savings institution generally is taxed in the same manner as other
corporations for federal income tax purposes, though savings institutions have
historically enjoyed favorable treatment under the Internal Revenue Code in
determining their deductions for bad debts. During 1996, however, Congress
enacted legislation that repealed the reserve method of determining bad debt
deductions for large thrift institutions or thrifts with assets greater than
$500 million. As a result, savings associations are required to comply with
rules similar to those currently applicable to large commercial banks.
Congress made the repeal effective for tax years beginning after 1995.
Accordingly, bad debt reserves accumulated by savings institutions since 1987
were subject to recapture as taxable income over a six-year period beginning
in 1996. However, Congress allowed thrifts to defer recapture for up to two
years if the amount of mortgage loans the thrift originated in 1996 and 1997
equaled or exceeded the average amount of mortgages the thrift originated in
the six years before 1996. Based upon the Bank's mortgage originations in 1996
and 1997, the Bank qualifies for the two-year deferral under this test, and
began to recapture its post-1987 bad debt reserve over a six-year period
beginning in 1998. The Bank's bad debt deductions for 1997 and 1998 were
determined under the specific charge-off method, which allows the Bank to take
a tax deduction for loans determined to be wholly or partially worthless.
In addition to the regular corporate income tax, corporations, including
qualifying savings institutions, might be required to pay an alternative
minimum tax. This 20% tax is computed with respect to the corporation's
regular taxable income, with some adjustments, as increased by tax preference
items and called "alternative minimum taxable income." This alternative
minimum income tax applies to corporations to the extent that the
corporation's alternative minimum taxable income exceeds the corporation's
regular tax liability. In computing a corporation's alternative minimum
taxable income, the corporation's regular taxable income is required to be
increased by 75% of:
. the excess of the corporation's current earnings and profits, as
adjusted, over
. the corporation's alternative minimum taxable income determined before
this adjustment and without regard to the alternative tax net operating
loss deduction.
A corporation that incurs alternative minimum tax generally is entitled to
take this tax as a credit against its regular tax in later years to the extent
that the corporation's regular tax liability in these later years, as reduced
by some other tax credits, exceeds the corporation's so-called "tentative
minimum tax." This tentative minimum tax is an amount computed by multiplying
the corporation's alternative minimum taxable income for the year by the then-
applicable rate for the alternative minimum tax.
State
The Bank uses a formula to compute its applicable California franchise tax.
This formula results in a rate higher than the rate applicable to non-
financial corporations because the rate reflects an amount "in lieu" of local
personal property and business license taxes paid by non-financial
corporations, but not generally paid by
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banks or financial corporations like the Bank. The Bank's variable tax rate
has been 10.84% since 1997. We file a California franchise tax return on a
combined reporting basis. We file additional state income tax returns on a
separate-entity basis in Arizona, Colorado, and Oregon. As the Bank expands
its lending business nationwide, the Bank may be required to file additional
state tax returns.
The Internal Revenue Service and state taxing authorities have examined our
tax returns for all tax years through 1995. We have protested proposed
adjustments for the years examined by the Internal Revenue Service, and are
currently moving through the appeals process. We believe that substantial
legal authority exists for the positions we have taken on the tax returns and
we intend to vigorously defend those positions. In addition we have made
adequate provisions for the potential exposure. Our tax years subsequent to
1995 remain open to review by federal and state tax authorities.
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DESCRIPTION OF THE CAPITAL SECURITIES
In this prospectus, unless the context requires otherwise, we use the terms
set forth below as follows:
. the "Indenture" means the Junior Subordinated Indenture between Downey
and Wilmington Trust Company, as trustee (the "Indenture Trustee"),
under which the junior subordinated debentures will be issued;
. the "Trust Agreement" means the Amended and Restated Trust Agreement
relating to the trust among Downey, as Depositor, Wilmington Trust
Company, as property trustee (the "Property Trustee"), Wilmington Trust
Company, as Delaware trustee (the "Delaware Trustee"), and the
administrative trustees (the "Administrative Trustees") named therein
(collectively, with the Property Trustee and Delaware Trustee, the
"Issuer Trustees"); and
. the "Guarantee Agreement" means the capital securities guarantee
agreement relating to the capital securities between Downey and
Wilmington Trust Company, as guarantee trustee (the "Guarantee
Trustee").
The capital securities and the common securities will be issued under the
terms of the Trust Agreement. The Trust Agreement will be qualified as an
indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Administrative Trustees will be officers of Downey.
The Property Trustee is the independent trustee whose sole responsibility is
to fulfill the obligations specified in the Trust Indenture Act and the Trust
Agreement. The terms of the capital securities will include those stated in
the Trust Agreement and those made part of the Trust Agreement by the Trust
Indenture Act. We do not purport to represent that this summary of terms and
provisions of the capital securities and the Trust Agreement is complete. It
is qualified in its entirety by reference to all the provisions of the Trust
Agreement, including the definitions of terms in the Trust Agreement, and the
Trust Indenture Act. Wherever particular defined terms of the Trust Agreement
are referred to in this prospectus, the defined terms are incorporated in this
prospectus. As used under this caption "Description of the Capital
Securities," all references to "Downey" mean Downey Financial Corp. excluding,
unless otherwise expressly stated or the context otherwise requires, its
subsidiaries. The form of the Trust Agreement has been filed as an exhibit to
the registration statement, together with all amendments and exhibits thereto
(the "Registration Statement"), of which this prospectus forms a part, and
copies of the Trust Agreement may be obtained as described under "Where You
Can Find More Information."
General
Under the terms of the Trust Agreement, the Administrative Trustees on
behalf of the trust will issue the capital securities and the common
securities, which we refer to collectively as the "Trust Securities." The
capital securities will be limited to $100,000,000 aggregate Liquidation
Amount, as defined below. The capital securities will represent undivided
beneficial interests in the assets of the trust. The holders of the capital
securities will be entitled to a preference in some circumstances with respect
to Distributions, as defined below, and amounts payable on redemption or
liquidation over the common securities of the trust, which will be held by
Downey, as well as other benefits as described in the Trust Agreement.
The capital securities will rank equally in right of payment with, and
payments will be made thereon pro rata with, the common securities of the
trust, except as described below under "--Subordination of Common Securities."
Legal title to the junior subordinated debentures will be held by the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
Guarantee Agreement executed by Downey for the benefit of the holders of the
capital securities will be a guarantee on a subordinated basis and will not
guarantee payment of Distributions or amounts payable on redemption of the
capital securities or on liquidation of the capital securities if the trust
does not have funds on hand available to make these payments. See "Description
of Guarantee."
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Distributions
Payment of Distributions. Holders of the capital securities will be entitled
to receive cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on the 15th day of March, June,
September and December of each year, unless there is a deferral as described
below. These payments, which we refer to as "Distributions," will commence on
September 15, 1999, at the annual rate of % of the Liquidation Amount of $25
per capital security. Each date on which Distributions are payable is referred
to as a "Distribution Date." The amount of each Distribution due with respect
to the capital securities will include amounts accrued to but excluding the
Distribution Date. The distribution payable on any Distribution Date will be
payable to registered holders of the capital securities at the close of
business on the immediately preceding regular record date, which will be the
15th day, whether or not a Business Day, immediately preceding the
Distribution Date.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. For any period less than a
full quarterly period, Distributions will be computed on the basis of the
actual number of days elapsed in a 30-day month. If any date on which
Distributions are payable on the capital securities is not a Business Day,
then payment of the Distributions payable on that date will be made on the
next Business Day, and without any interest or other payment in respect of
that delay, with the same force and effect as if made on the date the payment
was originally payable. As used in this prospectus, a "Business Day" shall
mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in the City of New York are authorized or required by law or
executive order to remain closed.
The funds of the trust available for distribution to holders of its capital
securities will be limited to payments by Downey under the junior subordinated
debentures in which the trust will invest the proceeds from the issuance and
sale of its capital securities. For further information, see "Description of
Junior Subordinated Debentures." If Downey does not make interest payments on
the junior subordinated debentures, the Property Trustee will not have funds
available to pay Distributions on the capital securities. The payment of
Distributions, if and to the extent the trust has funds available for the
payment of Distributions, will be guaranteed on a subordinated basis by
Downey. For a more complete discussion of Downey's guarantee, see "Description
of Guarantee."
Extension Period. So long as no Debenture Event of Default, as defined
below, has occurred and is continuing, Downey will have the right under the
Indenture to defer the payment of interest on the junior subordinated
debentures at any time and from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each period (each, an "Extension
Period"). However, no Extension Period may extend beyond the Stated Maturity,
as defined below, of the junior subordinated debentures or end on any date
other than an interest payment date for the junior subordinated debentures. As
a consequence of that election, the trust will defer quarterly Distributions
on the capital securities during any Extension Period. During an Extension
Period, interest on the junior subordinated debentures will continue to accrue
and Distributions on the capital securities will continue to accumulate in
each case with interest thereon to the extent permitted by law, compounded
quarterly, at the rate per annum of %. Because interest will continue to
accrue during an Extension Period, holders of capital securities will be
required to accrue interest income for United States federal income tax
purposes. For a more complete discussion of the tax consequences pertaining to
holders of capital securities, see "Certain Federal Income Tax Consequences--
Interest Income and Original Issue Discount." The term "Distributions" as used
in this prospectus shall include this interest on the deferred Distributions
and any other Additional Amounts, as defined below. During any Extension
Period, Downey may not itself and shall not allow any of its subsidiaries to:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of Downey's
capital stock, which includes common and preferred stock;
. make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Downey that rank on a
parity with or junior to the junior subordinated debentures in right of
payment;
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. redeem, purchase or acquire less than all of the junior subordinated
debentures or the capital securities; or
. make any guarantee payments with respect to any guarantee by Downey of
the debt securities of any subsidiary of Downey if the guarantee ranks
on parity with or junior to the junior subordinated debentures in right
of payment.
Notwithstanding the foregoing, during an Extension Period Downey and its
subsidiaries will be allowed to make:
. any dividend in a form of stock, warrants, options or other rights where
the dividend or the stock issuable upon the exercise of the warrants,
options or other rights is the same stock as that on which the dividend
is being paid or ranks on a parity with or junior to that stock in right
of payment;
. any declaration of a dividend in connection with the implementation of a
stockholders' rights plan or the issuance of stock under any
stockholders' rights plan in the future, or the redemption or repurchase
of any rights pursuant thereto;
. payments under the Guarantee Agreement; and
. purchases of common stock related to the issuance of common stock or
rights under any of Downey's benefit plans for its directors, officers
or employees.
Before the termination of any Extension Period, Downey may further extend
the Extension Period, provided that the Extension Period does not exceed 20
consecutive quarters or extend beyond the Stated Maturity.
If Downey shortens the Stated Maturity of the junior subordinated debentures
as described below under "Description of Junior Subordinated Debentures--
General" at any time while an Extension Period is in effect, and if the Stated
Maturity, as so shortened, would end before the last day of the Extension
Period, the Extension Period will be deemed to end on the Stated Maturity. If
the junior subordinated debentures are called for redemption on any date
before the end of an Extension Period, the Extension Period will be deemed to
end on that Redemption Date, as defined below, as to all of the capital
securities.
Upon the termination of any Extension Period and the payment of all amounts
then due, and so long as no Debenture Event of Default has occurred and is
continuing, Downey may elect to begin a new Extension Period. Each Extension
Period must end on a Distribution Date, and all deferred Distributions will be
payable on that Distribution Date to the persons in whose names the capital
securities are registered at the close of business on the immediately
preceding record date.
The Administrative Trustees will give notice of Downey's election to begin
or extend an Extension Period to the holders of the capital securities as
described below under "Description of Junior Subordinated Debentures--Option
to Defer Interest Payments."
Except as described above, there is no limitation on the number of times
that Downey may elect to begin an Extension Period. Downey has no current
intention of exercising its right to defer payments of interest by extending
the interest payment period on the junior subordinated debentures. Downey must
give the Issuer Trustees notice of its election of any Extension Period at
least one Business Day before the earlier of:
. the date the Distributions on the capital securities would have been
payable but for the election to begin or extend the Extension Period,
. the date the Administrative Trustees are required to give notice to the
New York Stock Exchange or any applicable stock exchange or automated
quotation system on which the capital securities are then listed or
quoted or to holders of the capital securities of the record date, or
. the date the Distributions are payable,
but, in any event not less than one Business Day before the applicable record
date.
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Redemption
Upon the repayment or redemption at any time, in whole or in part, of any
junior subordinated debentures, the proceeds from the repayment or redemption
shall be applied by the Property Trustee to redeem a Like Amount, as defined
below, of the Trust Securities. The Property Trustee will redeem the Trust
Securities upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the Redemption Price, as defined below.
For a more complete discussion of the redemption procedures for the junior
subordinated debentures, see "Description of Junior Subordinated Debentures--
Redemption." If less than all of the junior subordinated debentures are to be
repaid or redeemed on a Redemption Date, then the proceeds from the repayment
or redemption shall be allocated to the redemption of the capital securities
and common securities pro rata, except as described below under "--Events of
Default; Notice."
Downey will have the right to redeem the junior subordinated debentures at a
redemption price equal to the accrued and unpaid interest on the junior
subordinated debentures to be redeemed to the date fixed for redemption, plus
100% of the principal amount of the junior subordinated debentures as follows:
. on or after , 2004, in whole at any time, or in part from time to
time; or
. before , 2004, in whole but not in part, within 90 days following
the occurrence and during the continuance of a Tax Event, an Investment
Company Event or a Capital Treatment Event, each as defined below.
However, Downey's right to redeem the junior subordinated debentures
upon the occurrence of a Tax Event, Investment Company Event or Capital
Treatment Event will not go into effect if there is available to Downey
or the trust the opportunity to eliminate, within the 90-day period, the
relevant event by taking some ministerial action, such as filing a form
or making an election or pursuing some reasonable measure that will have
no adverse effect on Downey, the trust or the holders of the capital
securities and will involve no material cost, and in that case Downey
will pursue this measure instead of redemption. See "Description of
Junior Subordinated Debentures--Redemption" for a further discussion of
the redemption procedures of the junior subordinated debentures.
If a Tax Event, Capital Treatment Event or an Investment Company Event has
occurred and is continuing and Downey does not elect to redeem the junior
subordinated debentures and thereby cause a mandatory redemption of the Trust
Securities, the Trust Securities will remain outstanding and, in the case of a
Tax Event, Downey will be obligated to pay Additional Sums, as defined below,
if any, on the junior subordinated debentures.
Additionally, if a Tax Event, Capital Treatment Event or an Investment
Company Event has occurred and is continuing and Downey does not elect to
liquidate the trust and cause the junior subordinated debentures to be
distributed to holders of the Trust Securities in liquidation of the trust as
described below, then the Trust Securities will remain outstanding and, in the
case of a Tax Event, Downey will be obligated to pay Additional Sums, if any,
on the junior subordinated debentures.
A "Tax Event" means the receipt by Downey and the trust of an opinion of
nationally recognized independent tax counsel, which may include outside
counsel to Downey for this offering, experienced in these 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
. any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations,
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which amendment or change is effective or which prospective change, action,
pronouncement or decision is announced on or after the original issuance date
of the capital securities, there is more than an insubstantial risk that:
. the trust is, or will be within 90 days of the date of the opinion,
subject to United States federal income tax with respect to income
received or accrued on the junior subordinated debentures;
. interest payable by Downey on the junior subordinated debentures is not,
or within 90 days of the date of the opinion will not be, deductible by
Downey, in whole or in part, for United States federal income tax
purposes; or
. the trust is, or will be within 90 days of the date of the opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
See "Certain Federal Income Tax Consequences--Possible Tax Law Changes
Affecting the Capital Securities" below for a discussion of some legislative
proposals that, if adopted, could give rise to a Tax Event, which may permit
Downey to cause a redemption of the junior subordinated debentures, and
therefore the capital securities, before , 2004. In addition, for a
further discussion see "Risk Factors--Risk Factors Relating to the Capital
Securities--Downey may redeem the capital securities before , 2004 if
special events occur."
An "Investment Company Event" means the receipt by Downey and the trust of
an opinion of nationally recognized independent counsel, which may include
outside counsel to Downey for this offering, experienced in these matters to
the effect that, as the result of any change in law or regulation or any
written change in interpretation or application of law or regulation by any
legislative body, court, governmental agency or regulatory authority, which
change is effective or which written change is announced on or after the
original issuance date of the capital securities, there is more than an
insubstantial risk that the trust is or will be considered an "investment
company" that is required to be registered under the Investment Company Act of
1940, as amended.
A "Capital Treatment Event" means the receipt by Downey and the trust of an
opinion of nationally recognized independent counsel, which may include
outside counsel to Downey for this offering, experienced in these 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 thereof or therein, or as a result
of any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change
is effective or which prospective change, pronouncement, action or decision is
announced on or after the original issuance date of the capital securities,
there is more than an insubstantial risk that:
. Downey will not be entitled to treat the capital securities, or any
substantial portion thereof, as "tier 1 capital," or the then equivalent
thereof, for purposes of the capital adequacy guidelines of the primary
federal regulator of Downey, as then in effect and applicable to Downey,
in which case the legal opinion shall also state that Downey is subject
to those holding company capital adequacy guidelines; or
. The Bank will not be entitled to treat the net proceeds from the sale of
the junior subordinated debentures that are invested in the Bank, or any
substantial portion thereof, as "tier 1 capital," or the then equivalent
thereof, for purposes of the capital adequacy guidelines of the primary
federal regulator of the Bank, as then in effect and applicable to the
Bank, assuming for this purpose that at least 50% of the net proceeds
are invested in the Bank by Downey in the form of a capital contribution
or through the purchase of the common stock of the Bank.
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions including any Additional Amounts, as defined
below, due and paid or payable by the trust on the outstanding Trust
Securities shall not be reduced as a result of any additional taxes, duties
and other governmental charges to which the trust has become subject as a
result of a Tax Event.
"Additional Amounts" means, with respect to the Trust Securities of a given
liquidation amount and for a given period, the amount of Additional Interest,
as defined below, paid or payable by Downey on a Like Amount of junior
subordinated debentures for such period.
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"Additional Interest" means the interest, if any, that shall accrue on any
interest on the junior subordinated debentures the payment of which has not
been made on the applicable Interest Payment Date, as defined below under
"Description of Junior Subordinated Debentures," or other date when due,
including without limitation any interest which is deferred as the result of
an Extension Period, and which shall accrue at the rate per annum specified or
determined as specified in the junior subordinated debentures.
"Like Amount" means:
. With respect to a redemption of Trust Securities, Trust Securities
having a Liquidation Amount equal to the principal amount of the junior
subordinated debentures to be contemporaneously redeemed, allocated pro
rata to the common securities and the capital securities based upon the
relative Liquidation Amounts of the outstanding capital securities and
common securities, subject to the preferential rights of the capital
securities if a Debenture Event of Default has occurred and is
continuing; and
. With respect to a distribution of junior subordinated debentures to
holders of Trust Securities in connection with a dissolution or
liquidation of the trust, junior subordinated debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities
of the holder to whom such junior subordinated debentures are
distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date.
Redemption Procedures
The trust shall redeem capital securities on each Redemption Date at the
Redemption Price. The trust shall pay the Redemption Price with the applicable
proceeds from the contemporaneous redemption of the junior subordinated
debentures. The trust shall redeem the capital securities and pay the
Redemption Price on each Redemption Date only to the extent that the trust has
funds on hand for the payment of the Redemption Price. For a description of
factors affecting the redemption of the Trust Securities, see "--Subordination
of Common Securities" and "Description of Guarantee." The trust may not redeem
fewer than all of the outstanding Trust Securities unless it has paid all
accumulated and unpaid Distributions on all Trust Securities for all quarterly
distribution periods terminating on or before the relevant Redemption Date.
If the trust gives a notice of redemption in respect of the capital
securities, then, by 12:00 noon, Eastern time, on the Redemption Date, to the
extent funds are available, the Property Trustee will irrevocably deposit with
the Depository funds sufficient to pay the aggregate Redemption Price and will
give the Depository irrevocable instructions and authority to pay the
Redemption Price to the holders of the capital securities. For a description
of the Depository procedures, see "Book-Entry Issuance." With respect to Trust
Securities not held in book-entry form, the Property Trustee, to the extent
funds are available, will irrevocably deposit with the paying agent for those
Trust Securities, by 12:00 noon, Eastern time, on the Redemption Date, funds
sufficient to pay the aggregate Redemption Price and will give the paying
agent irrevocable instructions and authority to pay the Redemption Price to
the holders of the Trust Securities upon their surrender of the certificates
evidencing the Trust Securities.
Notwithstanding the foregoing, Distributions payable on any Distribution
Date falling on or before the Redemption Date shall be payable to the
registered holders of the capital securities at the close of business on the
relevant record dates for the related Distribution Dates. Thus, if a
Redemption Date falls on a Distribution Date, the Distribution payable on that
date will be paid to the person who was the holder of record on the relevant
record date. If the trust has given notice of redemption and the Property
Trustee has deposited funds as required, then upon the date that the Property
Trustee makes the deposit, all of the rights of the holders of the capital
securities to be redeemed will cease except as follows and those capital
securities will cease to be outstanding.
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The only right a holder of capital securities to be redeemed will still have
is the right to receive the applicable Redemption Price, and any Distributions
payable on or before the Redemption Date, but without interest for any period
from and after the Redemption Date. If any date fixed for redemption of the
capital securities is not a Business Day, then the trust will pay the
Redemption Price payable on that date on the next succeeding Business Day, and
without any interest or other payment in respect of any delay. If the trust or
Downey, under the terms of the Guarantee Agreement, improperly withholds or
refuses payment of the Redemption Price in respect of capital securities
called for redemption, Distributions on the capital securities will continue
to accrue, at the then applicable rate, from the Redemption Date originally
established by the trust for the capital securities to the date the Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price. For a
discussion of Downey's obligations under the Guarantee Agreement, see
"Description of Guarantee."
If allowed under applicable law, including, without limitation, United
States federal securities law, and further provided that Downey is not then
exercising its rights to defer interest payments on the junior subordinated
debentures, Downey or its subsidiaries, other than the trust, may at any time
and from time to time purchase outstanding capital securities by tender, in
the open market or by private agreement.
If less than all of the outstanding Trust Securities issued by the trust are
to be redeemed on a Redemption Date, then the aggregate Redemption Price for
the Trust Securities to be redeemed shall be allocated pro rata to the capital
securities and common securities based upon the relative Liquidation Amounts
of the capital securities and common securities then outstanding. The
particular capital securities to be redeemed shall be selected not more than
60 days before the Redemption Date by the Property Trustee from the
outstanding capital securities not previously called for redemption, by a
method that the Property Trustee deems fair and appropriate and which may
provide for the selection for redemption of portions, equal to $25 or an
integral multiple of $25, of the Liquidation Amount of capital securities of a
denomination larger than $25. The Property Trustee shall promptly notify the
Securities Registrar in writing of the capital securities selected for
redemption and, in the case of any capital securities selected for partial
redemption, the Liquidation Amount to be redeemed. For all purposes of the
Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of capital securities shall relate to the portion
of the aggregate Liquidation Amount of capital securities which has been or is
to be redeemed.
In the event of any redemption, neither the trust nor the Property Trustee
shall be required to:
. issue, register the transfer of or exchange capital securities during a
period beginning at the opening of business 15 days before the date of
mailing of a notice of redemption of any capital securities called for
redemption and ending at the close of business on the day of the
mailing; or
. register the transfer or exchange any capital securities so selected for
redemption, except, in the case of any capital securities being redeemed
in part, any portion of the capital securities not to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at the holder's registered address. Unless Downey defaults in payment
of the Redemption Price on the junior subordinated debentures, on and after
the Redemption Date interest will cease to accrue on the junior subordinated
debentures or portions of the junior subordinated debentures called for
redemption and, unless payment of the Redemption Price in respect of the
capital securities is withheld or refused and not paid either by the trust or
Downey as required by the Guarantee Agreement, Distributions will cease to
accumulate on the capital securities or portions of the capital securities
called for redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the capital
securities and common securities shall be made pro rata based on the
Liquidation Amounts of the outstanding capital securities and common
securities.
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However, no payment of any Distribution, including Additional Amounts, if
applicable, on, or applicable Redemption Price of, any of the common
securities, and no other payment on account of the redemption, liquidation or
other acquisition of the common securities, shall be made if:
. a Debenture Event of Default shall have occurred and be continuing as a
result of any failure by Downey to pay any amounts in respect of the
junior subordinated debentures when due; or
. the trust is dissolved or liquidated and funds held by the trust are
insufficient to pay in full the aggregate Liquidation Amount, plus
accrued and unpaid Distributions, payable on the Trust Securities or, in
the event of the distribution of junior subordinated debentures to
holders of capital securities upon such dissolution or liquidation, the
holders of capital securities do not receive the full amount of junior
subordinated debentures to which they are entitled.
The payments with respect to the common securities will be allowed, however,
if:
. payment in full in cash of all accumulated and unpaid Distributions,
including Additional Amounts, if applicable, on all of the outstanding
capital securities for all Distribution periods terminating on or prior
thereto, and in the case of payment of the applicable Redemption Price,
the full payment in cash of the Redemption Price on all of the
outstanding capital securities then called for redemption, shall have
been made or provided for; or
. the trust is dissolved or liquidated and the full Liquidation Amount on
all outstanding capital securities plus accumulated and unpaid
Distributions thereon shall have been made or duly provided for in cash
or, in the event of the distribution of junior subordinated debentures
to holders of capital securities upon the dissolution or liquidation,
the distribution to each holder of capital securities of the junior
subordinated debentures to which such holder is entitled shall have been
made or duly provided for.
All funds available to the Property Trustee shall first be applied to the
payment in full in cash of all Distributions on, or the Redemption Price or
Liquidation Amount, plus accrued and unpaid Distributions, of the capital
securities then due and payable, including Additional Amounts, if applicable,
or, in the event of the distribution of junior subordinated debentures upon
dissolution or liquidation of the trust, the junior subordinated debentures
available to the Property Trustee shall first be distributed to holders of
capital securities.
In the case of any Event of Default under the Trust Agreement resulting from
a Debenture Event of Default, Downey as holder of the common securities will
be deemed to have waived any right to act with respect to the Event of Default
until all Events of Default with respect to the capital securities have been
cured, waived or otherwise eliminated. Until all Events of Default with
respect to the capital securities have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
the capital securities and not on behalf of Downey as holder of the common
securities and only the holders of the capital securities will have the right
to direct the Property Trustee to act on their behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the Trust Securities if the trust is liquidated or
dissolved is $25 per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment. Downey has the right to make the payment to
holders of the Trust Securities by distributing a Like Amount of the junior
subordinated debentures to them as described below.
Downey will have the right, at any time before the 30th day before the
Stated Maturity, to dissolve the trust and cause a Like Amount of the junior
subordinated debentures to be distributed to holders of the Trust Securities.
Before exercising this right, Downey must receive approval of the Federal
Reserve or OTS, if then required under applicable capital guidelines or
policies of the Federal Reserve or OTS, and an opinion of nationally
recognized independent tax counsel, which may include outside counsel to
Downey for this offering, experienced in these matters to the effect that the
holders of the Trust Securities will not recognize income, gain or loss for
United States federal income tax purposes as a result of the dissolution of
the trust and distribution of the junior subordinated debentures and will be
subject to federal income tax with respect to the junior
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subordinated debentures on the same amounts, in the same manner and at the
same times as would have been the case if the holders had remained holders of
Trust Securities. For a more complete discussion of the distribution of the
junior subordinated debentures, see "--Distribution of Junior Subordinated
Debentures." Downey might exercise its right to dissolve the trust under
circumstances where a Tax Event, a Capital Treatment Event, an Investment
Company Event or other undesirable event could be avoided simply by dissolving
the trust and causing the junior subordinated debentures to be distributed to
the holders of the Trust Securities.
In addition, under the terms of the Trust Agreement, the trust shall
automatically dissolve upon expiration of its term and shall earlier dissolve
on the first to occur of:
1. specific events of bankruptcy, dissolution or liquidation of Downey or
any other holder of the common securities;
2. the distribution of a Like Amount of the junior subordinated debentures
to the holders of its Trust Securities, if Downey, as Depositor, has
delivered written direction to the Property Trustee to terminate the
trust, which direction is optional and wholly within the discretion of
Downey, as Depositor, so long as Downey has received an opinion of
nationally recognized independent tax counsel, which may include outside
counsel to Downey for this offering, experienced in these matters to the
effect that the holders of the Trust Securities will not recognize
income, gain or loss for United States federal income tax purposes as a
result of the dissolution of the trust and the distribution of the
junior subordinated debentures and will be subject to federal income tax
with respect to the junior subordinated debentures on the same amounts,
in the same manner and at the same times as would have been the case if
the holders had remained holders of Trust Securities;
3. redemption of all of the capital securities as described under "--
Redemption;" or
4. the entry of an order for the dissolution of the trust, Downey or any
other holder of the common securities by a court of competent
jurisdiction.
If an early dissolution occurs as described in clause 1, 2 or 4 above, the
Issuer Trustees shall liquidate the trust as expeditiously as the Issuer
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the junior subordinated
debentures. However, if this distribution is determined by the Property
Trustee not to be practical, the holders will be entitled to receive out of
the assets of the trust available for distribution to holders, after
satisfaction of liabilities to creditors of the trust as provided by
applicable law, an amount equal to the aggregate of the Liquidation Amount
plus accrued and unpaid Distributions thereon to the date of payment. The
amount due and payable upon liquidation of the trust, whether payable in cash
or out of the assets of the trust, is called the "Liquidation Distribution."
If 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 the capital
securities shall be paid on a pro rata basis, based upon Liquidation Amounts.
Downey, as the holder of the common securities, will be entitled to receive
distributions upon the trust's liquidation pro rata with the holders of the
capital securities, except that if a Debenture Event of Default has occurred
and is continuing as a result of any failure by Downey to pay any amounts due
in respect of the junior subordinated debentures when due or if funds
available to the trust are insufficient to pay in full the Liquidation
Distribution on all of the outstanding capital securities, the capital
securities shall have a priority over the common securities to the extent
described above under "--Subordination of Common Securities."
After the liquidation date fixed for any distribution of junior subordinated
debentures for Trust Securities, the following will happen:
. the Trust Securities will no longer be deemed to be outstanding;
. certificates representing a Like Amount of junior subordinated
debentures will be issued to holders of Trust Securities certificates,
upon surrender of such certificates to the Administrative Trustees or
their agent for exchange;
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. Downey shall use its best efforts to have the junior subordinated
debentures listed on the New York Stock Exchange or on another exchange,
interdealer quotation system or self-regulatory organization on which
the capital securities are then listed;
. any Trust Securities certificates not so surrendered for exchange will
be deemed to represent a Like Amount of junior subordinated debentures,
accruing interest from the last Distribution Date on which a
Distribution was made on the Trust Securities certificates until the
certificates are surrendered for exchange as described above; and
. all rights of securityholders holding Trust Securities will cease,
except the right of the securityholders to receive a Like Amount of
junior subordinated debentures upon surrender of Trust Securities
certificates and to receive accrued and unpaid interest on the junior
subordinated debentures.
We can give no assurance as to the market prices for the junior subordinated
debentures that may be distributed in exchange for the capital securities if a
dissolution and liquidation of the trust were to occur. Accordingly, the
junior subordinated debentures that holders of capital securities may receive
on dissolution and liquidation of the trust may trade at a discount to the
price paid to purchase the capital securities offered by this prospectus. For
more information about these risks, see "Risk Factors--Risk Factors Relating
to the Capital Securities--Holders of capital securities may receive junior
subordinated debentures upon liquidation of the trust so investing in capital
securities requires an investment decision regarding the junior subordinated
debentures;-- Distribution of junior subordinated debentures may have an
adverse effect on trading price" and "--There is no existing market for the
capital securities."
Under current United States federal income tax law and interpretations and
assuming, as shown in an opinion of counsel to Downey, the trust is treated as
a grantor trust, a distribution of the junior subordinated debentures should
not be a taxable event to holders of the capital securities. Should there be a
change in law, a change in legal interpretation, a Tax Event or other
circumstances, however, the distribution could be a taxable event to the trust
and to holders of capital securities. For a discussion of possible tax
consequences, see "Certain Federal Income Tax Consequences."
If Downey elects to dissolve the trust and thereby causes the junior
subordinated debentures to be distributed to holders of the capital securities
in liquidation of the trust, Downey shall continue to have the right to
shorten the maturity of the junior subordinated debentures, subject to a
number of conditions which are discussed under "Description of Junior
Subordinated Debentures--General."
Events of Default; Notice
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement with respect to
the capital securities, regardless of the reason for the Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of
law or by any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body:
1. the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures-- Debenture Events of Default");
2. default by the trust in the payment of any Distribution when it becomes
due and payable, and continuation of such default for a period of 30
days;
3. default by the trust in the payment of any Redemption Price of any Trust
Security when it becomes due and payable;
4. default in the performance, or breach, in any material respect, of any
covenant or warranty of any of the Issuer Trustees in the Trust
Agreement (other than a default or breach in the performance of a
covenant or warranty which is addressed in clause 2 or 3 above), and
continuation of such default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the defaulting
Issuer Trustee and the trust by the holders of at least 25% in aggregate
Liquidation Amount of the outstanding capital securities, a written
notice specifying such default or breach and
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requiring it to be remedied and stating that such notice is a "Notice of
Default" under the Trust Agreement; or
5. the occurrence of specific events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by Downey to appoint a
successor Property Trustee within 60 days after the occurrence.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of the Event of Default to the holders of the capital securities, the
Administrative Trustees and Downey, as Depositor, unless the Event of Default
shall have been cured or waived. Downey, as Depositor, and the Administrative
Trustees will be required to file annually with the Property Trustee a
certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by Downey to pay any amounts in respect of the junior
subordinated debentures when due, the capital securities shall have a
preference over the common securities as described under "--Subordination of
Common Securities" and "--Liquidation Distribution Upon Dissolution." Upon a
Debenture Event of Default, either the Indenture Trustee or the holders of not
less than 25% in aggregate principal amount of the junior subordinated
debentures then outstanding may declare all of the junior subordinated
debentures to be due and payable immediately by giving notice in writing to
Downey. If the Indenture Trustee or the holders of not less than 25% in
principal amount of the outstanding junior subordinated debentures fail to
declare the principal of all of the junior subordinated debentures due and
payable upon a Debenture Event of Default, the holders of at least 25% in
Liquidation Amount of the capital securities then outstanding shall have the
right to declare the principal amount of the junior subordinated debentures
immediately due and payable. In either event, payment of principal and
interest on the junior subordinated debentures shall remain subordinated to
the extent provided in the Indenture. In addition, holders of the capital
securities have the right in specific circumstances to bring a Direct Action,
as defined below and discussed under "Description of Junior Subordinated
Debentures--Enforcement of Specified Rights by Holders of Capital Securities."
The holders of a majority in aggregate outstanding principal amount of the
junior subordinated debentures may rescind and annul the declaration and its
consequences if all defaults, other than the non-payment of the principal and
interest of the junior subordinated debentures which has become due solely by
the acceleration, have been cured or waived as provided in the Indenture and a
sum sufficient to pay all overdue installments of interest, including any
Additional Interest, and principal due otherwise than by acceleration has been
deposited with the Indenture Trustee. The holders of a majority in aggregate
Liquidation Amount of the capital securities may similarly waive any past
default under the Indenture, except a default in the payment of principal or
interest, unless the default has been cured or waived and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Indenture Trustee, or a default in
respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each outstanding
junior subordinated debenture.
Removal of Trustees
Unless an Event of Default shall have occurred and be continuing, any of the
Property Trustee, the Delaware Trustee or the Administrative Trustees may be
removed at any time by Downey as the holder of the common securities. If an
Event of Default has occurred and is continuing, the holders of a majority in
Liquidation Amount of the outstanding capital securities may remove the
Property Trustee or the Delaware Trustee or both of them. In no event will the
holders of the capital securities have the right to vote to appoint, remove or
replace the Administrative Trustees, which voting rights are vested
exclusively in Downey as the holder of the common securities. No resignation
or removal of an Issuer Trustee and no appointment of a successor trustee
shall be effective until the acceptance of appointment by the successor
trustee has been made in compliance with the provisions of the Trust
Agreement.
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Co-Trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust Property
may at the time be located, Downey, as the holder of the common securities,
and the Administrative Trustees by agreed action of the majority of the
Administrative Trustees shall have the power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or
any part of the Trust Property, or to act as separate trustee of any Trust
Property, in either case with the powers as may be provided in the instrument
of appointment, and to vest in the person or persons in that capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. If Downey does not join in the appointment
within 15 days of the receipt by it of a request to do so, or in case an Event
of Default has occurred and is continuing, the Property Trustee alone shall
have power to make the appointment.
Merger or Consolidation of Issuer Trustees
Any Person, as defined in the Trust Agreement, into which the Property
Trustee or the Delaware Trustee may be merged or converted or with which it
may be consolidated, or any Person resulting from any merger, conversion or
consolidation to which the Property Trustee or Delaware Trustee shall be a
party, or any Person succeeding to all or substantially all the corporate
trust business of the Property Trustee or Delaware Trustee, shall be the
successor of the Property Trustee or Delaware Trustee, as the case may be,
under the Trust Agreement, provided the Person shall be otherwise qualified
and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The trust may not merge with or into, consolidate, amalgamate or be replaced
by, or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to any Person, except as described below. The
trust may, at the request of Downey, with the consent of the Administrative
Trustees and without the consent of the holders of the capital securities,
merge with or into, consolidate, amalgamate or be replaced by or convey,
transfer or lease its properties and assets as an entirety or substantially as
an entirety to a trust organized under the laws of any state. Downey will only
be allowed to make this request if:
. the successor trust either (a) expressly assumes all of the obligations
of the trust with respect to the Trust Securities or (b) substitutes for
the Trust Securities other securities having substantially the same
terms as the common securities (the "Successor Common Securities") and
the capital securities (the "Successor Capital Securities") so long as
the Successor Common Securities are subordinated in right of payment to
the Successor Capital Securities to the same extent and in the same
manner as the common securities are subordinated in right of payment to
the capital securities;
. Downey expressly appoints a trustee of the successor trust possessing
the same powers and duties as the Property Trustee as the holder of the
junior subordinated debentures;
. the Successor Capital Securities are listed, or any Successor Capital
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the capital
securities are then listed, if any;
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the capital securities or the Successor
Capital Securities, as the case may be, to be downgraded by any
nationally recognized statistical rating organization which gives
ratings to the capital securities or the Successor Capital Securities,
as the case may be;
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the capital securities or the Successor
Capital Securities, as the case may be, in any material respect;
. the successor trust has a purpose identical to that of the trust;
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. before the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, Downey has received an opinion from nationally
recognized independent counsel, which may include outside counsel to
Downey for this offering, experienced in the following matters to the
effect that:
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences
and privileges of holders of the capital securities or the Successor
Capital Securities, as the case may be, in any material respect; and
. following the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the trust nor any successor
trust will be required to register as an investment company under
the Investment Company Act or will be classified as other than a
grantor trust for United States federal income tax purposes; and
. Downey or any permitted successor or assignee owns all of the Successor
Common Securities of the successor and guarantees the obligations of the
successor trust under the Successor Capital Securities at least to the
extent provided by the Guarantee Agreement and under the Successor
Common Securities at least to the extent provided by Downey's guarantee
of the common securities.
Notwithstanding the foregoing, the trust shall not, except with the consent
of holders of 100% in Liquidation Amount of the outstanding 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 any other Person or permit any other Person to
consolidate, amalgamate, merge with or into, or replace it if the
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause the trust or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "--Removal of Trustees" and "Description
of Guarantee--Amendments and Assignment" and as otherwise required by law and
the Trust Agreement, the holders of the capital securities will have no voting
rights.
The Trust Agreement may be amended from time to time by Downey, the Property
Trustee and the Administrative Trustees, without the consent of holders of the
Trust Securities, if the Trust Agreement is being amended to:
1. cure any ambiguity, correct or supplement any provisions in the Trust
Agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the Trust Agreement, which shall not be inconsistent with the other
provisions of the Trust Agreement; or
2. modify, eliminate or add to any provisions of the Trust Agreement to
such extent as shall be necessary to ensure that the trust will be
classified for United States federal income tax purposes as a grantor
trust at all times that any Trust Securities are outstanding or to
ensure that the trust will not be required to register as an "investment
company" under the Investment Company Act.
In the case of clause 1 above, the amendment will only be allowed if the
action shall not adversely affect in any material respect the interests of any
holder of Trust Securities, and any amendments of the Trust Agreement shall
become effective when notice of the amendments are given to the holders of the
Trust Securities.
In other cases, the Trust Agreement may be amended by the Administrative
Trustees and the Property Trustee with:
. the consent of holders representing not less than a majority of the
aggregate Liquidation Amount of the outstanding Trust Securities; and
. the receipt by the Issuer Trustees of an opinion of nationally
recognized independent counsel, which may include outside counsel to
Downey for this offering, experienced in these matters to the effect
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that the amendment or the exercise of any power granted to the Issuer
Trustees in compliance with the terms of the amendment will not affect
the trust's status as a grantor trust for United States federal income
tax purposes or the trust's exemption from registration as an investment
company under the Investment Company Act.
However, the Trust Agreement may only be amended with the unanimous consent
of each holder of Trust Securities, if it is being amended to:
. change the amount or timing of any Distribution on the Trust Securities,
or the amount or timing of any payment of the Redemption Price of, or
the amount or timing of any payment or distribution of funds or
property, including junior subordinated debentures, payable or
distributable upon liquidation or dissolution of the trust or otherwise
adversely affect the amount or change the time of any Distribution
required to be made in respect of the Trust Securities or the amount of
funds or property, including junior subordinated debentures, required to
be paid or distributed in respect of the Trust Securities; or
. restrict the right of a holder of Trust Securities to institute suit for
the enforcement of any of the foregoing payments on or after the date it
is due.
So long as any junior subordinated debentures are held by the Property
Trustee, the Issuer Trustees shall not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the Indenture Trustee, or execute any trust or power
conferred on the Indenture Trustee or the Property Trustee with respect
to the junior subordinated debentures;
. waive any past default that is waivable under the Indenture;
. exercise any right to rescind or annul a declaration that the principal
of and interest on all the junior subordinated debentures shall be due
and payable; or
. consent to any amendment, modification or termination of the Indenture
or the junior subordinated debentures, where their consent shall be
required;
without, in each case, obtaining the prior approval of the holders of a
majority in aggregate Liquidation Amount of all outstanding capital
securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of junior subordinated debentures affected
thereby, no consent shall be given by the Property Trustee without the prior
consent of each holder of the outstanding capital securities.
The Issuer Trustees shall not revoke any action previously authorized or
approved by vote of the holders of the capital securities except by subsequent
vote of the holders of the capital securities. The Property Trustee shall
notify each holder of capital securities of any notice of default with respect
to the junior subordinated debentures. In addition to obtaining the foregoing
approvals of the holders of the capital securities, before taking any of the
foregoing actions, the Issuer Trustees shall obtain an opinion of nationally
recognized independent counsel, which may include outside counsel to Downey
for this offering, experienced in these matters to the effect that the trust
will not be classified as other than a grantor trust for United States federal
income tax purposes on account of that action.
Any required approval from holders of the capital securities may be given at
a meeting of the holders convened for that purpose or may be given by written
consent. The Property 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 the holders of the capital securities is to
be taken, to be given to each holder of record of the capital securities in
the manner described in the Trust Agreement.
No vote or consent of holders of the capital securities will be required for
the trust to redeem and cancel the capital securities in compliance with the
Trust Agreement.
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Notwithstanding that holders of the capital securities will be entitled to
vote or consent under any of the circumstances described above, any of the
capital securities that are owned by Downey, the Issuer Trustees or any
affiliate of Downey or any Issuer Trustee, shall, for purposes of any vote or
consent, be treated as if they were not outstanding.
Expenses
In the Indenture, Downey will agree to pay all costs, expenses, obligations
and liabilities, other than with respect to the Trust Securities, of the
trust, including those relating to the organization of the trust, the fees and
expenses of the Issuer Trustees, costs and expenses relating to the operation
of the trust, those relating to the offering of the capital securities and the
fees and expenses of the Property Trustee in connection with any enforcement
of the rights of the holders of the capital securities or the junior
subordinated debentures. The foregoing obligations of Downey under the
Indenture are for the benefit of, and will be enforceable by, any person to
whom any of those costs, expenses, obligations, taxes or liabilities are owed,
which person is referred to as a "Creditor," whether or not the Creditor has
received notice. Any Creditor may enforce the obligations of Downey described
in this paragraph and Downey will irrevocably waive, to the extent permitted
by law, any right or remedy to require that the Creditor take action against
the trust or any other person before proceeding against Downey.
Global Capital Securities
The capital securities will be represented by one or more global
certificates registered in the name of the Depository or its nominee (a
"Global Capital Security"). Beneficial interests in the Global Capital
Securities will be shown on, and transfers of the Global Capital Securities
will be effected only through, records maintained by participants in the
Depository, which are referred to as the "Participants." Except as described
below, capital securities in certificated form will not be issued in exchange
for interests in the Global Capital Security. For more information, see "Book-
Entry Issuance."
Unless and until a Global Capital Security is exchanged in whole or in part
for the individual capital securities represented thereby, it may not be
transferred except as a whole by:
. the Depository to a nominee of the Depository;
. a nominee of the Depository to the Depository or another nominee of the
Depository; or
. the Depository or any nominee to a successor depository or any nominee
of that successor.
The Depository may discontinue providing its services as securities
depository with respect to the Global Capital Security at any time.
A Global Capital Security shall be exchangeable for capital securities
registered in the names of persons other than the Depository or its nominee
only if:
. the Depository notifies Downey that it is unwilling or unable to
continue as depository for the Global Capital Security or at any time
the Depository ceases to be a clearing agency registered under the
Securities Exchange Act if so required by applicable law or regulation,
and no successor Depository shall have been appointed within 90 days of
such notification or of Downey becoming aware of the Depository ceasing
to be so registered, as the case may be; or
. Downey in its sole discretion determines that such Global Capital
Security shall be so exchangeable.
Any Global Capital Security that is exchangeable as described in the
preceding sentence shall be exchangeable for definitive certificates
registered in those names as the Depository shall direct. It is expected that
the Depository's instructions will be based upon directions received by the
Depository from its Participants with respect to ownership of beneficial
interests in the Global Capital Security. If the capital securities are issued
in definitive form, the capital securities will be in denominations of $25 and
integral multiples of $25 and may be transferred or exchanged at the offices
of the Property Trustee described below.
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Upon the issuance of a Global Capital Security, and the deposit of the
Global Capital Security with or on behalf of the Depository, the Depository
for the Global Capital Security or its nominee will credit, on its book-entry
registration and transfer system, the respective aggregate Liquidation Amounts
of the individual capital securities represented by the Global Capital
Security to the accounts of Participants. These accounts shall be designated
by the dealers, underwriters or agents with respect to the capital securities.
Ownership of beneficial interests in a Global Capital Security will be limited
to Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in the Global Capital Security will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by the Depository or its nominee, with respect to interests of
Participants, and the records of Participants, with respect to interests of
persons who hold through Participants. The laws of some states may require
that some purchasers of securities take physical delivery of securities in
definitive form. The foregoing limits and these laws may impair the ability to
transfer beneficial interests in a Global Capital Security.
So long as the Depository for a Global Capital Security, or its nominee, is
the registered owner of the Global Capital Security, the Depository or its
nominee, as the case may be, will be considered the sole owner or holder of
the capital securities represented by the Global Capital Security for all
purposes under the Trust Agreement. Except as provided above, owners of
beneficial interests in a Global Capital Security will not be entitled to have
any of the individual capital securities represented by the Global Capital
Security registered in their names, will not receive or be entitled to receive
physical delivery of any capital securities in definitive form and will not be
considered the owners or holders of the capital securities under the Trust
Agreement. Accordingly, each person owning a beneficial interest in the Global
Capital Security must rely on the procedures of the Depository and, if the
person is not a Participant, on the procedures of the Participant through
which the person owns its interest, to exercise any rights of a holder under
the Trust Agreement.
Distributions on the capital securities registered in the name of the
Depository or its nominee will be made to the Depository or its nominee, as
the case may be, as the registered owner of the Global Capital Security
representing the capital securities. None of Downey, the Property Trustee, any
paying agent or the securities registrar for the capital securities will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global
Capital Security representing the capital securities or for maintaining,
supervising or reviewing any records relating to beneficial ownership
interests.
Disbursements of Distributions to Participants shall be the responsibility
of the Depository. Downey expects that the Depository or its nominee, upon
receipt of any payment of the Liquidation Amount or Distributions in respect
of a Global Capital Security, will credit Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
aggregate Liquidation Amount of the Global Capital Security as shown on the
records of the Depository or its nominee. Downey also expects that payments by
Participants to owners of beneficial interests in the Global Capital Security
held through Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers in "street name." Payments to owners of beneficial interests will
be the responsibility of the relevant Participants.
Payment and Paying Agent
Payments in respect of the capital securities shall be made to the
Depository, which shall credit the relevant accounts at the Depository on the
applicable Distribution Dates and Redemption Dates, or, if any of the capital
securities are not held by the Depository, payments of Distributions shall be
made at the Property Trustee's option either by check mailed to the address of
the holder entitled thereto as the address shall appear on the register or by
wire transfer. The paying agent shall initially be the Property Trustee and
any co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and Downey. The paying agent shall be permitted to
resign as paying agent upon 30 days' written notice to Downey, the Property
Trustee and the Administrative Trustees. If the Property Trustee shall no
longer be the paying agent, then the Administrative Trustees shall appoint a
successor, which shall be a bank or trust company acceptable to the Property
Trustee and Downey, to act as paying agent.
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Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
capital securities. Registration of transfers of the capital securities will
be effected without charge by or on behalf of the trust, but the registrar may
require payment of a sum sufficient to cover any tax or other governmental
charges that may be imposed in connection with any transfer or exchange.
Downey will agree in the Trust Agreement that, if capital securities are
issued in certificated form, it will at all times maintain a paying agent and
transfer agent for the capital securities in the Borough of Manhattan, the
City of New York.
Information Concerning the Property Trustee
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only the duties that
are specifically provided in the Trust Agreement and, after an Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. In all other
instances, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
capital securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the capital
securities are entitled under the Trust Agreement to vote, then the Property
Trustee shall take the action that is directed by Downey and if not so
directed, shall take the action as it deems advisable and in the best
interests of the holders of the Trust Securities and will have no liability
therefor except for liability resulting from its own bad faith, negligence or
willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that the trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes, and so that the
junior subordinated debentures will be treated as indebtedness of Downey for
United States federal income tax purposes. In this connection, Downey and the
Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust or the Trust Agreement, that
Downey and the Administrative Trustees determine in their discretion to be
necessary or desirable for the foregoing purposes, as long as the action does
not materially adversely affect the interests of the holders of the capital
securities.
The holders of the capital securities have no preemptive or similar rights.
The trust may not borrow money or incur debt or mortgage or pledge any of
its assets.
Governing Law
The Trust Agreement will be governed by and construed under the laws of the
State of Delaware.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Concurrently with the issuance of the capital securities, the trust will
invest the proceeds therefrom, together with the consideration paid by Downey
for the common securities, in junior subordinated debentures to be issued by
Downey. The junior subordinated debentures will be issued under the Indenture.
The following summary of the terms and provisions of the junior subordinated
debentures and the Indenture does not purport to be complete, and is qualified
in its entirety by reference to the Indenture, which has been filed as an
exhibit to the Registration Statement of which this prospectus forms a part,
and to the Trust Indenture Act. Copies of the junior subordinated debentures
and the Indenture may be obtained as described under "Where You Can Find More
Information." The Indenture is qualified under the Trust Indenture Act.
Whenever particular defined terms of the Indenture are referred to in this
prospectus, the defined terms are incorporated herein by reference. As used
under this caption "Description of Junior Subordinated Debentures," all
references to "Downey" mean Downey Financial Corp. excluding, unless otherwise
expressly stated or the context otherwise requires, its subsidiaries.
General
The Indenture provides that Downey may issue junior subordinated debt
securities (the "Debt Securities") thereunder from time to time in one or more
series and permits Downey to establish the terms of each series of Debt
Securities at the time of issuance. The junior subordinated debentures to be
issued to the trust will constitute a separate series of Debt Securities under
the Indenture, limited to $ million aggregate principal amount. The
Indenture will not limit the aggregate amount of Debt Securities that may be
issued by Downey under the Indenture nor will it limit the incurrence or
issuance of other debt by Downey or any of its subsidiaries. The junior
subordinated debentures will be unsecured and will be subordinated to the
extent described below.
The junior subordinated debentures will bear interest at the rate of % per
annum, payable quarterly in arrears on the 15th day of March, June, September
and December of each year (each, an "Interest Payment Date"), commencing
September 15, 1999, to the registered holders of the junior subordinated
debentures as of the close of business on the relevant record date, which will
be the 15th day, whether or not a Business Day, immediately preceding the
Distribution Date. The amount of each interest payment due with respect to the
junior subordinated debentures will include amounts accrued to but excluding
the relevant Interest Payment Date. It is anticipated that, until the
liquidation, if any, of the trust, each junior subordinated debenture will be
held in the name of the Property Trustee in trust for the benefit of the
holders of the capital securities. The amount of interest payable for any
period will be computed on the basis of a 30-day month. Interest for any
period of less than a full quarterly period will be computed upon the basis of
the actual number of days elapsed in a 30-day month. If any date on which
interest is payable on the junior subordinated debentures is not a Business
Day, then payment of the interest payable on that date will be made on the
next Business Day, and without any interest or other payment in respect of any
delay. Accrued interest that is not paid on the applicable Interest Payment
Date will bear additional interest on the amount of the accrued interest, to
the extent permitted by law, at the rate of % per annum, compounded
quarterly. The term "interest" as used herein shall include quarterly interest
payments and Additional Interest, Additional Sums and Additional Expenses, if
any.
The junior subordinated debentures will mature on , 2029 (this date, as
it may be shortened as hereinafter described, the "Stated Maturity"). This
date may be shortened at any time by Downey to any date not earlier than ,
2004, provided that the shortened date must fall on an Interest Payment Date.
Downey may exercise its right to shorten the maturity of the junior
subordinated debentures under circumstances where, for example, a Tax Event,
Capital Treatment Event, Investment Company Event or other undesirable event
could be avoided simply by shortening the maturity of the junior subordinated
debentures. If Downey elects to shorten the Stated Maturity of the junior
subordinated debentures, then it shall give notice to the Indenture Trustee,
and the Indenture Trustee shall give notice of the shortening to the holders
of the junior subordinated debentures no less than 60 days before the
effectiveness of the shortening. If Downey elects to shorten the Stated
Maturity of the junior subordinated debentures, Downey will also cause the
capital securities to be redeemed on the earlier maturity date.
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The Stated Maturity may be shortened only if Downey shall have received an
opinion of nationally recognized independent counsel, which may include
outside counsel to Downey for this offering, experienced in these matters to
the effect that:
. The holders of the capital securities and the junior subordinated
debentures will not recognize income, gain or loss for United States
federal income tax purposes as a result of the shortening of the Stated
Maturity and will be subject to United States federal income tax on the
same amounts, in the same manner and at the same times as would have
been the case if the shortening of the Stated Maturity had not occurred;
and
. The shortening of the Stated Maturity will not cause the trust to be
classified as other than a grantor trust for the United States federal
income tax purposes.
The junior subordinated debentures will be unsecured and will be subordinate
in right of payment to all Senior and Subordinated Debt of Downey. Because
Downey is a holding company, the right of Downey to participate in any
distribution of assets of any subsidiaries upon the subsidiaries' liquidation
or reorganization or otherwise, and thus the ability of holders of the capital
securities and junior subordinated debentures to benefit indirectly from the
distribution, is subordinated to the prior claims of creditors of that
subsidiary, except to the extent that Downey may itself be a creditor with
recognized claims against the subsidiary, in which case the claims of Downey
would still be effectively subordinate to any security interest in, or
mortgages or other liens on, the assets of the subsidiary and would be
subordinate to any indebtedness of the subsidiary senior to that held by
Downey. In that regard, if a receiver or conservator is appointed for the
Bank, then the Federal Deposit Insurance Act recognizes a priority in favor of
depositors, including the FDIC as subrogee or transferee, over general
creditors. Thus, in the event of a conservatorship or receivership of the
Bank, claims for customer deposits would have a priority over any claims
Downey may itself have as a creditor of the Bank. Accordingly, the junior
subordinated debentures will be effectively subordinated to all existing and
future liabilities of the subsidiaries of Downey, including deposit
liabilities of the Bank, and holders of junior subordinated debentures should
look only to the assets of Downey for payments on the junior subordinated
debentures. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of Downey, including Senior and Subordinated Debt.
See "Risk Factors--Risk Factors Relating to the Capital Securities" and "--
Subordination" below for a discussion of the effects of subordination.
Option to Defer Interest Payments
So long as no Debenture Event of Default has occurred and is continuing,
Downey will have the right under the Indenture at any time during the term of
the junior subordinated debentures to defer the payment of interest at any
time and from time to time for a period not exceeding 20 consecutive quarters
with respect to each period, provided that no Extension Period may extend
beyond the Stated Maturity. During an Extension Period, interest on the junior
subordinated debentures will continue to accrue, with interest thereon at the
rate of % per annum, compounded quarterly, to the extent permitted by law. No
Extension Period shall end other than on an Interest Payment Date. At the end
of an Extension Period, Downey must pay all interest then accrued and unpaid,
together with interest thereon at the annual rate of %, compounded quarterly,
to the extent permitted by applicable law. During an Extension Period, because
interest will continue to accrue, holders of junior subordinated debentures
will be required to accrue interest income for United States federal income
tax purposes as discussed under "Certain Federal Income Tax Consequences--
Interest Income and Original Issue Discount." During any Extension Period,
Downey will be restricted from making specific payments as described below
under "--Restrictions on Specified Payments."
Before the termination of any Extension Period, Downey may further extend
the Extension Period, provided that the Extension Period does not exceed 20
consecutive quarters or extend beyond the Stated Maturity. If Downey shortens
the Stated Maturity at any time while an Extension Period is in effect, and if
the Stated Maturity, as so shortened, would end before the last day of the
Extension Period, the Extension Period will be deemed to end on the Stated
Maturity. If the junior subordinated debentures are called for redemption on
any
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date before the end of an Extension Period, the Extension Period will be
deemed to end on that Redemption Date as to all of the junior subordinated
debentures.
Upon the termination of any Extension Period and the payment of all amounts
then due, Downey may elect to begin a new Extension Period subject to the
above requirements. Each Extension Period must end on an Interest Payment
Date, and all deferred interest will be payable on that Interest Payment Date
to the persons in whose names the junior subordinated debentures are
registered at the close of business on the immediately preceding record date.
Except as discussed above, there is no limitation on the number of times
Downey may elect to begin an Extension Period. No interest shall be due and
payable during an Extension Period, except at the end of the Extension Period.
Downey must give the Property Trustee, the Administrative Trustees and the
Indenture Trustee notice of its election or extension of any Extension Period
at least one Business Day before the earlier of:
. the date the Distributions on the capital securities or the interest on
the junior subordinated debentures would have been payable except for
the election to begin or extend such Extension Period;
. the date the Administrative Trustees are or the Indenture Trustee is
required to give notice to the New York Stock Exchange or any applicable
stock exchange or automated quotation system on which the capital
securities or the junior subordinated debentures are then listed or
quoted or to the holders of the capital securities or the junior
subordinated debentures of the record date; or
. the date the interest is payable,
but in any event not less than one Business Day before the applicable record
date.
The Indenture Trustee shall give notice of Downey's election to begin or
extend an Extension Period to the holders of the junior subordinated
debentures.
Distributions on the capital securities will be deferred by the trust during
any Extension Period as discussed under "Description of the Capital
Securities--Distributions." For a description of related United States federal
income tax consequences and special considerations applicable to the junior
subordinated debentures during the Extension Period, see "Certain Federal
Income Tax Consequences."
Redemption
The junior subordinated debentures will be redeemable before the Stated
Maturity at the option of Downey at a redemption price equal to the accrued
and unpaid interest on the junior subordinated debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount of the junior
subordinated debentures so redeemed as follows:
1. on or after , 2004, in whole at any time or in part from time to
time; or
2. before , 2004, in whole but not in part, within 90 days following
the occurrence and during the continuance of a Tax Event, an
Investment Company Event or a Capital Treatment Event. However,
Downey's right to redeem the junior subordinated debentures upon the
occurrence of a Tax Event, Investment Company Event or Capital
Treatment Event will not go into effect if there is available to
Downey or the trust the opportunity to eliminate, within the 90-day
period, the relevant event by taking some ministerial action, such as
filing a form or making an election or pursuing some other reasonable
measure that will have no adverse effect on Downey, the trust or the
holders of the capital securities and will involve no material cost,
and in that case Downey will pursue this measure instead of
redemption.
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Notwithstanding the foregoing, installments of interest on the junior
subordinated debentures which are due and payable on Interest Payment Dates
falling on or before a redemption date shall be payable to the registered
holders as of the close of business on the relevant record dates. Notice of
any redemption will be mailed at least 30 days but not more than 60 days
before the redemption date to each holder of junior subordinated debentures to
be redeemed at the holder's registered address. Unless Downey defaults in
payment of the redemption price, on and after the redemption date interest
will cease to accrue on the junior subordinated debentures or portions of the
junior subordinated debentures called for redemption.
If Downey redeems less than all of the outstanding junior subordinated
debentures, the junior subordinated debentures, or portions of the junior
subordinated debentures to be redeemed, will be selected by the Indenture
Trustee. The Indenture Trustee will select the junior subordinated debentures
to be redeemed from the outstanding junior subordinated debentures not
previously called for redemption. The Indenture Trustee may use any method it
deems fair and appropriate and which may provide for the selection for
redemption of a portion of the principal amount of any junior subordinated
debentures, which must be in a principal amount of $25 or integral multiples
of $25.
Downey may not redeem fewer than all of the outstanding junior subordinated
debentures unless it has paid or contemporaneously pays all accrued and unpaid
interest on all junior subordinated debentures for all quarterly interest
payment periods terminating on or before the relevant redemption date.
The junior subordinated debentures will not be subject to any sinking fund.
Restrictions on Specified Payments
Downey will not make the payments described below if at any time Downey does
the following or the following events occur:
. failure by Downey to pay any principal of or interest on junior
subordinated debentures when due, including any Additional Interest or
Additional Sums;
. there shall have occurred any event of which Downey has actual knowledge
that (a) constitutes or with the giving of notice or the lapse of time,
or both, would constitute a Debenture Event of Default with respect to
the junior subordinated debentures, other than a Debenture Event of
Default referred to in the preceding bullet point, and (b) in respect of
which Downey shall not have taken reasonable steps to cure;
. Downey shall have given notice of its election of an Extension Period as
provided in the Indenture with respect to the junior subordinated
debentures and such Extension Period, or any extension of an Extension
Period, shall be continuing; or
. while the junior subordinated debentures are held by the trust, Downey
shall be in default with respect to its payment of any obligation under
the Guarantee Agreement.
If any of the above events occurs and is continuing, then Downey may not and
shall not allow any of its subsidiaries to:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of Downey's
capital stock, which includes common and preferred stock;
. make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Downey that rank on a
parity with or junior to the junior subordinated debentures in right of
payment;
. redeem, purchase or acquire less than all of the junior subordinated
debentures or the capital securities; or
. make any guarantee payments with respect to any guarantee by Downey of
the debt securities of any subsidiary of Downey if such guarantee ranks
on parity with or junior to the junior subordinated debentures in right
of payment.
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Notwithstanding the foregoing, during an Extension Period Downey and its
subsidiaries will be allowed to make:
. any dividend in a form of stock, warrants, options or other rights where
the dividend or the stock issuable upon the exercise of the warrants,
options or other rights is the same stock as that on which the dividend
is being paid or ranks on a parity with or junior to that stock in right
of payment;
. any declaration of a dividend in connection with the implementation of a
stockholders' rights plan or the issuance of stock under any
stockholders' rights plan in the future, or the redemption or repurchase
of any rights pursuant thereto;
. payments under the Guarantee Agreement; and
. purchases of common stock related to the issuance of common stock or
rights under any of Downey's benefit plans for its directors, officers
or employees.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the junior subordinated debentures that has occurred
and is continuing constitutes a "Debenture Event of Default" with respect to
the junior subordinated debentures:
. failure for 30 days to pay any interest, including any Additional
Interest or Additional Sums, on the junior subordinated debentures when
due, subject to the deferral of any due date as the result of an
Extension Period;
. failure to pay any principal of the junior subordinated debentures when
due, whether at maturity, upon redemption, by declaration or otherwise;
. default in the performance, or breach, in any material respect, of any
covenants contained in the Indenture or the junior subordinated
debentures (other than a covenant contained in the Indenture for the
benefit of a series of Debt Securities other than the junior
subordinated debentures) for 90 days after written notice to Downey from
the Indenture Trustee or to Downey and the Indenture Trustee by the
holders of at least 25% in aggregate outstanding principal amount of the
junior subordinated debentures;
. the dissolution, winding up or termination of the trust, except in
connection with the distribution of the junior subordinated debentures
to holders of Trust Securities in liquidation of the trust in accordance
with the terms of the Trust Agreement; or
. specified events in bankruptcy, insolvency or reorganization of Downey.
The holders of not less than a majority in aggregate outstanding principal
amount of the junior subordinated debentures will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Indenture Trustee. The Indenture Trustee or the holders of not less
than 25% in aggregate outstanding principal amount of the junior subordinated
debentures may declare the principal of and accrued and unpaid interest on the
junior subordinated debentures due and payable immediately upon a Debenture
Event of Default. If the Indenture Trustee or the holders of the junior
subordinated debentures fail to make this declaration, the holders of at least
25% in aggregate Liquidation Amount of the capital securities shall have the
right. The holders of a majority in aggregate outstanding principal amount of
the junior subordinated debentures may annul the declaration and waive the
default if all defaults, other than the non-payment of the principal and
interest of the junior subordinated debentures which have become due solely by
the above-mentioned acceleration, have been cured or waived and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee.
Should the holders of the junior subordinated debentures fail to annul the
declaration and waive the default, the holders of a majority in aggregate
Liquidation Amount of the capital securities shall have this right.
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The holders of a majority in aggregate outstanding principal amount of
junior subordinated debentures may, on behalf of the holders of all the junior
subordinated debentures, waive any past default, except a default in the
payment of principal or interest, unless the 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 Indenture Trustee,
or a default in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each
outstanding junior subordinated debenture.
In case a Debenture Event of Default shall occur and be continuing, the
Indenture Trustee will have the right to declare the principal of and the
interest on the junior subordinated debentures, and any other amounts payable
under the Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the junior subordinated debentures.
Downey will be required to file annually with the Indenture Trustee a
certificate as to whether or not Downey is in compliance with all the
conditions and covenants applicable to it under the Indenture.
Subordination
The Indenture provides that the junior subordinated debentures will be
subordinate and junior in right of payment to all Senior and Subordinated Debt
to the extent provided in the Indenture. Upon any payment or distribution of
assets of Downey to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets
or any bankruptcy, insolvency, receivership or similar proceedings in
connection with any insolvency or bankruptcy proceeding of Downey, the holders
of Senior and Subordinated Debt will first be entitled to receive payment in
full of all Senior and Subordinated Debt before the holders of junior
subordinated debentures will be entitled to receive or retain any payment in
respect of the junior subordinated debentures.
The Indenture also provides that Downey may not make payments of principal
of or interest on the junior subordinated debentures if:
. any Senior or Subordinated Debt is not paid when due and any applicable
grace period after the default has ended and the default has not been
cured or waived or ceased to exist; or
. the maturity of any Senior or Subordinated Debt has been accelerated
because of a default, and the acceleration has not been rescinded.
Upon the occurrence of any of the events described in the two preceding
paragraphs, any payment or distribution on the junior subordinated debentures
that would otherwise be payable in respect of the junior subordinated
debentures but for the subordination provisions will be paid or delivered
directly to the holders of Downey's Senior and Subordinated Debt until all of
Downey's Senior and Subordinated Debt has been paid in full. Upon the
occurrence of any of the events described in the two preceding paragraphs, if
the Indenture Trustee or any holder of junior subordinated debentures receives
any payment or distribution on account of the junior subordinated debentures
before all of Downey's Senior and Subordinated Debt is paid in full, then that
payment or distribution will be paid over or delivered and transferred to
Downey, or if Downey is in bankruptcy to a bankruptcy trustee, which will then
be obligated to pay the holders of its Senior and Subordinated Debt at the
time outstanding.
The rights of the holders of the junior subordinated debentures will be
subrogated to the rights of the holders of Downey's Senior and Subordinated
Debt to the extent of any payment Downey makes to the holders of its Senior or
Subordinated Debt that otherwise would have been made to the holders of the
junior subordinated debentures but for the subordination provisions.
"Debt" means with respect to any Person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent:
1. every obligation of the Person for money borrowed;
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2. every obligation of the Person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
3. every reimbursement obligation of the Person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of the Person;
4. every obligation of the Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
5. every capital lease obligation of the Person;
6. all indebtedness of the Person for claims in respect of derivative
products, including interest rate, foreign exchange rate and commodity
forward contracts, options and swaps and similar arrangements; and
7. every obligation of the type referred to in clauses 1 through 6 of
another Person and all dividends of another Person the payment of which,
in either case, the Person in question has guaranteed or for which the
person in question is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior and Subordinated Debt" means the principal of, and premium, and
interest, if any, including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Downey whether or not
such claim for post-petition interest is allowed in such proceeding, on Debt
of Downey, whether incurred on or before the date of the Indenture or
thereafter incurred, unless, in the instrument creating or evidencing the same
or under which the same is outstanding, it is expressly provided that such
Debt is not superior in right of payment to, or ranks on parity in right of
payment with or junior in right of payment to, the junior subordinated
debentures or to other Debt which by its express terms ranks on parity with,
or junior to, the junior subordinated debentures in right of payment. However,
Senior and Subordinated Debt shall not be deemed to include:
. any Debt of Downey which, when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of
1978, as amended, or any successor provision thereto, was without
recourse to Downey;
. any Debt of Downey to any of its subsidiaries;
. any Debt to any employee of Downey;
. any other debt securities issued under the Indenture;
. any Debt between or among Downey and any of its affiliates, including
all other debt securities and guarantees in respect of those debt
securities issued to any other trust, or trustee of any other trust,
partnership, limited liability company or other entity affiliated with
Downey which is a financing vehicle of Downey (a "Financing Entity") in
connection with the issuance by that Financing Entity of preferred
securities or other securities that rank on parity in right of payment
with, or junior in right of payment to, the capital securities or
Downey's guarantee of which ranks on a parity in right of payment with,
or junior in right of payment to, Downey's guarantee under the Guarantee
Agreement;
. trade accounts payable or accrued liabilities arising in the ordinary
course of business; and
. any liabilities for federal, state, local or other taxes.
By reason of the subordination provisions described above, in the event of
bankruptcy, insolvency, receivership or similar proceedings involving Downey,
holders of Senior and Subordinated Debt may receive more, ratably, and holders
of junior subordinated debentures may receive less, ratably, than other
creditors of Downey. The subordination provisions will not prevent the
occurrence of any Debenture Event of Default.
The Indenture places no limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by Downey. Downey may from time to time
incur additional indebtedness constituting Senior and Subordinated Debt.
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Additional Expenses
If at any time while the Property Trustee is the holder of the junior
subordinated debentures, the trust shall be required to pay any taxes, duties,
assessments or governmental charges of whatever nature, other than withholding
taxes, imposed by the United States or any other taxing authority, then, in
any such case, we will pay as additional interest on the junior subordinated
debentures any additional amounts ("Additional Expenses") that are required so
that the net amounts received and retained by the trust after paying those
taxes, duties, assessments or governmental charges will not be less than the
amounts the trust would have received if those taxes, duties, assessments or
governmental charges had not been imposed.
Denominations, Registration and Transfer
The junior subordinated debentures will initially be registered in the name
of the trust and delivered to and held by the Property Trustee. If the junior
subordinated debentures are distributed to holders of the capital securities,
it is anticipated that the junior subordinated debentures will be represented
by a global certificate or certificates registered in the name of the
Depository or its nominee (a "Global Subordinated Debenture"). It is likewise
anticipated that the depository arrangements for any Global Subordinated
Debenture will be substantially similar to those in effect for the capital
securities as described above under "Description of the Capital Securities--
Global Capital Securities" and under "Book-Entry Issuance" below. Accordingly,
beneficial interests in the Global Subordinated Debenture will be shown on,
and transfers of the Global Subordinated Debenture will be effected only
through, records maintained by the Depository. Except as described below,
junior subordinated debentures in certificated form will not be issued in
exchange for the Global Subordinated Debenture.
Unless and until a Global Subordinated Debenture is exchanged in whole or in
part for the individual capital securities represented thereby, it may not be
transferred except as a whole by:
. the Depository to a nominee of the Depository;
. a nominee of the Depository to the Depository or another nominee of the
Depository; or
. the Depository or any nominee to a successor depository or any nominee
of that successor.
The Depository may discontinue providing its services as securities
depository with respect to the Global Subordinated Debenture at any time.
A Global Subordinated Debenture shall be exchangeable for junior
subordinated debentures registered in the names of persons other than the
Depository or its nominee only if:
. the Depository notifies Downey that it is unwilling or unable to
continue as depository for the Global Subordinated Debenture or at any
time the Depository ceases to be a clearing agency registered under the
Securities Exchange Act if so required by applicable law or regulation,
and no successor depository shall have been appointed within 90 days of
such notification or of Downey becoming aware of the Depository's
ceasing to be so registered, as the case may be;
. Downey in its sole discretion determines that the Global Subordinated
Debenture shall be so exchangeable; or
. a Debenture Event of Default shall have occurred and be continuing.
Any Global Subordinated Debenture that is exchangeable as described in the
preceding sentence shall be exchangeable for definitive certificates
registered in the names as the Depository shall direct. It is expected that
the instructions will be based upon directions received by the Depository from
its Participants with respect to ownership of beneficial interests in the
Global Subordinated Debenture. If junior subordinated debentures are issued in
definitive form, the junior subordinated debentures will be in denominations
of $25 and integral multiples of $25 and may be transferred or exchanged at
the offices described below.
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For so long as the Property Trustee is the holder of the junior subordinated
debentures, all payments on junior subordinated debentures will be made to the
Property Trustee. Payments on junior subordinated debentures represented by a
Global Subordinated Debenture will be made to the Depository, as the
depository for the junior subordinated debentures. For junior subordinated
debentures issued in certificated form, principal and interest will be
payable, the transfer of the junior subordinated debentures will be
registrable, and junior subordinated debentures will be exchangeable for
junior subordinated debentures of other denominations of a like aggregate
principal amount, at the office or agency of Downey maintained for that
purpose, which initially shall be the office of the Indenture Trustee which on
the date of this prospectus is located at Rodney Square North, 1100 Market
Street, Wilmington, Delaware or at the offices of any other paying agent or
transfer agent appointed by Downey, provided that payment of interest may be
made at the option of Downey by check mailed to the address of the persons
entitled thereto or by wire transfer to those persons. Downey will agree that,
if the junior subordinated debentures are distributed to holders of capital
securities upon liquidation or dissolution of the trust and any such junior
subordinated debentures are not in the form of Global Subordinated Debentures,
it will at all times maintain a paying agent and transfer agent for the junior
subordinated debentures in the Borough of Manhattan, the City of New York. For
a description of the Depository and the terms of the depository arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
Downey will appoint the Indenture Trustee as securities registrar under the
Indenture. Junior subordinated debentures in certificated form may be
presented for exchange, and may be presented for registration of transfer, and
shall, if so required by Downey or the securities registrar, have the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed, at the office of the securities registrar. Downey will not
impose a service charge for the transfer or exchange but may require payment
of any transfer tax or other governmental charge which may be imposed in
connection with any transfer or exchange. Downey may at any time rescind the
designation of any transfer agent or approve a change in the location through
which any transfer agent acts. Downey may at any time designate additional
transfer agents with respect to the junior subordinated debentures.
In the event of any redemption, neither Downey nor the Indenture Trustee
shall be required to:
. issue, register the transfer of or exchange junior subordinated
debentures during a period beginning at the opening of business 15
calendar days before the day of mailing of a notice of redemption of any
junior subordinated debentures called for redemption and ending at the
close of business on the day of mailing of the relevant notice of
redemption; or
. transfer or exchange any junior subordinated debentures so selected for
redemption in whole or in part, except, in the case of any junior
subordinated debentures being redeemed in part, any portion of the
junior subordinated debentures not to be redeemed.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by Downey in trust, for the payment of the principal of or interest on
the junior subordinated debentures and remaining unclaimed for two years after
the principal or interest has become due and payable shall, at the request of
Downey, be repaid to Downey and the holder of those junior subordinated
debentures shall thereafter look, as a general unsecured creditor, only to
Downey for payment thereof.
Modification of Indenture
From time to time Downey and the Indenture Trustee may, without the consent
of the holders of the junior subordinated debentures, amend, waive or
supplement the Indenture for specified purposes, including:
. to evidence the succession of another party to Downey and the assumption
by that party of the covenants of Downey under the Indenture;
. to add to the covenants of Downey for the benefit of the holders of the
junior subordinated debentures;
. to add any additional Events of Default for the benefit of the holders
of the junior subordinated debentures;
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. to cure any ambiguity, to correct or supplement any provision of the
Indenture which may be defective or inconsistent with any other
provision in the Indenture, or to make any other provisions regarding
matters or questions arising under the Indenture, provided that any
actions under this clause shall not adversely affect the interests of
any holders of junior subordinated debentures or capital securities in
any material respect for so long as they remain outstanding; or
. to comply with the requirements of the SEC to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
The Indenture also contains provisions permitting Downey and the Indenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of the outstanding junior subordinated debentures, to modify
the Indenture in a manner affecting the rights of the holders of the junior
subordinated debentures. However, Downey and the Indenture Trustee may not
modify the Indenture without the consent of the holder of each outstanding
junior subordinated debenture, except to the extent permitted in connection
with the deferral of Interest Payment Dates during an Extension Period, or the
shortening of the Stated Maturity, if the modification will:
. change the Stated Maturity of the junior subordinated debentures, or
reduce the principal amount of the junior subordinated debentures, or
reduce the rate or extend the time of payment of interest thereon, or
reduce the amount payable upon redemption, or change the place of
payment where, or the currency in which, any amount is payable or impair
the right to institute suit for the enforcement of any payment on or
after the date it is due and payable;
. reduce the percentage of principal amount of junior subordinated
debentures, the holders of which are required to consent to any
modification of or for waivers under the Indenture; or
. modify the provisions of the Indenture with respect to the subordination
of the junior subordinated debentures, including the definitions
relating thereto, in a manner adverse to the holders of the junior
subordinated debentures.
With respect to the above modifications, so long as any of the capital
securities remain outstanding, neither Downey, the Indenture Trustee, nor the
holders of the outstanding junior subordinated debentures may make
modifications to the Indenture that adversely affect the holders of the
capital securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the capital securities then outstanding unless and until
the principal of the junior subordinated debentures and all accrued and unpaid
interest thereon have been paid in full and other conditions are satisfied.
Where a consent under the Indenture would require the consent of each holder
of junior subordinated debentures, no consent shall be given by the Property
Trustee without the prior consent of each holder of capital securities then
outstanding. In addition, Downey and the Indenture Trustee may execute,
without the consent of any holder of junior subordinated debentures, any
supplemental Indenture for the purpose of creating any new series of Debt
Securities.
Enforcement of Specified Rights by Holders of Capital Securities
If a Debenture Event of Default has occurred and is continuing and that
event is attributable to the failure of Downey to pay principal of or interest
on the junior subordinated debentures on the date that interest or principal
is otherwise payable, a holder of capital securities may institute a legal
proceeding directly against Downey for enforcement of payment to the holder of
the principal of or interest on the junior subordinated debentures having a
principal amount equal to the aggregate Liquidation Amount of the capital
securities held by the holder (a "Direct Action"). Downey may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the capital securities
outstanding. In connection with a Direct Action, Downey will be subrogated to
the rights of any holders of the capital securities to the extent of any
payment made by Downey to any holders of the junior subordinated debentures in
the Direct Action.
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The holders of the capital securities will not be able to exercise directly
any remedies other than those discussed in the preceding paragraph available
to the holders of the junior subordinated debentures unless there shall have
been an Event of Default under the Trust Agreement as discussed under
"Description of the Capital Securities--Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that Downey shall not consolidate or merge with or
into any other Person or convey, transfer or lease its properties and assets
as an entirety or substantially as an entirety to any Person, and no Person
shall consolidate with or merge into Downey or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to
Downey, unless:
. either Downey shall be the continuing Person, in the case of a merger,
or the successor Person, if other than Downey, formed by the
consolidation or into which Downey is merged or which acquires by
conveyance, transfer or lease the properties and assets of Downey as an
entirety or substantially as an entirety is organized under the laws of
the United States or any state or the District of Columbia, and the
successor Person expressly assumes, by execution of a supplemental
indenture in form satisfactory to the Indenture Trustee, all of Downey's
obligations under the junior subordinated debentures, the Guarantee
Agreement, the guarantee agreement in respect of the common securities
and the Indenture and the due and punctual performance and observance of
every obligation in the junior subordinated debentures, Guarantee
Agreement, guarantee agreement in respect of the common securities and
the Indenture to be performed or observed by Downey;
. immediately after giving effect thereto, no Debenture Event of Default
with respect to the junior subordinated debentures, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default with respect to the junior subordinated debentures, shall have
occurred and be continuing; and
. other conditions as described in the Indenture are met.
The provisions of the Indenture do not afford holders of the junior
subordinated debentures protection in the event of a highly leveraged or other
transaction involving Downey that may adversely affect holders of the junior
subordinated debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all junior
subordinated debentures not previously delivered to the Indenture Trustee for
cancellation:
. have become due and payable,
. will become due and payable at their Stated Maturity within one year, or
. are to be called for redemption within one year under arrangements
satisfactory to the Indenture Trustee,
and, in each of the foregoing cases, Downey deposits or causes to be deposited
with the Indenture Trustee funds, in trust, for the purpose and in an amount
in the currency in which the junior subordinated debentures are payable
sufficient to pay and discharge the entire indebtedness on the junior
subordinated debentures not previously delivered to the Indenture Trustee for
cancellation, for the principal and interest to the date of the deposit or to
the Stated Maturity or the relevant Redemption Date, as the case may be, then
the Indenture will cease to be of further effect, except as to Downey's
obligations to pay all other sums due under the Indenture and to provide the
officers' certificates and opinions of counsel described therein, and a
limited number of other provisions which the Indenture provides will survive,
and Downey will be deemed to have satisfied and discharged the Indenture.
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Covenants of Downey
Downey will covenant in the Indenture, as to the junior subordinated
debentures, that Downey will pay to the trust any applicable Additional Sums
if and so long as:
. the trust is the holder of all the junior subordinated debentures; and
. a Tax Event in respect of the trust has occurred and is continuing.
Downey will also covenant, as to the junior subordinated debentures:
. to maintain, directly or indirectly, 100% ownership of the common
securities of the trust, provided that successors which are permitted
under the Indenture may succeed to Downey's ownership of the common
securities;
. to use its reasonable efforts, consistent with the terms and provisions
of the Trust Agreement, to cause the trust to remain classified as a
grantor trust and not as an association taxable as a corporation for
United States federal income tax purposes;
. not to voluntarily terminate, wind-up or liquidate the trust, except
upon prior approval of the primary federal regulator of Downey if then
so required under applicable capital guidelines or policies of such
primary regulator, and except
. in connection with a distribution of junior subordinated debentures
to the holders of the capital securities in liquidation of the
trust; or
. in connection with specified mergers, consolidations, or
amalgamations permitted by the Trust Agreement; and
. to pay the costs, expenses, obligations and liabilities as described
under "Description of Junior Subordinated Debentures--Additional
Expenses" and "Description of the Capital Securities--Expenses."
Governing Law
The Indenture and the junior subordinated debentures will be governed by and
construed under the laws of the State of New York.
Information Concerning the Indenture Trustee
The Indenture Trustee shall have all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act.
The Indenture Trustee, other than during the occurrence and continuance of a
Debenture Event of Default, undertakes only to perform those duties as are
specifically described in the Indenture and, after a Debenture Event of
Default, must exercise the same degree of care as a prudent person would
exercise or use in the conduct of his or her own affairs. Except as discussed
in the foregoing, the Indenture Trustee is under no obligation to exercise any
of the powers vested in it by the Indenture at the request of any holder of
junior subordinated debentures, unless the holder offers it reasonable
indemnity against the costs, expenses and liabilities which it might incur.
The Indenture Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties
if the Indenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
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BOOK-ENTRY ISSUANCE
The capital securities will be issued in the form of one or more fully
registered securities in book-entry form registered in the name of the
Depository or its nominee. So long as the junior subordinated debentures are
held by the Property Trustee, the junior subordinated debentures will not be
issued in book-entry form, but will be evidenced by one or more certificates
held by, and registered in the name of, the Property Trustee. However, if the
junior subordinated debentures are distributed to holders of capital
securities upon dissolution or liquidation of the trust, Downey anticipates
that the junior subordinated debentures will be issued in fully registered
book-entry form. The following discussion is relevant only with respect to
capital securities and junior subordinated debentures in book-entry form which
are evidenced by one or more global certificates registered in the name of the
Depository or its nominee as described below.
The Depository will act as securities depository for all capital securities
while they are in book-entry form and, if applicable, junior subordinated
debentures issued in book-entry form (collectively, the "Global Securities").
The Global Securities will be issued only as fully-registered securities
registered in the name of Cede & Co., the Depository's nominee. One or more
fully-registered global certificates will be issued for the capital securities
and the junior subordinated debentures and will be deposited with the
Depository.
The Depository has advised Downey as follows: The Depository is a limited
purpose trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered as required
by the provisions of Section 17A of the Exchange Act.
The Depository holds securities that its Participants deposit with the
Depository. The Depository also facilitates the settlement among Participants
of securities transactions, like transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. "Direct Participants" include securities brokers and dealers,
banks, trust companies, clearing corporations and other organizations. The
Depository is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the Depository system is
also available to other parties like securities brokers and dealers, banks and
trust companies that clear through or maintain custodial relationships with
Direct Participants, either directly or indirectly ("Indirect Participants").
The rules applicable to the Depository and its Participants are on file with
the SEC.
Parties who purchase capital securities or junior subordinated debentures
within the Depository system must make the purchase by or through Direct
Participants, which will receive a credit for the capital securities or junior
subordinated debentures on the Depository's records. The ownership interest of
each actual purchaser of each capital security and each junior subordinated
debenture ("Beneficial Owner") will in turn be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from the Depository of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which the Beneficial Owners purchased
capital securities or junior subordinated debentures. Transfers of ownership
interests in the capital securities or junior subordinated debentures are to
be accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in capital securities or junior
subordinated debentures, except under the limited circumstances referred to
below.
The Depository will have no knowledge of the actual Beneficial Owners of the
capital securities or junior subordinated debentures. The Depository's records
reflect only the identity of the Direct Participants to whose accounts the
capital securities or junior subordinated debentures are credited, which may
or may not be the Beneficial Owners. The Participants will remain responsible
for keeping account of their holdings on behalf of their customers.
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Conveyance of notices and other communications by:
. the Depository to Direct Participants,
. Direct Participants to Indirect Participants, and
. Direct Participants and Indirect Participants to Beneficial Owners,
and the voting rights of Direct Participants, Indirect Participants and
Beneficial Owners will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Global Securities. If less than all of the Global Securities are being
redeemed, the Depository will determine by lot or pro rata the amount of the
Global Securities of each Direct Participant to be redeemed.
Although voting with respect to the capital securities and the junior
subordinated debentures is generally limited to the holders of record of the
capital securities or junior subordinated debentures, as applicable, in those
instances in which a vote is required, neither the Depository nor Cede & Co.
will itself consent or vote with respect to capital securities or junior
subordinated debentures. Under its usual procedures, the Depository would mail
an omnibus proxy to the relevant trustee as soon as possible after the record
date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to
those Direct Participants to whose accounts the capital securities or junior
subordinated debentures are credited on the record date, and identified in a
listing attached to the omnibus proxy.
Payments on the capital securities or the junior subordinated debentures
will be made by the relevant trustee or paying agent to the Depository. The
Depository's practice is to credit Direct Participants' accounts on the
relevant payment date in any amount determined by each Direct Participants'
holdings shown on the Depository's records unless the Depository has reason to
believe that it will not receive payments on the payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices and will be the responsibility of the Participants and
not of the Depository, the relevant trustee, the trust or Downey, subject to
any statutory or regulatory requirements as may be in effect from time to
time. Payments to the Depository is the responsibility of the relevant
trustee, disbursement of these payments to Direct Participants is the
responsibility of the Depository, and disbursement of these payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
The Depository may discontinue providing its services as securities
depositary with respect to the capital securities or the junior subordinated
debentures at any time by giving reasonable notice to the relevant trustee and
Downey. In that event, or in the other limited circumstances described above
under "Description of the Capital Securities-Global Capital Securities" and
"Description of the Junior Subordinated Debentures--Denominations,
Registration and Transfer" and "--Global Subordinated Debentures," definitive
certificates representing the capital securities or junior subordinated
debentures are required to be printed and delivered.
The information in this section and elsewhere in this prospectus concerning
the Depository and the Depository's book-entry system has been obtained from
sources that the trust and Downey believe to be accurate, but the trust and
Downey assume no responsibility for the accuracy of the information. Neither
the trust nor Downey has any responsibility for the performance by the
Depository or its Participants of their individual obligations as described in
this prospectus or under the rules and procedures governing their operations.
Management of the Depository is aware that some computer applications,
systems, and the like for processing data that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"year 2000 problems." The Depository has informed its Participants and other
members of the financial community that it has developed and is implementing a
program so that its applications and systems, as the same relate to the timely
payment of distributions to securityholders, book-entry deliveries, and
settlement of trades within the Depository, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which the Depository has indicated is complete. Additionally,
the Depository's plan includes a testing phase, which the Depository expects
to be completed within appropriate time frames.
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However, the Depository's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom the Depository licenses
software and hardware, and third party vendors upon whom the Depository relies
for information or the provision of services, including telecommunication and
electrical utility service providers, among others. The Depository has
informed its Participants and other members of the financial community that it
is contacting, and will continue to contact, third party vendors from whom the
Depository acquires services to:
. impress upon them the importance of these services being year 2000
compliant; and
. determine the extent of their efforts for year 2000 remediation (and, as
appropriate, testing) of their services.
In addition, the Depository is in the process of developing contingency
plans as it deems appropriate.
According to the Depository, the foregoing information with respect to the
Depository has been provided for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of
any kind.
If problems associated with the year 2000 problem were to occur with respect
to the Depository and the services described above, payments to holders would
be delayed or otherwise adversely affected.
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DESCRIPTION OF GUARANTEE
The Guarantee Agreement will be executed and delivered by Downey
concurrently with the issuance of the capital securities for the benefit of
the holders of the capital securities. Wilmington Trust Company will act as
Guarantee Trustee under the Guarantee Agreement for the purposes of compliance
with the Trust Indenture Act, and the Guarantee Agreement will be qualified as
an indenture under the Trust Indenture Act. The following summary of
provisions of the Guarantee Agreement does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Guarantee
Agreement, including the definitions therein of terms, and the Trust Indenture
Act. The form of the Guarantee Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus forms a part, and copies of
the Guarantee Agreement may be obtained as described under "Where You Can Find
More Information." As used under this caption "Description of Guarantee," all
references to "Downey" mean Downey Financial Corp. excluding, unless otherwise
expressly stated or the context otherwise requires, its subsidiaries.
General
Downey will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent described below, the Guarantee Payments, as
defined below, to the holders of the capital securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the trust may
have or assert other than the defense of payment. The following payments with
respect to the capital securities, to the extent not paid by or on behalf of
the trust (the "Guarantee Payments"), will be guaranteed by Downey under the
Guarantee Agreement:
. any accrued and unpaid Distributions required to be paid on the capital
securities, to the extent that the trust has funds on hand available
therefor at that time;
. the Redemption Price with respect to any capital securities called for
redemption, to the extent that the trust has funds on hand available
therefor at that time; and
. upon a voluntary or involuntary dissolution, winding up or liquidation
of the trust (unless the junior subordinated debentures are distributed
to the holders of the capital securities), the lesser of (a) the
Liquidation Distribution and (b) the amount of assets of the trust
remaining available for distribution to holders of the capital
securities after satisfaction of liabilities to creditors of the trust
as required by applicable law.
Downey's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by Downey to the holders of the capital
securities or by causing the trust to pay those amounts to the holders of the
capital securities.
Downey's guarantee (the "Guarantee") under the Guarantee Agreement will be
an irrevocable guarantee on a subordinated basis of the trust's obligations
under the capital securities, but will apply only to the extent the trust has
funds sufficient to make those payments, and is not a guarantee of collection.
If Downey does not make payments on the junior subordinated debentures held
by the trust, the trust will not be able to pay amounts due on the capital
securities and will not have funds available to pay amounts due on the capital
securities. The Guarantee Agreement does not limit the incurrence or issuance
of other secured or unsecured debt of Downey, including Senior and
Subordinated Debt.
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of Downey and will
rank subordinate and junior in right of payment to all Senior and Subordinated
Debt in the same manner as the junior subordinated debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
For example, the guaranteed party may institute a legal proceeding directly
against Downey to enforce its rights under the Guarantee
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Agreement without first instituting a legal proceeding against any other
person or entity. The Guarantee will be held by the Guarantee Trustee for the
benefit of the holders of the capital securities. The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent
not paid by the trust or upon distribution to the holders of the capital
securities of the junior subordinated debentures.
Amendments and Assignment
Except with respect to any changes which do not adversely affect the rights
of holders of the capital securities in any material respect, in which case no
vote will be required, the Guarantee Agreement may not be amended without the
prior approval of the holders of not less than a majority of the aggregate
Liquidation Amount of the outstanding capital securities. All guarantees and
agreements contained in the Guarantee Agreement shall bind the successors,
assigns, receivers, trustees and representatives of Downey and shall inure to
the benefit of the holders of the capital securities then outstanding.
Events of Default
An event of default under the Guarantee Agreement will occur upon the
failure of Downey to perform any of its payment obligations thereunder, or to
perform any of its non-payment obligations thereunder if the default remains
uncured for 90 days after Downey receives notice of the default. The foregoing
notice and cure conditions do not apply, however, with respect to Downey's
default in payment of any guarantee payment. The holders of not less than a
majority in aggregate Liquidation Amount of the outstanding capital securities
will 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 the
Guarantee Agreement or to direct the exercise of any trust or power conferred
upon the Guarantee Trustee under the Guarantee Agreement. Any holder of the
capital securities may institute a legal proceeding directly against Downey to
enforce its rights under the Guarantee Agreement without first instituting a
legal proceeding against the trust, the Guarantee Trustee or any other person
or entity.
Downey, as guarantor, will be required to file annually with the Guarantee
Trustee a certificate as to whether or not Downey is in compliance with all
the conditions and covenants applicable to it under the Guarantee Agreement.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of a
default by Downey in performance of its obligations under the Guarantee
Agreement, undertakes to perform only those duties as are specifically
provided in the Guarantee Agreement and, after default with respect to the
Guarantee Agreement, must exercise the same degree of care and skill as a
prudent person would exercise or use in the conduct of his or her own affairs.
Except as discussed in this paragraph, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee
Agreement at the request of any holder of the capital securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
it might incur.
Termination of the Guarantee Agreement
The Guarantee Agreement will terminate and be of no further force and effect
upon full payment of the Redemption Price of the capital securities, upon full
payment of the amounts payable upon liquidation of the trust or upon
distribution of junior subordinated debentures to the holders of the capital
securities upon the dissolution of the trust. The Guarantee Agreement will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the capital securities must restore payment of any sums
paid under the capital securities or the Guarantee Agreement.
Governing Law
The Guarantee Agreement will be governed by and construed under the laws of
the State of New York.
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RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the capital securities,
to the extent the trust has funds available for the payment of those amounts,
will be irrevocably guaranteed by Downey on a subordinated basis as and to the
extent described under "Description of Guarantee." Taken together, Downey's
obligations under the junior subordinated debentures, the Indenture, the Trust
Agreement, and the Guarantee Agreement will provide, in the aggregate, a full,
irrevocable and unconditional guarantee on a subordinated basis of payments of
distributions and other amounts due on the capital securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes the same guarantee. It is only the combined
operation of those documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the trust's obligations under the
capital securities. If and to the extent that Downey does not make payments on
the junior subordinated debentures, the trust will not pay Distributions or
other amounts due holders of the capital securities. Neither the Guarantee
Agreement nor any of the other documents described above covers payment of
Distributions or other amounts payable on the capital securities when the
trust does not have sufficient funds to pay those amounts. In that event, the
remedy of a holder of the capital securities is to institute a legal
proceeding directly against Downey for enforcement of payment. The obligations
of Downey under the Guarantee Agreement will be subordinate and junior in
right of payment to all Senior and Subordinated Debt to the same extent as the
junior subordinated debentures.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
junior subordinated debentures, those payments will be sufficient to cover
Distributions and other payments due on the capital securities, primarily
because:
. the aggregate principal amount of the junior subordinated debentures
will be equal to the aggregate Liquidation Amount of the capital
securities and common securities;
. the interest rate and interest and other payment dates on the junior
subordinated debentures will match the distribution rate and
Distribution Dates and other payment dates for the capital securities;
. Downey shall pay for all and any costs, expenses and liabilities of the
trust except the trust's payment obligations to holders of the capital
securities; and
. the Trust Agreement further provides that the trust will not engage in
any activity that is not consistent with its limited purposes.
In connection with any Direct Action, Downey will be subrogated to the
rights of any holder of Trust Securities to the extent of any payment made by
Downey to any holder of the Trust Securities in the Direct Action.
Enforcement Rights of Holders of the Capital Securities under the Guarantee
Holders of capital securities may institute a legal proceeding directly
against Downey to enforce their rights under the Guarantee Agreement without
first instituting a legal proceeding against the Guarantee Trustee, the trust
or any other person or entity.
Downey's default or the event of default under any Senior or Subordinated
Debt would not constitute a default or Debenture Event of Default with respect
to the junior subordinated debentures. However, in the event of payment
defaults under, or acceleration of any Senior or Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the junior subordinated debentures until the Senior and
Subordinated Debt has been paid in full or any payment default thereunder has
been cured or waived or the acceleration has been rescinded.
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Limited Purpose of the Trust
The capital securities evidence beneficial interests in the assets of the
trust, and the trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds in junior subordinated debentures. A
principal difference between the rights of a holder of the capital securities
and the rights of a holder of a junior subordinated debenture is that a holder
of a junior subordinated debenture will be entitled to receive from Downey the
principal of and interest accrued on junior subordinated debentures held,
while a holder of the capital securities will be entitled to receive
Distributions from the trust.
Rights upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the trust, other than a dissolution involving the distribution of the junior
subordinated debentures to the holders of the capital securities, the holders
of the capital securities will be entitled to receive, out of assets held by
the trust, the Liquidation Distribution in cash, as discussed under
"Description of the Capital Securities--Liquidation Distribution Upon
Dissolution." Upon any voluntary or involuntary liquidation or bankruptcy of
Downey, the Property Trustee, as holder of the junior subordinated debentures,
would be a subordinated creditor of Downey, subordinated in right of payment
to all Senior and Subordinated Debt as described in the Indenture, but
entitled to receive payment in full of principal and interest, before any
stockholders of Downey receive payments or distributions. Since Downey is the
guarantor under the Guarantee Agreement and will pay for all costs, expenses
and liabilities of the trust, other than the trust's payment obligations to
the holders of its capital securities, the position of a holder of the capital
securities and the position of a holder of junior subordinated debentures
relative to other creditors and to shareholders of Downey in the event of
liquidation or bankruptcy of Downey are expected to be substantially the same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the material United States federal income tax
consequences associated with the purchase, ownership and disposition of
capital securities held as capital assets by a holder who purchased original
capital securities upon initial issuance. We do not purport to deal with all
aspects of federal income taxation that might be relevant to particular
holders in light of their personal investment circumstances or status, nor do
we discuss the federal income tax consequences to some types of holders
subject to special treatment under the federal income tax laws. These holders
include banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-
exempt investors, United States Alien Holders engaged in a U.S. trade or
business or persons that will hold the capital securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of capital
securities. Further, we do not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or
of any foreign government that may be applicable to the capital securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations thereunder and the administrative and judicial
interpretations of the Code and the Treasury Regulations, as of the date
hereof, all of which might change, possibly on a retroactive basis. This
discussion is based upon opinions issued by Manatt, Phelps & Phillips, LLP
("Tax Counsel"). An opinion of Tax Counsel is not binding on the IRS or the
courts. No rulings have been or are expected to be sought from the IRS with
respect to any of the transactions described herein and we cannot assure that
the IRS will not take contrary positions. Moreover, we cannot assure that the
IRS will not challenge the opinions expressed herein or, if challenged, that
the IRS would not be successful. Tax Counsel has reviewed this summary and is
of the opinion that, to the extent that it constitutes matters of law or
purports to describe particular provisions of the federal income tax laws, it
is a correct summary in all material respects of the matters discussed herein.
Classification of the Junior Subordinated Debentures
We intend to take the position that the junior subordinated debentures will
be classified for federal income tax purposes as indebtedness of Downey. Tax
counsel's opinion supports this position. Downey, the trust and the holders of
the capital securities, by acceptance of a beneficial interest in a capital
security, will agree to treat the junior subordinated debentures as
indebtedness of Downey and the capital securities as evidence of a beneficial
ownership interest in the junior subordinated debentures for all federal
income tax purposes. We cannot assure, however, that the IRS will not
challenge this position or, if challenged, that the IRS will not be
successful. The remainder of this discussion assumes that the junior
subordinated debentures will be classified as indebtedness of Downey for
federal income tax purposes.
Enron Corporation filed a petition in the United States Tax Court (Docket
No. 6149-98) challenging the IRS' proposed disallowance of the deduction of
interest expense on securities Enron Corporation issued in 1993 and 1994 that
are similar to, although different in a number of respects from, the junior
subordinated debentures. It has been reported to Tax Counsel that the IRS is
not currently pursuing this issue in the pending Enron case.
More recently, the IRS issued a technical advice memorandum (PLR 199910046),
that addresses whether instruments that are similar in some respects to the
junior subordinated debentures constituted debt or equity for federal income
tax purposes. The IRS concluded that the instruments constituted debt. A
technical advice memorandum may not be used or cited as a legal precedent, but
it does provide some indication of the views of the IRS National Office on the
issues addressed therein. While PLR 199910046 is supportive of Tax Counsel's
opinion and our intended reporting position referred to above, the
characterization action of instruments like the junior subordinated debentures
continues to be an area of some controversy.
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Classification of the Trust
Tax Counsel has rendered its opinion generally to the effect that, under
current law and assuming full compliance with the terms of the Trust Agreement
and the Indenture, and other documents, and based on specific facts and
assumptions contained in the opinion, the trust will be classified for federal
income tax purposes as a grantor trust and not as an association taxable as a
corporation. Accordingly, for federal income tax purposes, each holder of
capital securities generally will be considered the owner of an undivided
interest in the junior subordinated debentures, and each holder will be
required to include in its gross income any interest, or original issue
discount ("OID") accrued, with respect to its allocable share of those junior
subordinated debentures.
Interest Income and Original Issue Discount
Under recently issued Treasury Regulations (the "Treasury Regulations")
applicable to debt instruments issued on or after August 13, 1996, a "remote"
contingency that stated interest will not be timely paid will be ignored in
determining whether a debt instrument is issued with OID. Downey believes that
the likelihood of its exercising its option to defer payments of interest is
"remote" since exercising that option would, among other things, prevent
Downey from declaring dividends on any class of its equity securities.
Accordingly, we intend to take the position that the junior subordinated
debentures will not be considered to be issued with OID and, accordingly,
stated interest on the junior subordinated debentures generally will be
taxable to a holder as ordinary income at the time it is paid or accrued
according to the holder's method of tax accounting. Tax Counsel's opinion
supports this proposed position. The IRS has not addressed the Treasury
Regulations in any rulings or other interpretations, and it is possible that
the IRS could take a position contrary to the interpretation described herein.
Under the Treasury Regulations, if Downey were to exercise its option to
defer payments of interest, the junior subordinated debentures would at that
time be treated as issued with OID, and all stated interest on the junior
subordinated debentures would thereafter be treated as OID as long as the
junior subordinated debentures remain outstanding. In this event, all of a
holder's taxable interest income with respect to the junior subordinated
debentures would thereafter be accounted for on an economic accrual basis
regardless of the holder's method of tax accounting, and actual distributions
of stated interest would not be reported as taxable income. Consequently, a
holder of capital securities would be required to include in gross income OID
even though Downey would not make actual cash payments during an Extension
Period. Moreover, under the Treasury Regulations, if the option to defer the
payment of interest was determined not to be "remote," the junior subordinated
debentures would be treated as having been originally issued with OID. In this
event, all of a holder's taxable interest income with respect to the junior
subordinated debentures would be accounted for on an economic accrual basis
regardless of the holder's method of tax accounting, and actual distributions
of stated interest would not be reported as taxable income.
Because income on the capital securities will constitute interest or OID,
corporate holders of the capital securities will not be entitled to a
dividends-received deduction with respect to any income recognized with
respect to the capital securities.
Distribution of Junior Subordinated Debentures to Holders of Capital
Securities
Downey will have the right at any time to liquidate the trust and cause the
junior subordinated debentures to be distributed to the holders of the capital
securities under specific circumstances. Under current law, this distribution,
for federal income tax purposes, would be treated as a nontaxable event to
each holder, and each holder would receive an aggregate tax basis in the
junior subordinated debentures equal to the holder's aggregate tax basis in
its capital securities. A holder's holding period in the junior subordinated
debentures so received in liquidation of the trust would include the period
during which the holder held the capital securities. If, however, the trust
were characterized for federal income tax purposes as an association taxable
as a corporation at the time of its dissolution, the distribution of the
junior subordinated debentures may constitute a taxable event to the trust and
to holders of capital securities and a holder's holding period in junior
subordinated debentures would begin on the date the holder received the junior
subordinated debentures.
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Under specific circumstances discussed under "Description of the Capital
Securities," the junior subordinated debentures may be redeemed for cash and
the proceeds of the redemption distributed to holders in redemption of their
capital securities. Under current law, a redemption would, for federal income
tax purposes, constitute a taxable disposition of the redeemed capital
securities, and a holder would recognize a gain or loss as if he had sold the
redeemed capital securities for cash. See "--Sales or Redemptions of Capital
Securities."
Sales or Redemptions of Capital Securities
A holder that sells capital securities, including a redemption of the
capital securities either on the Stated Maturity Date or upon an optional
redemption of the junior subordinated debentures by Downey, will recognize
gain or loss equal to the difference between its adjusted tax basis in capital
securities and the amount realized on the sale of capital securities, other
than with respect to accrued and unpaid interest which has not yet been
included in income, which will be treated as ordinary income. A holder's
adjusted tax basis in the capital securities generally will be its initial
purchase price increased by OID, if any, previously includable in the holder's
gross income to the date of disposition and decreased by payments, if any,
received on the capital securities in respect of OID. This gain or loss
generally will be a capital gain or loss and generally will be a long-term
capital gain or loss if the capital securities have been held for more than
one year. For individuals the maximum tax on long term capital gains on most
assets is 20% for amounts properly taken into account after January 1, 1998.
The capital securities may trade at a price that does not accurately reflect
the value of accrued but unpaid interest with respect to the underlying junior
subordinated debentures. A holder who uses the accrual method of accounting
for tax purposes--and a cash method holder, if the junior subordinated
debentures are deemed to have been issued with OID--who disposes of his
capital securities between record dates for payments of distributions thereon
will be required to include accrued but unpaid interest on the junior
subordinated debentures through the date of disposition in income as ordinary
income--i.e., interest or, if applicable, OID--and to add this amount to his
adjusted tax basis in his pro rata share of the underlying junior subordinated
debentures deemed disposed of. To the extent the selling price is less than
the holder's adjusted tax basis, which will include all accrued but unpaid
interest, a holder will recognize a capital loss. Except for limited
exceptions, capital losses cannot be applied to offset ordinary income for
federal income tax purposes.
Possible Tax Law Changes Affecting the Capital Securities
In the recent past, President Clinton proposed legislation that would, among
other things, have denied an issuer a deduction for United States federal
income tax purposes for the payment of interest on instruments with
characteristics similar to the junior subordinated debentures. This
legislation was not enacted. We cannot assure, however, that legislation
enacted after the date hereof would not adversely affect the tax treatment of
the junior subordinated debentures, resulting in a Tax Event. The occurrence
of a Tax Event may result in the redemption of the junior subordinated
debentures for cash, in which event the holders of the capital securities
would receive cash in redemption of their capital securities.
United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S.
Holder for federal income tax purposes.
A "U.S. Holder" is a holder of capital securities who or which is:
. a citizen or individual resident (or is treated as a citizen or
individual resident) of the United States for federal income tax
purposes;
. a corporation or partnership created or organized in or under the laws
of the United States, any state of the United States or the District of
Columbia; or
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. an estate the income of which is includable in its gross income for
federal income tax purposes without regard to its source. A trust is a
U.S. Holder if, and only if:
. a court within the United States is able to exercise primary
supervision over the administration of the trust; and
. one or more United States trustees have the authority to control all
substantial decisions of the trust.
Under present federal income tax laws:
. payments by the trust or any of its paying agents to any holder of a
capital security who or which is a United States Alien Holder will
not be subject to federal withholding tax; provided that:
. the beneficial owner of the capital security does not actually or
constructively own 10% or more of the total combined voting power
of all classes of stock of Downey entitled to vote;
. the beneficial owner of the capital security is not a controlled
foreign corporation that is related to Downey through stock
ownership; and
. either:
. the beneficial owner of the capital security certifies to the
trust or its agent, under penalties of perjury, that it is not
a U.S. holder and provides its name and address; or
. a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution"),
and holds the capital security in such capacity, certifies to
the trust or its agent, under penalties of perjury, that such
statement has been received from the beneficial owner by it or
by a Financial Institution between it and the beneficial owner
and furnishes the trust or its agent with a copy of the
statement; and
. a United States Alien Holder of a capital security will not be
subject to federal withholding tax on any gain realized upon the
sale or other disposition of a capital security.
The IRS recently issued regulations which will be effective for payments
made after December 31, 2000, making modifications to the certification
procedures applicable to United States Alien Holders. In general, these
regulations unify certification procedures and forms and clarify and modify
reliance standards. A United States Alien Holder should consult with its own
advisor regarding the effect of the new Treasury Regulations.
As discussed above, changes in legislation or other events affecting the
federal income tax treatment of the junior subordinated debentures are
possible, and could adversely affect the ability of Downey to deduct the
interest payable on the junior subordinated debentures. Moreover, legislation
or other events could adversely affect United States Alien Holders by
characterizing income derived from the junior subordinated debentures as
dividends, generally subject to a 30% income tax, on a withholding basis, when
paid to a United States Alien Holder, rather than as interest which, as
discussed above, is generally exempt from income tax in the hands of a United
States Alien Holder.
Information Reporting to Holders
Generally, income on the capital securities will be reported to holders on
Form 1099, which forms should be mailed to holders of capital securities by
January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the capital securities may
be subject to a "backup" withholding tax of 31% unless the holder complies
with specific identification requirements. Any withheld amounts will be
allowed as a credit against the holder's federal income tax, provided the
holder provides the required information to the IRS.
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THE UNITED STATES FEDERAL INCOME TAX DISCUSSION ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED
STATES FEDERAL OR OTHER TAX LAWS.
147
<PAGE>
CERTAIN ERISA CONSIDERATIONS
Downey, which is the obligor with respect to the junior subordinated
debentures held by the trust, the Property Trustee and their affiliates may be
considered "parties in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or "disqualified persons,"
within the meaning of Section 4975 of the Code, with respect to many
individual retirement accounts that are subject to Section 408 of the Code or
employee benefit plans that are subject to ERISA or to Section 4975 of the
Code (collectively as "Plans"). Any purchaser proposing to acquire capital
securities with assets of any Plan should consult with its counsel. The
purchase and/or holding of capital securities by a Plan that is subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of Section 4975 of the Code, including individual retirement
arrangements and other Plans described in Section 4975(e)(1) of the Code, and
with respect to which Downey, the Property Trustee or any affiliate is a
service provider or otherwise is a party in interest or a disqualified person
may constitute or result in a prohibited transaction under ERISA or Section
4975 of the Code, unless the acquisition of the capital securities fall within
an applicable exemption, like Prohibited Transaction Class Exemption ("PTCE")
84-14, an exemption for specific transactions determined by an independent
qualified professional asset manager, PTCE 91-38, an exemption for specific
transactions involving bank collective investment funds, PTCE 90-1, an
exemption for specific transactions involving insurance company pooled
separate accounts, PTCE 95-60, an exemption for specific transactions
involving specific insurance company general accounts or PTCE 96-23, an
exemption for specific transactions determined by an in-house asset manager.
In addition, a Plan fiduciary considering the purchase of capital securities
should be aware that, under regulations issued by the Department of Labor
concerning what constitutes the assets of a Plan (the "Plan Assets
Regulation"), the assets of the trust may be considered "plan assets" for
ERISA purposes if Plans acquire the capital securities, unless an exception
under those regulations applies. It is anticipated that the capital securities
will qualify for the exception for "publicly-offered securities" because they
will be sold in an offering registered under the Securities Act and will be
registered under the Securities Exchange Act within the period required under
the Plan Assets Regulation; it is expected that they will be held by 100 or
more investors at the conclusion of the offering; and Downey believes that the
capital securities will be "freely transferable." If the capital securities
qualify for this exception, ownership of the capital securities by Plans would
not cause the assets of the trust to constitute plan assets.
The discussion herein of ERISA is general in nature and is not intended to
be all inclusive. Any fiduciary of a Plan, governmental plan or church plan
considering an investment in the capital securities should consult with its
legal advisors regarding the consequence of an investment.
148
<PAGE>
UNDERWRITERS
Under the terms and conditions of an underwriting agreement dated the date
of this prospectus, the underwriters named below, for whom Morgan Stanley &
Co. Incorporated is acting as representative, have severally agreed to
purchase, and the trust has agreed to sell to them, severally, the respective
number of capital securities indicated below.
<TABLE>
<CAPTION>
Number of
Capital
Name Securities
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...................................
---------
Total............................................................. 4,000,000
=========
</TABLE>
The underwriters are offering the capital securities subject to their
acceptance of the capital securities from the trust and subject to prior sale.
The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the capital securities are
subject to conditions, including the delivery of legal opinions by their
counsel. The underwriters are obligated to purchase all the capital securities
if any capital securities are purchased.
The underwriters initially propose to offer part of the capital securities
directly to the public at the public offering price appearing on the cover
page of this prospectus. The underwriters may also offer the capital
securities to securities dealers at a price that represents a concession not
in excess of $. per capital security. Any underwriter may allow, and
dealers may reallow, a concession not in excess of $. per capital security
to other securities dealers. After the initial offering of the capital
securities, the offering price and other selling terms may from time to time
be changed by the representatives.
Because the proceeds from the sale of the capital securities will be used to
purchase the junior subordinated debentures issued by Downey, the underwriting
agreement provides that Downey will pay to the underwriters as compensation
for their services $. per capital security or $ in the aggregate.
Downey's offering expenses, not including underwriting discounts and
commissions, are estimated to be $ .
Downey and the trust have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, they will
not, during the period beginning on the date of the underwriting agreement and
continuing through and including the date which is 30 days after the date of
the underwriting agreement:
. offer, pledge, sell, contact to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any debt securities or preferred stock of Downey
or any securities of the trust or any similar trust or other entity
affiliated with Downey, or any securities convertible into or
exchangeable or exercisable for any debt securities or preferred stock
of Downey or any securities of the trust or any similar trust or other
entity affiliated with Downey; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of any
preferred stock or debt securities of Downey or any securities of the
trust or any similar trust or other entity affiliated with Downey,
whether any transaction described above is to be settled by delivery of
securities of Downey, the trust or any similar trust or other entity, any
other securities, in cash or otherwise, except for the issuance of the capital
securities to the underwriters, the issuance of the common securities to
Downey or the issuance of the junior subordinated debentures to the trust in
connection with this offering.
149
<PAGE>
Before this offering, there has been no public market for the capital
securities. The trust has applied to list the capital securities on the New
York Stock Exchange. To meet one of the requirements for listing the capital
securities on the New York Stock Exchange, the underwriters intend to sell
capital securities to a minimum of 400 beneficial holders in lots of 100
capital securities or more. If the listing is approved, trading of the capital
securities on the New York Stock Exchange is expected to begin within a 30-day
period after the date of this prospectus. The representatives have advised
Downey that they presently intend to make a market in the capital securities
before the commencement of trading on the New York Stock Exchange. The
representative is not obligated to make a market in the capital securities,
however, and may discontinue market making activities at any time without
notice. No assurance can be given as to the liquidity of any trading market
for the capital securities.
Downey, the trust and the underwriters have agreed to indemnify each other
against some liabilities, including liabilities under the Securities Act.
To facilitate the offering of the capital securities, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the capital securities. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the capital
securities for their own account. In addition, to cover over-allotments or to
stabilize the price of the capital securities, the underwriters may bid for,
and purchase, capital securities in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the capital securities in the offering, if the
syndicate repurchases previously distributed capital securities in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market
price of the capital securities above independent market levels. The
underwriters are not required to engage in these activities, and may end any
of these activities at any time.
LEGAL MATTERS
Matters of Delaware law relating to the validity of the capital securities,
the enforceability of the Trust Agreement and the formation of the trust will
be passed upon by Richards, Layton & Finger, P.A., Wilmington, Delaware,
special counsel to Downey and the trust. The validity of the Guarantee
Agreement, the Indenture and the junior subordinated debentures will be passed
upon for Downey by Manatt, Phelps & Phillips, LLP, Menlo Park, California,
counsel to Downey. Brown & Wood LLP, San Francisco, California will act as
counsel to the underwriters. Manatt, Phelps & Phillips, LLP and Brown & Wood
LLP will rely on the opinions of Richards, Layton & Finger, P.A. as to matters
of Delaware law. Matters relating to United States federal income tax
considerations will be passed upon for Downey by Manatt, Phelps & Phillips,
LLP.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1997, and
for each of the years in the three-year period ended December 31, 1998 have
been incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG LLP, independent auditors, incorporated
herein by reference, and upon the authority of said firm as experts in
accounting and auditing.
150
<PAGE>
[BLANK BACK COVER]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...................... $[ ]
NASD fee................................................................. [ ]
New York Stock Exchange fees............................................. [ ]
Trustees' fees and expenses.............................................. [ ]
Legal fees and expenses.................................................. [ ]
Blue Sky fees and expenses............................................... [ ]
Accounting fees and expenses............................................. [ ]
Printing expenses........................................................ [ ]
Miscellaneous expenses................................................... [ ]
-----
Total.................................................................. [ ]
=====
</TABLE>
All of the above items except the registration fee and NASD fee are
estimated.
Item 15. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") contains
detailed provisions on indemnification of directors and officers against
expenses, judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with legal proceedings. Section 102(a)(7) of
the DGCL permits a provision in the certificate of incorporation of each
corporation organized thereunder, like Downey, eliminating or limiting, with
certain exceptions, the personal liability of a director of the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
Our bylaws provide that we shall indemnify and hold harmless to the fullest
extent authorized by Delaware law each person who is or was a director or
officer of Downey against all expense, liability and loss, including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement, reasonably incurred or suffered by the
director or officer. The indemnification shall continue as to a person who has
ceased to be a director or officer; provided, however, that, except as
otherwise provided in our bylaws, we shall indemnify any person seeking
indemnification in connection with a proceeding initiated by that person only
if our board of directors authorized the proceeding. The right to
indemnification conferred in our bylaws is a contract right and includes the
right to have us pay the expenses incurred in defending the proceeding in
advance of its final disposition. However, if Delaware law requires the
payment of expenses incurred in advance of the final disposition of a
proceeding, we shall make payment only upon delivery to us of an undertaking,
by or on behalf of the director or officer, to repay all amounts so advanced
if it shall ultimately be determined that the director or officer is not
entitled to be indemnified under the bylaws or otherwise. Our bylaws create a
right to indemnification whether or not the proceeding to which the
indemnification relates arose in whole or in part before adoption of our
bylaws.
The rights of indemnification provided in our bylaws are not exclusive of
any other rights which may be available under Delaware law, any insurance or
other agreement, by vote of shareholders or disinterested directors or
otherwise. In addition, our bylaws authorize us to maintain insurance on
behalf of any person who is or was a director or officer of Downey or with
another entity at our request, whether or not we would have the power to
provide indemnification to the person. We currently maintain directors' and
officers' liability insurance. The indemnification provisions may, in some
instances, cover acts of directors and officers that may not be covered by
insurance.
These provisions require indemnification even in cases in which the conduct
giving rise to the request for indemnification may have been negligent,
grossly negligent or reckless. Although equitable remedies may be
II-1
<PAGE>
available in some instances, these indemnification provisions cover any
expenses or damages resulting from these suits.
Our certificate of incorporation provides for the elimination, except in
limited circumstances, of the liability of our directors for monetary damages
for breach of fiduciary duty to Downey and its shareholders. Under our
certificate of incorporation, a director shall not be personally liable to
Downey or its shareholders for monetary damages for breach of fiduciary duty
as a director, except for liability:
. for any breach of the director's duty of loyalty to Downey or its
shareholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock purchase or
redemption; or
. for any transaction from which the director derived an improper personal
benefit.
The underwriting agreement with respect to the offering of securities
registered hereunder will also provide for indemnification of Downey and its
officers and directors who signed this registration statement by the
underwriters, against certain liabilities including liabilities under the
Securities Act of 1933.
The Amended and Restated Trust Agreement also provides that we shall
indemnify the Property Trustee, the Delaware Trustee, the Administrative
Trustee, or any of their affiliates, or any officers, directors, shareholders,
employees, representatives, or agents of the Property Trustee, the Delaware
Trustee and the Administrative Trustee, each, a "Fiduciary Indemnified
Person," for, and hold each Fiduciary Indemnified Person harmless, to the
fullest extent permitted by applicable law, against, any loss, damage,
liability, tax, penalty, expense or claim of any kind or nature whatsoever a
Fiduciary Indemnified Person incurred by reason of the creation, operation or
dissolution of the trust or any act or omission the Fiduciary Indemnified
Person performed or omitted in good faith on behalf of the trust and in a
manner the Indemnified Person reasonably believed to be within the scope of
authority conferred on the Fiduciary Indemnified Person by the Amended and
Restated Trust Agreement. However, no Fiduciary Indemnified Person shall be
entitled to be indemnified in respect of any loss, damage or claim the
Fiduciary Indemnified Person incurred by reason of gross negligence, or
ordinary negligence in the case of the Property Trustee, bad faith or willful
misconduct with respect to the acts or omissions.
Item 16. Exhibits
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Junior Subordinated Indenture between Downey Financial Corp. and
Wilmington Trust Company, as Trustee (includes Form of Junior Subordinated
Debenture).
4.2 Certificate of Trust of Downey Financial Capital I.
4.3 Trust Agreement of Downey Financial Capital I dated as of May 25, 1999.
4.4 Form of Amended and Restated Trust Agreement of Downey Financial Capital
I.
4.5 Form of Capital Securities Certificate of Downey Financial Capital I.
4.6 Form of Capital Securities Guarantee Agreement.
5.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP.
5.2 Opinion and Consent of Richards, Layton & Finger, P.A.
8.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP, counsel to Downey
Financial Corp., as to certain federal income tax matters.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of KPMG LLP.
23.2 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1
above).
23.3 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2
above).
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 8.1
above).
24.1 A power of attorney is set forth on the signature page of the
Registration Statement.
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee under the Subordinated Indenture.
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee under the Amended and Restated Trust Agreement.
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee under the Capital Securities Guarantee Agreement.
</TABLE>
Item 17. Undertakings
The undersigned Registrants hereby undertake as follows:
(a) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of Downey's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrants pursuant to the foregoing
provisions, or otherwise, the Registrants have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer, trustee or controlling person in connection with
the securities being registered, the Registrants will, unless in the
opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(c) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of a registration statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, State of California, on June 2,
1999.
Downey Financial Corp.
By: /s/ Daniel D. Rosentha___________l
Daniel D. Rosenthal
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Downey Financial Corp., do
hereby severally constitute and appoint Daniel D. Rosenthal and Thomas E.
Prince and each of them singly, our true and lawful attorneys and agents, to
do any and all things and acts in our names in the capacities indicated below
and to execute any all instruments for us and in our names in the capacities
indicated below which said persons, or either of them, may deem necessary or
advisable to enable Downey Financial Corp. to comply with the Securities Act
of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the offering
contemplated by this Registration Statement on Form S-3, including
specifically, but not limited to, power and authority to sign for us or any of
us in our names in the capacities indicated below and any and all amendments,
including post-effective amendments, to this Registration Statement and any
Rule 462(b) registration statement or amendments thereto; and we hereby ratify
and confirm all that said persons, or either of them, shall do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on June 2, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Daniel D. Rosenthal President, Chief Executive Officer and Director
______________________________________ (Principal Executive Officer)
Daniel D. Rosenthal
/s/ Thomas E. Prince Executive Vice President and Chief Financial
____________________________________ Officer (Principal Financial and Accounting
Thomas E. Prince Officer)
/s/ Michael Abrahams Director
______________________________________
Michael Abrahams
/s/ Paul Kouri Director
______________________________________
Paul Kouri
/s/ Maurice McAlister Director
______________________________________
Maurice McAlister
/s/ Brent McQuarrie Director
______________________________________
Brent McQuarrie
/s/ Cheryl E. Olson Director
______________________________________
Cheryl E. Olson
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
/s/ Lester C. Smull Director
______________________________________
Lester C. Smull
/s/ Sam Yellen Director
______________________________________
Sam Yellen
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, State of California, on June 2,
1999.
Downey Financial Capital Trust I
/s/ Daniel D. Rosenthal
By: _________________________________
Daniel D. Rosenthal, Trustee
/s/ Thomas E. Prince
By: _________________________________
Thomas E. Prince, Trustee
/s/ Paul G. Woollatt
By: _________________________________
Paul G. Woollatt, Trustee
II-5
<PAGE>
Index to Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Junior Subordinated Indenture between Downey Financial Corp. and
Wilmington Trust Company, as Trustee (includes Form of Junior
Subordinated Debenture).
4.2 Certificate of Trust of Downey Financial Capital I.
4.3 Trust Agreement of Downey Financial Capital I dated as of May 25, 1999.
4.4 Form of Amended and Restated Trust Agreement of Downey Financial Capital
I.
4.5 Form of Capital Securities Certificate of Downey Financial Capital I.
4.6 Form of Capital Securities Guarantee Agreement.
5.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP.
5.2 Opinion and Consent of Richards, Layton & Finger, P.A.
8.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP, counsel to Downey
Financial Corp., as to certain federal income tax matters.
12.1 Statement of Computation of Ratio to Earnings to Fixed Charges.
23.1 Consent of KPMG LLP.
23.2 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1
above).
23.3 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2
above).
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 8.1
above).
24.1 A power of attorney is set forth on the signature page of the
Registration Statement.
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee under the Subordinated Indenture.
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee under the Amended and Restated Trust Agreement.
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee under the Capital Securities Guarantee Agreement.
</TABLE>
<PAGE>
EXHIBIT 1.1
DOWNEY FINANCIAL CAPITAL TRUST I
UNDERWRITING AGREEMENT
[ ]% CAPITAL SECURITIES
[ ], 1999
Downey Financial Corp.
3501 Jamboree Road
Newport Beach, California 92660
Ladies and Gentlemen:
We (the "Representatives") are acting on behalf of the underwriters
(including ourselves) named below (such underwriters being herein called the
"Underwriters"), and we understand that Downey Financial Capital Trust I (the
"Trust"), a statutory business trust created under the Business Trust Act of the
State of Delaware (Chapter 38, Title 12, of the Delaware Code, 12 Del. C. (S)(S)
3801 et seq.) (the "Delaware Act"), proposes to issue and sell to the several
Underwriters [ ],000,000 of its [ ]% Capital Securities (liquidation amount of
$25 per capital security) (the "Capital Securities").
It is understood that, contemporaneously with the closing of the sale of
the Capital Securities to the Underwriters contemplated hereby, (i) Daniel D.
Rosenthal, Thomas E. Prince and Paul G. Woolla (the "Administrative Trustees"),
Wilmington Trust Company, as property trustee (the "Property Trustee"), and
Wilmington Trust Company, as Delaware trustee (the "Delaware Trustee" and,
together with the Regular Trustees and the Property Trustee, the "Issuer
Trustees"), and Downey Financial Corp., a Delaware corporation (the "Company"),
shall enter into an Amended and Restated Declaration of Trust (the "Declaration
of Trust") to be dated as of [ ], 1999, in substantially the form attached as
Exhibit 4.4 to the Registration Statement, pursuant to which the Trust shall (x)
issue and sell the Capital Securities to the Underwriters and (y) issue and sell
to the Company [ ] of its [ ]% Common Securities (the "Common Securities" and,
together with the Capital Securities the "Trust Securities"), in each case with
such rights and obligations as shall be set forth in such Declaration of Trust,
(ii) the Company and Wilmington Trust Company, as trustee (the "Indenture
Trustee"), shall enter into an indenture to be dated as of [ ], 1999 (the
"Indenture"), in substantially the form attached as Exhibit 4.1 to the
Registration Statement, providing for the issuance of $[ ] aggregate principal
amount of the Company's [ ]% Junior Subordinated Deferrable Interest Debentures
due 2029 (the "Debentures"), (iii) the
<PAGE>
Company shall sell such Debentures to the Trust and the Trust shall purchase
such Debentures with the proceeds of the sale of the Capital Securities to the
Underwriters and the proceeds of the sale of the Common Securities to the
Company, (iv) the Company and Wilmington Trust Company, as trustee (the
"Guarantee Trustee"), shall enter into a Guarantee Agreement to be dated as of
[ ], 1999 (the "Capital Securities Guarantee Agreement, in substantially the
form attached as Exhibit 4.6 to the Registration Statement, for the benefit of
holders from time to time of the Capital Securities, and (v) the Company shall
enter into a Common Securities Guarantee Agreement to be dated as of [ ], 1999
(the "Common Securities Guarantee Agreement" and, together with the Capital
Securities Guarantee Agreement, the "Guarantee Agreements") for the benefit of
holders from time to time of the Common Securities. The Common Securities will
be sold to the Company pursuant to a Common Securities Subscription Agreement
(the "Subscription Agreement") [to be] dated as of [ ], 1999 between the Company
and the Trust, and the Debentures will be sold to the Trust pursuant to a
Debenture Subscription Agreement (the "Debenture Subscription Agreement") to be
dated as of [ ], 1999 between the Company and the Trust. The Capital Securities
will be guaranteed by the Company, to the extent set forth in the Prospectus,
with respect to distributions and payments upon liquidation, redemption and
otherwise (the "Capital Securities Guarantee"), pursuant to the Capital
Securities Guarantee Agreement and will be entitled to the benefit of certain
back-up undertakings described in the Prospectus with respect to the Company 's
agreement to pay expenses of the Trust. The Common Securities will be guaranteed
by the Company, to the extent set forth in the Prospectus, with respect to
distributions and payments upon liquidation and redemption (the "Common
Securities Guarantee" and, together with the Capital Securities Guarantee, the
"Guarantees") pursuant to the Common Securities Guarantee Agreement.
On the basis of the representations and warranties, and subject to the
terms and conditions, set forth and incorporated by reference herein, the Trust
hereby agrees to sell to the several Underwriters, and each Underwriter agrees,
severally and not jointly, to purchase from the Trust, the respective number of
Capital Securities set forth opposite their names below, at a purchase price of
$25 per Capital Security (the "Purchase Price").
<TABLE>
<CAPTION>
Underwriter Number of
Firm Capital Securities
To Be Purchased
<S> <C>
Morgan Stanley & Co. Incorporated [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
-------
Total [ ]
=======
</TABLE>
2
<PAGE>
The Underwriters will pay for the Capital Securities in Federal or other
funds immediately available in New York City against delivery thereof for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Capital Securities to the Underwriters
duly paid by the Company, at the offices of Brown & Wood LLP, 555 California
Street, 50th Floor, San Francisco, California 94104 at 10:00 a.m. (New York City
time) on [ ], 1999, or at such other time on the same or such other date, not
later than [ ], 1999, as shall be designated in writing by the Representatives.
The time and date of such payment and delivery are hereinafter referred to as
the "Closing Date".
In view of the fact that the proceeds from the sale of the Capital
Securities will be invested by the Trust in the Debentures, the Company hereby
agrees to pay the several Underwriters as compensation (the "Underwriters'
Compensation") for their arranging for the investment therein of such proceeds $
[ ] per Capital Security purchased by the Underwriters on the Closing Date. The
Company agrees to pay the Underwriters' Compensation by wire transfer of Federal
or other funds immediately available in New York City to Morgan Stanley & Co.
Incorporated on the Closing Date,
3
<PAGE>
such payment to be made contemporaneously with the payment of the Purchase
Price by the several Underwriters.
The Capital Securities and the Debentures shall have the terms set forth in
the Prospectus, including the following:
<TABLE>
<S> <C>
Price to Public: $25 per Capital Security, plus accrued
distributions, if any, from [ ], 1999
Selling Concession: $.[ ] per Capital Security
Reallowance: $.[ ] per Capital Security
Form: Book-entry
Maturity Date of Debentures: [ ], 2029, subject to shortening of the maturity date
under certain circumstances as described in the
Prospectus to a date no earlier than [ ], 2004
Liquidation Amount: $25 per Capital Security, plus accrued and unpaid
distributions
Distributions: [ ]% per annum
Distribution Payment Dates: March 15, June 15, September 15 and December 15 of
each year, commencing September 15, 1999
Redemption of Debentures: The Debentures will be redeemable prior to maturity
at the option of the Company (i) on or after [ ], 2004
in whole at any time or in part from time to time and
(ii) prior to [ ], 2004 in whole (but not in part) at any
time within 90 days following the occurrence and
continuation of a Tax Event, an Investment Company
Event or a Capital Treatment Event (as such terms are
defined in the Prospectus), in each case at a redemption
price equal to 100% of the principal amount to be
redeemed plus accrued and unpaid interest to the
redemption date
</TABLE>
Capitalized terms used above and not defined herein shall have the meanings
set forth in the Standard Provisions (as defined below).
4
<PAGE>
Except as set forth below, all provisions contained in the document dated
[ ], 1999 entitled "Downey Financial Capital Trust I Underwriting Agreement
Standard Provisions" (the "Standard Provisions"), a copy of which is attached
hereto, are herein incorporated by reference in their entirety and shall be
deemed to be a part hereof to the same extent as if such provisions had been set
forth in full herein, except that if any term defined in the Standard Provisions
is otherwise defined herein, the definition set forth herein shall control.
[SIGNATURE PAGE FOLLOWS]
5
<PAGE>
Please confirm your agreement by having an authorized officer sign a copy
of this Agreement in the space set forth below.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
[ ]
[ ]
[ ]
Acting severally on behalf of themselves and the
several Underwriters named herein.
By: Morgan Stanley & Co. Incorporated
By:
-------------------------------------
Name:
Title:
Accepted:
DOWNEY FINANCIAL CORP.
By:
-------------------------------------
Name:
Title:
DOWNEY FINANCIAL CAPITAL TRUST I
By:
-------------------------------------
Name:
Title: Trustee
By:
-------------------------------------
Name:
Title: Trustee
6
<PAGE>
DOWNEY FINANCIAL CAPITAL TRUST I
UNDERWRITING AGREEMENT STANDARD PROVISIONS
[ ], 1999
Downey Financial Corp., a Delaware corporation (the "Company"), may,
together with Downey Financial Capital Trust I (the "Trust"), a statutory
business trust created under the Business Trust Act of the State of Delaware
(Chapter 38, Title 12, of the Delaware Code, 12 Del. C. (S)(S) 3801 et seq.)
(the "Delaware Act"), enter into an underwriting agreement that provides for the
sale of designated securities to the several underwriters named therein. The
standard provisions set forth herein may be incorporated by reference in such
underwriting agreement (the "Underwriting Agreement"). The Underwriting
Agreement, including the provisions incorporated therein by reference, is herein
referred to as this "Agreement", and any reference to the date of this Agreement
shall mean the date of the Underwriting Agreement. Terms defined in the
Underwriting Agreement are used herein as therein defined.
If the Trust issues Capital Securities, it will use the proceeds from the
sale of the Capital Securities and the sale of its Common Securities to purchase
from the Company an aggregate principal amount of its Debentures equal to the
aggregate liquidation amount of such Capital Securities and Common Securities.
The Company will be the holder of one hundred percent of the Common Securities
of the Trust.
The Trust has been created under Delaware law pursuant to the filing of a
Certificate of Trust (the "Certificate of Trust") with the Secretary of State of
the State of Delaware. As used in this Agreement, the term "Operative
Instruments" means Certificate of Trust, the Declaration of Trust, the
Indenture, the Guarantee Agreements, this Agreement, the Subscription Agreement,
the Debenture Subcription Agreement, the Capital Securities, the Common
Securities and the Debentures.
The Company and the Trust (collectively, the "Offerors" and, individually,
an "Offeror") have filed with the Securities and Exchange Commission (the
"Commission") a registration statement (No. 333-[ ]), including a prospectus,
relating to the Capital Securities, the Debentures and the Capital Securities
Guarantee (collectively, the "Offered Securities"). The registration statement
as amended at the time it became effective and any post-effective amendment to
such registration statement at the time it becomes effective, including the
information (if any) deemed to be part of the registration statement and any
post-effective amendment to such registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended
(the "Securities Act"), is hereinafter referred to as the "Registration
Statement"; the prospectus in the form first used to confirm sales of Capital
Securities is hereinafter referred to as the "Prospectus". The term "preliminary
prospectus" means a preliminary prospectus relating to the Offered Securities.
As used herein, the terms "Prospectus" and "preliminary prospectus" shall
include in each case the documents incorporated by reference therein. The terms
"supplement", "amendment" and "amend" as used herein shall include all documents
deemed to be incorporated by reference in the Prospectus that
<PAGE>
are filed subsequent to the effective date of the Registration Statement by the
Company or the Trust with the Commission pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). If the Offerors have filed or file an
abbreviated registration statement to register additional Offered Securities
pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration
Statement"), then any reference in this Agreement to the term "Registration
Statement" shall be deemed to include such Rule 462 Registration Statement.
1. Representations and Warranties. The Offerors, jointly and severally,
------------------------------
represent and warrant to and agree with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the knowledge of the
Company or the Trust, threatened by the Commission. The Offerors meet the
requirements for the use of Form S-3 under the Securities Act.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated or deemed to be incorporated by reference in the
Registration Statement and Prospectus complied or will comply when so filed in
all material respects with the Exchange Act and the applicable rules and
regulations of the Commission thereunder, (ii) each part of the Registration
Statement, when such part became effective, did not and each such part, as
amended or supplemented, if applicable, will 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 not misleading, (iii) the
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iv) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this Section 1(b) do
not apply (A) to statements or omissions in the Registration Statement or the
Prospectus based upon information concerning any Underwriter furnished to the
Company in writing by such Underwriter through the Representatives expressly for
use therein or (B) to those parts of the Registration Statement that constitute
the Statements of Eligibility (Form T-1) under the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act"), of the Property Trustee, the Indenture
Trustee or the Guarantee Trustee.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has the
corporate power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a whole;
and the Company has the corporate power and authority to enter into the
Operative Instruments to which it is party and to perform and comply with its
obligations thereunder.
2
<PAGE>
(d) The Trust has been duly organized and is validly existing as a business
trust in good standing under the laws of the State of Delaware, Downey Savings
and Loan Association F.A., a federally chartered savings association (the
"Association"), has been duly organized and is validly existing as a federal
savings association in good standing under the laws of the United States of
America, and each other subsidiary of the Company has been duly organized and is
validly existing as a corporation [expand if there are any non-corporate
subsidiaries] in good standing under the laws of the jurisdiction of its
incorporation; each subsidiary of the Company has the power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole; and all of the issued and
outstanding shares of capital stock of each subsidiary of the Company (other
than the Trust, whose securities are covered by representations set forth
elsewhere in this Agreement) have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned of record, directly or
indirectly, by the Company, free and clear of all liens, encumbrances, equities
or claims. For purposes of this Agreement, all references to any "subsidiary" or
"subsidiaries" of the Company shall include, without limitation, the Trust and
the Association.
(e) The Company is duly registered as a savings and loan holding company
under Section 10 of the Home Owners' Loan Act of 1933, as amended ("HOLA").
(f) All shares of the issued and outstanding capital stock of the Company
have been duly and validly authorized and issued and are fully paid and non-
assessable.
(g) The Association is a federally chartered savings association duly
organized in stock form and a member in good standing of the Federal Home Loan
Bank of San Francisco (the "FHLBSF") and the deposit accounts of the Association
are insured by the Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent
provided by the Federal Deposit Insurance Act, as amended (the "FDIA"), and the
rules and regulations of the FDIC thereunder.
(h) The Trust has the power and authority to enter into each of the
Operative Instruments to which it is a party and to perform and comply with its
obligations thereunder and under the Declaration of Trust; the Trust is not a
party to or otherwise bound by any agreement or instrument other than those
described in the Registration Statement; the Trust is and will be classified for
United States federal income tax purposes as a grantor trust and not as an
association taxable as a corporation; the Trust has not conducted and will not
conduct any business other than as permitted by the Declaration of Trust; the
Trust is not required to qualify to do business as a foreign entity in any
jurisdiction; the Offerors will treat the Debentures as indebtedness of the
Company for United States federal income tax purposes; and, from and after the
Closing Date, the Trust will be treated as a consolidated subsidiary of the
Company pursuant to generally accepted accounting principles and the Debentures
will be classified for United States federal income tax purposes as indebtedness
of the Company.
3
<PAGE>
(i) This Agreement has been duly authorized, executed and delivered by the
Company and the Trust.
(j) The Indenture has been duly qualified under the Trust Indenture Act;
the Indenture has been duly authorized by the Company and, on the Closing Date,
will have been duly executed and delivered by the Company and will be a valid
and binding agreement of the Company, enforceable in accordance with its terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
(k) The Debentures have been duly authorized by the Company and, on the
Closing Date, the Debentures will have been duly executed by the Company and,
when authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Trust in accordance with the terms of the
Debenture Purchase Agreement, will be entitled to the benefits of the Indenture
and will be valid and binding obligations of the Company, enforceable in
accordance with their terms except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability.
(l) The Capital Securities Guarantee Agreement has been qualified under the
Trust Indenture Act; each of the Guarantee Agreements has been duly authorized
by the Company and, on the Closing Date will have been duly executed and
delivered by the Company and will be a valid and binding agreement of the
Company, enforceable in accordance with its terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (ii) the availability of equitable
remedies may be limited by equitable principles of general applicability.
(m) The Declaration of Trust has been qualified under the Trust Indenture
Act; the Declaration of Trust has been duly authorized by the Company and, at
the Closing Date, will have been duly executed and delivered by the Company and
the Regular Trustees and will be a valid and binding obligation of the Company
and the Regular Trustees, enforceable in accordance with its terms except as (i)
the enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability.
(n) The Capital Securities have been duly authorized by the Declaration of
Trust and, on the Closing Date, the Capital Securities will have been duly
executed by the Trust and, when authenticated in accordance with the provisions
of the Declaration of Trust and delivered to and paid for by the Underwriters in
accordance with the provisions of this Agreement, will be validly issued, fully
paid and non-assessable undivided beneficial interests in the assets of the
Trust and will be entitled to the benefits of the Declaration of Trust, and the
issuance of the Capital Securities is not and will not be subject to any
preemptive or similar rights; and holders of the Capital Securities will be
entitled to the same limitation
4
<PAGE>
of personal liability as that extended to stockholders of private corporations
for profit organized under the General Corporation Law of the State of Delaware
(the "DGCL").
(o) The Common Securities have been duly authorized by the Declaration of
Trust and, on the Closing Date, the Common Securities will have been duly
executed by the Trust and, when delivered to and paid for by the Company in
accordance with the terms of the Subscription Agreement, will be validly issued
and, except as otherwise provided in Section [10.1] of the Declaration of Trust,
fully paid and non-assessable undivided beneficial interests in the assets of
the Trust, and the issuance of the Common Securities is not and will not be
subject to any preemptive rights or similar rights; and all of the issued and
outstanding Common Securities will be directly owned by the Company, free and
clear of all liens, encumbrances, equities or claims, except for restrictions on
transfer set forth in the Declaration of Trust.
(p) The Subscription Agreement and the Debenture Purchase Agreement have
been duly authorized by the Trust and the Company and, on the Closing Date, will
have been duly executed and delivered by the Trust and the Company and will
constitute valid and binding agreements of the Trust and the Company,
enforceable in accordance with their respective terms, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (ii) the availability of equitable
remedies may be limited by equitable principles of general applicability.
(q) The Company's obligations under the Guarantees will be subordinate and
junior in right of payment to all liabilities of the Company [and will be pari
passu with the most senior preferred stock hereafter issued by the Company] and
any guarantee hereafter entered into by the Company in respect of any preferred
or preference stock or preferred securities of any affiliate of the Company.
(r) The Debentures are and will be subordinate and junior in right of
payment to all Senior and Subordinated Debt (as defined in the Indenture) of the
Company to the extent provided in the Indenture.
(s) The Declaration of Trust, the Trust Securities, the Indenture, the
Debentures, the Guarantee Agreements and the Guarantees conform in all material
respects to the descriptions thereof contained in the Registration Statement and
the Prospectus.
(t) The execution and delivery by each Offeror of, and the performance by
each Offeror of its obligations under, the Operative Instruments to which such
Offeror is a party and, in the case of the Trust, the performance of its
obligations under the Declaration of Trust do not and will not contravene any
provision of applicable law, the Declaration of Trust or the articles of
incorporation or by-laws of the Company or any agreement or other instrument
binding upon the Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over the Company
or any of its subsidiaries, and no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for the
performance by any Offeror of its obligations under any Operative Instrument to
which such Offeror is a party or, in the case of the Trust, for the performance
of its obligations under the Declaration of Trust, except such as (i) have been
obtained or (ii) may be required by the
5
<PAGE>
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Offered Securities by the Underwriters.
(u) There has not occurred any material adverse change, or any development
involving a prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, or of the Trust, in each case from that set
forth in the Prospectus (exclusive of any amendments or supplements thereto
effected subsequent to the date of the Underwriting Agreement).
(v) There are no legal or governmental proceedings pending or, to the
knowledge of the Company or the Trust, threatened to which the Company or any of
its subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus or any of the documents incorporated or
deemed to be incorporated by reference therein that are not so described or of
any statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or any of the
documents incorporated or deemed to be incorporated by reference therein or to
be filed or incorporated by reference as exhibits to the Registration Statement
or any of the documents incorporated or deemed to be incorporated by reference
therein that are not described, filed or incorporated as required. There are no
legal or governmental proceedings pending or, to the knowledge of the Company or
the Trust, threatened to which the Trust is a party or to which any of the
properties of the Trust is subject.
(w) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Securities Act, complied when so filed in all material
respects with the Securities Act and the applicable rules and regulations of the
Commission thereunder.
(x) Neither of the Offerors is or, after giving effect to the issuance and
sale of the Capital Securities and the Common Securities and the application of
the proceeds thereof as described in the Prospectus, will be an "investment
company" as such term is defined under the Investment Company Act of 1940, as
amended.
(y) The Company and its subsidiaries (i) are in compliance with all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(z) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties) which
6
<PAGE>
would, singly or in the aggregate, have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(aa) The Company and each of its subsidiaries possess all material
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken as a
whole.
(bb) There are no contracts, agreements or understandings between either of
the Offerors, on the one hand, and any other person, on the other hand, granting
such person the right to require either of the Offerors to file a registration
statement under the Securities Act with respect to any securities of either of
the Offerors or to require either of the Offerors to include such securities
with the Offered Securities registered pursuant to the Registration Statement.
(cc) The Company has reviewed its operations and that of its subsidiaries
to evaluate the extent to which the business or operations of the Company or any
of its subsidiaries will be affected by the "Year 2000 Problem" (that is, any
significant risk that the Company's computer hardware or software applications
and those of its subsidiaries will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or times periods occurring prior to January 1, 2000); as a result
of such review, the Company has no reason to believe, and does not believe, that
(i) there are any issues related to the Company's preparedness to address the
Year 2000 Problem that are of a character required to be described or referred
to in the Registration Statement or the Prospectus which have not been
accurately described in the Registration Statement or the Prospectus and (ii)
the Year 2000 Problem will have a material adverse effect on the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, or result in any material loss or
interference with the business or operations of the Company and it subsidiaries,
taken as a whole.
(dd) Each of the Administrative Trustees is an employee of the Company and
has been duly authorized by the Company to execute and deliver the Declaration
of Trust, the Capital Securities, the Common Securities and each other Operative
Instruments to which the Trust is a party.
(ee) The total assets of the subsidiaries of the Company and the
Association, in each case excluding any of their respective subsidiaries other
than the Association, determined on a consolidated basis, are equal to at least
[ ]% of the total consolidated assets of the Company; for the three months ended
March 31, 1999, the total revenues of the Company and the Association, in each
case excluding any of their respective subsidiaries other than the Association,
determined on a consolidated basis, were equal to at least [ ]% of the total
consolidated revenues of the Company for such period. The total assets of the
subsidiaries of the Company listed on Exhibit E hereto (the "Subject
Subsidiaries"), the Company and the Association, in each case excluding any of
their respective subsidiaries other than the Subject Subsidiaries and the
Association,
7
<PAGE>
determined on a consolidated basis, are equal to at least [ ]% of the total
consolidated assets of the Company; for the three months ended March 31, 1999,
the total revenues of the Subject Subsidiaries, the Company and the Association,
in each case excluding any of their respective subsidiaries other than the
Subject Subsidiaries and the Association, determined on a consolidated basis,
were equal to at least [ ]% of the total consolidated revenues of the Company
for such period. Exhibit E accurately sets forth the current jurisdiction of
incorporation of each Subject Subsidiary.
2. Public Offering. The Trust and the Company are advised by the
---------------
Representatives that the Underwriters propose to make a public offering of their
respective portions of the Capital Securities as soon after this Agreement has
been entered into as in the Representatives' judgment is advisable. The terms of
the public offering of the Capital Securities are set forth in the Underwriting
Agreement.
3. Purchase and Delivery. Except as otherwise provided in this Section 3,
---------------------
payment for the Capital Securities shall be made to the Trust, in immediately
available funds at the time and place set forth in the Underwriting Agreement,
upon delivery to the Representatives for the respective accounts of the several
Underwriters of the Capital Securities registered in such names and in such
denominations or amounts, as the case may be, as the Representatives shall
request in writing not less than one full business day prior to the date of
delivery, with any transfer taxes payable in connection with the transfer of the
Capital Securities to the Underwriters duly paid by the Company.
4. Conditions to Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters hereunder are subject to the following conditions:
(a) Subsequent to the execution and delivery of the Underwriting Agreement
and prior to the Closing Date,
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded the Capital Securities or any of
the Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2) under
the Securities Act;
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise,
or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, or of the Trust, in each case from that set
forth in the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of the Underwriting Agreement) that, in the judgment
of the Representatives, is material and adverse and that makes it, in the
judgment of the Representatives, impracticable to market the Capital
Securities on the terms and in the manner contemplated in the Prospectus;
and
8
<PAGE>
(b) the Representatives shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company and by two Administrative Trustees of the Trust,
(i) to the effect set forth in Section 4(a)(i) hereof; and
(ii) to the effect that the representations and warranties of the
Company and the Trust contained in this Agreement are true and correct as
of the Closing Date and that each of the Company and the Trust has complied
with all of the agreements and satisfied all of the conditions on its part
to be performed or satisfied on or before the Closing Date.
The officer and Regular Trustees signing and delivering such certificate
may rely upon the best of their knowledge as to proceedings threatened.
(c) The Representatives shall have received on the Closing Date an opinion
of Manatt, Phelps & Phillips, LLP, counsel to the Company and the Trust, dated
the Closing Date, to the effect set forth in Exhibit A.
(d) The Representatives shall have received on the Closing Date an opinion
of Richards, Layton & Finger, P.A., special Delaware counsel to the Trust, dated
the Closing Date, to the effect set forth in Exhibit B.
(e) The Underwriters shall have received on the Closing Date an opinion of
Donald E. Royer, Esq., Executive Vice President and General Counsel of the
Company, dated the Closing Date, to the effect set forth in Exhibit C.
(f) The Representatives shall have received on the Closing Date an opinion
of Brown & Wood LLP, counsel for the Underwriters, dated the Closing Date, with
respect to the validity of the Indenture, the Debentures and the Capital
Securities Guarantee and such other matters as the Underwriters may reasonably
request.
(g) The Representatives shall have received on the Closing Date an opinion
of [ ], counsel for the Property Trustee, Delaware Trustee, Indenture Trustee
and Guarantee Trustee, dated the Closing Date, to the effect set forth in
Exhibit D.
The opinions described in Sections 4(c), 4(d) and 4(e) hereof shall be
rendered to the Underwriters at the request of the Company and the Trust and
shall so state therein. The opinion described in Section 4(g) hereof shall be
rendered to the Underwriters at the request of the Property Trustee, Delaware
Trustee, Indenture Trustee and Guarantee Trustee and shall so state therein.
(h) The Representatives shall have received on the date of this Agreement
and on the Closing Date a letter, dated the date of this Agreement and the
Closing Date, respectively, in form and substance satisfactory to the
Representatives, from KPMG LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in or incorporated by reference into the
Prospectus; provided that
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<PAGE>
the letter delivered on the Closing Date shall use a "cut-off date" not earlier
than the date of this Agreement.
(i) The Capital Securities shall have been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange.
5. Covenants of the Company and the Trust. In further consideration of
--------------------------------------
the agreements of the Underwriters contained herein, the Offerors, jointly and
severally, covenant with each Underwriter as follows:
(a) To furnish the Representatives, without charge, 5 signed copies of the
Registration Statement (including exhibits and, upon request, documents
incorporated therein by reference) and for delivery to each other Underwriter a
conformed copy of the Registration Statement (without exhibits thereto but, upon
request, including documents incorporated therein by reference) and to furnish
to the Representatives in New York City, without charge, prior to 10:00 a.m. New
York City time on the business day next succeeding the date of the Underwriting
Agreement and during the period mentioned in Section 5(c) hereof, as many copies
of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as the Representatives may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus with respect to the Offered Securities, to furnish to the
Representatives a copy of each such proposed amendment or supplement and not to
file or use any such proposed amendment or supplement to which the
Representatives reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering of
the Capital Securities as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with law, forthwith to prepare and furnish, at the
Company's own expense, to the Underwriters and to the dealers (whose names and
addresses the Representatives will furnish to the Company and the Trust) to
which Capital Securities may have been sold by the Representatives on behalf of
the Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not,
10
<PAGE>
in the light of the circumstances existing when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as so amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Offered Securities for offer and sale under
the securities or Blue Sky laws of such jurisdictions in the United States as
the Representatives shall reasonably request.
(e) To make generally available to the security holders of the Company and
the Trust and to the Representatives as soon as practicable an earning statement
covering a twelve-month period beginning on the first day of the first full
fiscal quarter after the date of the Underwriting Agreement, which earning
statement shall satisfy the provisions of Section 11(a) of the Securities Act
and the rules and regulations of the Commission thereunder. If such fiscal
quarter is the last fiscal quarter of the Company's fiscal year, such earning
statement shall be made available not later than 90 days after the close of the
period covered thereby and in all other cases shall be made available not later
than 45 days after the close of the period covered thereby.
(f) During the period beginning on the date of the Underwriting Agreement
and continuing to and including the date which is 30 days after the date of the
Underwriting Agreement, not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any debt securities or preferred stock of the
Company or any securities of the Trust or any similar trust or other entity
affiliated with the Company, or any securities convertible into or exchangeable
or exercisable for any debt securities or preferred stock of the Company or any
securities of the Trust or any similar trust or other entity affiliated with the
Company or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
any preferred stock or debt securities of the Company or any securities of the
Trust or any similar trust or other entity affiliated with the Company, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of securities of the Company, the Trust or any similar trust or other
entity, any other securities, in cash or otherwise, in each case, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters; provided that the restrictions set forth in this paragraph shall
not apply to the issuance of Capital Securities to the Underwriters, the
issuance of Common Securities to the Company or the issuance of Debentures to
the Trust.
(g) Whether or not any sale of Offered Securities is consummated, the
Company will pay or cause to be paid all expenses incident to the performance of
the obligations of the Company and the Trust under this Agreement, including:
(i) the preparation and filing of the Registration Statement and the Prospectus
and all amendments and supplements thereto, (ii) the preparation, issuance,
transfer and delivery of the Offered Securities and the Common Securities,
including any transfer or other taxes payable thereon, (iii) the fees and
disbursements of the Company's counsel and accountants and of the Trust's
counsel, (iv) the qualification of the Offered Securities under securities or
Blue Sky laws in accordance with the provisions of Section 5(d) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the printing or
producing and delivery of any Blue Sky or Legal Investment memoranda, (v) all
filing fees and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review
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<PAGE>
and qualification of the offering of the Offered Securities by the National
Association of Securities Dealers, Inc., (vi) the printing and delivery to the
Underwriters in quantities as hereinabove stated of copies of the Registration
Statement and all amendments thereto and of the Prospectus and any amendments or
supplements thereto, (vii) any fees charged by rating agencies for the rating of
the Offered Securities, (viii) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Offered Securities and all costs and expenses, if any, incident to listing the
Offered Securities on the New York Stock Exchange, (ix) the costs and expenses
of the Offerors relating to investor presentations on any "road show" undertaken
in connection with the marketing of the offering of the Offered Securities,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives, trustees and
officers of the Offerors and any such consultants, and the cost of any aircraft
chartered in connection with the road show, (x) all fees and expenses of the
Property Trustee, the Delaware Trustee, the Guarantee Trustee and the Indenture
Trustee, including fees and disbursements of their respective counsel, and (xi)
all other costs and expenses incident to the performance of the obligations of
the Offerors hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this Section,
Section 6 entitled "Indemnity and Contribution", and the last paragraph of
Section 8 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes payable
on resale of any of the Capital Securities by them and any advertising expenses
connected with any offers they may make.
6. Indemnity and Contribution.
--------------------------
(a) The Company and the Trust, jointly and severally, agree to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company or the Trust shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through the
Representatives expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Trust, the Trustees of the Trust, the Company, the Company's
directors, the Company's officers who sign the Registration Statement and each
person, if any, who controls the Trust or the Company within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Company and the Trust to such
Underwriter, but only with reference to information relating to such
12
<PAGE>
Underwriter furnished to the Company by such Underwriter in writing through the
Representatives expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to Section 6(a) or 6(b), such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 6(b), and by the Company, in the case of
parties indemnified pursuant to Section 6(a). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section 6(a) or 6(b)
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying party
under such paragraph, in lieu of indemnifying such indemnified party thereunder,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
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<PAGE>
Trust on the one hand and the Underwriters on the other hand from the offering
of the Capital Securities or (ii) if the allocation provided by clause 6(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 6(d)(i) above
but also the relative fault of the Company and the Trust on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Trust on the one hand and the Underwriters on the other
hand in connection with the offering of the Offered Capital Securities shall be
deemed to be in the same respective proportions as the net proceeds from the
offering of such Capital Securities (before deducting expenses) received by the
Company and the Trust and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate public offering price of the
Capital Securities. The relative fault of the Company and the Trust on the one
hand and of the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Trust or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Underwriters' respective obligations to contribute pursuant to this Section 6
are several in proportion to the respective amounts of Capital Securities
purchased by each of such Underwriters and not joint. The obligations of the
Company and the Trust to contribute pursuant to this Section 6 are joint and
several.
(e) The Company, the Trust and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 6 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 6(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Capital
Securities underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 6 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this Section 6
and the representations, warranties and other statements of the Trust and the
Company set forth in this Agreement will remain operative and in full force and
effect, regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any
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<PAGE>
person controlling the Company or by or on behalf of the Trust, the Trustees or
any person controlling the Trust and (iii) acceptance of and payment for any of
the Offered Securities.
7. Termination. This Agreement shall be subject to termination by notice
-----------
given by the Representatives to the Company, if (a) after the execution and
delivery of the Underwriting Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company or the Trust shall have been suspended
on any exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities, or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in the judgment of the Representatives, is material and
adverse and (b) in the case of any of the events specified in clauses (a)(i)
through (a)(iv), such event, singly or together with any other such event, makes
it, in the judgment of the Representatives, impracticable to market the Offered
Securities on the terms and in the manner contemplated in the Prospectus.
8. Defaulting Underwriters. If, on the Closing Date, any one or more of
-----------------------
the Underwriters shall fail or refuse to purchase Capital Securities that it has
or they have agreed to purchase hereunder on such date, and the aggregate number
of Capital Securities which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase is not more than one-tenth of the aggregate
number of the Capital Securities to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Capital Securities set forth opposite their respective names in the Underwriting
Agreement bears to the aggregate number of Capital Securities set forth opposite
the names of all such non-defaulting Underwriters, or in such other proportions
as the Representatives may specify, to purchase the Capital Securities which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Capital
--------
Securities that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 8 by an amount in excess of one-
ninth of such number of Capital Securities without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Capital Securities and the aggregate number of Capital
Securities with respect to which such default occurs is more than one-tenth of
the aggregate number of Capital Securities to be purchased, and arrangements
satisfactory to us and the Company for the purchase of such Capital Securities
are not made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter, the Trust or
the Company. In any such case that does not result in termination, either the
Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and in the Prospectus or in any
other documents or arrangements may be effected.
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<PAGE>
Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company or the Trust to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company or the Trust shall be unable to perform their
respective obligations under this Agreement, the Company and the Trust jointly
and severally agree to reimburse the Underwriters or such Underwriters as have
so terminated this Agreement with respect to themselves, severally, for all out-
of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering of the Securities, but the Company and the Trust shall then be
under no further liability to any Underwriter except as provided in Sections
5(g) and 6 hereof.
9. Counterparts. This Agreement may be signed in any number of
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
10. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of New York.
11. Headings. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
16
<PAGE>
EXHIBIT A
Opinion of Manatt, Phelps & Phillips LLP
----------------------------------------
(a) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole; and the Company has the corporate
power and authority to enter into the Operative Instruments to which it is
a party and to perform and comply with its obligations thereunder;
(b) the Trust has been duly organized and is validly existing as a
business trust in good standing under the laws of the State of Delaware and
has the power and authority to own its property and to conduct its business
as described in the Prospectus;
(c) the Association has been duly organized and is validly existing as
a federal savings association in good standing under the laws of the United
States of America and has the power and authority to own its property and
to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole; and all of
the issued and outstanding shares of capital stock of the Association have
been duly and validly authorized and issued, are fully paid and non-
assessable and are owned of record, directly or indirectly, by the Company,
free and clear, to the best of our knowledge, of all liens, encumbrances,
equities or claims. For purposes of this opinion, all references to any
"subsidiary" or "subsidiaries" of the Company shall include, without
limitation, the Trust and the Association;
(d) The Company is duly registered as a savings and loan holding
company under Section 10 of the HOLA;
(e) all shares of issued and outstanding capital stock of the Company
have been duly and validly authorized and issued and are fully paid and
non-assessable;
(f) the Association is a federally chartered savings association duly
organized in stock form and is a member in good standing of the FHLBSF and
the deposit accounts of the Association are insured by the SAIF to the
fullest extent provided by the FDIA and the rules and regulations of the
FDIC thereunder;
(g) the Trust has the power and authority to enter into each of the
Operative Instruments to which it is a party and to perform and comply with
its obligations thereunder and under the Declaration of Trust;
A-1
<PAGE>
(h) the Trust is and will be classified for United States federal
income tax purposes as a grantor trust and not as an association taxable as
a corporation; the Trust is not required to qualify to do business as a
foreign entity in any jurisdiction; and the Debentures are and will be
classified for United States federal income tax purposes as indebtedness of
the Company;
(i) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company and the Trust;
(j) the Indenture has been duly qualified under the Trust Indenture Act
and has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) the availability of equitable remedies
may be limited by equitable principles of general applicability;
(k) the Debentures have been duly authorized by the Company; the
Debentures being issued on the date of this opinion have been duly executed
by the Company and, when authenticated in accordance with the provisions of
the Indenture and delivered to and paid for by the Trust in accordance with
the provisions of the Debenture Subscription Agreement, will be entitled to
the benefits of the Indenture and will be valid and binding obligations of
the Company, enforceable against the Company in accordance with their
terms, except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability;
(l) the Capital Securities Guarantee Agreement has been duly qualified
under the Trust Indenture Act; each of the Guarantee Agreements has been
duly authorized, executed and delivered by the Company and is a valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (ii) the availability of equitable remedies may be
limited by equitable principles of general applicability;
(m) the Declaration of Trust has been duly qualified under the Trust
Indenture Act; the Declaration of Trust has been duly authorized by the
Company and has been duly executed and delivered by the Company and the
Regular Trustees and is a valid and binding obligation of the Company and
the Regular Trustees, enforceable against the Company and the Regular
Trustees in accordance with its terms, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) the availability of equitable remedies
may be limited by equitable principles of general applicability;
(n) the Capital Securities have been duly authorized by the Declaration
of Trust; the Capital Securities have been duly executed by the Trust and,
when authenticated in accordance with the provisions of the Declaration of
Trust and delivered to and paid for by the Underwriters in accordance with
the provisions of the Underwriting Agreement, will be validly issued, fully
paid and non-assessable undivided beneficial interests in the assets of the
Trust and will be entitled to the benefits of the Declaration of Trust, and
the issuance of the Capital Securities is not subject to any
A-2
<PAGE>
preemptive or similar rights; and holders of the Capital Securities will be
entitled to the same limitation of personal liability as that extended to
stockholders of private corporations for profit organized under the DGCL;
(o) the Common Securities have been duly authorized by the Declaration
of Trust; the Common Securities have been duly executed by the Trust and,
when delivered to and paid for by the Company in accordance with the terms
of the Subscription Agreement, will be validly issued and, except as
otherwise provided in Section [10.1] of the Declaration of Trust, fully
paid and non-assessable undivided beneficial ownership interests in the
assets of the Trust, and the issuance of the Common Securities is not
subject to any preemptive or similar rights;
(p) after giving effect to the issuance of the Common Securities, all
of the issued and outstanding Common Securities will be owned of record by
the Company, free and clear, to the best of our knowledge, of all liens,
encumbrances, equities or claims, except for restrictions on transfer set
forth in the Declaration of Trust;
(q) the Subscription Agreement and the Debenture Subscription Agreement
have been duly authorized, executed and delivered by the Company and the
Trust and are valid and binding agreements of the Company and the Trust,
enforceable against the Company and the Trust in accordance with their
respective terms, except as (i) the enforceability thereof may be limited
by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability;
(r) the execution and delivery by each Offeror of, and the performance
by each Offeror of its obligations under, the Operative Instruments to
which such Offeror is a party and, in the case of the Trust, the
performance of its obligations under the Declaration of Trust do not and
will not contravene any provision of applicable law, the Declaration of
Trust or the articles of incorporation or by-laws of the Company or, to the
best of our knowledge, any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to the best of our knowledge, any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or any of its subsidiaries, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by any Offeror
of its obligations under any Operative Instruments to which such Offeror is
a party or, in the case of the Trust, for the performance of its
obligations under the Declaration of Trust, except such as (i) have been
obtained or (ii) may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Offered
Securities by the Underwriters;
(s) the statements (i) in the Prospectus under the captions
"Description of the Capital Securities," "Description of Junior
Subordinated Debentures", "Description of Guarantee," "Certain ERISA
Considerations," "Certain Federal Income Tax Consequences, "Relationship
among the Capital Securities, the Junior Subordinated Debentures and the
Guarantee" and "Underwriters", (ii) in the Registration Statement in Item
15, (iii) in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 under the captions "[ ]" and "[ ]", and (iv) in the
Company's proxy statement dated [ ], 1999 under the captions "[ ]" and "[
]", in each case insofar as such statements constitute summaries of the
legal matters, Operative
A-3
<PAGE>
Instruments and other documents and proceedings referred to therein, fairly
summarize the matters referred to therein in all material respects; [To be
appropriately revised]
(t) after due inquiry, we do not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus or any of the documents
incorporated or deemed to be incorporated by reference therein that are not
so described or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or any of the documents incorporated or deemed to be
incorporated by reference therein or to be filed or incorporated by
reference as exhibits to the Registration Statement or any of the documents
incorporated or deemed to be incorporated by reference therein that are not
described, filed or incorporated as required; and after due inquiry, we do
not know of any legal or governmental proceedings pending or threatened to
which the Trust is a party or to which any of the properties of the Trust
is subject;
(u) neither of the Offerors is or, after giving effect to the issuance
and sale of the Capital Securities and the Common Securities and
the application of the proceeds thereof as described in the Prospectus,
will be an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(v) The Company and its subsidiaries (A) are in compliance with any and
all applicable Environmental Laws, (B) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (C) are in compliance with all
terms and conditions of any such permit, license or approval, except where
such noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(w) the Registration Statement and the Prospectus (except for financial
statements and schedules and other financial and statistical data included
therein, as to which we have not been called upon to express any opinion)
comply as to form in all material respects to the requirements of the
Securities Act and the applicable rules and regulations of the Commission
thereunder;
(x) each document filed pursuant to the Exchange Act and incorporated
or deemed to be incorporated by reference in the Registration Statement and
the Prospectus (except for financial statements and schedules and other
financial and statistical data included therein, as to which we have not
been called upon to express an opinion) complied when so filed as to form
in all material respects with the Exchange Act and the applicable rules and
regulations of the Commission thereunder;
In addition, Manatt, Phelps & Phillips LLP shall state that they have
participated in conferences with officers and other representatives of the
Company, the Administrative Trustees of the Trust, representatives of the
independent accountants of the Company, and representatives of the Underwriters
and counsel to the Underwriters at which the contents of the Registration
Statement
A-4
<PAGE>
and the Prospectus (in each case including the documents incorporated or deemed
to be incorporated by reference therein) and related matters were discussed and,
although Manatt, Phelps & Phillips LLP is not passing upon, and does not assume
any responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus and has made no
independent check or verification thereof, except as stated in paragraph [(s)]
above, on the basis of the foregoing, nothing has come to the attention of
Manatt, Phelps & Phillips LLP that has led such counsel to believe that the
Registration Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or as of the date of such opinion, contained
or contains an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except that
such counsel need express no belief with respect to the financial statements and
schedules and other financial and statistical data included in the Registration
Statement and the Prospectus.
Such counsel shall state that, in rendering the opinions set forth in
paragraphs [(b), (g), (i), (m), (n), (o) and (q) (solely insofar as the opinions
set forth in such paragraphs concern matters relating to the Trust or the
Declaration of Trust) above, such counsel has relied, as to matters governed by
or arising under the laws of the State of Delaware (other than the DGCL), upon
the opinion of Richards, Layton & Finger, P.A., special Delaware counsel to the
Trust, delivered to the Underwriters pursuant to Section 5(d) of the
Underwriting Agreement. In addition, in rendering such opinion, such counsel may
rely, as to matters of fact (but not as to legal conclusions), to the extent
they deem proper, on certificates of responsible officers of the Company,
Administrative Trustees of the Trust and public officials. Such opinion shall
not state that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the ABA
Section of Business Law (1991)
A-5
<PAGE>
EXHIBIT B
Opinion of Richards, Layton & Finger, P.A.
------------------------------------------
(a) the Trust has been duly organized and is validly existing as a
business trust in good standing under the laws of the State of Delaware and
has the power and authority to own its property and to conduct its business
as described in the Prospectus;
(b) the Trust has the power and authority to enter into each of the
Operative Instruments to which it is a party and to perform and comply with
its obligations thereunder and under the Declaration of Trust;
(c) the Underwriting Agreement has been duly authorized, executed and
delivered by the Trust;
(d) assuming that the Declaration of Trust has been duly authorized by
the Company and the Trustees, the Declaration of Trust has been duly
executed and delivered by the Company and the Trustees and is a valid and
binding obligation of the Company and the Trustees, enforceable against the
Company and the Trustees in accordance with its terms, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability;
(e) the Capital Securities have been duly authorized by the
Declaration of Trust; the Capital Securities have been duly executed by the
Trust and, when authenticated in accordance with the provisions of the
Declaration of Trust and delivered to and paid for by the Underwriters in
accordance with the provisions of the Underwriting Agreement, will be
validly issued, fully paid and non-assessable undivided beneficial
interests in the assets of the Trust and will be entitled to benefits of
the Declaration of Trust, and the issuance of the Capital Securities is not
subject to any preemptive or similar rights; and holders of the Capital
Securities will be entitled to the same limitation of personal liability as
that extended to stockholders of private corporations for profit organized
under the DGCL;
(f) the Common Securities have been duly authorized by the Declaration
of Trust; the Common Securities have been duly executed by the Trust and,
when delivered to and paid for by the Company in accordance with the terms
of the Subscription Agreement, will be validly issued and, except as
otherwise provided in Section [10.1] of the Declaration of Trust, fully
paid and non-assessable undivided beneficial ownership interests in the
assets of the Trust, and the issuance of the Common Securities is not
subject to any preemptive or similar rights;
(g) after giving effect to the issuance of the Common Securities, all
of the issued and outstanding Common Securities will be owned of record by
the Company, free and clear, to the best of our knowledge, of all liens,
encumbrances, equities or claims, except for restrictions on transfer set
forth in the Declaration of Trust;
B-1
<PAGE>
(h) the Subscription Agreement and the Debenture Subscription Agreement
have been duly authorized, executed and delivered by the Trust and are
valid and binding agreements of the Trust, enforceable against the Trust in
accordance with their respective terms, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) the availability of equitable remedies
may be limited by equitable principles of general applicability;
(i) the execution and delivery by the Trust of, and the performance by
the Trust of its obligations under, the Operative Instruments to which the
Trust is a party and the performance by the Trust of its obligations under
the Declaration of Trust do not and will not contravene any provision of
applicable law or the Declaration of Trust, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Trust of its obligations
under any Operative Instruments to which the Trust is a party or under the
Declaration of Trust, except such as (i) have been obtained or (ii) may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Offered Securities by the
Underwriters;
(j) the statements in the Prospectus under the captions "[]" and
"[]", in each case insofar as such statements constitute summaries of the
legal matters and Operative Instruments and other documents referred to
therein, fairly summarize the matters referred to therein in all material
respects; [To be appropriately revised]
Such counsel shall state that Manatt, Phelps & Phillips LLP and Brown &
Wood llp may rely, in rendering their respective opinions pursuant to the
Underwriting Agreement, upon the opinion of such Delaware counsel as if
such opinion were addressed to them. In rendering such opinion, such counsel
may rely, as to matters of fact (but not as to legal conclusions), to the extent
they deem proper, on certificates of responsible officers of the Company,
Administrative Trustees of the Trust and public officials. Such opinion shall
not state that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the ABA
Section of Business Law (1991)
B-2
<PAGE>
EXHIBIT C
Opinion of Donald E. Royer, Esq.
--------------------------------
(a) Each Subject Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation and has the power and authority to own
its property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; and all of the issued and outstanding shares of capital stock of
each Subject Subsidiary have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned of record, directly or
indirectly, by the Company, free and clear, to the best of my knowledge, of
all liens, encumbrances, equities or claims;
(b) after due inquiry, I do not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus or any of the documents
incorporated or deemed to be incorporated by reference therein that are not
so described or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or any of the documents incorporated or deemed to be
incorporated by reference therein or to be filed or incorporated by
reference as exhibits to the Registration Statement or any of the documents
incorporated or deemed to be incorporated by reference therein that are not
described or filed as required; and after due inquiry, I do not know of any
legal or governmental proceedings pending or threatened to which the Trust
is a party or to which any properties of the Trust is subject;
(c) The Company and its subsidiaries (A) are in compliance with all
applicable Environmental Laws, (B) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (C) are in compliance with all
terms and conditions of any such permit, license or approval, except where
such noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
In addition, such counsel shall state that he has participated in
conferences with officers and other representatives of the Company,
Administrative Trustees of the Trust, representatives of the independent
accountants of the Company, and representatives of the Underwriters and counsel
to the Underwriters at which the contents of the Registration Statement and the
Prospectus (in each case including the documents incorporated or deemed to be
incorporated by reference therein) and related matters were discussed and,
although he is not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus and has made no independent check or
verification thereof, on the basis of the foregoing, nothing has come to his
attention that has led him to
C-1
<PAGE>
believe that the Registration Statement, at the time it became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus, as of its date or as of the date of such
opinion, contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that such counsel need express no belief with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement and the Prospectus.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent he deems proper, on
certificates of responsible officers of the Company, Administrative Trustees of
the Trust and public officials. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991)
C-2
<PAGE>
EXHIBIT D
Opinion of []
-------------
(a) Wilmington Trust Company ("Wilmington") is a [] with trust powers,
duly organized, validly existing and in good standing under the laws of [],
with all necessary corporate power and authority to execute and deliver,
and to carry out and perform its obligations under, the Declaration of
Trust, the Indenture and the Capital Securities Guarantee Agreement;
(b) the Declaration of Trust has been duly authorized, executed and
delivered by Wilmington in its capacity as property trustee (the "Property
Trustee") and Delaware trustee (the "Delaware Trustee") thereunder and
constitutes a valid and binding obligation of the Property Trustee and the
Delaware Trustee, enforceable against the Property Trustee and the Delaware
Trustee in accordance with its terms, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) the availability of equitable remedies
may be limited by equitable principles of general applicability;
(c) The Indenture has been duly authorized, executed and delivered by
Wilmington in its capacity as trustee thereunder (the "Indenture Trustee")
and constitutes a valid and binding obligation of the Indenture Trustee,
enforceable against the Indenture Trustee in accordance with its terms,
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (ii)
the availability of equitable remedies may be limited by equitable
principles of general applicability;
(d) The Capital Securities Guarantee Agreement has been duly
authorized, executed and delivered by Wilmington in its capacity as trustee
thereunder (the "Guarantee Trustee") and constitutes a valid and binding
agreement of the Guarantee Trustee, enforceable against the Guarantee
Trustee in accordance with its terms, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) the availability of equitable remedies
may be limited by equitable principles of general applicability;
(e) the execution, delivery and performance of the Declaration of Trust
by the Property Trustee and the Delaware Trustee, the Indenture by the
Indenture Trustee and the Capital Securities Guarantee Agreement by the
Guarantee Trustee do not conflict with or constitute a breach of the
charter or by-laws of Wilmington;
(f) no consent, approval or authorization of, or registration with or
notice to, any federal or Delaware state banking authority is required for
the execution, delivery or performance by the Property Trustee or the
Delaware Trustee of the Declaration of Trust, by the Indenture Trustee of
the Indenture or by the Guarantee Trustee of the Capital Securities
Guarantee Agreement.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent he deems proper, on
certificates of responsible officers of Wilmington and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions,
D-1
<PAGE>
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
D-2
<PAGE>
EXHIBIT E
Subject Subsidiaries
--------------------
Name
- ---- Jurisdiction of Incorporation
-----------------------------
E-1
<PAGE>
EXHIBIT 4.1
___________________________________________________________
DOWNEY FINANCIAL CORP.
to
WILMINGTON TRUST COMPANY
Trustee
____________________________________
JUNIOR SUBORDINATED INDENTURE
Dated as of ____________, 1999
___________________________________________________________
<PAGE>
Downey Financial Corp.
Reconciliation and tie between the Trust Indenture Act of 1939 (including
cross-references to provisions of Sections 310 to and including 317 which,
pursuant to Section 318(c) of the Trust Indenture Act of 1939, as amended by the
Trust Reform Act of 1990, are a part of and govern the Indenture whether or not
physically contained therein) and the Junior Subordinated Indenture, dated as of
____________, 1999.
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
----------- -------
<S> <C> <C>
(S)310 (a) (1), (2) and (5)............................................................ Not Applicable
(a) (3)......................................................................... Not Applicable
(a) (4)......................................................................... Not Applicable
(b)............................................................................. 6.8
................................................................................ 6.10
(c)............................................................................. Not Applicable
(S)311 (a)............................................................................. 6.13(a)
(b)............................................................................. 6.13(b b) (2)
................................................................................ 7.3(a) (2)
................................................................................ 7.3(a) (2)
(S)312 (a)............................................................................. 7.1
................................................................................ 7.2(a)
(b)............................................................................. 7.2(b)
(c)............................................................................. 7.2(c)
(S)313 (a)............................................................................. 7.3(a)
(b)............................................................................. 7.3(b)
(c)............................................................................. 7.3(a), 7.3(b)
(d)............................................................................. 7.3(c)
(S)314 (a) (1), (2) and (3)............................................................ 7.4
(a) (4)......................................................................... 10.5
(b)............................................................................. Not Applicable
(c) (1)......................................................................... 1.2
(c) (2)......................................................................... 1.2
(c) (3)......................................................................... Not Applicable
(d)............................................................................. Not Applicable
(e)............................................................................. 1.2
(f)............................................................................. Not Applicable
(S)315 (a)............................................................................. 6.1(a)
(b)............................................................................. 6.2
................................................................................ 7.3(a) (6)
(c)............................................................................. 6.1(b)
(d)............................................................................. 6.1(c)
(d) (1)......................................................................... 6.1(a) (1)
(d) (2)......................................................................... 6.1(c) (2)
(d) (3)......................................................................... 6.1(c) (3)
(e)............................................................................. 5.14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
----------- -------
<S> <C>
(S)316 (a)............................................................................. 1.1
(a) (1) (A)..................................................................... 5.12
(a) (1) (B)..................................................................... 5.13
(a) (2)......................................................................... Not Applicable
(b)............................................................................. 5.8
(c)............................................................................. 1.4(f)
(S)317 (a) (1)......................................................................... 5.3
(a) (2)......................................................................... 5.4
(b)............................................................................. 10.3
(S)318 (a)............................................................................. 1.7
</TABLE>
- --------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
a part of the Junior Subordinated Indenture.
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION....................................1
Section 1.1. Definitions...........................................................................1
Section 1.2. Compliance Certificate and Opinions..................................................10
Section 1.3. Forms of Documents Delivered to Trustee..............................................10
Section 1.4. Acts of Holders......................................................................11
Section 1.5. Notices, Etc. to Trustee and Company.................................................13
Section 1.6. Notice to Holders; Waiver............................................................13
Section 1.7. Conflict with Trust Indenture Act....................................................14
Section 1.8. Effect of Headings and Table of Contents.............................................14
Section 1.9. Successors and Assigns...............................................................14
Section 1.10. Separability Clause..................................................................14
Section 1.11. Benefits of Indenture................................................................14
Section 1.12. Governing Law........................................................................14
Section 1.13. Non-Business Days....................................................................14
ARTICLE II SECURITY FORMS............................................................................15
Section 2.1. Forms Generally......................................................................15
Section 2.2. Form of Face of Security.............................................................15
Section 2.3. Form of Reverse of Security..........................................................18
Section 2.4. Additional Provisions Required in Global Security....................................21
Section 2.5. Form of Trustee's Certificate of Authentication......................................21
ARTICLE III THE SECURITIES............................................................................21
Section 3.1. Title and Terms......................................................................21
Section 3.2. Denominations........................................................................24
Section 3.3. Execution, Authentication, Delivery and Dating.......................................24
Section 3.4. Temporary Securities.................................................................25
Section 3.5. Registration, Transfer and Exchange..................................................26
Section 3.6. Mutilated, Destroyed, Lost and Stolen Securities.....................................27
Section 3.7. Payment of Interest; Interest Rights Preserved.......................................28
Section 3.8. Persons Deemed Owners................................................................29
Section 3.9. Cancellation.........................................................................30
Section 3.10. Computation of Interest..............................................................30
Section 3.11. Deferrals of Interest Payment Dates..................................................30
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
Section 3.12. Right of Set-Off.....................................................................31
Section 3.13. Agreed Tax Treatment.................................................................32
Section 3.14. Shortening of Stated Maturity........................................................32
Section 3.15. CUSIP Numbers........................................................................32
ARTICLE IV SATISFACTION AND DISCHARGE................................................................32
Section 4.1. Satisfaction and Discharge of Indenture..............................................32
Section 4.2. Application of Trust Money...........................................................33
ARTICLE V REMEDIES..................................................................................34
Section 5.1. Events of Default....................................................................34
Section 5.2. Acceleration of Maturity; Rescission and Annulment...................................35
Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee......................36
Section 5.4. Trustee May File Proofs of Claim.....................................................37
Section 5.5. Trustee May Enforce Claim Without Possession of Securities...........................37
Section 5.6. Application of Money Collected.......................................................38
Section 5.7. Limitation on Suits..................................................................38
Section 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest; Direct Action by
Holders of Capital Securities........................................................39
Section 5.9. Restoration of Rights and Remedies...................................................39
Section 5.10. Rights and Remedies Cumulative.......................................................39
Section 5.11. Delay or Omission Not Waiver.........................................................40
Section 5.12. Control by Holders...................................................................40
Section 5.13. Waiver of Past Defaults..............................................................40
Section 5.14. Undertaking for Costs................................................................41
Section 5.15. Waiver of Usury, Stay or Extension Laws..............................................41
ARTICLE VI THE TRUSTEE...............................................................................41
Section 6.1. Certain Duties and Responsibilities..................................................41
Section 6.2. Notice of Defaults...................................................................42
Section 6.3. Certain Rights of Trustee............................................................43
Section 6.4. Not Responsible for Recitals or Issuance of Securities...............................44
Section 6.5. May Hold Securities..................................................................44
Section 6.6. Money Held in Trust..................................................................44
Section 6.7. Compensation and Reimbursement.......................................................44
Section 6.8. Disqualification; Conflicting Interests..............................................45
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.9. Corporate Trustee Required; Eligibility..............................................45
Section 6.10. Resignation and Removal; Appointment of Successor....................................45
Section 6.11. Acceptance of Appointment by Successor...............................................47
Section 6.12. Merger, Conversion, Consolidation or Succession to Business..........................48
Section 6.13. Preferential Collection of Claims Against Company....................................48
Section 6.14. Appointment of Authenticating Agent..................................................48
ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY.........................................50
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders............................50
Section 7.2. Preservation of Information, Communications to Holders...............................50
Section 7.3. Reports by Trustee...................................................................51
Section 7.4. Reports by Company...................................................................51
ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE......................................51
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms.................................51
Section 8.2. Successor Corporation Substituted....................................................52
ARTICLE IX SUPPLEMENTAL INDENTURES...................................................................53
Section 9.1. Supplemental Indentures without Consent of Holders...................................53
Section 9.2. Supplemental Indentures with Consent of Holders......................................54
Section 9.3. Execution of Supplemental Indentures.................................................55
Section 9.4. Effect of Supplemental Indentures....................................................55
Section 9.5. Conformity with Trust Indenture Act..................................................55
Section 9.6. Reference in Securities to Supplemental Indentures...................................56
ARTICLE X COVENANTS.................................................................................56
Section 10.1. Payment of Principal, Premium and Interest...........................................56
Section 10.2. Maintenance of Office or Agency......................................................56
Section 10.3. Money for Security Payments to be Held in Trust......................................57
Section 10.4. Statement as to Compliance...........................................................58
Section 10.5. Waiver of Certain Covenants..........................................................58
Section 10.6. Additional Sums......................................................................58
Section 10.7. Additional Covenants.................................................................59
Section 10.8. Payment of Expenses..................................................................60
ARTICLE XI REDEMPTION OF SECURITIES..................................................................61
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C> <C>
Section 11.1. Applicability of This Article........................................................61
Section 11.2. Election to Redeem; Notice to Trustee................................................61
Section 11.3. Selection of Securities to be Redeemed...............................................61
Section 11.4. Notice of Redemption.................................................................62
Section 11.5. Deposit of Redemption Price..........................................................63
Section 11.6. Payment of Securities Called for Redemption..........................................63
Section 11.7. Right of Redemption of Securities Initially Issued to a Downey Trust.................63
ARTICLE XII SINKING FUNDS.............................................................................64
Section 12.1. Applicability of Article.............................................................64
Section 12.2. Satisfaction of Sinking Fund Payments with Securities................................64
Section 12.3. Redemption of Securities for Sinking Fund............................................65
ARTICLE XIII SUBORDINATION OF SECURITIES...............................................................66
Section 13.1. Securities Subordinate to Senior and Subordinated Debt...............................66
Section 13.2. Payment Over of Proceeds Upon Dissolution, Etc.......................................66
Section 13.3. Reserved.............................................................................67
Section 13.4. No Payment When Senior and Subordinated Debt in Default..............................67
Section 13.5. Payment Permitted If No Default......................................................68
Section 13.6. Subrogation to Rights of Holders of Senior and Subordinated Debt.....................68
Section 13.7. Provisions Solely to Define Relative Rights..........................................69
Section 13.8. Trustee to Effectuate Subordination..................................................69
Section 13.9. No Waiver of Subordination Provisions................................................69
Section 13.10. Notice to Trustee....................................................................70
Section 13.11. Reliance on Judicial Order or Certificate of Liquidating Agent.......................70
Section 13.12. Trustee Not Fiduciary for Holders of Senior and Subordinated Debt....................71
Section 13.13. Rights of Trustee as Holder of Senior and Subordinated Debt;
Preservation of Trustee's Rights.....................................................71
Section 13.14. Article Applicable to Paying Agents..................................................71
Section 13.15. Certain Conversions or Exchanges Deemed Payment......................................71
</TABLE>
-iv-
<PAGE>
JUNIOR SUBORDINATED INDENTURE, dated as of ______________, 1999, between
DOWNEY FINANCIAL CORP., a Delaware corporation (hereinafter called the
"Company") having its principal office at 3501 Jamboree Road, North Tower,
Newport Beach, California 92660, and WILMINGTON TRUST COMPANY, a Delaware
banking corporation, as Trustee (hereinafter called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured junior
subordinated debt securities in series (hereinafter called the "Securities") of
substantially the tenor hereinafter provided, including, without limitation,
Securities issued to evidence loans made to the Company of the proceeds from the
issuance from time to time by one or more business trusts (each a "Downey
Trust," and, collectively, the "Downey Trusts") of capital trust interests in
such Trusts (the Capital Securities") and common interests in such Trusts (the
"Common Securities" and, collectively with the Capital Securities, the Trust
Securities), and to provide the terms and conditions upon which the Securities
are to be authenticated, issued and delivered.
All things necessary to make the Securities, when executed by the Company
and authenticated and delivered hereunder and duly issued by the Company the
valid obligations of the Company, and to make this Indenture a valid agreement
of the Company, in accordance with their and its terms, have been done.
NOW THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the
premises and the purchase of the Securities by the Holders thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders of the Securities or of any series thereof, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(a) The terms defined in this Article have the meanings assigned to them in
this Article, and include the plural as well as the singular;
(b) All other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
(c) All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles,
and the term "generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles which are generally accepted at the date or time of such
<PAGE>
computation; provided, that when two or more principles are so generally
accepted, it shall mean that set of principles consistent with those in use by
the Company; and
(d) 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.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Act" when used with respect to any Holder has the meaning specified in
Section 1.4.
"Additional Interest" means the interest, if any, that shall accrue on any
interest on the Securities of any series the payment of which has not been made
on the applicable Interest Payment Date or other date when due, including
without limitation any interest which is deferred as the result of an Extension
Period, and which shall accrue at the rate per annum specified or determined as
specified in such Security.
"Additional Sums" has the meaning specified in Section 10.6.
"Additional Taxes" means the sum of any additional taxes, duties and other
governmental charges to which a Downey Trust has become subject from time to
time as a result of a Tax Event.
"Administrative Trustee" means, in respect of any Downey Trust, each Person
identified as an "Administrative Trustee" or an "Administrative Agent" in the
related Amended and Restated Trust Agreement, solely in such Person's capacity
as Administrative Trustee or an Administrative Agent, as the case may be, of
such Downey Trust under such Amended and Restated Trust Agreement and not in
such Person's individual capacity, or any successor administrative trustee or
successor administrative agent, as the case may be, appointed as therein
provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, no Downey Trust to which
Securities have been issued shall be deemed to be an Affiliate of the Company.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Allocable Amounts," when used with respect to any Senior and Subordinated
Debt, means all amounts due or to become due on such Senior and Subordinated
Debt less, if applicable, any amount which would have been paid to, and retained
by, the holders of such Senior and Subordinated Debt (whether as a result of the
receipt of payments by the holders of such Senior and Subordinated Debt from the
Company or any other obligor thereon or from any holders of, or trustee in
respect of, other indebtedness that is subordinate and junior in right of
payment to such Senior and Subordinated Debt pursuant to any provision of such
indebtedness for the payment over of amounts received on account of such
indebtedness to the holders of such Senior and Subordinated Debt or otherwise)
but for the fact that such Senior and Subordinated
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Debt is subordinate or junior in right of payment to (or subject to a
requirement that amounts received on such Senior and Subordinated Debt be paid
over to obligees on) trade accounts payable or accrued liabilities arising in
the ordinary course of business.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
to Section 6.14 to act on behalf of the Trustee to authenticate Securities of
one or more series.
"Board of Directors" means either the board of directors of the Company or
any committee of that board duly authorized to act hereunder.
"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, or such committee of the Board of Directors or officers of the
Company to which authority to act on behalf of the Board of Directors has been
delegated, 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 (i) a Saturday or Sunday, (ii) a
day on which banking institutions in the State of California are authorized or
required by law or executive order to remain closed.
"Capital Securities" has the meaning specified in the first recital of this
Indenture.
"Capital Securities Guarantee" means the Capital Securities Guarantee
Agreement substantially in the form attached hereto as Annex C, or substantially
in such form as may be specified as contemplated by Section 3.1 with respect to
the Securities of any series and operates directly or indirectly for the benefit
of holders of the related series of Capital Securities, in each case as amended
from time to time.
"Capital Treatment Event" means, in respect of any Downey Trust, the
receipt by the Company and the Downey 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 thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such prospective change,
pronouncement, action or decision is announced on or after the original issuance
date of the Capital Securities of such Downey Trust, there is more than an
insubstantial risk that (i) the Company will not be entitled to treat the
Capital Securities (or any substantial portion thereof) as "Tier I Capital" (or
the then equivalent thereof) for purposes of the capital adequacy guidelines of
the primary federal regulator of the Company, as then in effect and applicable
to the Company in which case such legal opinion shall also state that the
Company is subject to those capital adequacy guidelines, (ii) the Subsidiary
Bank will not be entitled to treat net proceeds from the sale of Securities of a
series issued to such Downey Trust that are invested in the Subsidiary Bank (or
any substantial portion thereof) as "Tier I Capital" (or the then equivalent
thereof) for purposes of the capital adequacy guidelines of the primary federal
regulator of the Subsidiary Bank, as then in effect and applicable to the
Subsidiary Bank (assuming for the purpose of this clause (ii) that ____% of such
net proceeds
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are invested in the Subsidiary Bank in the form of capital contribution or the
purchase of common stock of the Subsidiary Bank).
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties on such date.
"Common Securities" has the meaning specified in the first recital of this
Indenture.
"Common Securities Guarantee" means the Common Securities Guarantee
Agreement substantially in the form attached hereto as Annex D, substantially in
such form as may be specified as contemplated by Section 3.1 with respect to the
Securities of any series and operates directly or indirectly for the benefit of
holders of Common Securities, in each case, as amended from time to time.
"Common Stock" means the common stock, no par value, of the Company.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor corporation shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation.
"Company Request" and "Company Order" mean, respectively, the written
request or order signed in the name of the Company by the Chairman of the Board
of Directors, the Vice Chairman of the Board of Directors, its Chief Executive
Officer, its President or a Vice President, and by its Chief Financial Officer,
its Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Corporate Trust Office" means the principal office of the Trustee at which
at any particular time its corporate trust business shall be administered.
"Corporation" includes a corporation, association, company, joint-stock
company or business trust.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) all
indebtedness of such Person whether incurred on or prior to the date of this
Indenture or thereafter incurred, for claims in respect of derivative products,
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another Person and
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all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable for, directly or indirectly,
as obligor or otherwise.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Delaware Trustee" means in respect to any Downey Trust, the commercial
bank or trust company identified as the "Delaware Trustee" in the related Trust
Agreement, solely in its capacity as Delaware Trustee of such Downey Trust under
such Trust Agreement and not in its individual capacity, or its successor in
interest in such capacity or any successor Delaware trustee appointed as therein
provided.
"Depositary" means, with respect to the Securities of any series issuable
or issued in whole or in part in the form of one or more Global Securities, the
Person designated as Depositary by the Company pursuant to Section 3.1 with
respect to such series (or any successor thereto).
"Discount Security" means any security which provides for an amount less
than the principal amount thereof to be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 5.2.
"Distributions," with respect to the Trust Securities issued by a Downey
Trust, means amounts payable in respect of such Trust Securities as provided in
the related Trust Agreement and referred to therein as "Distributions."
"Dollar" or "U.S. $" means the currency of the United States of America
that, as at the time of payment, is legal tender for the payment of public and
private debts.
"Downey Trust Guarantee" means the guarantee by the Company of
distributions on the Capital Securities of a Downey Trust to the extent provided
in the related Capital Securities Guarantee.
"Downey Trust" has the meaning specified in the first recital of this
Indenture.
"Event of Default" has the meaning specified in Article V unless otherwise
specified in the supplemental indenture or the Officers' Certificate delivered
pursuant to Section 3.1 hereof creating a series of Securities.
"Exchange Act" means the Securities Exchange Act of 1934 and any statute
successor thereto, in each case as amended from time to time.
"Extension Period" has the meaning specified in Section 3.11.
"Financing Entity" has the meaning specified in the definition of Senior
and Subordinated Debt.
"Global Security" means a Security in the form prescribed in Section 2.4
evidencing all or part of a series of Securities, issued to the Depositary or
its nominee for such series, and registered in the name of such Depositary or
its nominee.
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"Holder" means a Person in whose name a Security is registered in the
Securities Register.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof or one or more
Officers' Certificates delivered pursuant to Section 3.1 and shall include the
terms of each particular series of Securities established as contemplated by
Section 3.1.
"Interest Payment Date" means as to each series of Securities the Stated
Maturity of an installment of interest on such Securities.
"Investment Company Event" means, in respect of a Downey Trust, the receipt
by the Company and the Downey Trust of an Opinion of Counsel experienced in such
matters to the effect that as the result of any change in law or regulation or
any 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 such Downey Trust is or will be considered
an "investment company" that is required to be registered under the 1940 Act,
which change becomes effective on or which written change is announced or after
the date of original issuance of the Capital Securities of such Downey Trust.
"Junior Subordinated Payment" has the meaning specified in Section 13.2.
"Maturity" when used with respect to any Security means the date on which
the principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"Notice of Default" means a written notice of the kind specified in Section
5.1(c).
"Officers' Certificate" means a certificate signed by the Chairman of the
Board of Directors, a Vice Chairman of the Board of Directors, the Chief
Executive Officer, the President or a Vice President, and by the Chief Financial
Officer, the Secretary or an Assistant Secretary of the Company, and delivered
to the Trustee.
"Opinion of Counsel" means a written opinion of nationally recognized
independent counsel, who may be counsel for the Company (such counsel for the
Company may include Manatt, Phelps & Phillips, LLP), but not an employee of the
Company, and who shall be reasonably acceptable to the Trustee.
"Original Issue Date" means the date of issuance specified as such in each
Security.
"Outstanding" means, when used in reference to any Securities, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
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(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent in
trust for the Holders of such Securities; provided that, if such Securities are
to be redeemed, notice of such redemption has been duly given pursuant to this
Indenture; and
(iii) Securities in substitution for or in lieu of which other
Securities have been authenticated and delivered or which have been paid
pursuant to Section 3.6, unless proof satisfactory to the Trustee is presented
that any such Securities are held by Holders in whose hands such Securities are
valid, binding and legal obligations of the Company; provided, however, that in
determining whether the Holders of the requisite principal amount of Outstanding
Securities have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Securities owned by the Company or any other
obligor upon the Securities or, unless all the Securities of a series shall then
be held by an Affiliate of the Company, any Affiliate of the Company or such
other obligor shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Company or any other obligor upon the Securities or any Affiliate of
the Company or such other obligor. Upon the written request of the Trustee, the
Company shall furnish to the Trustee promptly an Officers' Certificate listing
and identifying all Securities, if any, known by the Company to be owned or held
by or for the account of the Company, or any other obligor on the Securities or
any Affiliate of the Company or such obligor, and, subject to the provisions of
Section 6.1, the Trustee shall be entitled to accept such Officers' Certificate
as conclusive evidence of the facts therein set forth and of the fact that all
Securities not listed therein are Outstanding for the purpose of any such
determination.
"Paying Agent" means the Trustee or any Person authorized by the Company to
pay the principal of or interest on any Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, joint venture,
trust, limited liability company or corporation, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment" means, with respect to the Securities of any series, the
place or places where the principal of (and premium, if any) and interest on the
Securities of such series are payable pursuant to Sections 3.1 and 3.11.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any security
authenticated and delivered under Section 3.6 in lieu of a lost, destroyed or
stolen Security shall be deemed to evidence the same debt as the lost, destroyed
or stolen Security.
"Proceeding" has the meaning specified in Section 13.2.
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"Property Trustee" means, in respect of any Downey Trust, the commercial
bank or trust company identified as the "Property Trustee" in the related Trust
Agreement, solely in its capacity as Property Trustee of such Downey Trust under
such Trust Agreement and not in its individual capacity, or its successor in
interest in such capacity, or any successor property trustee appointed as
therein provided.
"Redemption Date," when used with respect to any Security to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price," when used with respect to any Security to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
with respect to the Securities of a series means, unless otherwise provided
pursuant to Section 3.1 with respect to Securities of a series, (i) in the case
of Securities of a series represented by one or more Global Securities, the
Business Day next preceding such Interest Payment Date and (ii) in the case of
Securities of a series not represented by one or more Global Securities, the
date which is fifteen days next preceding such Interest Payment Date (or if such
date is not a Business Day, the next Business Day following such date).
"Responsible Officer" when used with respect to the Trustee means any
officer of the Trustee assigned by the Trustee from time to time to administer
its corporate trust matters.
"Securities" or "Security" means any debt securities or debt security, as
the case may be, authenticated and delivered under this Indenture.
"Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 3.5.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt of the Company, whether incurred on or prior to the date of this Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is expressly provided that
such obligations are not superior in right of payment to the Securities or is
pari passu with, or subordinated to the Securities, or to other Debt which by
its express terms is pari passu with, or subordinated to the Securities,
provided, however, that Senior and Subordinated Debt shall not be deemed to
include (a) any Debt of the Company which, when incurred and without respect to
any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, as
amended, or any successor provision thereto was without recourse to the Company,
(b) any Debt of the Company to any of its Subsidiaries, (c) Debt to any employee
of the Company, (d) any Securities, (e) in respect of a Downey Trust, any Debt
between or among the Company and any of its Affiliates, including all other debt
securities issued to any Downey Trust or trustee of any Downey Trust,
partnership, limited liability company or other entity affiliated with the
Company which is a financial vehicle of the Company (a "Financing Entity") in
connection with the issuance by that Financing Entity of preferred securities or
other securities that rank pari passu with or subordinate in right of
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payment to the related series of Capital Securities issued by such Downey Trust
or the Company's guarantee in connection with such issuance by such Financing
Entity which guarantee ranks pari passu with or subordinate in right of payment
to the Downey Trust Guarantee, (f) any trade accounts payable or accrued
liabilities arising in the Company's ordinary course of business, and (g) any
liabilities for federal, state, local or other taxes.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 3.7.
"Stated Maturity" when used with respect to any Security or any installment
of principal thereof or interest thereon means the date specified pursuant to
the terms of such Security as the date on which the principal of such Security
or such installment of interest is due and payable, in the case of such
principal, as such date may be shortened or extended as provided pursuant to the
terms of such Security and this Indenture.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
For purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
"Subsidiary Bank" means Downey Savings and Loan Association, F.A., a
federally chartered savings and loan association and the principal Subsidiary of
the Company.
"Tax Event" means the receipt by the Company and the Downey 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 or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such prospective change, pronouncement, action or decision is
announced on or after the original issuance date of the Capital Securities of
such Downey Trust, there is more than an insubstantial risk that (i) such Downey
Trust is, or will be within 90 days of the date of such Opinion of Counsel,
subject to United States Federal income tax with respect to income received or
accrued on the corresponding series of Securities, (ii) interest payable by the
Company on such corresponding series of Securities is not, or within 90 days of
the date of such Opinion of Counsel will not be, deductible by the Company, in
whole or in part, for United States Federal income tax purposes or (iii) such
Downey Trust is, or will be within 90 days of the date of such Opinion of
Counsel, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
"Trust" has the meaning specified in the first recital of this Indenture.
"Trust Agreement" means the Trust Agreement substantially in the form
attached hereto as Annex A, as amended by the form of Amended and Restated Trust
Agreement substantially in the form attached hereto as Annex B, or substantially
in such form as may be specified as
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contemplated by Section 3.1 with respect to the Securities of any series, in
each case as amended from time to time.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then a Trustee hereunder and, if at any time there is
more than one such Person, "Trustee" as used with respect to the Securities of
any series shall mean the Trustee with respect to Securities of that series.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
(S)(S) 77aaa-77bbb), as amended and as in effect on the date as of this
Indenture, except as provided in Section 9.5.
"Trust Securities" has the meaning specified in the first recital of this
Indenture.
"Vice President" when used with respect to the Company, means any duly
appointed vice president, whether or not designated by a number or a word or
words added before or after the title "vice president."
Section 1.2. Compliance Certificate and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent
(including covenants, compliance with which constitutes a condition precedent),
if any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent (including covenants compliance with which
constitute a condition precedent), if any, have been complied with, except that
in the case of any such application or request as to which the furnishing of
such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than the certificates provided
pursuant to Section 10.4) shall include:
(1) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating thereto;
(2) 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;
(3) a statement that, in the opinion of each such individual, 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
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(4) a statement as to whether, in the opinion of each such individual, such
condition or covenant has been complied with.
Section 1.3. Forms of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions, or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 1.4. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given to or taken by Holders
may be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Holders in person or by an agent or proxy duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments is or are
delivered to the Trustee, and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 6.1) conclusive in favor of
the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by
the certificate of any notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is
by a Person acting in other than his individual capacity, such certificate or
affidavit shall also constitute sufficient proof of his authority.
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(c) The fact and date of the execution by any Person of any such instrument
or writing, or the authority of the Person executing the same, may also be
proved in any other manner which the Trustee deems sufficient and in accordance
with such reasonable rules as the Trustee may determine.
(d) The ownership of Securities shall be proved by the Securities Register.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Security shall bind every future Holder of
the same Security and the Holder of every Security issued upon the transfer
thereof or in exchange therefor or in lieu thereof in respect of anything done
or suffered to be done by the Trustee or the Company in reliance thereon,
whether or not notation of such action is made upon such Security.
(f) The Company may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities of any series entitled to
give, make or take any request, demand, authorization, direction, notice,
consent, waiver or other action provided or permitted by this Indenture to be
given, made or taken by Holders of Securities of such series, provided that the
Company may not set a record date for, and the provisions of this paragraph
shall not apply with respect to, the giving or making of any notice,
declaration, request or direction referred to in the next paragraph. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities of the relevant series on such record date, and no other Holders,
shall be entitled to take the relevant action, whether or not such Holders
remain Holders after such record date, provided that no such action shall be
effective hereunder unless taken on or prior to the applicable Expiration Date
(as defined below) by Holders of the requisite principal amount of Outstanding
Securities of such series on such record date. Nothing in this paragraph shall
be construed to prevent the Company from setting a new record date for any
action for which a record date has previously been set pursuant to this
paragraph (whereupon the
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record date previously set shall automatically and with no action by any Person
be canceled and of no effect), and nothing in this paragraph shall be construed
to render ineffective any action taken by Holders of the requisite principal
amount of Outstanding Securities of the relevant series on the date such action
is taken. Promptly after any record date is set pursuant to this paragraph, the
Company, at its own expense, shall cause notice of such record date, the
proposed action by Holders and the applicable Expiration Date to be given to the
Trustee in writing and to each Holder of Securities of the relevant series in
the manner set forth in Section 1.6.
The Trustee may set any day as a record date for the purpose of determining
the Holders of Outstanding Securities of any series entitled to join in the
giving or making of (i) any Notice of Default, (ii) any declaration of
acceleration referred to in Section 5.2, (iii) any request to institute
proceedings referred to in Section 5.7(b) or (iv) any direction referred to in
Section 5.12, in each case with respect to Securities of such series. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities of such series on such record date, and no other Holders, shall be
entitled to join in such notice, declaration, request or direction, whether or
not such Holders remain Holders after such record date, provided that no such
action shall be effective hereunder unless taken on or prior to the applicable
Expiration Date by Holders of the requisite principal amount of Outstanding
Securities of such series on such record date. Nothing in this paragraph shall
be construed to prevent the Trustee from setting a new record date for any
action for which a record date has previously been set pursuant to this
paragraph (whereupon the record date previously set shall automatically and with
no action by any Person be canceled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Securities of the relevant
series on the date such action is taken. Promptly after any record date is set
pursuant to this paragraph, the Trustee, at the Company's expense, shall cause
notice of such record date, the proposed action by Holders and the applicable
Expiration Date to be given to the Company in writing and to each Holder of
Securities of the relevant series in the manner set forth in Section 1.6.
With respect to any record date set pursuant to this Section, the party
hereto which sets such record dates may designate any day as the "Expiration
Date" and from time to time may change the Expiration Date to any earlier or
later day, provided that no such change shall be effective unless notice of the
proposed new Expiration Date is given to the other party hereto in writing, and
to each Holder of Securities of the relevant series in the manner set forth in
Section 10.6, on or prior to the existing Expiration Date. If an Expiration
Date is not designated with respect to any record date set pursuant to this
Section, the party hereto which set such record date shall be deemed to have
initially designated the 180th day after such record date as the Expiration Date
with respect thereto, subject to its right to change the Expiration Date as
provided in this paragraph. Notwithstanding the foregoing, no Expiration Date
shall be later than the 180th day after the applicable record date.
(g) Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any particular Security may do so with regard to
all or any part of the principal amount of such Security or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.
Section 1.5. Notices, Etc. to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
(a) the Trustee by any Holder, any holder of Capital Securities or the
Company shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Trustee at its Corporate Trust
Office, or
(b) the Company by the Trustee, any Holder or any holder of Capital
Securities shall be sufficient for every purpose (except as otherwise provided
in Section 5.1) hereunder if in writing and mailed, first class, postage
prepaid, to the Company, addressed to it at the address of its principal office
specified in the first paragraph of this instrument or at any other address
previously furnished in writing to the Trustee by the Company.
Section 1.6. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first class postage prepaid, to each Holder affected
by such event, at the address of such Holder as it appears in the Securities
Register, not later than the latest date, and not earlier than the earliest
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date, prescribed for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by
Holders shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
Section 1.7. Conflict with Trust Indenture Act.
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by any of Sections 310 to 317, inclusive, of the Trust Indenture
Act through operation of Section 318(c) thereof, such imposed duties shall
control.
Section 1.8. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
Section 1.9. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
Section 1.10. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 1.11. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall
give to any Person, other than the parties hereto and their successors and
assigns, the Holders of Senior and Subordinated Debt, the Holders of the
Securities and, to the extent expressly provided in Sections 5.2, 5.8, 5.9,
5.11, 5.13, 9.1 and 9.2, the holders of Capital Securities, any benefit or any
legal or equitable right, remedy or claim under this Indenture.
Section 1.12. Governing Law.
This Indenture and the Securities shall be governed by and construed in
accordance with the laws of the State of California without regard to conflicts
of laws principles thereof, except that the immunities and standard of care of
the Trustee shall be governed by Delaware law.
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Section 1.13. Non-Business Days.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or the Securities) payment of interest or
principal (and premium, if any) need not be made on such date, but may be made
on the next succeeding Business Day (and no interest shall accrue for the period
from and after such Interest Payment Date, Redemption Date or Stated Maturity,
as the case may be, until such next succeeding Business Day) with the same force
and effect as if made on the Interest Payment Date or Redemption Date or at the
Stated Maturity.
ARTICLE II
SECURITY FORMS
Section 2.1. Forms Generally.
The Securities of each series shall be in substantially the forms set forth
in this Article, or in such other form or forms as shall be established by or
pursuant to a Board Resolution or in one or more indentures supplemental hereto,
in each case with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with applicable tax
laws or the rules of any securities exchange or as may, consistently herewith,
be determined by the officers executing such securities, as evidenced by their
execution of the Securities. If the form of Securities of any series is
established by action taken pursuant to a Board Resolution, a copy of an
appropriate record of such action shall be certified by the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee at or prior to
the delivery of the Company Order contemplated by Section 3.3 with respect to
the authentication and delivery of such Securities.
The Trustee's certificates of authentication shall be substantially in the
form set forth in this Article.
The definitive Securities shall be printed, lithographed or engraved or
produced by any combination of these methods, if required by any securities
exchange on which the Securities may be listed, on a steel engraved border or
steel engraved borders or may be produced in any other manner permitted by the
rules of any securities exchange on which the Securities may be listed, all as
determined by the officers executing such Securities, as evidenced by their
execution of such securities.
Section 2.2. Form of Face of Security.
DOWNEY FINANCIAL CORP.
__% Junior Subordinated Debenture due ___________
Registered Principal Amount:
No. CUSIP No.:
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DOWNEY FINANCIAL CORP., a corporation organized and existing under the laws
of California (hereinafter called the "Company", which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to __________, or registered assigns, the
principal sum of $_______ Dollars on ________; provided that the Company may
shorten the Stated Maturity of the principal of this Security to a date not
earlier than ________. The Company further promises to pay interest on said
principal sum from ________ or from the most recent interest payment date (each
such date, an "Interest Payment Date") on which interest has been paid or duly
provided for, quarterly (subject to deferral as set forth herein) in arrears on
the _____ day of _____, _____, _____ and _____ of each year commencing ________
at the rate of ____% per annum, until the principal hereof shall have become due
and payable, plus Additional Interest, if any, until the principal hereof is
paid or duly provided for or made available for payment 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 the rate of ____% per annum, compounded quarterly. The amount of
interest payable for any period shall be computed on the basis of twelve 30-day
months and a 360-day year. The amount of interest payable for any partial
period shall be computed on the basis of the actual number of days elapsed in a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on this Security is not a Business Day, then a payment of
the interest payable on such date will be made on the next succeeding day which
is a Business Day (and without any interest or other payment in respect of any
such delay), with the same force and effect as if made on the date the payment
was originally payable. A "Business Day" shall mean any day other than a
Saturday or Sunday a day on which banking institutions in the State of New York
are authorized or required by law or executive order to remain closed. The
interest installment so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered on the Regular Record Date for such interest installment, which shall
be [insert Record Date] next preceding such Interest Payment Date. Any such
interest installment not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders of Securities of this series not less than
____ days prior to such Special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities of this series may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said Indenture.
[If applicable insert--So long as no Event of Default has occurred and is
continuing, the Company shall have the right at any time during the term of this
Security to defer payment of interest on this Security, at any time or from time
to time, for up to 20 consecutive quarterly interest payment periods with
respect to each deferral period (each an "Extension Period") (at the end of
which the Company shall pay all interest then accrued and unpaid (together with
Additional Interest thereon to the extent permitted by applicable law));
provided, however, that no Extension Period shall extend beyond the Stated
Maturity of the principal of this Security; [if applicable, insert--provided,
further, that at any time while an Extension Period is in effect and the Company
shortens the Stated Maturity of the principal of such Securities to end before
the last day of such Extension Period, then the Extension Period will be deemed
to end on the Stated
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Maturity;] provided, further, that at any time while an Extension Period is in
effect and the Company elects to redeem all Outstanding Securities of such
Securities before the last day of such Extension Period, then the Extension
Period will be deemed to end on such Redemption Date; provided, further, that
during any such Extension Period, the Company shall not, and shall not permit
any Subsidiary of the Company to, (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 (which includes common and
capital stock), or (ii) make any payment of principal of or interest or premium,
if any, on or repay, repurchase or redeem any debt security of the Company
(including Securities issued by the Company pursuant to the Indenture other than
the Securities represented by this certificate) that ranks pari passu with or
junior in right of payment to this Security, (iii) make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
Subsidiaries of the Company (if such guarantee ranks pari passu in all respects
with or junior in right of payment to this Security) (other than (a) any
dividend in a form of stock, warrants, options or other rights where the
dividend or the stock issuable upon the exercise of the warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks on parity with or junior in right of payment to such stock), (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Downey Trust Guarantee related to the Capital Securities
issued by [name of Trust], and (d) purchases of Common Stock related to the
issuance of Common Stock or rights under any of the Company's benefit plans for
its directors, officers or employees) or (iv) redeem, purchase or acquire less
than all of the Securities of this series or any of the Capital Securities.
Prior to the termination of any such Extension Period, the Company may further
extend such Extension Period, provided that such extension does not cause such
Extension Period to exceed ___ consecutive interest payment periods or to extend
beyond the Stated Maturity. Upon the termination of any such Extension Period
and upon the payment of all amounts then due on any Interest Payment Date, and
subject to the foregoing limitation, the Company may elect to begin a new
Extension Period. No interest shall be due and payable during an Extension
Period except at the end thereof. The Company shall give the Trustee, the
Property Trustee and the Administrative Trustees of [name of Trust] notice of
its election to begin any Extension Period at least ___ Business Days prior to
the earlier of (i) the date on which Distributions on the Capital Securities or
interest on this Security would be payable except for the election to begin such
Extension Period, or (ii) the date the Administrative Trustees are or the
Indenture Trustee is required to give notice to the New York Stock Exchange, the
Nasdaq National Market or other applicable stock exchange or automated quotation
system on which the Capital Securities are or this Security is then listed or
quoted or to holders of such Capital Securities or the holder of this Security
of the record date or (iii) the date the interest is payable, but in any event
not less than ___ Business Days prior to such record date. The Trustee shall
give notice of the Company's election to begin a new Extension Period to the
holders of the Capital Securities. There is no limitation on the number of times
that the Company may elect to begin an Extension Period.]
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Trustee or at the office of
such paying agent or paying agents as the Company may designate from time to
time, maintained for that purpose in the United States, in such coin or currency
of the United States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that at the option of
the
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Company payment of interest may be made (i) by check mailed to the address of
the Person entitled thereto as such address shall appear in the Securities
Register or (ii) by transfer to an account maintained by the person entitled
thereto, in immediately available funds, at such place and to such account as
may be designated by the Person entitled thereto as specified in the Securities
Register.
The indebtedness evidenced by this Security is, to the extent provided in
the Indenture, unsecured and will rank junior and subordinate and subject in
right of payments to the prior payment in full of all Senior and Subordinated
Debt, and this Security is issued subject to the provisions of the Indenture
with respect thereto. Each Holder of this Security, by accepting the same, (a)
agrees to and shall be bound by such provisions, (b) authorizes and directs the
Trustee on his behalf to take such actions as may be necessary or appropriate to
effectuate the subordination so provided and (c) appoints the Trustee his
attorney-in-fact for any and all such purposes. Each Holder hereof, by his
acceptance hereof, waives all notice of the acceptance of the subordination
provisions contained herein and in the Indenture by each holder of Senior and
Subordinated Debt, whether now outstanding or hereafter incurred, and waives
reliance by each such holder upon said provisions.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
DOWNEY FINANCIAL CORP.
By: ___________________________
[President or Vice President]
Attest:
______________________________
[Secretary or Assistant Secretary]
Section 2.3. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under a Junior Subordinated Indenture, dated as of ________, 1999 (herein
called the "Indenture"), between the Company and Wilmington Trust Company, as
Trustee (herein called the "Trustee", which term includes any successor trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Trustee, the Company and the
Holders of the Securities, and of the terms upon which the Securities are, and
are to be, authenticated and
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delivered. This Security is one of the series designated on the face hereof,
limited in aggregate principal amount to $_________.
All terms used in this Security that are defined in the Indenture and in
the Amended and Restated Trust Agreement, dated as of _____________, 1999, as
amended (the "Amended and Restated Trust Agreement"), for [insert name of trust]
among Downey Financial Corp., as Depositor, and the Trustees named therein,
shall have the meanings assigned to them in the Indenture or the Amended and
Restated Trust Agreement, as the case may be.
[If applicable, insert--The Company may at any time, at its option, on or
after ________, and subject to the terms and conditions of Article XI of the
Indenture], redeem this Security [in whole at any time] [or in part from time to
time], at a redemption price equal to [insert redemption price] to the
Redemption Date.]
[If applicable, insert--Upon the occurrence and during the continuation of
a Tax Event, Investment Company Event or Capital Treatment Event in respect of a
Downey Trust, the Company may, at its option, at any time within 90 days of the
occurrence of such Tax Event, Investment Company Event or Capital Treatment
Event redeem this Security, [if applicable, insert--in whole but not in part],
subject to the provisions of Section 11.7 and the other provisions of Article XI
of the Indenture, at a redemption price equal to [insert redemption price] to
the Redemption Date.]
[If applicable, insert--In the event of redemption of this Security in part
only, a new Security or Securities of this series for the portion hereof not
redeemed will be issued in the name of the Holder hereof upon the cancellation
hereof.]
The Indenture contains provisions for satisfaction and discharge of the
entire indebtedness of this Security upon compliance by the Company with certain
conditions set forth in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the
Company and the Trustee at any time to enter into a supplemental indenture or
indentures for the purpose of modifying in any manner the rights and obligations
of the Company and of the Holders of the Securities, with the consent of the
Holders of
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not less than a majority in principal amount of the Outstanding Securities of
each series to be affected by such supplemental indenture. The Indenture also
contains provisions permitting Holders of specified percentages in principal
amount of the Securities of each series at the time Outstanding, on behalf of
the Holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.
[If the Security is not a Discount Security,--As provided in and subject to
the provisions of the Indenture, if an Event of Default with respect to the
Securities of this series at the time Outstanding occurs and is continuing, then
and in every such case the Trustee or the Holders of not less than 25% in
principal amount of the Outstanding Securities of this series may declare the
principal amount of all the Securities of this series to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by Holders), provided that, in the case of the Securities of this series issued
to a Downey Trust, if upon an Event of Default, the Trustee or the Holders of
not less than 25% in principal amount of the Outstanding Securities of this
series fails to declare the principal of all the Securities of this series to be
immediately due and payable, the holders of at least 25% in aggregate
Liquidation Amount of the Capital Securities then outstanding shall have such
right by a notice in writing to the Company and the Trustee; and upon any such
declaration the principal amount of and the accrued interest (including any
Additional Interest) on all the Securities of this series shall become
immediately due and payable, provided that the payment of principal and interest
(including any Additional Interest) on such Securities shall remain subordinated
to the extent provided in Article XIII of the Indenture.]
[If the Security is a Discount Security,--As provided in and subject to the
provisions of the Indenture, if an Event of Default with respect to the
Securities of this series at the time Outstanding occurs and is continuing, then
and in every such case the Trustee or the Holders of not less than such portion
of the principal amount as may be specified in the terms of this series may
declare an amount of principal of the Securities of this series to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by Holders), provided that, in the case of the Securities of this
series issued to a Downey Trust, if upon an Event of Default, the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Securities
of this series fails to declare the principal of all the Securities of this
series to be immediately due and payable, the holders of at least 25% in
aggregate Liquidation Amount of the Capital Securities then outstanding shall
have such right by a notice in writing to the Company and the Trustee. Such
amount shall be equal to [insert formula for determining the amount]. Upon any
such declaration, such amount of the principal of and the accrued interest
(including any Additional Interest) on all the Securities of this series shall
become immediately due and payable, provided that the payment of principal and
interest (including any Additional Interest) on such Securities shall remain
subordinated to the extent provided in Article XIII of the Indenture. Upon
payment (i) of the amount of principal so declared due and payable and (ii) of
interest on any overdue principal and overdue interest (in each case to the
extent that the payment of such interest shall be legally enforceable), all of
the Company's obligations in respect of the payment of the principal of and
interest, if any, on this Security shall terminate.]
No reference herein to the Indenture and no provision of this 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 Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Securities Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company maintained under Section 10.2 of the Indenture duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Securities Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Securities of this series, of authorized denominations and for the same
aggregate principal amount, will be issued to the
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designated transferee or transferees. No service charge shall be made for any
such registration of transfer or exchange, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Securities of this series are issuable only in registered form without
coupons in denominations of minimum denominations of $25 and any integral
multiples of $25 in excess thereof. As provided in the Indenture and subject to
certain limitations therein set forth, Securities of this series are
exchangeable for a like aggregate principal amount of Securities of such series
of a different authorized denomination, as requested by the Holder surrendering
the same.
The Company and, by its acceptance of this Security or a beneficial
interest therein, the Holder of, and any Person that acquires a beneficial
interest in, this Security agree that for United States Federal, state and local
tax purposes it is intended that this Security constitute indebtedness.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF.
Section 2.4. Additional Provisions Required in Global Security.
Any Global Security issued hereunder shall, in addition to the provisions
contained in Sections 2.2 and 2.3, bear a legend in substantially the following
form:
"THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES
REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE
TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY
OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY OR BY THE DEPOSITORY AND ANY NOMINEE TO A SUCESSOR DEPOSITORY OR TO A
NOMINEE OF SUCH SUCCESSOR DEPOSITORY."
Section 2.5. Form of Trustee's Certificate of Authentication.
This is one of the Securities referred to in the within mentioned
Indenture.
Dated:
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[INSERT NAME OF TRUSTEE]
as Trustee
By: ______________________________
Authorized Officer
ARTICLE III
THE SECURITIES
Section 3.1. Title and Terms.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate (such Officers' Certificate shall have the effect of a supplemental
indenture for all purposes hereunder), or established in one or more indentures
supplemental hereto, prior to the issuance of Securities of a series:
(a) the title of the securities of such series, which shall distinguish the
Securities of the series from all other Securities;
(b) the limit, if any, upon the aggregate principal amount of the
Securities of such series which may be authenticated and delivered under this
Indenture (except for Securities authenticated and delivered upon registration
of transfer of, or in exchange for, or in lieu of, other Securities of the
series pursuant to Section 3.4, 3.5, 3.6, 9.6 or 11.7 and except for any
Securities which, pursuant to Section 3.3, are deemed never to have been
authenticated and delivered hereunder); provided, however, that the authorized
aggregate principal amount of such series may be increased above such amount by
a Board Resolution to such effect;
(c) the Stated Maturity or Maturities on which the principal of the
Securities of such series is payable or the method of determination thereof;
(d) the rate or rates, if any, at which the Securities of such series shall
bear interest, if any, the rate or rates and extent to which Additional
Interest, if any, shall be payable in respect of any Securities of such series,
the Interest Payment Dates on which such interest shall be payable, the right,
pursuant to Section 3.11 or as otherwise set forth therein, of the Company to
defer or extend an Interest Payment Date, and the Regular Record Date for the
interest payable on any Interest Payment Date or the method by which any of the
foregoing shall be determined;
(e) the place or places where the principal of (and premium, if any) and
interest on the Securities of such series shall be payable, the place or places
where the Securities of such series may be presented for registration of
transfer or exchange, and the place or places where notices and demands to or
upon the Company in respect of the Securities of such series may be made;
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(f) the period or periods within or the date or dates on which, if any, the
price or prices at which and the terms and conditions upon which the Securities
of such series may be redeemed, in whole or in part, at the option of the
Company;
(g) the obligation or the right, if any, of the Company to prepay, repay or
purchase the Securities of such series pursuant to any sinking fund,
amortization or analogous provisions, or at the option of a Holder thereof, and
the period or periods within which, the price or prices at which, the currency
or currencies (including currency unit or units) in which and the other terms
and conditions upon which Securities of the series shall be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation;
(h) the denominations in which any Securities of such series shall be
issuable, if other than denominations of $25 and any integral multiples of $25
in excess thereof;
(i) if other than Dollars, the currency or currencies (including currency
unit or units) in which the principal of (and premium, if any) and interest, if
any, on the Securities of the series shall be payable, or in which the
Securities of the series shall be denominated;
(j) the additions, modifications or deletions, if any, in the Events of
Default or covenants of the Company set forth herein with respect to the
Securities of such series;
(k) if other than the principal amount thereof, the portion of the
principal amount of Securities of such series that shall be payable upon
declaration of acceleration of the Maturity thereof;
(l) the additions or changes, if any, to this Indenture with respect to the
Securities of such series as shall be necessary to permit or facilitate the
issuance of the Securities of such series in bearer form, registrable or not
registrable as to principal, and with or without interest coupons;
(m) any index or indices used to determine the amount of payments of
principal of and premium, if any, on the Securities of such series or the manner
in which such amounts will be determined;
(n) whether the Securities of the series, or any portion thereof, shall
initially be issuable in the form of a temporary Global Security representing
all or such portion of the Securities of such series and provisions for the
exchange of such temporary Global Security for definitive Securities of such
series;
(o) if applicable, that any Securities of the series shall be issuable in
whole or in part in the form of one or more Global Securities and, in such case,
the respective Depositaries for such Global Securities, the form of any legend
or legends which shall be borne by any such Global Security in addition to or in
lieu of that set forth in Section 2.4 and any circumstances in addition to or in
lieu of those set forth in Section 3.5 in which any such Global Security may be
exchanged in whole or in part for Securities registered, and any transfer of
such Global Security in whole or in part may be registered, in the name or names
of Persons other than the Depositary for such Global Security or a nominee
thereof;
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(p) the appointment of any Paying Agent or Agents for the Securities of
such series;
(q) the terms of any right to convert or exchange Securities of such series
into any other securities or property of the Company, and the additions or
changes, if any, to this Indenture with respect to the Securities of such series
to permit or facilitate such conversion or exchange;
(r) the form or forms of the Trust Agreement, Amended and Restated Trust
Agreement, Capital Securities Guarantee and Common Securities Guarantee, if
different from the forms attached hereto as Annexes A, B, C and D, respectively;
(s) the relative degree, if any, to which the Securities of the series
shall be senior to or be subordinated to other series of Securities in right of
payment, whether such other series of Securities are Outstanding or not; and
(t) any other terms of the Securities of such series (which terms shall not
be inconsistent with the provisions of this Indenture).
All Securities of any one series shall be substantially identical except as
to denomination and except as may otherwise be provided herein or in or pursuant
to such Board Resolution and set forth in such Officers' Certificate or in any
such indenture supplemental hereto.
If any of the terms of the series are established by action taken pursuant
to a Board Resolution, a copy of an appropriate record of such action shall be
certified by the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee at or prior to the delivery of the Officers'
Certificate setting forth the terms of the series.
The Securities shall be subordinated in right of payment to Senior and
Subordinated Debt as provided in Article XIII.
Section 3.2. Denominations.
The Securities of each series shall be in registered form without coupons
and shall be issuable in minimum denominations of $25 and integral multiples of
$25 in excess thereof, unless otherwise specified as contemplated by Section
3.1.
Section 3.3. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its President
or one of its Vice Presidents under its corporate seal reproduced or impressed
thereon and attested by its Secretary or one of its Assistant Secretaries. The
signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities. At any time and from time to
time after the execution and delivery of this Indenture, the Company may
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deliver Securities of any series executed by the Company to the Trustee for
authentication, together with a Company Order for the authentication and
delivery of such Securities, and the Trustee in accordance with the Company
Order shall authenticate and deliver such Securities. If the form or terms of
the Securities of the series have been established by or pursuant to one or more
Board Resolutions as permitted by Sections 2.1 and 3.1, in authenticating such
Securities, and accepting the additional responsibilities under this Indenture
in relation to such Securities, the Trustee shall be entitled to receive, and
(subject to Section 6.1) shall be fully protected in relying upon, an Opinion of
Counsel stating,
(1) if the form of such Securities has been established by or pursuant to
Board Resolution as permitted by Section 2.1, that such form has been
established in conformity with the provisions of this Indenture;
(2) if the terms of such Securities have been established by or pursuant to
Board Resolution as permitted by Section 3.1, that such terms have been
established in conformity with the provisions of this Indenture; and
(3) that such Securities, when authenticated and delivered by the Trustee
and issued by the Company in the manner and subject to any conditions
specified in such Opinion of Counsel, will constitute valid and legally
binding obligations of the Company enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
If such form or terms have been so established, the Trustee shall not be
required to authenticate such Securities if the issue of such Securities
pursuant to this Indenture will affect the Trustee's own rights, duties or
immunities under the Securities and this Indenture or otherwise in a manner
which is not reasonably acceptable to the Trustee.
Notwithstanding the provisions of Section 3.1 and of the preceding
paragraph, if all Securities of a series are not to be originally issued at one
time, it shall not be necessary to deliver the Officers' Certificate otherwise
required pursuant to Section 3.1 or the Company Order and Opinion of Counsel
otherwise required pursuant to such preceding paragraph at or prior to the
authentication of each Security of such series if such documents are delivered
at or prior to the authentication upon original issuance of the first Security
of such series to be issued.
For so long as the sole Holder of the Securities is the Property Trustee,
the Securities shall be issued in registered definitive form without interest
coupons.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by the manual signature of one of its authorized
officers, and such certificate upon any Security shall be conclusive evidence,
and the only evidence, that such Security has been duly authenticated and
delivered hereunder. Notwithstanding the foregoing, if any Security shall have
been authenticated and delivered hereunder but never issued and sold by the
Company, and the Company shall deliver such
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Security to the Trustee for cancellation as provided in Section 3.9, for all
purposes of this Indenture such Security shall be deemed never to have been
authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.
Section 3.4. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company
may execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any denomination, substantially of the tenor of the
definitive Securities of such series in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities of any series are issued, the Company will cause
definitive Securities of such series to be prepared without unreasonable delay.
After the preparation of definitive Securities, the temporary Securities shall
be exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for that purpose
without charge to the Holder. Upon surrender for cancellation of any one or
more temporary Securities, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor one or more definitive Securities
of the same series of authorized denominations having the same Original Issue
Date and Stated Maturity and having the same terms as such temporary Securities.
Until so exchanged, the temporary Securities of any series shall in all respects
be entitled to the same benefits under this Indenture as definitive Securities
of such series.
Section 3.5. Registration, Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Securities and of
transfers of Securities. Such register is herein sometimes referred to as the
"Securities Register." The Trustee is hereby appointed "Securities Registrar"
for the purpose of registering Securities and transfers of Securities as herein
provided.
Upon surrender for registration of transfer of any Security at the office
or agency of the Company designated for that purpose the Company shall execute,
and the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Securities of the same series of any
authorized denominations, of a like aggregate principal amount, of the same
Original Issue Date and Stated Maturity and having the same terms.
At the option of the Holder, Securities may be exchanged for other
Securities of the same series of any authorized denominations, of a like
aggregate principal amount, of the same Original Issue Date and Stated Maturity
and having the same terms, upon surrender of the Securities to be exchanged at
such office or agency. Whenever any securities are so surrendered for exchange,
the Company shall execute, and the Trustee shall authenticate and deliver, the
Securities which the Holder making the exchange is entitled to receive.
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All Securities issued upon any transfer or exchange of Securities shall be
the valid obligations of the Company, evidencing the same debt, and entitled to
the same benefits under this Indenture, as the Securities surrendered upon such
transfer or exchange.
Every Security presented or surrendered for transfer or exchange shall (if
so required by the Company or the Securities Registrar) be duly endorsed, or be
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Securities Registrar, duly executed by the Holder thereof or his
attorney duly authorized in writing.
No service charge shall be made to a Holder for any transfer or exchange of
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
transfer or exchange of Securities.
No service charge shall be made to a Holder for any transfer or exchange of
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
transfer or exchange of Securities.
The provisions of clauses (a), (b), (c) and (d) below shall apply only to
Global Securities:
(a) Each Global Security authenticated under this Indenture shall be
registered in the name of the Depositary designated for such Global Security
or a nominee thereof and delivered to such Depositary or a nominee thereof or
custodian therefor, and each such Global Security shall constitute a single
Security for all purposes of this Indenture.
(b) Notwithstanding any other provision in this Indenture, no Global
Security may be exchanged in whole or in part for Securities registered, and
no transfer of a Global Security in whole or in part may be registered, in the
name of any Person other than the Depositary for such Global Security or a
nominee thereof unless (i) such Depositary (A) has notified the Company that
it is unwilling or unable to continue as Depositary for such Global Security
or (B) has ceased to be a clearing agency registered under the Exchange Act at
a time when the Depositary is required to be so registered to act as
depositary, in each case unless the Company has approved a successor
Depositary within 90 days, (ii) there shall have occurred and be continuing an
Event of Default with respect to such Global Security, (iii) the Company in
its sole discretion determines that such Global Security will be so
exchangeable or transferable or (iv) there shall exist such circumstances, if
any, in addition to or in lieu of the foregoing as have been specified for
this purpose as contemplated by Section 3.1.
(c) Subject to clause (b) above, any exchange of a Global Security for
other Securities may be made in whole or in part, and all Securities issued in
exchange for a Global Security or any portion thereof shall be registered in
such names as the Depositary for such Global Security shall direct.
(d) Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any
portion thereof, whether pursuant to this Section, Section 3.4, 3.6, 9.6 or
11.6 or otherwise, shall be authenticated and delivered in the
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form of, and shall be, a Global Security, unless such Security is registered
in the name of a Person other than the Depositary for such Global Security or
a nominee thereof.
Neither the Company nor the Trustee shall be required, pursuant to the
provisions of this Section, (i) to issue, register the transfer of or exchange
any Security of any series during a period beginning at the opening of business
15 calendar days before the day of mailing of a notice of redemption of any
Securities called for redemption and ending at the close of business on the day
of mailing of notice of redemption or (ii) to transfer or exchange any Security
so selected for redemption in whole or in part, except, in the case of any
Security to be redeemed in part, any portion thereof not to be redeemed.
Section 3.6. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee together with such
security or indemnity as may be required by the Company or the Trustee to save
each of them harmless, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a new Security of the same issue
and series of like tenor and principal amount, having the same Original Issue
Date and Stated Maturity, and bearing a number not contemporaneously
outstanding.
If there shall be delivered to the Company and to the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security, and
(ii) such security or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Company or the Trustee that such
Security has been acquired by a bona fide purchaser, the Company shall execute
and upon its request the Trustee shall authenticate and deliver, in lieu of any
such destroyed, lost or stolen Security, a new Security of the same issue and
series of like tenor and principal amount, having the same Original Issue Date
and Stated Maturity as such destroyed, lost or stolen Security, and bearing a
number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, 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 (including
the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section 3.6 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
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Section 3.7. Payment of Interest; Interest Rights Preserved.
Interest on any Security of any series which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date, shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such interest
in respect of Securities of such series, except that, unless otherwise provided
in the Securities of such series, interest payable on the Stated Maturity of the
principal of a Security shall be paid to the Person to whom principal is paid.
The initial payment of interest on any Security of any series which is issued
between a Regular Record Date and the related Interest Payment Date shall be
payable as provided in such Security or in the Board Resolution pursuant to
Section 3.1 with respect to the related series of Securities.
Any interest on any Security which is payable, but is not timely paid or
duly provided for, on any Interest Payment Date for Securities of such series
(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 may be paid by the Company, at its
election in each case, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities of such series in respect of which
interest is in default (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 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 such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not less
than 10 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 Holder of a
Security of such series at the address of such Holder as it appears in the
Securities Register not less than 10 days prior to such Special Record Date.
The Trustee may, in its discretion, in the name and at the expense of the
Company, cause a similar notice to be published at least once in a newspaper,
customarily published in the English language on each Business Day and of
general circulation in the state of California, but such publication shall not
be a condition precedent to the establishment of 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 the Securities of such series (or their
respective Predecessor Securities) are registered on such Special Record Date
and shall no longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities
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of the series in respect of which interest is in default may be listed and, upon
such notice as may be required by such exchange (or by the Trustee if the
Securities are not listed), if, after notice given by the Company to the Trustee
of the proposed payment pursuant to this clause, such payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section 3.7, each Security
delivered under this Indenture upon transfer of or in exchange for or in lieu of
any other Security shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by such other Security.
Section 3.8. Persons Deemed Owners.
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name any Security is registered as the owner of such
Security for the purpose of receiving payment of principal of and (subject to
Section 3.7) any interest on such Security and for all other purposes
whatsoever, whether or not such Security be overdue, and neither the Company,
the Trustee nor any agent of the Company or the Trustee shall be affected by
notice to the contrary.
Section 3.9. Cancellation.
All Securities surrendered for payment, redemption, transfer or exchange
shall, if surrendered to any Person other than the Trustee, be delivered to the
Trustee, and any such Securities and Securities surrendered directly to the
Trustee for any such purpose shall be promptly canceled by it. The Company may
at any time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall be promptly canceled by
the Trustee. No Securities shall be authenticated in lieu of or in exchange for
any Securities canceled as provided in this Section, except as expressly
permitted by this Indenture. All canceled Securities shall be destroyed by the
Trustee and the Trustee shall deliver to the Company a certificate of such
destruction.
Section 3.10. Computation of Interest.
Except as otherwise specified as contemplated by Section 3.1 for Securities
of any series, interest on the Securities of each series for any period shall be
computed on the basis of a 360-day year of twelve 30-day months and interest on
the Securities of each series for any partial period shall be computed on the
basis of the actual number of days elapsed in a 360-day year of twelve 30-day
months.
Section 3.11. Deferrals of Interest Payment Dates.
If specified as contemplated by Section 2.1 or Section 3.1 with respect to
the Securities of a particular series, so long as no Event of Default has
occurred and is continuing, the Company shall have the right, at any time during
the term of such series, from time to time to defer the payment of interest on
such Securities for such period or periods as may be specified as contemplated
by Section 3.1 (each, an "Extension Period"). No Extension Period shall end on
a date other than an Interest Payment Date. At the end of any such Extension
Period, the Company shall pay all interest then accrued and unpaid on the
Securities (together with
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Additional Interest thereon, if any, at the rate specified for the Securities of
such series to the extent permitted by applicable law); provided, however, that
no Extension Period shall extend beyond the Stated Maturity of the principal of
the Securities of such series; provided, further, that at any time while an
Extension Period is in effect and (i) the Company shortens the Stated Maturity
of the principal of such Securities to end before the last day of such Extension
Period, then the Extension Period will be deemed to end on the Stated Maturity
or (ii) the Company elects to redeem all Outstanding Securities of such
Securities before the last day of such Extension Period, then the Extension
Period will be deemed to end on such Redemption Date; provided, further, that
during any such Extension Period, the Company shall not, and shall not permit
any Subsidiary to, (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 (which includes common and capital stock), (ii) make
any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including Securities
other than the Securities of such series) that ranks pari passu with or junior
in right of payment to the Securities of such series or (iii)make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any Subsidiary of the Company if such guarantee ranks pari passu with or junior
in right of payment to the Securities of such series (other than (a) any
dividend in a form of stock, warrants, options or other rights where the
dividend or the stock issuable upon the exercise of the warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks on parity with or junior in right of payment to such stock), (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Downey Trust Guarantee related to the Capital Securities
issued by the Downey Trust holding Securities of such series, and (d) purchases
of Common Stock related to the issuance of Common Stock or rights under any of
the Company's benefit plans for its directors, officers or employees) or (iii)
redeem, purchase or acquire less than all of the Securities of such series or
any of the Capital Securities. Prior to the termination of any such Extension
Period, the Company may further extend such Extension Period, provided that such
extension does not cause such Extension Period to extend beyond the Stated
Maturity of the principal of such Securities. Upon termination of any Extension
Period and upon the payment of all accrued and unpaid interest and any
Additional Interest then due on any Interest Payment Date, the Company may elect
to begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company shall give the Trustee, the Property Trustee and the Administrative
Trustees of the Downey Trust holding Securities of such series notice of its
election of any Extension Period (or an extension thereof) at least one Business
Day prior to the earlier of (i) the next succeeding date on which Distributions
on the Capital Securities of such Downey Trust or the interest on such
Securities would be payable except for the election to begin or extend such
Extension Period or (ii) the date the Administrative Trustees are or the Trustee
is required to give notice to the New York Stock Exchange, the Nasdaq National
Market or other applicable stock exchange or automated quotation system on which
the Capital Securities or the Securities are then listed or quoted or to holders
of such Capital Securities or such Securities of the record date or (iii) the
date such interest is payable, but in any event not less than one Business Day
prior to such record date. The Trustee shall give notice of the Company's
election to begin a new Extension Period to the
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holders of the Securities. There is no limitation on the number of times that
the Company may elect to begin an Extension Period.
The Trustee shall promptly give notice of the Company's election to begin
any such Extension Period to the Holders of the Outstanding Securities of such
series.
Section 3.12. Right of Set-Off.
With respect to the Securities of a series issued to a Downey Trust,
notwithstanding anything to the contrary in the Indenture, the Company shall
have the right to set-off any payment it is otherwise required to make
thereunder in respect of any such Security to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Capital Securities Guarantee or the Common Securities
Guarantee relating to such Security or under Section 5.8 of the Indenture.
Section 3.13. Agreed Tax Treatment.
Each Security issued hereunder shall provide that the Company and, by its
acceptance of a Security or a beneficial interest therein, the Holder of, and
any Person that acquires a beneficial interest in, such Security agree that for
United States Federal, state and local tax purposes it is intended that such
Security constitute indebtedness.
Section 3.14. Shortening of Stated Maturity.
If specified as contemplated by Section 2.1 or Section 3.1 with respect to
the Securities of a particular series, the Company shall have the right to
shorten the Stated Maturity of the principal of the Securities of such series at
any time to any date not earlier than the first date on which the Company has
the right to redeem the Securities of such series; provided, however, that the
shortened date must fall on an Interest Payment Date. In the event that the
Company elects to shorten the Stated Maturity of the Junior Subordinated
Debentures, it shall give notice to the Indenture Trustee, and the Indenture
Trustee shall give notice of such shortening to the holders of the Securities no
less than 60 days prior to the effectiveness thereof.
Section 3.15. CUSIP Numbers.
The Company in issuing the 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 Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers.
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ARTICLE IV
SATISFACTION AND DISCHARGE
Section 4.1. Satisfaction and Discharge of Indenture.
This Indenture shall, upon Company Request, cease to be of further effect
(except as to any surviving rights of registration of transfer or exchange of
Securities herein expressly provided for and as otherwise provided in this
Section 4.1) and the Trustee, on demand of and at the expense of the Company,
shall execute proper instruments acknowledging satisfaction and discharge of
this Indenture, when
(a) either
(i) all Securities theretofore authenticated and delivered (other than
(A) Securities which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3.6 and (B) Securities for whose payment
money has theretofore been deposited in trust or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged from such trust,
as provided in Section 10.3) have been delivered to the Trustee for
cancellation; or
(ii) all such Securities not theretofore delivered to the Trustee for
cancellation
(A) have become due and payable, or
(B) will become due and payable at their Stated Maturity within one
year of the date of deposit, or
(C) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company,
and the Company, in the case of clause (ii) (A), (B) or (C) above, has deposited
or caused to be deposited with the Trustee as trust funds in trust for such
purpose an amount in the currency or currencies in which the Securities of such
series are payable sufficient to pay and discharge the entire indebtedness on
such Securities not theretofore delivered to the Trustee for cancellation, for
principal (and premium, if any) and interest (including any Additional Interest)
to the date of such deposit (in the case of Securities which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(c) the Company has delivered to the Trustee 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.
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Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.7, the obligations of
the Trustee to any Authenticating Agent under Section 6.14 and, if money shall
have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of
this Section, the obligations of the Trustee under Section 4.2 and the last
paragraph of Section 10.3 shall survive.
Section 4.2. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.3, all money
deposited with the Trustee pursuant to Section 4.1 shall be held in trust and
applied by the Trustee, in accordance with the provisions of the Securities and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for the payment of which such money or obligations have been
deposited with or received by the Trustee.
ARTICLE V
REMEDIES
Section 5.1. Events of Default.
"Event of Default", wherever used herein with respect to the Securities of
any series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(a) default in the payment of any interest upon any Security of that
series, including any Additional Interest or Additional Sums in respect thereof,
when it becomes due and payable, and continuance of such default for a period of
30 days (subject to the deferral of any due date in the case of an Extension
Period); or
(b) default in the payment of the principal of any Security of that series
at its Stated Maturity, upon redemption by declaration or otherwise; or
(c) default in the performance, or breach, in any material respect, of any
covenant of the Company in this Indenture (other than a covenant in this
Indenture for the benefit of any other series of Securities, and other than a
covenant, a default in the performance of which is elsewhere in this Section 5.1
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 at
least 25% in principal amount of the Outstanding Securities of that series a
written notice specifying such default or breach and requiring it to be
remedied; or
(d) the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Company a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under
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any applicable Federal or State bankruptcy, insolvency, reorganization or other
similar law, or appointing a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or of any substantial
part of its property or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of 60 consecutive days; or
(e) the institution by the Company of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law, or the
consent by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or of any substantial part of its property, or the
making by it of an assignment for the benefit for creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due and
its willingness to be adjudicated a bankrupt, or the taking of corporate action
by the Company in furtherance of any such action; or
(f) any other Event of Default provided with respect to Securities of that
series.
Section 5.2. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in Section
5.1(d) or 5.1(e) with respect to Securities of any series at the time
Outstanding occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Outstanding
Securities of that series may declare the principal amount (or, if the
Securities of that series are Discount Securities, such portion of the principal
amount as may be specified in the terms of that series) of all the Securities of
that series to be due and payable immediately, by a notice in writing to the
Company (and to the Trustee if given by Holders), provided that, in the case of
the Securities of a series issued to a Downey Trust, if, upon an Event of
Default, the Trustee or the Holders of not less than 25% in principal amount of
the Outstanding Securities of that series fail to declare the principal of all
the Securities of that series to be immediately due and payable, the holders of
at least 25% in aggregate liquidation amount of the corresponding series of
Capital Securities then outstanding shall have such right by a notice in writing
to the Company and the Trustee; and upon any such declaration such principal
amount (or specified portion thereof) of and the accrued interest (including any
Additional Interest) on all the Securities of such series shall become
immediately due and payable. Payment of principal and interest (including any
Additional Interest) on such Securities shall remain subordinated to the extent
provided in Article XIII notwithstanding that such amount shall become
immediately due and payable as herein provided. If an Event of Default
specified in Section 5.1(d) or 5.1(e) with respect to Securities of any series
at the time Outstanding occurs, the principal amount of all the Securities of
that series (or, if the Securities of that series are Discount Securities, such
portion of the principal amount of such Securities as may be specified by the
terms of that series) shall automatically, and without any declaration or other
action on the part of the Trustee or any Holder, become immediately due and
payable.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been
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obtained by the Trustee as hereinafter in this Article provided, the Holders of
a majority in principal amount of the Outstanding Securities of that series, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum sufficient to
pay:
(i) all overdue installments of interest (including any Additional
Interest) on all Securities of that series,
(ii) the principal of (and premium, if any, on) any Securities of that
series which have become due otherwise than by such declaration of acceleration
and interest thereon at the rate borne by the Securities, and
(iii) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel; and
(b) all Events of Default with respect to Securities of that series, other
than the non-payment of the principal of Securities of that series which has
become due solely by such acceleration, have been cured or waived as provided in
Section 5.13.
In the case of Securities of a series issued to a Downey Trust, the holders
of a majority in aggregate Liquidation Amount (as defined in the Trust Agreement
under which such Downey Trust is formed) of the related series of Capital
Securities issued by such Downey Trust shall also have the right to rescind and
annul such declaration and its consequences by written notice to the Company and
the Trustee subject to the satisfaction of the conditions set forth in clauses
(a) and (b) above of this Section 5.2.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if:
(a) default is made in the payment of any installment of interest
(including any Additional Interest) on any Security when such interest becomes
due and payable and such default continues for a period of 30 days (subject to
the deferral of any due date in the case of an Extension Period), or
(b) default is made in the payment of the principal of (and premium, if
any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities, the whole amount then due and payable
on such Securities for principal, including any sinking fund payment or
analogous obligations (and premium, if any) and interest (including any
Additional Interest); and, in addition thereto, all amounts owing the Trustee
under Section 6.7.
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If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default with respect to Securities of any series occurs and
is continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders of Securities of such series by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
Section 5.4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors,
(a) the Trustee (irrespective of whether the principal of the Securities of
any series shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of overdue principal (and premium, if any) or
interest (including any Additional Interest)) shall be entitled and empowered,
by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest (including any Additional Interest) owing and
unpaid in respect to the Securities and to file such other papers or documents
as may be necessary or advisable and to take any and all actions as are
authorized under the Trust Indenture Act in order to have the claims of the
Holders and any predecessor to the Trustee under Section 6.7 allowed in any such
judicial proceedings; and
(ii) in particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same in accordance with Section 5.6; and
(b) any custodian, receiver, assignee, trustee, liquidator, sequestrator
(or other similar official) in any such judicial proceeding is hereby authorized
by each Holder to make such payments to the Trustee for distribution in
accordance with Section 5.6, and in the event that the Trustee shall consent to
the making of such payments directly to the Holders, to pay to the Trustee any
amount due to it and any predecessor Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding;
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provided, however, that the Trustee may, on behalf of the Holders, vote for the
election of a trustee in bankruptcy or similar official and be a member of a
creditors' or other similar committee.
Section 5.5. Trustee May Enforce Claim Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may
be prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of all the amounts owing the Trustee and any predecessor Trustee
under Section 6.7, its agents and counsel, be for the ratable benefit of the
Holders of the Securities in respect of which such judgment has been recovered.
Section 5.6. Application of Money Collected.
Any money or property collected or to be applied by the Trustee with
respect to a series of Securities pursuant to this Article shall be applied in
the following order, at the date or dates fixed by the Trustee and, in case of
the distribution of such money or property on account of principal (or premium,
if any) or interest (including any Additional Interest), upon presentation of
the Securities and the notation thereon of the payment if only partially paid
and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee and any predecessor
Trustee under Section 6.7;
SECOND: Subject to Article XIII, to the payment of the amounts then due
and unpaid upon such series of Securities for principal (and premium, if any)
and interest (including any Additional Interest), in respect of which or for the
benefit of which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on such series of
Securities for principal (and premium, if any) and interest (including any
Additional Interest), respectively; and
THIRD: The balance, if any, to the Person or Persons entitled thereto.
Section 5.7. Limitation on Suits.
No Holder of any Securities of any series shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture or for the
appointment of a receiver, assignee, trustee, liquidator, sequestrator (or other
similar official) or for any other remedy hereunder, unless:
(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Securities of that series;
(b) the Holders of not less than 25% in principal amount of the Outstanding
Securities of that series shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
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(c) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request:
(d) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in principal
amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing itself of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Securities, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all such Holders.
Section 5.8. Unconditional Right of Holders to Receive Principal, Premium and
Interest; Direct Action by Holders of Capital Securities.
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right which is absolute and unconditional to receive
payment of the principal of (and premium, if any) and (subject to Section 3.7)
interest (including any Additional Interest) on such Security on the respective
Stated Maturities expressed in such Security (or, in the case of redemption, on
the Redemption Date) and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of such
Holder. In the case of Securities of a series issued to a Downey Trust, any
holder of the corresponding series of Capital Securities issued by such Downey
Trust shall have the right, upon the occurrence of an Event of Default described
in Section 5.1(a) or 5.1(b), to institute a suit directly against the Company
for enforcement of payment to such holder of principal of (premium, if any) and
(subject to Section 3.7) interest (including any Additional Interest) on the
Securities having a principal amount equal to the aggregate Liquidation Amount
(as defined in the Trust Agreement under which such Downey Trust is formed) of
such Capital Securities of the corresponding series held by such holder.
Section 5.9. Restoration of Rights and Remedies.
If the Trustee, any Holder or any holder of Capital Securities has
instituted any proceeding to enforce any right or remedy under this Indenture
and such proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee, such Holder or such holder of Capital
Securities, then and in every such case the Company, the Trustee, the Holders
and such holder of Capital Securities 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 Trustee, the
Holders and the holders of Capital Securities shall continue as though no such
proceeding had been instituted.
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Section 5.10. Rights and Remedies Cumulative.
Except as otherwise provided in the last paragraph of Section 3.6, no right
or remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee, any Holder of any Security or any
holder of any Capital Security to exercise any right or remedy accruing upon any
Event of Default shall impair any such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee or to
the Holders and the right and remedy given to the holders of Capital Securities
by Section 5.8 may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee, the Holders or the holders of Capital Securities, as
the case may be.
Section 5.12. Control by Holders.
The Holders of a majority in principal amount of the Outstanding Securities
of any series 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 the Securities of
such series, provided that:
(a) such direction shall not be in conflict with any rule of law or with
this Indenture,
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(c) subject to the provisions of Section 6.1, the Trustee shall have the
right to decline to follow such direction if a Responsible Officer or Officers
of the Trustee shall, in good faith, determine that the proceeding so directed
would be unjustly prejudicial to the Holders not joining in any such direction
or would involve the Trustee in personal liability.
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series and, in the case of any Securities of a
series issued to a Downey Trust, the holders of Capital Securities issued by
such Downey Trust may waive any past default hereunder and its consequences with
respect to such series except a default:
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(1) in the payment of the principal of (or premium, if any) or interest
(including any Additional Interest) on any Security of such series (unless the
conditions set forth in clauses (a) and (b) of Section 5.2 are satisfied), or
(2) in respect of a covenant or provision hereof which under Article IX
cannot be modified or amended without the consent of the Holder of each
Outstanding Security of such series affected.
Any such waiver shall be deemed to be on behalf of the Holders of all the
Securities of such series or, in the case of a waiver by holders of Capital
Securities issued by such Downey Trust, by all holders of Capital Securities
issued by such Downey Trust.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any 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,
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 shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Securities of
any series, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of (or premium, if any) or interest (including any
Additional Interest) on any Security on or after the respective Stated
Maturities expressed in such Security.
Section 5.15. Waiver of Usury, Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
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ARTICLE VI
THE TRUSTEE
Section 6.1. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default;
(A) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(B) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon 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 provisions 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 to the
requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, 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 person
would exercise or use under the circumstances in the conduct of his own affairs.
(c) 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) this subsection shall not be construed to limit the effect of
subsection (a) of this Section;
(B) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts; and
(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
Holders pursuant to Section 5.12 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 with respect
to the Securities of such series.
(d) No provision of this Indenture shall require the Trustee 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 there shall be reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
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(e) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section
6.1.
Section 6.2. Notice of Defaults.
Within 90 days after actual knowledge by a Responsible Officer of the
Trustee of the occurrence of any default hereunder with respect to the
Securities of any series, the Trustee shall transmit by mail to all Holders of
Securities of such series, as their names and addresses appear in the Securities
Register, notice of such default, unless such default shall have been cured or
waived; provided, however, that, except in the case of a default in the payment
of the principal of (or premium, if any) or interest (including any Additional
Interest) on any Security of such series, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee or a trust committee of directors and/or Responsible Officers of the
Trustee in good faith determines that the withholding of such notice is in the
interests of the Holders of Securities of such series; and provided, further,
that, in the case of any default of the character specified in Section 5.13, no
such notice to Holders of Securities of such series shall be given until at
least 30 days after the occurrence thereof. For the purpose of this Section,
the term "default" means any event which is, or after notice or lapse of time or
both would become, an Event of Default with respect to Securities of such
series.
Section 6.3. Certain Rights of Trustee.
Subject to the provisions of Section 6.1:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, Security or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem
it desirable that a matter be proved or established prior to taking, suffering
or omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part, rely upon
an Officers' Certificate;
(d) the Trustee may consult with counsel and the advice of such counsel or
any 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 reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders pursuant to this Indenture, unless such Holders shall have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction;
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(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, request, direction, consent, order, bond, indenture,
Security or other paper or document, but the Trustee in its discretion may make
such inquiry or investigation into such facts or matters as it may see fit, and,
if the Trustee shall determine to make such inquiry or investigation, it shall
be entitled to examine the books, records and premises of the Company,
personally or by agent or attorney; 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 or
attorneys and the 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.
Section 6.4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and neither the Trustee nor any Authenticating Agent assumes any responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Securities. Neither the Trustee nor
any Authenticating Agent shall be accountable for the use or application by the
Company of the Securities or the proceeds thereof.
Section 6.5. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Securities
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to Sections
6.8 and 6.13, may otherwise deal with the Company with the same rights it would
have if it were not Trustee, Authenticating Agent, Paying Agent, Securities
Registrar or such other agent.
Section 6.6. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed with the Company.
Section 6.7. Compensation and Reimbursement.
The Company agrees
(a) to pay to the Trustee from time to time compensation for all services
rendered by it hereunder in such amounts as the Company and the Trustee shall
agree 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);
(b) to reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and the
expenses and disbursements of its
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agents and counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and
(c) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense (including the reasonable compensation and the
expenses and disbursements of its agents and counsel) incurred without
negligence or bad faith, arising out of or in connection with the acceptance or
administration of this trust or the performance of its duties hereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder. This indemnification shall survive the termination of this
Agreement.
To secure the Company's payment obligations in this Section 6.7, the
Company and the Holders agree that the Trustee shall have a lien prior to the
Securities on all money or property held or collected by the Trustee. Such lien
shall survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 5.1(d) or (e) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under the Bankruptcy Reform Act of 1978 or any successor statute.
Section 6.8. Disqualification; Conflicting Interests.
The Trustee for the Securities of any series issued hereunder shall be
subject to the provisions of Section 310(b) of the Trust Indenture Act. Nothing
herein shall prevent the Trustee from filing with the Commission the application
referred to in the second to last paragraph of said Section 310(b).
Section 6.9. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
(a) a corporation organized and doing business under the laws of the United
States of America or of any State or Territory or the District of Columbia,
authorized under such laws to exercise corporate trust powers and subject to
supervision or examination by Federal, State, Territorial or District of
Columbia authority, or
(b) a corporation or other Person organized and doing business under the
laws of a foreign government that is permitted to act as Trustee pursuant to a
rule, regulation or order of the Commission, authorized under such laws to
exercise corporate trust powers, and subject to supervision or examination by
authority of such foreign government or a political subdivision thereof
substantially equivalent to supervision or examination applicable to United
States institutional trustees,
in either case having a combined capital and surplus of at least $50,000,000,
subject to supervision or examination by Federal or State 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 6.9, the combined capital and
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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 the Trustee shall cease to be eligible in accordance with the
provisions of this Section 6.9, it shall resign immediately in the manner and
with the effect hereinafter specified in this Article VI. Neither the Company
nor any Person directly or indirectly controlling, controlled by or under common
control with the Company shall serve as Trustee for the Securities of any series
issued hereunder.
Section 6.10. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article VI shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee may resign at any time with respect to the Securities of
one or more series by giving written notice thereof to the Company. If an
instrument of acceptance by a successor Trustee shall not have been delivered to
the Trustee within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Securities of such
series.
(c) The Trustee may be removed at any time with respect to the Securities
of any series by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series, delivered to the Trustee and to the
Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 6.8 after written
request therefor by the Company or by any Holder who has been a bona fide Holder
of a Security for at least six months, or
(ii) the Trustee shall cease to be eligible under Section 6.9 and
shall fail to resign after written request therefor by the Company or by any
such Holder, or
(iii) 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, (i) the Company, acting pursuant to the authority of a
Board Resolution, may remove the Trustee with respect to all Securities, or (ii)
subject to Section 5.14, any Holder who has been a bona fide Holder of a
Security for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the removal
of the Trustee with respect to all Securities and the appointment of a successor
Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause with respect
to the Securities of one or more series, the Company, by a Board Resolution,
shall promptly appoint a successor Trustee with respect to the Securities of
that or those series. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee with
respect to
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the Securities of any series shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Securities of such series
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become the
successor Trustee with respect to the Securities of such series and supersede
the successor Trustee appointed by the Company. If no successor Trustee with
respect to the Securities of any series shall have been so appointed by the
Company or the Holders and accepted appointment in the manner hereinafter
provided, any Holder who has been a bona fide Holder of a Security for at least
six months may, subject to Section 5.14, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Securities of such
series.
(f) The Company shall give notice of each resignation and each removal of
the Trustee with respect to the Securities of any series and each appointment of
a successor Trustee with respect to the Securities of any series by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of Securities of such series as their names and addresses appear in the
Securities Register. Each notice shall include the name of the successor
Trustee with respect to the Securities of such series and the address of its
Corporate Trust Office.
Section 6.11. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, 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, trusts and duties of the retiring Trustee; but, on the request
of the Company or the successor Trustee, such retiring Trustee shall, upon
payment of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and
shall duly assign, transfer and deliver to such successor Trustee all property
and money held by such retiring Trustee hereunder.
(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and each successor Trustee with respect to the Securities of
one or more series shall execute and deliver an indenture supplemental hereto
wherein each successor Trustee shall accept such appointment and which (1) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Trustee all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of that
or those series to which the appointment of such successor Trustee relates, (2)
if the retiring Trustee is not retiring with respect to all Securities, 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 Securities of that or those series as to which the retiring
Trustee is not retiring shall continue to be vested in the retiring Trustee, and
(3) 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 trusts
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
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by any other such Trustee and upon the execution and delivery of such
supplemental indenture the resignation or removal of the retiring Trustee shall
become effective to the extent provided therein and each such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts, and duties of the retiring Trustee with respect to the
Securities of that or those series to which the appointment of such successor
Trustee relates; but, on request of the Company or any successor Trustee, such
retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder with
respect to the Securities of that or those series to which the appointment of
such successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all rights, powers and trusts referred to in paragraph
(a) or (b) of this Section 6.11, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article VI.
Section 6.12. Merger, Conversion, Consolidation or Succession to Business.
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,
provided such corporation shall be otherwise qualified and eligible under this
Article VI, without the execution or filing of any paper or any further act on
the part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated, and in case any
Securities shall not have been authenticated, any successor to the Trustee may
authenticate such Securities either in the name of any predecessor Trustee or in
the name of such successor Trustee, and in all cases the certificate of
authentication shall have the full force which it is provided anywhere in the
Securities or in this Indenture that the certificate of the Trustee shall have.
Section 6.13. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company (or
any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
Section 6.14. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents with respect to
one or more series of Securities which shall be authorized to act on behalf of
the Trustee to authenticate Securities of such series issued upon original issue
and upon exchange, registration of transfer or partial redemption thereof or
pursuant to Section 3.6, and Securities so authenticated shall be entitled to
the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the
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authentication and delivery of Securities by the Trustee or the Trustee's
certificate of authentication, such reference shall be deemed to include
authentication and delivery on behalf of the Trustee by an Authenticating Agent.
Each Authenticating Agent shall be acceptable to the Company and shall at all
times be a corporation organized and doing business under the laws of the United
States of America, or of any State or Territory or the District of Columbia,
authorized under such laws to act as Authenticating Agent, having a combined
capital and surplus of not less than $50,000,000 and subject to supervision or
examination by Federal or State authority. If such Authenticating Agent
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section 6.14 the combined capital and surplus of such Authenticating
Agent 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 6.14, such Authenticating Agent shall resign immediately in the manner
and with the effect specified in this Section 6.14.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of an Authenticating Agent shall be the successor
Authenticating Agent hereunder, provided such corporation shall be otherwise
eligible under this Section, without the execution or filing of any paper or any
further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
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 such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 6.14, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Company and shall give
notice of such appointment in the manner provided in Section 1.6 to all Holders
of Securities of the series with respect to which such Authenticating Agent will
serve. Any successor Authenticating Agent upon acceptance of its appointment
hereunder shall become vested with all the rights, powers and duties of its
predecessor hereunder, with like effect as if originally named as an
Authenticating Agent. No successor Authenticating Agent shall be appointed
unless eligible under the provision of this Section 6.14.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section 6.14, and the
Trustee shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 6.7.
If an appointment with respect to one or more series is made pursuant to
this Section 6.14, the Securities of such series may have endorsed thereon, in
addition to the Trustee's certificate of authentication, an alternative
certificate of authentication in the following form:
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This is one of the Securities referred to in the within mentioned
Indenture.
Dated:
[INSERT NAME OF TRUSTEE]
As Trustee
By:
----------------------------------
As Authenticating Agent
By:
----------------------------------
Authorized Officer
ARTICLE VII
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee:
(a) semi-annually, not more than 15 days after January 15 and July 15 in
each year, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of January 1 and July 1 of such year, 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, excluding from any such list names and addresses received by the
Trustee in its capacity as Securities Registrar.
Section 7.2. Preservation of Information, Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.1 and the names and
addresses of Holders received by the Trustee in its capacity as Securities
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the corresponding
rights and privileges of the Trustee, shall be as provided in the Trust
Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of
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them shall be held accountable by reason of the disclosure of information as to
the names and addresses of the Holders made pursuant to the Trust Indenture Act.
Section 7.3. Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act, at the times and in the manner provided pursuant thereto.
(b) Reports so required to be transmitted at stated intervals of not more
than 12 months shall be transmitted no later than July 15 in each calendar year,
commencing with the first July 15 after the first issuance of Securities under
this Indenture.
(c) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which any
Securities are listed and also with the Commission. The Company will notify the
Trustee when any Securities are listed on any stock exchange.
Section 7.4. Reports by Company.
The Company shall file with the Trustee and with the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided in the Trust Indenture Act; provided that any
such information, documents or reports required to be filed with the Commission
pursuant to Section 13 or Section 15(d) of the Exchange Act shall be filed with
the Trustee within 15 days after the same is required to be filed with the
Commission. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall continue to file with the Commission and provide the
Trustee with the annual reports and the information, documents and other reports
which are specified in Sections 13 and 15(d) of the Exchange Act. The Company
also shall comply with the other provisions of Trust Indenture Act Section
314(a).
ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
as an entirety or substantially as an entirety to the Company, unless:
(a) either the Company shall be the continuing Person, in the case of a
merger, or the successor Person, if other than the Company, formed by the
consolidation or into which the Company is merged or which acquires by
conveyance, transfer or lease, the properties and assets of the Company as an
entirety or substantially as an entirety is organized under the laws of the
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United States or any state of the United States or the District of Columbia, and
the successor Person expressly assumes, by execution of an indenture
supplemental hereto, in form satisfactory to the Trustee all of the Company's
obligations under the Securities of each series, each Capital Securities
Guarantee and Common Securities Guarantee relating to such series, and this
Indenture and the due and punctual performance and observance of every
obligation in such Securities of each series, such Capital Securities Guarantee
and Common Securities Guarantee relating to such series and this Indenture to be
performed or observed by the Company.
(b) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time, or both, would
become an Event of Default, shall have happened and be continuing;
(c) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and any such supplemental indenture comply with this Article
and that all conditions precedent herein provided for relating to such
transaction have been complied with; and the Trustee, subject to Section 6.1,
may rely upon such Officers' Certificate and Opinion of Counsel as conclusive
evidence that such transaction complies with this Section 8.1.
Section 8.2. Successor Corporation Substituted.
Upon any consolidation or merger by the Company with or into any other
Person, or any conveyance, transfer or lease by the Company of its properties
and assets substantially as an entirety to any Person in accordance with Section
8.1, the successor corporation formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein; and in the event of any such
conveyance, transfer or lease the Company shall be discharged from all
obligations and covenants under the Indenture and the Securities and may be
dissolved and liquidated.
Such successor Person 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 Securities issuable
hereunder which theretofore shall not have been signed by the Company and
delivered to the Trustee; and, upon the order of such successor Person instead
of the Company and subject to all the terms, conditions and limitations in this
Indenture prescribed, the Trustee shall authenticate and shall deliver any
Securities which previously shall have been signed and delivered by the officers
of the Company to the Trustee for authentication pursuant to such provisions and
any Securities which such successor Person thereafter shall cause to be signed
and delivered to the Trustee on its behalf for the purpose pursuant to such
provisions. All the Securities so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Securities theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities had been issued at the date of the execution hereof.
In case of any such consolidation, merger, sale, conveyance or lease, such
changes in phraseology and form may be made in the Securities thereafter to be
issued as may be appropriate.
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ARTICLE IX
SUPPLEMENTAL INDENTURES
Section 9.1. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
provided, however, that the form and terms of Securities of any series may be
established by a Board Resolution, as set forth in the Officers' Certificate
delivered to the Trustee pursuant to Section 3.1, without entering into a
supplemental indenture for all purposes hereunder, for any of the following
purposes:
(a) to evidence the succession of another Person to the Company, and the
assumption by any such successor of the covenants of the Company herein and in
the Securities contained; or
(b) to convey, transfer, assign, mortgage or pledge any property to or with
the Trustee or to surrender any right or power herein conferred upon the
Company; or
(c) to establish the form or terms of Securities of any series as permitted
by Sections 2.1 or 3.1; or
(d) to add to the covenants of the Company for the benefit of the Holders
of all or any series of Securities (and if such covenants are to be for the
benefit of less than all series of Securities, stating that such covenants are
expressly being included solely for the benefit of such series) or to surrender
any right or power herein conferred upon the Company; or
(e) to add any additional Events of Default for the benefit of the Holders
of all or any series of Securities (and if such additional Events of Default are
to be for the benefit of less than all series of Securities, stating that such
additional Events of Default are expressly being included solely for the benefit
of such series); or
(f) to change or eliminate any of the provisions of this Indenture,
provided that any such change or elimination shall become effective only when
there is no Security Outstanding of any series created prior to the execution of
such supplemental indenture which is entitled to the benefit of such provision;
or
(g) to cure any ambiguity, to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising under
this Indenture, provided that such action pursuant to this clause (g) shall not
adversely affect the interest of the Holders of Securities of any series in any
material respect or, in the case of the Securities of a series issued to a
Downey Trust and for so long as any of the corresponding series of Capital
Securities issued by such Downey Trust shall remain outstanding, the holders of
such Capital Securities; or
(h) to evidence and provide for the acceptance of appointment hereunder by
a successor Trustee with respect to the Securities of one or more series and to
add to or change any of the provisions of this Indenture as shall be necessary
to provide for or facilitate the
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administration of the trusts hereunder by more than one Trustee, pursuant to the
requirements of Section 6.11(b); or
(i) to comply with the requirements of the Commission in order to effect or
maintain the qualification of this Indenture under the Trust Indenture Act.
Section 9.2. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Securities of each series affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Securities of such series under this Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Security affected thereby,
(a) except to the extent permitted by Sections 3.11 or 3.14 or as otherwise
specified as contemplated by Section 2.1 or Section 3.1 with respect to the
deferral of the payment of interest on the Securities of any series or the
shortening of the Stated Maturity of the Securities of any series, change the
Stated Maturity of the principal of, or any installment of interest (including
any Additional Interest) on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or extend the time of payment of
interest thereon or reduce any amount payable upon the redemption thereof, or
reduce the amount of principal of a Discount Security that would be due and
payable upon a declaration of acceleration of the Maturity thereof pursuant to
Section 5.2, or change the place of payment where, or the coin or currency in
which, any Security or interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the date it
is due and payable, or
(b) reduce the percentage in principal amount of the Outstanding Securities
of any series, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture, or
(c) modify any of the provisions of this Section, Section 5.13 or Section
10.5, except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each Security affected thereby, or
(d) modify the provisions in Article XIII of this Indenture including the
definitions relating thereto with respect to the subordination of Outstanding
Securities of any series in a manner adverse to the Holders thereof; provided,
further, that, in the case of the Securities of a series issued to a Downey
Trust, so long as any of the corresponding series of Capital Securities issued
by such Downey Trust remains outstanding, (i) no such amendment shall be made
that adversely affects the holders of such Capital Securities in any material
respect, and no termination of this Indenture shall occur, and no waiver of any
Event of Default or compliance
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with any covenant under this Indenture shall be effective, without the prior
consent of the holders of at least a majority of the aggregate liquidation
preference of such Capital Securities then outstanding unless and until the
principal (and premium, if any) of the Securities of such series and all accrued
and, subject to Section 3.7, unpaid interest (including any Additional Interest)
thereon have been paid in full and (ii) no amendment shall be made to Section
5.8 of this Indenture that would impair the rights of the holders of Capital
Securities provided therein without the prior consent of the holders of each
Capital Security then outstanding unless and until the principal (and premium,
if any) of the Securities of such series and all accrued and (subject to Section
3.7) unpaid interest (including any Additional Interest) thereon have been paid
in full.
A supplemental indenture that changes or eliminates any covenant or other
provision of this Indenture that has expressly been included solely for the
benefit of one or more particular series of Securities or Capital Securities, or
which modifies the rights of the Holders of Securities or holders of Capital
Securities of such series with respect to such covenant or other provision,
shall be deemed not to affect the rights under this Indenture of the Holders of
Securities or holders of Capital Securities of any other series.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
Section 9.3. Execution of Supplemental Indentures.
In executing or accepting the additional series of Securities created by
any supplemental indenture permitted by this Article or the modifications
thereby of any series of Securities previously created by this Indenture, the
Trustee shall be entitled to receive, and (subject to Section 6.1) shall be
fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture, and that all conditions precedent have been
complied with. The Trustee may, but shall not be obligated to, enter into any
such supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Section 9.4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article IX or
delivery to the Trustee of the Officers' Certificate pursuant to Section 3.1
hereof (which Officers' Certificate shall have the effect of a supplemental
indenture for all purposes hereunder), this Indenture shall be modified in
accordance therewith, and such supplemental indenture shall form a part of this
Indenture for all purposes; and every Holder of Securities theretofore or
thereafter authenticated and delivered hereunder shall be bound thereby.
Section 9.5. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article IX and every
Officers' Certificate delivered to the trustee pursuant to Section 3.1 hereof
shall conform to the requirements of the Trust Indenture Act as then in effect.
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Section 9.6. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article IX or delivery to the Trustee of
the Officers' Certificate pursuant to Section 3.1 hereof (which Officers'
Certificate shall have the effect of a supplemental indenture for all purposes
hereunder) may, and shall if required by the Company, bear a notation in form
approved by the Company as to any matter provided for in such supplemental
indenture or such Officers' Certificate. If the Company shall so determine, new
Securities of any series so modified as to conform, in the opinion of the
Company, to any such supplemental indenture or such Officers' Certificate may be
prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Securities of such series.
ARTICLE X
COVENANTS
Section 10.1. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each series of
Securities that it will duly and punctually pay the principal of (and premium,
if any) and interest on the Securities of that series in accordance with the
terms of such Securities and this Indenture.
Section 10.2. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of
Securities, an office or agency where Securities of that series may be presented
or surrendered for payment and an office or agency where Securities of that
series may be surrendered for transfer or exchange and where notices and demands
to or upon the Company in respect of the Securities of that series and this
Indenture may be served. The Company initially appoints the Trustee, acting
through its Corporate Trust Office, as its agent for said purposes. The Company
will give prompt written notice to the Trustee of any change in the location of
any such office or agency. If at any time the Company shall fail to maintain
such office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee, and the Company hereby
appoints the Trustee as its agent to receive all such presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more other offices
or agencies where the Securities may be presented or surrendered for any or all
of such purposes, and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in each Place of
Payment for Securities of any series for such purposes. The Company will give
prompt written notice to the Trustee of any such designation and any change in
the location of any such office or agency.
Section 10.3. Money for Security Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect
to any series of Securities, it will, on or before each due date of the
principal of (and premium, if any) or interest
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on any of the Securities of such series, segregate and hold in trust for the
benefit of the Persons entitled thereto a sum sufficient to pay the principal
(and premium, if any) or interest so becoming due until such sums shall be paid
to such Persons or otherwise disposed of as herein provided, and will promptly
notify the Trustee of its failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, prior
to 10:00 a.m. New York time on each due date of the principal of or interest on
any Securities, deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) or interest so becoming due, such sum to be held
in trust for the benefit of the Persons entitled to such principal and premium
(if any) or interest, and (unless such Paying Agent is the Trustee) the Company
will promptly notify the Trustee of its failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section 10.3, that such
Paying Agent will:
(a) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Securities in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal (and
premium, if any) or interest:
(c) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent; and
(d) comply with the provisions of the Trust Indenture Act applicable to it
as a Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of (and premium, if any)
or interest on any Security and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall
(unless otherwise required by mandatory provision of applicable escheat or
abandoned or unclaimed property law) be paid on Company Request to the Company,
or (if then held by the Company) shall (unless otherwise required by mandatory
provision of applicable escheat or abandoned or unclaimed property law) be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
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required to make any such repayment, may at the expense of the Company cause to
be published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in the state of
California, notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Company.
Section 10.4. Statement as to Compliance.
The Company shall deliver to the Trustee, within 120 days after the end of
each calendar year of the Company ending after the date hereof, an Officers'
Certificate covering the preceding calendar year, stating whether or not to the
best knowledge of the signers thereof the Company is in default in the
performance, observance or fulfillment of or compliance with any of the terms,
provisions, covenants and conditions of this Indenture, and if the Company shall
be in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge. For the purpose of this Section 10.4, compliance
shall be determined without regard to any grace period or requirement of notice
provided pursuant to the terms of this Indenture.
Section 10.5. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any covenant
or condition provided pursuant to Sections 3.1, 9.1(c), or 9.1(d) with respect
to the Securities of any series, if before or after the time for such compliance
the Holders of at least a majority in principal amount of the Outstanding
Securities of such series shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such covenant or
condition, but no such waiver shall extend to or affect such covenant or
condition except to the extent so expressly waived, and, until such waiver shall
become effective, the obligations of the Company in respect of any such covenant
or condition shall remain in full force and effect.
Section 10.6. Additional Sums.
In the case of the Securities of a series issued to a Downey Trust, so long
as no Event of Default has occurred and is continuing, except as otherwise
specified as contemplated by Section 2.1 or Section 3.1, in the event that (i)
such Downey Trust is the Holder of all of the Outstanding Securities of such
series, (ii) a Tax Event in respect of such Downey Trust shall have occurred and
be continuing, and (iii) the Company shall not have (A) redeemed the Securities
of such series pursuant to Section 11.7 or (B) terminated such DFC Trust
pursuant to Section 9.2(b) of the related Trust Agreement, the Company shall pay
to such Downey Trust (and its permitted successors or assigns under the related
Trust Agreement) for so long as such Downey Trust (or its permitted successor or
assignee) is the registered holder of any Securities of such series, such
additional amounts as may be necessary in order that the amount of Distributions
(including any Additional Amounts (as defined in such Trust Agreement)) then due
and paid or payable by such Downey Trust on the related Capital Securities and
Common Securities that at any time remain outstanding in accordance with the
terms thereof shall not be reduced as a result of any Additional Taxes (the
"Additional Sums"). Whenever in this Indenture or the Securities there is a
reference in any context to the payment of principal of or
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interest on the Securities, such mention shall be deemed to include mention of
the payments of the Additional Sums provided for in this paragraph to the extent
that, in such context, Additional Sums are, were or would be payable in respect
thereof pursuant to the provisions of this paragraph and express mention of the
payment of Additional Sums (if applicable) in any provisions hereof shall not be
construed as excluding Additional Sums in those provisions hereof where such
express mention is not made; provided, however, that the deferral of the payment
of interest pursuant to Section 3.11 or the Securities shall not defer the
payment of any Additional Sums that may be due and payable.
Section 10.7. Additional Covenants.
The Company covenants and agrees with each Holder of Securities of any
series that it shall not, and it shall not permit any Subsidiary of the Company
to, (a) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any shares of the
Company's capital stock (which includes common and capital stock), (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 (including Securities other than
the Securities of such series) that rank pari passu with or junior in right of
payment to the Securities of such series or (c) make any guarantee payments with
respect to any guarantee by the Company of debt securities of any Subsidiary of
the Company if such guarantee ranks pari passu with or junior in right of
payment to the Securities (other than (i) any dividend in a form of stock,
warrants, options or other rights where the dividend or the stock issuable upon
the exercise of the warrants, options or other rights is the same stock as that
on which the dividend is being paid or ranks on parity with or junior in right
of payment to such stock, (ii) any declaration of a dividend in connection with
the implementation of a rights plan, or the issuance of stock under any such
plan in the future, or the redemption or repurchase of any such rights pursuant
thereto, (iii) payments under the Downey Trust Guarantee related to the Capital
Securities issued by the Downey Trust holding Securities of such series, and
(iv) purchases of Common Stock related to the issuance of Common Stock or rights
under any of the Company's benefit plans for its directors, officers consultants
or employees) or (d) redeem, purchase or acquire less than all of the Securities
of such series or any of the Capital Securities if at such time any of the
following events specified in clauses (i) through (iv) shall have occurred and
is continuing, (i) an Event of Default with respect to the Securities of such
series as specified in Section 5.1(a) or 5.1(b), (ii) any event of which the
Company has actual knowledge that (A) constitutes or with the giving of notice
or the lapse of time or both, would constitute an Event of Default with respect
to the Securities of such series other than an Event of Default specified in
Section 5.1(a) or 5.1(b), (iii) if the Securities of such series are held by a
Downey Trust, the Company shall be in default with respect to its payment of any
obligations under the Downey Trust Guarantee relating to the Capital Securities
issued by such Downey Trust, or (iv) the Company shall have given notice of its
election to begin an Extension Period with respect to the Securities of such
series as provided herein, or such Extension Period, or any extension thereof,
shall be continuing.
The Company also covenants with each Holder of Securities of a series
issued to a Downey Trust (i) to maintain, directly or indirectly, 100% ownership
of the Common Securities of such Downey Trust; provided, however, that any
permitted successor of the Company hereunder may succeed to the Company's
ownership of such Common Securities, (ii) not to voluntarily terminate, wind-up
or liquidate such Downey Trust, except (a) in connection with a
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distribution of the Securities of such series to the holders of Trust Securities
in liquidation of such Downey Trust or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the related Trust Agreement and
(iii) to use its reasonable efforts, consistent with the terms and provisions of
such Trust Agreement, to cause such Downey Trust to remain classified as a
grantor trust and not an association taxable as a corporation for United States
federal income tax purposes.
Section 10.8. Payment of Expenses.
In the case of Securities of a series issued to a Downey Trust, in
connection with the offering, sale and issuance of the Securities to such Downey
Trust and in connection with the sale of the Trust Securities by such Downey
Trust, the Corporation, in its capacity as borrower with respect to the
Securities of such series, shall:
(a) pay all costs and expenses relating to the offering, sale and issuance
of the Securities of such series and compensation of the Trustee in accordance
with the provisions of Section 6.7;
(b) pay all costs and expenses of such Downey Trust (including, but not
limited to, costs and expenses relating to the organization of such Downey
Trust, the offering, sale and issuance of the Trust Securities (including
commissions to the underwriters or initial purchasers in connection therewith),
the fees and expenses of the Property Trustee, the Delaware Trustee and the
Administrative Trustees, the costs and expenses relating to the operation of the
Trust, including without limitation, costs and expenses of accountants,
attorneys, statistical or bookkeeping services, expenses for printing and
engraving and computing or accounting equipment, paying agent(s), registrar(s),
transfer agent(s), duplicating, travel and telephone and other
telecommunications expenses and costs and expenses incurred in connection with
the acquisition, financing, and disposition of assets of the Trust;
(c) by primarily and fully liable for any indemnification obligations
arising with respect to the Trust Agreement;
(d) pay any and all taxes (other than United States withholding taxes
attributable to such Downey Trust or its assets) and all liabilities, costs and
expenses with respect to such taxes of such Downey Trust; and
(e) pay all other fees, expenses, debts, obligations and liabilities (other
than in respect of the Trust Securities) related to the Trust.
The obligations set forth in this Section 10.8 are intended to be for the
benefit of and will be enforceable by, any Person to whom any of such costs,
expenses, obligations, taxes or liabilities are owed (a "Creditor"), whether or
not the Creditor has received notice. The Creditor may enforce the Company's
obligations in this Section 10.8 directly against the Company and the Company
waives any right or remedy to require that any action be brought against such
Downey Trust or any other person or entity before proceeding against the
Company.
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ARTICLE XI
REDEMPTION OF SECURITIES
Section 11.1. Applicability of This Article.
Redemption of Securities of any series (whether by operation of a sinking
fund or otherwise) as permitted or required by any form of Security issued
pursuant to this Indenture shall be made in accordance with such form of
Security and this Article; provided, however, that if any provision of any such
form of Security shall conflict with any provision of this Article, the
provision of such form of Security shall govern. Except as otherwise set forth
in the form of Security for such series, each Security of such series shall be
subject to partial redemption only in the amount of $25 or, in the case of the
Securities of a series issued to a Downey Trust, $25, or integral multiples of
$25 in excess thereof.
Section 11.2. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by
or pursuant to a Board Resolution. In case of any redemption at the election of
the Company of less than all of the Securities of any particular series and
having the same terms, the Company shall, not less than 30 nor more than 60 days
prior to the Redemption Date (unless a shorter notice shall be satisfactory to
the Trustee), notify the Trustee of such date and of the principal amount of
Securities of that series to be redeemed. In the case of any redemption of
Securities prior to the expiration of any restriction on such redemption
provided in the terms of such Securities, the Company shall furnish the Trustee
with an Officers' Certificate and an Opinion of Counsel evidencing compliance
with such restriction.
Section 11.3. Selection of Securities to be Redeemed.
If less than all the Securities of any series are to be redeemed (unless
all the Securities of such series and of a specified tenor are to be redeemed or
unless such redemption affects only a single Security), the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities of such series
not previously called for redemption, by such method as the Trustee shall deem
fair and appropriate and which may provide for the selection for redemption of a
portion of the principal amount of any Security of such series, provided that
the portion of the principal amount of any Security not redeemed shall be in an
authorized denomination (which shall not be less than the minimum authorized
denomination) for such Security. If less than all the Securities of such series
and of a specified tenor are to be redeemed (unless such redemption affects only
a single Security), the particular Securities to be redeemed shall be selected
not more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of such series and specified tenor not previously called
for redemption in accordance with the preceding sentence.
The Trustee shall promptly notify the Company in writing of the Securities
selected for partial redemption and the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all
provisions relating to the redemption of Securities shall relate, in the case of
any Security redeemed or to be redeemed only in part, to the
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portion of the principal amount of such Security which has been or is to be
redeemed. If the Company shall so direct, Securities registered in the name of
the Company, any Affiliate or any Subsidiary thereof shall not be included in
the Securities selected for redemption.
Section 11.4. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage prepaid,
mailed not later than the thirtieth day, and not earlier than the sixtieth day,
prior to the Redemption Date, to each Holder of Securities to be redeemed, at
the address of such Holder as it appears in the Securities Register.
With respect to Securities of each series to be redeemed, each notice of
redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Outstanding Securities of such particular series and
having the same terms are to be redeemed, the identification (and, in the case
of partial redemption, the respective principal amounts) of the particular
Securities to be redeemed;
(d) that on the Redemption Date, the Redemption Price will become due and
payable upon each such Security or portion thereof, and that interest thereon,
if any, shall cease to accrue on and after said date;
(e) the place or places where such Securities are to be surrendered for
payment of the Redemption Price; and
(f) that the redemption is for a sinking fund, if such is the case.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall not be
irrevocable. 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, a failure to give such notice by mail or any
defect in the notice to the Holder of any Security designated for redemption as
a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
Section 11.5. Deposit of Redemption Price.
Prior to 12:00 noon, Eastern time on the Redemption Date specified in the
notice of redemption given as provided in Section 11.4, the Company will deposit
with the Trustee or with one or more Paying Agents (or if the Company is acting
as its own Paying Agent, the Company will segregate and hold in trust as
provided in Section 10.3) an amount of money sufficient to pay the Redemption
Price of, and any accrued interest (including Additional Interest) on, all the
Securities which are to be redeemed on that date.
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Section 11.6. Payment of Securities Called for Redemption.
If any notice of redemption has been given as provided in Section 11.4, the
Securities or portion of Securities with respect to which such notice has been
given shall become due and payable on the date and at the place or places stated
in such notice at the applicable Redemption Price. On presentation and
surrender of such Securities at a Place of Payment in said notice specified, the
said securities or the specified portions thereof shall be paid and redeemed by
the Company at the applicable Redemption Price, together with accrued interest
(including any Additional Interest) to the Redemption Date; provided, however,
that interest on any Security of any series which is payable and is punctually
paid or duly provided for, on any Interest Payment Date falling on or before a
Redemption Date shall be paid according to the provisions of Section 3.7;
provided, further, that, unless otherwise specified as contemplated by Section
3.1, installments of interest whose Stated Maturity is on or prior to the
Redemption Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, registered as such at the close of business on the
relevant Record Dates according to their terms and the provisions of Section
3.7.
Upon presentation of any Security redeemed in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the Holder thereof, at
the expense of the Company, a new Security or Securities of the same series, of
authorized denominations, in aggregate principal amount equal to the portion of
the Security not redeemed so presented and having the same Original Issue Date,
Stated Maturity and terms. If a Global Security is so surrendered, such new
Security will also be a new Global Security.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal of and premium, if any, on such Security
shall, until paid, bear interest from the Redemption Date at the rate prescribed
therefor in the Security.
Section 11.7. Right of Redemption of Securities Initially Issued to a Downey
Trust.
In the case of the Securities of a series initially issued to a Downey
Trust, except as otherwise specified as contemplated by Section 3.1, the
Company, at its option, may redeem such Securities (i) on or after the date five
years after the Original Issue Date of such Securities, in whole at any time or
in part from time to time, or (ii) upon the occurrence and during the
continuation of a Tax Event, Investment Company Event, or Capital Treatment
Event, at any time within 90 days following the occurrence of such Tax Event,
Investment Company Event or Capital Treatment Event in respect of such Downey
Trust, in whole (but not in part) in each case at a Redemption Price equal to
100% of the principal amount thereof plus accrued and unpaid interest.
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ARTICLE XII
SINKING FUNDS
Section 12.1. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for
the retirement of Securities of any series except as otherwise specified as
contemplated by Section 3.1 for such Securities.
The minimum amount of any sinking fund payment provided for by the terms of
any Securities of any series is herein referred to as a "mandatory sinking fund
payment", and any sinking fund payment in excess of such minimum amount which is
permitted to be made by the terms of such Securities of any series is herein
referred to as an "optional sinking fund payment". If provided for by the terms
of any Securities of any series, the cash amount of any sinking fund payment may
be subject to reduction as provided in Section 12.2. Each sinking fund payment
shall be applied to the redemption of Securities of any series as provided for
by the terms of such Securities.
Section 12.2. Satisfaction of Sinking Fund Payments with Securities.
In lieu of making all or any part of a mandatory sinking fund payment with
respect to any Securities of a series in cash, the Company may at its option, at
any time no more than 16 months and no less than 30 days prior to the date on
which such sinking fund payment is due, deliver to the Trustee Securities of
such series (together with the unmatured coupons, if any, appertaining thereto)
theretofore purchased or otherwise acquired by the Company, except Securities of
such series that have been redeemed through the application of mandatory or
optional sinking fund payments pursuant to the terms of the Securities of such
series, accompanied by a Company Order instructing the Trustee to credit such
obligations and stating that the Securities of such series were originally
issued by the Company by way of bona fide sale or other negotiation for value;
provided that the Securities to be so credited have not been previously so
credited. The Securities to be so credited shall be received and credited for
such purpose by the Trustee at the redemption price for such Securities, as
specified in the Securities so to be redeemed, for redemption through operation
of the sinking fund and the amount of such sinking fund payment shall be reduced
accordingly.
Section 12.3. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any
series of Securities, the Company will deliver to the Trustee an Officers'
Certificate specifying the amount of the next ensuing sinking fund payment for
such Securities pursuant to the terms of such Securities, the portion thereof,
if any, which is to be satisfied by payment of cash in the currency in which the
Securities of such series are payable (except as provided pursuant to Section
3.1) and the portion thereof, if any, which is to be satisfied by delivering and
crediting Securities pursuant to Section 12.2 and will also deliver to the
Trustee any Securities to be so delivered. Such Officers' Certificate shall be
irrevocable and upon its delivery the Company shall be obligated to make the
cash payment or payments therein referred to, if any, on or before the
succeeding sinking fund
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payment date. In the case of the failure of the Company to deliver such
Officers' Certificate (or, as required by this Indenture, the Securities and
coupons, if any, specified in such Officers' Certificate), the sinking fund
payment due on the succeeding sinking fund payment date for such series shall be
paid entirely in cash and shall be sufficient to redeem the principal amount of
the Securities of such series subject to a mandatory sinking fund payment
without the right to deliver or credit securities as provided in Section 12.2
and without the right to make the optional sinking fund payment with respect to
such series at such time.
Any sinking fund payment or payments (mandatory or optional) made in cash
plus any unused balance of any preceding sinking fund payments made with respect
to the Securities of any particular series shall be applied by the Trustee (or
by the Company if the Company is acting as its own Paying Agent) on the sinking
fund payment date on which such payment is made (or, if such payment is made
before a sinking fund payment date, on the sinking fund payment date immediately
following the date of such payment) to the redemption of Securities of such
series at the Redemption Price specified in such Securities with respect to the
sinking fund. Any sinking fund moneys not so applied or allocated by the
Trustee (or, if the Company is acting as its own Paying Agent, segregated and
held in trust by the Company as provided in Section 10.3) for such series and
together with such payment (or such amount so segregated) shall be applied in
accordance with the provisions of this Section 12.3. Any and all sinking fund
moneys with respect to the Securities of any particular series held by the
Trustee (or if the Company is acting as its own Paying Agent, segregated and
held in trust as provided in Section 10.3) on the last sinking fund payment date
with respect to Securities of such series and not held for the payment or
redemption of particular Securities of such series shall be applied by the
Trustee (or by the Company if the Company is acting as its own Paying Agent),
together with other moneys, if necessary, to be deposited (or segregated)
sufficient for the purpose, to the payment of the principal of the Securities of
such series at Maturity. The Trustee shall select the Securities to be redeemed
upon such sinking fund payment date in the manner specified in Section 11.3 and
cause notice of the redemption thereof to be given in the name of and at the
expense of the Company in the manner provided in Section 11.4. Such notice
having been duly given, the redemption of such Securities shall be made upon the
terms and in the manner stated in Section 11.6. On or before each sinking fund
payment date, the Company shall pay to the Trustee (or, if the Company is acting
as its own Paying Agent, the Company shall segregate and hold in trust as
provided in Section 10.3) in cash a sum in the currency in which Securities of
such series are payable (except as provided pursuant to Section 3.1) equal to
the principal and any interest accrued to the Redemption Date for Securities or
portions thereof to be redeemed on such sinking fund payment date pursuant to
this Section 12.3.
Neither the Trustee nor the Company shall redeem any Securities of a series
with sinking fund moneys or mail any notice of redemption of Securities of such
series by operation of the sinking fund for such series during the continuance
of a default in payment of interest, if any, on any Securities of such series or
of any Event of Default (other than an Event of Default occurring as a
consequence of this paragraph) with respect to the Securities of such series,
except that if the notice of redemption shall have been provided in accordance
with the provisions hereof, the Trustee (or the Company, if the Company is then
acting as its own Paying Agent) shall redeem such Securities if cash sufficient
for that purpose shall be deposited with the Trustee (or segregated by the
Company) for that purpose in accordance with the terms of this Article XII.
Except as aforesaid, any moneys in the sinking fund for such series at the time
when any such
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default or Event of Default shall occur and any moneys thereafter paid into such
sinking fund shall, during the continuance of such default or Event of Default,
be held as security for the payment of the Securities and coupons, if any, of
such series; provided, however, that in case such default or Event of Default
shall have been cured or waived herein, such moneys shall thereafter be applied
on the next sinking fund payment date for the Securities of such series on which
such moneys may be applied pursuant to the provisions of this Section 12.3.
ARTICLE XIII
SUBORDINATION OF SECURITIES
Section 13.1. Securities Subordinate to Senior and Subordinated Debt.
The Company covenants and agrees, and each Holder of a Security, by its
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article XIII, the payment of the
principal of (and premium, if any) and interest (including any Additional
Interest) on each and all of the Securities are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
amounts then due and payable in respect of all Senior and Subordinated Debt.
Section 13.2. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of any liquidation, dissolution, winding up, receivership,
insolvency, bankruptcy, reorganization, arrangement, adjustment, composition,
assignment for the benefit of creditors, marshaling of assets, debt
restructuring or other similar proceedings relative to the Company (each such
event, if any, herein sometimes referred to as a "Proceeding"), then the holders
of Senior and Subordinated Debt shall be entitled to receive payment in full of
Allocable Amounts of such Senior and Subordinated Debt, or provision shall be
made for such payment in cash or cash equivalents or otherwise in a manner
satisfactory to the holders of Senior and Subordinated Debt, before the Holders
of the Securities are entitled to receive or retain any payment or distribution
of any kind or character, whether in cash, property or securities (including any
payment or distribution which may be payable or deliverable by reason of the
payment of any other Debt of the Company subordinated to the payment of the
Securities, such payment or distribution being hereinafter referred to as a
"Junior Subordinated Payment"), on account of principal of (or premium, if any)
or interest (including any Additional Interest) on the Securities or on account
of the purchase or other acquisition of Securities by the Company or any
Subsidiary and to that end the holders of Senior and Subordinated Debt shall be
entitled to receive, for application to the payment thereof, any payment or
distribution of any kind or character, whether in cash, property or securities,
including any Junior Subordinated Payment, which may be payable or deliverable
in respect of the Securities in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of this Section
13.2, the Trustee or the Holder of any Security shall have received any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, including any Junior Subordinated Payment, before
all Allocable Amounts of all Senior and Subordinated Debt are paid in full or
payment thereof is provided for in cash or cash equivalents or otherwise in a
manner satisfactory to the holders of Senior and Subordinated Debt, and if such
fact shall, at or
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<PAGE>
prior to the time of such payment or distribution, have been made known to the
Trustee or, as the case may be, such Holder, then and in such event such payment
or distribution shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for application
to the payment of all Allocable Amounts of all Senior and Subordinated Debt
remaining unpaid, to the extent necessary to pay all Allocable Amounts of all
Senior and Subordinated Debt in full, after giving effect to any concurrent
payment or distribution to or for the holders of Senior and Subordinated Debt.
For purposes of this Article XIII only, the words "any payment or
distribution of any kind or character, whether in 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 which securities are subordinated in
right of payment to all then outstanding Senior and Subordinated Debt to
substantially the same extent as the Securities are so subordinated as provided
in this Article XIII. The consolidation of the Company with, or the merger of
the Company into, another Person or the liquidation or dissolution of the
Company following the sale of all or substantially all of its properties and
assets as an entirety to another Person upon the terms and conditions set forth
in Article VIII shall not be deemed a Proceeding for the purposes of this
Section 13.2 if the Person formed by such consolidation or into which the
Company is merged or the Person which acquires by sale such properties and
assets as an entirety, as the case may be, shall, as a part of such
consolidation, merger, or sale comply with the conditions set forth in Article
VIII.
Section 13.3. Reserved.
Section 13.4. No Payment When Senior and Subordinated Debt in Default.
In the event and during the continuation of any default in the payment of
principal of (or premium, if any) or interest on any Senior and Subordinated
Debt and any applicable grace period after the default has ended, or in the
event that any event of default with respect to any Senior and Subordinated Debt
shall have occurred and be continuing and shall have resulted in such Senior and
Subordinated Debt becoming or being declared due and payable prior to the date
on which it would otherwise have become due and payable, unless and until such
event of default shall have been cured or waived or shall have ceased to exist
and such acceleration shall have been rescinded or annulled, then no payment or
distribution of any kind or character, whether in cash, properties or securities
(including any Junior Subordinated Payment) shall be made by the Company on
account of principal of (or premium, if any) or interest (including any
Additional Interest), if any, on the Securities or on account of the purchase or
other acquisition of Securities by the Company or any Subsidiary, in each case
unless and until all Allocable Amounts of such Senior and Subordinated Debt are
paid in full; provided, however, that nothing in this Section 13.4 shall prevent
the satisfaction of any sinking fund payment in accordance with this Indenture
or as otherwise specified as contemplated by Section 3.1 for the Securities of
any series by delivering and crediting pursuant to Section 12.2 or as otherwise
specified as contemplated by Section 3.1 for the Securities of any series
Securities which have been acquired (upon redemption or otherwise) prior to such
default in payment or event of default.
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<PAGE>
In the event that, notwithstanding the foregoing, the Company shall make
any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section 13.4, and if such fact shall, at or prior
to the time of such payment, have been made known to the Trustee or, as the case
may be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the Company which will then be obligated to pay such
payment to the holders of its Senior and Subordinated Debt at the time
outstanding.
The provisions of this Section 13.4 shall not apply to any payment with
respect to which Section 13.2 would be applicable.
Section 13.5. Payment Permitted If No Default.
Nothing contained in this Article XIII or elsewhere in this Indenture or in
any of the Securities shall prevent (a) the Company, at any time except during
the pendency of any Proceeding referred to in Section 13.2 or under the
conditions described in Sections 13.3 and 13.4, from making payments at any time
of principal of (and premium, if any) or interest (including Additional
Interest) on the Securities, or (b) the application by the Trustee of any money
deposited with it hereunder to the payment of or on account of the principal of
(and premium, if any) or interest (including any Additional Interest) on the
Securities or the retention of such payment by the Holders, if, at the time of
such application by the Trustee, it did not have knowledge that such payment
would have been prohibited by the provisions of this Article XIII.
Section 13.6. Subrogation to Rights of Holders of Senior and Subordinated Debt.
Subject to the payment in full of all amounts due or to become due on all
Senior and Subordinated Debt, or the provision for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior and
Subordinated Debt, the Holders of the Securities shall be subrogated to the
extent of the payments or distributions made to the holders of such Senior and
Subordinated Debt pursuant to the provisions of this Article XIII (equally and
ratably with the holders of all indebtedness of the Company which by its express
terms is subordinated to Senior and Subordinated Debt of the Company to
substantially the same extent as the Securities are subordinated to the Senior
and Subordinated Debt and is entitled to like rights of subrogation by reason of
any payments or distributions made to holders of such Senior and Subordinated
Debt) to the rights of the holders of such Senior and Subordinated Debt to
receive payments and distributions of cash, property and securities applicable
to the Senior and Subordinated Debt until the principal of (and premium, if any)
and interest on the Securities shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior and
Subordinated Debt of any cash, property or securities to which the Holders of
the Securities or the Trustee would be entitled except for the provisions of
this Article, and no payments pursuant to the provisions of this Article XIII to
the holders of Senior and Subordinated Debt by Holders of the Securities or the
Trustee shall, as among the Company, its creditors other than holders of Senior
and Subordinated Debt, and the Holders of the Securities, be deemed to be a
payment or distribution by the Company to or on account of the Senior and
Subordinated Debt.
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<PAGE>
Section 13.7. Provisions Solely to Define Relative Rights.
The provisions of this Article XIII are and are intended solely for the
purpose of defining the relative rights of the Holders of the Securities on the
one hand and the holders of Senior and Subordinated Debt on the other hand.
Nothing contained in this Article XIII or elsewhere in this Indenture or in the
Securities is intended to or shall (a) impair, as between the Company and the
Holders of the Securities, the obligations of the Company, which are absolute
and unconditional, to pay to the Holders of the Securities the principal of (and
premium, if any) and interest (including any Additional Interest) on the
Securities as and when the same shall become due and payable in accordance with
their terms; or (b) affect the relative rights against the Company of the
Holders of the Securities and creditors of the Company other than their rights
in relation to the holders of Senior and Subordinated Debt; or (c) prevent the
Trustee or the Holder of any Security from exercising all remedies otherwise
permitted by applicable law upon default under this Indenture including, without
limitation, filing and voting claims in any Proceeding, subject to the rights,
if any, under this Article XIII of the holders of Senior and Subordinated Debt
to receive cash, property and securities otherwise payable or deliverable to the
Trustee or such Holder.
Section 13.8. Trustee to Effectuate Subordination.
Each Holder of a Security by his or her acceptance thereof authorizes and
directs the Trustee on his or her behalf to take such action as may be necessary
or appropriate to acknowledge or effectuate the subordination provided in this
Article XIII and appoints the Trustee his or her attorney-in-fact for any and
all such purposes.
Section 13.9. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior and Subordinated
Debt 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, provisions and covenants of this
Indenture, regardless of any knowledge thereof that any such holder may have or
be otherwise charged with.
Without in any way limiting the generality of the immediately preceding
paragraph, the holders of Senior and Subordinated Debt may, at any time and from
to time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of the Holders of the Securities to the holders of
Senior and Subordinated Debt, do any one or more of the following: (i) change
the manner, place or terms of payment or extend the time of payment of, or renew
or alter, Senior and Subordinated Debt, or otherwise amend or supplement in any
manner Senior and Subordinated Debt or any instrument evidencing the same or any
agreement under which Senior and Subordinated Debt is outstanding; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior and Subordinated Debt; (iii) release any Person liable
in any manner for the collection of Senior and Subordinated Debt; and (iv)
exercise or refrain from exercising any rights against the Company and any other
Person.
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<PAGE>
Section 13.10. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article XIII or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior and Subordinated Debt or from any trustee, agent
or representative therefor; provided, however, that if the Trustee shall not
have received the notice provided for in this Section 13.10 at least two
Business Days prior to the date upon which by the terms hereof any monies may
become payable for any purpose (including, without limitation, the payment of
the principal of (and premium, if any) or interest (including any Additional
Interest) on any Security), then, anything herein contained to the contrary
notwithstanding, the Trustee shall have full power and authority to receive such
monies and to apply the same to the purpose for which they were received and
shall not be affected by any notice to the contrary which may be received by it
within two Business Days prior to such date.
Subject to the provisions of Section 6.1, the Trustee shall be entitled to
rely on the delivery to it of a written notice by a Person representing himself
to be a holder of Senior and Subordinated Debt (or a trustee therefor) to
establish that such notice has been given by a holder of Senior and Subordinated
Debt (or a trustee therefor). 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 Senior and Subordinated Debt to participate in any payment or
distribution pursuant to this Article, the Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the amount
of Senior and Subordinated Debt 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, 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 13.11. Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to in
this Article XIII, the Trustee, subject to the provisions of Section 6.1, and
the Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such Proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior and
Subordinated Debt 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 XIII.
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<PAGE>
Section 13.12. Trustee Not Fiduciary for Holders of Senior and Subordinated
Debt.
The Trustee, in its capacity as trustee under this Indenture, shall not be
deemed to owe any fiduciary duty to the holders of Senior and Subordinated Debt
and shall not be liable to any such holders if it shall in good faith mistakenly
pay over or distribute to Holders of Securities or to the Company or to any
other Person cash, property or securities to which any holders of Senior and
Subordinated Debt shall be entitled by virtue of this Article or otherwise.
Section 13.13. Rights of Trustee as Holder of Senior and Subordinated Debt;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article XIII with respect to any Senior and Subordinated Debt
which may at any time be held by it, to the same extent as any other holder of
Senior and Subordinated Debt, and nothing in this Indenture shall deprive the
Trustee of any of its rights as such holder.
Section 13.14. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article XIII shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article XIII in addition to or in place of the Trustee.
Section 13.15. Certain Conversions or Exchanges Deemed Payment.
For the purposes of this Article XIII only, (a) the issuance and delivery
of junior securities upon conversion or exchange of Securities shall not be
deemed to constitute a payment or distribution on account of the principal of
(or premium, if any) or interest (including any Additional Interest) on
Securities or on account of the purchase or other acquisition of Securities, and
(b) the payment, issuance or delivery of cash, property or securities (other
than junior securities) upon conversion or exchange of a Security shall be
deemed to constitute payment on account of the principal of such security. For
the purposes of this Section 13.15, the term "junior securities" means (i)
shares of any stock of any class of the Company and (ii) securities of the
Company which are subordinated in right of payment to all Senior and
Subordinated Debt which may be outstanding at the time of issuance or delivery
of such securities to substantially the same extent as, or to a greater extent
than, the Securities are so subordinated as provided in this Article XIII.
* * * *
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
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<PAGE>
DOWNEY FINANCIAL CORP.
By:
-------------------------------
Name:
Title:
Attest:
By:
-------------------------
Name:
Title:
WILMINGTON TRUST COMPANY,
as Trustee
By:
-------------------------------
Its:
------------------------------
Attest:
By:
--------------------------
Its:
-------------------------
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<PAGE>
EXHIBIT 4.2
CERTIFICATE OF TRUST
OF
DOWNEY FINANCIAL CAPITAL TRUST I
THIS CERTIFICATE OF TRUST of DOWNEY FINANCIAL CAPITAL I (the "Trust"),
dated May 25, 1999, is being duly executed and filed by the undersigned, as
trustees, to form a business trust under the Delaware Business Trust Act (12
Del. C. (S) 3801 et seq.).
1. Name. The name of the business trust being formed hereby is DOWNEY
FINANCIAL CAPITAL TRUST I.
2. Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware are Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890, Attention:
Corporate Trust Administration.
3. Effective Date. This Certificate of Trust shall be effective upon its
filing.
IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have
executed this Certificate of Trust as of the date first above written.
WILMINGTON TRUST COMPANY,
as Trustee
By: /s/ W. Chris Sponenberg
-----------------------
Name: W. Chris Sponenberg
Title: Assistant Vice President
/s/ Daniel D. Rosenthal
-----------------------
Daniel D. Rosenthal,
Administrative Trustee
/s/ Thomas E. Prince
--------------------
Thomas E. Prince,
Administrative Trustee
/s/ Paul G. Woollatt
--------------------
Paul G. Woollatt,
Administrative Trustee
<PAGE>
EXHIBIT 4.3
TRUST AGREEMENT
This TRUST AGREEMENT, dated as of May 25, 1999 (this "Trust
Agreement"), among Downey Financial Corp., a Delaware corporation (the
"Depositor"), (ii) Wilmington Trust Company a Delaware banking corporation, as
trustee (the "Delaware Trustee"), and (iii) Daniel D. Rosenthal, Thomas E.
Prince and Paul G. Woollatt, each an individual, as trustees (the
"Administrative Trustees" and, together with the Delaware Trustee, the
"Trustees"). The Depositor and the Trustees hereby agree as follows:
1. The trust created hereby (the "Trust") shall be known as "DOWNEY
FINANCIAL CAPITAL TRUST I" in which name the Trustees, or the Depositor to the
extent provided herein, may engage in the transactions contemplated hereby, make
and execute contracts, and sue and be sued.
2. The Depositor hereby assigns, transfers, conveys and sets over to
the Trustees the sum of Ten Dollars ($10.00). The Trustees hereby acknowledge
receipt of such amount in trust from the Depositor, which amount shall
constitute the initial trust estate. The Trustees hereby declare that they will
hold the trust estate in trust for the Depositor. It is the intention of the
parties hereto that the Trust created hereby constitute a business trust under
Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Section 3801, et seq.
(the "Business Trust Act"), and that this document constitutes the governing
instrument of the Trust. The parties hereto hereby ratify the Trustees' filing
of a Certificate of Trust with the Delaware Secretary of State under the name
"DOWNEY FINANCIAL CAPITAL TRUST I."
3. The Depositor and the Trustees will enter into an amended and
restated Trust Agreement, satisfactory to each such party and substantially in
the form included as an exhibit to the 1933 Act Registration Statement (as
defined below), to provide for the contemplated operation of the Trust created
hereby and the issuance of the Capital Securities and Common Securities referred
to therein. Prior to the execution and delivery of such amended and restated
Trust Agreement, the Trustees shall not have any duty or obligation hereunder or
with respect to the trust estate, except as otherwise required by applicable law
or as may be necessary to obtain prior to such execution and delivery any
licenses, consents or approvals required by applicable law or otherwise.
4. The Depositor and the Trustees hereby authorize and direct the
Depositor, as the sponsor of the Trust, (i) to file with the Securities and
Exchange Commission (the "Commission") and execute, in each case on behalf of
the Trust, (a) the Registration Statement on Form S-3 (the "1933 Act
Registration Statement"), including any pre-effective or post-effective
amendments to the 1933 Act Registration Statement, relating to the registration
under the Securities Act of 1933, as amended, of the Capital Securities of the
Trust and possibly certain other securities and (b) if required, a Registration
Statement on Form 8-A (the "1934 Act Registration Statement")
1
<PAGE>
(including all pre-effective and post-effective amendments thereto) relating to
the registration of the Capital Securities of the Trust under the Securities
Exchange Act of 1934, as amended; (ii) to file with the New York Stock Exchange
or a national stock exchange (each, an "Exchange") and execute on behalf of the
Trust one or more listing applications and all other applications, statements,
certificates, agreements and other instruments as shall be necessary or
desirable to cause the Capital Securities to be listed on any of the Exchanges;
(iii) to file and execute on behalf of the Trust such applications, reports,
surety bonds, irrevocable consents, appointments of attorney for service of
process and other papers and documents as shall be necessary or desirable to
register the Capital Securities under the securities or blue sky laws of such
jurisdictions as the Depositor, on behalf of the Trust, may deem necessary or
desirable; and (iv) to execute on behalf of the Trust that certain Underwriting
Agreement relating to the Capital Securities, among the Trust, the Depositor and
the Underwriters named therein, substantially in the form included as an exhibit
to the 1933 Act Registration Statement. In the event that any filing referred to
in clauses (i), (ii) and (iii) above is required by the rules and regulations of
the Commission, an Exchange or state securities or blue sky laws to be executed
on behalf of the Trust by one or more of the Trustees, each of the Trustees, in
such Trustee's capacity as a trustee of the Trust, is hereby authorized and, to
the extent so required, directed to join in any such filing and to execute on
behalf of the Trust any and all of the foregoing, it being understood that the
Delaware Trustee in its capacity as a trustee of the Trust shall not be required
to join in any such filing or execute on behalf of the Trust any such document
unless required by the rules and regulations of the Commission, the Exchange or
state securities or blue sky laws. In connection with the filings referred to
above, the Depositor and Daniel D. Rosenthal, Thomas E. Prince and Paul G.
Woollatt, each as Trustees and not in their individual capacities, hereby
constitutes and appoints Daniel D. Rosenthal and Thomas E. Prince, and each of
them, as the Depositor's or such Trustee's true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for the Depositor or
such Trustee or in the Depositor's or such Trustee's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to the 1933 Act Registration Statement and the 1934 Act Registration
Statement (if required) and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Commission, the Exchange and
administrators of the state securities or blue sky laws, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully and to all intents and purposes as the Depositor or such Trustee might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or their respective substitute or
substitutes, shall do or cause to be done by virtue hereof.
5. This Trust Agreement may be executed in one or more counterparts.
6. The number of Trustees initially shall be four (4) and thereafter
the number of Trustees shall be such number as shall be fixed from time to time
by a written instrument signed by the Depositor which may increase or decrease
the number of Trustees; provided, however, that to the extent required by the
Business Trust Act, one Trustee shall either be a natural person who is a
resident of the State of Delaware or, if not a natural person, an entity which
has its principal place of business in the State of Delaware and otherwise meets
the requirements of applicable Delaware
2
<PAGE>
law. Subject to the foregoing, the Depositor is entitled to appoint or remove
without cause any Trustee at any time. The Trustees may resign upon thirty (30)
days' prior notice to the Depositor.
7. This Trust Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws of principles).
IN WITNESS WHEREOF, the parties hereto have caused this Trust
Agreement to be duly executed as of the day and year first above written.
Downey Financial Corp.
as Depositor
By: /s/ Donald E. Royer
-------------------------------------------
Donald E. Royer
Executive Vice President and General Counsel
WILMINGTON TRUST COMPANY
as Trustee
By: /s/ W. Chris Sponenberg
-------------------------------------------
Name: W. Chris Sponenberg
Title: Assistant Vice President
By: /s/ Daniel D. Rosenthal
-------------------------------------------
Daniel D. Rosenthal, as Administrative Trustee
By: /s/ Thomas E. Prince
-------------------------------------------
Thomas E. Prince, as Administrative Trustee
By: /s/ Pual G. Woollatt
-------------------------------------------
Paul G. Woollatt, as Administrative Trustee
3
<PAGE>
EXHIBIT 4.4
AMENDED AND RESTATED TRUST AGREEMENT
among
Downey Financial Corp., as Depositor,
Wilmington Trust Company,
as Property Trustee,
Wilmington Trust Company,
as Delaware Trustee,
and
The Administrative Trustees Named Herein
Dated as of _________, 1999
<PAGE>
DOWNEY FINANCIAL CORP.
DOWNEY FINANCIAL CORP.
Certain Sections of this Trust Agreement relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
<TABLE>
<CAPTION>
Trust Indenture Trust Agreement
Act Section Section
------------------- -------------------
<S> <C> <C>
((S)) 310 (a) (1) 8.7
(a) (2) 8.7
(a) (3) 8.7
(a) (4) 2.7 (a) (ii)
(b)
((S)) 311 (a) 8.13
(b) 8.13
((S)) 312 (a) 5.7
(b) 5.7
(c) 5.7
((S)) 313 (a) 8.14 (a)
(a) (4) 8.14 (b)
(b) 8.14 (b)
(c) 10.8
(d) 8.14 (c)
((S)) 314 (a) 8.15
(b) Not Applicable
(c) (1) 8.16
(c) (2) 8.16
(c) (3) Not Applicable
(d) Not Applicable
(e) 1.1, 8.16
((S)) 315 (a) 8.1 (a), 8.3 (a)
(b) 8.2, 10.8
(c) 8.1 (a)
(d) 8.1, 8.3
(e) Not Applicable
((S)) 316 (a) Not Applicable
(a) (1) (A) Not Applicable
(a) (1) (B) Not Applicable
(a) (2) Not Applicable
(b) 5.14
(c) 6.7
((S)) 317 (a) (1) Not Applicable
(a) (2) Not Applicable
(b) 5.9
((S)) 318 (a) 10.10
</TABLE>
- ------
Note: This reconciliation and tie sheet shall not, for any purpose, be deemed to
be a part of the Trust Agreement.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
ARTICLE I. Defined Terms.........................................................................................1
Section 1.1. Definitions................................................................................1
ARTICLE II. Establishment of the Trust..........................................................................10
Section 2.1. Name. 10
Section 2.2. Office of the Delaware Trustee; Principal Place of Business...............................10
Section 2.3. Initial Contribution of Trust Property; Organizational Expenses...........................11
Section 2.4. Issuance of the Capital Securities........................................................11
Section 2.5. Issuance of the Common Securities; Subscription and Purchase of Debentures................11
Section 2.6. Declaration of Trust......................................................................11
Section 2.7. Authorization to Enter into Certain Transactions..........................................12
Section 2.8. Assets of Trust...........................................................................15
Section 2.9. Title to Trust Property...................................................................15
ARTICLE III. Payment Account....................................................................................15
Section 3.1. Payment Account...........................................................................15
ARTICLE IV. Distributions, redemption...........................................................................16
Section 4.1. Distributions.............................................................................16
Section 4.2. Redemption................................................................................17
Section 4.3. Subordination of Common Securities........................................................18
Section 4.4. Payment Procedures........................................................................19
Section 4.5. Tax Returns and Reports...................................................................19
Section 4.6. Payment of Taxes, Duties, Etc. of the Trust...............................................20
Section 4.7. Payments under Indenture or Pursuant to Direct Actions....................................20
ARTICLE V. trust Securities Certificates........................................................................20
Section 5.1. Initial Ownership.........................................................................20
Section 5.2. The Trust Securities Certificates.........................................................20
Section 5.3. Execution and Delivery of Trust Securities Certificates...................................21
Section 5.4. Registration of Transfer and Exchange of Capital Securities Certificates..................21
Section 5.5. Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates........................22
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
Section 5.6. Persons Deemed Securityholders...........................................................22
Section 5.7. Access to List of Securityholders' Names and Addresses...................................22
Section 5.8. Maintenance of Office or Agency..........................................................23
Section 5.9. Appointment of Paying Agent..............................................................23
Section 5.10. Ownership of Common Securities by Depositor..............................................24
Section 5.11. Book-Entry Capital Securities Certificates; Common Securities Certificate................24
Section 5.12. Notices to Clearing Agency...............................................................25
Section 5.13. Definitive Capital Securities Certificates...............................................25
Section 5.14. Rights of Securityholders................................................................25
ARTICLE VI. Acts of Securityholders, Meetings, Voting...........................................................27
Section 6.1. Limitations on Voting Rights..............................................................27
Section 6.2. Notice of Meetings........................................................................28
Section 6.3. Meetings of Capital Securityholders.......................................................28
Section 6.4. Voting Rights.............................................................................29
Section 6.5. Proxies, etc..............................................................................29
Section 6.6. Securityholder Action by Written Consent..................................................29
Section 6.7. Record Date for Voting and Other Purposes.................................................29
Section 6.8. Acts of Securityholders...................................................................29
Section 6.9. Inspection of Records.....................................................................31
ARTICLE VII. Representations and Warranties.....................................................................31
Section 7.1. Representations and Warranties of the Bank................................................31
Section 7.2. Representations and Warranties of Depositor...............................................32
ARTICLE VIII. The Trustees......................................................................................32
Section 8.1. Certain Duties and Responsibilities.......................................................32
Section 8.2. Certain Notices...........................................................................33
Section 8.3. Certain Rights of Property Trustee........................................................34
Section 8.4. Not Responsible for Recitals or Issuance of Securities....................................36
Section 8.5. May Hold Securities.......................................................................36
Section 8.6. Compensation; Indemnity; Fees.............................................................36
Section 8.7. Corporate Property Trustee Required; Eligibility of Trustees..............................37
Section 8.8. Conflicting Interests.....................................................................37
Section 8.9. Co-Trustees and Separate Trustee..........................................................38
</TABLE>
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<TABLE>
<S> <C>
Section 8.10. Resignation and Removal; Appointment of Successor........................................39
Section 8.11. Acceptance of Appointment by Successor...................................................40
Section 8.12. Merger, Conversion, Consolidation or Succession to Business..............................41
Section 8.13. Preferential Collection of Claims Against Depositor or Trust.............................41
Section 8.14. Reports by Property Trustee..............................................................42
Section 8.15. Reports to the Property Trustee..........................................................42
Section 8.16. Evidence of Compliance with Conditions Precedent.........................................42
Section 8.17. Number of Trustees.......................................................................43
Section 8.18. Delegation of Power......................................................................43
Section 8.19. Voting...................................................................................43
ARTICLE IX. Dissolution, Liquidation and Merger.................................................................44
Section 9.1. Dissolution Upon Expiration Date..........................................................44
Section 9.2. Early Dissolution.........................................................................44
Section 9.3. Dissolution...............................................................................44
Section 9.4. Liquidation...............................................................................45
Section 9.5. Mergers, Consolidations, Amalgamations or Replacements of the Trust.......................46
ARTICLE X. Miscellaneous Provisions.............................................................................47
Section 10.1. Limitation of Rights of Securityholders..................................................47
Section 10.2. Amendment................................................................................47
Section 10.3. Counterparts.............................................................................49
Section 10.4. Separability.............................................................................49
Section 10.5. Governing Law............................................................................49
Section 10.6. Payments Due on Non-Business Day.........................................................49
Section 10.7. Successors...............................................................................49
Section 10.8. Headings.................................................................................49
Section 10.9. Reports, Notices and Demands.............................................................49
Section 10.10. Agreement Not to Petition...............................................................50
Section 10.11. Trust Indenture Act; Conflict with Trust Indenture Act..................................50
Section 10.12. Acceptance of Terms of Trust Agreement, Guarantee and Indenture.........................51
</TABLE>
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AMENDED AND RESTATED TRUST AGREEMENT (this "Trust Agreement"), dated as of
__________, 1999, among (i) Downey Financial Corp., a Delaware corporation
(including any successors or assigns, the "Depositor"), (ii) Wilmington Trust
Company, a Delaware banking corporation duly organized and existing under the
laws of the State of Delaware, as property trustee, (in such capacity, the
"Property Trustee" and, in its separate corporate capacity and not in its
capacity as Property Trustee, the "Bank"), (iii) Wilmington Trust Company, a
Delaware banking corporation organized under the laws of the State of Delaware,
as Delaware trustee (the "Delaware Trustee"), (iv) Daniel D. Rosenthal, an
individual, Thomas E. Prince, an individual, and Paul G. Woollatt, an
individual, each of whose address is c/o Downey Financial Corp., 3501 Jamboree
Road, North Tower, Newport Beach, California 92660 (each an "Administrative
Trustee" and collectively the "Administrative Trustees") (the Property Trustee,
the Delaware Trustee and the Administrative Trustees are referred to
collectively herein as the "Trustees") and (v) the several Holders, as
hereinafter defined.
WITNESSETH
Whereas, the Depositor, the Delaware Trustee and each of the Administrative
Trustees, have heretofore duly declared and established a business trust
pursuant to the Delaware Business Trust Act by the entering into this certain
Trust Agreement, dated as of ________, 1999 (the "Original Trust Agreement"),
and by the execution and filing by the Delaware Trustee with the Secretary of
State of the State of Delaware of the Certificate of Trust, filed on ________,
1999, attached as Exhibit A; and
Whereas, the parties desire to amend and restate the Original Trust
Agreement in its entirety as set forth herein to provide for, among other
things, (i) the issuance of the Common Securities by the Trust to the Depositor,
(ii) the issuance and sale of the Capital Securities by the Trust pursuant to
the Underwriting Agreement, (iii) the acquisition by the Trust from the
Depositor of all of the right, title and interest in the Debentures and (iv) the
appointment of the Property Trustee;
Now Therefore, in consideration of the agreements and obligations set forth
herein and for other good and valuable consideration, the sufficiency of which
is hereby acknowledged, each party, for the benefit of the other parties and for
the benefit of the Securityholders, hereby agrees as follows:
ARTICLE I.
DEFINED TERMS
SECTION 1.1. Definitions.
For all purposes of this Trust Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them
in this Article and include the plural as well as the singular;
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(b) all other terms used herein that are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
(c) unless the context otherwise requires, any reference to an "Article"
or a "Section" refers to an Article or a Section, as the case may be, of this
Trust Agreement; and
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Trust Agreement as a whole and not to any
particular Article, Section or other subdivision.
"Act" has the meaning specified in Section 6.8.
"Additional Amount" means, with respect to Trust Securities of a given
Liquidation Amount and for a given period, the amount of Additional Interest (as
defined in the Indenture) paid or payable by the Depositor on a Like Amount of
Debentures for such period.
"Additional Sums" has the meaning specified in Section 10.6 of the
Indenture.
"Administrative Trustee" means each of the Persons identified as an
"Administrative Trustee" in the preamble to this Trust Agreement solely in such
Person's capacity as Administrative Trustee of the Trust created and continued
hereunder and not in such Person's individual capacity, or such Administrative
Trustee's successor in interest in such capacity, or any successor trustee
appointed as herein provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Bank" has the meaning specified in the preamble to this Trust Agreement.
"Bankruptcy Event" means, with respect to any Person:
(a) the entry of a decree or order by a court having jurisdiction in the
premises judging such Person a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjudication or
composition of or in respect of such Person under any applicable Bankruptcy Law,
or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of such Person or of any substantial part of its property or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 60 consecutive
days; or
(b) the institution by such Person of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under any applicable Bankruptcy Law,
or the consent by it to the filing of any such petition or to the appointment of
a receiver, liquidator, assignee, trustee, sequestrator (or similar official) of
such
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Person or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due and its willingness
to be adjudicated a bankrupt, or the taking of corporate action by such Person
in furtherance of any such action.
"Bankruptcy Law" means any Federal or state bankruptcy, insolvency,
reorganization or similar law.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Depositor to have been duly adopted by the
Depositor's Board of Directors, or such committee of the Board of Directors or
officers of the Depositor to which authority to act on behalf of the Board of
Directors has been delegated, and to be in full force and effect on the date of
such certification, and delivered to the appropriate Trustees.
"Book-Entry Capital Securities Certificates" means a beneficial interest in
the Capital Securities Certificates, ownership and transfers of which shall be
made through book entries by a Clearing Agency as described in Section 5.11.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day
on which banking institutions in the State of New York are authorized or
required by law or executive order to remain closed.
"Capital Security" means an undivided beneficial interest in the assets of
the Trust designated as "____% Cumulative Capital Securities," having a
Liquidation Amount of $25 per security and having the rights provided therefor
in this Trust Agreement, including the right to receive Distributions and a
Liquidation Distribution as provided herein.
"Capital Securities Certificate" means a certificate evidencing ownership
of Capital Securities, substantially in the form attached as Exhibit D.
"Capital Treatment Event" means the receipt by the Depositor 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 thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such prospective change, pronouncement, action or decision is announced on or
after the original issuance date of the Capital Securities, there is more than
an insubstantial risk that: (i) the Depositor will not be entitled to treat
the Capital Securities (or any substantial portion thereof) as "Tier I Capital"
(or the then equivalent thereof) for purposes of the capital adequacy guidelines
of the primary federal regulator of the Depositor, as then in effect and
applicable to the Depositor in which case such legal opinion shall also state
that the Depositor is subject to those capital adequacy guidelines; or (ii) the
Subsidiary Bank will not be entitled to treat net proceeds from the sale of
Securities of a series issued to such DFC Trust that are invested in the
Subsidiary Bank (or any substantial portion thereof), as "Tier I Capital" (or
the then equivalent thereof) for purposes of the capital adequacy guidelines of
the primary federal regulator of the Subsidiary Bank, as then in effect and
applicable to the Subsidiary Bank (assuming for the purpose of this clause (ii)
that
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___% of such net proceeds are invested in the Subsidiary Bank in the form of
capital contribution or the purchase of common stock of the Subsidiary Bank).
"Certificate Depository Agreement" means the agreement among the Trust, the
Depositor and The Depository Trust Company, as the initial Clearing Agency,
dated as of the Closing Date, relating to the Capital Securities Certificates,
substantially in the form attached as Exhibit B, as the same may be amended and
supplemented from time to time.
"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 or restated from time to time.
"Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Exchange Act. The Depository Trust Company will
act as the initial Clearing Agency hereunder.
"Clearing Agency Participant" means a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of securities deposited with the Clearing
Agency.
"Closing Date" means the date of execution and delivery of this Trust
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, as amended, or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $25 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.
"Common Securities Guarantee" means the Common Securities Guarantee
Agreement executed and delivered by the Depositor contemporaneously with the
execution and delivery of this Trust Agreement, for the benefit of holders of
the Common Securities, as amended from time to time.
"Common Securities Certificate" means a certificate evidencing ownership of
Common Securities, substantially in the form attached as Exhibit C.
"Corporate Trust Office" means (i) when used with respect to the Property
Trustee, the principal office of the Property Trustee located at Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention:
Corporate Trust Administration, and (ii) when used with respect to the Debenture
Trustee, the principal office of the Debenture Trustee located at Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention:
Corporate Trust Administration.
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"Debenture Event of Default" means an "Event of Default" as defined in the
Indenture.
"Debenture Redemption Date" means, with respect to any Debentures to be
redeemed under the Indenture, the date fixed for redemption under the Indenture.
"Debenture Tax Event" means a "Tax Event" as defined in the Indenture.
"Debenture Trustee" means Wilmington Trust Company, a Delaware banking
corporation organized under the laws of the State of Delaware and any successor
thereto, as trustee under the Indenture.
"Debentures" means the aggregate principal amount of the Depositor's ____%
Junior Subordinated Deferrable Interest Debentures, issued pursuant to the
Indenture.
"Definitive Capital Securities Certificates" means either or both (as the
context requires) of (a) Capital Securities Certificates issued as Book-Entry
Capital Securities Certificate as provided in Section 5.11(a) and (b) Capital
Securities Certificates issued in certificated, fully registered form as
provided in Section 5.13.
"Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C. ((S)) 3801, et seq., as it may be amended from time to time.
"Delaware Trustee" means the Person identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust created and continued hereunder and not in its individual capacity,
or its successor in interest in such capacity, or any successor trustee
appointed as herein provided.
"Depositor" has the meaning specified in the preamble to this Trust
Agreement.
"Distribution Date" has the meaning specified in Section 4.1(a).
"Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 4.1.
"Early Dissolution Event" has the meaning specified in Section 9.2.
"Event of Default" means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) the occurrence of a Debenture Event of Default; or
(b) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of 30
days; or
(c) default by the Trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
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(d) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Property Trustee in this Trust Agreement (other than
a covenant or warranty a default in the performance or breach of which is dealt
with in clause (b) or (c) above) and continuation of such default or breach for
a period of 60 days after there has been given, by registered or certified mail,
to the defaulting Property Trustee and the Trust by the Holders of at least 25%
in aggregate liquidation preference of the Outstanding Capital 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
(e) the occurrence of a Bankruptcy Event with respect to the Property
Trustee and the failure by the Depositor to appoint a successor Property Trustee
within 60 days thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" has the meaning specified in Section 9.1.
"Guarantee" means the Capital Securities Guarantee Agreement executed and
delivered by the Depositor and Wilmington Trust Company, as trustee,
contemporaneously with the execution and delivery of this Trust Agreement, for
the benefit of the holders of the Capital Securities, as amended from time to
time.
"Holder" means a Securityholder.
"Indenture" means the Junior Subordinated Indenture, dated as of ________,
1999, between the Depositor and the Debenture Trustee, as trustee, as amended or
supplemented from time to time.
"Investment Company Event" means the receipt by the Depositor and the Trust
of an Opinion of Counsel experienced in such matters to the effect that as a
result of any change in law or regulation or any written change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in Investment
Company Act Law"), there is more than an insubstantial risk that the Trust is or
will be considered an "investment company" that is required to be registered
under the Investment Company Act, which Change in Investment Company Act Law
becomes effective or which written change is announced on or after the date or
original issuance date of the Capital Securities under this Trust Agreement.
"Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, adverse claim, hypothecation, assignment,
security interest or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever.
"Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to the principal amount of
the Debentures to be contemporaneously redeemed in accordance with the
Indenture, allocated to the Common Securities then Outstanding and the Capital
Securities then Outstanding based upon the relative Liquidation Amounts of such
classes and the proceeds of which will be used to pay the Redemption Price of
such Trust Securities subject to the preferential rights of Capital Securities
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if a Debenture Event of Default has occurred or is continuing, and (b) with
respect to a distribution of Debentures to Holders of Trust Securities in
connection with a dissolution or liquidation of the Trust, Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
Holder to whom such Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Liquidation Date" means the date on which Debentures are to be distributed
to Holders of Trust Securities in connection with a dissolution and liquidation
of the Trust pursuant to Section 9.4(a).
"Liquidation Distribution" has the meaning specified in Section 9.4(d).
"1940 Act" means the Investment Company Act of 1940, as amended.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board of Directors, a Vice Chairman of the Board of Directors, the Chief
Executive Officer, the President or a Vice President, and by the Chief Financial
Officer, the Secretary or an Assistant Secretary of the Depositor, and delivered
to the appropriate Trustee. One of the officers signing an Officers'
Certificate given pursuant to Section 8.16 shall be the principal executive,
financial or accounting officer of the Depositor. Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Trust Agreement shall include:
(a) a statement that each officer signing the Officers' 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 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.
"Opinion of Counsel" means a written opinion of nationally recognized
independent counsel, who may be counsel for the Trust, the Property Trustee, the
Delaware Trustee or the Depositor (such counsel for the Depositor or the Trust
may include Manatt, Phelps & Phillips, LLC) but not an employee of any of the
Trust, the Property Trustee, the Delaware Trustee or the Depositor, and who
shall be reasonably acceptable to the Property Trustee.
"Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.
"Outstanding," when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:
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(a) Trust Securities theretofore canceled by the Property Trustee or
delivered to the Property Trustee for cancellation;
(b) Trust Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Property Trustee or any
Paying Agent for the Holders of such Trust Securities; provided that, if such
Trust Securities are to be redeemed, notice of such redemption has been duly
given pursuant to this Trust Agreement; and
(c) Trust Securities which have been paid or in exchange for or in lieu of
which other Trust Securities have been executed and delivered pursuant to
Sections 5.4, 5.5, 5.11 and 5.13; provided, however, that in determining whether
the Holders of the requisite Liquidation Amount of the Outstanding Capital
Securities have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Capital Securities owned by the Depositor, any
Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded
and deemed not to be Outstanding, except that (a) in determining whether any
Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Capital Securities
that such Trustee knows to be so owned shall be so disregarded and (b) the
foregoing shall not apply at any time when all of the outstanding Capital
Securities are owned by the Depositor, one or more of the Trustees and/or any
such Affiliate. Capital Securities so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Administrative Trustees the pledgee's right so to act with
respect to such Capital Securities and that the pledgee is not the Depositor or
any Affiliate of the Depositor. Upon the written request of any Trustee, the
Depositor shall furnish to such Trustee promptly an Officers' Certificate
listing and identifying all Trust Securities, if any, known by the Depositor to
be owned or held by or for the account of the Depositor, any Trustee or any
Affiliate of the Depositor or any Trustee, and, subject to the provisions of
Section 8.1, such Trustee shall be entitled to accept such Officers' Certificate
as conclusive evidence of the facts therein set forth and of the fact that all
Trust Securities not listed therein are Outstanding for the purpose of any such
determination.
"Owner" means each Person who is the beneficial owner of a Book-Entry
Capital Securities Certificate as reflected in the records of the Clearing
Agency or, if a Clearing Agency Participant is not the Owner, then as reflected
in the records of a Person maintaining an account with such Clearing Agency
(directly or indirectly, in accordance with the rules of such Clearing Agency).
"Paying Agent" means any paying agent or co-paying agent appointed pursuant
to Section 5.9 and shall initially be the Bank.
"Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee with the Bank in its trust department
for the benefit of the Securityholders in which all amounts paid in respect of
the Debentures will be held and from which the Property Trustee, through the
Paying Agent, shall make payments to the Securityholders in accordance with
Sections 4.1 and 4.2.
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"Person" means any individual, corporation, partnership, joint venture,
trust, limited liability company or corporation, unincorporated organization or
government or any agency or political subdivision thereof.
"Property Trustee" means the Person identified as the "Property Trustee" in
the preamble to this Trust Agreement solely in its capacity as Property Trustee
of the Trust heretofore created and continued hereunder and not in its
individual capacity, or its successor in interest in such capacity, or any
successor property trustee appointed as herein provided.
"Redemption Date" means, with respect to any Trust Security to be redeemed,
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Capital Securities.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date.
"Relevant Trustee" shall have the meaning specified in Section 8.10.
"Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.4.
"Securityholder" means a Person in whose name a Trust Security is
registered in the Securities Register; any such Person shall be deemed to be a
beneficial owner within the meaning of the Delaware Business Trust Act.
"Subsidiary Bank" means Downey Savings and Loan Association, F.A., a
federally chartered savings and loan association and the principal subsidiary of
the Depositor.
"Tax Event" means the receipt by the Depositor 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 or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement, action or decision is announced on or after
the original issuance date of the Capital Securities under this Trust Agreement,
there is more than an insubstantial risk that (i) the Trust is, or will be
within 90 days after the date of such Opinion of Counsel, subject to United
States Federal income tax with respect to income received or accrued on the
Debentures, (ii) interest payable by the Depositor on the Debentures is not, or
within 90 days after the date of such Opinion of Counsel will not be, deductible
by the Depositor, in whole or in part, for United States Federal income tax
purposes or (iii) the Trust is, or will be within 90 days after the date of such
Opinion of Counsel subject to more than a de minimis amount of other taxes,
duties or other governmental charges.
"Trust" means the Delaware business trust created and continued hereby and
identified on the cover page to this Trust Agreement.
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"Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including (i) all exhibits hereto and (ii) for all purposes
of this Amended and Restated Trust Agreement and any such modification,
amendment or supplement, the provisions of the Trust Indenture Act that are
deemed to be a part of and govern this Trust Agreement and any such
modification, amendment or supplement, respectively.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as amended and
as in force at the date as of which this instrument was executed; provided,
however, that in the event the Trust Indenture Act of 1939 is amended after such
date, "Trust Indenture Act" means, to the extent required by any such amendment,
the Trust Indenture Act of 1939 as so amended.
"Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
owing to, the Payment Account and (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement.
"Trust Security" means any one of the Common Securities or the Capital
Securities.
"Trust Securities Certificate" means any one of the Common Securities
Certificates or the Capital Securities Certificates.
"Trustees" means, collectively, the Property Trustee, the Delaware Trustee
and the Administrative Trustees.
"Underwriters" means each of the Underwriters named in the Underwriting
Agreement.
"Underwriting Agreement" means that certain Underwriting Agreement dated as
of ________ 1999, among the Trust, the Depositor, and Morgan Stanley Dean Witter
& Co. [and ___________], as the Underwriter[s].
ARTICLE II.
ESTABLISHMENT OF THE TRUST
SECTION 2.1. Name.
The Trust continued hereby shall be known as "Downey Financial Capital
Trust I," as such name may be modified from time to time by the Administrative
Trustees following written notice to the Holders of Trust Securities and the
other Trustees, in which name the Trustees may engage in the transactions
contemplated hereby, make and execute contracts and other instruments on behalf
of the Trust and sue and be sued.
SECTION 2.2. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is c/o
Wilmington Trust Company, Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration, or
such other address in the State of Delaware as the
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Delaware Trustee may designate by written notice to the Securityholders and the
Depositor. The principal executive office of the Trust is c/o Downey Financial
Corp., 3501 Jamboree Road, North Tower, Newport Beach, California 92660.
SECTION 2.3. Initial Contribution of Trust Property; Organizational Expenses.
The Trustees acknowledges receipt in trust from the Depositor in connection
with the Trust Agreement of the sum of $10, which constituted the initial Trust
Property. The Depositor shall pay organizational expenses of the Trust as they
arise or shall, upon request of any Trustee, promptly reimburse such Trustee for
any such expenses paid by such Trustee. The Depositor shall make no claim upon
the Trust Property for the payment of such expenses.
SECTION 2.4. Issuance of the Capital Securities.
The Depositor and an Administrative Trustee, on behalf of the Trust and
pursuant to the Trust Agreement, have executed and delivered the Underwriting
Agreement. Contemporaneously with the execution and delivery of this Trust
Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in
accordance with Section 5.2 and deliver to the Underwriters named in the
Underwriting Agreement, Capital Securities Certificates, registered in the name
of the nominee of the initial Clearing Agency, as instructed by Morgan Stanley
Dean Witter & Co., as a representative of the Underwriters, in an aggregate
amount of ________ Capital Securities having an aggregate Liquidation Amount of
$________, against receipt of such aggregate purchase price of such Capital
Securities of $________ which amount the Administrative Trustee shall promptly
deliver to the Property Trustee.
SECTION 2.5. Issuance of the Common Securities; Subscription and Purchase of
Debentures.
Contemporaneously with the execution and delivery of this Trust Agreement,
an Administrative Trustee, on behalf of the Trust, shall execute in accordance
with Section 5.2 and deliver to the Depositor Common Securities Certificates,
registered in the name of the Depositor, in an aggregate amount of ________
Common Securities having an aggregate Liquidation Amount of $________, against
payment by the Depositor of such amount, which amount such Administrative
Trustee shall promptly deliver to the Property Trustee. An Administrative
Trustee, on behalf of the Trust, shall subscribe to and purchase from the
Depositor Debentures, registered in the name of Cede & Co., as nominee of The
Depository Trust Company, and having an aggregate principal amount equal to
$________ and, in satisfaction of the purchase price for such Debentures, the
Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum
of $________, such amount being the sum of the amounts delivered to the Property
Trustee pursuant to (i) the second sentence of Section 2.4 and (ii) the first
sentence of this Section 2.5.
SECTION 2.6. Declaration of Trust.
The exclusive purposes and functions of the Trust are (a) to issue and sell
Trust Securities and use the proceeds from such sale to acquire the Debentures,
and (b) to engage in those activities necessary, advisable or incidental
thereto. The Depositor hereby appoints the Trustees as trustees of the Trust,
to have all the rights, powers and duties to the extent set forth herein, and
the Trustees hereby accept such appointment. The Property Trustee hereby
declares that it will hold the Trust Property in trust upon and subject to the
conditions set forth herein for the benefit
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of the Trust and the Securityholders. The Administrative Trustees shall have all
rights, powers and duties set forth herein and in accordance with applicable law
with respect to accomplishing the purposes of the Trust. The Delaware Trustee
shall not be entitled to exercise any powers, nor shall the Delaware Trustee
have any of the duties and responsibilities, of the Property Trustee or the
Administrative Trustees set forth herein. The Delaware Trustee shall be one of
the Trustees of the Trust for the sole and limited purpose of fulfilling the
requirements of Section 3807 of the Delaware Business Trust Act.
SECTION 2.7. Authorization to Enter into Certain Transactions.
(a) The Trustees shall conduct the affairs of the Trust in accordance
with the terms of this Trust Agreement. Subject to the limitations set forth in
paragraph (b) of this Section and Section 2.6, and in accordance with the
following provisions (i) and (ii), the Trustees shall have the authority to
enter into all transactions and agreements determined by the Trustees to be
appropriate in exercising the authority, express or implied, otherwise granted
to the Trustees under this Trust Agreement, and to perform all acts in
furtherance thereof, including without limitation, the following:
(i) As among the Trustees, each Administrative Trustee shall have
the power and authority to act on behalf of the Trust with respect to the
following matters:
(A) the issuance and sale of the Trust Securities;
(B) to cause the Trust to enter into, and to execute, deliver
and perform on behalf of the Trust, the Certificate Depository Agreement and
such other agreements as may be necessary or desirable in connection with the
purposes and function of the Trust;
(C) assisting in the registration (including the execution of
a registration statement on the appropriate form) of the Capital Securities
under the Securities Act of 1933, as amended, and under state securities or blue
sky laws, and the qualification of this Trust Agreement as a trust indenture
under the Trust Indenture Act;
(D) assisting in the listing of the Capital Securities upon
such securities exchange or exchanges as shall be determined by the Depositor
and the registration of the Capital Securities under the Exchange Act, and the
preparation and filing of all periodic and other reports and other documents
pursuant to the foregoing;
(E) the sending of notices (other than notices of default) and
other information regarding the Trust Securities and the Debentures to the
Securityholders in accordance with this Trust Agreement;
(F) the appointment of a Paying Agent, authenticating agent
and Securities Registrar in accordance with this Trust Agreement;
(G) registering transfer of the Trust Securities in accordance
with this Trust Agreement;
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(H) to the extent provided in this Trust Agreement, 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) unless otherwise determined by the Depositor, the Property
Trustee or the Administrative Trustees, or as otherwise required by the Delaware
Business Trust Act or the Trust Indenture Act, to execute on behalf of the Trust
(either acting alone or together with any or all of the Administrative Trustees)
any documents that the Administrative Trustees have the power to execute
pursuant to this Trust Agreement; and
(J) the taking of any action incidental to the foregoing as
the Trustees may from time to time determine is necessary or advisable to give
effect to the terms of this Trust Agreement for the benefit of the
Securityholders (without consideration of the effect of any such action on any
particular Securityholder).
(ii) As among the Trustees, the Property Trustee shall have the power,
duty and authority to act on behalf of the Trust with respect to the following
matters:
(A) the establishment of the Payment 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 Payment Account;
(D) the distribution through the Paying Agent of amounts owed
to the Securityholders in respect of the Trust Securities;
(E) the exercise of all of the rights, powers and privileges
of a holder of the Debentures;
(F) the sending of notices of default and other information
regarding the Trust Securities and the Debentures to the Securityholders in
accordance with this Trust Agreement;
(G) the distribution of the Trust Property in accordance with
the terms of this Trust Agreement;
(H) to the extent provided in this Trust Agreement, 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 an Event of Default (other than under paragraph (b),
(c), (d) or (e) of the definition of such term if such Event of Default is by or
with respect to the Property Trustee) the taking of any action incidental to the
foregoing as the Property Trustee may from time to time determine is necessary
or advisable to give effect to the terms of this Trust Agreement and protect and
conserve the Trust Property for the benefit of the Securityholders (without
consideration of the effect of any such action on any particular
Securityholder);
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(J) so long as the Property Trustee is the Securities
Registrar, registering transfers of the Trust Securities in accordance with this
Trust Agreement; and
(K) except as otherwise provided in this Section 2.7(a)(ii),
the Property Trustee shall have none of the duties, liabilities, powers or the
authority of the Administrative Trustees set forth in Section 2.7(a)(i).
(b) So long as this Trust Agreement remains in effect, the Trust (or
the Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees shall not (i) acquire any investments or
engage in any activities not authorized by this Trust Agreement, (ii) sell,
assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of
any of the Trust Property or interests therein, including to Securityholders,
except as expressly provided herein, (iii) take any action that 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 Administrative Trustees
shall 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
Securityholders in their capacity as Securityholders.
(c) In connection with the issue and sale of the Capital Securities,
the Depositor 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 Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects):
(i) the preparation and filing by the Trust with the Commission
and the execution by the Trust of a registration statement on the appropriate
form in relation to the Capital Securities, including any amendments thereto;
(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 advice 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 Depositor deems necessary or advisable in order to comply with
the applicable laws of any such States;
(iii) the preparation for filing by the Trust and execution on
behalf of the of an application to the Nasdaq National Market, the New York
Stock Exchange or any other national stock exchange for listing upon notice of
issuance of any Capital Securities;
(iv) the preparation for filing by the Trust with the Commission
and the execution on behalf of the Trust of a registration statement on Form 8-A
relating to the registration of the Capital Securities under Section 12(b) or
12(g) of the Exchange Act, including any amendments thereto;
(v) the negotiation of the terms of, and the execution and
delivery of, the Underwriting Agreement providing for the sale of the Capital
Securities; and
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(vi) 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 Administrative
Trustees are authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act, or fail to be classified
as a grantor trust for United States federal income tax purposes and so that the
Debentures will be treated as indebtedness of the Depositor for United States
federal income tax purposes. In this connection, the Depositor and the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the Certificate of Trust or this Trust Agreement, that each of
the Depositor and any Administrative Trustee determines in its discretion to be
necessary or desirable for such purposes, as long as such action does not
adversely affect in any material respect the interests of the holders of the
Capital Securities.
SECTION 2.8. Assets of Trust.
The assets of the Trust shall consist of the Trust Property.
SECTION 2.9. Title to Trust Property.
Legal title to all Trust Property shall be vested at all times in the
Property Trustee (in its capacity as such) and shall be held and administered by
the Property Trustee for the benefit of the Trust and the Securityholders in
accordance with this Trust Agreement.
ARTICLE III.
PAYMENT ACCOUNT
SECTION 3.1. Payment Account.
(a) On or prior to the Closing Date, the Property Trustee shall
establish the Payment Account. The Property Trustee and any agent of the
Property Trustee shall have exclusive control and sole right of withdrawal with
respect to the Payment Account for the purpose of making deposits in and
withdrawals from the Payment Account in accordance with this Trust Agreement.
All monies and other property deposited or held from time to time in the Payment
Account shall be held by the Property Trustee in the Payment Account for the
exclusive benefit of the Securityholders and for distribution as herein
provided, including (and subject to) any priority of payments provided for
herein.
(b) The Property Trustee shall deposit in the Payment Account,
promptly upon receipt, all payments of principal of or interest on, and any
other payments or proceeds with respect to, the Debentures. Amounts held in the
Payment Account shall not be invested by the Property Trustee pending
distribution thereof.
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ARTICLE IV.
DISTRIBUTIONS, REDEMPTION
SECTION 4.1. Distributions.
(a) The Trust Securities represent undivided beneficial interests in
the Trust Property, and Distributions (including of Additional Amounts) will be
made on the Trust Securities at the rate and on the dates that payments of
interest (including of Additional Interest, as defined in the Indenture) are
made on the Debentures. Accordingly:
(i) Distributions on the Trust Securities shall be cumulative,
and will accumulate whether or not there are funds of the Trust available for
the payment of Distributions. Distributions shall accrue from the date of
original issuance of the Trust Securities, and, except in the event (and to the
extent) that the Depositor exercises its right to defer the payment of interest
on the Debentures pursuant to the Indenture, shall be payable quarterly in
arrears at the close of business on the 15th day of March, June, September and
December of each year, commencing on ______________, 1999. If any date on which
a Distribution is otherwise payable on the Trust Securities is not a Business
Day, then the payment of such Distribution shall 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) with the same force and effect as if made on such date (each
date on which distributions are payable in accordance with this Section 4.1(a),
a "Distribution Date").
(ii) Assuming payments of interest on the Debentures are made
when due (and before giving effect to Additional Amounts, if applicable),
Distributions on the Trust Securities shall be payable at a rate of ____% per
annum of the Liquidation Amount of the Trust Securities. The amount of
Distributions payable for any full period shall be computed on the basis of a
360-day year of twelve 30-day months. The amount of Distributions for any
partial period shall be computed on the basis of the number of actual days
elapsed in a 360-day year of twelve 30-day months. The amount of Distributions
payable for any period will include amounts accrued to but excluding the
Distribution Date. The amount of Distributions payable for any period shall
include the Additional Amounts, if any.
(iii) Distributions on the Trust Securities shall be made by the
Property Trustee from the Payment Account and shall be payable on each
Distribution Date only to the extent that the Trust has funds then on hand and
available in the Payment Account for the payment of such Distributions.
(b) Distributions on the Trust Securities with respect to a
Distribution Date shall be payable to the Holders thereof as they appear on the
Securities Register for the Trust Securities at the close of business on the
relevant record date, which shall be the date 15 days prior to the relevant
Distribution Date (or if such date is not a Business Day, the next Business Day
following such date).
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SECTION 4.2. Redemption.
(a) On each Debenture Redemption Date and on the stated maturity of the
Debentures, the Trust will be required to redeem, subject to Section 4.3, a
Like Amount of Trust Securities at the Redemption Price.
(b) Notice of redemption shall be given by the Property Trustee by
first-class to the Redemption Date to each Holder of Trust Securities to be
redeemed, at such Holder's address appearing in the Security Register. All
notices of redemption shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the CUSIP number;
(iv) if less than all the Outstanding Trust Securities are to be
redeemed, the identification and the total Liquidation Amount of the particular
Trust Securities to be redeemed; and
(v) that on the Redemption Date the Redemption Price will become
due and payable upon each such Trust Security to be redeemed and that
Distributions thereon will cease to accrue on and after said date.
(c) The Trust Securities redeemed on each Redemption Date shall
be redeemed at the Redemption Price with the proceeds from the contemporaneous
redemption of Debentures. Redemptions of the Trust Securities shall be made and
the Redemption Price shall be payable on each Redemption Date only to the extent
that the Trust has funds then on hand and available in the Payment Account for
the payment of such Redemption Price.
(d) If the Property Trustee gives a notice of redemption in
respect of any Capital Securities, then, by 12:00 noon, Eastern time, on the
Redemption Date, subject to Section 4.2(c), with respect to Capital Securities
held in book-entry form, the Property Trustee will irrevocably deposit with the
Clearing Agency for the Capital Securities, to the extent funds are available,
funds sufficient to pay the applicable Redemption Price and will give such
Clearing Agency irrevocable instructions and authority to pay the Redemption
Price to the holders thereof. With respect to Capital Securities held in
certificated form, the Property Trustee, by 12:00 noon, Eastern Time, on the
Redemption Date subject to Section 4.2(c), will irrevocably deposit with the
Paying Agent, to the extent funds are available, funds sufficient to pay the
applicable Redemption Price and will give the Paying Agent irrevocable
instructions and authority to pay the Redemption Price to the Holders thereof
upon surrender of their Capital Securities Certificates. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for any
Trust Securities called for redemption shall be payable to the Holders of such
Trust Securities as they appear on the Register for the Trust Securities at the
close of business on the relevant record dates for the related Distribution
Dates. If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit, all rights of Securityholders
holding Trust Securities so called for redemption will cease, except the right
of
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such Securityholders to receive the Redemption Price and any Distribution
payable on or prior to the Redemption Date, but without interest for any period
from and after the Redemption Date, on such Redemption Date and such Securities
will cease to be outstanding. In the event that any date on which any Redemption
Price is payable is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
with the same force and effect as if made on such date. In the event that
payment of the Redemption Price in respect of any Trust Securities called for
redemption is improperly withheld or refused and not paid either by the Trust or
by the Depositor pursuant to the Guarantee, Distributions on such Trust
Securities will continue to accrue, at the then applicable rate, from the
Redemption Date originally established by the Trust for such Trust Securities to
the date such Redemption Price is actually paid, in which case the actual
payment date will be the date fixed for redemption for purposes of calculating
the Redemption Price.
(e) Payment of the Redemption Price on the Trust Securities shall be
made to the recordholders thereof as they appear on the Securities Register for
the Trust Securities.
(f) Subject to Section 4.3(a), if less than all the Outstanding Trust
Securities are to be redeemed on a Redemption Date, then the aggregate
Redemption Price of Trust Securities to be redeemed shall be allocated on a pro
rata basis (based on Liquidation Amounts) among the Common Securities then
Outstanding and the Capital Securities then Outstanding. The particular Capital
Securities to be redeemed shall be selected on a pro rata basis (based upon
Liquidation Amounts) not more than 60 days prior to the Redemption Date by the
Property Trustee from the Outstanding Capital Securities not previously called
for redemption, by such method (including, without limitation, by lot) as the
Property Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to $25 or an integral multiple of
$25 in excess thereof) of the Liquidation Amount of Capital Securities of a
denomination larger than $25. The Property Trustee shall promptly notify the
Security Registrar in writing of the Capital Securities selected for redemption
and, in the case of any Capital Securities selected for partial redemption, the
Liquidation Amount thereof to be redeemed. For all purposes of this Trust
Agreement, unless the context otherwise requires, all provisions relating to the
redemption of Capital Securities shall relate, in the case of any Capital
Securities redeemed or to be redeemed only in part, to the portion of the
Liquidation Amount of Capital Securities that has been or is to be redeemed.
SECTION 4.3. Subordination of Common Securities.
(a) Payment of Distributions (including Additional Amounts, if
applicable) on, and the Redemption Price of, the Trust Securities, as
applicable, shall be made, subject to Section 4.2(f), pro rata among the Common
Securities then Outstanding and the Capital Securities then Outstanding based on
the Liquidation Amount of the Trust Securities then Outstanding; provided,
however, that if (i) any Event of Default resulting from a Debenture Event of
Default shall have occurred and be continuing, or (ii) the Trust is dissolved or
liquidated and (A) funds available to the Trust are insufficient to pay in full
the Liquidation Distribution payable on all Outstanding Trust Securities or, (B)
a Like Amount of Debentures are distributed to Securityholders upon such
dissolution or liquidation in accordance with Article IX herein and the Holders
of Capital Securities do not receive the full amount of Debentures to which they
are
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entitled, then no payment of any Distribution (including Additional Amounts, if
applicable) on, or Redemption Price of, any Common Security, and no other
payment on account of the redemption, liquidation or other acquisition of Common
Securities, shall be made unless (1) payment in full in cash of all accumulated
and unpaid Distributions (including Additional Amounts, if applicable) on all
Outstanding Capital Securities for all Distribution periods terminating on or
prior thereto, and in the case of payment of the Redemption Price, the full
payment in cash of such Redemption Price on all Outstanding Capital Securities
then called for redemption, shall have been made or provided for, or (2) the
Trust is dissolved or liquidated and the aggregate Liquidation Amount on all
Capital Securities then Outstanding, plus accumulated and unpaid Distributions
thereon shall have been made or provided for in cash or, in the event a Like
Amount of Debentures are distributed to Securityholders upon such liquidation or
dissolution in accordance with Article IX herein, the distribution to each
Holder of Capital Securities of such Like Amount of Debentures to which such
holder is entitled shall have been made or duly provided for, and (3) all funds
immediately available to the Property Trustee shall first be applied to the
payment in full in cash of all Distributions on, or the Redemption Price or
Liquidation Amount (plus accumulated and unpaid Distributions) of, Capital
Securities then due and payable (including Additional Amounts, if applicable)
or, in the event a Like Amount of Debentures are distributed to Securityholders
upon dissolution or liquidation of the Trust, the Debentures available to the
Property Trustee shall first be distributed to Holders of Capital Securities.
(b) In the case of the occurrence of any Event of Default resulting
from any Debenture Event of Default, the Holder of Common Securities will be
deemed to have waived any right to act with respect to any such Event of Default
under this Trust Agreement until the effect of all such Events of Default with
respect to the Capital Securities have been cured, waived or otherwise
eliminated. Until any such Event of Default under this Trust Agreement with
respect to the Capital Securities has been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the Holders of
the Capital Securities and not the Holder of the Common Securities, and only the
Holders of the Capital Securities will have the right to direct the Property
Trustee to act on their behalf.
SECTION 4.4. Payment Procedures.
Payments of Distributions (including Additional Amounts, if applicable) in
respect of the Capital Securities shall be made at the Property Trustee's option
either by wire transfer or check mailed to the address of the Person entitled
thereto as such address shall appear on the Securities Register or, if the
Capital Securities are held by a Clearing Agency, such Distributions shall be
made to the Clearing Agency in immediately available funds, which shall credit
the relevant Persons' accounts at such Clearing Agency on the applicable
Distribution Dates and Redemption Dates. Payments in respect of the Common
Securities shall be made in such manner as shall be mutually agreed between the
Property Trustee and the Common Securityholder.
SECTION 4.5. Tax Returns and Reports.
The Administrative Trustees shall prepare (or cause to be prepared), at the
Depositor's expense, and file all United States federal, state and local tax and
information returns and reports required to be filed by or in respect of the
Trust. In this regard, the Administrative Trustees shall
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(a) prepare and file (or cause to be prepared and filed) the appropriate
Internal Revenue Service form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the appropriate Internal Revenue
Service form required to be provided on such form. The Administrative Trustees
shall provide the Depositor and the Property Trustee with a copy of all such
returns and reports promptly after such filing or furnishing. The Trustees shall
comply with United States federal withholding and backup withholding tax laws
and information reporting requirements with respect to any payments to
Securityholders under the Trust Securities.
SECTION 4.6. Payment of Taxes, Duties, Etc. of the Trust.
Upon receipt under the Debentures of Additional Sums, the Property Trustee
shall promptly pay any taxes, duties or governmental charges of whatsoever
nature (other than withholding taxes) imposed on the Trust by the United States
or any other taxing authority.
SECTION 4.7. Payments under Indenture or Pursuant to Direct Actions.
Any amount payable hereunder to any Holder of Capital Securities shall be
reduced by the amount of any corresponding payment that such Holder (and any
Owner with respect thereto) has directly received pursuant to Section 5.8 of the
Indenture or Section 5.14 of this Trust Agreement.
ARTICLE V.
TRUST SECURITIES CERTIFICATES
SECTION 5.1. Initial Ownership.
Upon the formation of the Trust and the contribution by the Depositor
pursuant to Section 2.3 and until the issuance of the Trust Securities, and at
any time during which no Trust Securities are outstanding, the Depositor shall
be the sole beneficial owner of the Trust.
SECTION 5.2. The Trust Securities Certificates.
The Capital Securities Certificates shall be issued in minimum
denominations of $25 Liquidation Amount and integral multiples of $25 in excess
thereof, and the Common Securities Certificates shall be issued in denominations
of $25 Liquidation Amount and integral multiples thereof. The Trust Securities
Certificates shall be executed on behalf of the Trust by manual signature of at
least one Administrative Trustee. Trust Securities Certificates bearing the
manual signatures of individuals who were, at the time when such signatures
shall have been affixed, authorized to sign on behalf of the Trust, shall be
validly issued and entitled to the benefits of this Trust Agreement,
notwithstanding that such individuals or any of them shall have ceased to be so
authorized prior to the delivery of such Trust Securities Certificates or did
not hold such offices at the date of delivery of such Trust Securities
Certificates. A transferee of a Trust Securities Certificate shall become a
Securityholder, and shall be entitled to the rights and subject to the
obligations of a Securityholder hereunder, upon due registration of such Trust
Securities Certificate in such transferee's name pursuant to Sections 5.4, 5.11
and 5.13.
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SECTION 5.3. Execution and Delivery of Trust Securities Certificates.
On the Closing Date, the Administrative Trustees shall cause Trust
Securities Certificates, in an aggregate Liquidation Amount as provided in
Section 2.4, to be executed on behalf of the Trust and delivered to or upon the
written order of the Depositor, signed by its chief executive officer, its
president, any executive vice president or any vice president, treasurer or
assistant treasurer or controller without further corporate action by the
Depositor, in authorized denominations.
SECTION 5.4. Registration of Transfer and Exchange of Capital Securities
Certificates.
The Depositor shall keep or cause to be kept, at the office or agency
maintained pursuant to Section 5.8, a register or registers for the purpose of
registering Trust Securities Certificates and transfers and exchanges of Capital
Securities Certificates (the "Securities Register") in which, the registrar
designated by the Depositor (the "Securities Registrar"), subject to such
reasonable regulations as it may prescribe, shall provide for the registration
of Capital Securities Certificates and Common Securities Certificates (subject
to Section 5.10 in the case of the Common Securities Certificates) and
registration of transfers and exchanges of Capital Securities Certificates as
herein provided. The Property Trustee shall be the initial Securities
Registrar.
Upon surrender for registration of transfer of any Capital Securities
Certificate at the office or agency maintained pursuant to Section 5.8, the
Administrative Trustees or any one of them shall execute and deliver, in the
name of the designated transferee or transferees, one or more new Capital
Securities Certificates in authorized denominations of a like aggregate
Liquidation Amount dated the date of execution by such Administrative Trustee or
Trustees.
The Securities Registrar shall not be required to register the transfer of
any Capital Securities that have been called for redemption. At the option of a
Holder, Capital Securities Certificates may be exchanged for other Capital
Securities Certificates in authorized denominations of the same class and of a
like aggregate Liquidation Amount upon surrender of the Capital Securities
Certificates to be exchanged at the office or agency maintained pursuant to
Section 5.8.
Every Capital Securities Certificate presented or surrendered for
registration of transfer or exchange shall be accompanied by a written
instrument of transfer in form satisfactory to an Administrative Trustee and the
Securities Registrar duly executed by the Holder or his attorney duly authorized
in writing. Each Capital Securities Certificate surrendered for registration of
transfer or exchange shall be canceled and subsequently disposed of by an
Administrative Trustee in accordance with such Person's customary practice. The
Trust shall not be required to (i) issue, register the transfer of, or exchange
any Capital Securities during a period beginning at the opening of business 15
calendar days before the date of mailing of a notice of redemption of any
Capital Securities called for redemption and ending at the close business on the
day of such mailing or (ii) register the transfer of or exchange any Capital
Securities so selected for redemption, in whole or in part, except the
unredeemed portion of any such Capital Securities being redeemed in part.
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No service charge shall be made for any registration of transfer or
exchange of Capital Securities Certificates, but the Securities Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer or exchange of Capital Securities
Certificates.
SECTION 5.5. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates.
If (a) any mutilated Trust Securities Certificate shall be surrendered to
the Securities Registrar, or if the Securities Registrar shall receive evidence
to its satisfaction of the destruction, loss or theft of any Trust Securities
Certificate and (b) there shall be delivered to the Securities Registrar and the
Administrative Trustees such security or indemnity as may be required by them to
save each of them harmless, then in the absence of notice that such Trust
Securities Certificate shall have been acquired by a bona fide purchaser, the
Administrative Trustees, or any one of them, on behalf of the Trust shall
execute and make available for delivery, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust
Securities Certificate of like class, tenor and denomination. In connection
with the issuance of any new Trust Securities Certificate under this Section,
the Administrative Trustees or the Securities Registrar 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 Trust Securities Certificate
issued pursuant to this Section shall constitute conclusive evidence of an
undivided beneficial interest in the assets of the Trust, as if originally
issued, whether or not the lost, stolen or destroyed Trust Securities
Certificate shall be found at any time.
SECTION 5.6. Persons Deemed Securityholders.
The Trustees or the Securities Registrar shall treat the Person in whose
name any Trust Securities Certificate shall be registered in the Securities
Register as the owner of such Trust Securities Certificate for the purpose of
receiving Distributions and for all other purposes whatsoever, and neither the
Trustees nor the Securities Registrar shall be bound by any notice to the
contrary.
SECTION 5.7. Access to List of Securityholders' Names and Addresses.
At any time when the Property Trustee is not also acting as the Securities
Registrar, the Administrative Trustees or the Depositor shall furnish or cause
to be furnished to the Property Trustee (a) semi-annually on or before January 1
and July 1 in each year, a list, in such form as the Property Trustee may
reasonably require, of the names and addresses of the Securityholders as of the
most recent Record Date and (b) promptly after receipt by any Administrative
Trustee or the Depositor of a request therefor from the Property Trustee, such
other information as the Property Trustee may reasonably require in order to
enable the Property Trustee to discharge its obligations under this Trust
Agreement, in each case to the extent such information is in the possession or
control of the Administrative Trustees or the Depositor and is not identical to
a previously supplied list or has not otherwise been received by the Property
Trustee in its capacity as Securities Registrar. The rights of Securityholders
to communicate with other Securityholders with respect to their rights under
this Trust Agreement or under the Trust Securities, and the corresponding rights
of the Trustee shall be as provided in the Trust Indenture Act. Each
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Securityholder, by receiving and holding a Trust Securities Certificate, and
each Owner shall be deemed to have agreed not to hold the Depositor, the
Property Trustee or the Administrative Trustees accountable by reason of the
disclosure of its name and address, regardless of the source from which such
information was derived.
SECTION 5.8. Maintenance of Office or Agency.
The Administrative Trustees shall maintain an office or offices or agency
or agencies where Capital Securities Certificates may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Trustees in respect of the Trust Securities Certificates may be served. The
Administrative Trustees initially designate the principal corporate trust office
of the Property Trustee, Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration, as
the principal corporate trust office for such purposes. The Administrative
Trustees shall give prompt written notice to the Depositor and to the
Securityholders of any change in the location of the Securities Register or any
such office or agency. If Definitive Capital Securities Certificates are issued
to Owners pursuant to Section 5.13, so long as the Capital Securities remain
Outstanding in such form, the Depositor will at all times maintain an office or
offices or agency or agencies where Capital Securities Certificates may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustees in respect of the Trust Securities Certificates
may be served in the Borough of Manhattan, City of New York.
SECTION 5.9. Appointment of Paying Agent.
The Paying Agent shall make Distributions to Securityholders from the
Payment Account and shall report the amounts of such Distributions to the
Property Trustee and the Administrative Trustees. Any Paying Agent shall have
the revocable power to withdraw funds from the Payment Account for the purpose
of making the Distributions referred to above. The Administrative Trustees may
revoke such power and remove the Paying Agent if such Trustees determine in
their sole discretion that the Paying Agent shall have failed to perform its
obligations under this Trust Agreement in any material respect. The Paying
Agent shall initially be the Property Trustee, and any co-paying agent chosen by
the Property Trustee, and acceptable to the Administrative Trustees and the
Depositor. Any Person acting as Paying Agent shall be permitted to resign as
Paying Agent upon 30 days' written notice to the Administrative Trustees, the
Property Trustee and the Depositor. In the event that the Property Trustee shall
no longer be the Paying Agent or a successor Paying Agent shall resign or its
authority to act be revoked, the Administrative Trustees shall appoint a
successor that is acceptable to the Property Trustee and the Depositor to act as
Paying Agent (which shall be a bank or trust company). The Administrative
Trustees shall cause such successor Paying Agent or any additional Paying Agent
appointed by the Administrative Trustees to execute and deliver to the Trustees
an instrument in which such successor Paying Agent or additional Paying Agent
shall agree with the Trustees that as Paying Agent, such successor Paying Agent
or additional Paying Agent will hold all sums, if any, held by it for payment to
the Securityholders in trust for the benefit of the Securityholders entitled
thereto until such sums shall be paid to such Securityholders. The Paying Agent
shall return all unclaimed funds to the Property Trustee and upon removal of a
Paying Agent such Paying Agent shall also return all funds in its possession to
the Property Trustee. The provisions of Sections 8.1, 8.3 and 8.6 herein shall
apply to the Property Trustee also in its role as Paying Agent, for so long as
the Property Trustee shall act as Paying Agent and, to the extent applicable,
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to any other paying agent appointed hereunder. Any reference in this Trust
Agreement to the Paying Agent shall include any co-paying agent unless the
context requires otherwise.
SECTION 5.10. Ownership of Common Securities by Depositor.
At the Closing Date, the Depositor shall acquire and retain beneficial and
record ownership of the Common Securities. To the fullest extent permitted by
law, other than a transfer in connection with a consolidation or merger of the
Depositor into another Person, or any conveyance, transfer or lease by the
Depositor of its properties and assets substantially as an entirety to any
Person, pursuant to Section 8.1 of the Indenture, any attempted transfer of the
Common Securities shall be void. The Administrative Trustees shall cause each
Common Securities Certificate issued to the Depositor to contain a legend
stating "THIS CERTIFICATE IS NOT TRANSFERABLE".
SECTION 5.11. Book-Entry Capital Securities Certificates; Common Securities
Certificate.
(a) The Capital Securities Certificates, upon original issuance, will
be issued in the form of a typewritten Capital Securities Certificate or
Certificates representing Book-Entry Capital Securities Certificates, to be
delivered to The Depository Trust Company, the initial Clearing Agency, by, or
on behalf of, the Trust. Such Capital Securities Certificate or Certificates
shall initially be registered on the Securities Register in the name of Cede &
Co., the nominee of the initial Clearing Agency, and no Owner will receive a
Definitive Capital Securities Certificate representing such Owner's interest in
such Capital Securities, except as provided in Section 5.13. Unless and until
Definitive Capital Securities Certificates have been issued to Owners pursuant
to Section 5.13:
(i) the provisions of this Section 5.11(a) shall be in full
force and effect;
(ii) the Securities Registrar, the Paying Agent and the
Trustees shall be entitled to deal with the Clearing Agency for all purposes of
this Trust Agreement relating to the Book-Entry Capital Securities Certificates
(including the payment of the Liquidation Amount of and Distributions on the
Capital Securities evidenced by Book-Entry Capital Securities Certificates) and
shall have no obligations to the Owners thereof;
(iii) to the extent that the provisions of this Section 5.11
conflict with any other provisions of this Trust Agreement, the provisions of
this Section 5.11 shall control; and
(iv) the rights of the Owners of the Book-Entry Capital
Securities Certificates shall be exercised only through the Clearing Agency and
shall be limited to those established by law and agreements between such Owners
and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the
Certificate Depository Agreement, unless and until Definitive Capital Securities
Certificates are issued pursuant to Section 5.13, the initial Clearing Agency
will make book-entry transfers among the Clearing Agency Participants and
receive and transmit payments on the Capital Securities to such Clearing Agency
Participants. Any Clearing Agency designated pursuant hereto will not be deemed
an agent of the Trustee for any purpose.
(b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.
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SECTION 5.12. Notices to Clearing Agency.
To the extent that a notice or other communication to the Owners is
required under this Trust Agreement, unless and until Definitive Capital
Securities Certificates shall have been issued to Owners pursuant to Section
5.13, the Trustees shall give all such notices and communications specified
herein to be given to Owners to the Clearing Agency, and shall have no
obligations to the Owners.
SECTION 5.13. Definitive Capital Securities Certificates.
If (a) the Clearing Agency (A) has notified the Depositor that it is
unwilling or unable to continue as Clearing Agency with respect to the Capital
Securities Certificates or (B) has ceased to be a clearing agency registered
under the Exchange Act at a time when the Clearing Agency is required to be so
registered to act as a clearing agency and in each case the Depositor has not
approved a successor clearing agency within 90 days of such notification or the
Depositor becoming aware of the Clearing Agency ceasing to be so registered, or
(b) the Depositor in its sole discretion determines that such capital securities
certificates will be so exchangeable or transferable, then the Property Trustee
shall notify the Clearing Agency and the Clearing Agency shall notify all Owners
of Capital Securities Certificates and the other Trustees of the occurrence of
any such event and of the availability of the Definitive Capital Securities
Certificates to Owners of such class or classes, as applicable, requesting the
same. Upon surrender to the Property Trustee of the typewritten Capital
Securities Certificate or Certificates representing the Book Entry Capital
Securities Certificates by the Clearing Agency, accompanied by registration
instructions, the Administrative Trustees, or any one of them, shall execute the
Definitive Capital Securities Certificates in accordance with the instructions
of the Clearing Agency. Neither the Securities Registrar nor the Trustees shall
be liable for any delay in delivery of such instructions and may conclusively
rely on, and shall be protected in relying on, such instructions. Upon the
issuance of Definitive Capital Securities Certificates, the Trustees shall
recognize the Holders of the Definitive Capital Securities Certificates as
Securityholders. The Definitive Capital Securities Certificates shall be
engraved and executed in accordance with the applicable rules of the Nasdaq
National Market, the New York Stock Exchange or such other national exchange or
over-the-counter market on which the Capital Securities are then listed for
trading.
SECTION 5.14. Rights of Securityholders.
(a) The legal title to the Trust Property is vested exclusively in
the Property Trustee (in its capacity as such) in accordance with Section 2.9,
and the Securityholders shall not have any right or title therein other than the
undivided beneficial interest in the assets of the Trust conferred by their
Trust 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 Trust Securities shall be personal property giving only the rights
specifically set forth therein and in this Trust Agreement. The Trust Securities
shall have no preemptive or similar rights and when issued and delivered to
Securityholders against payment of the purchase price therefor will be fully
paid and nonassessable by the Trust. The Holders of the Trust Securities, in
their capacities as such, 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.
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(b) For so long as any Capital Securities remain Outstanding, if,
upon a Debenture 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 at least 25% in Liquidation Amount of the Capital
Securities then Outstanding shall have such right by a notice in writing to the
Depositor and the Debenture Trustee; and upon any such declaration such
principal amount of and the accrued interest on all of the Debentures shall
become immediately due and payable, provided that the payment of principal and
interest on such Debentures shall remain subordinated to the extent provided in
the Indenture.
At any time after such 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 in the Indenture
provided, the Holders of a majority in Liquidation Amount of the Capital
Securities, by written notice to the Property Trustee, the Depositor and the
Debenture Trustee, may rescind and annul such declaration and its consequences
if:
(i) the Depositor has paid or deposited with the Debenture Trustee a
sum sufficient to pay
(A) all overdue installments of interest (including any
Additional Interest (as defined in the Indenture)) on all of the Debentures,
(B) the principal of (and premium, if any, on) any Debentures
which have become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Debentures, and
(C) all sums paid or advanced by the Debenture Trustee under
the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Debenture Trustee and the Property 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 which has become due solely by
such acceleration, have been cured or waived as provided in Section 5.13 of the
Indenture.
The Holders of a majority in aggregate Liquidation Amount of the Capital
Securities may, on behalf of the Holders of all the Capital Securities, waive
any past default under the Indenture, except a default in the payment of
principal or interest (unless such default has been cured or waived 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 in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Debenture. No such rescission or waiver shall affect any subsequent default or
impair any right consequent thereon.
Upon receipt by the Property Trustee of written notice declaring such an
acceleration, or rescission and annulment thereof, by Holders of the Capital
Securities all or part of which is represented by Book-Entry Capital Securities
Certificates, 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 Property Trustee receives
such notice.
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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 which 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 which 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 5.14(b).
(c) For so long as any Capital Securities remain Outstanding, to the
fullest extent permitted by law and subject to the terms of this Trust Agreement
and the Indenture, upon a Debenture Event of Default specified in Section 5.1(a)
or 5.1(b) of the Indenture, any Holder of Capital Securities shall have the
right to institute a proceeding directly against the Depositor, pursuant to
Section 5.8 of the Indenture, for enforcement of payment to such Holder of the
principal amount of or interest on Debentures having a principal amount equal to
the Liquidation Amount of the Capital Securities of such Holder (a "Direct
Action"). Except as set forth in Section 5.14(b) and this Section 5.14(c), the
Holders of Capital Securities shall have no right to exercise directly any right
or remedy available to the holders of, or in respect of, the Debentures.
ARTICLE VI.
ACTS OF SECURITYHOLDERS, MEETINGS, VOTING
SECTION 6.1. Limitations on Voting Rights.
(a) Except as provided in this Section, in Sections 5.14, 8.10 and
10.2 and in the Indenture and as otherwise required by law, no Holder of Capital
Securities shall have any right to vote or in any manner otherwise control the
administration, operation and management of the Trust or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the terms
of the Trust Securities Certificates, be construed so as to constitute the
Securityholders from time to time as partners or members of an association.
(b) So long as any Debentures are held by the Property Trustee, the
Trustees shall not (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or execute any
trust or power conferred on the Debenture Trustee or the Property Trustee with
respect to such Debentures, (ii) waive any past default which is waivable under
Section 5.13 of the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of and interest on all the 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, without,
in each case, obtaining the prior approval of the Holders of at least a majority
in Liquidation Amount of all Outstanding Capital Securities, provided, however,
that where a consent under the Indenture would require the consent of each
Holder of Debentures affected thereby, no such consent shall be given by the
Property Trustee without the prior written
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consent of each Holder of Capital Securities. The Trustees shall not revoke any
action previously authorized or approved by a vote of the Holders of Capital
Securities, except by a subsequent vote of the Holders of Capital Securities.
The Property Trustee shall notify all Holders of the Capital Securities of any
notice of default received from the Debenture Trustee with respect to the
Debentures. In addition to obtaining the foregoing approvals of the Holders of
the Capital Securities, prior to taking any of the foregoing actions, the
Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel,
experienced in such matters to the effect that such action shall not cause the
Trust to fail to be classified as a grantor trust for United States federal
income tax purposes on account of that action.
(c) If any proposed amendment to the Trust Agreement provides for, or
the Trustees otherwise propose to effect, (i) any action that would adversely
affect in any material respect the powers, preferences or special rights of the
Capital Securities, whether by way of amendment to the Trust Agreement or
otherwise, or (ii) the dissolution, winding-up or termination of the Trust,
other than pursuant to the terms of this Trust Agreement, then the Holders of
Outstanding Capital Securities as a 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 at least a majority in Liquidation
Amount of the Outstanding Capital Securities. Notwithstanding any other
provision of this Trust Agreement, no amendment to this Trust Agreement may be
made if, as a result of such amendment, it would cause the Trust to fail to be
classified as a grantor trust for United States federal income tax purposes.
SECTION 6.2. Notice of Meetings.
Notice of all meetings of the Capital Securityholders, stating the time,
place and purpose of the meeting, shall be given by the Property Trustee
pursuant to Section 10.9 to each Capital Securityholder of record, at his
registered address, at least 15 days and not more than 90 days before the
meeting. At any such meeting, any business properly before the meeting may be
so considered whether or not stated in the notice of the meeting. Any adjourned
meeting may be held as adjourned without further notice.
SECTION 6.3. Meetings of Capital Securityholders.
No annual meeting of Securityholders is required to be held. The
Administrative Trustees, however, shall call a meeting of Capital
Securityholders to vote on any matter upon the written request of Holders of
record of 25% of the Outstanding Capital Securities (based upon their
Liquidation Amount) and the Administrative Trustees or the Property Trustee may,
at any time in their discretion, call a meeting of Capital Securityholders to
vote on any matters as to which Capital Securityholders are entitled to vote.
Holders of record of 50% of the Outstanding Capital Securities (based upon
their Liquidation Amount), present in person or by proxy, shall constitute a
quorum at any meeting of Securityholders.
If a quorum is present at a meeting, an affirmative vote by the Capital
Securityholders of record present, in person or by proxy, holding more than a
majority of the Capital Securities (based upon their Liquidation Amount) held by
the Capital Securityholders of record present,
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either in person or by proxy, at such meeting shall constitute the action of the
Capital Securityholders, unless this Trust Agreement requires a greater number
of affirmative votes.
SECTION 6.4. Voting Rights.
Securityholders shall be entitled to one vote for each $25 of Liquidation
Amount represented by their Trust Securities in respect of any matter as to
which such Securityholders are entitled to vote.
SECTION 6.5. Proxies, etc.
At any meeting of Securityholders, any Securityholder entitled to vote
thereat may vote by proxy, provided that no proxy shall be voted at any meeting
unless it shall have been placed on file with the Administrative Trustees, or
with such other officer or agent of the Trust as the Administrative Trustees may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of the Property Trustee, proxies may be solicited in
the name of the Property Trustee or one or more officers of the Property
Trustee. Only Securityholders of record shall be entitled to vote. When Trust
Securities are held jointly by several Persons, any one of them may vote at any
meeting in person or by proxy in respect of such Trust Securities, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Trust Securities. A
proxy purporting to be executed by or on behalf of a Securityholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. No proxy shall be valid more
than three years after its date of execution.
SECTION 6.6. Securityholder Action by Written Consent.
Any action which may be taken by Securityholders at a meeting may be taken
without a meeting if Securityholders holding a majority of all Outstanding Trust
Securities (based upon their aggregate Liquidation Amount) entitled to vote in
respect of such action (or such larger proportion thereof as shall be required
by any express provision of this Trust Agreement) shall consent to the action in
writing (based upon their aggregate Liquidation Amount).
SECTION 6.7. Record Date for Voting and Other Purposes.
For the purposes of determining the Securityholders who are entitled to
notice of and to vote at any meeting or by written consent, or to participate in
any Distribution on the Trust Securities in respect of which a record date is
not otherwise provided for in this Trust Agreement, or for the purpose of any
other action, the Administrative Trustees may from time to time fix a date, not
more than 90 days prior to the date of any meeting of Securityholders or the
payment of a Distribution or other action, as the case may be, as a record date
for the determination of the identity of the Securityholders of record for such
purposes.
SECTION 6.8. Acts of Securityholders.
Any request, demand, authorization, direction, notice, consent, waiver or
other action provided or permitted by this Trust Agreement to be given, made or
taken by Securityholders or
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Owners may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Securityholders or Owners in person
or by an agent duly appointed in writing; and, except as otherwise expressly
provided herein, such action shall become effective when such instrument or
instruments are delivered to an Administrative Trustee. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Securityholders or Owners signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Trust Agreement and (subject to Section 8.1) conclusive in favor of the
Trustees, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is
by a signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which any Trustee receiving the same deems sufficient.
The ownership of Capital Securities shall be proved by the Securities
Register.
Any request, demand, authorization, direction, notice, consent, waiver or
other Act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.
Without limiting the foregoing, a Securityholder entitled hereunder to take
any action hereunder with regard to any particular Trust Security may do so with
regard to all or any part of the Liquidation Amount of such Trust Security or by
one or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any part of such liquidation amount.
If any dispute shall arise between the Securityholders and the
Administrative Trustees or among such Securityholders or Trustees with respect
to the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.
A Securityholder may institute a legal proceeding directly against the
Depositor under the Guarantee to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee (as defined
in the Guarantee), the Trust or any Person.
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SECTION 6.9. Inspection of Records.
Upon reasonable notice to the Administrative Trustees and the Property
Trustee, the records of the Trust shall be open to inspection by Securityholders
during normal business hours for any purpose reasonably related to such
Securityholder's interest as a Securityholder.
ARTICLE VII.
Representations and Warranties
SECTION 7.1. Representations and Warranties of the Bank.
The Bank hereby represents and warrants for the benefit of the Depositor
and the Securityholders that:
(a) the Bank is a Delaware banking corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware;
(b) the Bank has full corporate power, authority and legal right to
execute, deliver and perform its obligations under this Trust Agreement and has
taken all necessary action to authorize the execution, delivery and performance
by it of this Trust Agreement;
(c) this Trust Agreement has been duly authorized, executed and
delivered by the Bank and, assuming due authorization, execution and delivery by
the other parties thereto, constitutes the valid and legally binding agreement
of the Bank enforceable against it in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
(d) the execution, delivery and performance of this Trust Agreement
has been duly authorized by all necessary corporate or other action on the part
of the Bank and does not require any approval of stockholders of the Bank and
such execution, delivery and performance will not (i) violate the charter or
bylaws of the Bank, (ii) violate any provision of, or constitute, with or
without notice or lapse of time, a default under, or result in the creation or
imposition of, any Lien on any properties included in the Trust Property
pursuant to the provisions of, any indenture, mortgage, credit agreement,
license or other agreement or instrument to which the Bank is a party or by
which it is bound, or (iii) violate any law, governmental rule or regulation of
the United States governing the banking or trust powers of the Bank or of the
State of Delaware or any order, judgment or decree applicable to the Bank;
(e) neither the authorization, execution or delivery by the Bank of
this Trust Agreement nor the consummation of any of the transactions by the
Property Trustee or the Delaware Trustee (as appropriate in context)
contemplated herein or therein requires the consent or approval of, the giving
of notice to, the registration with or the taking of any other action with
respect to any governmental authority or agency under any existing federal law
governing the banking, or trust powers of the Bank, as the case may be, under
the laws of the United States or the State of Delaware;
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(f) there are no proceedings pending or, to the best the Bank's
knowledge, threatened against or affecting the Property Trustee or the Delaware
Trustee in any court or before any governmental authority, agency or arbitration
board or tribunal which, individually or in the aggregate, would materially and
adversely affect the Trust or would question the right, power and authority of
the Bank to enter into or perform its obligations as one of the Trustees under
this Trust Agreement.
SECTION 7.2. Representations and Warranties of Depositor.
The Depositor hereby represents and warrants for the benefit of the
Securityholders that:
(a) the Trust Securities Certificates issued at the Closing Date on
behalf of the Trust have been duly authorized and will have been, duly and
validly executed, issued and delivered by the Trustees pursuant to the terms and
provisions of, and in accordance with the requirements of, this Trust Agreement
and the Securityholders will be, as of each such date, entitled to the benefits
of this Trust Agreement; and
(b) there are no taxes, fees or other governmental charges payable by
the Trust (or the Trustees on behalf of the Trust) under the laws of the State
of Delaware or any political subdivision thereof in connection with the
execution, delivery and performance by the Bank, the Property Trustee or the
Delaware Trustee, as the case may be, of Bank, this Trust Agreement.
ARTICLE VIII.
THE TRUSTEES
SECTION 8.1. Certain Duties and Responsibilities.
(a) The duties and responsibilities of the Trustees shall be as
provided by this Trust Agreement and, in the case of the Property Trustee, by
the Trust Indenture Act. Notwithstanding the foregoing, no provision of this
Trust Agreement shall require the Trustees to expend or risk their own funds or
otherwise incur any financial liability in the performance of any of their
duties hereunder, or in the exercise of any of their rights or powers, unless
they are afforded reasonable indemnity against such risk or liability. Whether
or not therein expressly so provided, every provision of this Trust Agreement
relating to the conduct or affecting the liability of or affording protection to
the Trustees shall be subject to the provisions of this Section. No
Administrative Trustee or the Delaware Trustee shall be subject to any liability
under this Trust Agreement except for its own grossly negligent action, its own
grossly negligent failure to act, or its own willful misconduct. To the extent
that, at law or in equity, a Trustee has duties (including fiduciary duties) and
liabilities relating thereto to the Trust or to the Securityholders, such
Trustee shall not be liable to the Trust or to any Securityholder for such
Trustee's good faith reliance on the provisions of this Trust Agreement. The
provisions of this Trust Agreement, to the extent that they restrict the duties
and liabilities of the Trustees otherwise existing at law or in equity, are
agreed by the Depositor and the Securityholders to replace such other duties and
liabilities of the Trustees.
(b) All payments made by the Property Trustee or a Paying Agent in
respect of the Trust Securities shall be made only from the revenue and proceeds
from the Trust Property and
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only to the extent that there shall be sufficient revenue or proceeds from the
Trust Property to enable the Property Trustee or a Paying Agent to make payments
in accordance with the terms hereof. Each Securityholder, by its acceptance of a
Trust 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 are not personally liable to it for any
amount distributable in respect of any Trust Security or for any other liability
in respect of any Trust Security. This Section 8.1(b) does not limit the
liability of the Trustees expressly set forth elsewhere in this Trust Agreement
or, in the case of the Property Trustee, in the Trust Indenture Act.
(c) No provision of this Trust Agreement shall be construed to
relieve the Property Trustee from liability for its own negligent action, its
own negligent failure to act, or its own willful misconduct, except that:
(i) the Property Trustee shall not be liable for any error of
judgment made in good faith by an authorized officer of the Property Trustee,
unless it shall be proved that the Property Trustee was negligent in
ascertaining the pertinent facts;
(ii) the Property Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of the Trust Securities given in accordance with this
Trust Agreement relating to the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or exercising any
trust or power conferred upon the Property Trustee under this Trust Agreement;
(iii) the Property Trustee's sole duty with respect to the
custody, safe keeping and physical preservation of the Debentures and the
Payment Account shall be to deal with such Property in a similar manner as the
Property Trustee deals with similar property for its own account, subject to the
protections and limitations on liability afforded to the Property Trustee under
this Trust Agreement and the Trust Indenture Act;
(iv) the Property Trustee shall not be liable for any interest on
any money received by it except as it may otherwise agree with the Depositor;
and money held by the Property Trustee need not be segregated from other funds
held by it except in relation to the Payment Account maintained by the Property
Trustee pursuant to Section 3.1 and except to the extent otherwise required by
law; and
(v) the Property Trustee shall not be responsible for monitoring
the compliance by the Administrative Trustees or the Depositor with their
respective duties under this Trust Agreement, nor shall the Property Trustee be
liable for the default or misconduct of the Administrative Trustees or the
Depositor.
SECTION 8.2. Certain Notices.
(a) Within five Business Days after the occurrence of any Event of
Default actually known to a Responsible Officer of the Property Trustee, the
Property Trustee shall transmit, in the manner and to the extent provided in
Section 10.9, notice of such Event of Default to the Securityholders, the
Administrative Trustees and the Depositor, unless the Event of Default shall
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have been cured or waived. For purposes of this Section the term "Event of
Default" means any event that is, or after notice or lapse of time or both would
become, and Event of Default.
(b) The Administrative Trustees shall transmit, to the Securityholders
in the manner and to the extent provided in Section 10.9, notice of the
Depositor's election to begin or further extend an Extension Period on the
Debentures (unless such election shall have been revoked) within the time
specified for transmitting such notice to the holders of the Debentures pursuant
to the Indenture as originally executed.
SECTION 8.3. Certain Rights of Property Trustee.
Subject to the provisions of Section 8.1:
(a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, 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 or presented by the proper party or parties;
(b) if (i) in performing its duties under this Trust Agreement the
Property Trustee is required to decide between alternative courses of action or
(ii) in construing any of the provisions of this Trust Agreement the Property
Trustee finds the same ambiguous or inconsistent with any other provisions
contained herein or (iii) the Property Trustee is unsure of the application of
any provision of this Trust Agreement, then, except as to any matter as to which
the Capital Securityholders are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken and the Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own bad
faith, negligence or willful misconduct;
(c) any direction or act of the Depositor or the Administrative Trustees
contemplated by this Trust Agreement shall be sufficiently evidenced by an
Officers' Certificate;
(d) whenever in the administration of this Trust Agreement, the Property
Trustee shall deem it desirable that a matter be established before undertaking,
suffering or omitting any action hereunder, the Property Trustee (unless other
evidence is herein specifically prescribed) may, in the absence of bad faith on
its part, request and rely upon an Officers' Certificate which, upon receipt of
such request, shall be promptly delivered by the Depositor or the Administrative
Trustees;
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(e) the Property Trustee shall have no duty to see to any recording,
filing or registration of any instrument (including any financing or
continuation statement or any filing under tax or securities laws) or any
rerecording, refiling or registration thereof;
(f) the Property Trustee may consult with counsel 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, such counsel may be counsel
to the Depositor or any of its Affiliates, but not an employee thereof; the
Property Trustee shall have the right at any time to seek instructions
concerning the administration of this Trust Agreement from any court of
competent jurisdiction;
(g) the Property Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(h) the Property Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, 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 Securityholders, but the
Property Trustee may make such further inquiry or investigation into such facts
or matters as it may see fit;
(i) the Property 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, provided that the Property Trustee shall be responsible for
its own negligence or recklessness with respect to selection of any agent or
attorney appointed by it hereunder;
(j) whenever in the administration of this Trust Agreement the
Property Trustee shall deem it desirable to receive instructions with respect to
enforcing any remedy or right or taking any other action hereunder the Property
Trustee (i) may request instructions from the Holders of the Trust Securities
which instructions may only be given by the Holders of the same proportion in
Liquidation Amount of the Trust Securities as would be entitled to direct the
Property Trustee under the terms of the Trust Securities in respect of such
remedy, right or action, (ii) may refrain from enforcing such remedy or right or
taking such other action until such instructions are received, and (iii) shall
be protected in acting in accordance with such instructions; and
(k) except as otherwise expressly provided by this Trust Agreement, the
Property Trustee shall not be under any obligation to take any action that is
discretionary under the provisions of this Trust Agreement.
No provision of this Trust Agreement shall be deemed to impose any duty or
obligation on the Property Trustee to perform any act or acts or exercise any
right, power, duty or obligation conferred or imposed on it, in any jurisdiction
in which it shall be illegal, or in which the Property Trustee shall be
unqualified or incompetent in accordance with applicable law, to
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perform any such act or acts, or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Property Trustee
shall be construed to be a duty.
SECTION 8.4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Trust Securities Certificates
shall be taken as the statements of the Trust, and the Trustees do not assume
any responsibility for their correctness. The Trustees shall not be accountable
for the use or application by the Depositor of the proceeds of the Debentures.
SECTION 8.5. May Hold Securities.
Any Trustee or any other agent of any Trustee or the Trust, in its
individual or any other capacity, may become the owner or pledgee of Trust
Securities and, except as provided in the definition of the term "Outstanding"
in Article I and subject to Sections 8.8 and 8.13, may otherwise deal with the
Trust with the same rights it would have if it were not a Trustee or such other
agent.
SECTION 8.6. Compensation; Indemnity; Fees.
The Depositor agrees:
(a) to pay to the Trustees from time to time reasonable compensation
for all services rendered by them hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust) as specified in a separate agreement between any of the Trustees
and the Depositor;
(b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and advances
incurred or made by the Trustees in accordance with any provision of this Trust
Agreement (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, bad faith or willfulness;
and
(c) to the fullest extent permitted by applicable law, to indemnify
and hold harmless (i) each Trustee, (ii) any Affiliate of any Trustee, (iii) any
officer, director, shareholder, employee, representative or agent of any
Trustee, and (iv) any employee or agent of the Trust or its Affiliates,
(referred to herein as an "Indemnified Person") from and against any loss,
damage, liability, tax, penalty, expense or claim of any kind or nature
whatsoever incurred by such Indemnified Person by reason of the creation,
operation or dissolution 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 Trust Agreement, except
that no Indemnified Person shall be entitled to be indemnified in respect of any
loss, damage or claim incurred by such Indemnified Person by reason of gross
negligence (or ordinary negligence in the case of the Property Trustee), bad
faith or willful misconduct with respect to such acts or omissions.
The provisions of this Section 8.6 shall survive the termination of this
Trust Agreement.
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No Trustee may claim any lien or charge on any Trust Property as a result
of any amount due pursuant to this Section 8.6.
The Depositor and any Trustee may (subject to Section 8.8) 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 Trust Securities shall have no rights by
virtue of this Trust Agreement 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. Neither the Depositor, nor any 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 the Depositor or any 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 Trustee may
engage or be interested in any financial or other transaction with the Depositor
or any Affiliate of the Depositor, or may act as depository for, trustee or
agent for, or act on any committee or body of holders of, securities or other
obligations of the Depositor or its Affiliates.
SECTION 8.7. Corporate Property Trustee Required; Eligibility of Trustees.
(a) There shall at all times be a Property Trustee hereunder with
respect to the Trust Securities. The Property Trustee shall be a Person that is
eligible pursuant to the Trust Indenture Act to act as such and has a combined
capital and surplus of at least $50,000,000. If any such Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of its supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such Person shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Property Trustee with respect to the
Trust Securities shall cease to be eligible in accordance with the provisions of
this Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
(b) There shall at all times be one or more Administrative Trustees
hereunder with respect to the Trust Securities. Each Administrative Trustee
shall be either a natural person who is at least 21 years of age or a legal
entity that shall act through one or more persons authorized to bind that
entity.
(c) There shall at all times be a Delaware Trustee with respect to
the Trust Securities. The Delaware Trustee shall either be (i) a natural person
who is at least 21 years of age and a resident of the State of Delaware or (ii)
a legal entity with its principal place of business in the State of Delaware and
that otherwise meets the requirements of applicable Delaware law that shall act
through one or more persons authorized to bind such entity.
SECTION 8.8. Conflicting Interests.
If the Property Trustee has or shall acquire a conflicting interest within
the meaning of the Trust Indenture Act, the Property Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Trust
Agreement.
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SECTION 8.9. Co-Trustees and Separate Trustee.
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust Property may
at the time be located, the Holder of the Common Securities and the
Administrative Trustees, by agreed action of the majority of such Trustees,
shall have power to appoint, and upon the written request of the Administrative
Trustees, the Holder of the Common Securities shall for such purpose join with
the Administrative Trustees in the execution, delivery, and performance of all
instruments and agreements necessary or proper to appoint, one or more Persons
approved by the Property Trustee either to act as co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to the extent
required by law to act as separate trustee of any such property, in either case
with such powers as may be provided in the instrument of appointment, and to
vest in such Person or Persons in the capacity aforesaid, any property, title,
right or power deemed necessary or desirable, subject to the other provisions of
this Section. If the Depositor does not join in such appointment within 15 days
after the receipt by it of a request so to do, or in case an Event of Default
has occurred and is continuing, the Property Trustee alone shall have power to
make such appointment. Any co-trustee or separate trustee appointed pursuant to
this Section shall either be (i) a natural person who is at least 21 years of
age and a resident of the United States or (ii) a legal entity with its
principal place of business in the United States that shall act through one or
more persons authorized to bind such entity.
Should any written instrument from the Depositor be required by any co-
trustee or separate trustee so appointed for more fully confirming to such co-
trustee or separate trustee such property, title, right, or power, any and all
such instruments shall, on request, be executed, acknowledged and delivered by
the Depositor.
Every co-trustee or separate trustee shall, to the extent permitted by law,
but to such extent only, be appointed subject to the following terms, namely:
(a) The Trust Securities shall be executed and delivered and all
rights, powers, duties, and obligations hereunder in respect of the custody of
securities, cash and other personal property held by, or required to be
deposited or pledged with, the Trustees specified hereunder shall be exercised
solely by such Trustees and not by such co-trustee or separate trustee.
(b) The rights, powers, duties, and obligations hereby conferred or
imposed upon the Property Trustee in respect of any property covered by such
appointment shall be conferred or imposed upon and exercised or performed by the
Property Trustee or by the Property Trustee and such co-trustee or separate
trustee jointly, as shall be provided in the instrument appointing such co-
trustee or separate trustee, except to the extent that under any law of any
jurisdiction in which any particular act is to be performed, the Property
Trustee shall be incompetent or unqualified to perform such act, in which event
such rights, powers, duties and obligations shall be exercised and performed by
such co-trustee or separate trustee.
(c) The Property Trustee at any time, by an instrument in writing
executed by it, with the written concurrence of the Depositor, may accept the
resignation of or remove any co-trustee or separate trustee appointed under this
Section, and, in case a Debenture Event of Default has
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occurred and is continuing, the Property Trustee shall have power to accept the
resignation of, or remove, any such co-trustee or separate trustee without the
concurrence of the Depositor. Upon the written request of the Property Trustee,
the Depositor shall join with the Property Trustee in the execution, delivery
and performance of all instruments and agreements necessary or proper to
effectuate such resignation or removal. A successor to any co-trustee or
separate trustee so resigned or removed may be appointed in the manner provided
in this Section.
(d) No co-trustee or separate trustee hereunder shall be personally
liable by reason of any act or omission of the Property Trustee or any other
trustee hereunder.
(e) The Property Trustee shall not be liable by reason of any act of
a co-trustee or separate trustee.
(f) Any Act of Holders delivered to the Property Trustee shall be
deemed to have been delivered to each such co-trustee and separate trustee.
SECTION 8.10. Resignation and Removal; Appointment of Successor.
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 Section 8.11.
Subject to the immediately preceding paragraph, the Relevant Trustee may
resign at any time by giving written notice thereof to the Common
Securityholder. If the instrument of acceptance by the successor Trustee
required by Section 8.11 shall not have been delivered to the Relevant Trustee
within 30 days after the giving of such notice of resignation, the Relevant
Trustee may petition, at the expense of the Trust, any court of competent
jurisdiction for the appointment of a successor Relevant Trustee.
Unless an Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by Act of the Common Securityholder. If an
Event of Default shall have occurred and be continuing, the Property Trustee or
the Delaware Trustee, or both of them, may be removed at such time by 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).
In no event will the Holders of the Capital Securities have the right to vote to
appoint, remove or replace the Administrative Trustee. An Administrative
Trustee may be removed by the Common Securityholder at any time.
If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Debenture Event of Default shall have occurred and be
continuing, the Common Securityholder, by Act of the Common Securityholder
delivered to the retiring Trustee, shall promptly appoint a successor Trustee or
Trustees, and the retiring Trustee shall comply with the applicable requirements
of Section 8.11. If the Property Trustee or the Delaware Trustee shall resign,
be removed or become incapable of continuing to act as the Property Trustee or
the Delaware Trustee, as the case may be, at a time when a Debenture Event of
Default shall have occurred and be continuing, the Capital Securityholders, by
Act of the Securityholders of a majority in Liquidation Amount
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of the Capital Securities then Outstanding delivered to the retiring Relevant
Trustee, shall promptly appoint a successor Relevant Trustee or Trustees, and
such successor Trustee shall comply with the applicable requirements of Section
8.11. If an Administrative Trustee shall resign, be removed or become incapable
of acting as Administrative Trustee, at a time when a Debenture Event of Default
shall have occurred and be continuing, the Common Securityholder by Act of the
Common Securityholder delivered to the Administrative Trustee shall promptly
appoint a successor Administrative Trustee or Administrative Trustees and such
successor Administrative Trustee or Trustees shall comply with the applicable
requirements of Section 8.11. If no successor Relevant Trustee shall have been
so appointed by the Common Securityholder or the Capital Securityholders and
accepted appointment in the manner required by Section 8.11, any Securityholder
who has been a Securityholder of Trust Securities for at least six months may,
on behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Relevant Trustee.
The Property Trustee shall give notice of each resignation and each removal
of a Trustee and each appointment of a successor Trustee to all Securityholders
in the manner provided in Section 10.9 and shall give notice to the Depositor.
Each notice shall include the name of the successor Relevant Trustee and the
address of its Corporate Trust Office if it is the Property Trustee.
Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or a Delaware Trustee who is
a natural person dies or becomes, in the opinion of the Depositor, incompetent
or incapacitated, the vacancy created by such death, incompetence or incapacity
may be filled by (a) the unanimous act of the remaining Administrative Trustees
if there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirement
for Administrative Trustees or Delaware Trustee, as the case may be, set forth
in Section 8.7).
SECTION 8.11. Acceptance of Appointment by Successor.
In case of the appointment hereunder of a successor Relevant Trustee, the
retiring Relevant Trustee and each successor Relevant Trustee with respect to
the Trust Securities shall 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
Trust Securities and the Trust and (b) shall add to or change any of the
provisions of this Trust Agreement 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 Trust Securities and the Trust.
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Upon request of any such successor Relevant Trustee, the Trust shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Relevant Trustee all such rights, powers and trusts
referred to in the first or second preceding paragraph, as the case may be.
No successor Relevant Trustee shall accept its appointment unless at the
time of such acceptance such successor Relevant Trustee shall be qualified and
eligible under this Article.
SECTION 8.12. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any Person
resulting from any merger, conversion or consolidation to which such Relevant
Trustee shall be a party, or any Person succeeding to all or substantially all
the corporate trust business of such Relevant Trustee, shall be the successor of
such Relevant Trustee hereunder, provided such Person shall be otherwise
qualified and eligible under this Article, without the execution or filing of
any paper or any further act on the part of any of the parties hereto.
SECTION 8.13. Preferential Collection of Claims Against Depositor or Trust.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
similar judicial proceeding relative to the Trust or any other obligor upon the
Trust Securities or the property of the Trust or of such other obligor or their
creditors, the Property Trustee (irrespective of whether any Distributions on
the Trust Securities shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Property Trustee shall
have made any demand on the Trust for the payment of any past due Distributions)
shall be entitled and empowered, to the fullest extent permitted by law, by
intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of any
Distributions owing and unpaid in respect of the Trust Securities and to file
such other papers or documents as may be necessary or advisable in order to have
the claims of the Property Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Property Trustee, its
agents and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Property Trustee and, in the event the Property Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Property Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Property Trustee, its agents and counsel, and
any other amounts due the Property Trustee.
Nothing herein contained shall be deemed to authorize the Property Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement adjustment or compensation affecting the Trust
Securities or the rights of any Holder thereof or
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to authorize the Property Trustee to vote in respect of the claim of any Holder
in any such proceeding.
SECTION 8.14. Reports by Property Trustee.
(a) Not later than March 31 of each year commencing with the year
commencing January 1, 2000, the Property Trustee shall transmit to all
Securityholders in accordance with Section 10.9, and to the Depositor, a brief
report dated as of the immediately preceding December 31 with respect to:
(i) its eligibility under Section 8.7 or, in lieu thereof, if to
the best of its knowledge it has continued to be eligible under said Section, a
written statement to such effect;
(ii) a statement that the Property Trustee has complied with all
of its obligations under this Trust Agreement during the twelve-month period
(or, in the case of the initial report, the period since the Closing Date)
ending with such December 31 or, if the Property Trustee has not complied in any
material respect with such obligations, a description of such noncompliance; and
(iii) any change in the property and funds in its possession as
Property Trustee since the date of its last report and any action taken by the
Property Trustee in the performance of its duties hereunder which it has not
previously reported and which in its opinion materially affects the Trust
Securities.
(b) In addition the Property Trustee shall transmit to Securityholders
such reports concerning the Property Trustee and its actions under this Trust
Agreement as may be required pursuant to the Trust Indenture Act at the times
and in the manner provided pursuant thereto.
(c) A copy of each such report shall, at the time of such transmission
to Holders, be filed by the Property Trustee with the Nasdaq National Market,
the New York Stock Exchange or such other national exchange or such other
interdealer quotation system or self-regulatory organization upon which the
Trust Securities are listed or traded, with the Commission and with the
Depositor.
SECTION 8.15. Reports to the Property Trustee.
The Depositor and the Administrative Trustees on behalf of the Trust
shall provide to the Property Trustee such documents, reports and information as
required by Section 314 of the Trust Indenture Act (if any) and the compliance
certificate required by Section 314(a) of the Trust Indenture Act in the form,
in the manner and at the times required by Section 314 of the Trust Indenture
Act.
SECTION 8.16. Evidence of Compliance with Conditions Precedent.
Each of the Depositor and the Administrative Trustees on behalf of the
Trust shall provide to the Property Trustee such evidence of compliance with any
conditions precedent, if any, provided for in this Trust Agreement that relate
to any of the matters set forth in Section 314(c) of the Trust Indenture Act.
Any certificate or opinion required to be given by an
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officer pursuant to Section 314(c)(1) of the Trust Indenture Act shall be given
in the form of an Officers' Certificate.
SECTION 8.17. Number of Trustees.
(a) The number of Trustees shall be five (5) provided that the Holder
of all of the Common Securities by written instrument may increase or decrease
the number of Administrative Trustees. The Property Trustee and the Delaware
Trustee may be the same Person.
(b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 8.17(a), or if the
number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 8.10.
(c) The death, resignation, retirement, removal, bankruptcy,
incompetence or incapacity to perform the duties of a Trustee shall not operate
to dissolve, terminate or annul the Trust. Whenever a vacancy in the number of
Administrative Trustees shall occur, until such vacancy is filled by the
appointment of an Administrative Trustee in accordance with Section 8.10, the
Administrative Trustees in office, regardless of their number (and
notwithstanding any other provision of this Trust Agreement), shall have all the
powers granted to the Administrative Trustees and shall discharge all the duties
imposed upon the Administrative Trustees by this Trust Agreement.
SECTION 8.18. Delegation of Power.
(a) Any Administrative Trustee may, by power of attorney consistent
with applicable law, delegate to any other natural person over the age of 21 his
or her power for the purpose of executing any documents contemplated in Section
2.7(a), including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and
(b) The Administrative Trustees shall have power to delegate from time
to time to such of their number or to the Depositor the doing of such things and
the execution of such instruments either in the name of the Trust or the names
of the Administrative Trustees or otherwise as the Administrative Trustees may
deem expedient, to the extent such delegation is not prohibited by applicable
law or contrary to the provisions of this Trust Agreement, as set forth herein.
SECTION 8.19. Voting.
Except as otherwise provided in this Trust Agreement, the consent or
approval of the Administrative Trustees shall require consent or approval by not
less than a majority of the Administrative Trustees, unless there are only two,
in which case both must consent.
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ARTICLE IX.
Dissolution, Liquidation and Merger
SECTION 9.1. Dissolution Upon Expiration Date.
Unless dissolved earlier, the Trust shall automatically dissolve on ______
__, 2029 (the "Expiration Date"), following the distribution of the Trust
Property in accordance with Section 9.4.
SECTION 9.2. Early Dissolution.
The first to occur of any of the following events is an "Early Dissolution
Event," upon the occurrence of which the Trust shall dissolve:
(a) the occurrence of a Bankruptcy Event in respect of, or the
dissolution or liquidation of, the Depositor;
(b) the written direction to the Property Trustee from the Depositor at
any time before the 30th day before the Stated Maturity to dissolve the Trust
and distribute Debentures to Securityholders in exchange for a Like Amount of
the Capital Securities (which direction is subject to the Depositor's having
received (i) all required regulatory approvals and (ii) an Opinion of Counsel
experienced in those matters to the effect that such distribution will not cause
the Holders to recognize gain or loss for United States federal income tax
purposes and will be subject to federal income tax with respect to the
Debentures on the same amounts, in the same manner and at the same times as
would have been the case if the Holders had remained Securityholders);
(c) the redemption of all of the Capital Securities in connection with
the redemption of all the Debentures; and
(d) the entry of an order for dissolution of the Trust or the Depositor
(or any other Holder of the Common Securities) by a court of competent
jurisdiction.
SECTION 9.3. Dissolution.
The respective obligations and responsibilities of the Trustees and the
Trust created and continued hereby shall dissolve upon the latest to occur of
the following: (a) the distribution by the Property Trustee to Securityholders
upon the liquidation of the Trust pursuant to Section 9.4, or upon the
redemption of all of the Trust Securities pursuant to Section 4.2, of all
amounts required to be distributed hereunder upon the final payment of the Trust
Securities; (b) the payment of any expenses owed by the Trust; and (c) the
discharge of all administrative duties of the Administrative Trustees, including
the performance of any tax reporting obligations with respect to the Trust or
the Securityholders, and (d) the filing of a Certificate of Cancellation by the
Administrative Trustee under the Business Trust Act.
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SECTION 9.4. Liquidation.
(a) If an Early Dissolution Event specified in clause (a), (b) or (d)
of Section 9.2 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 9.4(d). Notice of liquidation shall be given by the Property
Trustee by first-class mail, postage prepaid mailed not later than 30 nor more
than 60 days prior to the Liquidation Date to each Holder of Trust Securities at
such Holder's address appearing in the Securities Register. All notices of
liquidation shall:
(i) state the Liquidation Date;
(ii) state that from and after the Liquidation Date, the Trust
Securities will no longer be deemed to be Outstanding and any Trust
Securities Certificates not surrendered for exchange will be deemed to
represent a Like Amount of Debentures; and
(iii) provide such information with respect to the mechanics by
which Holders may exchange Trust Securities Certificates for certificates
representing the Like Amount of the Debentures, or if Section 9.4(d) applies
receive a Liquidation Distribution, as the Administrative Trustees or the
Property Trustee shall deem appropriate.
(b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect
the liquidation of the Trust and distribution of the Debentures to
Securityholders, the Administrative Trustees shall establish a record date for
such distribution (which shall be not more than 45 days prior to the Liquidation
Date) and, either itself acting as exchange agent or through the appointment of
a separate exchange agent, shall establish such procedures as it shall deem
appropriate to effect the distribution of Debentures in exchange for the
Outstanding Trust Securities Certificates.
(c) Except where Section 9.2(c) or 9.4(d) applies, after the
Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Debentures will be
issued to holders of Trust Securities Certificates, upon surrender of such
certificates to the Administrative Trustees or their agent for exchange, (iii)
the Depositor shall use its best efforts to have the Debentures listed on the
Nasdaq National Market, the New York Stock Exchange or on such other exchange,
interdealer quotation system or self-regulatory organization on which the
Capital Securities are then listed, (iv) any Trust Securities Certificates not
so surrendered for exchange will be deemed to represent a Like Amount of
Debentures, accruing interest at the rate provided for in the Debentures from
the last Distribution Date on which a Distribution was made on such Trust
Securities Certificates until such certificates are so surrendered and (v) all
rights of Securityholders holding Trust Securities will cease, except the right
of such Securityholders to receive a Like Amount of Debentures upon surrender of
Trust Securities Certificates and to receive accrued and unpaid interest on such
Debentures.
(d) In the event that, notwithstanding the other provisions of this
Section 9.4, whether because of an order for dissolution entered by a court of
competent jurisdiction or otherwise, distribution of the Debentures in the
manner provided herein is determined by the Property Trustee not to be
practical, the Trust Property shall be liquidated, and the Trust shall be
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wound-up or terminated, by the Property Trustee in such manner as the Property
Trustee determines. In such event, on the date of the dissolution of the Trust,
Securityholders will be entitled to receive out of the assets of the Trust
available for distribution to Securityholders, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, an amount equal to the
Liquidation Amount per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment (such amount due and payable upon liquidation of
the Trust, whether payable in cash or out of the assets of the Trust being the
"Liquidation Distribution"). If, upon any such winding up or termination, 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, subject to the next succeeding sentence, the amounts payable
by the Trust on the Trust Securities shall be paid on a pro rata basis (based
upon Liquidation Amounts). The Holder of the Common Securities will be entitled
to receive Liquidation Distributions upon any such winding-up or termination pro
rata (determined as aforesaid) with Holders of Capital Securities, except that,
if a Debenture Event of Default has occurred and is continuing or if funds
available to the Trust are insufficient to pay in full the Liquidation
Distribution payable on all Outstanding Capital Securities, Holders of the
Capital Securities shall have a priority over the Holders of Common Securities.
SECTION 9.5. Mergers, Consolidations, Amalgamations or Replacements of the
Trust.
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except pursuant to this Section 9.5 or Section 9.4. At the request of the
Depositor, with the consent of the Administrative Trustees and without the
consent of the Holders of the Capital Securities, the Property Trustee or the
Delaware Trustee, the Trust may merge with or into, consolidate, amalgamate, or
be replaced by or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to a trust organized as such under the
laws of any State; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of the Trust with respect to the Trust Securities
or (b) substitutes for the Trust Securities other securities having
substantially the same terms as the Common Securities (the "Successor Common
Securities") and the Capital Securities (the "Successor Capital Securities") so
long as the Successor Common Securities are subordinated in right of payment to
the Successor Capital Securities to the same extent and in the same manner as
the Common Securities are subordinated in right of payment to the Capital
Securities, (ii) the Depositor expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Debentures, (iii) the Successor Capital Securities are listed or
traded, or any Successor Capital Securities will be listed upon notification of
issuance, on any national securities exchange or other organization on which the
Capital Securities are then listed or traded, if any, (iv) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
cause the Capital Securities (including any Successor Capital Securities) to be
downgraded by any nationally recognized statistical rating organization which
gives ratings to the Capital Securities (including any Successor Capital
Securities), (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Capital Securities (including any Successor
Capital Securities) in any material respect, (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 Depositor has received an
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Opinion of Counsel, experienced in the following 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 Capital Securities (including any Successor Securities) in any
material respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act
and (viii) the Depositor owns all of the Successor Common Securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Capital Securities at least to the extent provided by the
Guarantee and under the Successor Common Securities at least to the extent
provided by the Common Securities Guarantee. Notwithstanding the foregoing, the
Trust shall not, except with the consent of holders of 100% in Liquidation
Amount of the Outstanding 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 any other Person or
permit any other Person to consolidate, amalgamate, merge with or into, or
replace it if such consolidation, amalgamation, merger, replacement, conveyance,
transfer or lease would cause the Trust or the successor entity to be classified
as other than a grantor trust for United States federal income tax purposes.
ARTICLE X.
Miscellaneous Provisions
SECTION 10.1. Limitation of Rights of Securityholders.
The death or incapacity of any person having an interest, beneficial or
otherwise, in Trust Securities shall not operate to terminate this Trust
Agreement, nor entitle the legal representatives or heirs of such person or any
Securityholder for such person, to claim an accounting, take any action or bring
any proceeding in any court for a partition or winding up of the arrangements
contemplated hereby, nor otherwise affect the rights, obligations and
liabilities of the parties hereto or any of them.
SECTION 10.2. Amendment.
(a) This Trust Agreement may be amended from time to time by the Property
Trustee, the Administrative Trustees and the Depositor, without the consent of
any Securityholders, (i) to cure any ambiguity, correct or supplement any
provision herein which may be inconsistent with any other provision herein, or
to make any other provisions with respect to matters or questions arising under
this Trust Agreement, which shall not be inconsistent with the other provisions
of this Trust Agreement, or (ii) to modify, eliminate or add to any provisions
of this Trust Agreement to such extent as shall be necessary to ensure that the
Trust will be classified for United States federal income tax purposes as a
grantor trust at all times that any Trust Securities are outstanding or to
ensure that the Trust will not be required to register as an investment company
under the 1940 Act; provided, however, that in the case of clause (i), such
action shall not adversely affect in any material respect the interests of any
Securityholder, and any such amendments of this Trust Agreement shall become
effective when notice thereof is given to the Securityholders.
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(b) Except as provided in Section 10.2(c) hereof, any provision of this
Trust Agreement may be amended by the Administrative Trustees and the Property
Trustee with (i) the consent of Trust Securityholders representing not less than
a majority (based upon Liquidation Amounts) of the Trust Securities then
Outstanding and (ii) receipt by the Trustees of an Opinion of Counsel,
experienced in those matters to the effect that such amendment or the exercise
of any power granted to the Trustees in accordance with such amendment will not
affect the Trust's status as a grantor trust for United States federal income
tax purposes or the Trust's exemption from registration as an investment company
under the 1940 Act.
(c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 6.3 or 6.6 hereof), this Trust
Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or the amount or timing of any payment of
the Redemption Price of, or the amount or timing of any payment or distribution
of funds or property (including Debentures) payable or distributable upon
liquidation or dissolution of the Trust or otherwise adversely affect the amount
or change the time of any Distribution required to be made in respect of the
Trust Securities or the amount of funds or property (including Debentures),
required to be paid or distributed in respect of the Trust Securities, or (ii)
restrict the right of a Securityholder to institute suit for the enforcement of
any such payment on or after the date it is due; notwithstanding any other
provision herein, without the unanimous consent of the Securityholders (such
consent being obtained in accordance with Section 6.3 or 6.6 hereof), this
paragraph (c) of this Section 10.2 may not be amended.
(d) Notwithstanding any other provisions of this Trust Agreement, no
Administrative Trustee shall enter into or consent to any amendment to this
Trust Agreement which would (i) cause the Trust to fail or cease to qualify for
the exemption from status of an investment company under the 1940 Act, (ii)
cause the Trust to fail or cease to be classified as a grantor trust for United
States federal income tax purposes, or (iii) cause the Capital Securities to be
delisted by the Nasdaq National Market, the New York Stock Exchange or such
other national exchange or over-the-counter market on which the Capital
Securities are then listed for trading.
(e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Delaware Trustee or the Depositor, as the case may
be, this Trust Agreement may not be amended in a manner which imposes any
additional obligation on the Depositor or the Delaware Trustee.
(f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustees shall promptly provide to the Depositor a copy of such
amendment.
(g) Neither the Property Trustee nor the Delaware Trustee shall be
required to enter into any amendment to this Trust Agreement which affects its
own rights, duties or immunities under this Trust Agreement. The Property
Trustee shall be entitled to receive an Opinion of Counsel and an Officers'
Certificate stating that any amendment to this Trust Agreement is in compliance
with this Trust Agreement.
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SECTION 10.3. Counterparts.
This Trust Agreement may be executed in one or more counterparts, each of
which shall be an original and all of which shall constitute one and the same
instrument.
SECTION 10.4. Separability.
In case any provision in this Trust Agreement or in the Trust Securities
Certificates shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 10.5. Governing Law.
THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE
SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT
AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES).
SECTION 10.6. Payments Due on Non-Business Day.
If the date fixed for any payment on any Trust Security shall be a day that
is not a Business Day, then such payment need not be made on such date but may
be made on the next succeeding day that is a Business Day, with the same force
and effect as though made on the date fixed for such payment, and no interest
shall accrue thereon for the period after such date.
SECTION 10.7. Successors.
This Trust Agreement shall be binding upon and shall inure to the benefit
of any successor to the Depositor, the Trust or the Relevant Trustee, including
any successor by operation of law. Except in connection with a consolidation,
merger or sale involving the Depositor that is permitted under Article Eight of
the Indenture and pursuant to which the assignee agrees in writing to perform
the Depositor's obligations hereunder, the Depositor shall not assign its
obligations hereunder.
SECTION 10.8. Headings.
The Article and Section headings are for convenience only and shall not
affect the construction of this Trust Agreement.
SECTION 10.9. Reports, Notices and Demands.
Any report, notice, demand or other communication which by any provision of
this Trust Agreement is required or permitted to be given or served to or upon
any Securityholder or the Depositor may be given or served in writing by deposit
thereof, first-class postage prepaid, in the United States mail, hand delivery
or facsimile transmission, in each case, addressed, (a) in the case of a Capital
Securityholder, to such Capital Securityholder as such Securityholder's name
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and address may appear on the Securities Register; and (b) in the case of the
Common Securityholder or the Depositor, to Downey Financial Corp., 3501 Jamboree
Road, North Tower, Newport Beach, California 92660 Attention: Donald E. Royer,
facsimile number: (949) 725-0619. Such notice, demand or other communication to
or upon a Securityholder shall be deemed to have been sufficiently given or
made, for all purposes, upon hand delivery, mailing or transmission.
Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee, the Delaware Trustee or the Administrative Trustees
shall be given in writing addressed (until another address is published by the
Trust) as follows: (a) with respect to the Property Trustee to Wilmington Trust
Company, Rodney Square North, 1100 North Market Street, Wilmington , Delaware
19890-0001; (b) with respect to the Delaware Trustee, to Wilmington Trust
Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001, Attention: Corporate Trust Administration; and (c) with respect to
the Administrative Trustees, to them at the address above for notices to the
Depositor, marked "Attention Administrative Trustees of Downey Financial Capital
Trust I." Such notice, demand or other communication to or upon the Trust or the
Property Trustee shall be deemed to have been sufficiently given or made only
upon actual receipt of the writing by the Trust or the Property Trustee.
SECTION 10.10. Agreement Not to Petition.
Each of the Trustees and the Depositor agree for the benefit of the
Securityholders that, until at least one year and one day after the Trust has
been terminated in accordance with Article IX, they shall not file, or join in
the filing of, a petition against the Trust under any Bankruptcy Laws or
otherwise join in the commencement of any proceeding against the Trust under any
Bankruptcy Law. In the event the Depositor takes action in violation of this
Section 10.10, the Property Trustee agrees, for the benefit of Securityholders,
that at the expense of the Depositor, it shall file an answer with the
bankruptcy court or otherwise properly contest the filing of such petition by
the Depositor against the Trust or the commencement of such action and raise the
defense that the Depositor has agreed in writing not to take such action and
should be stopped and precluded therefrom and such other defenses, if any, as
counsel for the Trustee or the Trust may assert. The provisions of this Section
10.10 shall survive the termination of this Trust Agreement.
SECTION 10.11. Trust Indenture Act; Conflict with Trust Indenture Act.
(a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.
(b) The Property Trustee shall be the only Trustee which is a trustee for
the purposes of the Trust Indenture Act.
(c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement
by any of the provisions of the Trust
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Indenture Act, such required provision shall control. If any provision of this
Trust Agreement modifies or excludes any provision of the Trust Indenture Act
which may be so modified or excluded, the latter provision shall be deemed to
apply to this Trust Agreement as so modified or excluded, as the case may be.
(d) The application of the Trust Indenture Act to this Trust Agreement
shall not affect the nature of the Securities as equity securities representing
undivided beneficial interests in the assets of the Trust.
SECTION 10.12. Acceptance of Terms of Trust Agreement, Guarantee and Indenture.
THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY
OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE
OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND
THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH
SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST
AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND
SUCH SECURITYHOLDER AND SUCH OTHERS.
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IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Trust Agreement this ________ day of _________, 1999.
Downey Financial Corp. Downey Financial Capital Trust I
By:
---------------------------- --------------------------------
Name: Paul G. Woollatt,
Title: as Administrative Trustee
Wilmington Trust Company,
As Property Trustee
--------------------------------
Daniel D. Rosenthal,
as Administrative Trustee
By:
----------------------------
Name:
Title:
--------------------------------
Thomas E. Prince,
as Administrative Trustee
Wilmington Trust Company,
As Delaware Trustee
By:
----------------------------
Name:
Title:
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EXHIBIT A
CERTIFICATE OF TRUST
OF
DOWNEY FINANCIAL CAPITAL TRUST I
This Certificate of Trust of DOWNEY FINANCIAL CAPITAL I (the "Trust"),
dated May 25, 1999, is being duly executed and filed by the undersigned, as
trustees, to form a business trust under the Delaware Business Trust Act (12
Del. C. ((S)) 3801 et seq.).
1. Name. The name of the business trust being formed hereby is DOWNEY
FINANCIAL CAPITAL TRUST I.
2. Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware are Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890, Attention:
Corporate Trust Administration.
3. Effective Date. This Certificate of Trust shall be effective upon its
filing.
In Witness Whereof, the undersigned, being the trustees of the Trust, have
executed this Certificate of Trust as of the date first above written.
Wilmington Trust Company,
as Trustee
By: /s/ W. Chris Sponeberg
--------------------------------------------
W. Chris Sponeberg
Assistant Vice President
/s/ Daniel D. Rosenthal
--------------------------------------------
Daniel D. Rosenthal
Administrative Trustee
/s/ Thomas E. Price
--------------------------------------------
Thomas E. Price
Administrative Trustee
/s/ Paul G. Woollatt
--------------------------------------------
Paul G. Woollatt
Administrative Trustee
A-1
<PAGE>
EXHIBIT B
The Depository Trust Company,
55 Water Street, 49th Floor,
New York, New York 10041-0099
__________, 1999
Attention: _______________
General Counsel's Office
Re: DOWNEY FINANCIAL CAPITAL TRUST I ____% Cumulative Capital Securities
Ladies and Gentlemen:
The purpose of this letter is to set forth certain matters relating to the
issuance and deposit with The Depository Trust Company ("DTC") of the DOWNEY
FINANCIAL CAPITAL TRUST I ____% Cumulative Capital Securities, (the "Capital
Securities"), of DOWNEY FINANCIAL CAPITAL TRUST I, a Delaware business trust
(the "Issuer"), formed pursuant to an Amended and Restated Trust Agreement
between Downey Financial Corp. ("Downey") and Wilmington Trust Company, as
Property Trustee, Wilmington Trust Company, as Delaware Trustee, and the
Administrative Trustees named therein. The payment of distributions on the
Capital Securities, and payments due upon liquidation of the Issuer or
redemption of the Capital Securities, to the extent the Issuer has funds
available for the payment thereof are guaranteed by Downey to the extent set
forth in a Capital Securities Guarantee Agreement dated ____________, 1999 by
Downey with respect to the Capital Securities. Downey and the Issuer propose
to sell the Capital Securities to certain Underwriters (the "Underwriters")
pursuant to a Underwriting Agreement dated ____________, 1999 by and among the
Underwriters, the Issuer and Downey , and the Underwriters wish to take delivery
of the Capital Securities through DTC. Wilmington Trust Company is acting as
transfer agent and registrar with respect to the Capital Securities (the
"Transfer Agent and Registrar").
To induce DTC to accept the Trust Preferred Securities as eligible for
deposit at DTC, and to act in accordance with DTC's rules with respect to the
Capital Securities, the Issuer, the Transfer Agent and Registrar and DTC agree
among each other as follows:
1. Prior to the closing of the sale of the Capital Securities to the
Underwriters, which is expected to occur on or about ____________, 1999, there
shall be deposited with DTC one or more global certificates (individually and
collectively, the "Global Certificate") registered in the name of DTC's Capital
Securities nominee, Cede & Co., representing an aggregate of ____________
Capital Securities and bearing the following legend:
Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to
the Issuer or its agent for registration of transfer, exchange, or
payment, and any certificate issued is registered in
B-1
<PAGE>
the name of Cede & Co. or in such other name as is requested by an
authorized representative of DTC (and any payment is made to Cede &
Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein.
2. The Amended and Restated Trust Agreement of the Issuer provides for
the voting by holders of the Capital Securities under certain limited
circumstances. The Issuer shall establish a record date for such purposes and
shall, to the extent possible, give DTC notice of such record date not less than
15 calendar days in advance of such record date.
3. In the event of a stock split, conversion, recapitalization,
reorganization or any other similar transaction resulting in the cancellation of
all or any part of the Capital Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice of such event at least 5
business days prior to the effective date of such event.
4. In the event of distribution on, or an offering or issuance of
rights with respect to, the Capital Securities outstanding, the Issuer or the
Transfer Agent and Registrar shall send DTC a notice specifying: (a) the amount
of and conditions, if any, applicable to the payment of any such distribution or
any such offering or issuance of rights; (b) any applicable expiration or
deadline date, or any date by which any action on the part of the holders of
Capital Securities is required; and (c) the date any required notice is to be
mailed by or on behalf of the Issuer to holders of Capital Securities or
published by or on behalf of the Issuer (whether by mail or publication, the
"Publication Date"). Such notice shall be sent to DTC by a secure means (e.g.,
legible telecopy, registered or certified mail, overnight delivery) in a timely
manner designed to assure that such notice is in DTC's possession no later than
the close of business on the business day before the Publication Date. The
Issuer or the Transfer Agent and Registrar will forward such notice either in a
separate secure transmission for each CUSIP number or in a secure transmission
of multiple CUSIP numbers (if applicable) that includes a manifest or list of
each CUSIP number submitted in that transmission. (The party sending such notice
shall have a method to verify subsequently the use of such means and the
timeliness of such notice.) The Publication Date shall be not less than 30
calendar days nor more than 60 calendar days prior to the payment of any such
distribution or any such offering or issuance of rights with respect to the
Capital Securities. After establishing the amount of payment to be made on the
Capital Securities, the Issuer or the Transfer Agent and Registrar will notify
DTC's Dividend Department of such payment 5 business days prior to payment date.
Notices to DTC's Dividend Department by telecopy shall be sent to (212) 709-
1723. Such notices by mail or by any other means shall be sent to:
Manager, Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, New York 10004-2695
B-2
<PAGE>
The Issuer or the Transfer Agent and Registrar shall confirm DTC's receipt
of such telecopy by telephoning the Dividend Department at (212) 709-1270.
5. In the event of a redemption by the Issuer of the Capital
Securities, notice specifying the terms of the redemption and the Publication
Date of such notice shall be sent by the Issuer or the Transfer Agent and
Registrar to DTC not less than 30 calendar days prior to such event by a secure
means in the manner set forth in paragraph 4. Such redemption notice shall be
sent to DTC's Call Notification Department at (516) 227-4164 or (516) 227-4190,
and receipt of such notice shall be confirmed by telephoning (516) 227-4070.
Notice by mail or by any other means shall be sent to:
Call Notification Department
The Depository Trust Company
711 Stewart Avenue
Garden City, New York 11530-4719
6. In the event of any invitation to tender the Capital Securities,
notice specifying the terms of the tender and the Publication Date of such
notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC by
a secure means and in a timely manner as described in paragraph 4. Notices to
DTC pursuant to this paragraph and notices of other corporate actions (including
mandatory tenders, exchanges and capital changes) shall be sent, unless
notification to another department is expressly provided for herein, by telecopy
to DTC's Reorganization Department at (212) 709-1093 or (212) 709-1094 and
receipt of such notice shall be confirmed by telephoning (212) 709-6884, or by
mail or any other means to:
Manager, Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, New York 10004-2695
7. All notices and payment advices sent to DTC shall contain the CUSIP
number or numbers of the Capital Securities and the accompanying designation of
the Capital Securities, which, as of the date of this letter, is "DOWNEY
FINANCIAL CAPITAL TRUST I ____% Cumulative Capital Securities.
8. Distribution payments or other cash payments with respect to the
Capital Securities evidenced by the Global Certificate shall be received by Cede
& Co., as nominee of DTC, or its registered assigns in next day funds on each
payment date (or in accordance with existing arrangements between the Issuer or
the Transfer Agent and Registrar and DTC). Such payments shall be made payable
to the order of Cede & Co., and shall be addressed as follows:
NDFS Redemption Department
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, New York 10004-2695
B-3
<PAGE>
9. DTC may by prior written notice direct the Issuer and the Transfer
Agent and Registrar to use any other telecopy number or address of DTC as the
number or address to which notices or payments may be sent.
10. In the event of a conversion, redemption, or any other similar
transaction (e.g., tender made and accepted in response to the Issuer's or the
Transfer Agent and Registrar's invitation) necessitating a reduction in the
aggregate number of Capital Securities outstanding evidenced by Global
Certificates, DTC, in its discretion: (a) may request the Issuer or the Transfer
Agent and Registrar to issue and countersign a new Global Certificate; or (b)
may make an appropriate notation on the Global Certificate indicating the date
and amount of such reduction.
11. DTC may discontinue its services as a securities depositary with
respect to the Capital Securities at any time by giving at least 90 days' prior
written notice to the Issuer and the Transfer Agent and Registrar (at which time
DTC will confirm with the Issuer or the Transfer Agent and Registrar the
aggregate number of Trust Preferred Securities deposited with it) and
discharging its responsibilities with respect thereto under applicable law.
Under such circumstances, the Issuer may determine to make alternative
arrangements for book-entry settlement for the Capital Securities, make
available one or more separate global certificates evidencing Capital Securities
to any Participant having Capital Securities credited to its DTC account, or
issue definitive Capital Securities to the beneficial holders thereof, and in
any such case, DTC agrees to cooperate fully with the Issuer and the Transfer
Agent and Registrar, and to return the Global Certificate, duly endorsed for
transfer as directed by the Issuer or the Transfer Agent and Registrar, together
with any other documents of transfer reasonably requested by the Issuer or the
Transfer Agent and Registrar.
12. In the event that the Issuer determines that beneficial owners of
Capital Securities shall be able to obtain definitive Capital Securities, the
Issuer or the Transfer Agent and Registrar shall notify DTC of the availability
of certificates. In such event, the Issuer or the Transfer Agent and Registrar
shall issue, transfer and exchange certificates in appropriate amounts, as
required by DTC and others, and DTC agrees to cooperate fully with the Issuer
and the Transfer Agent and Registrar and to return the Global Certificate, duly
endorsed for transfer as directed by the Issuer or the Transfer Agent and
Registrar, together with any other documents of transfer reasonably requested by
the Issuer or the Transfer Agent and Registrar.
13. This letter may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
B-4
<PAGE>
Nothing herein shall be deemed to require the Transfer Agent and Registrar
to advance funds on behalf of DOWNEY FINANCIAL CAPITAL TRUST I.
Very truly yours,
DOWNEY FINANCIAL CAPITAL TRUST I
(as Issuer)
By:
--------------------------------------
Name:
Title:
Wilmington Trust Company,
as Trustee, Paying Agent and Registrar
By:
--------------------------------------
Name:
Title:
Received and Accepted:
The Depository Trust Company
By:
-------------------------
Authorized Officer
B-5
<PAGE>
EXHIBIT C
THIS CERTIFICATE IS NOT TRANSFERABLE
Certificate Number C-1 Number of Common Securities ______
Certificate Evidencing Common Securities
of
DOWNEY FINANCIAL CAPITAL TRUST I
____% Common Securities
(liquidation amount $25 per Common Security)
DOWNEY FINANCIAL CAPITAL TRUST I, a statutory business trust formed under
the laws of the State of Delaware (the "Trust"), hereby certifies that DOWNEY
FINANCIAL CORP. (the "Holder") is the registered owner of _______ common
securities of the Trust representing undivided beneficial interests of the Trust
and designated the ____% Common Securities (liquidation amount $25 per Common
Security) (the "Common Securities"). In accordance with Section 5.10 of the
Trust Agreement (as defined below) the Common Securities are not transferable
and any attempted transfer hereof shall be void. The designations, rights,
privileges, restrictions, preferences and other terms and provisions of the
Common Securities are set forth in, and this certificate and the Common
Securities represented hereby are issued and shall in all respects be subject to
the terms and provisions of, the Amended and Restated Trust Agreement of the
Trust dated as of __________, 1999, as the same may be amended from time to time
(the "Trust Agreement") including the designation of the terms of the Common
Securities as set forth therein. The Trust will furnish a copy of the Trust
Agreement to the Holder without charge upon written request to the Trust at its
principal place of business or registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
In Witness Whereof, an Administrative Trustee of the Trust has executed
this certificate this _____ day of ______, 1999.
DOWNEY FINANCIAL CAPITAL
TRUST I
By:
--------------------------------------
, Administrative Trustee
-------------
C-1
<PAGE>
EXHIBIT D
This Capital Security is a Global Certificate within the meaning of the Trust
Agreement hereinafter referred to and is registered in the name of The
Depository Trust Company (the "Depository") or a nominee of the Depository.
This Capital Security is exchangeable for Capital Securities registered in the
name of a person other than the Depository or its nominee only in the limited
circumstances described in the Trust Agreement and no transfer of this Capital
Security (other than a transfer of this Capital Security as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository and any
nominee to a successor depository or to a nominee of such successor depository)
may be registered except in limited circumstances.
Unless this Capital Security is presented by an authorized representative of the
Depository (55 Water Street, New York) to DOWNEY FINANCIAL CAPITAL TRUST I or
its agent for registration of transfer, exchange or payment, and any Capital
Security issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of the Depository and any payment
hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE
OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof,
Cede & Co., has an interest herein.
Certificate Number S-001 Number of Trust Capital Securities _______
CUSIP NO.
__________
Certificate Evidencing Capital Securities
of
Downey Financial Capital Trust I
____% Cumulative Capital Securities,
(liquidation amount $__ per Capital Security)
DOWNEY FINANCIAL CAPITAL TRUST I, a statutory business trust formed 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 an undivided beneficial interest in
the assets of the Trust and designated the DOWNEY FINANCIAL CAPITAL TRUST I
____% Cumulative Capital Securities, (liquidation amount $__ per Capital
Security) (the "Capital Securities"). The Capital Securities are transferable
on the books and records of the Trust, in person or by a duly authorized
attorney, upon surrender of this certificate duly endorsed and in proper form
for transfer as provided in Section 5.4 of the Trust Agreement (as defined
below). The designations, rights, privileges, restrictions,
D-1
<PAGE>
preferences and other terms and provisions of the Capital Securities are set
forth in, and this certificate and the Capital Securities represented hereby are
issued and shall in all respects be subject to the terms and provisions of, the
Amended and Restated Trust Agreement of the Trust dated as of __________, 1999,
as the same may be amended from time to time (the "Trust Agreement") including
the designation of the terms of Capital Securities as set forth therein. The
Holder is entitled to the benefits of the Guarantee Agreement entered into by
Downey Financial Corp., a California corporation, and Wilmington Trust Company,
as guarantee trustee, dated as of ___________, 1999, (the "Guarantee"), to the
extent provided therein. The Trust will furnish a copy of the Trust Agreement
and the Guarantee to the Holder without charge upon written request to the Trust
at its principal place of business or registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
In Witness Whereof, an Administrative Trustee of the Trust has executed
this certificate this ___ day of ___________, 1999.
DOWNEY FINANCIAL CAPITAL TRUST I
By:
-----------------------------------------
, Administrative Trustee
------------------
D-2
<PAGE>
ASSIGNMENT
For Value Received, the undersigned assigns and transfers this Capital
Security to:
(Insert assignee's social security or tax identification number)
(Insert address and zip code of assignee)
and irrevocably appoints
agent to transfer this Capital Security Certificate on the books of the Trust.
The agent may substitute another to act for him or her.
Date: __________________________________
Signature: _____________________________________________________________________
(Sign exactly as your name appears on the other side of this Capital Security
Certificate)
(S)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
SEC Rule 17Ad-15.
<PAGE>
EXHIBIT 4.5
This Capital Security is a Global Certificate within the meaning of the Trust
Agreement hereinafter referred to and is registered in the name of The
Depository Trust Company (the "Depository") or a nominee of the Depository. This
Capital Security is exchangeable for Capital Securities registered in the name
of a person other than the Depository or its nominee only in the limited
circumstances described in the Trust Agreement and no transfer of this Capital
Security (other than a transfer of this Capital Security as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository and any
nominee to a successor depository or to a nominee of such successor depository)
may be registered except in limited circumstances.
Unless this Capital Security is presented by an authorized representative of the
Depository (55 Water Street, New York) to DOWNEY FINANCIAL CAPITAL TRUST I or
its agent for registration of transfer, exchange or payment, and any Capital
Security issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of the Depository and any payment
hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE
OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof,
Cede & Co., has an interest herein.
Certificate Number S-001 Number of Capital Securities ______
CUSIP NO.
_________
Certificate Evidencing Capital Securities
of
Downey Financial Capital Trust I
____% Cumulative Capital Securities
(liquidation amount $__ per Capital Security)
DOWNEY FINANCIAL CAPITAL TRUST I, a statutory business trust formed 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 an undivided beneficial interest in
the assets of the Trust and designated the DOWNEY FINANCIAL CAPITAL TRUST I
____% Cumulative Capital Securities (liquidation amount $__ per Capital
Security) (the "Capital Securities"). The Capital Securities are transferable
on the books and records of the Trust, in person or by a duly authorized
attorney, upon surrender of this certificate duly endorsed and in proper form
for transfer as provided in Section 5.4 of the Trust Agreement (as defined
below). The designations, rights, privileges, restrictions, preferences and
other terms and provisions of the Capital Securities are set forth in, and this
certificate and the Capital Securities represented hereby are issued and shall
in all respects be subject to the terms and provisions of, the Amended and
Restated Trust
<PAGE>
Agreement of the Trust dated as of __________, 1999, as the same may be amended
from time to time (the "Trust Agreement") including the designation of the terms
of Capital Securities as set forth therein. The Holder is entitled to the
benefits of the Capital Securities Guarantee Agreement entered into by Downey
Financial Corp., a California corporation, and Wilmington Trust Company, as
guarantee trustee, dated as of ___________, 1999 (the "Capital Securities
Guarantee"), to the extent provided therein. The Trust will furnish a copy of
the Trust Agreement and the Capital Securities Guarantee to the Holder without
charge upon written request to the Trust at its principal place of business or
registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
In WITNESS WHEREOF, an Administrative Trustee of the Trust has executed
this certificate this ___ day of ___________, 1999.
DOWNEY FINANCIAL CAPITAL TRUST I
By:_____________________________
________________, Administrative Trustee
2
<PAGE>
EXHIBIT 4.6
------------------------------------------------
CAPITAL SECURITIES GUARANTEE AGREEMENT
Between
DOWNEY FINANCIAL CORP.
(as Guarantor)
and
WILMINGTON TRUST COMPANY
(as Trustee)
dated as of
______________, 1999
------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS............................................................. 2
SECTION 1.1 Definitions...................................................... 2
ARTICLE II. TRUST INDENTURE ACT..................................................... 4
SECTION 2.1 Trust Indenture Act; Application................................. 4
SECTION 2.2 List of Holders.................................................. 4
SECTION 2.3 Reports by the Guarantee Trustee................................. 5
SECTION 2.4 Periodic Reports to the Guarantee Trustee........................ 5
SECTION 2.5 Evidence of Compliance with Conditions Precedent................. 5
SECTION 2.6 Events of Default; Waiver........................................ 5
SECTION 2.7 Event of Default; Notice......................................... 5
SECTION 2.8 Conflicting Interests............................................ 6
ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE...................... 6
SECTION 3.1 Powers and Duties of the Guarantee Trustee....................... 6
SECTION 3.2 Certain Rights of Guarantee Trustee.............................. 7
SECTION 3.3 Indemnity........................................................ 9
ARTICLE IV. GUARANTEE TRUSTEE....................................................... 9
SECTION 4.1 Guarantee Trustee. Eligibility.................................. 9
SECTION 4.2 Appointment, Removal and Resignation of the Guarantee Trustee.... 10
ARTICLE V. GUARANTEE............................................................... 10
SECTION 5.1 Guarantee........................................................ 10
SECTION 5.2 Waiver of Notice and Demand...................................... 11
SECTION 5.3 Obligations Not Affected......................................... 11
SECTION 5.4 Rights of Holders................................................ 12
SECTION 5.5 Guarantee of Payment............................................. 12
SECTION 5.6 Subrogation...................................................... 12
SECTION 5.7 Independent Obligations.......................................... 13
ARTICLE VI. COVENANTS AND SUBORDINATION............................................. 13
SECTION 6.1 Subordination.................................................... 13
SECTION 6.2 Pari Passu Guarantees............................................ 13
ARTICLE VII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE.................... 13
SECTION 7.1 Guarantor May Consolidate, Etc., Only on Certain Terms........... 13
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 7.2 Successor Guarantor Substituted.................................. 14
ARTICLE VIII. TERMINATION...................................................... 14
SECTION 8.1 Termination...................................................... 14
ARTICLE IX. MISCELLANEOUS........................................................... 14
SECTION 9.1 Successors and Assigns........................................... 14
SECTION 9.2 Amendments....................................................... 15
SECTION 9.3 Notices.......................................................... 15
SECTION 9.4 Benefit.......................................................... 16
SECTION 9.5 Interpretation................................................... 16
SECTION 9.6 Governing Law.................................................... 17
</TABLE>
ii
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Section of Trust Section of
Indenture Act of 1939, as amended Guarantee Agreement
--------------------------------- -------------------
<S> <C>
310(a) 4.1(a)
310(b) 4.1(c), 2.8
310(c) Inapplicable
311(a) 2.2(b)
311(b) 2.2(b)
311(c) Inapplicable
312(a) 2.2(a)
312(b) 2.2(b)
311(c) Inapplicable
312(a) 2.2(a)
312(b) 2.2(b)
313 2.3
314(a) 2.4
314(b) Inapplicable
314(c) 2.5
314(d) Inapplicable
314(e) 1.1, 2.5, 3.2
314(f) 2.1, 3.2
315(a) 3.1(d)
315(b) 2.7
315(c) 3.1
315(d) 3.1(d)
316(a) 1.1, 2.6, 5.4
316(b) 5.3
316(c) 9.2
317(a) Inapplicable
317(b) Inapplicable
318(a) 2.1(b)
318(b) 2.1
318(c) 2.1(a)
</TABLE>
__________________
* This Cross-Reference Table does not constitute part of the Capital Securities
Guarantee and shall not affect the interpretation of any of its terms or
provisions.
<PAGE>
CAPITAL SECURITIES GUARANTEE AGREEMENT
This CAPITAL SECURITIES GUARANTEE AGREEMENT (the "Capital Securities
Guarantee"), dated as of ________________, 1999, is executed and delivered by
DOWNEY FINANCIAL CORP., a Delaware corporation (the "Guarantor") having its
principal office at 3501 Jamboree Road, North Tower, Newport Beach, California
92660, 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 DOWNEY
FINANCIAL CAPITAL TRUST I, a Delaware statutory business trust (the "Trust").
WHEREAS, pursuant to an Amended and Restated Trust Agreement, dated as
of _________, 1999 (the "Trust Agreement"), among the Guarantor as Depositor,
Wilmington Trust Company as Property Trustee, Wilmington Trust Company as
Delaware Trustee, the Administrative Trustees named therein and the holders from
time to time of undivided beneficial interests in the assets of the Trust, the
Trust issued $______________ aggregate Liquidation Amount (as defined in the
Trust Agreement) of its ____% Cumulative Capital Securities, Liquidation Amount
$25 per Capital Security (the "Capital Securities");
WHEREAS, the Capital Securities will be issued by the Trust and the
proceeds thereof, together with the proceeds from the issuance of the Trust's
Common Securities (as defined below), will be used to purchase the Debentures
(as defined in the Trust Agreement) of the Guarantor which were deposited with
Wilmington Trust Company, as Property Trustee under the Trust Agreement, as
trust assets;
WHEREAS, as an incentive for the Holders to purchase the Capital
Securities, the Guarantor desires irrevocably and unconditionally to agree, to
the extent set forth herein, to pay to the Holders of the Capital Securities the
Guarantee Payments (as defined herein) and to make certain other payments on the
terms and conditions set forth herein; and
WHEREAS, the Guarantor is also executing and delivering the Common
Securities Guarantee Agreement dated as of _______________, 1999 (the "Common
Securities Guarantee") for the benefit of holders of the Common Securities the
terms of which provide that if (i) a Debenture Event of Default (as defined in
the Trust Agreement) shall have occurred and is continuing or (ii) the Trust is
dissolved or liquidated and funds available to the Trust are insufficient to pay
in full the amounts due on the Capital Securities and the Common Securities or
if Debentures are distributed to holders of the Common Securities and Holders of
the Capital Securities upon such liquidation or dissolution and the Holders of
Capital Securities do not receive the full amount of Debentures to which they
are entitled, the rights of holders of the Common Securities to receive
Guarantee Payments under the Common Securities Guarantee are subordinated, to
the extent and in the manner set forth in the Common Securities Guarantee, to
the rights of Holders of Capital Securities to receive Guarantee Payments under
this Capital Securities Guarantee.
NOW, THEREFORE, in consideration of the purchase by each Holder of
Capital Securities, which purchase the Guarantor hereby acknowledges shall
benefit the Guarantor, the Guarantor executes and delivers this Capital
Securities Guarantee for the benefit of the Holders.
1
<PAGE>
ARTICLE I. DEFINITIONS
SECTION 1.1 Definitions.
As used in this Capital Securities Guarantee, the terms set forth below
shall, unless the context otherwise requires, have the following meanings.
Capitalized or otherwise defined terms used but not otherwise defined herein
shall have the meanings assigned to such terms in the Trust Agreement and the
Indenture (as defined herein), each as in effect on the date hereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
Guarantor shall not be deemed to be an Affiliate of the Trust. For the purposes
of this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Board of Directors" means either the board of directors of the Guarantor
or any committee of that board duly authorized to act hereunder.
"Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Trust.
"Event of Default" means a default by the Guarantor on any of its payment
or other obligations under this Capital Securities Guarantee; provided, however,
that, except with respect to a default in payment of any Guarantee Payments, the
Guarantor shall have received notice of default and shall not have cured such
default within 90 days after receipt of such notice.
"Guarantee" has the meaning set forth in Section 5.1.
"Guarantee Payments" means the following payments or distributions, without
duplication, with respect to the Capital Securities, to the extent not paid or
made by or on behalf of the Trust: (i) any accrued and unpaid Distributions (as
defined in the Trust Agreement) that are required to be paid on such Capital
Securities, to the extent the Trust shall have funds legally available therefor
at such time, (ii) the applicable Redemption Price (as defined in the Trust
Agreement), to the extent the Trust shall have funds legally available therefor
at such time with respect to any Capital Securities called for redemption, and
(iii) upon a voluntary or involuntary termination, winding up or liquidation of
the Trust, (other than in connection with the distribution of Debentures to the
Holders in exchange for capital securities as provided in the Trust Agreement),
the lesser of (a) the aggregate of the Liquidation Distribution (as defined in
the Trust Agreement) or (b) the amount of assets of the Trust remaining
available for distribution to the Holders after satisfaction of liabilities to
creditors of the Trust as required by applicable law.
2
<PAGE>
"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 Capital Securities Guarantee, and thereafter means each
such Successor Guarantee Trustee.
"Holder" means any holder, as registered on the books and records of the
Trust, 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, the Guarantee Trustee, or any Affiliate of the Guarantor or the
Guarantee Trustee.
"Indenture" means the Junior Subordinated Indenture dated as of
________________, 1999, as supplemented and amended between the Guarantor and
Wilmington Trust Company, as trustee.
"List of Holders" has the meaning specified in Section 2.2(a).
"Majority in Liquidation Amount of the Capital Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the Liquidation Amount of all then outstanding
Capital Securities issued by the Trust.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chairman or a Vice Chairman of the Board of Directors of such
Person or the President or a Vice President of such Person, and by the Chief
Financial Officer, the Secretary or an Assistant Secretary of such Person, and
delivered to the Guarantee Trustee. Any Officers' Certificate delivered with
respect to compliance with a condition or covenant provided for in this Capital
Securities Guarantee shall include:
(a) a statement that each officer signing the Officers' Certificate has
read the 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 Officers' Certificate;
(c) a statement that each 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 officer, such
condition or covenant has been complied with.
"Other Guarantees" means any guarantees similar to the Guarantee issued,
from time to time, by the Guarantor on behalf of holders of one or more series
of Capital Securities issued by any Downey Trust (as defined in the Indenture)
other than the Trust.
3
<PAGE>
"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 of the Corporate Trust Department of the Guarantee Trustee 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.
"Securities Act" means the Securities Act of 1933, as amended.
"Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
ARTICLE II. TRUST INDENTURE ACT
SECTION 2.1 Trust Indenture Act; Application.
(a) This Capital Securities Guarantee is subject to the provisions of the
Trust Indenture Act that are required to be part of this Capital Securities
Guarantee and shall, to the extent applicable, be governed by such provisions.
(b) If and to the extent that any provision of this Capital Securities
Guarantee limits, qualifies or conflicts with the duties imposed by Sections 310
to 317, inclusive, of the Trust Indenture Act, such imposed duties shall
control.
SECTION 2.2 List of Holders.
(a) The Guarantor shall furnish or cause to be furnished to the Guarantee
Trustee (a) semiannually, on or before January 15 and July 15 of each year, a
list, in such form as the Guarantee Trustee may reasonably require, of the names
and addresses of the Holders ("List of Holders") as of a date not more than 15
days prior to the delivery thereof, and (b) at such other times as the Guarantee
Trustee may request in writing, within 30 days after the receipt by the
Guarantor of any such request, a List of Holders as of a date not more than 15
days prior to the time such list is furnished, in each case to the extent such
information is in the possession or control of the Guarantor and is not
identical to a previously supplied list of Holders or has not otherwise been
received by the Guarantee Trustee in its capacity as such. The Guarantee
Trustee may destroy any List of Holders previously given to it on receipt of a
new List of Holders.
(b) The Guarantee Trustee shall comply with its obligations under Section
311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act.
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SECTION 2.3 Reports by the Guarantee Trustee.
Not later than March 31 of each year, commencing on the year beginning
January 1, 2000, the Guarantee Trustee shall provide to the Holders such reports
as are required by Section 313 of the Trust Indenture Act, if any, in the form
and in the manner provided by Section 313 of the Trust Indenture Act. The
Guarantee Trustee shall also comply with the requirements of Section 313(d) of
the Trust Indenture Act.
SECTION 2.4 Periodic Reports to the Guarantee Trustee.
The Guarantor shall provide to the Guarantee Trustee, the Securities and
Exchange Commission and the Holders such documents, reports and information, if
any, as required by Section 314 of the Trust Indenture Act and the compliance
certificate required by Section 314 of the Trust Indenture Act, in the form, in
the manner and at the times required by Section 314 of the Trust Indenture Act.
SECTION 2.5 Evidence of Compliance with Conditions Precedent.
The Guarantor shall provide to the Guarantee Trustee, on an annual basis,
such evidence of compliance with such conditions precedent, if any, provided for
in this Capital Securities Guarantee that relate to any of the matters set forth
in Section 314(c) of the Trust Indenture Act. Any certificate or opinion
required to be given by an officer pursuant to Section 314(c)(1) may be given in
the form of an Officers' Certificate.
SECTION 2.6 Events of Default; Waiver.
The Holders of a Majority in Liquidation Amount of the Capital Securities
may, by vote, on behalf of the Holders, waive any past Event of Default and its
consequences. Upon such waiver, any such Event of Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Capital Securities Guarantee, but no such waiver shall
extend to any subsequent or other default or Event of Default or impair any
right consequent therefrom.
SECTION 2.7 Event of Default; Notice.
(a) The Guarantee Trustee shall, within 90 days after the occurrence of a
default which with notice or the passage of time, or both, could become an Event
of Default, transmit by mail, first class postage prepaid, to the Holders,
notices of all such defaults known to the Guarantee Trustee, unless such
defaults have been cured before the giving of such notice, provided, that,
except in the case of a default in the payment of a Guarantee Payment, the
Guarantee Trustee shall be protected in withholding such notice if and so long
as the Board of Directors, the executive committee or a trust committee of
directors and/or Responsible Officers of the Guarantee Trustee in good faith
determines that the withholding of such notice is in the interests of the
Holders.
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(b) The Guarantee Trustee shall not be deemed to have knowledge of any
such default unless the Guarantee Trustee shall have received written notice, or
a Responsible Officer charged with the administration of this Capital Securities
Guarantee shall have obtained written notice, of such default.
SECTION 2.8 Conflicting Interests.
The Trust Agreement shall be deemed to be specifically described in this
Capital Securities Guarantee for the purposes of clause (i) of the first proviso
contained in Section 310(b) of the Trust Indenture Act.
ARTICLE III. POWERS, DUTIES AND RIGHTS
OF THE GUARANTEE TRUSTEE
SECTION 3.1 Powers and Duties of the Guarantee Trustee.
(a) This Guarantee shall be held by the Guarantee Trustee for the benefit
of the Holders, and the Guarantee Trustee shall not transfer this Guarantee to
any Person except to a Holder exercising his or her rights pursuant to Section
5.4(iv) 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, upon acceptance by such Successor Guarantee
Trustee of its appointment hereunder, 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 has occurred and is continuing, the Guarantee
Trustee shall enforce this Guarantee for the benefit of the Holders.
(c) The Guarantee Trustee, before the occurrence of any Event of Default
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
Capital Securities Guarantee, and no implied covenants shall be read into this
Capital Securities Guarantee against the Guarantee Trustee. In case an Event of
Default has occurred (that has not been cured or waived pursuant to Section
2.6), the Guarantee Trustee shall exercise such of the rights and powers vested
in it by this Capital Securities Guarantee, and use the same degree of care and
skill in its exercise thereof, as a prudent person would exercise or use under
the circumstances in the conduct of his or her own affairs.
(d) No provision of this Capital Securities Guarantee shall be construed
to relieve the 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:
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(A) the duties and obligations of the Guarantee Trustee
shall be determined solely by the express provisions of this Capital Securities
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
Capital Securities Guarantee; 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 Capital Securities Guarantee; but in the case of any
such certificates or opinions that by any provision hereof or of the Trust
Indenture Act are specifically required to be furnished to the Guarantee
Trustee, the Guarantee Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this Capital
Securities 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 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
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 Capital
Securities Guarantee; and
(iv) no provision of this Capital Securities 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 or liability
is not reasonably assured to it under the terms of this Capital Securities
Guarantee or adequate indemnity against such risk or liability is not reasonably
assured to it.
SECTION 3.2 Certain Rights of Guarantee Trustee.
(a) Subject to the provisions of Section 3.1:
(i) The Guarantee Trustee may 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
reasonably believed by it to be genuine and to have been signed, sent or
presented by the proper party or parties.
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(ii) Any direction or act of the Guarantor contemplated by this
Capital Securities Guarantee shall be sufficiently evidenced by an Officers'
Certificate unless otherwise prescribed herein.
(iii) Whenever, in the administration of this Capital Securities
Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved
or established before taking, suffering or omitting to take 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 rely upon
an Officers' Certificate which, upon receipt of such request from the Guarantee
Trustee, shall be promptly delivered by the Guarantor.
(iv) The Guarantee Trustee may consult with legal counsel, and the
written advice or opinion of such legal counsel with respect to legal matters
shall be full and complete authorization and protection in respect of any action
taken, suffered or omitted to be taken by it hereunder in good faith and in
accordance with such advice or opinion. Such legal counsel may be legal counsel
to the Guarantor or any of its Affiliates and may be one of its employees. The
Guarantee Trustee shall have the right at any time to seek instructions
concerning the administration of this Capital Securities Guarantee from any
court of competent jurisdiction.
(v) The Guarantee Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Capital Securities Guarantee at
the request or direction of any Holder, unless such Holder shall have provided
to the Guarantee Trustee such adequate security and indemnity as would satisfy a
reasonable person in the position of the Guarantee Trustee, against the costs,
expenses (including attorneys' fees and expenses) 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 that,
nothing contained in this Section 3.2(a)(v) 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 Capital Securities
Guarantee.
(vi) 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.
(vii) The Guarantee 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 Guarantee Trustee shall not be responsible for any
misconduct or negligence on the part of any such agent or attorney appointed
with due care by it hereunder.
(viii) Whenever in the administration of this Capital Securities
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,
(B) may refrain from enforcing such remedy or right or taking such
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other action until such instructions are received, and (C) shall be protected in
acting in accordance with such instructions.
(b) No provision of this Capital Securities 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 to act in accordance with such power and
authority.
SECTION 3.3 Indemnity.
The Guarantor agrees to indemnify the Guarantee Trustee for, and to hold it
harmless against, any loss, liability or expense incurred without negligence or
bad faith on the part of the Guarantee Trustee, arising out of or in connection
with the acceptance or administration of this Capital Securities Guarantee,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder.
ARTICLE IV. GUARANTEE TRUSTEE
SECTION 4.1 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 Person that is eligible pursuant to the Trust Indenture Act
to act as such and has a combined capital and surplus of at least $50,000,000,
and shall be a corporation meeting the requirements of Section 310(a) of the
Trust Indenture Act. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of the supervising or examining
authority, then, for the purposes of this Section 4.1(a)(ii) and to the extent
permitted by the Trust Indenture Act, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published.
(b) If at any time the Guarantee Trustee shall cease to be eligible to so
act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the
manner and with the effect set out in Section 4.2(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 and Guarantor shall in all respects comply with the provisions
of Section 310(b) of the Trust Indenture Act.
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SECTION 4.2 Appointment, Removal and Resignation of the Guarantee Trustee.
(a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or
removed without cause at any time by the Guarantor.
(b) The Guarantee Trustee shall not be removed 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 hereunder 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 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 4.2 within 60 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, 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.
ARTICLE V. GUARANTEE
SECTION 5.1 Guarantee.
The Guarantor irrevocably and unconditionally agrees to pay in full on a
subordinated basis to the Holders the Guarantee Payments (without duplication of
amounts theretofore paid by or on behalf of the Trust), as and when due,
regardless of any defense, right of set-off or counterclaim which the Trust may
have or assert other than the defense of payment (the "Guarantee"). The
Guarantee is a continuing guarantee, and the Guarantor fully, knowingly and
unconditionally waives any right the Guarantor may have to revoke the Guarantee
as to any future transactions under [Section _______ of the New York Civil Code]
or otherwise. 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 Trust to pay such amounts to the Holders.
SECTION 5.2 Waiver of Notice and Demand.
The Guarantor hereby waives notice of acceptance of this Capital Securities
Guarantee and of any liability to which it applies or may apply, presentment,
demand for payment, any right to require a proceeding first against the
Guarantee Trustee, Trust or any other Person before proceeding
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against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice
of redemption and all other notices and demands.
SECTION 5.3 Obligations Not Affected.
The obligations, covenants, agreements and duties of the Guarantor under
this Capital Securities Guarantee shall in no way be affected or impaired by
reason of the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Trust of any express or implied agreement,
covenant, term or condition relating to the Capital Securities to be performed
or observed by the Trust;
(b) the extension of time for the payment by the Trust of all or any
portion of the Distributions (other than an extension of time for payment of
Distributions that results from the extension of any interest payment period on
the Debentures as provided in the Indenture), Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Capital Securities
or the extension of time for the performance of any other obligation under,
arising out of, or in connection with, the Capital Securities;
(c) any failure, omission, delay or lack of diligence on the part of the
Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Capital Securities, or any
action on the part of the Trust 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 Trust or any of the assets of the
Trust;
(e) any invalidity of, or defect or deficiency in, the Capital Securities;
(f) the settlement or compromise of any obligation guaranteed hereby or
hereby incurred; or
(g) any other circumstance whatsoever that might otherwise constitute a
legal or equitable discharge or defense of a guarantor;
it being the intent of this Section 5.3 that the obligations of the Guarantor
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 the
consent of, the Guarantor with respect to the happening of any of the foregoing.
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SECTION 5.4 Rights of Holders.
The Guarantor expressly acknowledges that: (i) this Capital Securities
Guarantee will be deposited with the Guarantee Trustee to be held for the
benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this
Guarantee on behalf of the Holders; (iii) 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 Capital Securities Guarantee or exercising
any trust or power conferred upon the Guarantee Trustee under this Capital
Securities Guarantee; and (iv) any Holder may institute a legal proceeding
directly against the Guarantor to enforce its rights under this Capital
Securities Guarantee, without first instituting a legal proceeding against the
Guarantee Trustee, the Trust or any other Person.
SECTION 5.5 Guarantee of Payment.
This Capital Securities Guarantee creates a guarantee of payment and not of
collection. This Guarantee will not be discharged except by payment of the
Guarantee Payments in full (without duplication of amounts theretofore paid by
the Trust) or upon distribution of Debentures to Holders as provided in the
Trust Agreement.
SECTION 5.6 Subrogation.
The Guarantor shall be subrogated to all (if any) rights of the Holders
against the Trust in respect of any amounts paid to the Holders by the Guarantor
under this Capital Securities Guarantee and shall have the right to waive
payment by the Trust pursuant to Section 5.1; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any rights which it may acquire by way
of subrogation or any indemnity, reimbursement or other agreement, in all cases
as a result of payment under this Guarantee, if, at the time of 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.
SECTION 5.7 Independent Obligations.
The Guarantor acknowledges that its obligations hereunder are independent
of the obligations of the Trust with respect to the Capital Securities and that
the Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Capital Securities Guarantee
notwithstanding the occurrence of any event referred to in subsections (a)
through (g), inclusive, of Section 5.3 hereof.
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ARTICLE VI. COVENANTS AND SUBORDINATION
SECTION 6.1 Subordination.
The obligations of the Guarantor under this Guarantee will constitute
unsecured obligations of the Guarantor and will rank subordinate and junior in
right of payment to all Senior and Subordinated Debt in the same manner as
Debentures.
SECTION 6.2 Pari Passu Guarantees.
The obligations of the Guarantor under this Guarantee shall rank pari passu
with the obligations of the Guarantor under all Other Guarantees.
ARTICLE VII. CONSOLIDATION, MERGER, CONVEYANCE,
TRANSFER OR LEASE
SECTION 7.1 Guarantor May Consolidate, Etc., Only on Certain Terms.
The Guarantor shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Guarantor or convey, transfer or lease its properties and
assets as an entirety or substantially as an entirety to the Guarantor, unless:
(a) either the Guarantor shall be the continuing Person, in the case of a
merger the successor Person (if other than the Guarantor) formed by the
consolidation or into which the Guarantor is merged or which acquires by
conveyance, transfer or lease, the properties and assets of the Guarantor as an
entirety or substantially as an entirety is organized under the laws of the
United States or any state of the United States or the District of Columbia, and
the successor Person expressly assume the Guarantor's obligations under this
Capital Securities Guarantee and the due and punctual performance and observance
of every obligation in this Capital Securities Guarantee;
(b) immediately after giving effect thereto, no Event of Default, and no
event which, after notice or lapse of time, or both, would become an Event of
Default, shall have happened and be continuing;
(c) such consolidation, merger, conveyance, transfer or lease is
permitted under the Trust Agreement and the Indenture and does not give rise to
any breach or violation of the Trust Agreement or the Indenture; and
(d) the Guarantor has delivered to the Guarantee Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and assumption of the Guarantor's
obligations under this Capital Securities Guarantee comply with this Article and
that all conditions precedent herein provided for relating to such transaction
have been complied with; and the Guarantee Trustee, subject to Section 3.1
hereof, may rely upon such
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Officers' Certificate and Opinion of Counsel as conclusive evidence that such
transaction complies with this Section 7.1.
SECTION 7.2 Successor Guarantor Substituted.
Upon any consolidation or merger by the Guarantor with or into any other
Person, or any conveyance, transfer or lease by the Guarantor of its properties
and assets substantially as an entirety to any Person in accordance with Section
7.1, the successor Person formed by such consolidation or into which the
Guarantor is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Guarantor under this Capital Securities Guarantee with the same effect as if
such successor Person had been named as the Guarantor herein; and in the event
of any such conveyance, transfer or lease the Guarantor shall be discharged from
all obligations and covenants under this Capital Securities Guarantee.
ARTICLE VIII. TERMINATION
SECTION 8.1 Termination.
This Capital Securities Guarantee shall terminate and be of no further
force and effect upon the (i) full payment of the applicable Redemption Price of
all Capital Securities, (ii) the distribution of Debentures to the Holders in
exchange for all of the Capital Securities or (iii) full payment of the amounts
payable in accordance with the Trust Agreement upon liquidation or dissolution
of the Trust. Notwithstanding the foregoing, this Capital Securities Guarantee
will continue to be effective or will be reinstated, as the case may be, if at
any time any Holder must restore payment of any sums paid with respect to
Capital Securities or under this Capital Securities Guarantee.
ARTICLE IX. MISCELLANEOUS
SECTION 9.1 Successors and Assigns.
All guarantees and agreements contained in this Capital Securities
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Guarantor and shall inure to the benefit of the Holders
of the Capital Securities then outstanding. Except in connection with a
consolidation, merger or sale involving the Guarantor that is permitted under
Article VII hereof and Article VIII of the Indenture, the Guarantor shall not
assign its obligations hereunder.
SECTION 9.2 Amendments.
Except with respect to any changes which do not adversely affect the rights
of the Holders in any material respect (in which case no consent of the Holders
will be required), this Capital Securities Guarantee may not be amended without
the prior approval of the holders of not less than a Majority in Liquidation
Amount of all outstanding Capital Securities. The provisions of Article VI of
the Trust Agreement concerning meetings of the Holders of the Trust Securities
shall apply to the giving of such approval.
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SECTION 9.3 Notices.
Any notice, request or other communication required or permitted to be
given hereunder shall be in writing, duly signed by the party giving such
notice, and delivered, telecopied or mailed by first class mail as follows:
(a) if given to the Guarantor, to the address set forth below or such
other address, facsimile number or to the attention of such other Person as the
Guarantor may give notice to the Holders:
Downey Financial Corp.
3501 Jamboree Road, North Tower
Newport Beach, California 92660
Facsimile No.: (949) 725-0619
Attention: Donald E. Royer
(b) if given to the Trust, in care of the Guarantee Trustee, at the
Trust's (and the Guarantee Trustee's) address set forth below or such other
address as the Guarantee Trustee on behalf of the Trust may give notice to the
Holders:
Downey Financial Capital Trust I
c/o Downey Financial Corp.
3501 Jamboree Road, North Tower
Newport Beach, California 92660
Facsimile No.: (949) 725-0619
Attention: Donald E. Royer
with a copy to:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Facsimile No.: (302) 651-1576
Attention: Corporate Trust Administration
(c) if given to any Holder, at the address set forth on the books and
records of the Trust.
All notices hereunder 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
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which no notice was given, such notice or other document shall be deemed to have
been delivered on the date of such refusal or inability to deliver.
SECTION 9.4 Benefit.
This Guarantee is solely for the benefit of the Holders and is not
separately transferable from the Capital Securities.
SECTION 9.5 Interpretation.
In this Capital Securities Guarantee, unless the context otherwise
requires:
(a) capitalized terms used in this Capital Securities Guarantee but not
defined in the preamble hereto have the respective meanings assigned to them in
Section 1.1;
(b) a term defined anywhere in this Capital Securities Guarantee has the
same meaning throughout;
(c) all references to "the Capital Securities Guarantee" or "this Capital
Securities Guarantee" are to this Capital Securities Guarantee as modified,
supplemented or amended from time to time;
(d) all references in this Capital Securities Guarantee to Articles and
Sections are to Articles and Sections of this Capital Securities Guarantee
unless otherwise specified;
(e) a term defined in the Trust Indenture Act has the same meaning when
used in this Capital Securities Guarantee unless otherwise defined in this
Capital Securities Guarantee or unless the context otherwise requires;
(f) a reference to the singular includes the plural and vice versa; and
(g) the masculine, feminine or neuter genders used herein shall include
the masculine, feminine and neuter genders.
SECTION 9.6 Governing Law.
THIS CAPITAL SECURITIES GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
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THIS CAPITAL SECURITIES GUARANTEE is executed as of the day and year first
above written.
Downey Financial Corp.
By: ___________________________________
Name:
Title:
Wilmington Trust Company
as Guarantee Trustee
By: ___________________________________
Name:
Title:
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EXHIBIT 5.1
[LETTERHEAD OF MANATT, PHELPS & PHILLIPS, LLP]
June 2, 1999 File No: 12050-035
Downey Financial Corp.
3501 Jamboree Road
Newport Beach, California 92660
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have acted as special counsel to Downey Financial Corp., a Delaware
corporation ("Downey") in connection with the preparation and filing under the
Securities Act of 1933, as amended (the "Act"), of a Registration Statement on
Form S-3 to be filed with the Securities and Exchange Commission on or about
June 2, 1999 (the "Registration Statement"). The Registration Statement
relates to the offer for sale of 4,000,000 shares of Cumulative Trust Preferred
Securities (the "Capital Securities") of Downey Financial Capital Trust I, a
statutory business trust formed at the direction of Downey under the laws of the
State of Delaware (the "Trust") and the guaranty of Downey with respect to the
Capital Securities (the "Guarantee Agreement") and Junior Subordinated
Debentures to be issued by Downey to the Trust in connection with the sale of
the Capital Securities, and as further described in the Registration Statement
(the "Offering"). Other capitalized terms used but not defined herein have the
meanings ascribed to them in the Registration Statement. As special counsel to
Downey, we have been requested to render this opinion.
For the purpose of rendering the opinions set forth herein, we have
been furnished with and examined only the following documents:
1. The Certificate of Incorporation of Downey, as amended, certified
by the Delaware Secretary of State as of May 27, 1999;
2. The Bylaws of Downey, as amended, certified by the Secretary of
Downey as of June 2, 1999;
3. The Registration Statement;
4. The Form of Guarantee Agreement relating to the Capital
Securities, attached as Exhibit 4.6 to the Registration Statement;
<PAGE>
Downey Financial Corp.
June 2, 1999
Page 2
5. The Form of Junior Subordinated Debenture included in the form of
Junior Subordinated Indenture, attached as Exhibit 4.1 to the Registration
Statement; and
6. Records of the meetings of the Board of Directors of Downey
pertaining to the Offering.
With respect to all of the foregoing documents, we have assumed,
without investigation, the genuineness of all signatures, the authenticity of
all documents submitted to us as originals and the conformity to originals of
all documents submitted to us as certified or reproduced copies. We also have
obtained from the officers of Downey such advice as to such factual matters as
we consider necessary for the purpose of this opinion, and insofar as this
opinion is based on such matters of fact, we have relied on such advice.
Based upon the foregoing and subject to our receipt of the following
documents or fulfillment of the following conditions to our satisfaction, upon
both of which our opinions are expressly conditioned:
(a) The order to be issued by the Securities and Exchange Commission
declaring the Registration Statement to be effective;
(b) Such exemptive orders, permits, licenses or no action letters as
may be required by the appropriate regulatory or governmental agencies in the
states where the Offering is to be made;
(c) All other conditions and legal requirements necessary to
consummate the transactions contemplated by the Registration Statement; and
(d) The due execution and delivery of the Guarantee Agreement and
Indenture; upon which our opinions are expressly conditioned,
we are of the opinion that:
1. Downey has been duly incorporated and is validly existing as a
corporation under the laws of the State of Delaware.
2. The Guarantee Agreement, when executed and delivered as
contemplated by the Registration Statement, and the Junior Subordinated
Debentures, when issued and paid for as contemplated by the Registration
Statement, will be validly issued obligations of Downey enforceable in
accordance with their terms except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
transfer laws or similar laws affecting the rights of creditors generally and
subject to general principles of equity, including, but not limited to, concepts
of materiality, reasonableness, good faith and fair dealing and the
unavailability of specific performance or injunctive relief, regardless of
whether considered in a proceeding in equity or at law.
The foregoing opinion is also subject to the following comments and
qualifications:
<PAGE>
Downey Financial Corp.
June 2, 1999
Page 3
(a) The enforceability of certain provisions of the Indenture and the
Guarantee Agreement may be limited by laws rendering unenforceable the release
of a party from, or the indemnification of a party against, liability for its
own wrongful or negligent acts under certain circumstances, and indemnification
contrary to Federal or state securities laws and the public policy underlying
such laws.
(b) The enforceability of provisions in the Indenture, the Junior
Subordinated Debentures and the Guarantee Agreement, to the effect that the
terms may not be waived or modified except in writing, may be limited under
certain circumstances.
(c) We advise you that, under certain circumstances, a guaranty
executed by a corporate shareholder of a corporate borrower may not be enforced
as an obligation separate from the obligation guaranteed if it is determined
that the borrower is merely an alter ego or nominee of the guarantor and that
the "true" borrower is the guarantor. If the guarantor is deemed to be liable
as a primary obligor, it is likely that the guarantor will also be entitled to
the rights and defenses otherwise available to a primary obligor.
(d) Notwithstanding the choice of law provision in the Guarantee
Agreement, we also advise you of California statutory provisions and case law,
including defenses set forth in Union Bank v. Gradsky, 265 Cal.App. 2d 40 (1968)
---------------------
and defenses arising from California Civil Code Section 2787 et seq. relating to
-- ----
suretyship defenses or rights of redemption, to the effect that, in certain
circumstances, a surety may be exonerated if the creditor materially alters the
original obligation of the principal without the consent of the guarantor,
elects remedies for default which impairs the subrogation rights of the
guarantor against the principal, or otherwise takes any action without notifying
the guarantor which materially prejudices the guarantor. However, there is also
authority to the effect that a guarantor may validly waive such rights, if such
waivers are expressly set forth in the guaranty. While we believe that a
California court should hold that the explicit language contained in the
Guarantee Agreement waiving such rights should be enforceable, we express no
opinion with respect to the effect of (i) any modification to or amendment of
the obligations of the Trust which materially increases such obligations; (ii)
any election of remedies by the Trust following the occurrence of an event of
default; or (iii) any other action by the Trust which materially prejudices any
guarantor, if, in any such instance, such modification, election or action
occurs without notice to any guarantor and without granting to any guarantor an
opportunity to cure any default by the Trust.
Our opinion expressed herein is limited to those matters expressly set
forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. We hereby disclaim any obligation to notify any person
or entity after the date hereof if any change in fact or law should change our
opinion with respect to any matter set forth in this letter.
This opinion is limited to the current laws of the State of New York,
the State of California, the General Corporation Law of Delaware (the "GCL"), to
present judicial interpretations thereof and to facts as they presently exist.
In rendering this opinion, we have no obligation to revise or supplement it
should the current laws of the State of New York, the State of California or the
GCL be changed by legislative action, judicial decision or otherwise.
<PAGE>
Downey Financial Corp.
June 2, 1999
Page 4
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus which is part of the Registration Statement.
Very truly yours,
/s/ Manatt, Phelps & Phillips, LLP
<PAGE>
EXHIBIT 5.2
[LETTERHEAD OF RICHARDS, LAYTON & FINGER, PA]
June 2, 1999
Downey Financial Capital Trust I
c/o Downey Financial Corp
3501 Jamboree Road
Newport Beach, California 92660
Re: Downey Financial Capital Trust I
--------------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for Downey Financial Corp.,
a Delaware corporation (the "Company"), and Downey Financial Capital Trust I, a
Delaware business trust (the "Trust"), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust as filed with the office of
the Secretary of State of the State of Delaware (the "Secretary of State") on
May 25, 1999;
(b) The Trust Agreement of the Trust, dated as of May 25, 1999, among
the Company and the trustees of the Trust named therein (collectively, the
"Trustees);
(c) The proposed Amended and Restated Trust Agreement of the Trust,
(in the form attached as an exhibit to the Registration Statement referred to
below) (the "Trust Agreement");
(d) The Registration Statement (the "Registration Statement") on Form
S-3, including a preliminary prospectus with respect to the Trust (the
"Prospectus"), relating to the Capital Securities of the Trust representing
undivided beneficial interests in the assets of the Trust (each, a "Capital
Security" and collectively, the "Capital Securities"), to be filed by the
<PAGE>
Downey Financial Capital Trust I
June 2, 1999
Page 2
Company and the Trust with the Securities and Exchange Commission on or about
June 2, 1999; and
(e) A Certificate of Good Standing for the Trust, dated June 2, 1999,
obtained from the Secretary of State.
Initially, capitalized terms used herein and not otherwise defined are
used as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (e) above. In particular,
we have not reviewed any document (other than the documents listed in paragraphs
(a) through (e) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our
own but rather have relied solely upon the foregoing documents, the statements
and information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust
Agreement and the Certificate of Trust are in full force and effect and have not
been amended, (ii) except to the extent provided in paragraph 1 below, the due
organization or due formation, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, organization or formation, (iii) the legal
capacity of natural persons who are parties to the documents examined by us,
(iv) that each of the parties to the documents examined by us has the power and
authority to execute and deliver, and to perform its obligations under, such
documents, (v) the due authorization, execution and delivery by all parties
thereto of all documents examined by us, (vi) the receipt by each Person to whom
a Capital Security will be issued by the Trust (collectively, the "Capital
Security Holders") of a Capital Securities Certificate for such Capital Security
and the payment for such Capital Security, in accordance with the Trust
Agreement and the Prospectus, and (vii) that the Capital Securities will be
issued and sold to the Capital Security Holders in accordance with the Trust
Agreement and the Prospectus. We have not participated in the preparation of
the Registration Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware, and we
have not considered and express no opinion on the laws of any other
jurisdiction, including federal laws and rules and regulations relating thereto.
Our opinions are rendered only with respect to
<PAGE>
Downey Financial Capital Trust I
June 2, 1999
Page 3
Delaware laws (excluding securities laws) and rules, regulations and orders
thereunder which are currently in effect.
Based upon the foregoing, and upon our examination of such questions
of law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act.
2. The Capital Securities of the Trust will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The Capital Security Holders, 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. We note that the Capital Security
Holders may be obligated to make payments as set forth in the Trust Agreement.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. We hereby
consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Richards, Layton & Finger, PA
EAM
<PAGE>
Exhibit 8.1
[LETTERHEAD OF MANATT, PHELPS & PHILLIPS, LLP]
June 2, 1999
Downey Financial Corp.
3501 Jamboree Road
Newport Beach, California 92660
Downey Financial Capital Trust I
3501 Jamboree Road
Newport Beach, California 92660
Re: Certain Federal Income Tax Consequences
of the Purchase and Ownership of Capital Securities
Issued by Downey Financial Capital Trust I
Ladies and Gentlemen:
We have acted as special counsel to Downey Financial Corp. and its
subsidiaries ("Downey") in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), of a Registration Statement on Form S-3 that is being filed with
the Securities and Exchange Commission on this date (the "Registration
Statement"). The Registration Statement relates to the offer for sale of up to
4,000,000 shares of Capital Securities (the "Capital Securities") of Downey
Financial Capital Trust I (the "Trust"), a statutory business trust that has
been formed at the direction of Downey under the laws of the State of Delaware,
the Junior Subordinated Debentures to be issued by Downey to the Trust in
connection with the sale of the Capital Securities, and the guaranty of Downey
with respect to the Capital Securities (the "Guarantee Agreement").
This opinion letter relates to the material federal income tax
consequences of the purchase and ownership of the Capital Securities by
investors. All capitalized terms used in this opinion letter and not otherwise
defined herein have the same meaning as set forth in the Registration Statement.
We have examined the Registration Statement, the form of the Amended
and Restated Trust Agreement of the Trust, and such other documents as we have
deemed necessary to render our opinions expressed below. In our examination of
such material, we have relied upon the current and continued accuracy of the
factual matters we have considered, and we have
<PAGE>
MANATT, PHELPS & PHILLIPS, LLP
Downey Financial Corp.
Downey Financial Capital Trust I
June 2, 1999
Page 2
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
copies of documents submitted to us. We assume for purposes of our opinions that
there are no agreements or understandings with respect to the transactions
contemplated in the documents referred to above other than those described
therein and that all parties to such documents will comply with the terms
thereof, including all tax reporting requirements contained therein. Our
opinions are also based (with your consent) on certain representations from
Downey in a letter to us of even date herewith. In addition, we also have
assumed that the transactions related to the issuance of the Junior Subordinated
Debentures, the Capital Securities and the Guarantee Agreement will be
consummated in accordance with the terms and forms of such documents and as
described in the Registration Statement.
Based on the foregoing, and assuming the Trust will be maintained in
compliance with the terms of the form of the Amended and Restated Trust
Agreement of the Trust, it is our opinion that more likely than not the
following conclusions would be sustained by a court with jurisdiction in a
properly presented case (with all appeals exhausted):
(1) The Trust will be classified for United Stated federal income tax
purposes as a grantor trust and not as an association taxable as a corporation
and, as a result, each beneficial owner of Capital Securities will be treated as
owning an undivided beneficial interest in the Junior Subordinated Debentures
held by the Trust.
(2) The Junior Subordinated Debentures will be classified for federal
income tax purposes as indebtedness of Downey.
(3) Except in the case of the occurrence of an Extension Period,
stated interest on the Junior Subordinated Debentures will be included in income
by a holder of Capital Securities at the time such interest income is paid or
accrued in accordance with the holder's regular method of tax accounting. If
Downey exercises its right to defer payments of interest on the Junior
Subordinated Debentures during an Extension period, beneficial owners of Capital
Securities will commence reporting interest income with respect to the Junior
Subordinated Debentures under the original issue discount rules of the Internal
Revenue Code of 1986, as amended (the "Code").
(4) Gain or loss will be recognized by a holder of Capital Securities
on a sale of Capital Securities (including a redemption for cash) in an amount
equal to the difference between the amount realized (which for this purpose will
exclude amounts attributable to accrued interest or original issue discount not
previously included in income) and the holder's adjusted tax basis in the
Capital Securities sold or so redeemed. Gain or loss recognized by the holder
on
<PAGE>
MANATT, PHELPS & PHILLIPS, LLP
Downey Financial Corp.
Downey Financial Capital Trust I
June 2, 1999
Page 3
a sale of Capital Securities held for more than one year will generally be
taxable as long-term capital gain or loss.
(5) A distribution by the Trust of the Junior Subordinated Debentures,
as described in the Registration Statement (and subject to the limits discussed
therein), will be non-taxable and will result in the distributee receiving
directly its pro rata share of the Junior Subordinated Debentures previously
held indirectly through the Trust, with a holding period and aggregate tax basis
equal to the holding period and aggregate tax basis such distributee had in its
Capital Securities before such distribution.
(6) The discussion of "Certain Federal Income Tax Consequences" in the
Registration Statement accurately describes the material federal income tax
consequences concerning the Capital Securities.
These opinions are based upon the Code, the Treasury Regulations
promulgated thereunder and other relevant authorities and law, all as in effect
on the date hereof. Future changes in the law or interpretations of the law may
cause the tax effects of the transactions referred to herein to be materially
different from those described above. We have undertaken no obligation to
update this opinion in such event.
Other than the specific tax opinions set forth in this letter, no
other opinion has been requested of us or rendered by us with respect to the tax
treatment of the Junior Subordinated Debentures, the Capital Securities or the
Guarantee Agreement, including, but not limited to, the tax treatment of the
proposed transactions under other provisions of the Code and the Treasury
Regulations or the tax treatment of the proposed transactions under state,
local, foreign or any other tax laws.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and the use of our name in the Registration Statement
under the caption "Certain Federal Income Tax Consequences." In giving such
consent, we do not concede that this consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/ Manatt, Phelps & Phillips, LLP
<PAGE>
EXHIBIT 12.1
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
March 31, December 31,
--------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income
taxes and extraordinary
items.................. $21,460 $30,683 $101,141 $ 79,434 $ 36,454 $ 36,690 $ 40,202
Less:
Equity in net income
from joint ventures.. 47 5,226 9,203 3,931 55 (1,676) 1,512
Interest capitalized.. 178 -- 225 -- -- -- --
Plus:
Distributed income
from joint ventures.. 125 1,789 4,852 1,452 2,086 258 1,259
Fixed charges:
Interest on
deposits........... 55,489 61,538 248,337 227,521 184,402 180,859 109,995
Interest on
borrowings......... 9,449 5,559 17,720 38,739 27,363 33,379 12,606
Interest
capitalized........ 178 -- 225 -- -- -- --
33% of rental
expense............ 133 127 560 440 283 233 250
------- ------- -------- -------- -------- -------- --------
Total fixed charges... 65,249 67,224 266,842 266,700 212,048 214,471 122,851
------- ------- -------- -------- -------- -------- --------
Income plus fixed
charges................ $86,609 $94,470 $363,407 $343,655 $250,533 $253,095 $162,800
------- ------- -------- -------- -------- -------- --------
Ratio of earnings to
fixed charges (1):
Including interest on
deposits............. 1.33x 1.41x 1.36x 1.29x 1.18x 1.18x 1.33x
======= ======= ======== ======== ======== ======== ========
Excluding interest on
deposits (2)......... 3.19x 5.79x 6.22x 2.96x 2.39x 2.15x 4.11x
======= ======= ======== ======== ======== ======== ========
</TABLE>
- --------
(1) Excluding the 1996 SAIF special assessment, the ratio of earnings to fixed
charges would have been 1.30x including interest on deposits and 3.28x
excluding interest on deposits.
(2) The calculation of this ratio excludes interest on deposits from income
before income taxes and extraordinary items and from fixed charges.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Downey Financial Corp.:
We consent to incorporation by reference in the registration statement on
Form S-3 of Downey Financial Corp. of our report dated January 20, 1999,
relating to the consolidated balance sheets of Downey Financial Corp. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998,
which report appears in the December 31, 1998 annual report on Form 10-K of
Downey Financial Corp. and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG LLP
KPMG LLP
Los Angeles, California
June 2, 1999
<PAGE>
Registration No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)_____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware
51-0055023
(State of incorporation)
(I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
DOWNEY FINANCIAL CORP.
(Exact name of obligor as specified in its charter)
Delaware 95-1953342
(State of incorporation) (I.R.S. employer identification no.)
3501 Jamboree Road
Newport Beach, California 92660
(Address of principal executive offices)
(Zip Code)
Junior Subordinated Deferrable Interest Debentures of Downey Financial Corp.
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. GENERAL INFORMATION.
- -------- --------------------
Furnish the following information as to the trustee:
Name and address of each examining or supervising authority
to which it is subject.
Federal Deposit Insurance Co. State Bank
Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
Whether it is authorized to exercise corporate trust
powers.
The trustee is authorized to exercise corporate trust
powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe
each affiliation:
Based upon an examination of the books and records of the
trustee and upon information
furnished by the obligor, the obligor is not an affiliate of
the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which
includes the certificate of authority of Wilmington Trust Company to commence
business and the authorization of Wilmington Trust Company to exercise corporate
trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section
321(b) of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 21st day
of May, 1999.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Donald G. MacKelcan By: /s/ James P. Lawler
----------------------------- ----------------------------
Assistant Secretary Name: James P. Lawler
Title: Vice President
2
<PAGE>
EXHIBIT A
AMENDED CHARTER
Wilmington Trust Company
Wilmington, Delaware
As existing on May 9, 1987
<PAGE>
Amended Charter
or
Act of Incorporation
of
Wilmington Trust Company
Wilmington Trust Company, originally incorporated by an Act of the General
Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware
Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which
company was changed to "Wilmington Trust Company" by an amendment filed in the
Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act
of Incorporation of which company has been from time to time amended and changed
by merger agreements pursuant to the corporation law for state banks and trust
companies of the State of Delaware, does hereby alter and amend its Charter or
Act of Incorporation so that the same as so altered and amended shall in its
entirety read as follows:
First: - The name of this corporation is Wilmington Trust Company.
Second: - The location of its principal office in the State of Delaware is
at Rodney Square North, in the City of Wilmington, County of New Castle; the
name of its resident agent is Wilmington Trust Company whose address is
Rodney Square North, in said City. In addition to such principal office,
the said corporation maintains and operates branch offices in the City of
Newark, New Castle County, Delaware, the Town of Newport, New Castle County,
Delaware, at Claymont, New Castle County, Delaware, at Greenville, New
Castle County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate branch
offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market
Street, and 3605 Market Street, all in the City of Wilmington, New Castle
County, Delaware, and such other branch offices or places of business as may
be authorized from time to time by the agency or agencies of the government
of the State of Delaware empowered to confer such authority.
Third: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation are to
do any or all of the things herein mentioned as fully and to the same extent
as natural persons might or could do and in any part of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of law or
equity and to make and use a common seal, and alter the seal at pleasure, to
hold,
<PAGE>
purchase, convey, mortgage or otherwise deal in real and personal estate and
property, and to appoint such officers and agents as the business of the
Corporation shall require, to make by-laws not inconsistent with the
Constitution or laws of the United States or of this State, to discount bills,
notes or other evidences of debt, to receive deposits of money, or securities
for money, to buy gold and silver bullion and foreign coins, to buy and sell
bills of exchange, and generally to use, exercise and enjoy all the powers,
rights, privileges and franchises incident to a corporation which are proper or
necessary for the transaction of the business of the Corporation hereby
created.
(2) To insure titles to real and personal property, or any estate or
interests therein, and to guarantee the holder of such property, real or
personal, against any claim or claims, adverse to his interest therein, and to
prepare and give certificates of title for any lands or premises in the State
of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the purchase,
sale, management and disposal of property of all descriptions, and to prepare
and execute all papers which may be necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every description, and to
carry on the business of conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry, plate,
deeds, bonds and any and all other personal property of every sort and kind,
from executors, administrators, guardians, public officers, courts, receivers,
assignees, trustees, and from all fiduciaries, and from all other persons and
individuals, and from all corporations whether state, municipal, corporate or
private, and to rent boxes, safes, vaults and other receptacles for such
property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or underwriting the stock,
bonds or other obligations of any corporation, association, state or
municipality, and may receive and manage any sinking fund therefor on such
terms as may be agreed upon between the two parties, and in like manner may act
as Treasurer of any corporation or municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or
other
<PAGE>
instrument issued by any state, municipality, body politic, corporation,
association or person, either alone or in conjunction with any other person or
persons, corporation or corporations.
(8) To guarantee the validity, performance or effect of any contract
or agreement, and the fidelity of persons holding places of responsibility or
trust; to become surety for any person, or persons, for the faithful
performance of any trust, office, duty, contract or agreement, either by itself
or in conjunction with any other person, or persons, corporation, or
corporations, or in like manner become surety upon any bond, recognizance,
obligation, judgment, suit, order, or decree to be entered in any court of
record within the State of Delaware or elsewhere, or which may now or hereafter
be required by any law, judge, officer or court in the State of Delaware or
elsewhere.
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor,
administrator, guardian, bailee, or in any other trust capacity in the
receiving, holding, managing, and disposing of any and all estates and
property, real, personal or mixed, and to be appointed as such trustee, trustee
in bankruptcy, receiver, assignee, assignee in bankruptcy, executor,
administrator, guardian or bailee by any persons, corporations, court, officer,
or authority, in the State of Delaware or elsewhere; and whenever this
Corporation is so appointed by any person, corporation, court, officer or
authority such trustee, trustee in bankruptcy, receiver, assignee, assignee in
bankruptcy, executor, administrator, guardian, bailee, or in any other trust
capacity, it shall not be required to give bond with surety, but its capital
stock shall be taken and held as security for the performance of the duties
devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise of
any of its powers hereby given, or for the performance of any of the duties
which it may undertake or be called upon to perform, or for the assumption of
any responsibility the said Corporation may be entitled to receive a proper
compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities, obligations,
contracts and evidences of indebtedness, of any private, public or municipal
corporation within and without the State of Delaware, or of the Government of
the United States, or of any state, territory, colony, or possession thereof,
or of any foreign government or country; to receive, collect, receipt for, and
dispose of
<PAGE>
interest, dividends and income upon and from any of the bonds, mortgages,
debentures, notes, shares of capital stock, securities, obligations, contracts,
evidences of indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages, debentures, notes, shares of
capital stock, securities, obligations, contracts, evidences of indebtedness
and other property, any and all the rights, powers and privileges of individual
owners thereof, including the right to vote thereon; to invest and deal in and
with any of the moneys of the Corporation upon such securities and in such
manner as it may think fit and proper, and from time to time to vary or realize
such investments; to issue bonds and secure the same by pledges or deeds of
trust or mortgages of or upon the whole or any part of the property held or
owned by the Corporation, and to sell and pledge such bonds, as and when the
Board of Directors shall determine, and in the promotion of its said corporate
business of investment and to the extent authorized by law, to lease, purchase,
hold, sell, assign, transfer, pledge, mortgage and convey real and personal
property of any name and nature and any estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred by
the laws of the State of Delaware, it is hereby expressly provided that the
said Corporation shall also have the following powers:
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of the world.
(2) To acquire the good will, rights, property and franchises and to
undertake the whole or any part of the assets and liabilities of any person,
firm, association or corporation, and to pay for the same in cash, stock of
this Corporation, bonds or otherwise; to hold or in any manner to dispose of
the whole or any part of the property so purchased; to conduct in any lawful
manner the whole or any part of any business so acquired, and to exercise all
the powers necessary or convenient in and about the conduct and management of
such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and to
lease, sell, exchange, transfer, or in any manner whatever dispose of property,
real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of every
kind with any person, firm, association or corporation, and, without limit as
to amount, to draw, make, accept, endorse, discount, execute and issue
promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and
other negotiable or
<PAGE>
transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same extent as natural
persons might or could do, to purchase or otherwise acquire, to hold, own, to
mortgage, sell, convey or otherwise dispose of, real and personal property, of
every class and description, in any State, District, Territory or Colony of the
United States, and in any foreign country or place.
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except where otherwise
expressed in said paragraph) be nowise limited or restricted by reference to or
inference from the terms of any other clause of this or any other paragraph in
this charter, but that the objects, purposes and powers specified in each of
the clauses of this paragraph shall be regarded as independent objects,
purposes and powers.
Fourth: - (a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is forty-one million (41,000,000)
shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one or
more series as may from time to time be determined by the Board of Directors
each of said series to be distinctly designated. All shares of any one
series of Preferred Stock shall be alike in every particular, except that
there may be different dates from which dividends, if any, thereon shall be
cumulative, if made cumulative. The voting powers and the preferences and
relative, participating, optional and other special rights of each such
series, and the qualifications, limitations or restrictions thereof, if any,
may differ from those of any and all other series at any time outstanding;
and, subject to the provisions of subparagraph 1 of Paragraph (c) of this
Article Fourth, the Board of Directors of the Corporation is hereby
expressly granted authority to fix by resolution or resolutions adopted
prior to the issuance of any shares of a particular series of Preferred
Stock, the voting powers and the designations, preferences and relative,
optional and other special rights, and the qualifications, limitations and
restrictions of such series, including, but without limiting the generality
of the
<PAGE>
foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number may be
increased (except where otherwise provided by the Board of Directors) or
decreased (but not below the number of shares thereof then outstanding) from
time to time by like action of the Board of Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series shall be paid, the
extent of the preference or relation, if any, of such dividends to the
dividends payable on any other class or classes, or series of the same or other
class of stock and whether such dividends shall be cumulative or non-
cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares of any other
class or classes or of any series of the same or any other class or classes of
stock of the Corporation and the terms and conditions of such conversion or
exchange;
(4) Whether or not Preferred Stock of such series shall be subject
to redemption, and the redemption price or prices and the time or times at
which, and the terms and conditions on which, Preferred Stock of such series
may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of such
series upon the voluntary or involuntary liquidation, merger, consolidation,
distribution or sale of assets, dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase account,
if any, to be provided for the Preferred Stock of such series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of the foregoing
include the right, voting as a series or by itself or together with other
series of Preferred Stock or all series of Preferred Stock as a class, to elect
one or more directors of the Corporation if there shall have been a default in
the payment of dividends on any one or more series of Preferred Stock or under
such circumstances and on such conditions as the Board of Directors may
determine.
(c) (1) After the requirements with respect to preferential dividends on
the Preferred Stock (fixed in accordance with the provisions of section (b)
of this Article
<PAGE>
Fourth), if any, shall have been met and after the Corporation shall have
complied with all the requirements, if any, with respect to the setting
aside of sums as sinking funds or redemption or purchase accounts (fixed in
accordance with the provisions of section (b) of this Article Fourth), and
subject further to any conditions which may be fixed in accordance with the
provisions of section (b) of this Article Fourth, then and not otherwise the
holders of Common Stock shall be entitled to receive such dividends as may
be declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amount, if any,
(fixed in accordance with the provisions of section (b) of this Article
Fourth), to be distributed to the holders of Preferred Stock in the event of
voluntary or involuntary liquidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation, the holders of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation,
tangible and intangible, of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of Common Stock held
by them respectively.
(3) Except as may otherwise be required by law or by the provisions
of such resolution or resolutions as may be adopted by the Board of Directors
pursuant to section (b) of this Article Fourth, each holder of Common Stock
shall have one vote in respect of each share of Common Stock held on all
matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series
of stock or of other securities of the Corporation shall have any preemptive
right to purchase or subscribe for any unissued stock of any class or series
or any additional shares of any class or series to be issued by reason of
any increase of the authorized capital stock of the Corporation of any class
or series, or bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock of the Corporation of
any class or series, or carrying any right to purchase stock of any class or
series, but any such unissued stock, additional authorized issue of shares
of any class or series of stock or securities convertible into or
exchangeable for stock, or carrying any right to purchase stock, may be
issued and disposed of pursuant to resolution of the Board of Directors to
such persons, firms, corporations or associations, whether such holders or
others, and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of Preferred
Stock in relation to the relative powers, preferences and rights of each
other series of Preferred Stock shall, in each case, be as fixed from time
to time by the Board of
<PAGE>
Directors in the resolution or resolutions adopted pursuant to authority
granted in section (b) of this Article Fourth and the consent, by class or
series vote or otherwise, of the holders of such of the series of Preferred
Stock as are from time to time outstanding shall not be required for the
issuance by the Board of Directors of any other series of Preferred Stock
whether or not the powers, preferences and rights of such other series shall
be fixed by the Board of Directors as senior to, or on a parity with, the
powers, preferences and rights of such outstanding series, or any of them;
provided, however, that the Board of Directors may provide in the resolution
or resolutions as to any series of Preferred Stock adopted pursuant to
section (b) of this Article Fourth that the consent of the holders of a
majority (or such greater proportion as shall be therein fixed) of the
outstanding shares of such series voting thereon shall be required for the
issuance of any or all other series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of Directors of
the Corporation shall determine and on such terms and for such consideration
as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(h) The authorized amount of shares of Common Stock and of Preferred Stock
may, without a class or series vote, be increased or decreased from time to
time by the affirmative vote of the holders of a majority of the stock of
the Corporation entitled to vote thereon.
Fifth: - (a) The business and affairs of the Corporation shall be conducted
and managed by a Board of Directors. The number of directors constituting
the entire Board shall be not less than five nor more than twenty-five as
fixed from time to time by vote of a majority of the whole Board, provided,
however, that the number of directors shall not be reduced so as to shorten
the term of any director at the time in office, and provided further, that
the number of directors constituting the whole Board shall be twenty-four
until otherwise fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the whole
Board permits, with the term of office of one class expiring each year. At
the annual meeting of stockholders in 1982, directors of the first class
shall be elected to hold office for a term expiring at the next succeeding
annual meeting, directors of the second class
<PAGE>
shall be elected to hold office for a term expiring at the second succeeding
annual meeting and directors of the third class shall be elected to hold
office for a term expiring at the third succeeding annual meeting. Any
vacancies in the Board of Directors for any reason, and any newly created
directorships resulting from any increase in the directors, may be filled by
the Board of Directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen shall hold
office until the next annual election of directors. At such election, the
stockholders shall elect a successor to such director to hold office until
the next election of the class for which such director shall have been
chosen and until his successor shall be elected and qualified. No decrease
in the number of directors shall shorten the term of any incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law, this Charter or
Act of Incorporation or the By-Laws of the Corporation), any director or the
entire Board of Directors of the Corporation may be removed at any time
without cause, but only by the affirmative vote of the holders of two-thirds
or more of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose.
(d) Nominations for the election of directors may be made by the Board of
Directors or by any stockholder entitled to vote for the election of
directors. Such nominations shall be made by notice in writing, delivered
or mailed by first class United States mail, postage prepaid, to the
Secretary of the Corporation not less than 14 days nor more than 50 days
prior to any meeting of the stockholders called for the election of
directors; provided, however, that if less than 21 days' notice of the
meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than
the close of the seventh day following the day on which notice of the
meeting was mailed to stockholders. Notice of nominations which are
proposed by the Board of Directors shall be given by the Chairman on behalf
of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed
in such notice, (ii) the principal occupation or employment of such nominee
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine and
declare to
<PAGE>
the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
Sixth: - The Directors shall choose such officers, agent and servants as may
be provided in the By-Laws as they may from time to time find necessary or
proper.
Seventh: - The Corporation hereby created is hereby given the same powers,
rights and privileges as may be conferred upon corporations organized under
the Act entitled "An Act Providing a General Corporation Law", approved
March 10, 1899, as from time to time amended.
Eighth: - This Act shall be deemed and taken to be a private Act.
Ninth: - This Corporation is to have perpetual existence.
Tenth: - The Board of Directors, by resolution passed by a majority of the
whole Board, may designate any of their number to constitute an Executive
Committee, which Committee, to the extent provided in said resolution, or in
the By-Laws of the Company, shall have and may exercise all of the powers of
the Board of Directors in the management of the business and affairs of the
Corporation, and shall have power to authorize the seal of the Corporation
to be affixed to all papers which may require it.
Eleventh: - The private property of the stockholders shall not be liable for
the payment of corporate debts to any extent whatever.
Twelfth: - The Corporation may transact business in any part of the world.
Thirteenth: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by a vote
of the majority of the entire Board. The stockholders may make, alter or
repeal any By-Law whether or not adopted by them, provided however, that any
such additional By-Laws, alterations or repeal may be adopted only by the
affirmative vote of the holders of two-thirds or more of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as
<PAGE>
one class).
Fourteenth: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the Company
outside of the State of Delaware at such places as may be from time to time
designated by them.
Fifteenth: - (a) In addition to any affirmative vote required by law, and
except as otherwise expressly provided in sections (b) and (c) of this
Article Fifteenth:
(A) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with or into (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself an
Interested Stockholder), which, after such merger or consolidation, would be an
Affiliate (as hereinafter defined) of an Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions) to or with
any Interested Stockholder or any Affiliate of any Interested Stockholder of
any assets of the Corporation or any Subsidiary having an aggregate fair market
value of $1,000,000 or more, or
(C) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of related transactions) of any securities of
the Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate fair market value
of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
(E) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or consolidation
of the Corporation with any of its Subsidiaries or any similar transaction
(whether or not with or into or otherwise involving an Interested Stockholder)
which has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible
securities of the Corporation or any Subsidiary which is directly or indirectly
owned by any Interested Stockholder, or any Affiliate of any Interested
Stockholder,
<PAGE>
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article Fifteenth as one class ("Voting Shares"). Such affirmative vote shall
be required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in
this Article Fifteenth shall mean any transaction
which is referred to any one or more of clauses (A)
through (E) of paragraph 1 of the section (a).
(b) The provisions of section (a) of this Article Fifteenth shall not be
applicable to any particular business combination and such business
combination shall require only such affirmative vote as is required by law
and any other provisions of the Charter or Act of Incorporation of By-Laws
if such business combination has been approved by a majority of the whole
Board.
(c) For the purposes of this Article Fifteenth:
(1) A "person" shall mean any individual firm, corporation or other entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary) who
or which as of the record date for the determination of stockholders
entitled to notice of and to vote on such business combination, or
immediately prior to the consummation of any such transaction:
(A) is the beneficial owner, directly or indirectly, of more than 10% of
the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within two years
prior thereto was the beneficial owner, directly or indirectly, of not
less than 10% of the then outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any share of capital
stock of the Corporation which were at any time within two years prior
thereto beneficially owned by any Interested Stockholder, and such
assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933.
<PAGE>
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates (as
hereafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has (i) the
right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote pursuant to
any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any other
person with which such first mentioned person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of any shares of capital stock
of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned through
application of paragraph (3) above but shall not include any other Voting
Shares which may be issuable pursuant to any agreement, or upon exercise of
conversion rights, warrants or options or otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings given
those terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on December 31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security (as defined in Rule 3a11-1 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect in
December 31, 1981) is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Investment
Stockholder set forth in paragraph (2) of this section (c), the term
"Subsidiary" shall mean only a corporation of which a majority of each class
of equity security is owned, directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty to determine
for the purposes of this Article Fifteenth on the basis of information
known to them, (1) the number of Voting Shares beneficially owned by any
person (2) whether a person is an Affiliate or Associate of another, (3)
whether a person has an agreement, arrangement or understanding with
another as to the matters referred to in paragraph (3) of section (c), or
(4) whether the assets subject to any business combination or the
consideration received for the issuance or
<PAGE>
transfer of securities by the Corporation, or any Subsidiary has an
aggregate fair market value of $1,000,000 or more.
(e) Nothing contained in this Article Fifteenth shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed
by law.
Sixteenth: Notwithstanding any other provision of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and in addition to any
other vote that may be required by law, this Charter or Act of Incorporation
by the By-Laws), the affirmative vote of the holders of at least two-thirds
of the outstanding shares of the capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose
as one class) shall be required to amend, alter or repeal any provision of
Articles Fifth, Thirteenth, Fifteenth or Sixteenth of this Charter or Act of
Incorporation.
Seventeenth: (a) a Director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except to the extent such exemption from liability or
limitation thereof is not permitted under the Delaware General Corporation
Laws as the same exists or may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a Director of the Corporation
existing hereunder with respect to any act or omission occurring prior to
the time of such repeal or modification."
<PAGE>
EXHIBIT B
BY-LAWS
- --------------------------------------------------------------------------------
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
<PAGE>
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
Stockholders' Meetings
Section 1. The Annual Meeting of Stockholders shall be held on the third
Thursday in April each year at the principal office at the Company or at such
other date, time, or place as may be designated by resolution by the Board of
Directors.
Section 2. Special meetings of all stockholders may be called at any time
by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given by
mailing to each stockholder at least ten (10) days before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the Company
issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
Directors
Section 1. The number and classification of the Board of Directors shall
be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72) years
shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for three
years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed and
conducted by the Board of Directors.
<PAGE>
Section 5. The Board of Directors shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Board of
Directors or the President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of any
special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability to
act, or disqualification of any director, the Board of Directors, although less
than a quorum, shall have the right to elect the successor who shall hold office
for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
<PAGE>
ARTICLE III
Committees
Section 1. Executive Committee
(A) The Executive Committee shall be composed of not more than nine
members who shall be selected by the Board of Directors from its own members and
who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the Board of
Directors when it is not in session to transact all business for and in behalf
of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal office of the
Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Executive
Committee or at the call of the Chairman of the Board of Directors. The
majority of its members shall be necessary to constitute a quorum for the
transaction of business. Special meetings of the Executive Committee may be
held at any time when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall be kept
and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient severity to
prevent the conduct and management of the affairs and business of the Company by
its directors and officers as contemplated by these By-Laws any two available
members of the Executive Committee as constituted immediately prior to such
disaster shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Company in accordance with the
provisions of Article III of these By-Laws; and if less than three members of
the Trust Committee is constituted immediately prior to such disaster shall be
available for the transaction of its business, such Executive Committee shall
also be empowered to exercise all of the powers reserved to the Trust Committee
under Article III Section 2 hereof. In the event of the unavailability, at such
time, of a minimum of two members of such Executive Committee, any three
available directors shall constitute the Executive Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the foregoing provisions of this Section. This By-Law shall be subject to
implementation by Resolutions of the Board of Directors presently existing or
hereafter passed from time to time
<PAGE>
for that purpose, and any provisions of these By-Laws (other than this Section)
and any resolutions which are contrary to the provisions of this Section or to
the provisions of any such implementary Resolutions shall be suspended during
such a disaster period until it shall be determined by any interim Executive
Committee acting under this section that it shall be to the advantage of the
Company to resume the conduct and management of its affairs and business under
all of the other provisions of these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than thirteen
members who shall be selected by the Board of Directors, a majority of whom
shall be members of the Board of Directors and who shall hold office during the
pleasure of the Board.
(B) The Trust Committee shall have general supervision over the Trust
Department and the investment of trust funds, in all matters, however, being
subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office of the
Company or elsewhere in its discretion at such times to be determined by a
majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be kept
and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint Committees
and/or designate officers or employees of the Company to whom supervision over
the investment of trust funds may be delegated when the Trust Committee is not
in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members who shall
be selected by the Board of Directors from its own members, none of whom shall
be an officer of the Company, and shall hold office at the pleasure of the
Board.
(B) The Audit Committee shall have general supervision over the Audit
Division in all matters however subject to the approval of the Board of
Directors; it shall consider all matters brought to its attention by the officer
in charge of the Audit Division, review all reports of examination of the
Company made by any governmental agency or such independent auditor employed for
that purpose, and make such recommendations to the Board of Directors with
respect thereto or with respect to any other matters pertaining to auditing the
<PAGE>
Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the majority
of its members shall deem it to be proper for the transaction of its business,
and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more than
five (5) members who shall be selected by the Board of Directors from its own
members who are not officers of the Company and who shall hold office during the
pleasure of the Board.
(B) The Compensation Committee shall in general advise upon all
matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at any time
by the Chairman of the Compensation Committee, the Chairman of the Board of
Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected by the
Board of Directors as an associate director, to serve during the pleasure of the
Board.
(B) An associate director shall be entitled to attend all directors
meetings and participate in the discussion of all matters brought to the Board,
with the exception that he would have no right to vote. An associate director
will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any Committee
created under Article III of the By-Laws of this Company, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absence or
disqualified member.
<PAGE>
ARTICLE IV
Officers
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
-------------------------------
Board of Directors shall preside at all meetings of the Board of Directors at
which the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining to
the office of the President conferred or imposed upon him by statute or assigned
to him by the Board of Directors in the absence of the Chairman of the Board the
President shall have the powers and duties of the Chairman of the Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however denominated
by the Board of Directors, who may at any time perform all the duties of the
Chairman of the Board of Directors and/or the President and such other powers
and duties as may from time to time be assigned to them by the Board of
Directors, the Executive Committee, the Chairman of the Board or the President
and by the officer in charge of the department or division to which they are
assigned.
Section 6. The Secretary shall attend to the giving of notice of meetings
of the stockholders and the Board of Directors, as well as the Committees
thereof, to the keeping of accurate minutes of all such meetings and to
recording the same in the minute books of the Company. In addition to the other
notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
<PAGE>
Section 7. The Treasurer shall have general supervision over all assets
and liabilities of the Company. He shall be custodian of and responsible for
all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to all
Vice Presidents with such functional titles as shall be determined from time to
time by the Board of Directors, who shall ex officio hold the office Assistant
Secretary of this Company and who may perform such duties as may be prescribed
by the officer in charge of the department or division to whom they are
assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
ARTICLE V
Stock and Stock Certificates
Section 1. Shares of stock shall be transferrable on the books of the
Company and a
<PAGE>
transfer book shall be kept in which all transfers of stock shall be recorded.
Section 2. Certificate of stock shall bear the signature of the President
or any Vice President, however denominated by the Board of Directors and
countersigned by the Secretary or Treasurer or an Assistant Secretary, and the
seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of
stock shall be issued only upon giving such security as may be satisfactory to
the Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix in
advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
Seal
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner
circle the words "Wilmington, Delaware."
ARTICLE VII
Fiscal Year
Section 1. The fiscal year of the Company shall be the calendar year.
<PAGE>
ARTICLE VIII
Execution of Instruments of the Company
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
Compensation of Directors and Members of Committees
Section 1. Directors and associate directors of the Company, other than
salaried officers of the Company, shall be paid such reasonable honoraria or
fees for attending meetings of the Board of Directors as the Board of Directors
may from time to time determine. Directors and associate directors who serve as
members of committees, other than salaried employees of the Company, shall be
paid such reasonable honoraria or fees for services as members of committees as
the Board of Directors shall from time to time determine and directors and
associate directors may be employed by the Company for such special services as
the Board of Directors may from time to time determine and shall be paid for
such special services so performed reasonable compensation as may be determined
by the Board of Directors.
ARTICLE X
Indemnification
Section 1. (A) The Corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or was
a director, officer, employee or agent of the Corporation or is or was
<PAGE>
serving at the request of the Corporation as a director, officer, employee,
fiduciary or agent of another corporation or of a partnership, joint venture,
trust, enterprise or non-profit entity, including service with respect to
employee benefit plans, against all liability and loss suffered and expenses
reasonably incurred by such person. The Corporation shall indemnify a person in
connection with a proceeding initiated by such person only if the proceeding was
authorized by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in defending any
proceeding in advance of its final disposition, provided, however, that the
-------- -------
payment of expenses incurred by a Director officer in his capacity as a Director
or officer in advance of the final disposition of the proceeding shall be made
only upon receipt of an undertaking by the Director or officer to repay all
amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses, under this
Article X is not paid in full within ninety days after a written claim therefor
has been received by the Corporation the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification of payment of expenses under
applicable law.
(D) The rights conferred on any person by this Article X shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Charter or Act of Incorporation, these By-
Laws, agreement, vote of stockholders or disinterested Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions of this
Article X shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
ARTICLE XI
Amendments to the By-Laws
Section 1. These By-Laws may be altered, amended or repealed, in whole or
in part, and any new By-Law or By-Laws adopted at any regular or special meeting
of the Board of Directors by a vote of the majority of all the members of the
Board of Directors then in office.
<PAGE>
EXHIBIT C
Section 321(b) Consent
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended,
Wilmington Trust Company hereby consents that reports of examinations by
Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: May 21, 1999 By: /s/ James P. Lawler
---------------------------------------
Name: James P. Lawler
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and savings banks with
state publication requirements. It has not been approved by any state banking
authorities. Refer to your appropriate state banking authorities for your state
publication requirements.
<TABLE>
<CAPTION>
R E P O R T O F C O N D I T I O N
<S> <C> <C>
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- -------------------------------------------- ----------------------------------
Name of Bank City
in the State of DELAWARE, at the close of business on December 31, 1998.
--------
</TABLE>
ASSETS
Thousands of dollars
Cash and balances due from depository institutions:
<TABLE>
<S> <C>
Noninterest-bearing balances and currency and coins................ 194,839
Interest-bearing balances.......................................... 0
Held-to-maturity securities............................................. 73,911
Available-for-sale securities........................................... 1,228,194
Federal funds sold and securities purchased under agreements to resell.. 203,500
Loans and lease financing receivables:
Loans and leases, net of unearned income. . . . . . . 4,167,235
LESS: Allowance for loan and lease losses........... 66,897
LESS: Allocated transfer risk reserve............... 0
Loans and leases, net of unearned income, allowance, and reserve... 4,100,338
Assets held in trading accounts......................................... 0
Premises and fixed assets (including capitalized leases)................ 139,079
Other real estate owned................................................. 1,532
Investments in unconsolidated subsidiaries and associated companies..... 1,052
Customers' liability to this bank on acceptances outstanding............ 0
Intangible assets....................................................... 3,047
Other assets............................................................ 98,867
Total assets............................................................ 6,044,359
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits:
In domestic offices......................................................... 4,474,659
Noninterest-bearing . . . . . . . . 1,037,549
Interest-bearing................... 3,437,110
Federal funds purchased and Securities sold under agreements to repurchase.. 390,060
Demand notes issued to the U.S. Treasury.................................... 18,944
Trading liabilities (from Schedule RC-D).................................... 0
Other borrowed money:....................................................... ///////
With original maturity of one year or less............................. 555,000
With original maturity of more than one year........................... 43,000
Bank's liability on acceptances executed and outstanding.................... 0
Subordinated notes and debentures........................................... 0
Other liabilities (from Schedule RC-G)...................................... 90,951
Total liabilities........................................................... 5,572,614
EQUITY CAPITAL
Perpetual preferred stock and related surplus............................... 0
Common Stock................................................................ 500
Surplus (exclude all surplus related to preferred stock).................... 62,118
Undivided profits and capital reserves...................................... 403,264
Net unrealized holding gains (losses) on available-for-sale securities...... 5,863
Total equity capital........................................................ 471,745
Total liabilities, limited-life preferred stock, and equity capital......... 6,044,359
</TABLE>
<PAGE>
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)_____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
DOWNEY FINANCIAL CORP.
DOWNEY FINANCIAL CAPITAL TRUST I
(Exact name of obligor as specified in its charter)
Delaware 95-1953342
(State of incorporation) (I.R.S. employer identification no.)
3501 Jamboree Road
Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
___% Cumulative Capital Securities of Downey Financial Capital Trust I
(Title of the indenture securities)
================================================================================
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor is
not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes
the certificate of authority of Wilmington Trust Company to
commence business and the authorization of Wilmington Trust
Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b)
of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 21st day
of May, 1999.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Donald G. MacKelcan By: /s/ James P. Lawler
------------------------- -------------------------
Assistant Secretary Name: James P. Lawler
Title: Vice President
2
<PAGE>
EXHIBIT A
AMENDED CHARTER
Wilmington Trust Company
Wilmington, Delaware
As existing on May 9, 1987
<PAGE>
Amended Charter
or
Act of Incorporation
of
Wilmington Trust Company
Wilmington Trust Company, originally incorporated by an Act of the General
Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware
Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which
company was changed to "Wilmington Trust Company" by an amendment filed in the
Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act
of Incorporation of which company has been from time to time amended and changed
by merger agreements pursuant to the corporation law for state banks and trust
companies of the State of Delaware, does hereby alter and amend its Charter or
Act of Incorporation so that the same as so altered and amended shall in its
entirety read as follows:
First: - The name of this corporation is Wilmington Trust Company.
Second: - The location of its principal office in the State of Delaware is
at Rodney Square North, in the City of Wilmington, County of New Castle;
the name of its resident agent is Wilmington Trust Company whose address
is Rodney Square North, in said City. In addition to such principal
office, the said corporation maintains and operates branch offices in the
City of Newark, New Castle County, Delaware, the Town of Newport, New
Castle County, Delaware, at Claymont, New Castle County, Delaware, at
Greenville, New Castle County Delaware, and at Milford Cross Roads, New
Castle County, Delaware, and shall be empowered to open, maintain and
operate branch offices at Ninth and Shipley Streets, 418 Delaware Avenue,
2120 Market Street, and 3605 Market Street, all in the City of Wilmington,
New Castle County, Delaware, and such other branch offices or places of
business as may be authorized from time to time by the agency or agencies
of the government of the State of Delaware empowered to confer such
authority.
Third: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation are
to do any or all of the things herein mentioned as fully and to the same
extent as natural persons might or could do and in any part of the world,
viz.:
(1) To sue and be sued, complain and defend in any Court of law or
equity
<PAGE>
and to make and use a common seal, and alter the seal at pleasure, to
hold, purchase, convey, mortgage or otherwise deal in real and
personal estate and property, and to appoint such officers and agents
as the business of the Corporation shall require, to make by-laws not
inconsistent with the Constitution or laws of the United States or of
this State, to discount bills, notes or other evidences of debt, to
receive deposits of money, or securities for money, to buy gold and
silver bullion and foreign coins, to buy and sell bills of exchange,
and generally to use, exercise and enjoy all the powers, rights,
privileges and franchises incident to a corporation which are proper
or necessary for the transaction of the business of the Corporation
hereby created.
(2) To insure titles to real and personal property, or any estate or
interests therein, and to guarantee the holder of such property, real
or personal, against any claim or claims, adverse to his interest
therein, and to prepare and give certificates of title for any lands
or premises in the State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every description,
and to carry on the business of conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry, plate,
deeds, bonds and any and all other personal property of every sort and
kind, from executors, administrators, guardians, public officers,
courts, receivers, assignees, trustees, and from all fiduciaries, and
from all other persons and individuals, and from all corporations
whether state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or underwriting
the stock, bonds or other obligations of any corporation, association,
state or municipality, and may receive and manage any sinking fund
therefor on such terms as may be agreed upon between the two parties,
and in like manner may act as Treasurer of any corporation or
municipality.
2
<PAGE>
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body politic,
corporation, association or person, either alone or in conjunction
with any other person or persons, corporation or corporations.
(8) To guarantee the validity, performance or effect of any contract
or agreement, and the fidelity of persons holding places of
responsibility or trust; to become surety for any person, or persons,
for the faithful performance of any trust, office, duty, contract or
agreement, either by itself or in conjunction with any other person,
or persons, corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment, suit, order,
or decree to be entered in any court of record within the State of
Delaware or elsewhere, or which may now or hereafter be required by
any law, judge, officer or court in the State of Delaware or
elsewhere.
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity in the receiving, holding, managing, and disposing of any and
all estates and property, real, personal or mixed, and to be appointed
as such trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian or bailee by any
persons, corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so appointed
by any person, corporation, court, officer or authority such trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity, it shall not be required to give bond with surety, but its
capital stock shall be taken and held as security for the performance
of the duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise of
any of its powers hereby given, or for the performance of any of the
duties which it may undertake or be called upon to perform, or for the
assumption of any responsibility the said Corporation may be entitled
to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages, debentures,
shares of capital stock, and other securities, obligations, contracts
and evidences of indebtedness, of any private, public or municipal
corporation within and without the State of Delaware, or of the
Government of the
3
<PAGE>
United States, or of any state, territory, colony, or possession
thereof, or of any foreign government or country; to receive, collect,
receipt for, and dispose of interest, dividends and income upon and
from any of the bonds, mortgages, debentures, notes, shares of capital
stock, securities, obligations, contracts, evidences of indebtedness
and other property held and owned by it, and to exercise in respect of
all such bonds, mortgages, debentures, notes, shares of capital stock,
securities, obligations, contracts, evidences of indebtedness and
other property, any and all the rights, powers and privileges of
individual owners thereof, including the right to vote thereon; to
invest and deal in and with any of the moneys of the Corporation upon
such securities and in such manner as it may think fit and proper, and
from time to time to vary or realize such investments; to issue bonds
and secure the same by pledges or deeds of trust or mortgages of or
upon the whole or any part of the property held or owned by the
Corporation, and to sell and pledge such bonds, as and when the Board
of Directors shall determine, and in the promotion of its said
corporate business of investment and to the extent authorized by law,
to lease, purchase, hold, sell, assign, transfer, pledge, mortgage and
convey real and personal property of any name and nature and any
estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred by
the laws of the State of Delaware, it is hereby expressly provided that
the said Corporation shall also have the following powers:
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of the
world.
(2) To acquire the good will, rights, property and franchises and to
undertake the whole or any part of the assets and liabilities of any
person, firm, association or corporation, and to pay for the same in
cash, stock of this Corporation, bonds or otherwise; to hold or in any
manner to dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any part of
any business so acquired, and to exercise all the powers necessary or
convenient in and about the conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and to
lease, sell, exchange, transfer, or in any manner whatever dispose of
property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of every
kind with
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any person, firm, association or corporation, and, without limit as to
amount, to draw, make, accept, endorse, discount, execute and issue
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same extent as
natural persons might or could do, to purchase or otherwise acquire,
to hold, own, to mortgage, sell, convey or otherwise dispose of, real
and personal property, of every class and description, in any State,
District, Territory or Colony of the United States, and in any foreign
country or place.
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except where
otherwise expressed in said paragraph) be nowise limited or restricted
by reference to or inference from the terms of any other clause of
this or any other paragraph in this charter, but that the objects,
purposes and powers specified in each of the clauses of this paragraph
shall be regarded as independent objects, purposes and powers.
Fourth: - (a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is forty-one million
(41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one or
more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares of
any one series of Preferred Stock shall be alike in every particular,
except that there may be different dates from which dividends, if any,
thereon shall be cumulative, if made cumulative. The voting powers and the
preferences and relative, participating, optional and other special rights
of each such series, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any
time outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article Fourth, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by resolution or
resolutions adopted prior to the
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issuance of any shares of a particular series of Preferred Stock, the
voting powers and the designations, preferences and relative, optional and
other special rights, and the qualifications, limitations and restrictions
of such series, including, but without limiting the generality of the
foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number may
be increased (except where otherwise provided by the Board of
Directors) or decreased (but not below the number of shares thereof
then outstanding) from time to time by like action of the Board of
Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series shall be
paid, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes, or
series of the same or other class of stock and whether such dividends
shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares of
any other class or classes or of any series of the same or any other
class or classes of stock of the Corporation and the terms and
conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be subject to
redemption, and the redemption price or prices and the time or times
at which, and the terms and conditions on which, Preferred Stock of
such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of such
series upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding-
up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase account,
if any, to be provided for the Preferred Stock of such series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of the
foregoing include the right, voting as a series or by itself or
together with other series of Preferred Stock or all series of
Preferred Stock as a class, to elect one or more directors of the
Corporation if there shall have been a default in the payment of
dividends on any one or more series of Preferred Stock or under such
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circumstances and on such conditions as the Board of Directors may
determine.
(c) (1) After the requirements with respect to preferential dividends on
the Preferred Stock (fixed in accordance with the provisions of section
(b) of this Article Fourth), if any, shall have been met and after the
Corporation shall have complied with all the requirements, if any, with
respect to the setting aside of sums as sinking funds or redemption or
purchase accounts (fixed in accordance with the provisions of section (b)
of this Article Fourth), and subject further to any conditions which may
be fixed in accordance with the provisions of section (b) of this Article
Fourth, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to time by
the Board of Directors.
(2) After distribution in full of the preferential amount, if any,
(fixed in accordance with the provisions of section (b) of this
Article Fourth), to be distributed to the holders of Preferred Stock
in the event of voluntary or involuntary liquidation, distribution or
sale of assets, dissolution or winding-up, of the Corporation, the
holders of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and intangible, of
whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of Common Stock held by them
respectively.
(3) Except as may otherwise be required by law or by the provisions
of such resolution or resolutions as may be adopted by the Board of
Directors pursuant to section (b) of this Article Fourth, each holder
of Common Stock shall have one vote in respect of each share of Common
Stock held on all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or
series of stock or of other securities of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued stock of any
class or series or any additional shares of any class or series to be
issued by reason of any increase of the authorized capital stock of the
Corporation of any class or series, or bonds, certificates of
indebtedness, debentures or other securities convertible into or
exchangeable for stock of the Corporation of any class or series, or
carrying any right to purchase stock of any class or series, but any such
unissued stock, additional authorized issue of shares of any class or
series of stock or securities convertible into or exchangeable for stock,
or carrying any right to purchase stock, may be issued and
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<PAGE>
disposed of pursuant to resolution of the Board of Directors to such
persons, firms, corporations or associations, whether such holders or
others, and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and rights
of each other series of Preferred Stock shall, in each case, be as fixed
from time to time by the Board of Directors in the resolution or
resolutions adopted pursuant to authority granted in section (b) of this
Article Fourth and the consent, by class or series vote or otherwise, of
the holders of such of the series of Preferred Stock as are from time to
time outstanding shall not be required for the issuance by the Board of
Directors of any other series of Preferred Stock whether or not the
powers, preferences and rights of such other series shall be fixed by the
Board of Directors as senior to, or on a parity with, the powers,
preferences and rights of such outstanding series, or any of them;
provided, however, that the Board of Directors may provide in the
resolution or resolutions as to any series of Preferred Stock adopted
pursuant to section (b) of this Article Fourth that the consent of the
holders of a majority (or such greater proportion as shall be therein
fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of Directors
of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for
such consideration as shall be fixed by the Board of Directors.
(h) The authorized amount of shares of Common Stock and of Preferred Stock
may, without a class or series vote, be increased or decreased from time
to time by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote thereon.
Fifth: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more than
twenty-five as fixed from time to time by vote of a majority of the whole
Board, provided, however, that the number of directors shall not be
reduced so as to shorten the term of any director at the
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time in office, and provided further, that the number of directors
constituting the whole Board shall be twenty-four until otherwise fixed by
a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the
whole Board permits, with the term of office of one class expiring each
year. At the annual meeting of stockholders in 1982, directors of the
first class shall be elected to hold office for a term expiring at the
next succeeding annual meeting, directors of the second class shall be
elected to hold office for a term expiring at the second succeeding annual
meeting and directors of the third class shall be elected to hold office
for a term expiring at the third succeeding annual meeting. Any vacancies
in the Board of Directors for any reason, and any newly created
directorships resulting from any increase in the directors, may be filled
by the Board of Directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen shall
hold office until the next annual election of directors. At such election,
the stockholders shall elect a successor to such director to hold office
until the next election of the class for which such director shall have
been chosen and until his successor shall be elected and qualified. No
decrease in the number of directors shall shorten the term of any
incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law, this Charter or
Act of Incorporation or the By-Laws of the Corporation), any director or
the entire Board of Directors of the Corporation may be removed at any
time without cause, but only by the affirmative vote of the holders of
two-thirds or more of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the Board of
Directors or by any stockholder entitled to vote for the election of
directors. Such nominations shall be made by notice in writing, delivered
or mailed by first class United States mail, postage prepaid, to the
Secretary of the Corporation not less than 14 days nor more than 50 days
prior to any meeting of the stockholders called for the election of
directors; provided, however, that if less than 21 days' notice of the
meeting is given to stockholders, such written notice shall be delivered
or mailed, as prescribed, to the Secretary of the Corporation not later
than the close of the seventh day following the day on which notice of the
meeting was mailed to stockholders. Notice of nominations which are
proposed by the Board of Directors
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shall be given by the Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed
in such notice, (ii) the principal occupation or employment of such
nominee and (iii) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with
the foregoing procedure, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
Sixth: - The Directors shall choose such officers, agent and servants as
may be provided in the By-Laws as they may from time to time find
necessary or proper.
Seventh: - The Corporation hereby created is hereby given the same powers,
rights and privileges as may be conferred upon corporations organized
under the Act entitled "An Act Providing a General Corporation Law",
approved March 10, 1899, as from time to time amended.
Eighth: - This Act shall be deemed and taken to be a private Act.
Ninth: - This Corporation is to have perpetual existence.
Tenth: - The Board of Directors, by resolution passed by a majority of the
whole Board, may designate any of their number to constitute an Executive
Committee, which Committee, to the extent provided in said resolution, or
in the By-Laws of the Company, shall have and may exercise all of the
powers of the Board of Directors in the management of the business and
affairs of the Corporation, and shall have power to authorize the seal of
the Corporation to be affixed to all papers which may require it.
Eleventh: - The private property of the stockholders shall not be liable
for the payment of corporate debts to any extent whatever.
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Twelfth: - The Corporation may transact business in any part of the world.
Thirteenth: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by a
vote of the majority of the entire Board. The stockholders may make, alter
or repeal any By-Law whether or not adopted by them, provided however,
that any such additional By-Laws, alterations or repeal may be adopted
only by the affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class).
Fourteenth: - Meetings of the Directors may be held outside of the State
of Delaware at such places as may be from time to time designated by the
Board, and the Directors may keep the books of the Company outside of the
State of Delaware at such places as may be from time to time designated by
them.
Fifteenth: - (a) In addition to any affirmative vote required by law, and
except as otherwise expressly provided in sections (b) and (c) of this
Article Fifteenth:
(A) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with or into (i) any Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder), which, after such merger or
consolidation, would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions)
to or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate fair market value of $1,000,000 or
more, or
(C) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of related transactions) of any securities
of the Corporation or any Subsidiary to any Interested Stockholder or
any Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
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(E) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds
of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, considered for the purpose of
this Article Fifteenth as one class ("Voting Shares"). Such affirmative
vote shall be required notwithstanding the fact that no vote may be
required, or that some lesser percentage may be specified, by law or in
any agreement with any national securities exchange or otherwise.
(2) The term "business combination" as used in this Article
Fifteenth shall mean any transaction which is referred to
any one or more of clauses (A) through (E) of paragraph 1 of
the section (a).
(b) The provisions of section (a) of this Article Fifteenth shall
not be applicable to any particular business combination and such business
combination shall require only such affirmative vote as is required by law
and any other provisions of the Charter or Act of Incorporation of By-Laws
if such business combination has been approved by a majority of the whole
Board.
(c) For the purposes of this Article Fifteenth:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary)
who or which as of the record date for the determination of
stockholders entitled to notice of and to vote on such business
combination, or immediately prior to the consummation of any such
transaction:
(A) is the beneficial owner, directly or indirectly, of more than
10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within two
years prior
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thereto was the beneficial owner, directly or indirectly, of not
less than 10% of the then outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within two
years prior thereto beneficially owned by any Interested
Stockholder, and such assignment or succession shall have occurred
in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities
Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates (as
hereafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of
any class of equity security (as defined in Rule 3a11-1 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as in
effect in December 31, 1981) is owned, directly or indirectly, by the
Corporation; provided, however, that for the
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purposes of the definition of Investment Stockholder set forth in
paragraph (2) of this section (c), the term "Subsidiary" shall
mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by the
Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article Fifteenth on the basis of
information known to them, (1) the number of Voting Shares beneficially
owned by any person (2) whether a person is an Affiliate or Associate of
another, (3) whether a person has an agreement, arrangement or
understanding with another as to the matters referred to in paragraph (3)
of section (c), or (4) whether the assets subject to any business
combination or the consideration received for the issuance or transfer of
securities by the Corporation, or any Subsidiary has an aggregate fair
market value of $1,000,000 or more.
(e) Nothing contained in this Article Fifteenth shall be construed
to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
Sixteenth: Notwithstanding any other provision of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and in addition to any
other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of at
least two-thirds of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) shall be required to amend,
alter or repeal any provision of Articles Fifth, Thirteenth, Fifteenth or
Sixteenth of this Charter or Act of Incorporation.
Seventeenth: (a) a Director of this Corporation shall not be liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent such exemption from
liability or limitation thereof is not permitted under the Delaware
General Corporation Laws as the same exists or may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph shall
not adversely affect any right or protection of a Director of the
Corporation existing hereunder with respect to any act or omission
occurring prior to the time of such repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
<PAGE>
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
Stockholders' Meetings
Section 1. The Annual Meeting of Stockholders shall be held on the third
Thursday in April each year at the principal office at the Company or at such
other date, time, or place as may be designated by resolution by the Board of
Directors.
Section 2. Special meetings of all stockholders may be called at any time
by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given by
mailing to each stockholder at least ten (10) days before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the Company
issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
Directors
Section 1. The number and classification of the Board of Directors shall
be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72) years
shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for three
years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed and
conducted by the Board of Directors.
<PAGE>
Section 5. The Board of Directors shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Board of
Directors or the President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of any
special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability to
act, or disqualification of any director, the Board of Directors, although less
than a quorum, shall have the right to elect the successor who shall hold office
for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
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ARTICLE III
Committees
Section 1. Executive Committee
(A) The Executive Committee shall be composed of not more than
nine members who shall be selected by the Board of Directors from its own
members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and in
behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members, or at the call of the Chairman of the Executive
Committee or at the call of the Chairman of the Board of Directors. The majority
of its members shall be necessary to constitute a quorum for the transaction of
business. Special meetings of the Executive Committee may be held at any time
when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient severity
to prevent the conduct and management of the affairs and business of the Company
by its directors and officers as contemplated by these By-Laws any two available
members of the Executive Committee as constituted immediately prior to such
disaster shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Company in accordance with the
provisions of Article III of these By-Laws; and if less than three members of
the Trust Committee is constituted immediately prior to such disaster shall be
available for the transaction of its business, such Executive Committee shall
also be empowered to exercise all of the powers reserved to the Trust Committee
under Article III Section 2 hereof. In the event of the unavailability, at such
time, of a minimum of two members of such Executive Committee, any three
available directors shall constitute the Executive Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the foregoing provisions of this Section. This By-Law shall be
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subject to implementation by Resolutions of the Board of Directors presently
existing or hereafter passed from time to time for that purpose, and any
provisions of these By-Laws (other than this Section) and any resolutions which
are contrary to the provisions of this Section or to the provisions of any such
implementary Resolutions shall be suspended during such a disaster period until
it shall be determined by any interim Executive Committee acting under this
section that it shall be to the advantage of the Company to resume the conduct
and management of its affairs and business under all of the other provisions of
these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office during
the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters, however,
being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members who
shall be selected by the Board of Directors from its own members, none of whom
shall be an officer of the Company, and shall hold office at the pleasure of the
Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division,
4
<PAGE>
review all reports of examination of the Company made by any governmental agency
or such independent auditor employed for that purpose, and make such
recommendations to the Board of Directors with respect thereto or with respect
to any other matters pertaining to auditing the Company as it shall deem
desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than five (5) members who shall be selected by the Board of Directors from its
own members who are not officers of the Company and who shall hold office during
the pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected by
the Board of Directors as an associate director, to serve during the pleasure of
the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An associate
director will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, the member
or members thereof
5
<PAGE>
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absence or disqualified
member.
ARTICLE IV
Officers
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
-------------------------------
Board of Directors shall preside at all meetings of the Board of Directors at
which the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining to
the office of the President conferred or imposed upon him by statute or assigned
to him by the Board of Directors in the absence of the Chairman of the Board the
President shall have the powers and duties of the Chairman of the Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however denominated
by the Board of Directors, who may at any time perform all the duties of the
Chairman of the Board of Directors and/or the President and such other powers
and duties as may from time to time be assigned to them by the Board of
Directors, the Executive Committee, the Chairman of the Board or the President
and by the officer in charge of the department or division to which they are
assigned.
Section 6. The Secretary shall attend to the giving of notice of meetings
of the stockholders and the Board of Directors, as well as the Committees
thereof, to the keeping of accurate minutes of all such meetings and to
recording the same in the minute books of the
6
<PAGE>
Company. In addition to the other notice requirements of these By-Laws and as
may be practicable under the circumstances, all such notices shall be in writing
and mailed well in advance of the scheduled date of any other meeting. He shall
have custody of the corporate seal and shall affix the same to any documents
requiring such corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all assets
and liabilities of the Company. He shall be custodian of and responsible for
all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to all
Vice Presidents with such functional titles as shall be determined from time to
time by the Board of Directors, who shall ex officio hold the office Assistant
Secretary of this Company and who may perform such duties as may be prescribed
by the officer in charge of the department or division to whom they are
assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President
7
<PAGE>
and the officer in charge of the department or division to which they are
assigned.
ARTICLE V
Stock and Stock Certificates
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the President
or any Vice President, however denominated by the Board of Directors and
countersigned by the Secretary or Treasurer or an Assistant Secretary, and the
seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of
stock shall be issued only upon giving such security as may be satisfactory to
the Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix in
advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
Seal
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner
circle the words "Wilmington, Delaware."
8
<PAGE>
ARTICLE VII
Fiscal Year
Section 1. The fiscal year of the Company shall be the calendar year.
9
<PAGE>
ARTICLE VIII
Execution of Instruments of the Company
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
Compensation of Directors and Members of Committees
Section 1. Directors and associate directors of the Company, other than
salaried officers of the Company, shall be paid such reasonable honoraria or
fees for attending meetings of the Board of Directors as the Board of Directors
may from time to time determine. Directors and associate directors who serve as
members of committees, other than salaried employees of the Company, shall be
paid such reasonable honoraria or fees for services as members of committees as
the Board of Directors shall from time to time determine and directors and
associate directors may be employed by the Company for such special services as
the Board of Directors may from time to time determine and shall be paid for
such special services so performed reasonable compensation as may be determined
by the Board of Directors.
ARTICLE X
Indemnification
Section 1. (A) The Corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal
10
<PAGE>
representative, is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, enterprise or non-profit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses reasonably incurred by such person. The Corporation shall
indemnify a person in connection with a proceeding initiated by such person only
if the proceeding was authorized by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
-------- -------
that the payment of expenses incurred by a Director officer in his capacity as a
Director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Director or officer to repay
all amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses,
under this Article X is not paid in full within ninety days after a written
claim therefor has been received by the Corporation the claimant may file suit
to recover the unpaid amount of such claim and, if successful in whole or in
part, shall be entitled to be paid the expense of prosecuting such claim. In any
such action the Corporation shall have the burden of proving that the claimant
was not entitled to the requested indemnification of payment of expenses under
applicable law.
(D) The rights conferred on any person by this Article X
shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions of
this Article X shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time of such
repeal or modification.
ARTICLE XI
Amendments to the By-Laws
Section 1. These By-Laws may be altered, amended or repealed, in whole or
in part, and any new By-Law or By-Laws adopted at any regular or special meeting
of the Board of Directors by a vote of the majority of all the members of the
Board of Directors then in office.
11
<PAGE>
EXHIBIT C
Section 321(b) Consent
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended,
Wilmington Trust Company hereby consents that reports of examinations by
Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: May 21, 1999 By: /s/ James P. Lawler
---------------------------------------
Name: James P. Lawler
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks
and savings banks with state publication requirements.
It has not been approved by any state banking authorities.
Refer to your appropriate state banking authorities
for your state publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ------------------------------ ----------------
Name of Bank City
in the State of DELAWARE , at the close of business on December 31, 1998.
-------------
ASSETS
<TABLE>
<CAPTION>
Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins................. 194,839
Interest-bearing balances........................................... 0
Held-to-maturity securities.............................................. 73,911
Available-for-sale securities............................................ 1,228,194
Federal funds sold and securities purchased under agreements to resell... 203,500
Loans and lease financing receivables:
Loans and leases, net of unearned income..............4,167,235
LESS: Allowance for loan and lease losses............ 66,897
LESS: Allocated transfer risk reserve................ 0
Loans and leases, net of unearned income, allowance, and reserve.... 4,100,338
Assets held in trading accounts.......................................... 0
Premises and fixed assets (including capitalized leases)................. 139,079
Other real estate owned.................................................. 1,532
Investments in unconsolidated subsidiaries and associated companies...... 1,052
Customers' liability to this bank on acceptances outstanding............. 0
Intangible assets........................................................ 3,047
Other assets............................................................. 98,867
Total assets............................................................. 6,044,359
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>
LIABILITIES
<TABLE>
<CAPTION>
<S> <C>
Deposits:
In domestic offices.......................................................... 4,474,659
Noninterest-bearing................. 1,037,549
Interest-bearing.................... 3,437,110
Federal funds purchased and Securities sold under agreements to repurchase... 390,060
Demand notes issued to the U.S. Treasury..................................... 18,944
Trading liabilities (from Schedule RC-D)..................................... 0
Other borrowed money:........................................................ ///////
With original maturity of one year or less.............................. 555,000
With original maturity of more than one year............................ 43,000
Bank's liability on acceptances executed and outstanding..................... 0
Subordinated notes and debentures............................................ 0
Other liabilities (from Schedule RC-G)....................................... 90,951
Total liabilities............................................................ 5,572,614
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................ 0
Common Stock................................................................. 500
Surplus (exclude all surplus related to preferred stock)..................... 62,118
Undivided profits and capital reserves....................................... 403,264
Net unrealized holding gains (losses) on available-for-sale securities....... 5,863
Total equity capital......................................................... 471,745
Total liabilities, limited-life preferred stock, and equity capital.......... 6,044,359
</TABLE>
2
<PAGE>
Registration No.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)_____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
DOWNEY FINANCIAL CORP.
(Exact name of obligor as specified in its charter)
Delaware 95-1953342
(State of incorporation) (I.R.S. employer identification no.)
3501 Jamboree Road
Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
Guarantee of Downey Financial Corp. with respect to
___% Cumulative Capital Securities of Downey Financial Capital Trust I
(Title of the indenture securities)
===============================================================================
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor is
not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes
the certificate of authority of Wilmington Trust Company to
commence business and the authorization of Wilmington Trust
Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b)
of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 21st day
of May, 1999.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Donald G. MacKelcan By: /s/ James P. Lawler
------------------------ ------------------------
Assistant Secretary Name: James P. Lawler
Title: Vice President
2
<PAGE>
EXHIBIT A
AMENDED CHARTER
Wilmington Trust Company
Wilmington, Delaware
As existing on May 9, 1987
<PAGE>
Amended Charter
or
Act of Incorporation
of
Wilmington Trust Company
Wilmington Trust Company, originally incorporated by an Act of the General
Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware
Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which
company was changed to "Wilmington Trust Company" by an amendment filed in the
Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act
of Incorporation of which company has been from time to time amended and changed
by merger agreements pursuant to the corporation law for state banks and trust
companies of the State of Delaware, does hereby alter and amend its Charter or
Act of Incorporation so that the same as so altered and amended shall in its
entirety read as follows:
First: - The name of this corporation is Wilmington Trust Company.
Second: - The location of its principal office in the State of Delaware is
at Rodney Square North, in the City of Wilmington, County of New Castle;
the name of its resident agent is Wilmington Trust Company whose address
is Rodney Square North, in said City. In addition to such principal
office, the said corporation maintains and operates branch offices in the
City of Newark, New Castle County, Delaware, the Town of Newport, New
Castle County, Delaware, at Claymont, New Castle County, Delaware, at
Greenville, New Castle County Delaware, and at Milford Cross Roads, New
Castle County, Delaware, and shall be empowered to open, maintain and
operate branch offices at Ninth and Shipley Streets, 418 Delaware Avenue,
2120 Market Street, and 3605 Market Street, all in the City of Wilmington,
New Castle County, Delaware, and such other branch offices or places of
business as may be authorized from time to time by the agency or agencies
of the government of the State of Delaware empowered to confer such
authority.
Third: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation are
to do any or all of the things herein mentioned as fully and to the same
extent as natural persons might or could do and in any part of the world,
viz.:
(1) To sue and be sued, complain and defend in any Court of law or
equity
<PAGE>
and to make and use a common seal, and alter the seal at pleasure, to
hold, purchase, convey, mortgage or otherwise deal in real and
personal estate and property, and to appoint such officers and agents
as the business of the Corporation shall require, to make by-laws not
inconsistent with the Constitution or laws of the United States or of
this State, to discount bills, notes or other evidences of debt, to
receive deposits of money, or securities for money, to buy gold and
silver bullion and foreign coins, to buy and sell bills of exchange,
and generally to use, exercise and enjoy all the powers, rights,
privileges and franchises incident to a corporation which are proper
or necessary for the transaction of the business of the Corporation
hereby created.
(2) To insure titles to real and personal property, or any estate or
interests therein, and to guarantee the holder of such property, real
or personal, against any claim or claims, adverse to his interest
therein, and to prepare and give certificates of title for any lands
or premises in the State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every description,
and to carry on the business of conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry, plate,
deeds, bonds and any and all other personal property of every sort and
kind, from executors, administrators, guardians, public officers,
courts, receivers, assignees, trustees, and from all fiduciaries, and
from all other persons and individuals, and from all corporations
whether state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or underwriting
the stock, bonds or other obligations of any corporation, association,
state or municipality, and may receive and manage any sinking fund
therefor on such terms as may be agreed upon between the two parties,
and in like manner may act as Treasurer of any corporation or
municipality.
2
<PAGE>
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body politic,
corporation, association or person, either alone or in conjunction
with any other person or persons, corporation or corporations.
(8) To guarantee the validity, performance or effect of any contract
or agreement, and the fidelity of persons holding places of
responsibility or trust; to become surety for any person, or persons,
for the faithful performance of any trust, office, duty, contract or
agreement, either by itself or in conjunction with any other person,
or persons, corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment, suit, order,
or decree to be entered in any court of record within the State of
Delaware or elsewhere, or which may now or hereafter be required by
any law, judge, officer or court in the State of Delaware or
elsewhere.
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity in the receiving, holding, managing, and disposing of any and
all estates and property, real, personal or mixed, and to be appointed
as such trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian or bailee by any
persons, corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so appointed
by any person, corporation, court, officer or authority such trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity, it shall not be required to give bond with surety, but its
capital stock shall be taken and held as security for the performance
of the duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise of
any of its powers hereby given, or for the performance of any of the
duties which it may undertake or be called upon to perform, or for the
assumption of any responsibility the said Corporation may be entitled
to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages, debentures,
shares of capital stock, and other securities, obligations, contracts
and evidences of indebtedness, of any private, public or municipal
corporation within and without the State of Delaware, or of the
Government of the
3
<PAGE>
United States, or of any state, territory, colony, or possession
thereof, or of any foreign government or country; to receive, collect,
receipt for, and dispose of interest, dividends and income upon and
from any of the bonds, mortgages, debentures, notes, shares of capital
stock, securities, obligations, contracts, evidences of indebtedness
and other property held and owned by it, and to exercise in respect of
all such bonds, mortgages, debentures, notes, shares of capital stock,
securities, obligations, contracts, evidences of indebtedness and
other property, any and all the rights, powers and privileges of
individual owners thereof, including the right to vote thereon; to
invest and deal in and with any of the moneys of the Corporation upon
such securities and in such manner as it may think fit and proper, and
from time to time to vary or realize such investments; to issue bonds
and secure the same by pledges or deeds of trust or mortgages of or
upon the whole or any part of the property held or owned by the
Corporation, and to sell and pledge such bonds, as and when the Board
of Directors shall determine, and in the promotion of its said
corporate business of investment and to the extent authorized by law,
to lease, purchase, hold, sell, assign, transfer, pledge, mortgage and
convey real and personal property of any name and nature and any
estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred by
the laws of the State of Delaware, it is hereby expressly provided that
the said Corporation shall also have the following powers:
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of the
world.
(2) To acquire the good will, rights, property and franchises and to
undertake the whole or any part of the assets and liabilities of any
person, firm, association or corporation, and to pay for the same in
cash, stock of this Corporation, bonds or otherwise; to hold or in any
manner to dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any part of
any business so acquired, and to exercise all the powers necessary or
convenient in and about the conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and to
lease, sell, exchange, transfer, or in any manner whatever dispose of
property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of every
kind with
4
<PAGE>
any person, firm, association or corporation, and, without limit as to
amount, to draw, make, accept, endorse, discount, execute and issue
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same extent as
natural persons might or could do, to purchase or otherwise acquire,
to hold, own, to mortgage, sell, convey or otherwise dispose of, real
and personal property, of every class and description, in any State,
District, Territory or Colony of the United States, and in any foreign
country or place.
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except where
otherwise expressed in said paragraph) be nowise limited or restricted
by reference to or inference from the terms of any other clause of
this or any other paragraph in this charter, but that the objects,
purposes and powers specified in each of the clauses of this paragraph
shall be regarded as independent objects, purposes and powers.
Fourth: - (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is forty-one million
(41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one or
more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares of
any one series of Preferred Stock shall be alike in every particular,
except that there may be different dates from which dividends, if any,
thereon shall be cumulative, if made cumulative. The voting powers and the
preferences and relative, participating, optional and other special rights
of each such series, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any
time outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article Fourth, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by resolution or
resolutions adopted prior to the
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<PAGE>
issuance of any shares of a particular series of Preferred Stock, the
voting powers and the designations, preferences and relative, optional and
other special rights, and the qualifications, limitations and restrictions
of such series, including, but without limiting the generality of the
foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number may
be increased (except where otherwise provided by the Board of
Directors) or decreased (but not below the number of shares thereof
then outstanding) from time to time by like action of the Board of
Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series shall be
paid, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes, or
series of the same or other class of stock and whether such dividends
shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares of
any other class or classes or of any series of the same or any other
class or classes of stock of the Corporation and the terms and
conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be subject
to redemption, and the redemption price or prices and the time or
times at which, and the terms and conditions on which, Preferred Stock
of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of such
series upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding-
up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase account,
if any, to be provided for the Preferred Stock of such series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of the
foregoing include the right, voting as a series or by itself or
together with other series of Preferred Stock or all series of
Preferred Stock as a class, to elect one or more directors of the
Corporation if there shall have been a default in the payment of
dividends on any one or more series of Preferred Stock or under such
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circumstances and on such conditions as the Board of Directors may
determine.
(c) (1) After the requirements with respect to preferential dividends on
the Preferred Stock (fixed in accordance with the provisions of section
(b) of this Article Fourth), if any, shall have been met and after the
Corporation shall have complied with all the requirements, if any, with
respect to the setting aside of sums as sinking funds or redemption or
purchase accounts (fixed in accordance with the provisions of section (b)
of this Article Fourth), and subject further to any conditions which may
be fixed in accordance with the provisions of section (b) of this Article
Fourth, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to time by
the Board of Directors.
(2) After distribution in full of the preferential amount, if any,
(fixed in accordance with the provisions of section (b) of this
Article Fourth), to be distributed to the holders of Preferred Stock
in the event of voluntary or involuntary liquidation, distribution or
sale of assets, dissolution or winding-up, of the Corporation, the
holders of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and intangible, of
whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of Common Stock held by them
respectively.
(3) Except as may otherwise be required by law or by the provisions
of such resolution or resolutions as may be adopted by the Board of
Directors pursuant to section (b) of this Article Fourth, each holder
of Common Stock shall have one vote in respect of each share of Common
Stock held on all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or
series of stock or of other securities of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued stock of any
class or series or any additional shares of any class or series to be
issued by reason of any increase of the authorized capital stock of the
Corporation of any class or series, or bonds, certificates of
indebtedness, debentures or other securities convertible into or
exchangeable for stock of the Corporation of any class or series, or
carrying any right to purchase stock of any class or series, but any such
unissued stock, additional authorized issue of shares of any class or
series of stock or securities convertible into or exchangeable for stock,
or carrying any right to purchase stock, may be issued and
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<PAGE>
disposed of pursuant to resolution of the Board of Directors to such
persons, firms, corporations or associations, whether such holders or
others, and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and rights
of each other series of Preferred Stock shall, in each case, be as fixed
from time to time by the Board of Directors in the resolution or
resolutions adopted pursuant to authority granted in section (b) of this
Article Fourth and the consent, by class or series vote or otherwise, of
the holders of such of the series of Preferred Stock as are from time to
time outstanding shall not be required for the issuance by the Board of
Directors of any other series of Preferred Stock whether or not the
powers, preferences and rights of such other series shall be fixed by the
Board of Directors as senior to, or on a parity with, the powers,
preferences and rights of such outstanding series, or any of them;
provided, however, that the Board of Directors may provide in the
resolution or resolutions as to any series of Preferred Stock adopted
pursuant to section (b) of this Article Fourth that the consent of the
holders of a majority (or such greater proportion as shall be therein
fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of Directors
of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the Board
of Directors of the Corporation shall determine and on such terms and for
such consideration as shall be fixed by the Board of Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased from
time to time by the affirmative vote of the holders of a majority of the
stock of the Corporation entitled to vote thereon.
Fifth: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more than
twenty-five as fixed from time to time by vote of a majority of the whole
Board, provided, however, that the number of directors shall not be
reduced so as to shorten the term of any director at the
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time in office, and provided further, that the number of directors
constituting the whole Board shall be twenty-four until otherwise fixed by
a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the
whole Board permits, with the term of office of one class expiring each
year. At the annual meeting of stockholders in 1982, directors of the
first class shall be elected to hold office for a term expiring at the
next succeeding annual meeting, directors of the second class shall be
elected to hold office for a term expiring at the second succeeding annual
meeting and directors of the third class shall be elected to hold office
for a term expiring at the third succeeding annual meeting. Any vacancies
in the Board of Directors for any reason, and any newly created
directorships resulting from any increase in the directors, may be filled
by the Board of Directors, acting by a majority of the directors then in
office, although less than a quorum, and any directors so chosen shall
hold office until the next annual election of directors. At such election,
the stockholders shall elect a successor to such director to hold office
until the next election of the class for which such director shall have
been chosen and until his successor shall be elected and qualified. No
decrease in the number of directors shall shorten the term of any
incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law, this Charter or
Act of Incorporation or the By-Laws of the Corporation), any director or
the entire Board of Directors of the Corporation may be removed at any
time without cause, but only by the affirmative vote of the holders of
two-thirds or more of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the Board of
Directors or by any stockholder entitled to vote for the election of
directors. Such nominations shall be made by notice in writing, delivered
or mailed by first class United States mail, postage prepaid, to the
Secretary of the Corporation not less than 14 days nor more than 50 days
prior to any meeting of the stockholders called for the election of
directors; provided, however, that if less than 21 days' notice of the
meeting is given to stockholders, such written notice shall be delivered
or mailed, as prescribed, to the Secretary of the Corporation not later
than the close of the seventh day following the day on which notice of the
meeting was mailed to stockholders. Notice of nominations which are
proposed by the Board of Directors
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shall be given by the Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed
in such notice, (ii) the principal occupation or employment of such
nominee and (iii) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with
the foregoing procedure, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
Sixth: - The Directors shall choose such officers, agent and servants as
may be provided in the By-Laws as they may from time to time find
necessary or proper.
Seventh: - The Corporation hereby created is hereby given the same powers,
rights and privileges as may be conferred upon corporations organized
under the Act entitled "An Act Providing a General Corporation Law",
approved March 10, 1899, as from time to time amended.
Eighth: - This Act shall be deemed and taken to be a private Act.
Ninth: - This Corporation is to have perpetual existence.
Tenth: - The Board of Directors, by resolution passed by a majority of the
whole Board, may designate any of their number to constitute an Executive
Committee, which Committee, to the extent provided in said resolution, or
in the By-Laws of the Company, shall have and may exercise all of the
powers of the Board of Directors in the management of the business and
affairs of the Corporation, and shall have power to authorize the seal of
the Corporation to be affixed to all papers which may require it.
Eleventh: - The private property of the stockholders shall not be liable
for the payment of corporate debts to any extent whatever.
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Twelfth: - The Corporation may transact business in any part of the world.
Thirteenth: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by a
vote of the majority of the entire Board. The stockholders may make, alter
or repeal any By-Law whether or not adopted by them, provided however,
that any such additional By-Laws, alterations or repeal may be adopted
only by the affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class).
Fourteenth: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be from
time to time designated by them.
Fifteenth: - (a) In addition to any affirmative vote required by law, and
except as otherwise expressly provided in sections (b) and (c) of this
Article Fifteenth:
(A) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with or into (i) any Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder), which, after such merger or
consolidation, would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions)
to or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate fair market value of $1,000,000 or
more, or
(C) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of related transactions) of any
securities of the Corporation or any Subsidiary to any Interested
Stockholder or any Affiliate of any Interested Stockholder in exchange
for cash, securities or other property (or a combination thereof)
having an aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
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(E) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds
of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, considered for the purpose of
this Article Fifteenth as one class ("Voting Shares"). Such affirmative
vote shall be required notwithstanding the fact that no vote may be
required, or that some lesser percentage may be specified, by law or in
any agreement with any national securities exchange or otherwise.
(2) The term "business combination" as used in this Article
Fifteenth shall mean any transaction which is referred to
any one or more of clauses (A) through (E) of paragraph 1 of
the section (a).
(b) The provisions of section (a) of this Article Fifteenth shall
not be applicable to any particular business combination and such business
combination shall require only such affirmative vote as is required by law
and any other provisions of the Charter or Act of Incorporation of By-Laws
if such business combination has been approved by a majority of the whole
Board.
(c) For the purposes of this Article Fifteenth:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary)
who or which as of the record date for the determination of
stockholders entitled to notice of and to vote on such business
combination, or immediately prior to the consummation of any such
transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within
two years prior
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thereto was the beneficial owner, directly or indirectly, of not
less than 10% of the then outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within two
years prior thereto beneficially owned by any Interested
Stockholder, and such assignment or succession shall have occurred
in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities
Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates (as
hereafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of
any class of equity security (as defined in Rule 3a11-1 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as in
effect in December 31, 1981) is owned, directly or indirectly, by the
Corporation; provided, however, that for the
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purposes of the definition of Investment Stockholder set forth in
paragraph (2) of this section (c), the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article Fifteenth on the basis of
information known to them, (1) the number of Voting Shares beneficially
owned by any person (2) whether a person is an Affiliate or Associate of
another, (3) whether a person has an agreement, arrangement or
understanding with another as to the matters referred to in paragraph (3)
of section (c), or (4) whether the assets subject to any business
combination or the consideration received for the issuance or transfer of
securities by the Corporation, or any Subsidiary has an aggregate fair
market value of $1,000,000 or more.
(e) Nothing contained in this Article Fifteenth shall be construed
to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
Sixteenth: Notwithstanding any other provision of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and in addition to any
other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of at
least two-thirds of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) shall be required to amend,
alter or repeal any provision of Articles Fifth, Thirteenth, Fifteenth or
Sixteenth of this Charter or Act of Incorporation.
Seventeenth: (a) a Director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent such exemption from
liability or limitation thereof is not permitted under the Delaware
General Corporation Laws as the same exists or may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph shall
not adversely affect any right or protection of a Director of the
Corporation existing hereunder with respect to any act or omission
occurring prior to the time of such repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
<PAGE>
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
Stockholders' Meetings
Section 1. The Annual Meeting of Stockholders shall be held on the third
Thursday in April each year at the principal office at the Company or at such
other date, time, or place as may be designated by resolution by the Board of
Directors.
Section 2. Special meetings of all stockholders may be called at any time
by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given by
mailing to each stockholder at least ten (10) days before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the Company
issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
Directors
Section 1. The number and classification of the Board of Directors shall
be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72) years
shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for three
years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed and
conducted by the Board of Directors.
<PAGE>
Section 5. The Board of Directors shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Board of
Directors or the President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of any
special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability to
act, or disqualification of any director, the Board of Directors, although less
than a quorum, shall have the right to elect the successor who shall hold office
for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
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ARTICLE III
Committees
Section 1. Executive Committee
(A) The Executive Committee shall be composed of not more than
nine members who shall be selected by the Board of Directors from its own
members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and in
behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members, or at the call of the Chairman of the Executive
Committee or at the call of the Chairman of the Board of Directors. The majority
of its members shall be necessary to constitute a quorum for the transaction of
business. Special meetings of the Executive Committee may be held at any time
when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient severity
to prevent the conduct and management of the affairs and business of the Company
by its directors and officers as contemplated by these By-Laws any two available
members of the Executive Committee as constituted immediately prior to such
disaster shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Company in accordance with the
provisions of Article III of these By-Laws; and if less than three members of
the Trust Committee is constituted immediately prior to such disaster shall be
available for the transaction of its business, such Executive Committee shall
also be empowered to exercise all of the powers reserved to the Trust Committee
under Article III Section 2 hereof. In the event of the unavailability, at such
time, of a minimum of two members of such Executive Committee, any three
available directors shall constitute the Executive Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the foregoing provisions of this Section. This By-Law shall be
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subject to implementation by Resolutions of the Board of Directors presently
existing or hereafter passed from time to time for that purpose, and any
provisions of these By-Laws (other than this Section) and any resolutions which
are contrary to the provisions of this Section or to the provisions of any such
implementary Resolutions shall be suspended during such a disaster period until
it shall be determined by any interim Executive Committee acting under this
section that it shall be to the advantage of the Company to resume the conduct
and management of its affairs and business under all of the other provisions of
these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office during
the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters, however,
being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members who
shall be selected by the Board of Directors from its own members, none of whom
shall be an officer of the Company, and shall hold office at the pleasure of the
Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division,
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review all reports of examination of the Company made by any governmental agency
or such independent auditor employed for that purpose, and make such
recommendations to the Board of Directors with respect thereto or with respect
to any other matters pertaining to auditing the Company as it shall deem
desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than five (5) members who shall be selected by the Board of Directors from its
own members who are not officers of the Company and who shall hold office during
the pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected by
the Board of Directors as an associate director, to serve during the pleasure of
the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An associate
director will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, the member
or members thereof
5
<PAGE>
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absence or disqualified
member.
ARTICLE IV
Officers
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
-------------------------------
Board of Directors shall preside at all meetings of the Board of Directors at
which the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining to
the office of the President conferred or imposed upon him by statute or assigned
to him by the Board of Directors in the absence of the Chairman of the Board the
President shall have the powers and duties of the Chairman of the Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however denominated
by the Board of Directors, who may at any time perform all the duties of the
Chairman of the Board of Directors and/or the President and such other powers
and duties as may from time to time be assigned to them by the Board of
Directors, the Executive Committee, the Chairman of the Board or the President
and by the officer in charge of the department or division to which they are
assigned.
Section 6. The Secretary shall attend to the giving of notice of meetings
of the stockholders and the Board of Directors, as well as the Committees
thereof, to the keeping of accurate minutes of all such meetings and to
recording the same in the minute books of the
6
<PAGE>
Company. In addition to the other notice requirements of these By-Laws and as
may be practicable under the circumstances, all such notices shall be in writing
and mailed well in advance of the scheduled date of any other meeting. He shall
have custody of the corporate seal and shall affix the same to any documents
requiring such corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all assets
and liabilities of the Company. He shall be custodian of and responsible for
all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to all
Vice Presidents with such functional titles as shall be determined from time to
time by the Board of Directors, who shall ex officio hold the office Assistant
Secretary of this Company and who may perform such duties as may be prescribed
by the officer in charge of the department or division to whom they are
assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President
7
<PAGE>
and the officer in charge of the department or division to which they are
assigned.
ARTICLE V
Stock and Stock Certificates
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the President
or any Vice President, however denominated by the Board of Directors and
countersigned by the Secretary or Treasurer or an Assistant Secretary, and the
seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of
stock shall be issued only upon giving such security as may be satisfactory to
the Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix in
advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
Seal
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner
circle the words "Wilmington, Delaware."
8
<PAGE>
ARTICLE VII
Fiscal Year
Section 1. The fiscal year of the Company shall be the calendar year.
9
<PAGE>
ARTICLE VIII
Execution of Instruments of the Company
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
Compensation of Directors and Members of Committees
Section 1. Directors and associate directors of the Company, other than
salaried officers of the Company, shall be paid such reasonable honoraria or
fees for attending meetings of the Board of Directors as the Board of Directors
may from time to time determine. Directors and associate directors who serve as
members of committees, other than salaried employees of the Company, shall be
paid such reasonable honoraria or fees for services as members of committees as
the Board of Directors shall from time to time determine and directors and
associate directors may be employed by the Company for such special services as
the Board of Directors may from time to time determine and shall be paid for
such special services so performed reasonable compensation as may be determined
by the Board of Directors.
ARTICLE X
Indemnification
Section 1. (A) The Corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal
10
<PAGE>
representative, is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, enterprise or non-profit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses reasonably incurred by such person. The Corporation shall
indemnify a person in connection with a proceeding initiated by such person only
if the proceeding was authorized by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in defending any
proceeding in advance of its final disposition, provided, however, that the
-------- -------
payment of expenses incurred by a Director officer in his capacity as a Director
or officer in advance of the final disposition of the proceeding shall be made
only upon receipt of an undertaking by the Director or officer to repay all
amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses, under this
Article X is not paid in full within ninety days after a written claim therefor
has been received by the Corporation the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification of payment of expenses under
applicable law.
(D) The rights conferred on any person by this Article X shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Charter or Act of Incorporation, these By-
Laws, agreement, vote of stockholders or disinterested Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions of this
Article X shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
ARTICLE XI
Amendments to the By-Laws
Section 1. These By-Laws may be altered, amended or repealed, in whole or
in part, and any new By-Law or By-Laws adopted at any regular or special meeting
of the Board of Directors by a vote of the majority of all the members of the
Board of Directors then in office.
11
<PAGE>
EXHIBIT C
Section 321(b) Consent
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended,
Wilmington Trust Company hereby consents that reports of examinations by
Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: May 21, 1999 By: /s/ James P. Lawler
------------------------------------
Name: James P. Lawler
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks
and savings banks with state publication requirements.
It has not been approved by any state banking authorities.
Refer to your appropriate state banking authorities for
your state publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ----------------------------- ---------------
Name of Bank City
in the State of DELAWARE , at the close of business on December 31, 1998.
------------
ASSETS
<TABLE>
<CAPTION>
Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins................. 194,839
Interest-bearing balances........................................... 0
Held-to-maturity securities.............................................. 73,911
Available-for-sale securities............................................ 1,228,194
Federal funds sold and securities purchased under agreements to resell... 203,500
Loans and lease financing receivables:
Loans and leases, net of unearned income............. 4,167,235
LESS: Allowance for loan and lease losses........... 66,897
LESS: Allocated transfer risk reserve............... 0
Loans and leases, net of unearned income, allowance, and reserve.... 4,100,338
Assets held in trading accounts.......................................... 0
Premises and fixed assets (including capitalized leases)................. 139,079
Other real estate owned.................................................. 1,532
Investments in unconsolidated subsidiaries and associated companies...... 1,052
Customers' liability to this bank on acceptances outstanding............. 0
Intangible assets........................................................ 3,047
Other assets............................................................. 98,867
Total assets............................................................. 6,044,359
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>
LIABILITIES
<TABLE>
<CAPTION>
<S> <C>
Deposits:
In domestic offices......................................................... 4,474,659
Noninterest-bearing..................... 1,037,549
Interest-bearing........................ 3,437,110
Federal funds purchased and Securities sold under agreements to repurchase.. 390,060
Demand notes issued to the U.S. Treasury.................................... 18,944
Trading liabilities (from Schedule RC-D).................................... 0
Other borrowed money:....................................................... ///////
With original maturity of one year or less............................. 555,000
With original maturity of more than one year........................... 43,000
Bank's liability on acceptances executed and outstanding.................... 0
Subordinated notes and debentures........................................... 0
Other liabilities (from Schedule RC-G)...................................... 90,951
Total liabilities........................................................... 5,572,614
EQUITY CAPITAL
Perpetual preferred stock and related surplus............................... 0
Common Stock................................................................ 500
Surplus (exclude all surplus related to preferred stock).................... 62,118
Undivided profits and capital reserves...................................... 403,264
Net unrealized holding gains (losses) on available-for-sale securities...... 5,863
Total equity capital........................................................ 471,745
Total liabilities, limited-life preferred stock, and equity capital......... 6,044,359
</TABLE>
2
