-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NCZ2fN1SoaFIzbl/fJO75mRfDfoltWoje/45gjZqUFrLV5mm8W6t9QQDRvxLnnRd UE/J+rW5u8RIkORC6XCmCg== 0000899078-02-000196.txt : 20020415 0000899078-02-000196.hdr.sgml : 20020415 ACCESSION NUMBER: 0000899078-02-000196 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX BANCORP INC CENTRAL INDEX KEY: 0000944725 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 841233716 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21231 FILM NUMBER: 02575375 BUSINESS ADDRESS: STREET 1: 1380 LAWRENCE ST STREET 2: STE 1410 CITY: DENVER STATE: CO ZIP: 80204 BUSINESS PHONE: 3035959898 MAIL ADDRESS: STREET 1: 1380 LAWRENCE STREET STREET 2: SUITE 1410 CITY: DENVER STATE: CO ZIP: 80204 FORMER COMPANY: FORMER CONFORMED NAME: MATRIX CAPITAL CORP /CO/ DATE OF NAME CHANGE: 19960711 10-K 1 dec312001-10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 0-21231 MATRIX BANCORP, INC. (Exact name of registrant as specified in its charter) Colorado 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1380 Lawrence Street, Suite 1400 Denver, Colorado 80204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 4, 2002, 6,518,604 shares of common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing sales price of such stock on the NASDAQ National Market on March 4, 2002, was $30,870,893. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held May 17, 2002 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS Page ---- PART I Item 1. Business..................................................................................... 3 Item 2. Properties................................................................................... 24 Item 3. Legal Proceedings............................................................................ 25 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 27 Item 6. Selected Financial Data...................................................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 28 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 52 Item 8. Financial Statements and Supplementary Data.................................................. 52 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......... 52 PART III Item 10. Directors and Executive Officers of the Registrant........................................... 52 Item 11. Executive Compensation....................................................................... 52 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 52 Item 13. Certain Relationships and Related Transactions............................................... 52 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 52
2 PART I Item 1. Business Matrix Bancorp, Inc. General. Matrix Bancorp, Inc. (occasionally referred to in this document, on a consolidated basis, as "us," "we," the "Company" or similar terms), is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, mortgage banking, trust and clearing activities, lending activities and other fee-based services. Our traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository services. Our mortgage banking activities consist of purchasing and selling residential mortgage loans and residential mortgage servicing rights; offering brokerage, consulting and analytical services to financial services companies and financial institutions; servicing residential mortgage portfolios for investors; originating residential mortgages; and providing real estate management and disposition services. Our trust and clearing activities focus primarily on offering specialized custody and clearing services to banks, trust companies, broker-dealers, third party administrators and investment professionals, as well as the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. Our other fee-based services and lending activities include providing outsourced business services, such as budgeting, governmental reporting, accounts payable, payroll, facility and safety management and comprehensive insurance programs to charter schools. We also offer financing to charter schools for the purchase of school sites and equipment. Matrix Bancorp was incorporated in Colorado in June 1993 and was formerly called "Matrix Capital Corporation." The trading symbol for our common stock on The Nasdaq National Market is "MTXC." The Subsidiaries Our core business operations are conducted through the operating subsidiaries and an investment in a settlement and clearing operation described below. Matrix Capital Bank. With offices in New Mexico, Arizona and Colorado, Matrix Bank serves its local communities by providing a broad range of personal and business depository services, offering residential loans and providing consumer and commercial real estate loans, including Small Business Administration loans. In 2001, Matrix Bank decided to relocate its domicile from Las Cruces, New Mexico to Denver, Colorado. The relocation is anticipated to be complete in the second quarter of 2002. Matrix Bank intends to offer all of its existing banking services in the Denver market. Matrix Bank holds the noninterest-bearing custodial escrow deposits related to the residential mortgage loan portfolio serviced by Matrix Financial Services Corporation, the interest-bearing money market accounts administered by Sterling Trust Company and the deposits resulting from transactions in which Matrix Bank acts as the clearing bank for clients of Matrix Settlement & Clearance Services, L.L.C. These deposits, as well as other traditional deposits, are used primarily to fund our mortgage origination activity, as well as bulk purchases of residential mortgage loan portfolios throughout the United States, a substantial portion of which are serviced for Matrix Bank by Matrix Financial following their purchase. As of December 31, 2001, Matrix Bank had total assets of $1.5 billion. Matrix Bank and several of our other subsidiaries have significant experience in purchasing and originating mortgage loans, have familiarity with real estate markets throughout the United States and have traditionally had access to relatively low-cost deposits. We believe that the resulting knowledge and activities permit Matrix Bank to manage its funding and capital position in a way that enhances its performance. Matrix Financial Services Corporation. Matrix Financial, which became a wholly owned subsidiary of Matrix Bank in August 2000, originates mortgage loans through its wholesale loan origination network, acquires mortgage servicing rights on a nationwide basis through purchases in the secondary market and services the loans underlying the purchased mortgage servicing rights and a portion of our originated mortgage servicing rights. As of December 31, 2001, Matrix Financial serviced 86,155 borrower accounts representing $5.7 billion in principal balances, excluding $889.0 million in subservicing for companies that are unaffiliated with us. Many of these accounts were seasoned loans having lower principal and higher custodial escrow balances than newly originated mortgage loans. As a servicer of mortgage loans, Matrix Financial generally is required to establish custodial escrow accounts for the 3 deposit of borrowers' payments. These custodial accounts are maintained at Matrix Bank. At December 31, 2001, the custodial escrow accounts related to our servicing portfolio maintained at Matrix Bank were $129.7 million. During 2001, Matrix Financial originated $3.6 billion in residential mortgage loans primarily through its regional wholesale production offices located in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Sacramento, Santa Ana and St. Louis. The mortgage loans originated by Matrix Financial are typically sold in the secondary market. Matrix Capital Markets, Inc. Matrix Capital Markets, formerly known as United Financial, Inc., provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry. These services include: o the brokering and analysis of residential mortgage loan servicing rights and residential mortgage loans; o corporate and mortgage loan servicing portfolio valuations, which includes the "mark-to-market" valuation and analysis required under Statements of Financial Accounting Standards No. 133 and No. 140; and o to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Matrix Capital Markets provides brokerage services to the mortgage banking entities of several of the nation's largest financial institutions. During 2001, Matrix Capital Markets brokered the sale of 25 mortgage loan servicing portfolios totaling $23.9 billion in outstanding mortgage loan principal balances. Matrix Capital Markets' volume of brokerage activity and the expertise of its analytics department give us access to a wide array of information relating to the mortgage banking industry, including emerging market trends, prevailing market prices, pending regulatory changes and changes in levels of supply and demand. Consequently, we are often able to identify certain types of mortgage loan and mortgage loan servicing portfolios that are well suited to our particular servicing platform, investment objectives and unique corporate structure. First Matrix Investment Services Corp. First Matrix, which became a wholly owned subsidiary of Matrix Capital Markets in October 2001, is registered with the National Association of Securities Dealers ("NASD") as a fully disclosed broker-dealer, with its headquarters in Denver, Colorado and branch offices in Fort Worth, Texas and Memphis Tennessee. First Matrix offers brokerage service related to a wide range of investment options for both individual and institutional investors, including stocks, bonds, mutual funds and fixed income and debt securities, as well as providing investment banking services focusing on fixed income products. The Fort Worth office focuses primarily on long-term investing and retirement planning for individuals. The Denver office assists primarily financial institutions in managing their investment portfolios. Denver's client base currently consists of more than 500 banks throughout the United States. The Memphis office, which focuses on the acquisition, brokering and sale of SBA loan pools, began its operations in the fourth quarter of 2001. Matrix Asset Management Corporation. Matrix Asset Management provides nationwide real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions. In addition to the unaffiliated clients currently served by Matrix Asset Management, Matrix Financial utilizes Matrix Asset Management to handle the disposition of foreclosed real estate for which it is responsible as servicer. As of December 31, 2001, Matrix Asset Management had approximately 1,100 foreclosed properties under its management. Matrix Asset Management also provides limited collateral valuation opinions to clients that are interested in assessing the value of the collateral underlying mortgage loans, as well as to clients such as Matrix Bank and other third party mortgage loan buyers evaluating potential bulk purchases of mortgage loans. Sterling Trust Company. Sterling Trust, headquartered in Waco, Texas, was incorporated in 1984 as a Texas non-bank trust company specializing in the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. As of December 31, 2001, Sterling Trust administered approximately 41,300 accounts, with assets under administration of over $6.0 billion. As of December 31, 2001, approximately $120.4 million of the $6.0 billion represented money market deposits held at Matrix Bank. ABS School Services, L.L.C. ABS School Services (sometimes referred to hereafter collectively with its subsidiaries as "ABS") provides outsourced business services to charter schools. Charter schools are public schools that are an alternative to traditional public schools. As of December 31, 2001, ABS 4 provided its services to approximately 125 schools. The primary services offered include fund accounting, cash management, budgeting, governmental reporting, payroll and accounts payable. ABS also offers administrative and instructional leadership and consults with schools and offers assistance in the following areas: facility and safety management, technology, policy development, grant administration and comprehensive insurance programs. Additionally, ABS has a financing division, which offers financing to charter schools for the purchase of school sites and equipment. Matrix Settlement & Clearance Services, L.L.C. Matrix Settlement & Clearance Services, is a joint venture in which we own a 45% equity interest. Matrix Settlement & Clearance Services provides automated clearing of mutual funds utilizing the National Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance & Settlement platform for banks, trust companies, third party administrators and registered investment advisors. For the year ended December 31, 2001, Matrix Settlement & Clearance Services had $3.5 million of revenues and a net loss of approximately $400,000. Effective January 2, 2002, Matrix Settlement & Clearance Services' wholly owned subsidiary, MSCS Financial Services, LLC, began operations as a NASD registered broker-dealer. As of December 31, 2001, Matrix Settlement & Clearance Services had 56 clients under contract. These clients administer approximately $7.6 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. Matrix Settlement & Clearance Services has developed relationships with several Matrix Bancorp subsidiaries to assist in the performance of services for its customers. For example, Matrix Bank, as the National Securities Clearing Corporation member, serves as the settlement bank for Fund/SERV transactions and provides banking services for certain Matrix Settlement & Clearance Services customers. This relationship helps generate low-cost deposits for Matrix Bank. As of December 31, 2001, Matrix Settlement & Clearance Services' clients had $54.3 million of deposits at Matrix Bank. Lending Activities Purchase and Sale of Bulk Loan Portfolios. In addition to our mortgage loan origination and servicing-related activities, which are discussed under "--Residential Mortgage Loan Origination" and "Mortgage Servicing Activities," respectively, we traditionally make bulk purchases of residential mortgage loans in the secondary market through Matrix Bank. We believe that our structure provides advantages over our competitors in the purchase of bulk mortgage loan packages. In particular: o Matrix Capital Markets, through its networking within the mortgage banking and financial services industries, is able to refer companies that are interested in selling mortgage loan portfolios directly to Matrix Bank. This direct contact reduces the number of portfolios that must be purchased through competitive bid situations, thereby reducing the cost associated with the acquisition of bulk residential mortgage loan portfolios; and o Matrix Bank's subsidiary, Matrix Financial, provides servicing advantages that a typical "stand-alone" community bank does not possess. Matrix Financial acts as a subservicer for a majority of Matrix Bank's mortgage loan portfolio. Because Matrix Financial services loans throughout the entire United States, Matrix Bank can acquire various types of loans secured by property located in any of the fifty states. Substantially all of the residential mortgage loans that Matrix Bank acquires are classified as held for sale. This accounting classification requires Matrix Bank to carry the loans at the lower of aggregate cost or market. The purchased loan portfolios typically include both fixed and adjustable rate mortgage loans. Although Matrix Bank reviews many loan portfolios for prospective acquisition, it focuses on acquiring seasoned first lien priority loans secured primarily by one-to-four single-family residential properties with unpaid principal balances of less than $500,000. To the extent that adjustable rate loans are available, Matrix Bank generally targets adjustable over fixed rate portfolios. Due to the accounting treatment required, we believe that the focus on seasoned and adjustable rate products is generally expected to reduce the effect of changing interest rates on the portfolio's market value. Matrix Bank purchases mortgage loan portfolios from various sellers who have either originated the loans or, more typically, acquired the loan portfolios in bulk purchases. Matrix Bank considers several factors prior to a purchase. Among other factors, Matrix Bank considers the product type, the current loan balance, the current interest rate environment, the seasoning of the mortgage loans, payment histories, geographic location of the underlying collateral, price, the current liquidity of Matrix Bank and the product mix in its existing mortgage loan portfolio. In some cases, the mortgage loan portfolios that Matrix Bank acquires are purchased at yields that exceed market. Some of the loans in these portfolios are considered performing loans that have had payment problems in the past or 5 have had document deficiencies. These types of portfolios afford Matrix Bank with an opportunity to resell the loans at a higher price if the discount to market on these portfolios accurately reflects the additional risks associated with purchasing these types of loans. Loan document deficiencies are identified in the due diligence process and, to the extent practical, are cured by Matrix Bank prior to reselling the loans. Matrix Bank also analyzes the payment history on each mortgage loan portfolio. Many prior problems may be a result of inefficient servicing or may be attributable to several servicing transfers of the loans over a short period of time. Because many considerations may impact pricing or yield, Matrix Bank prices each loan package based on the specific underlying loan characteristics. In the past, Matrix Bank has purchased nonperforming Federal Housing Administration and Veteran's Administration loans from third party sellers. The Department of Housing and Urban Development ("HUD") generally guarantees the majority of principal and interest on these nonperforming loans. These loans are at fixed rates and have a relatively short average life since the loans are typically liquidated through the foreclosure and subsequent claim process with HUD. As of December 31, 2001, Matrix Bank owned $68.3 million of these loans. Matrix Bank performs due diligence on each mortgage loan portfolio that it desires to purchase on a bulk basis. These procedures consist of analyzing a representative sample of the mortgage loans in the portfolio and are typically performed by Matrix Bank employees, but occasionally are outsourced to third party contractors. The underwriter takes into account many factors and statistics in analyzing the sample of mortgage loans in the subject portfolio, including: the general economic conditions in the geographic area or areas in which the underlying residential properties are located; the loan-to-value ratios on the underlying loans; and the payment histories of the borrowers. In addition, the underwriter attempts to verify that each sample loan conforms to the standards for loan documentation set by Fannie Mae and Freddie Mac. In cases where a significant portion of the sample loans contain nonconforming documentation, Matrix Bank assesses the additional risk involved in purchasing the loans. This process helps Matrix Bank determine whether the mortgage loan portfolio meets its investment criteria and, if it does, the range of pricing that is appropriate. Matrix Bank continually monitors the secondary market for purchases and sales of mortgage loan portfolios and typically undertakes a sale of a particular loan portfolio in an attempt to "match" an anticipated bulk purchase of a particular mortgage loan portfolio or to generate current period earnings and cash flow. To the extent that Matrix Bank is unsuccessful in matching its purchases and sales of mortgage loans, Matrix Bank may have excess capital, resulting in less leverage and higher capital ratios. During the year ended December 31, 2001, we made bulk purchases of mortgage loans of approximately $105.9 million and made bulk sales of approximately $76.1 million for a net gain on sale of bulk mortgage loans of $960,000. Residential Mortgage Loan Origination. We originate residential mortgage loans on a wholesale basis through Matrix Financial and on a retail basis through both Matrix Financial and Matrix Bank. Matrix Financial originated a total of $3.6 billion in residential mortgage loans for the year ended December 31, 2001. Wholesale Originations. Matrix Financial's primary source of mortgage loan originations is its wholesale division, which originates mortgage loans through approved independent mortgage loan brokers. These brokers qualify to participate in Matrix Financial's program through a formal application process that includes an analysis of the broker's financial condition and sample loan files, as well as the broker's reputation, general lending expertise and references. As of December 31, 2001, Matrix Financial had approved relationships with approximately 2,000 mortgage loan brokers. From Matrix Financial's offices in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Sacramento, Santa Ana and St. Louis, the sales staff solicits mortgage loan brokers throughout the Southeastern, Western, Midwestern and Rocky Mountain areas of the United States for mortgage loans that meet Matrix Financial's criteria. Mortgage loan brokers act as intermediaries between borrowers and Matrix Financial in arranging mortgage loans. Matrix Financial, as an approved seller/servicer for Fannie Mae, Freddie Mac, the Government National Mortgage Association and a multitude of private investors, provides these brokers access to the secondary market for the sale of mortgage loans that they otherwise cannot access because they do not meet the applicable seller/servicer net worth requirements. Matrix Financial attracts and maintains relationships with mortgage loan brokers by offering a variety of services and products. To supplement our product offerings made through our wholesale loan origination network, we offer a program tailored to borrowers who are unable or unwilling to obtain mortgage financing from conventional mortgage sources. The borrowers who need this type of loan product often have impaired or unsubstantiated credit histories and/or unverifiable income and require or seek 6 a high degree of personalized service and swift response to their loan applications. As a result, these borrowers generally are not adverse to paying higher interest rates for this loan product type, as compared to the interest rates charged by conventional lending sources. We have established classifications with respect to the credit profiles of these borrowers. The classifications range from Alternative A through D depending upon a number of factors, including the borrower's credit history and employment status. During 2001, Matrix Financial originated $135.8 million of Alternative A through D credit residential mortgage loans, the majority of which were sold to unaffiliated third party investors on a nonrecourse basis. All current originations of Alternative A through lesser quality credit loans are originated under third party investor guidelines and are generally sold monthly in bulk loan portfolios. This method of sale generally provides better execution as compared to selling individual loans. In 2000, Matrix Financial acquired a servicing portfolio and production platform in Missouri. The production platform specializes in the origination of loans under a first-time home buyer program. Under this program, first-time home buyers are able to obtain loans at rates that are generally below market. The funding for the loans is available as a result of bond issues through various state and local governmental units, such as Missouri Housing Authority. As master servicer under the bond programs, Matrix Financial purchases the loans from the originator, principally other financial institutions or mortgage brokers. Once acquired by Matrix Financial, the loans under the specific bond programs are packaged and Government National Mortgage Association securities are issued to the bond trustees under the programs. Our contract with the Missouri Housing Authority expired without renewal relative to our capacity to act as master servicer for any bond series issued after August 1, 2001. We will continue, however, to service prior bond series until such a time as the series is no longer outstanding under the indenture. For strategic purposes, Matrix Financial's management has increased its emphasis on wholesale originations by opening two new production offices in 2000 and another in January 2001, acquiring a servicing and production platform and hiring additional administrative and production staff at existing offices. In low or decreasing interest rate environments, increased loan origination volumes, which result in increased fee income, can act as an economic hedge against decreases in interest income and the decreasing value of mortgage servicing portfolios caused by increased prepayments, which reduces revenues. Retail Originations. Matrix Bank originates residential loans on a retail basis through its branches in Las Cruces, New Mexico and Sun City, Arizona. Matrix Bank's lending office in Evergreen, Colorado primarily originates residential construction loans and commercial loans in the local market place. We attempt to convert the construction loans funded through the Evergreen office into permanent mortgage loans. The retail loans originated by Matrix Bank consist of a broad range of residential loans, at both fixed and adjustable rates, consumer loans and commercial real estate loans. Once Matrix Bank completes its change of domicile, we anticipate that the Evergreen office will consolidate with the new office in Denver, Colorado with no interruption in services. Matrix Financial has also developed a retention center that focuses on the solicitation of our servicing portfolio and third-party owned servicing portfolios for refinancing opportunities. The goal is to identify those borrowers which are likely to refinance and have them refinance with Matrix Financial. If the refinanced loan replaces a loan that comprises part of our servicing portfolio, we have effectively preserved a portion of our servicing portfolio and the periodic servicing fees resulting therefrom, as the borrower would have been likely to refinance with an unaffiliated lender if not with us, which would result in a loss of the servicing income that results from servicing the loan. Quality Control. We have a loan quality control process designed to ensure sound lending practices and compliance with Fannie Mae, Freddie Mac, Ginnie Mae and applicable private investor guidelines. Prior to funding any wholesale or retail loan, we perform a verbal or written verification of employment as required by investor programs and utilize a detailed checklist to ensure accuracy of documentation. In addition, on a monthly basis, we select 10% of all closed loans for a detailed audit conducted by our own personnel or a third party service provider. The quality control process entails performing a complete underwriting review and independent re-verification of all employment information, tax returns, source of down payment funds, bank accounts and credit. Furthermore, 10% of the audited loans are chosen for an independent field review and standard factual credit report. All discovered deficiencies in these audits are reported to our senior management to determine trends and additional training needs. We then address and cure all resolvable issues. We also perform a quality control audit on all early payment defaults, first payment defaults and 60-day delinquent loans, the findings of which are reported to the appropriate investor and/or senior management. Sale of Originated Loans. We generally sell the residential mortgage loans that we originate. Under ongoing programs established with Fannie Mae, Freddie Mac and Ginnie Mae, conforming conventional and government loans may be sold on 7 a cash basis or pooled by us and exchanged for securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We then sell these securities to national or regional broker-dealers. Mortgage loans sold to Fannie Mae, Freddie Mac or Ginnie Mae are sold on a nonrecourse basis, except for standard representations and warranties, so that foreclosure losses are generally borne by Fannie Mae, Freddie Mac or Ginnie Mae and not by us. We also sell nonconforming and conforming residential mortgage loans on a nonrecourse basis to other secondary market investors. Nonconforming loans are typically first lien mortgage loans that do not meet all of the agencies' underwriting guidelines, and are originated instead for other institutional investors with whom we have previously negotiated purchase commitments and for which we occasionally pay a fee. We sell residential mortgage loans on a servicing-retained or servicing-released basis. Certain purchasers of mortgage loans require that the loan be sold to them servicing-released. We sell nonconforming loans on a servicing-released basis and may sell conforming loans on a servicing-retained or servicing-released basis. See "Mortgage Servicing Activities --Residential Mortgage Loan Servicing." In connection with our residential mortgage loan originations and sales, we make customary representations and warranties. Our experience has been that giving such representations and warranties have not resulted in material repurchases. However, there can be no assurance that we will not be required to make a significant repurchase in the future or that losses will not occur in the future due to the representations and warranties made. The sale of mortgage loans may generate a gain or loss for us. Gains or losses result primarily from two factors. First, we may make a loan to a borrower at a rate resulting in a price that is higher or lower than we would receive if we had immediately sold the loan in the secondary market. These price differences occur primarily as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses may result from changes in interest rates that consequently change the market value of the mortgage loans. The change in the market value of the mortgage loans may occur after the price commitment is given to the borrower and before the time that the mortgage loan is sold to the investor. Net gains and losses on originated loans sold are recorded in loan origination income. In order to hedge against the interest rate risk resulting from these timing differences, we historically have committed to sell all closed originated mortgage loans held for sale and a portion of the mortgage loans that are not yet closed but for which the interest rate has been established, sometimes referred to in this document as "pipeline loans." We adjust our net commitment position daily either by entering into new commitments to sell or by buying back commitments to sell depending upon our projection of the portion of the pipeline loans that we expect to close. These projections are based on numerous factors, including changes in interest rates and general economic trends. The accuracy of the underlying assumptions bears directly upon the effectiveness of our use of forward commitments and subsequent profitability. In addition, during the second half of 2000, we began selling a portion of our pipeline loans, both conforming and nonconforming, to third party investors on a best efforts basis. By selling the loans on a best efforts basis, we significantly reduce our hedging risk. The market value of loans committed for sale is determined based on the related forward loan sale commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Risk Sensitive Assets and Liabilities" for information on our adoption of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. Commercial and Other Lending. We have sought to diversify and enhance the yield of our loan portfolio by originating commercial and, to a lesser extent, consumer loans and by offering a full range of lending products to our customers. The Company offers a variety of commercial loan products, including: single-family construction loans; commercial real estate loans; business and SBA loans; and financing to charter schools for the purchase of real estate and equipment. Matrix Bank's loan production office in Evergreen, Colorado, a suburb of Denver, principally originates single-family construction and commercial real estate loans. Matrix Bank's office in Las Cruces, New Mexico also originates a portion of these loans. ABS performs underwriting and funding of financings for charter schools. Matrix Bank's SBA division, located in Denver, Colorado, offers the following loan products: SBA 7a loans; first trust deed loans senior to SBA 504 debentures; first trust deed companion loans senior to SBA 7a loans; and Business and Industry Guaranteed Loans offered through the United States Department of Agriculture. Matrix Bank has received preferred lender status under the SBA program in the Colorado market area, and is anticipating expansion of that designation in New Mexico, Utah, Oregon, Idaho and Las Vegas, Nevada during 2002. Preferred lender status allows Matrix Bank to approve SBA-guaranteed loan applications without prior review from the SBA, thereby 8 accelerating the approval process for small business loan applications. Preferred lenders also are granted unilateral servicing powers over the term of those loans. During 2001, Matrix Bank originated $26.1 million SBA loans. Matrix Bank generally limits its commercial lending to income-producing real estate properties. The repayment of loans collateralized by income-producing properties depends upon the successful operation of the related real estate property and also on the credit and net worth of the borrower. Thus, repayment is subject to the profitable operation of the borrower's business, conditions in the real estate market, interest rate levels and overall economic conditions. Loans on income-producing properties must generally meet internal underwriting guidelines that include: a limit on the loan-to-value ratio of 75%; a review of the borrower with regard to management talent, integrity, experience and available financial resources; and, in most instances, a personal guarantee from the borrower. Matrix Bank originates loans to builders for the construction of single-family properties, and to a lesser extent, for the acquisition and development of improved residential lots. Matrix Bank generally makes these loans on commitment terms that last from nine to eighteen months and typically adjust with the prime rate of interest. In many cases, the residential properties have been pre-sold to the homeowner. It is generally considered that construction lending involves a higher level of risk than secured lending on existing properties because the properties securing construction loans are usually more speculative and more difficult to evaluate and monitor. In addition to origination, Matrix Bank also buys participations in commercial real estate loans primarily from banks located in the Colorado market. The loans that we acquire through participations are underwritten with the same diligence and standards as though we were originating them directly. ABS offers financing to charter schools located primarily in Arizona, Colorado, Florida and Texas for the purchase of real estate, modular space and equipment. The offered financing is generally fully amortizing and completed on a tax-exempt basis. On occasion, we also provide cash flow loans to charter schools. During 2001, we funded $27.1 million loans to charter schools and, as of December 31, 2001, we had a total of $59.5 million loans to charter schools. Charter school financing involves inherent risks such as: o the loan-to-value ratio for real estate transactions can be as high as 90% and for furniture, fixtures and equipment and modular space it is 100%; o there are no personal guarantees; and o cash flow to service the financing is derived from the school's student count. If the school's student count decreases, or is less than projected, the school's ability to make scheduled payments on the financing may be impaired. In addition, Matrix Bank offers a variety of lending products to meet the specific needs of its customers. These products include fully amortizing secured installment loans, manufactured housing financing, credit card programs, home equity loans, business loans and share loans. In addition to the secured consumer loans, Matrix Bank extends unsecured loans, on a limited basis, to qualified borrowers based on their financial statements and creditworthiness. Matrix Bank originates the majority of its consumer lending within the Las Cruces, New Mexico market area. Mortgage Servicing Activities Residential Mortgage Loan Servicing. We conduct our residential mortgage loan servicing activities exclusively through Matrix Financial including the residential mortgage loan servicing that Matrix Financial provides as subservicer for Matrix Bank's servicing portfolio. At December 31, 2001, Matrix Financial serviced approximately $5.7 billion of mortgage loans, excluding $889.0 million subserviced for companies that are not affiliated with us. Servicing mortgage loans involves a contractual right to receive a fee for processing and administering loan payments. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. These payments are held in custodial escrow accounts at Matrix Bank. Matrix Bank invests this money in interest-earning assets with returns that historically have been greater than could be realized by Matrix Financial using the custodial escrow deposits as compensating balances to reduce the effective borrowing cost on its warehouse credit facilities. As compensation for its mortgage servicing activities, Matrix Financial receives servicing fees, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of 9 default by the borrower, Matrix Financial receives no servicing fees until the default is cured. At December 31, 2001, Matrix Financial's annual weighted-average servicing fee was 0.39%. Servicing is provided on mortgage loans on a recourse or nonrecourse basis. Our policy is to accept only a limited number of servicing assets on a recourse basis. As of December 31, 2001, on the basis of outstanding principal balances, less than 1% of our owned mortgage servicing contracts involved recourse servicing. To the extent that servicing is done on a recourse basis, we are exposed to credit risk with respect to the underlying loan in the event of a repurchase. Additionally, many of our nonrecourse mortgage servicing contracts owned require us to advance all or part of the scheduled payments to the owner of the mortgage loan in the event of a default by the borrower. Many owners of mortgage loans also require the servicer to advance insurance premiums and tax payments on schedule even though sufficient escrow funds may not be available. Therefore, we must bear the funding costs associated with making such advances. If the delinquent loan does not become current, these advances are typically recovered at the time of the foreclosure sale. Foreclosure expenses, which may include legal fees or property maintenance, are generally not fully reimbursable by Fannie Mae, Freddie Mac or Ginnie Mae, for which agencies we provide significant amounts of mortgage loan servicing. As of December 31, 2001, we had advanced approximately $9.6 million in funds on behalf of third party investors. A foreclosure reserve is estimated and included in the consolidated financial statements. For the Veteran's Administration loans sold and serviced for the Ginnie Mae, which are sold on a nonrecourse basis, the Veteran's Administration loan guarantees may not cover the entire principal balance and, in that case, the Company is responsible for the losses which exceed the Veteran's Administration's guarantee. Mortgage servicing rights represent a contractual right to service, and not a beneficial ownership interest in, underlying mortgage loans. Failure to service the loans in accordance with contract or other applicable requirements may lead to the termination of the mortgage servicing rights and the loss of future servicing fees. To date, there have been no terminations of mortgage servicing rights by any mortgage loan owners because of our failure to service the loans in accordance with our obligations. In order to track information on our servicing portfolio, Matrix Financial utilizes a data processing system provided by Alltel Information Services, Inc. Because Alltel is one of the largest mortgage banking service bureaus in the United States, we believe that this system gives Matrix Financial capacity to support expansion of our residential mortgage loan servicing portfolio. The following table sets forth certain information regarding the composition of our mortgage servicing portfolio, excluding loans subserviced for others, as of the dates indicated:
As of December 31, --------------------------------------------------- 2001 2000 1999 -------------- -------------- ---------------- (In thousands) FHA insured/VA guaranteed residential........................ $ 2,187,686 $1,608,115 $ 926,179 Conventional loans........................................... 3,272,109 3,764,586 4,891,809 Other loans.................................................. 196,570 145,262 71,727 -------------- --------------- --------------- Total mortgage servicing portfolio...................... $ 5,656,365 $5,517,963 $5,889,715 =============== ============== =============== Fixed rate loans............................................. $ 5,009,501 $4,346,813 $4,926,055 Adjustable rate loans........................................ 646,864 1,171,150 963,660 --------------- -------------- --------------- Total mortgage servicing portfolio...................... $ 5,656,365 $5,517,963 $5,889,715 =============== ============== ===============
The following table shows the delinquency statistics for the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, compared with national average delinquency rates as of the dates presented. Delinquencies and foreclosures for the mortgage loans serviced by us generally exceed the national average due to high rates of delinquencies and foreclosures on certain bulk loan and bulk servicing portfolios that we acquired at a discount. In September 1999, we acquired a servicing portfolio with higher loan delinquency. The majority of loans in that portfolio were in active bankruptcy or foreclosure. This portfolio was responsible for the majority of the increase in the percentage of our servicing portfolio that was delinquent at both December 31, 2000 and 1999. 10
As of December 31, ------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------------------- National National National Company Average(1) Company Average(1) Company Average(1) ---------------------- ---------- ----------------------- ---------- ---------------------- ----------- Number Percentage Percentage Number Percentage Percentage Number Percentage Percentage of of Servicing of of of Servicing of of of Servicing of Loans Portfolio Loans Loans Portfolio Loans Loans Portfolio Loans --------- ------------ ---------- ---------- ------------ ---------- --------- ------------ ----------- Loans delinquent for: 30-59 days..... 4,610 5.35% 3.35% 5,214 5.64% 3.16% 4,079 4.50% 2.74% 60-89 days..... 932 1.08 0.79 992 1.07 0.73 1,120 1.24 0.63 90 days and over 616 0.72 0.73 530 0.58 0.61 2,426 2.68 0.56 --------- ------------ ---------- ---------- ------------ ---------- --------- ------------ ----------- Total delinquencies.. 6,158 7.15% 4.87% 6,736 7.29% 4.50% 7,625 8.42% 3.93% ========= ============ ========== ========== ============ ========== ========= ============ =========== Foreclosures.... 757 0.88% Not 1,027 1.11% 0.84% 905 1.00% 0.98% Available ========= ============ ========== ========== ============ ========== ========= ============ =========== - ---------- (1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit Residential Mortgage Loans" (Seasonally Adjusted) (Data as of September 30, 2001, December 31, 2000 and December 31, 1999, respectively. Data as of September 30, 2001 used as December 31, 2001 not yet available and data regarding foreclosures was not available.)
The following table sets forth certain information regarding the number and aggregate principal balance of the mortgage loans serviced by Matrix Financial, including both fixed and adjustable rate loans, excluding loans subserviced for others, at various interest rates:
As of December 31, ----------------------------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------------- ----------------------------------------------------------------------- Percentage Percentage Percentage Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate of Principal Principal of Principal Principal of Principal Principal Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance ---- --------- ---------- ------------ --------- ---------- ------------ -------- ----------- ------------ (Dollars in thousands) Less than 7.00%.... 16,024 $1,443,862 25.53% 6,317 $ 474,596 8.60 % 7,301 $ 618,659 10.50 % 7.00%--7.99%...... 23,815 1,895,797 33.52 18,424 1,335,738 24.21 30,848 2,467,177 41.89 8.00%--8.99%...... 19,002 1,144,290 20.23 27,691 1,801,131 32.64 28,620 1,822,777 30.95 9.00%--9.99%...... 12,122 542,621 9.59 19,369 1,002,226 18.16 15,892 647,918 11.00 10.00% and over.... 15,192 629,795 11.13 20,603 904,272 16.39 7,898 333,184 5.66 ---------- ---------- ----------- ---------- ---------- ------------ -------- ---------- ------------ Total............ 86,155 $5,656,365 100.00% 92,404 $5,517,963 100.00 % 90,559 $5,889,715 100.00 % ========== ========== =========== ========== ========== ============ ======== ========== ============
Loan administration fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens. The following table sets forth certain information regarding the remaining contractual maturity of the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, as of the dates shown. The changes in the remaining maturities as a percentage of unpaid principal between 2001, 2000 and 1999, as reflected below, are the result of acquisitions of mortgage servicing rights completed during 2001 and 2000. 11
As of December 31, ------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------ Percentage Percentage Percentage Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid of of Number Principal Principal of of Number Principal Principal of of Number Principal Principal Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount Loans of Loans Amount Amount --------- ------- --------- ---------- -------- ------- ---------- --------- --------- ------- ---------- ---------- -------- (Dollars in thousands) 1-5 years... 11,539 13.39% $ 169,794 3.00% 19,489 21.09% $ 321,196 5.82% 34,990 38.64% $1,043,559 17.72% 6-10 years... 14,711 17.08 442,458 7.82 15,891 17.20 411,152 7.45 10,364 11.44 577,077 9.80 11-15 years... 12,101 14.05 729,162 12.89 14,981 16.21 779,922 14.13 8,691 9.60 560,212 9.51 16-20 years... 18,013 20.91 1,428,794 25.26 27,779 30.06 2,505,728 45.41 18,624 20.57 1,766,824 30.00 21-25 years... 2,219 2.58 246,835 4.36 4,522 4.90 444,679 8.06 3,417 3.77 381,663 6.48 More than 25 years......... 27,572 32.00 2,639,322 46.66 9,742 10.54 1,055,286 19.13 14,473 15.98 1,560,380 26.49 ------- --------- ---------- -------- ------- ---------- --------- --------- ------- ---------- ---------- -------- Total....... 86,155 100.00% $5,656,365 100.00% 92,404 100.00% $5,517,963 100.00% 90,559 100.0 % $5,889,715 100.00% ======= ========= ========== ======== ======= ========== ========= ========= ======= ========== ========= ========
Our servicing activity is diversified throughout all 50 states with concentrations at December 31, 2001 in California, Texas, Missouri, Arizona and Florida of approximately 14.5%, 14.5%, 16.4%, 8.2% and 5.6%, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. Acquisition of Servicing Rights. Our strategy with respect to mortgage servicing focuses on acquiring servicing for which the underlying mortgage loans tend to be more seasoned and to have higher interest rates, lower principal balances and higher custodial escrow balances than newly originated mortgage loans. We believe this strategy allows us to reduce our prepayment risk, while allowing us to capture relatively high custodial escrow balances in relation to the outstanding principal balance. During periods of declining interest rates, prepayments of mortgage loans usually increase as homeowners seek to refinance at lower interest rates, resulting in a decrease in the value of the servicing portfolio. Mortgage loans with higher interest rates and/or higher principal balances are more likely to result in prepayments since the cost savings to the borrower from refinancing can be significant. During 2001, interest rates continued to decrease throughout the year. While our prepayment rates increased, despite the strategy mentioned above, we remained opportunistic in our acquisition philosophy. Due to the interest rates prevalent during 2001 and the lack of the discussed servicing products available, we purchased only minimal servicing during 2001. If higher balance, less-seasoned portfolios are available at our desired internal rate of return, we may, from time to time, pursue such acquisitions. 13 The following table shows quarterly and annual average prepayment rate experience on the mortgage loans serviced by Matrix Financial, excluding loans subserviced by and for others: For the Year Ended December 31, ----------------------------------------------------- 2001(1)(4) 2000(2)(4) 1999(3)(4) ---------------- ---------------- ---------------- Quarter ended: December 31.... 24.67% 12.50% 13.63% September 30... 25.13 12.70 17.43 June 30........ 24.63 12.70 24.70 March 31....... 17.13 10.50 26.47 ---------------- ---------------- ---------------- Annual average.... 22.89% 12.10% 20.56% ================ ================ ================ - ---------- (1) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $889.0 million, $581.8 million, $306.9 million and $1.1 billion for the quarters ended December 31, September 30, June 30, and March 31, 2001, respectively. (2) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $447 million, $0, $16 million and $0 for the quarters ended December 31, September 30, June 30 and March 31, 2000, respectively. (3) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $0, $576 million, $1.0 billion and $238 million for the quarters ended December 31, September 30, June 30, and March 31, 1999, respectively. (4) These prepayment rates do not include prepayments that resulted from us targeting our own servicing portfolio for refinance opportunities. Historically, we acquired substantially all of our mortgage servicing rights in the secondary market. The industry expertise of Matrix Capital Markets and Matrix Financial allows us to capitalize upon inefficiencies in this market when acquiring mortgage servicing rights. Prior to acquiring mortgaging servicing rights, we analyze a wide range of characteristics of each portfolio considered for purchase. This analysis includes projecting revenues and expenses and reviewing geographic distribution, interest rate distribution, loan-to-value ratios, outstanding balances, delinquency history and other pertinent statistics. Due diligence is performed either by our employees or a designated independent contractor on a representative sample of the mortgages involved. The purchase price is based on the present value of the expected future cash flow, calculated by using a discount rate, loan prepayment, default rate and other assumptions that we consider to be appropriate to reflect the risk associated with the investment. In 2000, we began to retain a portion of the mortgage servicing rights generated from the origination platform. Throughout 2000 and for the majority of 2001, we generally retained the servicing on the loans sold to Ginnie Mae. In the fourth quarter of 2001, we began to retain the servicing on loans sold to Fannie Mae and Freddie Mac and sold our newly originated Ginnie Mae servicing. The decision on which servicing to retain or sell is based on factors including interest rate environment, secondary market pricing for the servicing, our capital levels and liquidity. As of December 31, 2001, in terms of unpaid principal amount, approximately $1.4 billion of the mortgage servicing rights in our portfolio were from loans originated and sold by Matrix Financial. Sales of Servicing Rights. We periodically sell our purchased mortgage servicing portfolios and generally sell a portion of the mortgage servicing rights on new loans that we originate, as mentioned above. These sales generate cash at the time of sale but reduce future cash flow and servicing fee income. We sold mortgage servicing rights on loans that we originated having an aggregate principal amount of $1.7 billion during the year ended December 31, 2001. Periodically, we may also sell purchased mortgage servicing rights to restructure our portfolio or generate revenues. Purchased mortgage servicing rights were sold on loans having an aggregate principal amount of $126.8 million during the year ended December 31, 2001 for net gains of approximately $200,000. We anticipate that we will continue to sell a portion of our originated mortgage servicing rights on new loans that we originate. We also may sell purchased mortgage servicing rights. We intend to base decisions regarding 13 future mortgage servicing sales upon our cash requirements, purchasing opportunities, capital needs, earnings and the market price for mortgage servicing rights. During a quarter in which we sell purchased mortgage servicing rights, reported income will tend to be greater than if we had not made the sale during that quarter. Prices obtained for mortgage servicing rights vary depending on servicing fee rates, anticipated prepayment rates, average loan balances, remaining time to maturity, servicing costs, custodial escrow balances, delinquency and foreclosure experience and purchasers' required rates of return. In the ordinary course of selling mortgage servicing rights in accordance with industry standards, we make certain representations and warranties to purchasers of mortgage servicing rights. If a borrower defaults and there has been a breach of representations or warranties and we have no third party recourse, we may become liable for the unpaid principal and interest on defaulted loans. In such a case, we may be required to repurchase the mortgage loan and bear any subsequent loss on the loan. In connection with any purchases of mortgage servicing rights that we make, we also are exposed to liability to the extent that an originator or seller of the mortgage servicing rights is unable to honor its representations and warranties. Historically, we have not incurred material losses due to breaches of representations and warranties and we do not anticipate any future material losses due to breaches of representations and warranties; however, there can be no assurance that we will not experience such losses. Hedging of Servicing Rights. Our investment in mortgage servicing rights is exposed to potential impairment in certain interest rate environments. As previously discussed, the prepayment of mortgage loans increases during periods of declining interest rates as homeowners seek to refinance their loan to lower interest rates. If the level of prepayment on segments of our mortgage servicing portfolio reaches a level higher than we projected for an extended period of time, the associated basis in the mortgage servicing rights may be impaired. To mitigate this risk of impairment due to declining interest rates, we initiated a hedging strategy during 1997 that used a program of exchange-traded futures and options. Through December 31, 2000, our hedging program qualified for hedge accounting treatment based on a high degree of statistical correlation and then current accounting guidance. With the required adoption of SFAS 133 on January 1, 2001, we did not attempt to qualify for hedge accounting treatment due to the requirements in the standard that are necessary to do so. As such, currently, we are not hedging our servicing rights. See additional information regarding the impact of SFAS 133 in Note 2 to the consolidated financial statements included elsewhere in this document. During 2001, based on valuation models which incorporate, among other things, prepayment speeds, we recorded an impairment reserve on our mortgage servicing rights totaling approximately $200,000. Brokerage, Consulting and Outsourcing Services Brokerage Services. Matrix Capital Markets, formerly called United Financial, Inc., changed its name in 2001 to better identify itself as affiliated with the Matrix family of companies. Matrix Capital Markets operates as one of the nation's leading full-service mortgage servicing and mortgage loan brokers. It is capable of analyzing, packaging, marketing and closing transactions involving mortgage servicing and loan portfolios and selected merger and acquisition transactions for mortgage banking entities. Matrix Capital Markets markets its services to all types and sizes of market participants, thereby developing diverse relationships. Mortgage servicing rights are sold either on a bulk basis or a flow basis. In a bulk sale, the seller identifies, packages and sells a portfolio of mortgage servicing rights to a buyer in a single transaction. In a flow sale, the seller agrees to sell to a specified buyer from time to time, at a predetermined price, the mortgage servicing rights originated by the seller that meet certain criteria. Matrix Capital Markets is capable of helping both buyers and sellers with respect to bulk and flow sales of mortgage servicing rights. We believe that the client relationships developed by Matrix Capital Markets through its national network of contacts with commercial banks, mortgage companies, savings associations and other institutional investors represent a significant competitive advantage and form the basis for Matrix Capital Market's national market presence. These contacts also enable Matrix Capital Markets to identify prospective clients for our other subsidiaries and make referrals when appropriate. See "--Consulting and Analytic Services" below. Most institutions that own mortgage servicing rights have found that careful management of these assets is necessary due to their susceptibility to interest rate cycles, changing prepayment patterns of mortgage loans and fluctuating earnings rates achieved on custodial escrow balances. Because companies must capitalize originated mortgage servicing rights, management of mortgage servicing assets has become even more critical. These management efforts, combined with interest rate sensitivity of assets and the growth strategies of market participants, create constantly changing supply and demand and, therefore, constantly fluctuating price levels in the secondary market for mortgage servicing rights. 14 The sale and transfer of mortgage servicing rights occurs in a market that is inefficient and often requires an intermediary to match buyers and sellers. Prices are unpublished and closely guarded by market participants, unlike most other major financial secondary markets. This lack of pricing information complicates an already difficult process of differentiating between servicing product types, evaluating regional, economic and socioeconomic trends and predicting the impact of interest rate movements. Due to its significant contacts, reputation and market penetration, Matrix Capital Markets has access to information on the availability of mortgage servicing portfolios, which helps it bring interested buyers and sellers together. Due to the consolidation that has taken place in the mortgage banking industry, the overall market, including the number of buyers and sellers of servicing, has decreased. As a result, we have experienced an overall decrease in both the portfolios brokered and the corresponding revenue. In the current market, we do not anticipate this trend to reverse. In addition, Matrix Capital Markets provides brokerage services to buyers and sellers of all types of loan products. Matrix Capital Markets provides loan brokerage services to both servicing brokerage clients and non-servicing brokerage clients. During 2001, Matrix Capital Markets continued to enhance its ability in the areas of analyzing, brokering and acquisition of all loan products. This was accomplished by hiring additional professional personnel and continued cross-training of existing staff. Consulting and Analytic Services. Matrix Capital Markets continues to make significant commitments to its analytics department, which has developed expertise in helping companies implement and track their "mark-to-market" valuations and analyses. Matrix Capital Markets has enhanced its existing valuation models and has created a software program that can be customized to fit its customers' many different needs and unique situations in performing valuations and analyses. In addition, Matrix Capital Markets has the infrastructure and management information system capabilities necessary to undertake the complex analyses required by SFAS 140. Many of the companies affected by the implementation of SFAS 140 have outsourced this function to a third party rather than dedicate the resources necessary to develop systems for and perform their own SFAS 140 valuations. Because SFAS 140 requires that mortgage servicing portfolios be valued at the lower of cost or market value on a quarterly basis, active management of servicing assets has become a critical component to holders of mortgage servicing rights. Due to the risk of impairment of mortgage servicing rights as a result of constantly changing interest rates and prepayment speeds on the underlying mortgage portfolio, risk management of mortgage servicing rights by holders of mortgage servicing rights portfolios, which typically takes the form of hedging the portfolio, has become more prevalent. The SFAS 140 "mark-to-market" analyses done by Matrix Capital Markets help clients assess which of their portfolios of mortgage servicing rights are most susceptible to impairment due to interest rate and prepayment risk. We believe that the services offered by the analytics department of Matrix Capital Markets provide us with a competitive advantage in attracting and retaining clients because we are able to offer financial services companies and financial institutions a more complete package of services than our competitors. In addition, Matrix Capital Markets is able to refer clients to Matrix Bank for financing opportunities and bulk loan acquisitions and to Matrix Asset Management for real estate management and disposition services. The full range of services offered by Matrix Capital Markets and its affiliates further strengthens Matrix Capital Market's client relationships. Real Estate Management and Disposition Services. Matrix Asset Management provides real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions across the United States. In addition to the unaffiliated clients currently served by Matrix Asset Management, many of which are also clients of Matrix Capital Markets, Matrix Financial uses Matrix Asset Management exclusively in handling the disposition of foreclosed real estate for which it is responsible. Having Matrix Asset Management, rather than Matrix Financial, provide this service transforms the disposition process into a revenue generator for us, since Matrix Asset Management typically collects a referral fee based on the value of the foreclosed real estate from the real estate broker involved in the sale transaction. Because Matrix Asset Management typically collects a portion of its fee from the real estate broker, Matrix Asset Management is able to provide this disposition service on an outsourced basis at a reduced cost to the mortgage loan servicer. Matrix Asset Management is able to pass a portion of the cost of the disposition on to the real estate broker because of the volume it generates. In addition, Matrix Asset Management provides limited collateral valuation opinions to clients who are interested in assessing the value of the underlying collateral on nonperforming mortgage loans, as well as to clients such as Matrix 15 Bank and other third party mortgage loan originators and buyers interested in evaluating potential bulk purchases of mortgage loans. School Services. In addition to providing financing to charter schools as mentioned in "Lending Activities --Commercial and Other Lending," ABS also provides a wide variety of outsourced business and consulting services to charter schools. The most basic services offered by ABS include fund accounting, cash management, budgeting, governmental reporting and payroll and accounts payable processing. Additionally, ABS consults with and offers programs to charter schools in the following areas: o facility and safety management; o technology; o policy development; o grant administration; and o comprehensive insurance coverage. ABS also provides administrative and instructional leadership to some charter schools by placing administrators on-site at the charter schools to take a hands-on approach and work with the schools with regard to curriculum development, special education and personnel management. The business services provided by ABS are integral to the financing division, as these services allow ABS to use their knowledge of the school's financial condition and the capability of the schools' operators to make informed decisions in the underwriting of charter school financing. The services also give ABS a significant advantage in the servicing and ongoing monitoring of the schools, which we believe is imperative to the collection process and the overall success of our financing efforts. ABS has begun to expand its services to include more operational control over individual charter schools, which consists of active oversight of the day-to-day operations of the charter, including the selection of curriculum. The expansion of the services applies to both independent charter schools and charter schools managed by ABS. Self-Directed Trust, Custody and Clearing Activities Self-Directed Trust and Custody Services. Sterling Trust provides administrative services for self-directed individual retirement accounts, qualified business retirement plans and personal custodial accounts, as well as corporate escrow and paying agent services. In addition, Sterling Trust offers specialized custody and clearing services to investment professionals. These services are marketed on a nationwide basis to the financial services industry, specifically broker-dealers, registered representatives, financial planners and advisors, tax professionals, insurance agents and investment product sponsors. The advantage offered by Sterling Trust is the ability to hold a wide array of publicly traded investments, as well as nonstandard assets and private placement offerings. Sterling Trust does not offer financial planning or advising services, nor does it recommend, sell or solicit any investments. Sterling Trust acts only as a directed custodian and is not affiliated with any investment. It has always been Sterling Trust's mission to keep this independence to ensure that high quality services are offered without any conflicting interests. Sterling Trust executes no investment transaction without the direction of the account holder or the account holder's authorized representative. At December 31, 2001, Sterling Trust had assets under administration of over $6.0 billion. Clearing Services. Matrix Settlement & Clearance Services, our joint venture, provides automated clearing of mutual funds utilizing the National Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance & Settlement platform for banks, trust companies, third party administrators and registered investment advisors. In performing services for its customers, Matrix Settlement & Clearance Services generates low-cost deposits and trust and custodial fees for the Company. As of December 31, 2001, Matrix Settlement & Clearance Services had 56 clients under contract with those clients administering approximately $7.6 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. During 2001, Matrix Settlement & Clearance Services established its subsidiary, MSCS Financial Services, LLC, which began operations January 2, 2002 as a NASD registered broker-dealer. 16 Through our wholly owned subsidiary, Matrix Advisory Services, LLC, we plan to offer an Internet-based private wealth management service through the utilization of proprietary asset allocation models in 2002 as a complementary business to the clearing operation. The model was developed and will be supported by a nationally recognized research and investment firm with whom we have an exclusive agreement. This research and investment firm will, in most cases, act as the investment advisor to the client. The advantage that our service will offer is a turnkey approach with the automation of the mutual fund clearing. Competition We compete for the acquisition of mortgage servicing rights and bulk loan portfolios mainly with mortgage companies, savings associations, commercial banks and other institutional investors. We believe that we have competed successfully for the acquisition of mortgage servicing rights and bulk loan portfolios by relying on the advantages provided by our unique corporate structure and the secondary market expertise of our employees. We believe that Matrix Bank's most direct competition for deposits comes from local financial institutions. Customers distinguish between market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Matrix Bank's cost of funds fluctuates with general market interest rates. During certain interest rate environments, we expect additional significant competition for deposits from corporate and governmental debt securities, as well as from money market mutual funds. Matrix Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing. For mortgage loan and mortgage servicing rights, brokerage and consulting, we compete mainly with other mortgage banking consulting firms and national and regional investment banking companies. We believe that the customers distinguish between market participants based primarily on customer service. Matrix Capital Markets competes for its brokerage and consulting activities by: o recruiting qualified and experienced sales people; o developing innovative sales techniques; o offering superior analytical services; o providing financing opportunities to its customers through its affiliation with Matrix Bank; and o seeking to provide a higher level of service than is furnished by its competitors. In originating mortgage loans, Matrix Financial and Matrix Bank compete mainly with other mortgage companies, finance companies, savings associations and commercial banks. Customers distinguish among market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Aggressive pricing policies of our competitors, especially during a declining period of mortgage loan originations, could in the future result in a decrease in our mortgage loan origination volume and/or a decrease in the profitability of our loan originations, thereby reducing our revenues and net income. We compete for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to mortgage brokers and borrowers than is furnished by our competitors. However, we do not have a significant market share of the lending markets in which we conduct operations. Sterling Trust faces considerable competition in all of the services and products that it offers, mainly from other self-directed trust companies and broker-dealers. Sterling Trust also faces competition from other trust companies and trust divisions of financial institutions. Sterling Trust's niche has been, and will continue to be, providing high quality customer service and servicing nonstandard retirement products. In an effort to increase market share, Sterling Trust will endeavor to provide superior service, offer technologically advanced solutions, expand its marketing efforts, provide competitive pricing and continue to diversify its product mix. Matrix Asset Management competes against other companies that specialize in providing real estate management and disposition services on foreclosed property. Additionally, clients or potential clients that opt to perform these services in-house diminish Matrix Asset Management's market. ABS competes with other outsourcing companies and Educational Management Organizations, as well as schools that prefer to perform the services offered by ABS in-house. 17 Employees At December 31, 2001, the Company had 960 employees. We believe that our relations with our employees are good. The Company is not party to any collective bargaining agreement. Regulation and Supervision Set forth below is a brief description of various laws and regulations affecting our operations. The description of laws and regulations contained in this document does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Any change in applicable laws, regulations or regulatory policies may have a material effect on our business, operations and prospects. Matrix Bancorp. We are a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act. As such, we are subject to Office of Thrift Supervision regulation, examination, supervision and reporting requirements. In addition, the Office Thrift Supervision has enforcement authority over us and our savings association and non-savings association subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of our subsidiary savings institution, Matrix Bank. In addition, Matrix Bank must notify the Office of Thrift Supervision at least 30 days before making any capital distribution to us. As a unitary savings and loan holding company that has been in existence previous to May 4, 1999, we generally are not restricted under existing laws as to the types of business activities in which we may engage, provided that Matrix Bank continues to be a "qualified thrift lender" under the Home Owners' Loan Act. To maintain its status as a qualified thrift lender, Matrix Bank must maintain a minimum percentage of its assets in qualified thrift investments unless the Office of Thrift Supervision grants an exception to this requirement. In general, qualified thrift investments include certain types of residential mortgage loans and mortgage-backed securities. If we acquire control of another savings association as a separate subsidiary, we would become a multiple savings and loan holding company. Multiple savings and loan holding companies may only engage in those activities permissible for a financial holding company under the Bank Holding Company Act of 1956. Generally, financial holding companies may only engage in activities such as banking, insurance and securities activities, as well as merchant banking activities under certain circumstances. In addition, if Matrix Bank fails to maintain its status as a qualified thrift lender, within one year of Matrix Bank's failure, we would be required to register as a bank holding company under the Bank Holding Company Act of 1956. The Change in Bank Control Act provides that no person, acting directly or indirectly or thorough or in concert with one or more other persons, may acquire control of a savings association unless the Office of Thrift Supervision has been given 60 days prior written notice. The Home Owners' Loan Act provides that no company may acquire control of a savings association without the prior approval of the Office of Thrift Supervision. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the Office of Thrift Supervision. Pursuant to federal regulations, control of a savings association (which includes its holding company) is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of the association or the ability to control the election of a majority of the directors of the association. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, or more than 25% of any class of stock of a savings association, where certain enumerated "control factors" are also present in the acquisition. The Office of Thrift Supervision may prohibit an acquisition of control if it would result in a monopoly or substantially lessen competition, the financial condition of the acquiring person might jeopardize the financial stability of the association, or the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. Gramm-Leach-Bliley. The Gramm-Leach-Bliley Act of 1999 (otherwise known as the "Financial Services Modernization Act") eliminated many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The law revised and expanded the Bank Holding Company Act framework to permit a holding company structure to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determined to be financial in nature, incidental to 18 such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Financial Services Modernization Act prohibits unitary savings and loan holding companies formed after May 4, 1999 from engaging in nonfinancial activities. We are a grandfathered unitary savings and loan holding company. The Financial Services Modernization Act has not had a material adverse effect on our operations. However, the Financial Services Modernization Act permits banks, securities firms and insurance companies to affiliate. This has continued a trend in the financial services industry toward further consolidation. The Financial Services Modernization Act could result in an increasing amount of competition from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources. In addition, the Financial Services Modernization Act may have an anti-takeover effect because it may tend to limit our attractiveness as an acquisition candidate to other savings and loan holding companies and financial holding companies. The Office of Thrift Supervision is proposing to require certain savings and loan holding companies to notify the Office of Thrift Supervision 30 days before undertaking certain significant new business activities. According to the Office of Thrift Supervision, the notice will enable the agency to assess the potential impact on the risk profile of the consolidated entity and subsidiary thrifts. The Office of Thrift Supervision also seeks comment on its proposal to codify its current practices for reviewing the capital adequacy of savings and loan holding companies and, when necessary, requiring additional capital on a case-by-case basis. The Office of Thrift Supervision could object or approve with conditions an activity or transaction if it finds a material risk to the safety and soundness and stability of the thrift. It is possible that such regulations, if adopted, would impose time delays and potential increased capital costs to the operations of Matrix Bank. Federal Savings Bank Operations. Matrix Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and potentially by the Federal Deposit Insurance Corporation, which insures its deposits up to applicable limits. Such regulation and supervision: o establishes a comprehensive framework of activities in which Matrix Bank can engage; o limits the types and amounts of investments permissible for Matrix Bank; o limits the ability of Matrix Bank to extend credit to any given borrower; o significantly limits the transactions in which Matrix Bank may engage with its affiliates; o requires Matrix Bank to meet a qualified thrift lender test that requires Matrix Bank to invest in qualified thrift investments, which include primarily residential mortgage loans and related investments; o places limitations on capital distributions by savings associations such as Matrix Bank, including cash dividends; o imposes assessments to the Office of Thrift Supervision to fund its operations; o establishes a continuing and affirmative obligation, consistent with Matrix Bank's safe and sound operation, to help meet the credit needs of its community, including low and moderate income neighborhoods; o requires Matrix Bank to maintain certain noninterest-bearing reserves against its transaction accounts; o establishes various capital categories resulting in various levels of regulatory scrutiny applied to the institutions in a particular category; and o establishes standards for safety and soundness. Matrix Bank must submit annual audit reports prepared by independent auditors to federal and state regulators. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted to the Office of Thrift Supervision. The audit committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. The regulatory structure is designed primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in these regulations, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material impact on Matrix Bank and its operations. Transactions with Affiliates. Under current federal law, Sections 23A and 23B of the Federal Reserve Act govern transactions between depository institutions and their affiliates. These provisions are made applicable to savings associations, such as Matrix Bank, by the Home Owners' Loan Act. In a holding company context, in general, the parent holding company of a savings association and any companies that are controlled by the parent holding company are affiliates of the savings association. However, the Office of Thrift Supervision has the discretion to treat subsidiaries of savings associations as affiliates on a case-by-case basis. Section 23A limits the extent to which the 19 savings association or its subsidiaries may engage in certain transactions with its affiliates. These transactions include, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Generally, these transactions between the savings association and any one affiliate cannot exceed 10% of the savings association's capital stock and surplus, and these transactions between the savings institution and all of its affiliates cannot, in the aggregate, exceed 20% of the savings institution's capital stock and surplus. Section 23A also establishes specific collateral requirements for loans or extensions of credit to an affiliate, and for guarantees or acceptances on letters of credit issued on behalf of an affiliate. Applicable regulations prohibit a savings association from lending to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. Section 23B requires that transactions covered by Section 23A and a broad list of other specified transactions be on terms and under circumstances substantially the same, or no less favorable to the savings association or its subsidiary, as similar transactions with non-affiliates. In addition to the restrictions on transactions with affiliates that Sections 23A and 23B of the Federal Reserve Act impose on depository institutions, the regulations of the Office of Thrift Supervision also generally prohibit a savings association from purchasing or investing in securities issued by an affiliate. Matrix Bank engages in transactions with its affiliates, which are structured with the intent of complying with these regulations. Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation. Matrix Bank is a member of the Savings Association Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The deposits of Matrix Bank are insured up to $100,000 per depositor by the Federal Deposit Insurance Corporation. This insurance is backed by the full faith and credit of the United States. As insurer, the Federal Deposit Insurance Corporation imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the Federal Deposit Insurance Corporation. It also may prohibit any Federal Deposit Insurance Corporation-insured institution from engaging in any activity the Federal Deposit Insurance Corporation determines by regulation or order to pose a serious risk to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also may initiate enforcement actions against savings associations and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The Federal Deposit Insurance Corporation's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized, as defined below, and considered healthy pay the lowest premium while institutions that are less than adequately capitalized, as defined below, and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured depository institutions is made by the Federal Deposit Insurance Corporation for each semi-annual assessment period. The Federal Deposit Insurance Corporation is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the Savings Association Insurance Fund will be less than the designated reserve ratio of 1.25% of the Savings Association Insurance Fund's insured deposits. In setting these increased assessments, the Federal Deposit Insurance Corporation must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation may also impose special assessments on Savings Association Insurance Fund members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the Federal Deposit Insurance Corporation. Since January 1, 1997, the premium schedule for insured institutions in the Bank Insurance Fund and the Savings Association Insurance Fund has ranged from 0 to 27 basis points. However, Savings Association Insurance Fund and Bank Insurance Fund insured institutions are required to pay a Financing Corporation or "FICO" assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the quarter ended December 31, 2002, the FICO assessment for both Savings Association Insurance Fund and Bank Insurance Fund insured institutions was equal to 1.84% for each $100 in domestic deposits maintained at the institution. These assessment, which will be revised based upon the level of Savings Association Insurance Fund and Bank Insurance Fund deposits, will continue until the bonds mature in the year 2017. Brokered Deposits. Under the Federal Deposit Insurance Corporation regulations governing brokered deposits, well capitalized associations, such as Matrix Bank, are not subject to brokered deposit limitations, while adequately capitalized associations are subject to certain brokered deposit limitations and undercapitalized associations may not accept brokered deposits. At December 31, 2001, Matrix Bank had $303.0 million of brokered deposits. In the event Matrix Bank is not permitted to accept brokered deposits in the future, it would have to find replacement sources of funding. It is possible that such alternatives, if available, would result in a higher cost of funds. 20 Matrix Bank's Capital Ratios. Federal law requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to savings institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Office of Thrift Supervision has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be: o "well capitalized" if it has a total risk-based capital ratio of 10% or greater and a leverage ratio of 5% or greater; o "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater and generally a leverage ratio of 4% or greater; o "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%; o "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and o "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of December 31, 2001, Matrix Bank was a "well capitalized" institution. "Undercapitalized" institutions must adhere to growth, capital distribution and dividend and other limitations and are required to submit a capital restoration plan with the Office of Thrift Supervision within 45 days after an association receives notice of such undercapitalization. A savings institution's compliance with its capital restoration plan is required to be guaranteed by any company that controls the "undercapitalized" institution in an amount equal to the lesser of 5% of total assets when deemed "undercapitalized" or the amount necessary to achieve the status of "adequately capitalized." If an "undercapitalized" savings institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" institutions must comply with one or more of a number of additional restrictions, including an order by the Office of Thrift Supervision to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restriction on interest rates paid on deposits, compensation of executive officers and capital distributions to the parent holding company. "Critically undercapitalized" institutions must comply with additional sanctions, including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains this status. The following table indicates Matrix Bank's regulatory capital ratios at December 31, 2001:
As of December 31, 2001 ---------------------------------- Core Risk-Based Capital Capital ---------------- ----------------- (Dollars in thousands) Shareholder's equity/GAAP capital............................................. $ 103,360 $ 103,360 Disallowed assets............................................................. 3,386 3,386 Unrealized gain on available for sale securities.............................. (25) (25) Additional capital items: General valuation allowances............................................. -- 6,361 ---------------- ----------------- Regulatory capital as reported to the Office of Thrift Supervision............ 99,949 106,310 Minimum capital requirement as reported to the Office of Thrift Supervision... 61,671 72,418 ---------------- ----------------- Regulatory capital-excess..................................................... $ 38,278 $ 33,892 ================ ================= Capital ratios................................................................ 6.48% 11.74% Well capitalized requirement.................................................. 5.00% 10.00%
Federal Home Loan Bank System. Matrix Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. The Federal Home Loan Bank advances must be secured by specified types of collateral and may only be obtained for the purpose of providing funds for residential housing finance. The Federal Home Loan Bank funds its operations primarily from proceeds derived from the sale of consolidated obligations of the 21 Federal Home Loan Bank system. Matrix Bank, as a member of the Federal Home Loan Bank system, must acquire and hold shares of capital stock in its regional Federal Home Loan Bank in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 0.3% of total assets, or 5% of its advances (borrowings) from the Federal Home Loan Bank. Matrix Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2001 of $18.2 million. Federal Reserve System. The Federal Reserve Board regulations require all depository institutions to maintain noninterest-earning reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At December 31, 2001, Matrix Bank was in compliance with the Federal Reserve Board's reserve requirements. Savings associations, such as Matrix Bank, are authorized to borrow from the Federal Reserve Bank "discount window," but the Federal Reserve Board regulations require institutions to exhaust other reasonable alternative sources of funds, including Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve Bank. Mortgage Banking Operations. The rules and regulations applicable to our mortgage banking operations establish underwriting guidelines that, among other things, include anti-discrimination provisions, require provisions for inspections, appraisals and credit reports on prospective borrowers and fix maximum loan amounts. Moreover, we are required annually to submit audited financial statements to the Department of Housing and Urban Development, Fannie Mae, Freddie Mac and the Government National Mortgage Association, and each regulatory entity maintains its own financial guidelines for determining net worth and eligibility requirements. Our operations are also subject to examination by the Department of Housing and Urban Development, Fannie Mae, Freddie Mac and the Government National Mortgage Association at any time to assure compliance with the applicable regulations, policies and procedures. Mortgage loan origination activities are subject to, among other laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974, and the regulations promulgated under these laws that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Moreover, the Office of Thrift Supervision, as primary regulatory authority over Matrix Bank (the parent of Matrix Financial), examines our mortgage banking operations as well. Regulation of Sterling Trust Company. Sterling Trust provides custodial services and directed, non-discretionary trustee services. Sterling Trust was chartered under the laws of the State of Texas, and as a Texas trust company is subject to supervision, regulation and examination by the Texas Department of Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is subject to virtually all provisions of the Texas Banking Act as if the trust company were a state chartered bank. The activities of a Texas trust company are limited by applicable law generally to acting as a trustee, executor, administrator, guardian or agent for the performance of any lawful act, and to lend and accumulate money when authorized under applicable law. In addition, a Texas trust company with capital of $1 million or more, such as Sterling Trust, has the power to: o purchase, sell, discount and negotiate notes, drafts, checks and other evidences of indebtedness; o purchase and sell securities; o issue subordinated debentures and promissory notes; and o exercise powers incidental to the enumerated powers of Texas trust companies as set forth in the Texas Banking Act. A Texas trust company, such as Sterling Trust, is generally prohibited from accepting demand or time deposits if not insured by the Federal Deposit Insurance Corporation. Limitation on Capital Distributions. The Texas Finance Code prohibits a Texas trust company from reducing its outstanding capital and certified surplus through redemption or other capital distribution without the prior written approval of the Texas Banking Commissioner. Moreover, Sterling Trust anticipates that it will not pay cash dividends during 2002. Investments. A Texas trust company is generally obligated to maintain an amount equal to 40% of its capital and surplus in investments that are readily marketable and that can be converted into cash within four business days. So long as it complies with those requirements, a Texas trust company generally is permitted to invest its corporate assets in any investment otherwise permitted by law. Generally, a Texas trust company cannot invest an amount in excess of 15% of its capital and certified surplus in the securities of a single issuer. 22 Branching. The Texas Banking Act permits a Texas trust company to establish and maintain branch offices at any location within the state if it first obtains written approval of the Texas Banking Commissioner. Transactions with Related Parties. The Texas Banking Act prohibits the sale or lease of an asset of a Texas trust company, or the purchase or lease of an asset by a Texas trust company, where the transaction involves an officer, director, principal shareholder or affiliate, unless the transaction is approved by a disinterested majority of the board of directors or the written approval of the Texas Banking Commissioner is first obtained. In no event, however, may a Texas trust company lease real property in a transaction involving an officer, director, principal shareholder or affiliate without the prior approval of the Texas Banking Commissioner. Enforcement. Under applicable provisions of the Texas Banking Act, the Texas Banking Commissioner has the power to issue enforcement actions against a Texas trust company or any officer, employee or director of a Texas trust company. In addition, in certain circumstances, the Texas Banking Commissioner may remove a present or former officer, director or employee of a Texas trust company from office or employment, and may prohibit a shareholder or other persons participating in the affairs of a Texas trust company from such participation. The Texas Banking Commissioner has the authority to assess civil penalties of up to $500 per day against a Texas trust company (penalties against individuals may be higher) for violations of a cease and desist, removal or prohibition order. The Texas Banking Commissioner may also refer violations of a cease and desist order to the attorney general for enforcement by injunction. The Texas Banking Commissioner may pursue an order of supervision or conservatorship if: o the Texas Banking Commissioner determines that the Texas trust company is in a hazardous condition and that the continuation of business would be hazardous to the public or to the shareholders or creditors of the Texas trust company; o the Texas Banking Commissioner determines that the Texas trust company has exceeded its powers; o the Texas trust company has violated the law; or o the Texas trust company gives written consent to supervision or conservatorship. The Texas Banking Commissioner also has the authority to pursue the appointment of an independent receiver for a Texas trust company. Capital Requirements. Applicable law generally requires a Texas trust company to have and maintain minimum restricted capital of at least $1 million. Sterling Trust was out of compliance with the $1 million capital requirement at December 31, 2001. Subsequent to year-end, the Company contributed $900,000 to Sterling Trust to meet the minimum capital requirements. A Texas trust company may not have at anytime outstanding liabilities in an amount that exceeds five times its capital stock and surplus, except that with the approval of the Texas Banking Commissioner, a Texas trust company may have outstanding liabilities in an amount that does not exceed ten times its capital stock and surplus. The Texas Banking Commissioner may require additional capital of a Texas trust company if the Texas Banking Commissioner determines it necessary to protect the safety and soundness of such company. If the Texas Banking Commissioner were to do so, or in the event Sterling Trust fails to maintain capital of at least $1 million, there is no assurance that Sterling Trust would be able to restore its capital or meet such additional requirements. In either case, the Texas Banking Commissioner could pursue various enforcement actions, such as appointing either a conservator or a receiver for Sterling Trust. Currently, however, Sterling Trust is in compliance with all capital requirements under Texas law. Regulation of First Matrix Investment Services Corp. First Matrix Investment Services Corp. is a registered broker-dealer subsidiary that is subject to the Securities and Exchange Commission's net capital rule, Rule 15c3-1, promulgated under the Securities Exchange Act of 1934. The net capital rule is designed to measure the general financial condition and liquidity of a broker-dealer. Net capital generally is the net worth of a broker or dealer (assets minus liabilities), less deductions for certain types of assets. If a firm fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the Securities and Exchange Commission and suspension or expulsion by the NASD, and could ultimately lead to the firm's liquidation. The net capital rule also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. At December 31, 2001, First Matrix was in compliance with these requirements with net capital of $408,000, which was $395,000 in excess of its required net capital of $13,000. 23 The foregoing is an attempt to summarize some of the relevant laws, rules and regulations governing unitary savings and loan holding companies and savings institutions but does not purport to be a complete summary of all applicable laws, rules and regulations governing such financial institutions. Item 2. Properties We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion on acceptable terms. The following table sets forth certain information concerning the real estate that we own or lease:
Square Monthly Rent or Location Feet/Acres Owned/Leased Occupant Mortgage Payment - ----------------------- ---------------- ----------------------------------------- -------------------------- ----------------- Denver, CO............ 29,318 Leased through July 31, 2006 Matrix Bancorp, Matrix $ 45,652 Capital Markets, Matrix Asset Management, Matrix Bank, First Matrix and Matrix Settlement & Clearance Services Phoenix, AZ........... 62,771 Leased through February 28, 2007 Matrix Financial, Matrix $ 61,463 Bank, ABS and Matrix Bancorp Memphis, TN........... 3,305 Leased month to month Matrix Bancorp $ 5,508 Atlanta, GA........... 4,129 Leased through August 31, 2003 Matrix Financial $ 4,843 Chicago, IL........... 1,658 Leased through April 30, 2003 Matrix Financial $ 2,728 Clayton, MO........... 6,718 Leased through June 30, 2003 Matrix Financial $ 14,275 Dallas, TX............ 6,205 Leased through May 31, 2004 Matrix Financial $ 7,756 Denver, CO............ 9,549 Leased through June 30, 2002(2) Matrix Financial $ 11,401 Houston, TX........... 4,011 Leased through October 31, 2003 Matrix Financial $ 5,682 Phoenix, AZ........... 4,040 Leased through June 14, 2002(2) Matrix Financial $ 7,070 Sacramento, CA........ 4,230 Leased through December 31, 2003 Matrix Financial $ 7,563 Santa Ana, CA......... 8,851 Leased through August 31, 2003 Matrix Financial $ 13,277 Littleton, CO......... 300 Leased month to month Matrix Financial $ 800 Denver, CO............ 23,615 Leased through December 21, 2013 Matrix Bank $ 43,294 Evergreen, CO......... 1,855 Leased through December 31, 2002 Matrix Bank $ 4,085 Las Cruces, NM........ 1,800 Owned Matrix Bank N/A Las Cruces, NM........ 30,000(1) Owned Matrix Bank N/A Sun City, AZ.......... 3,000 Owned Matrix Bank N/A Westminster, CO....... 823 Leased through March 1, 2003 Matrix Bank $ 1,419 Waco, TX.............. 11,294 Leased through June 30, 2006 Sterling Trust $ 13,553 Waco, TX.............. 928 Leased through June 30, 2002(2) Sterling Trust $ 1,021 Fort Worth, TX........ 1,148 Leased through November 30, 2004 First Matrix $ 1,579 Cottonwood, AZ........ 2,400 Owned ABS N/A Cottonwood, AZ........ 1,000 Leased month to month ABS $ 765 Tucson, AZ............ 1,879 Leased through September 30, 2002(2) ABS $ 2,400 Snowflake, AZ......... 2,850 Leased month to month ABS $ 2,760 Deerfield Beach, FL 500 Leased month to month ABS $ 750 Peoria, AZ............ 29,470 Owned ABS N/A Phoenix, AZ........... 10,924 Owned ABS N/A Phoenix, AZ........... 3,800 Owned ABS N/A Phoenix, AZ........... 22,920 Owned ABS N/A Phoenix, AZ........... 1.39 Acres Owned ABS N/A Maricopa County, AZ... 12.893 Acres Owned ABS N/A Flagstaff, AZ......... 1.1 Acres Owned ABS N/A Dallas, TX............ 15,000 Owned ABS N/A Dallas, TX............ 11.8 Acres Owned ABS N/A Port Charlotte, FL.... 8,576 Owned ABS N/A - ---------- (1) Of this 30,000 square feet, approximately 15,500 square feet serve as the headquarters for Matrix Bank. Substantially all of the remaining space is rented to unaffiliated third parties at market prices. After the change of domicile is completed, it is anticipated that approximately 10,100 square feet will be utilized by Matrix Bank. (2) Management is reviewing options concerning renewal of the lease at its expiration.
24 Item 3. Legal Proceedings General. We are from time to time party to various litigation matters, in most cases, involving ordinary and routine claims incidental to our business. With respect to all pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. Therefore, no accrual for loss has been made as of December 31, 2001. However, the outcome with respect to one or more of these matters, if adverse, is reasonably likely to have a material, adverse impact on the consolidated financial condition, results of operations or cash flows of the Company. Matrix Bancorp. In early 1999, Matrix Bancorp and Matrix Bank instituted an arbitration action with the American Arbitration Association in Phoenix, Arizona against Fidelity National Financial, Inc. The arbitration action arose out of an alleged breach by Fidelity of a Merger Termination Agreement entered into between Matrix Bancorp and Fidelity in connection with the termination of their proposed merger. The arbitration panel has ruled that the entire Merger Termination Agreement was unenforceable. Matrix Bancorp and Matrix Bank filed an appeal of the arbitration panel's decision in federal district court in Phoenix, Arizona, which has been denied. In October 2001, Fidelity initiated a second arbitration to determine the validity of a release given in connection with the Merger Termination Agreement. Matrix Bancorp and Matrix Bank contest that the releases are valid and, in the alternative, have filed a counterclaim against Fidelity demanding restitutional damages for the value of the releases if they are determined valid. Matrix Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings, Inc., Matrix Bank, and Guy A. Gibson, President and Chief Executive Officer of Matrix Bancorp, Richard V. Schmitz, Chairman of the Board of Matrix Bancorp, and D. Mark Spencer, Vice Chairman of Matrix Bancorp, have been named defendants in an action filed in November 2000 styled Roderick Adderley, et al. v. Guy A. Gibson, et al. pending in the District Court of Tarrant County, Texas, seeking to impose joint and several liability on these defendants for the judgment against Sterling Trust in Roderick Adderley, et al. v. Advance Financial Services, Inc., et al. ("Adderley I") See "--Sterling Trust" below. The plaintiffs have asserted various theories of liability, including control person theories of liability under the Texas Securities Act and fraudulent transfer theories of liability. The defendants believe they have adequate defenses and intend to vigorously defend this action. The parties have agreed to abate the action pending the outcome of Adderley I. See "--Sterling Trust." The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Matrix Bank. A former customer of Matrix Bank is a debtor in a Chapter 11 proceeding under the Bankruptcy Code styled In re Apponline.com, Inc. and Island Mortgage Network, Inc. pending in the United States Bankruptcy Court for the Eastern District of New York. Prior to the bankruptcy filing, Matrix Bank had provided the customer, Island Mortgage Network, Inc., with a purchase/repurchase facility under which Matrix Bank purchased residential mortgage loans from Island Mortgage, with Island Mortgage having the right or obligation to repurchase such mortgage loans within a specified period of time. Several other financial institutions had provided Island Mortgage with warehouse financing or additional purchase/repurchase facilities (the "Origination Facilities"). At this time, it appears that no other financial institution that provided an Origination Facility to Island Mortgage has a conflicting interest with Matrix Bank in respect of the loans purchased by Matrix Bank, which were approximately $12.4 million in original principal amount (the "Purchased Loans"). Various third parties have instituted lawsuits, adversary proceedings or competing bankruptcy claims against Matrix Bank claiming an equitable interest in approximately eighteen of the Purchased Loans (approximately $2.1 million in original principal amount). These third parties consist primarily of title companies, closing attorneys and other closing agents that provided settlement funds in connection with the funding of a borrower's mortgage loan, in many cases, we believe in violation of various "good funds" laws, which typically require a closing agent to wait for receipt of "good funds" prior to disbursement of settlement funds on the origination of a loan. After providing settlement funds, these closing agents discovered that Island Mortgage had either provided company checks with insufficient funds or had inappropriately placed a stop payment on the checks. To date, Matrix Bank has fully resolved one claim and has reached tentative agreements to settle claims asserted against five others upon terms satisfactory to Matrix Bank. Additionally, certain parties in the chain of title to property securing approximately $2.7 million of loans, including sellers and prior lien holders, are seeking to void or rescind their transactions on the theory that they never received consideration. Matrix Bank has reached tentative agreement to settle claims arising from thirteen of these Purchased Loans upon terms satisfactory to Matrix Bank and is awaiting approval of the Bankruptcy Court. Matrix Bank believes it has adequate defenses and intends to vigorously defend the actions discussed in the previous two paragraphs. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. 25 The trustee for Island Mortgage has received an order from the Bankruptcy Court finding that the Purchased Loans are a part of the estate of Island Mortgage. Nevertheless, the trustee and Matrix Bank have reached an agreement, in principle, whereby the trustee will release all of its right in and to the Purchased Loans if the trustee, after performance of a "due diligence" review, determines that Matrix Bank owns the Purchased Loans or would otherwise have a perfected security interest in the Purchased Loans. Matrix Bank believes it can adequately demonstrate to the trustee that it is the owner of the Purchased Loans, or otherwise has perfected security interest in the Purchased Loans. The Company intends to vigorously defend its position in this matter. The ultimate legal and financial liability of the Company, if any, in this bankruptcy cannot be estimated with certainty at this time. For a description of Roderick Adderley, et al. v. Guy A. Gibson, et al., see "-Matrix Bancorp" above. Sterling Trust. Sterling Trust has been named a defendant in an action filed July 1999 styled Roderick Adderley, et al. v. Advanced Financial Services, Inc., et al. that was tried in Tarrant County, Texas district court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of 12 theories of liability posed by the plaintiffs, and the court has signed a judgment for certain of the plaintiffs in the amount of approximately $6.4 million. Sterling Trust has filed an appeal of this judgment and believes it has meritorious points of appeal. It intends to vigorously prosecute the appeal of this action. The ultimate resolution of this appeal, which is expected to occur in two to six months, could result in a loss of up to $6.4 million plus post-judgment interest and additional attorneys' fees. The ultimate legal and financial liability, if any, of Sterling Trust cannot be estimated with certainty at this time. Sterling Trust was named a defendant in several putative class action lawsuits instituted in November 2000 by one law firm in Pennsylvania. The styles of such lawsuits are as follows: Douglas Wheeler, et al. v. Pacific Air Transport, et al.; Paul C. Jared, et al. v. South Mountain Resort and Spa, Inc., et al.; Lawrence Rehrig, et al. v. Caffe Diva, et al.; Merrill B. Christman, et al. v. Millennium 2100, Inc., et al.; David M. Veneziale, et al. v. Sun Broadcasting Systems, Inc., et al.; Don Glazer, et al. v. Technical Support Servs., Inc., et al.; and Donald Maudlin, et al. v. World Vision Entertainment, Inc., et al. All of such lawsuits were originally filed in the United States District Court for the Western District of Pennsylvania. On April 26, 2001, the District Court for the Western District of Pennsylvania ordered that all of such cases, except Maudlin, be transferred to the United States District Court for the Western District of Texas so that Sterling Trust could properly present its motion to compel arbitration. Sterling Trust filed separate motions to compel arbitration in these actions, all of which were granted. Each of the six plaintiffs timely filed arbitration demands with the American Arbitration Association. The demands seek damages and allege Sterling Trust breached fiduciary duties and was negligent in administrating each claimant's self-directed individual retirement account holding a nine-month promissory note. Sterling Trust believes it has meritorious defenses and is defending the matters vigorously. With respect to the Maudlin case, Sterling Trust filed a motion to dismiss because it can find no evidence that the named plaintiff in the case ever had accounts with Sterling Trust. On December 7, 2001, the Court stayed Sterling Trust's motion to dismiss and granted the named plaintiff thirty days to file an amended petition adding a Sterling Trust accountholder as a nominal plaintiff. The named plaintiff filed an amended petition within the 30-day period; however, he did not add any additional plaintiffs. On February 5, 2002, the court granted Sterling Trust's motion to dismiss the case. Sterling Trust was named a defendant in an action filed in October 1999 styled John A. Redin, et al. v. Sterling Trust Company, et al. in the Superior Court of the State of California for the County of Los Angeles. The plaintiffs in this action sought to certify a class action on behalf of all persons and entities that invested in promissory notes issued by Personal Choice Opportunities. The plaintiffs alleged, among other things, that Sterling Trust, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. In January 2002, this matter was settled. The settlement requires no payment from Sterling other than the $5,000 retention amount pursuant to the terms of the Company's insurance policy. The remainder of the settlement consideration is to be paid the by Company's insurer. The settlement is subject to, among other things, approval of the settlement by the Court and negotiation and execution of appropriate releases between Sterling Trust and its insurer. If these conditions are met, the case will be dismissed with prejudice. In addition, Sterling Trust has been the subject of numerous lawsuits and arbitration proceedings in which customers and, in some cases, persons who are not customers allege various theories of liability against the Company for losses suffered by these claimants in connection with their failed investments in several enterprises. To the extent that Sterling Trust has had any relationship with any of such claimants, it has been solely as custodian of such claimants self-directed IRAs pursuant to contracts that specify the limited nature of Sterling Trust's obligations. We believe Sterling Trust has in each case acted in accordance with its obligations under the contracts and/or as otherwise imposed by law. We further believe that the ultimate outcome of each of these cases will not be material to the consolidated financial statements of 26 Company; but, there can be no assurances that there will not be an adverse outcome in any one or more of these cases or that any such adverse outcome will not have a material adverse effect on the consolidated financial statements of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2001. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock, $.0001 par value, is traded on The Nasdaq National Market under the symbol "MTXC." The following table sets forth the high and low sales prices for our common stock on The Nasdaq National Market for the periods indicated. Market Price ----------------------------- Quarter Ended: High Low ------------ ------------ December 31, 2001............. $ 11.400 $ 9.960 September 30, 2001............ 11.420 9.810 June 30, 2001................. 11.750 8.600 March 31, 2001 ............... 9.375 6.938 December 31, 2000............. $ 8.250 $ 6.031 September 30, 2000............ 12.938 5.500 June 30, 2000 ................ 9.000 6.750 March 31, 2000................ 14.125 7.875 On March 4, 2002, the closing price of our common stock was $10.80 per share. Also, as of that date, the approximate number of holders of record of our common stock was 44. This number does not include beneficial owners who hold their shares in a depository trust in "street" name. In May 2000, we announced the adoption of a Common Stock Repurchase Program under which we were authorized to repurchase up to $3 million of our common stock. Under this program, we had repurchased a total of 323,500 shares through December 31, 2001, for a total purchase price of approximately $2.5 million. Subsequent to December 31, 2001, the Company repurchased additional shares and reached the $3 million level. No executive officer or director participated in this repurchase. Our ability to repurchase stock is further limited due to various provisions in Matrix Bancorp's debt instruments, the most restrictive of which is our bank stock loan. Under the bank stock loan, Matrix Bancorp is allowed to make certain restricted payments, which includes repurchases of stock and payments of dividends to shareholders, in an amount of up to $3 million plus 25% of the Company's cumulative consolidated net income for fiscal quarters beginning with the quarter ending March 31, 2001. Although we have no present plans to do so, we may seek in the future authorization from the Board of Directors of Matrix Bancorp to repurchase additional shares of our Common Stock under the Common Stock Repurchase Program. Any such additional authorization will be consistent with the restrictions and limitations under our debt covenants, including those of the bank stock loan described above. We have not paid any dividends on our equity for the last three fiscal years. Any future determination as to dividend policy will be made at the discretion of the Board of Directors of the Company and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors the Board of Directors may deem relevant. Our ability to pay dividends is restricted by the same provisions that restrict our ability to repurchase our stock, as described in the immediately preceding paragraph. Additionally, Matrix Bancorp is prohibited from paying dividends on its common stock if the scheduled payments on our junior subordinated debentures and trust preferred securities have not been made. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 9 to the consolidated financial statements included elsewhere in this document. In addition, the ability of Sterling Trust and Matrix Bank to pay dividends to Matrix Bancorp may be restricted due to certain regulatory requirements. See "Regulation and Supervision." 27 Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF MATRIX BANCORP, INC. The following selected consolidated financial data and operating information of Matrix Bancorp, Inc. should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each of which is included elsewhere in this document.
As of and for the Year Ended December 31, ---------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------- ------------- -------------- ------------ (Dollars in thousands, except per share data) Statement of Income Data Net interest income before provision for loan and valuation losses.................. $ 40,510 $ 29,785 $ 29,463 $ 24,190 $ 13,888 Provision for loan and valuation losses.... 2,980 4,235 3,180 4,607 874 ------------ ------------- ------------ -------------- ------------ Net interest income after provision for loan and valuation losses.................. 37,530 25,550 26,283 19,583 13,014 ------------ ------------- ------------ -------------- ------------ Noninterest income: Loan administration...................... 30,113 23,850 23,686 17,411 16,007 Brokerage................................ 2,959 5,476 6,156 7,054 3,921 Trust services........................... 4,036 4,923 4,840 4,169 3,561 Real estate disposition services......... 2,572 3,677 3,659 2,036 1,121 Gain on sale of loans, mortgage-backed and SBA securities...................... 1,475 982 3,247 3,108 2,441 Gain on sale of mortgage servicing rights 167 2,634 363 803 3,365 Loan origination(8)...................... 34,933 7,587 6,218 5,677 4,694 School services.......................... 5,427 4,240 2,813 46 - Other.................................... 9,474 5,423 9,378 6,441 2,919 ------------ ------------- ------------ -------------- ------------ Total noninterest income............... 91,156 58,792 60,360 46,745 38,029 Noninterest expense........................ 115,899 77,841 69,586 52,939 37,746 ------------ ------------- ------------ -------------- ------------ Income before income taxes(8).............. 12,787 6,501 17,057 13,389 13,297 Income taxes(8)............................ 4,275 2,243 6,278 4,876 5,159 ------------ -------------- ------------ -------------- ------------ Net income................................. $ 8,512 $ 4,258 $ 10,779 $ 8,513 $ 8,138 ============ ============= ============ ============== ============ Net income per share assuming dilution(1).. $ 1.30 $ 0.63 $ 1.58 $ 1.24 1.20 Weighted average common shares assuming dilution................................... 6,560,454 6,748,857 6,833,546 6,881,890 6,781,808 Balance Sheet Data Total assets............................... $ 1,646,787 $ 1,418,795 $ 1,283,746 $ 1,012,155 $ 606,581 Mortgage-backed and SBA securities......... 6,963 66,616 -- -- -- Total loans, net........................... 1,349,150 1,116,021 1,103,515 848,448 511,372 Mortgage servicing rights, net............. 78,712 71,529 63,479 57,662 36,276 Deposits(2)................................ 866,235 602,669 562,194 490,516 224,982 Custodial escrow balances.................. 129,665 77,647 94,206 96,824 53,760 FHLB borrowings............................ 303,361 519,433 405,000 168,000 171,943 Borrowed money............................. 222,032 124,503 142,101 178,789 89,909 Total shareholders' equity................. 71,312 64,023 60,497 49,354 40,610 Operating Ratios and Other Selected Data Return on average assets(3)................ 0.54 % 0.32 % 1.02 % 1.02 % 1.78% Return on average equity(3)................ 12.82 6.79 19.79 18.92 22.71 Average equity to average assets(3)........ 4.18 4.75 5.16 5.41 7.86 Net interest margin(3)(4).................. 2.87 2.51 3.25 3.37 3.70 Operating efficiency ratio(5).............. 71.42 76.76 59.21 59.74 60.14 Total amount of loans purchased............ $ 105,936 $ 225,898 $ 701,952 $ 678,150 $ 493,693 Balance of owned servicing portfolio (end of period)................................. 5,656,365 5,517,963 5,889,715 5,357,729 3,348,062 Trust assets under administration (end of period).................................... 6,017,085 3,847,038 2,545,060 2,089,562 1,437,478 Wholesale loan origination volume.......... 3,612,477 512,541 443,363 574,963 402,984 Ratios of Earnings to Fixed Charges(6) Including interest on deposits............. 1.19x 1.09x 1.38x 1.36x 1.71x Excluding interest on deposits............. 1.39x 1.15x 1.75x 1.64x 2.30x Loan Performance Ratios and Data Allowance for loan and valuation losses.... $ 9,338 $ 8,581 $ 6,354 $ 3,710 $ 1,756 Nonperforming loans(7) .................... 37,251 28,516 25,641 13,209 4,990 Nonperforming loans/total loans(7) ........ 2.74 % 2.54 % 2.31 % 1.55 % 0.97% Nonperforming assets/total assets(7) ...... 2.79 2.20 2.06 1.40 1.03 28 Net loan charge-offs/average loans(3) ..... 0.17 0.18 0.06 0.38 0.04 Allowance for loan and valuation losses/ total loans ........................... 0.69 0.72 0.57 0.44 0.34 Allowance for loan and valuation losses/ nonperforming loans .................... 25.07 30.09 24.78 28.09 35.19 - ---------- (1) Net income per common share assuming dilution is based on the weighted average number of common shares outstanding during each period and the dilutive effect, if any, of stock options and warrants outstanding. There are no other dilutive securities. (2) Beginning in February 1998, Matrix Bank began accepting brokered deposits. At December 31, 2001, 2000 and 1999, the total balance of brokered deposits was $303.0 million, $203.6 million and $221.5 million, respectively. (3) Calculations are based on average daily balances where available and monthly averages otherwise. (4) Net interest margin has been calculated by dividing net interest income before loan and valuation loss provision by average interest-earning assets. (5) The operating efficiency ratio has been calculated by dividing noninterest expense, excluding amortization of mortgage servicing rights, by operating income. Operating income is equal to net interest income before provision for loan and valuation losses plus noninterest income. (6) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense. (7) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Nonperforming Assets" for a discussion of the level of nonperforming loans. (8) Amounts for the year ended December 31, 2001 are shown net of cumulative effect of a change in accounting principle.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following management's discussion and analysis of the financial condition and results of operations in conjunction with the preceding "Selected Consolidated Financial and Operating Information." Additionally, our consolidated financial statements and the notes thereto, as well as other data included in this document, should be read and analyzed in combination with the analysis below. General Matrix Bancorp was formed in June 1993 when the founding shareholders of Matrix Financial and United Financial, now known as Matrix Capital Markets, two of our subsidiaries, exchanged all of their outstanding capital stock for shares of our stock in a series of transactions that were each accounted for as a pooling of interests. In September 1993, we acquired Dona Ana Savings and Loan Association, FSB, which was subsequently renamed Matrix Capital Bank. The acquisition was accounted for using the purchase method of accounting. We formed Matrix Asset Management, formerly United Special Services, in June 1995 and United Capital Markets in December 1996. In February 1997, we acquired The Vintage Group (whose primary subsidiary is Sterling Trust) in a pooling of interests and, accordingly, no goodwill was recorded and our consolidated financial statements for the prior periods were restated. Additionally, we acquired ABS in March 1999. The acquisition was accounted for using the purchase method of accounting. We entered into our joint venture, Matrix Settlement & Clearance Services, in September of 1999. On August 1, 2000, we sold the stock of United Capital Markets to one of the officers of that company. On August 1, 2000, Matrix Financial, our mortgage banking operation, became an operating subsidiary of Matrix Bank. On October 31, 2001, First Matrix, our broker-dealer operation, became an operating subsidiary of Matrix Capital Markets. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank, Matrix Financial and ABS School Services; o loan origination fees generated by Matrix Financial and, to a lesser extent, Matrix Bank; o brokerage and consulting and disposition services fees realized by Matrix Capital Markets and Matrix Asset Management, respectively; o gains on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust; and o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates and the effect of these changes on our interest margins, the volume of loan originations, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are effected to a lesser extent by interest rates and more by competition and general market conditions. 29 Comparison of Results of Operations for Fiscal Years 2001 and 2000 Net Income; Return on Average Equity. Net income increased $4.2 million to $8.5 million for fiscal year 2001 as compared to $4.3 million for fiscal year 2000. On a per share basis, net income was $1.30 per diluted share for fiscal year 2001 and $0.63 for fiscal year 2000. Return on average equity increased to 12.8% for fiscal year 2001 as compared to 6.8% for fiscal year 2000. The increases in net income, earnings per share and return on average equity were caused primarily by an increase in net interest income after provision for loan and valuation losses and large increases in loan origination income and loan administration fees generated at Matrix Financial, offset by increases in compensation and employee benefit costs and increased amortization expense on mortgage servicing rights. Net Interest Income. Net interest income before provision for loan and valuation losses increased $10.7 million to $40.5 million for fiscal year 2001 as compared to $29.8 million for fiscal year 2000. Our net interest income before provision for loan and valuation losses increased due to the $229 million, or 19%, increase in our interest-earning assets. Additionally, an element of the increase was our net interest margin increasing to 2.87% for the year ended December 31, 2001 as compared to 2.51% for the year ended December 31, 2000. Although the yield on our interest-earning assets decreased to 7.46% for the year ended December 31, 2001 from 8.22% for the year ended December 31, 2000, that decrease was more than offset by the decrease in our cost of interest-bearing liabilities which for the same periods decreased to 5.15% from 6.15%. Both the decrease in the yield on our interest-earning assets and cost of interest-bearing liabilities is a direct result of the interest rate environment prevalent in 2001, which saw significant interest rate cuts by the Federal Reserve. Also, attributing to the increase in the margin was the overall increase in average noninterest-bearing deposits to $205 million at December 31, 2001 as compared to $141 million at December 31, 2000. The increase in the noninterest-bearing deposits is due to a combination of an increase in our custodial deposits and deposits generated from our investment in Matrix Settlement & Clearance Services. For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses decreased $1.2 million, or 30%, to $3.0 million for fiscal year 2001 as compared to $4.2 million for fiscal year 2000. This decrease was primarily attributable to year 2000 including a significant charge-off at ABS of a loan to a school client which closed, as well as a high year 2000 provision at ABS and Matrix Bank versus levels in 2001. For a discussion of the components of the allowance for loan losses, see "--Asset and Liability Management--Analysis of Allowance for Loan and Valuation Losses." For a discussion on the allowance as it relates to nonperforming assets, see "--Asset and Liability Management--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges, as well as activity in Ginnie Mae servicing portfolios. Loan administration fees increased $6.3 million to $30.1 million for fiscal year 2001 as compared to $23.8 million for fiscal year 2000. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio increased slightly to an average balance of $5.5 billion for fiscal year 2001 as compared to an average balance of $5.4 billion for fiscal year 2000, despite significant increases in prepayment rates due to the declining interest rate environment in the latter part of 2001. The increase in loan administration fees was primarily driven by increased revenue generated from the purchasing of delinquent government loans out of our Ginnie Mae servicing and the subsequent sale of those loans. The revenue generated from this activity was approximately $1.8 million. There were also increases in our ancillary fees. The remainder of the increase is attributed to a slightly higher average servicing balance and a higher balance of government servicing which tends to have higher servicing fees. Brokerage fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights. Brokerage fees continued with 2000 trends and decreased $2.5 million, or 46%, to $3.0 million for fiscal year 2001 as compared to $5.5 million for fiscal year 2000. This decrease was the result of a decrease in the balance of residential mortgage servicing portfolios brokered by Matrix Capital Markets, which in terms of aggregate unpaid principal balances on the underlying loans, decreased $12.5 billion, or 34%, to $23.9 billion for fiscal year 2001 as compared to $36.4 billion for fiscal year 2000. As previously discussed, the decrease noted is due to the consolidation that has taken place in the mortgage banking industry. The overall market, including the number of buyers and sellers servicing, has decreased, and as a result, we have experienced an overall decrease in both the portfolios brokered and the corresponding revenue. In any event, brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon the seller's need to recognize a sale or to receive cash flows. 30 Trust Services. Trust service fees decreased $900,000, or 18%, to $4.0 million for fiscal year 2001 as compared to $4.9 million for fiscal year 2000. The decrease in revenue is despite the fact that trust accounts under administration at Sterling Trust increased to 41,329 accounts at December 31, 2001 from 39,220 accounts at December 31, 2000 and total fiduciary assets under administration increased to $6.0 billion at December 31, 2001 from $3.8 billion at December 31, 2000. The growth in accounts and assets under administration occurred in third party administrator accounts, which increased 147% in 2001 to 3,554 accounts, which are generally priced at lower fees based on the level of administration required and generate revenues based on number of transactions within accounts versus level of assets. Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition service income decreased $1.1 million, or 30%, between the fiscal years 2001 and 2000 to $2.6 million. The decrease was due to the decrease in the number of properties closed during the year, which decreased 23%, from 1,872 in 2000 to 1,444 in 2001. Gain on Sale of Loans, Mortgage-Backed and SBA Securities. Gain on sale of loans and mortgage-backed securities increased $500,000 to $1.5 million for fiscal year 2001 as compared to $1.0 million for fiscal year 2000. Loan sales of approximately $76.1 million in 2001 were completed under standard purchase and sale agreements, with standard representations and warranties and without recourse. Sales of mortgage-backed securities were approximately $59.6 million in 2001 and pertained to loans that the Company had purchased and swapped for securities. The gains from both types of these sales represent cash gains. Gains on sale can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan or mortgage-backed portfolios available in the market, the type of loan or mortgage-backed portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights decreased $2.5 million to approximately $200,000 for fiscal year 2001 as compared to $2.7 million for fiscal year 2000. In terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights, we sold $1.7 billion in purchased mortgage servicing rights during fiscal year 2001 as compared to $1.1 billion during fiscal year 2000. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to, at times, pursue opportunistic sales of mortgage servicing rights. The 2000 year sale was undertaken to take advantage of aggressive pricing in the marketplace while the market was not as favorable of 2001 with the low interest rate environment prevalent throughout the year. Loan Origination. Loan origination income includes all mortgage loan fees, secondary marketing activity on new loan originations for both residential and SBA loans, and servicing release premiums on servicing sold and capitalized servicing on new originations sold, net of origination costs. Loan origination income increased $27.4 million, or 360%, to $34.9 million for fiscal year 2001 as compared to $7.5 million for fiscal year 2000. The increase is primarily attributable to an increase in wholesale residential mortgage loan production at Matrix Financial by $3.1 billion, or 602%, to $3.6 billion during fiscal year 2001 as compared to $512.5 million during fiscal year 2000. The increases in volume were due to our 2000 initiatives to increase origination platform and by the declining interest rate environment of 2001. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided to schools. School services income increased $1.2 million, or 28%, to $5.4 million for fiscal year 2001 as compared to $4.2 million for fiscal year 2000. This increase was primarily due to an increase in new school customers during 2001. Other Income. Other income increased $4.1 million, or 75%, to $9.5 million for fiscal year 2001 as compared to $5.4 million for fiscal year 2000. The increase in other income was primarily due to $3.4 million pre-tax gain on sale of assets generated due to the condemnation of real estate held by Matrix Bank in Denver, Colorado, which was going to be used for relocation of Matrix Bank's domicile. The City and County of Denver condenmed the property in October 2001. Noninterest Expense. Noninterest expense increased $38.1 million, or 49%, to $115.9 million for fiscal year 2001 as compared to $77.8 million for fiscal year 2000. This increase was primarily due to increased compensation and benefits expense, increased amortization of mortgage servicing rights and increased other general and administrative expense, offset by a decrease in professional fees. The following table details the major components of noninterest expense for the periods indicated: 31 Year Ended December 31, ------------------------------- 2001 2000 --------------- -------------- (In thousands) Compensation and employee benefits.......... $ 52,573 $ 34,245 Amortization of mortgage servicing rights .. 21,862 9,851 Occupancy and equipment..................... 6,525 4,785 Postage and communication................... 4,063 2,812 Professional fees........................... 2,883 4,687 Data processing............................. 2,907 2,413 Other general and administrative............ 25,086 19,048 --------------- -------------- Total.................................. $ 115,899 $ 77,841 =============== ============== Compensation and employee benefits increased $18.3 million, or 54%, to $52.6 million for fiscal year 2001 as compared to $34.2 million for fiscal year 2000. This increase was primarily the result of increased salary expense at Matrix Financial, and to a lesser extent, at ABS, Matrix Bancorp and Matrix Bank. Matrix Financial's salary expense increased related to its initiative to develop its production platform and $15.9 million of the total company increase in compensation and employee benefits is attributable to Matrix Financial. This initiative involved opening two new production offices, acquiring a servicing and production platform and hiring additional administrative and production staff in late 2000 which operated all of 2001. The Company had an overall increase of 225 employees, or 31%, to 960 employees at December 31, 2001 as compared to 735 employees at December 31, 2000. Amortization of mortgage servicing rights increased $12.0 million, or 122%, to $21.9 million for fiscal year 2001 as compared to $9.9 million for fiscal year 2000. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. In response to the lower interest rates prevalent in the market, prepayment speeds on our servicing portfolio increased to an average of 22.9% during fiscal year 2001 as compared to 12.1% during fiscal year 2000. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $7.7 million, or 23%, to $41.5 million for fiscal year 2001 as compared to $33.8 million for fiscal year 2000. The $6.0 million increase in other general and administrative expense was primarily attributable to increases in foreclosure and REO expenses, increases in travel and entertainment costs, and in other miscellaneous expenses associated with the increased number of employees, and increases in outside services, consulting and temporary help, as well as a $984,000 charge recorded related to the relocation of Matrix Bank's domicile primarily for severence and contract benefits to be paid to certain of Matrix Bank's employees. For further discussion of these charges, see Note 2 to the consolidated financial statements. This was offset by a $1.8 million decrease in professional fees related mainly to high amounts in 2000 for litigation at Sterling Trust and legal expenses associated with the Harbor settlement which were not incurred in 2001. For a discussion of the Harbor items, see Note 19 to the consolidated financial statements. Provision for Income Taxes. Our provision for income taxes increased $2.1 million to $4.3 million for fiscal year 2001 as compared to $2.2 million for fiscal year 2000. The increase in pre-tax income was enhanced by a reduction in our effective tax rate to 33.4% for fiscal year 2001 from 34.5% for fiscal year 2000. The decrease in the effective tax rate was the result of our origination of tax-exempt financing at ABS. Comparison of Results of Operations for Fiscal Years 2000 and 1999 Net Income; Return on Average Equity. Net income decreased $6.5 million to $4.3 million for fiscal year 2000 as compared to $10.8 million for fiscal year 1999. On a per share basis, net income was $0.63 per share for fiscal year 2000 and $1.58 for fiscal year 1999. Return on average equity decreased to 6.8% for fiscal year 2000 as compared to 19.8% for fiscal year 1999. The decreases in net income, earnings per share and return on average equity were caused primarily by the substantial increase in the cost of our interest-bearing liabilities, which resulted from the higher interest rate environment of fiscal year 2000 as compared to fiscal year 1999. Additionally, we incurred losses related to loans that we acquired under a previously existing purchase/repurchase facility, as well as related to the settlement of the Harbor Financial Mortgage Corporation bankruptcy. Our legal expenses in fiscal year 2000 were substantially higher than the prior fiscal year relating to litigation at Sterling Trust and the two losses mentioned above. See "Legal Proceedings." Net Interest Income. Net interest income before provision for loan and valuation losses increased $322,000 to $29.8 million for fiscal year 2000 as compared to $29.5 million for fiscal year 1999. Our net interest income before provision for loan and valuation losses increased only slightly in spite of the $276.9 million, or 30.5%, increase in our interest-earning assets. The reason 32 for the small increase in net interest income before provision for loan and valuation losses was due to the interest rate environment, which caused the cost of our interest-bearing liabilities to increase significantly more than the yield on our interest-earning assets. The cost of our interest-bearing liabilities increased by 87 basis points, whereas the yield on our interest-earning assets only increased 9 basis points between the comparable periods. The increase in the cost of our interest-bearing liabilities caused our net interest margin to decrease to 2.51% for fiscal year 2000 as compared to 3.25% for fiscal year 1999 and our interest rate spread to decrease to 2.07% for fiscal year 2000 as compared to 2.85% for fiscal year 1999. As noted above, the compression in our net interest margin was a result of the interest rate environment during 2000 and our continued philosophy of acquiring adjustable-rate mortgages. For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses increased $1.0 million, or 33.2%, to $4.2 million for fiscal year 2000 as compared to $3.2 million for fiscal year 1999. This increase was primarily attributable to ABS' charge-off of a $768,000 loan during 2000 due to the closing of one of its school customers. The remaining increase was due to increases in the provision at ABS, Matrix Bank and Matrix Financial. For a discussion of the components of the allowance for loan losses, see "--Asset and Liability Management--Analysis of Allowance for Loan and Valuation Losses." For a discussion on the allowance as it relates to nonperforming assets, see "--Asset and Liability Management--Nonperforming Assets." Loan Administration. Loan administration fees were consistent with an increase of only $164,000 to $23.9 million for fiscal year 2000 as compared to $23.7 million for fiscal year 1999. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio decreased to an average balance of $5.4 billion for fiscal year 2000 as compared to an average balance of $5.6 billion for fiscal year 1999. This decrease was offset by a small increase in the average service fee rate, including all ancillary income, to 0.44% for fiscal year 2000 as compared to 0.43% for fiscal year 1999. Brokerage fees. Brokerage fees decreased $680,000, or 11.0%, to $5.5 million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999. This decrease was the result of a decrease in the balance of residential mortgage servicing portfolios brokered by Matrix Capital Markets, which in terms of aggregate unpaid principal balances on the underlying loans, decreased $11.3 billion to $36.4 billion for fiscal year 2000 as compared to $47.7 billion for fiscal year 1999. Brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon the seller's need to recognize a sale or to receive cash flows. Trust Services. Trust service fees increased $83,000, or 1.7%, to $4.9 million for fiscal year 2000 as compared to $4.8 million for fiscal year 1999. Trust accounts under administration at Sterling Trust increased to 39,220 accounts at December 31, 2000 from 36,546 accounts at December 31, 1999 and total fiduciary assets under administration increased to $3.8 billion at December 31, 2000 from $2.5 billion at December 31, 1999. Most of the growth in accounts and assets under administration occurred in third party administrator accounts, which are generally priced at lower fees based on the level of administration required. Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition service income was consistent between the fiscal years 2000 and 1999, with only an $18,000 increase in fiscal year 2000 over fiscal year 1999. Gain on Sale of Loans and Mortgage-Backed Securities. Gain on sale of loans and mortgage-backed securities decreased $2.3 million to $982,000 for fiscal year 2000 as compared to $3.2 million for fiscal year 1999. These loan sales were completed under standard purchase and sale agreements, with standard representations and warranties and without recourse. The gains from these sales represent cash gains. Gain on sale of loans can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights increased $2.3 million to $2.6 million for fiscal year 2000 as compared to $363,000 for fiscal year 1999. In terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights, we sold $1.1 billion in purchased mortgage servicing rights during fiscal year 2000 as compared to $161.2 million during fiscal year 1999. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing 33 portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to, at times, pursue opportunistic sales of mortgage servicing rights. The current year sale was undertaken to take advantage of aggressive pricing in the marketplace. Loan Origination. Loan origination income increased $1.4 million, or 22.0%, to $7.6 million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999. Approximately $806,000 of this increase related to increased originations ans sales by Matrix Bank's SBA loan department. The remainder of the increase is attributable to an increase in wholesale residential mortgage loan production by $69.1 million, or 15.6%, to $512.5 million during fiscal year 2000 as compared to $443.4 million during fiscal year 1999. School Services. School services income increased $1.4 million, or 50.7%, to $4.2 million for fiscal year 2000 as compared to $2.8 million for fiscal year 1999. This increase was primarily due to an increase in the pricing for ABS services, the addition of new school customers and our acquisition of ABS in March 1999, which resulted in less than a full year of revenues being recognized in 1999. Other Income. Other income decreased $4.0 million, or 42.2%, to $5.4 million for fiscal year 2000 as compared to $9.4 million for fiscal year 1999. The decrease in other income was primarily due to: o a $1.9 million decrease in consulting income from United Capital Markets because of its August sale and an overall slower year for that company; and o a decrease in Matrix Bank's income from certain financing transactions, which decreased miscellaneous fee income by $1.7 million compared to the prior fiscal year. Noninterest Expense. Noninterest expense increased $8.2 million, or 11.9%, to $77.8 million for fiscal year 2000 as compared to $69.6 million for fiscal year 1999. This increase was primarily due to increased compensation and benefits expense, increased other general and administrative expense and increased professional fees. These increases were offset by a decrease in the amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated: Year Ended December 31, --------------------------- 2000 1999 ------------ ------------ (In thousands) Compensation and employee benefits............. $ 34,245 $ 29,336 Amortization of mortgage servicing rights ..... 9,851 16,403 Occupancy and equipment........................ 4,785 3,727 Postage and communication...................... 2,812 2,688 Professional fees.............................. 4,687 2,385 Data processing................................ 2,413 1,688 Other general and administrative............... 19,048 13,359 ------------ ------------ Total..................................... $ 77,841 $ 69,586 ============ ============ Compensation and employee benefits increased $4.9 million, or 16.7%, to $34.2 million for fiscal year 2000 as compared to $29.3 million for fiscal year 1999. This increase was primarily the result of increased salary expense at Matrix Financial, ABS, Matrix Bancorp and Matrix Bank. Matrix Financial's salary expense increased towards the later half of 2000 related to its initiative to build a production platform. This initiative involved opening two new production offices, acquiring a servicing and production platform and hiring additional administrative and production staff. We had an overall increase of 135 employees, or 22.5%, to 735 employees at December 31, 2000 as compared to 600 employees at December 31, 1999. Amortization of mortgage servicing rights decreased $6.5 million, or 39.9%, to $9.9 million for fiscal year 2000 as compared to $16.4 million for fiscal year 1999. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. In response to the higher interest rates prevalent in the market, prepayment speeds on our servicing portfolio decreased to an average of 12.1% during fiscal year 2000 as compared to 20.6% during fiscal year 1999. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $9.9 million, or 41.5%, to $33.7 million for fiscal year 2000 as compared to $23.8 million for fiscal year 1999. The $5.7 million increase in other general and administrative expense increase was primarily attributable to previously mentioned losses from a purchase/repurchase facility and the Harbor settlement. Additionally, we 34 experienced a $2.3 million increase in professional fees related mainly to litigation at Sterling Trust and legal expenses associated with the Harbor settlement. Provision for Income Taxes. Our provision for income taxes decreased $4.1 million to $2.2 million for fiscal year 2000 as compared to $6.3 million for fiscal year 1999. The decrease in pre-tax income was further enhanced by a reduction in our effective tax rate to 34.5% for fiscal year 2000 from 36.8% for fiscal year 1999. The decrease in the effective tax rate was the result of our reduced earnings and our origination of tax-exempt financing. Average Balance Sheet The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Ratio, yield and rate information is based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated.
Year Ended December 31, ------------------------------------------------------------------------------------ 2001 2000 1999 --------------------------- --------------------------- -------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- -------- -------- ------------------ -------- -------------------------- (Dollars in thousands) Assets Interest-earning assets: Loans receivable, net ................ $1,338,613 $102,058 7.62% $1,086,041 $90,591 8.34% $877,117 $72,355 8.25% Mortgage-backed and SBA securities.... 17,667 1,335 7.56 45,253 3,374 7.46 -- -- -- Interest-earning deposits............. 33,746 1,008 2.99 28,831 1,508 5.23 16,326 629 3.85 Federal Home Loan Bank stock.......... 23,281 996 4.28 24,199 1,913 7.91 13,934 766 5.50 --------- -------- -------- ----------- ------- -------- ---------- --------- ------- Total interest-earning assets....... 1,413,307 105,397 7.46% 1,184,324 97,386 8.22% 907,377 73,750 8.13% Noninterest-earning assets: Cash.................................. 24,196 16,305 18,090 Allowance for loan and valuation losses.............................. (9,038) (7,302) (4,392) Premises and equipment................ 17,838 10,318 10,765 Other assets.......................... 142,914 116,602 122,705 --------- ---------- ---------- Total noninterest-earning assets.... 175,910 135,923 147,168 --------- ---------- ---------- Total assets........................ $1,589,217 $1,320,247 $1,054,545 ========= ========== ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts..................... $ 3,467 108 3.12% $ 2,981 102 3.42% $ 2,758 96 3.48 % Money market and NOW accounts......... 239,941 5,220 2.18 156,649 3,671 2.34 213,192 6,356 2.98 Certificates of deposit............... 493,954 29,544 5.98 361,084 22,502 6.23 287,347 15,137 5.27 Federal Home Loan Bank borrowings..... 347,807 16,071 4.62 430,331 27,242 6.33 175,619 9,184 5.23 Borrowed money........................ 176,980 13,944 7.88 147,377 14,084 9.56 159,272 13,514 8.48 --------- -------- -------- ----------- ------- -------- ----------- ---------- ------- Total interest-bearing liabilities.. 1,262,149 64,887 5.14% 1,098,422 67,601 6.15% 838,188 44,287 5.28 % --------- -------- -------- ----------- ------- -------- ----------- ---------- ------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances).................... 204,923 140,615 140,847 Other liabilities..................... 55,764 18,505 21,054 --------- ---------- ---------- Total noninterest-bearing liabilities. 260,687 159,120 161,901 Shareholders' equity.................. 66,381 62,705 54,456 --------- ---------- ---------- Total liabilities and shareholders' equity............................ $1,589,217 $ 1,320,247 $1,054,545 ========= ========== ========== Net interest income before provision for loan and valuation losses........... $ 40,510 $29,785 $29,463 ========= ========= ========== Interest rate spread.................... 2.32% 2.07 % 2.85 % ======== ======== ======= Net interest margin..................... 2.87% 2.51 % 3.25 % ======== ======== ======= Ratio of average interest-earning assets to average interest-bearing % liabilities........................... 111.98% 107.82 % 108.25 % ======== ======== ========
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: o changes in volume, in other words, changes in volume multiplied by old rate; and o changes in rate, in other words, changes in rate multiplied by old volume. 35 For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2001 vs. 2000 Year Ended December 31, 2000 vs. 1999 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in -------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ------------ ------------ ------------------------ ------------ ------------ (In thousands) Interest-earning assets: Loans receivable, net................. $ 19,781 $ (8,314) $ 11,467 $ 17,438 $ 798 $ 18,236 Mortgage-backed and SBA securities.... (2,085) 46 (2,039) 3,374 -- 3,374 Interest-earning deposits............. 225 (725) (500) 599 280 879 Federal Home Loan Bank stock.......... (70) (847) (917) 719 428 1,147 --------- ---------- ----------- --------- ---------- ---------- Total interest-earning assets....... 17,851 (9,840) 8,011 22,130 1,506 23,636 --------- ---------- ----------- --------- --------- ---------- Interest-bearing liabilities: Passbook accounts..................... 16 (10) 6 8 (2) 6 Money market and NOW accounts......... 1,822 (273) 1,549 (1,886) (799) (2,685) Certificates of deposit............... 7,984 (942) 7,042 4,307 3,058 7,365 Federal Home Loan Bank advances....... (4,637) (6,534) (11,171) 15,770 2,288 18,058 Borrowed money........................ 2,563 (2,703) (140) (957) 1,527 570 --------- ---------- ----------- --------- ---------- ---------- Total interest-bearing liabilities.. 7,748 (10,462) (2,714) 17,242 6,072 23,314 --------- ---------- ----------- --------- ---------- ---------- Change in net interest income before provision for loan and valuation losses. $ 10,103 $ 622 $ 10,725 $ 4,888 $ (4,566) $ 322 ========= ========== =========== ========= ========== ==========
Asset and Liability Management General. A significant portion of our revenues and net income is derived from net interest income and, accordingly, we strive to manage our interest-earning assets and interest-bearing liabilities to generate what we believe to be an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of our performance due to changes in interest rates. We constantly attempt to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. We have responded to interest rate volatility by developing and implementing asset and liability management strategies designed to increase noninterest income and improve the match between interest-earning assets and interest-bearing liabilities. These strategies include: o maintaining a wholesale loan origination operation. Wholesale originations provide a form of hedge against the balance of mortgage servicing rights. In a decreasing interest rate environment, the value of the servicing portfolio tends to decrease due to increased prepayments of the underlying loans. During this same environment, however, the volume of loan originations generally increases; o utilizing mortgage servicing rights as a source of noninterest income and as a countermeasure against the decline in the value of mortgage loans during a rising interest rate environment. Increases in interest rates tend to increase the value of mortgage servicing rights because of the resulting decrease in prepayment rates on the underlying loans; o focusing on noninterest-bearing custodial escrow balances related to our mortgage servicing rights; o increasing focus on lines of business that are less interest rate sensitive, such as brokerage activities, consulting services, self-directed trust services, clearing operations, real estate disposition and school business services; o originating and purchasing adjustable rate mortgages and selling newly originated fixed rate residential mortgages in the secondary market; o increasing emphasis on the origination of construction and commercial real estate lending, including SBA loans, which tend to have higher interest rates with shorter loan maturities than residential mortgage loans and generally are at adjustable rates; o acquisition and sales of guaranteed portions of SBA loans, which are generally at adjustable rates; o increasing retail deposits, which are less susceptible to changes in interest rates than other funding sources; o pursuing strategic acquisitions or alliances that provide fee-based income or generate liabilities that are less expensive or less interest rate sensitive than retail deposits or borrowings from third party institutions to fund our investing activities; o using Matrix Bank as the settlement bank for settlement and clearing services offered by Sterling Trust and Matrix Settlement & Clearance Services to generate low-cost deposits; and o hedging segments of our servicing portfolio and selling forward commitments on our loan pipeline. Lending Activities. Our major interest-earning asset is our loan portfolio. Consequently, a significant part of our asset and liability management involves monitoring the composition of our loan portfolio, including the corresponding maturities. The following table sets forth the composition of our loan portfolio by loan type as of the dates indicated. The amounts in the table below are shown net of discounts and other deductions. 36
As of December 31, ------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 --------------------- --------------------- --------- --------- ---------- ----------- -------- --------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------------ -------- ---------- -------- --------- --------- ---------- ----------- -------- --------- (Dollars in thousands) Residential........... $1,062,640 78.76% $ 903,955 81.00% 954,424 86.49% $732,512 86.34% $462,604 90.46% Multi-family, commercial real estate and 193,520 14.34 123,491 11.07 78,046 7.07 52,689 6.21 29,492 5.77 commercial......... School financing...... 61,969 4.59 51,909 4.65 31,748 2.88 24,429 2.88 2,708 0.53 Construction ......... 35,023 2.60 36,768 3.29 36,056 3.26 27,648 3.26 7,591 1.48 Consumer.............. 5,336 0.40 8,479 0.76 9,595 0.87 14,880 1.75 10,733 2.10 ------------ -------- ----------- -------- ---------- --------- ---------- ----------- -------- --------- Total loans...... $1,358,488 100.69% 1,124,602 100.77 1,109,869 69,100.57 852,158 100.44 513,128 100.34 Less allowance for loan and valuation losses 9,338 0.69 8,581 0.77 6,354 0.57 3,710 0.44 1,756 0.34 ------------ -------- ----------- -------- ---------- ---------- ---------- ----------- -------- --------- Loans receivable, net. 1,349,150 100.00 $1,116,021 100.00% $1,103,515 100.00% $848,448 100.00% $511,372 100.00% ============ ======== =========== ======== ========== ========== ========== =========== ======== =========
The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2001, excluding the allowance for loan losses. Loans held for sale are classified as maturing over five years. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments or the timing of loan sales.
As of December 31, 2001 ------------------------------------------------------ Less than One to Over Five One Year Five Years Years Total ------------- ------------ ------------ ------------- (In thousands) Residential.............................................. $ 651,685 $ 405,125 $ 5,830 $ 1,062,640 Multi-family, commercial real estate and commercial...... 83,276 20,023 90,221 193,520 School financing......................................... 10,622 51,347 -- 61,969 Construction............................................. 28,223 6,800 -- 35,023 Consumer................................................. 1,754 2,292 1,290 5,336 ------------- ------------ ------------ ------------- Total loans ........................................ $ 775,560 $ 485,587 $ 97,341 $ 1,358,488 ============= ============ ============ =============
Included in the balance of residential loans are approximately $434.3 million of loans originated by Matrix Financial that are committed for sale. Although the majority of the loans are fixed rate, we have very little interest risk associated with the loans because they are committed for sale......... Loans held for sale, excluding the allowance for loan losses, which are primarily contractually due in less than one to five years, are split between fixed and adjustable rates as follows:
As of December 31, 2001 ----------------------------------------------------- Less than One to Over Five One Year Five Years Years Total ------------- ------------ ------------ ------------ (In thousands) Fixed ................................................... $ 562,041 $ 166,336 $ 799 $ 729,176 Adjustable............................................... 144,849 289,817 709 435,375 ------------- ------------ ------------ ------------ Total loans ........................................ $ 706,890 $ 456,153 $ 1,508 $1,164,551 ============= ============ ============ ============
Loans held for investment, excluding the allowance for loan losses, which are contractually due in one or more years, are split between fixed and adjustable rates as follows:
As of December 31, 2001 ----------------------------------------------------- Less than One to Over Five One Year Five Years Years Total ------------- ------------ ------------ ------------ (In thousands) Fixed ................................................... $ 11,805 $ 8,193 $19,660 $ 39,658 Adjustable............................................... 56,864 21,241 76,174 154,279 ------------- ------------ ------------ ------------ Total loans ........................................ $ 68,669 $ 29,434 $95,834 $193,937 ============= ============ ============ ============
Nonperforming Assets. As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate 37 arises primarily through foreclosure on mortgage loans owned. The following table sets forth our nonperforming assets as of the dates indicated:
As of December 31, ----------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Nonaccrual residential mortgage loans............ $ 19,039 $ 22,592 $ 20,185 $ 8,208 $ 4,796 Nonaccrual commercial loans and school financing .................................... 18,172 5,792 5,301 4,349 -- Nonaccrual consumer loans........................ 40 132 155 652 194 ----------- ----------- ----------- ----------- ----------- Total nonperforming loans................... 37,251 28,516 25,641 13,209 4,990 Foreclosed real estate........................... 8,355 2,646 800 916 1,242 ----------- ----------- ----------- ----------- ----------- Total nonperforming assets.................. $ 45,606 $ 31,162 $ 26,441 $ 14,125 6,232 =========== =========== =========== =========== =========== Total nonperforming loans to total loans................................ 2.74 % 2.54% 2.31% 1.55% 0.97% Total nonperforming assets to total assets....... 2.79 % 2.20% 2.06% 1.40% 1.03% Ratio of allowance for loan and valuation losses to total nonperforming loans................. 25.07 % 30.09% 24.78% 28.09% 35.19% Interest income on nonperforming loans not included in interest income.................. $ 1,773 $ 1,016 $ 979 $ 524 $ 89
We accrue for interest on government-sponsored loans such as Federal Housing Administration insured and Veteran's Administration guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $55.2 million, $101.1 million and $147.9 million as of December 31, 2001, 2000 and 1999, respectively. Nonaccrual residential mortgage loans as a percentage of total loans were 1.4% at December 31, 2001, 2.1% at December 31, 2000, 1.8% at December 31, 1999, 1.0% at December 1998 and 0.9% at December 31, 1997. The nonaccrual residential mortgage loans have improved at December 31, 2001 as compared to December 30, 2000. The improvement is due to maturity and improvement in certain portfolios acquired in 2000 and 1999 on which the recourse option we had was eliminated with the bankruptcy of the seller/servicer. The balance of these loans in nonaccrual at December 31, 2001 totals $4.9 million as compared to $6.8 million at December 31, 2000. Associated with these nonaccrual loans, we have recorded $1.8 million of discounts. The increase in nonaccrual commercial loans and school financing in 2001 is primarily attributable to the increased volume of our SBA originated and purchased loans and the increased amount of those loans in nonaccrual status, which at December 31, 2001 was $8.1 million. It should be noted, however, that approximately $5.7 million of the interest and principal of these loans is guaranteed, and as such, our credit risk is minimized despite the increase in the balances. With regard to our school financing, a majority of our origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. We have noted that many of our charter schools have encountered enrollment and/or state funding delays with their start-up, which has delayed their funding and caused the school's loans to us to become delinquent. We have historically, however, been able to work with many of the schools on their cash flow issues and eventually removed them from the delinquent lists. The prior delinquency and anticipated future delinquencies are taken into consideration in the pricing of the loans acquired. We generally purchase such loans at discounts and, in limited instances, receive recourse from the seller to further reduce our risk of loss associated with the loans' nonaccrual status. At December 31, 2001, $15.0 million, or 40.3%, of the nonaccrual loans were loans that were residential loans purchased in bulk loan portfolios and remain classified as "held for sale." Total loans held for sale at December 31, 2001, were $1.2 billion, of which $4.7 million, or 0.41%, were nonaccrual loans related to commercial loans and school financing held for sale. The increase in foreclosed real estate in 2001 as compared to 2000 is primarily due to one commercial real estate property in Colorado of approximately $3.9 million, which was foreclosed upon in December 2001. This property was sold in February 2002 at no principal loss to Matrix Bank. Analysis of Allowance for Loan and Valuation Losses. The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated. The table includes the allowance for both loans held for investment and loans held for sale. 38
As of and for the Year Ended December 31, --------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ----------- ----------- ----------- ---------- (Dollars in thousands) Balance at beginning of period................. $ 8,581 $ 6,354 $ 3,710 $ 1,756 $ 1,039 Charge-offs: Real estate - mortgage (1)................ 872 434 98 1,922 22 Real estate - construction ............... 31 320 -- -- -- Commercial loans and school financing .... 746 819 -- -- -- Consumer.................................. 659 476 509 789 166 ------------ ------------ ----------- ----------- ---------- Total charge-offs.................... 2,308 2,049 607 2,711 188 Recoveries: Real estate-mortgage...................... 4 1 2 2 -- Consumer.................................. 81 40 69 56 31 ------------ ------------ ----------- ----------- ---------- Total recoveries..................... 85 41 71 58 31 ------------ ------------ ----------- ----------- ---------- Net charge-offs................................ 2,223 2,008 536 2,653 157 Provision for loan losses charged to operations 2,980 4,235 3,180 4,607 874 ------------ ------------ ----------- ----------- ---------- Balance at end of period....................... $ 9,338 $ 8,581 $ 6,354 $ 3,710 $ 1,756 ============ ============ =========== =========== ========== Ratio of net charge-offs to average loans...... 0.17% 0.18% 0.06% 0.38% 0.04% ============ ============ =========== =========== ========== Average loans outstanding during the period.... $1,338,613 $1,086,041 $ 877,117 $ 692,443 $355,848 ============ ============ =========== =========== ========== - ---------- (1) A majority of the increase in real estate mortgage charge-offs for 1998 as compared to 1997 is due to the loss recognized which related to loans acquired under an alleged fraudulent agreement. No future losses are anticipated.
The allowance for loan and valuation losses is analyzed by management as discussed below and is increased by the provision for loan and valuation losses, which is charged to operations, as necessary. The allowance for loan and valuation losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors, such as: o qualitative evaluations of individual classified assets; o geographic and other portfolio concentrations; o new products or markets; o evaluations of the changes in the historical loss experience component; and o projections of this component into the current and future periods based on current knowledge and conditions. These loss factors range from 0.10% for Federal Housing Administration/Veteran's Administration loans guaranteed by the Department of Housing and Urban Development, to 8.00% for credit card loans. The loss factors are applied to the outstanding principal balance of loans in their respective categories. Loans in the commercial and school finance portfolios are assigned loss factors based on items similar to those listed, plus additional individual loan review on all significant loans, including SBA loans, which result in loans being classified as watch, substandard or doubtful. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. Accordingly, potential impaired loans of the Company include only commercial loans, real estate construction loans, commercial real estate mortgage loans and school financing. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. After an allowance has been established for the loan portfolio, management establishes a portion of the allowance for loan losses, which is attributed to factors that cannot be associated with a specific loan or loan portfolio. The Company evaluates its residential loans collectively due to their homogeneous nature. These factors include: o general economic conditions; o recognition of specific regional geographic concerns; o loan type and the assessed risk inherent in each loan category; and o trends in the portfolio and portfolio growth trends. 39 Substandard and doubtful loans of homogeneous loan portfolios are assigned loss factors of 5.00% to 50.00%. The loss factors are applied to the outstanding principal balances of loans in their respective categories. The total for all categories as described above determines our allowance for loan and valuation losses. Loan losses are charged against the allowance when the probability of collection is considered remote. The following table shows information regarding the components of our allowance for loan and valuation losses as of the dates indicated:
As of December 31, ----------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------------------- --------------------- --------------------- --------------------- ------------------ Percentage Percentage Percentage Percentage Percentage of Loans of Loans of Loans of Loans of Loans in each in each in each in each in each Category Category Category Category Category Amount to Amount to Amount to Amount to Amount to Total Total Total Total Total Loans Loans Loans Loans Loans --------- ----------- --------- ---------- --------- ----------- --------- ---------- ------- ---------- (Dollars in thousands) Residential..............$3,918 78.30% $4,133 80.39% $3,591 86.00% $2,295 85.96% $1,234 90.15% Multi-family, commercial real 2,400 14.15 1,684 11.28 835 7.02 564 6.18 91 5.75 estate and commercial .. School financing......... 2,527 4.56 2,329 4.31 1,320 2.86 275 2.87 -- 0.53 Construction............. 445 2.59 302 3.27 286 3.25 207 3.24 23 1.48 Consumer................. 48 0.40 133 0.75 322 0.87 369 1.75 408 2.09 --------- ----------- --------- ---------- --------- ----------- --------- ---------- ------- ---------- $9,338 100.00% $8,581 100.00% $6,354 100.00% $3,710 100.00% $1,756 100.00% ========= =========== ========= ========== ========= =========== ========= ========== ======= ==========
The ratio of the allowance for loan and valuation losses to total loans was 0.69% at December 31. 2001; 0.77% at December 31, 2000; 0.57% at December 31, 1999; 0.44% at December 31, 1998; and 0.34% at December 31, 1997. The allowance for loan and valuation losses is reduced by loans charged off, net of recoveries. The balance of the allowance for loan and valuation losses allocated to residential, multi-family, commercial real estate, commercial, school financing and construction loans has increased mainly due to the increased outstanding loan principal balances in these loan categories. In addition, we have increased our origination of non 1-4 family loans, which are perceived to be higher risk and also are a contributor to the overall increase in the balance of the allowance. As of December 31, 2001, we believe that the allowance, when taken as a whole, is adequate to absorb losses in the current loan portfolio. Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability Management--General" a significant portion of our earnings and ultimate success is partially dependent upon our ability to manage our interest rate risk. Interest rate risk can be defined as the exposure of our net interest income to adverse movements in interest rates. Although we manage other risks, such as credit, operational and liquidity risk in the normal course of business, we consider interest rate risk to be a significant market risk which could potentially have the largest material effect on our financial condition and results of operations. The majority of our market risk related to interest rates exists within the operations of Matrix Bank. However, Matrix Financial also has interest rate risk related to its primary asset, mortgage servicing rights, and also related to its loan origination volumes, as well as the net interest income earned on its originated loans that are funded through warehouse lines of credit. With the majority of Matrix Financial's operations being funded by Matrix Bank, this is a smaller risk to the Company as compared to when Matrix Financial's operations were funded entirely by unaffiliated financial institutions. The susceptibility to movements in interest rates affects the cash flows generated from the mortgage servicing rights which are recorded in other income versus interest income. In a decreasing interest rate environment, the underlying servicing portfolio tends to prepay faster which reduces future servicing income; while in an increasing interest rate environment, prepayments tend to decrease, which increases expected future servicing income. As it relates to Matrix Financial's lending activities, Matrix Financial originates residential mortgage loans, which are generally pre-sold. However, between the time that the loan is originated and sold to the ultimate investor, Matrix Financial earns interest income. The loans are funded through the use of warehouse credit facilities or borrowings from Matrix Bank, both of which are generally priced based on short-term interest rates. Therefore, the net interest income that is earned by Matrix Financial is generally dependent on the spread between long-term mortgage rates and short-term interest rates. Aside from Matrix Financial's investment in servicing rights, the majority of the risk associated with interest rate movements relates more to the overhead associated with our origination platform. As discussed, a significant portion of the loan origination is directly related to the interest rate environment. Overhead significantly increased in 2001 to support the higher levels of originations. As a result, when interest rates increase and originations decrease, there is a risk that we will not be able to manage our overhead proportionally to the overall decrease in loan origination income. 40 We currently do not maintain a trading portfolio. As a result, we are not exposed to market risk as it relates to trading activities. The majority of our residential loan portfolio is held for sale which requires us to perform quarterly market valuations of the portfolio in order to properly record the portfolio at the lower of aggregate cost or market. Therefore, we continually monitor the interest rates of our loan portfolio as compared to prevalent interest rates in the market. Interest rate risk management at Matrix Bank is the responsibility of the Asset and Liability Committee, which reports to the board of directors of Matrix Bank. The Asset and Liability Committee establishes policies that monitor and coordinate our sources, uses and pricing of funds. The Asset and Liability Committee is also involved in formulating our budget and strategic plan as it relates to investment objectives. We have engaged a third party to provide consulting services that assists us with our asset/liability management. We meet with this consulting firm quarterly to review the results of our interest rate risk analysis and to discuss strategies. We are also researching various asset/liability software packages for possible future acquisition by Matrix Bank. Part of the modeling which is done is to comply with the requirements of the Office of Thrift Supervision. We continue to attempt to reduce the volatility in net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate residential mortgages and have increased our efforts regarding the origination of residential construction loans, commercial real estate loans, SBA loans and limited consumer lending, which re-price or mature more quickly than fixed rate residential real estate loans. In the fourth quarter of 2001, we began a strategy of purchasing with the intent to sell the guaranteed portion of SBA loans. Again, the loans generally adjust with prime and present very little interest rate risk. The other significant asset that we invest in is residential mortgage servicing rights. The value and cash flows from residential mortgage servicing rights respond counter-cyclically to the value of fixed rate mortgages. When interest rates increase and the value of fixed rate mortgages decrease, in turn decreasing net interest income, the value of the mortgage servicing rights increase. In a decreasing interest rate environment, the inverse occurs. It is important to note, however, that an equal increase or decrease in interest rates will not affect the value of our mortgage servicing rights portfolio equally. A decrease in interest rates causes a greater reduction in the value of the portfolio as compared to the increase in value in the portfolio from an equal increase in interest rates. Another significant strategy that we focus on in managing interest rate risk is identifying lines of business that generate noninterest rate sensitive liabilities. Examples of this strategy are the investment in mortgage servicing rights, which generate no cost escrow deposits; Sterling Trust's operations, which administer deposits with relatively low costs; and our investment in Matrix Settlement & Clearance Services, which uses Matrix Bank as the clearing bank, which creates low-cost deposits. In the ordinary course of business, we make commitments to originate residential mortgage loans and hold originated loans until delivery to an investor. Inherent in this business are risks associated with changes in interest rates and the resulting change in the market value of the pipeline loans. We mitigate this risk through the use of mandatory and best effort forward commitments to sell loans and mortgage-backed securities. As of December 31, 2001, we had $155.0 million and $492.6 million in pipeline and funded loans, respectively, offset with mandatory forward commitments of $434.3 million and best effort forward commitments of $96.2 million. The market value of loans committed for sale is determined based on the related forward loan sale commitments. Effective January 1, 2001, with the adoption of SFAS 133, we were required to treat substantially all mortgage loan commitments and loan sale commitments (both mandatory and best effort) as derivatives and record the fair value of those derivatives on the balance sheet and any subsequent changes in the fair value of those derivatives through current earnings. As the changes in fair value of the loan commitments and the loan sale commitments are generally expected to offset one another, we do not anticipate any material impact to our future earnings from pipeline loans as a result of the adoption of SFAS 133. Ownership of mortgage servicing rights exposes us to impairment of their value in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of our mortgage servicing portfolio achieves a level higher than we projected for an extended period of time, then an impairment in the associated basis in the mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, we hedged a segment of our portfolio beginning in September 1997. We had identified and hedged $353.2 million as of December 31, 2000 of our mortgage servicing portfolio using a program of exchange-traded futures and options. Due to FASB 133 and the low interest rate environment, we elected to discontinue our hedging strategy in the first quarter of 2001. The Company has no immediate plans to reinstate its hedging strategy of using derivative products. We have, however, developed a different strategy to address the risk as discussed below. With regards to our interest-sensitive liabilities during 2001, and in order to take advantage of the historically low interest rates, Matrix Bank has 41 entered into short option agreements and other longer term advances (2 to 5 years) totaling $120 million, which have interest rates ranging from 2.69% to 4.85%. It is anticipated that our interest margin will benefit in the long term from locking in these interest rates. The following tables represent, in tabular form, contractual balances of our on balance sheet financial instruments in dollars at the expected maturity dates, as well as the fair value of those on balance sheet financial instruments for the periods ended December 31, 2001 and 2000. The expected maturity categories take into consideration historical and anticipated prepayment speeds, as well as actual amortization of principal and do not take into consideration the reinvestment of cash. Our assets and liabilities that do not have a stated maturity date, such as interest-earning deposits, Federal Home Loan Bank stock and certain other deposits, are considered to be long term in nature and are reported in the thereafter column. We are very active in the secondary market as it relates to the purchase and sale of mortgage loans. We use a five-year maturity assumption for all of Matrix Bank's held for sale loans and school financing, and we use a one-year maturity assumption for Matrix Financial's originated loans held for sale. We also treat the Federal Home Loan Bank and revolving borrowings as long term in nature, as the continued availability of these amounts is anticipated indefinitely. Third party servicers service a portion of our loan portfolio; as a result, a portion of the information presented is based on the best available information. For the most part, the carrying amounts of interest-earning deposits, Federal Home Loan Bank stock, Federal Home Loan Bank borrowings and borrowed money approximate those assets' and liabilities' fair values. The fair values of the loan portfolios held for sale and held for investment are based on quoted market prices or outstanding commitments from investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The fair values of demand deposits are, by definition, equal to the amount payable upon demand at the reporting date. The fair value of time deposits are based upon the discounted value of contractual cash flows, which is estimated using interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. Mortgage servicing rights are not included in the tabular presentation, as the investment does not directly affect interest income. As noted, however, earnings from mortgage servicing rights directly correlate with market risk as it relates to interest rate fluctuations. We attempt to mitigate a portion of this risk by the type of mortgage servicing rights we acquire. The loans underlying the servicing rights acquired tend to be more seasoned and have lower principal balances. Management believes that the more seasoned, lower balance servicing portfolios carry less prepayment risk than less seasoned, higher balance mortgage servicing, because the cost savings of refinancing a lower balance loan tend to be less than for a higher balance loan with a comparable interest rate. We also believe that if a loan has been outstanding for a period of time and has been through several declining interest rate cycles without refinancing, the risk of prepayment in the future is less than a newly originated loan. In addition, in 2001 we began to retain a portion of our originated servicing. Based on the interest rate environment prevalent throughout 2001, the Company believes that retaining servicing that was generated in the lower interest rate environment will incur less prepayment risk. Although significantly higher in 1999 and 1998, the prepayment percentages which we have experienced over the past three years have been lower than experienced in the industry, as a whole. The prepayment speeds for the years ended December 31, 2001, 2000 and 1999 were 22.9%, 12.1%, and 20.6%, respectively. In the tables below, prepayment speeds of 19% and 12% for 2001 and 2000, respectively, were used for all loan types to project expected cash flows. These assumptions are based on our historical prepayment speeds, as well as our knowledge and experience in the market. The Company's on balance sheet financial instruments for the period ended December 31, 2001: 42
Expected Maturity Date - Fiscal Year Ended December 31, ---------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value ---------- ----------- ----------- ----------- ---------- ----------- ------------ ------------ (Dollars in thousands) Interest-earning assets: Available for sale: Fixed-rate mortgage-backed securities.................. $ 584 $ -- $ -- $ -- $ -- $ -- $ 584 $ 584 Average interest rate.... 6.50 % -- % -- % -- % -- % -- % 6.50 % Adjustable-rate mortgage- backed and SBA securities.. $ 6,379 $ -- $ -- $ -- $ -- $ -- $ 6,379 $ 6,379 Average interest rate...... 6.95 % -- % -- % -- % -- % -- % 6.95 % Held for sale (1)(2)(8): Fixed-rate residential loans. $542,650 $ 29,010 $ 29,010 $ 29,010 $ 29,011 $ -- $ 658,691 $ 661,697 Average interest rate.... 7.20 % 8.51 % 8.51 % 8.51 % 8.51 % -- % 7.43 % Adjustable-rate residential loans...................... $101,771 $ 72,335 $ 72,335 $ 72,336 $ 72,365 $ -- $ 391,142 $ 391,504 Average interest rate.... 7.50 % 7.50 % 7.50 % 7.50 % 7.50 % -- % 7.50 % Fixed-rate commercial and other loans................ $ 14,610 $ 51,071 $ -- $ -- $ -- $ 795 $ 66,476 $ 66,478 Average interest rate.... 9.22 % 10.08 % -- % -- % -- % 9.07 % 10.38 % Adjustable-rate commercial and other loans............ $ 40,787 $ 10 $ 45 $ 41 $ 92 $ 705 $ 41,680 $ 41,702 Average interest rate.... 5.64 % 8.89 % 8.89 % 8.89 % 8.89 % 8.89 % 5.71 % Held for investment(2): Fixed-rate residential loans. $ 856 $ 686 $ 550 $ 440 $ 353 $ 1,331 $ 4,216 $ 4,228 Average interest rate(3). 8.20 % 8.20 % 8.20 % 8.20 % 8.20 % 8.20 % 8.20 % Adjustable-rate residential . $ 466 $ 371 $ 296 $ 234 $ 186 $ 653 $ 2,206 $ 2,211 Average interest rate(3). 7.18 % 7.18 % 7.18 % 7.18 % 7.18 % 7.18 % 7.18 % Fixed-rate consumer loans.... $ 1,869 $ 1,403 $ 1,038 $ -- $ -- $ -- $ 4,310 $ 4,325 Average interest rate(3). 10.43 % 10.43 % 10.43 % -- % -- % -- % 10.43 % Adjustable-rate consumer loans(4)................... $ 261 $ 201 $ 153 $ 115 $ 87 $ 109 $ 926 $ 928 Average interest rate(3). 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % Fixed-rate other loans(5).... $ 10,263 $ 7,789 $ 5,471 $ 4,068 $ 2,973 $ -- $ 30,564 $ 30,656 Average interest rate(3). 8.92 % 8.92 % 8.92 % 8.92 % 8.92 % -- % 8.92 % Adjustable-rate other loans(4)(5)................ $ 50,290 $ 37,878 $ 18,356 $ 13,984 $ 10,557 $17,874 $ 148,939 $ 149,313 Average interest rate(3). 7.42 % 7.42 % 7.42 % 7.42 % 7.42 % 7.42 % 7.42 % Federal funds sold.............. $ 400 $ -- $ -- $ -- $ -- $ -- $ 400 $ 400 Average interest rate.... 1.81 % -- % -- % -- % -- % -- % 1.81 % Interest-earning deposits....... $ -- $ -- $ -- $ -- $ -- $31,559 $ 31,559 $ 31,559 Average interest rate.... -- % -- % -- % -- % -- % 1.47 % 1.47 % Federal Home Loan Bank stock.... $ -- $ -- $ -- $ -- $ -- $18,181 $ 18,181 $ 18,181 Average interest rate.... -- % -- % -- % -- % -- % 3.00 % 3.00 % Total interest-earning assets. $766,222 $200,754 $127,254 $120,228 $115,624 $71,207 $1,401,289 $1,410,145 ========= ========== ========== ========== ========= ========== =========== =========== Interest-bearing liabilities: Passbook accounts............... $ -- $ -- $ -- $ -- $ -- $ 4,291 $ 4,291 $ 4,291 Average interest rate.... -- % -- % -- % -- % -- % 4.47 % 4.47 % NOW accounts(6)................. $ -- $ -- $ -- $ -- $ -- $ 40,046 $ 40,046 $ 40,046 Average interest rate.... -- % -- % -- % -- % -- % 2.57 % 2.57 % Money market accounts........... $ -- $ -- $ -- $ -- $ -- $249,234 $ 249,234 $ 249,234 Average interest rate.... -- % -- % -- % -- % -- % 2.11 % 2.11 % Certificates of deposit over $ 16,674 $ 2,545 $ 1,960 $ 711 $ 520 $ -- $ 22,410 $ 22,797 $100,000........................... Average interest rate.... 5.13 % 5.61 % 4.76 % 6.92 % 5.06 % -- % 5.20 % Brokered certificates of deposit. $351,271 $ -- $ -- $ 10,000 $ -- $ -- $ 361,271 $ 362,079 Average interest rate......... 4.13 % -- % -- % 4.85 % -- % -- % 4.15 % Other certificates of deposit... $ 82,281 $ 12,719 $ 11,788 $ 8,230 $ 6,828 $ -- $ 121,846 $ 123,631 Average interest rate.... 5.32 % 5.10 % 4.80 % 6.66 % 5.18 % -- % 5.33 % Federal Home Loan Bank borrowings(7)................. $ -- $ -- $ -- $ -- $ -- $303,361 $ 303,361 $ 309,931 Average interest rate.... -- % -- % -- % -- % -- % 2.94 % 2.94 % Revolving borrowings............ $ -- $ -- $ -- $ -- $ -- $143,415 $ 143,415 $ 143,415 Average interest rate.... -- % -- % -- % -- % -- % 3.68 % 3.68 % Term borrowings................. $ 1,478 $ 7,184 $ 10,455 $ -- $ -- $ 59,500 $ 78,617 78,617 Average interest rate.... 8.00 % 8.23 % 11.50 % -- % -- % 9.76 % 9.82 % Total interest-bearing liabilities.................. $451,704 $ 22,448 $ 24,203 $ 18,941 $ 7,348 $799,847 $1,324,491 $1,334,041 ========= ========== ========== ========== ========= ========== =========== =========== 43 - ---------- (1) Loans held for sale are assumed to mature within one year. (2) Balances are stated net of discounts and other deductions. (3) For the fixed-rate loans held for investment, we computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 19% in determining the cash flows. The same approach was used for the adjustable-rate loans, which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3-, 5- and 7-year treasury. (5) Other consists of multi-family, commercial real estate, commercial, land and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $67.1 million. (7) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings. (8) The value of the hedging instruments used with our loan portfolio are included in the balance of the loans for purposes of fair value disclosure. See discussion regarding FAS 133 for additional information.
The Company's on balance sheet financial instruments for the period ended December 31, 2000:
Expected Maturity Date - Fiscal Year Ended December 31, ---------------------------------------------------------------------- There-after Fair 2001 2002 2003 2004 2005 Total Value ---------- ----------- ----------- ----------- ---------- ----------- ------------ ------------ (Dollars in thousands) Interest-earning assets: Available for sale: Fixed-rate mortgage-backed securities.................. $ 4,540 $ -- $ -- $ -- $ -- $ -- $ 4,450 $ 4,540 Average interest rate.... 7.54 % -- % -- % -- % -- % -- % 7.54 % Adjustable-rate mortgage- backed securities........... $ 62,076 $ -- $ -- $ $ -- $ -- $ 62,076 $ 62,076 Average interest rate.... 8.31 % -- % -- % -- % -- % -- % 8.31 % Held for sale (1)(2): Fixed-rate residential loans. $176,811 $ 48,130 $ 48,130 $ 48,130 $ 48,130 $ -- $369,331 $ 371,637 Average interest rate.... 8.28 % 8.56 % 8.56 % 8.56 % 8.56 % -- % 8.42 % Adjustable-rate residential loans....................... $124,104 $ 99,858 $ 99,858 $ 99,857 $ 99,857 $ -- $523,534 $ 526,802 Average interest rate.... 8.51 % 8.47 % 8.47 % 8.47 % 8.47 % -- % 8.47 % Fixed-rate commercial and other loans................. $ 9,926 $ 9,926 $ 9,926 $ 9,926 $ 9,926 $ -- $ 49,630 $ 49,630 Average interest rate.... 10.65 % 10.65 % 10.65 % 10.65 % 10.65 % -- % 10.65 % Held for investment(2): Fixed-rate residential loans. $ 602 $ 526 $ 460 $ 402 $ 351 $ 2,139 $ 4,480 $ 4,665 Average interest rate(3). 8.10 % 8.10 % 8.10 % 8.10 % 8.10 % 8.10 % 8.10 % Adjustable-rate residential loans(4)................... $ 495 $ 432 $ 377 $ 329 $ 287 $ 1,608 $ 3,528 $ 3,673 Average interest rate(3). 8.47 % 8.47 % 8.47 % 8.47 % 8.47 % 8.47 % 8.47 % Fixed-rate consumer loans.... $ 2,513 $ 2,170 $ 1,870 $ -- $ -- $ -- $ 6,553 $ 6,538 Average interest rate(3). 10.93 % 10.93 % 10.93 % -- % -- % -- % 10.93 % Adjustable-rate consumer loans(4)................... $ 351 $ 306 $ 265 $ 230 $ 199 $ 322 $ 1,673 $ 1,669 Average interest rate(3). 11.04 % 11.04 % 11.04 % 11.04 % 11.04 % 11.04 % 11.04 % Fixed-rate other loans(5).... $ 9,064 $ 7,787 $ 6,670 $ 5,694 $ 4,842 $ -- $ 34,057 $ 34,182 Average interest rate(3). 9.31 % 9.31 % 9.31 % 9.31 % 9.31 % -- % 9.31 % Adjustable-rate other loans(4)(5)................ $ 24,048 $ 20,919 $ 18,172 $ 15,761 $ 13,646 $ 30,688 $123,234 $ 123,688 Average interest rate(3). 10.66 % 10.66 % 10.66 % 10.66 % 10.66 % 10.66 % 10.66 % Federal funds sold.............. $ 20,000 $ -- $ -- $ -- $ -- $ -- $ 20,000 $ 20,000 Average interest rate.... 5.94 -- -- -- -- -- 5.94 Interest-earning deposits....... $ -- $ -- $ -- $ -- $ -- $ 15,631 $ 15,631 $ 15,631 Average interest rate.... -- % -- % -- % -- % -- % 4.27 % 4.27 % Federal Home Loan Bank stock.... $ -- $ -- $ -- $ -- $ -- $ 27,814 $ 27,814 $ 27,814 Average interest rate.... -- % -- % -- % -- % -- % 6.52 % 6.52 % Total interest-earning assets. $434,530 $ 190,054 $185,728 $180,329 $177,238 $ 78,202 $1,246,081 $ 1,252,545 ========= ========== ========== ========== ========= ========= =========== ========= Interest-bearing liabilities: Passbook accounts............... $ -- $ -- $ -- $ -- $ -- $ 3,010 $ 3,010 $ 3,010 Average interest rate.... -- % -- % -- % -- % -- % 3.44 % 3.44 % NOW accounts(6)................. $ -- $ -- $ -- $ -- $ -- $ 33,000 $ 33,000 $ 33,000 Average interest rate.... -- % -- % -- % -- % -- % 2.01 % 2.01 % Money market accounts........... $ -- $ -- $ -- $ -- $ -- $ 122,992 $ 122,992 $ 122,992 Average interest rate.... -- % -- % -- % -- % -- % 2.37 % 2.37 % Certificates of deposit over $100,000...................... $ 11,382 $ 5,161 $ 871 $ -- $ 1,401 $ -- $ 18,815 $ 18,916 Average interest rate.... 6.54 % 6.67 % 6.47 % -- % 6.58 % -- % 6.57 % Brokered certificates of deposit. $175,600 $ 28,000 $ -- $ -- $ -- $ -- $ 203,600 $ 204,129 Average interest rate......... 6.42 % 6.53 % -- % -- % -- % -- % 6.44 % Other certificates of deposit... $120,968 $ 33,448 $ 4,870 $ 1,440 $ 7,540 $ -- $ 168,266 $ 169,390 Average interest rate.... 6.48 % 6.58 % 6.13 % 5.59 % 6.68 % -- % 6.49 % Federal Home Loan Bank borrowings(7)................. $ -- $ -- $ -- $ -- $ -- $ 519,433 $ 519,433 $ 521,194 Average interest rate.... -- % -- % -- % -- % -- % 6.29 % 6.29 % Revolving borrowings............ $ -- $ -- $ -- $ -- $ -- $ 66,288 $ 66,288 $ 66,288 Average interest rate.... -- % -- % -- % -- % -- % 8.26 % 8.26 % Term borrowings................. $ 3,793 $ 1,468 $ 5,398 $ 20,056 $ -- $ 27,500 $ 58,215 $ 52,965 Average interest rate.... 9.65 % 8.28 % 8.28 % 11.50 % -- % 10.00 % 10.29 % Total interest-bearing liabilities................. $311,743 $ 68,077 $ 11,139 $ 21,496 $ 8,941 $ 772,223 $1,193,619 $ 1,191,884 ========= ========== ========== ========== ========= ========= =========== =========== - ---------- (1) Loans held for sale are assumed to mature within one year. (2) Balances are stated net of discounts and other deductions. 44 (3) For the fixed-rate loans held for investment, we computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 12% in determining the cash flows. The same approach was used for the adjustable-rate loans, which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3-, 5- and 7-year treasury. (5) Other consists of multi-family, commercial real estate, commercial, land and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $53.0 million. (7) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings. (8) Other consists of multi-family, commercial real estate, commercial (including SBA), land and construction loans. (9) Excludes noninterest-bearing demand deposits of approximately $21.2 million. (10) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings.
Short-term Borrowings. A primary function of asset and liability management is to ensure adequate liquidity. In addition to cash and cash equivalents, we rely heavily on short-term borrowing capabilities for liquidity and as a funding vehicle. The primary sources for short-term borrowings are the Federal Home Loan Bank for Matrix Bank, Matrix Bank and unaffiliated financial institutions for Matrix Financial and, at Matrix Bancorp, the revolving portion of the bank stock loan. See "Liquidity and Capital Resources." The following table sets forth a summary of our short-term borrowings during 2001, 2000 and 1999 and as of the end of each such period:
Average Amount Amount Maximum Weighted Weighted Outstanding Outstanding Outstanding Average Average at During the at any Interest Interest Year-End Year(1) Month-End Rate During Rate at the Year Year-End ------------------------------------------------------------- --------------- (Dollars in thousands) At or for the year ended December 31, 2001: Federal Home Loan Bank borrowings(2)..... $ 303,361 $ 347,807 $ 478,921 4.62% 2.94% Revolving lines of credit................ 95,450 58,097 95,450 4.51 3.56 School financing......................... 44,965 46,160 60,100 6.02 3.86 At or for the year ended December 31, 2000: Federal Home Loan Bank borrowings(3)..... 519,433 430,331 526,450 6.33 6.29 Revolving lines of credit................ 21,956 40,701 52,750 8.23 7.63 Repurchase agreements.................... 385 3,240 6,906 10.70 8.75 School financing......................... 44,308 30,262 44,308 8.18 8.56 At or for the year ended December 31, 1999: Federal Home Loan Bank borrowings(4)..... 405,000 175,619 417,606 5.23 5.64 Revolving lines of credit................ 28,205 49,762 73,878 6.38 6.71 Repurchase agreements.................... 3,156 7,157 12,467 10.11 8.67 School financing......................... 22,819 21,853 25,379 7.56 7.77 - ---------- (1) Calculations are based on daily averages where available and monthly averages otherwise. (2) A total of $136.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2001 were borrowed under short option advance agreements with the Federal Home Loan Bank. The interest rates on the short option advance borrowings ranged from 2.69% to 5.63% at December 31, 2001 and their possible call dates varied from February 20, 2002 to November 13, 2006. Additionally, $1.4 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2001 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2, 2014. (3) A total of $26.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2000 were borrowed under a short option advance agreement with the Federal Home Loan Bank. These short option advance borrowings have a term of ten years, but are callable by the Federal Home Loan Bank beginning after a six-month or one-year lockout period depending on the particular short option advance borrowing. After the expiration of the lock-out period, the short option advance borrowings are callable at three month intervals. If the Federal Home Loan Bank exercises its call option on a short option advance borrowing, the Federal Home Loan Bank is required to offer replacement funding to us at a market rate of interest for the remaining term of the short option advance borrowing. The interest rates on the short option advance borrowings ranged from 5.40% to 5.63% at December 31, 2000 and their possible call dates varied from February 20, 2001 to March 26, 2001. Under the terms of the short option advance agreement, we are not permitted to prepay or otherwise retire a callable short option advance borrowing prior to the final maturity date. Additionally, $1.4 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2000 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84% and their maturity date is June 2, 2014. Matrix Bank also had short-term, fixed-term/rate borrowings outstanding at December 31, 2000 from the Federal Home Loan Bank. These 45 short-term, fixed-term/rate borrowings totaled $150.0 million, with interest rates ranging from 6.00% to 6.23% and maturity dates ranging from March 27, 2001 through June 26, 2001. (4) A total of $100.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1999 were borrowed under a short option advance agreement with the Federal Home Loan Bank. The interest rates on the short option advance borrowings ranged from 4.90% to 5.63% at December 31, 1999 and their possible call dates varied from January 14, 2000 to December 26, 2000. Additionally, $1.5 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1999 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2, 2014.
Liquidity and Capital Resources Liquidity is our ability to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. To date, our principal source of funding for our investing activities has been: o secured senior debt provided by unaffiliated financial institutions; o the issuance of preferred securities through Matrix Bancorp Capital Trust I in 1999, Matrix Bancorp Capital Trust II, III and IV in 2001; o the issuance of 11.5% senior notes in September 1997; o a bank stock loan; and o our initial public offering. As of December 31, 2001, Matrix Bancorp had $81.5 million in indebtedness outstanding. The borrowed funds have been used historically as capital injections to Matrix Bank, Matrix Financial, Matrix Capital Markets and ABS. On December 27, 2000, Matrix Bancorp amended its bank stock loan agreement. The amended bank stock loan agreement has two components, a $10.0 million term loan and a revolving line of credit of $10.0 million. As of December 31, 2001, the balance of the term loan was $8.6 million and the balance of the revolving line of credit was $3.0 million. The amended bank stock loan requires Matrix Bancorp to maintain total shareholders' equity of $60.0 million. We exceed this requirement by 19%. The term loan has a three-year term with a maturity of December 27, 2003. The revolving line of credit is annually renewed. At December 31, 2001, the revolving line of credit was renewed for three months. At this time, management is confident that an additional renewal will be done. On July 30, 1999, Matrix Bancorp Capital Trust I (Trust I), a Delaware business trust formed by Matrix Bancorp, completed the sale of $27.5 million of 10% preferred securities. Trust I also issued common securities to Matrix Bancorp and used the net proceeds from the offering to purchase $28.6 million in principal amount of 10% junior subordinated debentures of Matrix Bancorp due September 30, 2029. The junior subordinated debentures are the sole assets of Trust I and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at an annual rate of 10% of the stated liquidation amount of $25 per preferred security. We have fully and unconditionally guaranteed all of the obligations of Trust I under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust I. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. We have the right to redeem the junior subordinated debentures, in whole or in part on or after September 30, 2004, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. See Note 9 to the consolidated financial statements included elsewhere in this document. Under the indenture, we are prohibited from paying dividends on our common stock if the scheduled payments on our junior debentures and trust preferred securities have not been made. On March 28, 2001, Matrix Bancorp Capital Trust II (Trust II), a Delaware business trust formed by the Company, completed the sale of $12.0 million of 10.18% preferred securities. Trust II also issued common securities to the Company and used the net process from the offering to purchase $12.4 million in principal amount of 10.18% junior subordinated debentures of the Company due June 8, 2031. The junior subordinated debentures are the sole assets of Trust II and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at an annual rate of 10.18% of the stated liquidation amount of $1,000 per preferred 46 security. The Company has fully and unconditionally guaranteed all of the obligations of Trust II under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust II. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indentures. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after June 8, 2011, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On July 16, 2001, Matrix Bancorp Capital Trust III (Trust III), a Delaware business trust formed by the Company, completed the sale of $15.0 million of 10.25% preferred securities. Trust III also issued common securities to the Company and used the net process from the offering to purchase $15.5 million in principal amount of 10.25% junior subordinated debentures of the Company due July 25, 2031. The junior subordinated debentures are the sole assets of Trust III and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at an annual rate of 10.25% of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust III. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indentures. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after July 25, 2006, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On November 28, 2001, Matrix Bancorp Capital Trust IV (Trust IV), a Delaware business trust formed by the Company, completed the sale of $5.0 million of floating rate of the six-month LIBOR plus 3.75% (6.007% for period ended December 31, 2001) preferred securities. Trust IV also issued common securities to the Company and used the net process from the offering to purchase $5.2 million in principal amount of floating rate of the six-month LIBOR plus 3.75% junior subordinated debentures of the Company due December 8, 2031. The junior subordinated debentures are the sole assets of Trust IV and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at a floating annual rate as described above of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust IV. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indentures. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after December 8, 2006, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. Capitalized expenses associated with all of the trust preferred securities offerings of approximately $2.3 million are included in other assets at December 31, 2001 and are being amortized on a straight-line basis over the life of the junior subordinated debentures. On September 29, 1997, we completed a registered debt offering of $20.0 million in senior notes due 2004, raising net proceeds of approximately $19.1 million. Interest on the senior notes of 11.5% is payable semi-annually on March 31 and September 30 of each year, commenced on March 31, 1998, with a balloon payment for the entire principal balance due in September 2004. The 11.5% senior notes require us to: o maintain consolidated tangible equity capital of not less than $35 million; and o meet the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized" as defined by applicable regulatory guidelines. Additionally, the 11.5% senior notes contain other covenants regarding certain restricted payments, incurrence of indebtedness and issuance of preferred stock, liens, merger, consolidation or sale of assets and transactions with affiliates. As of December 31, 2001, due to repurchases made by the Company of the senior notes, there remained $10.5 million of the debt issue outstanding. 47 Matrix Bancorp has guaranteed, with 50% recourse to our joint venture partner, the indebtedness of Matrix Settlement & Clearance Services to U.S. Bank, N.A., in an amount of no greater than $3 million. There was no balance outstanding at Matrix Settlement & Clearance Services on such indebtedness at December 31, 2001. The trend of net cash used by our operating activities experienced over the reported periods results primarily from the growth at Matrix Bank and more recently the growth at Matrix Financial and ABS. We anticipate the trend of a net use of cash from operations to continue for the foreseeable future. However, due to liquidity and capital availability, we do not anticipate growth to be as significant as in prior periods. Matrix Bank's primary source of funds for use in lending, purchasing bulk loan portfolios, investing and other general purposes are: o retail deposits; o trust deposits; o custodial escrow balances; o brokered deposits; o Federal Home Loan Bank borrowings; o sales of loan portfolios; and o proceeds from principal and interest payments on loans. Contractual loan payments and net deposit inflows are a generally predictable source of funds, while loan prepayments and loan sales are significantly influenced by general market interest rates and economic conditions. Borrowings on a short-term basis are used as a cash management vehicle to compensate for seasonal or other reductions in normal sources of funds. Matrix Bank utilizes advances from the Federal Home Loan Bank as its primary source for borrowings. At December 31, 2001, Matrix Bank had overnight and term borrowings from the Federal Home Loan Bank of $303.4 million. The availability of Federal Home Loan Bank borrowings is based on the level of collateral pledged. Generally, the availability will be limited to the lesser of 90% of the collateral pledged or 50% of total assets. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing rights portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. For a tabular presentation of the our short-term borrowings, see "Asset and Liability Management--Short-term Borrowings." Matrix Bank offers a variety of deposit accounts having a range of interest rates and terms. Matrix Bank's retail deposits principally consist of demand deposits and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. Matrix Bank's retail deposits are obtained from areas in which it is located, as well as through an Internet service. Therefore, its retail deposits are concentrated primarily in Las Cruces and Sun City, except for the Internet deposits, which could be out-of-market retail deposits. Matrix Bank relies principally on customer service, marketing programs and its relationships with customers to attract and retain in-market deposits. Beginning in February 1998, brokered deposits were accepted and have been utilized to support growth at Matrix Bank. In pricing deposit rates, management considers profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by competitors. Matrix Bank intends to continue its efforts to attract deposits as a primary source of funds to support its lending and investing activities. The following table sets forth the average balances for each major category of Matrix Bank's deposit accounts and the weighted-average interest rates paid for interest-bearing deposits for the periods indicated:
Year Ended December 31, ------------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------- ----------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------------- -------------- -------------- -------------- -------------- -------------- (Dollars in thousands) Passbook accounts........... $ 3,467 3.12 % $ 2,981 3.42 % $ 2,758 3.48 % NOW accounts................ 98,872 0.94 64,523 0.96 24,038 2.50 Money market accounts....... 203,757 2.11 130,592 2.34 189,154 3.04 Time deposits (except brokered)......... 181,535 5.60 177,399 6.10 131,054 5.45 Brokered deposits........... 312,419 6.20 183,685 6.36 156,293 5.11 ----------- ------------ ----------- ----------- ------------ ----------- Total deposits......... $ 800,050 4.36 % $ 559,180 4.70 % $ 503,297 4.29 % ----------- ------------ ----------- ----------- ------------ -----------
48 The following table sets forth the amount of Matrix Bank's certificates of deposit that are greater than $100,000 by time remaining until maturity as of December 31, 2001: As of December 31, 2001 ---------------------------------- Weighted Average Amount Rate Paid -------------- ------------------ (Dollars in thousands) Three months or less............... $ 4,419 5.74 % Over three months through six months.. 4,556 5.11 Over six months through twelve months. 7,699 4.78 Over twelve months.................... 5,736 5.43 -------------- ---------------- Total............................ $ 22,410 5.21 % ============== ================ We actively monitor Matrix Bank's compliance with regulatory capital requirements. Historically, Matrix Bank has increased its core capital through the retention of a portion of its earnings. Matrix Bank's future growth is expected to be achieved through deposit growth, brokered deposits, borrowings from the Federal Home Loan Bank and custodial deposits directed by affiliates. We anticipate that such growth will require additional capital. The capital requirements related to the anticipated growth will in part be fulfilled through retention of earnings, potentially increasing our bank stock loan and future possible debt or equity offerings. Prior to Matrix Financial becoming a subsidiary of Matrix Bank, our principal source of funding for our servicing acquisition activities and working capital needs of Matrix Financial consisted of a line of credit facility and a working capital facility provided to Matrix Financial by an unaffiliated financial institution. As noted earlier, effective August 1, 2000, Matrix Financial became a wholly owned subsidiary of Matrix Bank. The contribution of Matrix Financial increased the capital of Matrix Bank by approximately $25 million. In addition, effective August 1, 2000, through financing provided by Matrix Bank, Matrix Financial paid off its line of credit for the financing on its servicing acquisitions and in 2000 paid off approximately $4 million of higher costing borrowings under its purchase/repurchase facilities and paid off its working capital facility. Matrix Financial's principal source of funding for its loan origination business consists of a warehouse line of credit provided to Matrix Financial by Matrix Bank, and a warehouse line of credit provided to Matrix Financial by an unaffiliated financial institution. As of November 20, 2001, Matrix Financial's warehouse line of credit facility provided by an unaffiliated financial institution was amended. It aggregates $120.0 million, of which $24.5 million was available to be utilized as of December 31, 2001. It is anticipated that effective March 31, 2002, the warehouse line will be reduced to $80.0 million. At December 31, 2001, $95.5 million was outstanding under the warehouse line at a weighted average interest rate of 3.05%. Borrowings under the warehouse line of credit are secured by all of the mortgage loans funded with warehouse loan proceeds and bear interest at the LIBOR rate plus a negotiated margin. ABS School Services' principal source of funding for its loan origination business consists of its internal capital, a loan sale facility provided by an unaffiliated financial institution and a partnership trust with an unaffiliated financial institution. As of December 31, 2001, $22.8 million was outstanding under the loan sale facility at a weighted average interest rate of 4.92%. Borrowings under the loan sale facility are secured by all of the school financing sold and rates paid range from prime to 8% on the underlying loans. Amounts available under the loan sale facility and the partnership trust are at the lender's sole discretion. The loans financed through the loan sale facility are sold to an unaffiliated financial institution under an agreement which allows us to repurchase the loans at our sole option. The loan sale facility also provides a full guarantee of principal and interest in the case of default or loss. We are in the process of attempting to arrange additional financing vehicles to assist in the financing of originations of further charter school loans. The Company has placed tax-exempt financing of approximately $22 million at December 31, 2001 it originated to charter schools into several grantor trusts. The trusts then issued Class "A" Certificates and Class "B" Certificates, with the Class "A" Certificates being sold to various third party investors under a private placement at a price of par. The "A" Certificates are guaranteed by a letter of credit issued by a third party investment bank, and the underlying financing. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the investment bank. Generally, the trusts are short-term in nature with an average life of one year or less. 49 The "B" Certificates are owned in part by the Company and in part by the investment bank. The interest rate paid on the "A" Certificates and the "B" Certificates owned by the investment bank is considered the Company's financing cost. The approximate cost of the financing at December 31, 2001 and 2000 was 2.75% and 7.23%, respectively. The interest that the Company receives through its part ownership of the "B" Certificates is tax-exempt. Although the investment bank acts as a guarantor to the "A" Certificates, the Company provides limited recourse to the investment bank in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the trusts, the transactions have been accounted for as a secured financing. Matrix Bank and Sterling Trust are restricted in certain instances from paying dividends to Matrix Bancorp due to certain regulatory requirements. See "Regulation and Supervision." Matrix Financial is prohibited from paying dividends to Matrix Bank under its credit agreement dated September 29, 2000. At December 31, 2001, we were in compliance with all debt covenants. As discussed in "--Item 3. Legal Proceedings," we are from time to time party to various litigation matters, in most cases, involving ordinary routine claims incidental to our business. With respect to all pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. As such, the impact on our liquidity and capital cannot be estimated with certainty. We have not made an accrual for any losses in the financial statements as of December 31, 2001 related to these matters. One item of particular note, as discussed in the section noted above and in Note 14 of our consolidated financial statements, as of December 31, 2001, a subsidiary of the Company has been named a defendant in an action that was tried in Tarrant County, Texas District Court in the spring of 2000. The jury returned a verdict adverse to the Company with respect to 2 of 12 theories of liability posed by the plaintiffs, and the court has signed a judgment for certain of the plaintiffs in the amount of approximately $6.4 million. The Company has filed an appeal of this judgment and believes it has meritorious points of appeal and intends to vigorously prosecute the appeal of this action. The ultimate resolution of this matter could result in a loss of up to $6.4 million plus post-judgment interest and additional attorneys' fees. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty. To the extent additional information arises or our strategies change, it is possible that our liability in any of these matters may change. Inflation and Changing Prices The consolidated financial statements and related data presented in this document have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as prices of goods and services. Critical Accounting Policies The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in Note 2 of the consolidated financial statements. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan and valuation losses is a critical accounting policy that requires the most significant judgments, assumptions and estimates used in preparation of its consolidated financial statements. See discussion at "--Asset and Liability Management, Analysis of Allowance for Loan and Valuation Losses" for a detailed description of the Company's process and methodology related to the allowance for loan and valuation losses. 50 The Company also considers the valuation of mortgage servicing rights to be a critical accounting policy that requires judgments, assumptions and estimates concerning impairment of their value in certain interest rate environments. See "--Business, Mortgage Servicing Activities" for a detailed discussion of the nature of the servicing rights, and see Note 2 of the consolidated financial statements for a detailed discussion concerning the use of estimates in the valuation of mortgage servicing rights. The Company also considers the judgments and assumptions concerning litigation as a critical accounting policy. The Company has been notified that we are a defendant in a number of legal proceedings. Most of these cases involve ordinary and routine claims incidental to our business. Based on management's analysis, no accrual for loss has been made as of December 31, 2001 for any such cases. See a full description of such proceedings at "--Legal Proceedings". With respect to all pending litigation matters, our ultimate legal responsibility, if any, cannot be estimated with certainty. Based on the ultimate outcome of such proceedings, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to such proceedings. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires all derivative instruments to be carried at fair value on the balance sheet. At the time of adoption, the Company designated anew certain derivative instruments used for risk management into hedging relationships in accordance with the requirements of the new standard. Derivative instruments used to hedge changes in the fair value of assets and liabilities due to changes in interest rates were designated in fair value hedge relationships. As a result of adopting the new standard, the Company recorded transition amounts associated with establishing the fair value of the derivatives and hedged items on the consolidated balance sheet. At January 1, 2001, a pre-tax transition loss of $550,000, or $360,000 after tax, was recorded as a cumulative effect of a change in accounting principle. In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that replaces, in its entirety, SFAS 125. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS 140 is effective for transfers occurring after March 31, 2001 and the expanded disclosure requirements regarding securitizations and collateral are effective for fiscal years ended after December 15, 2000. The adoption of SFAS 140 did not have an impact on our consolidated financial statements. In June 2001, the FASB issued Statement No. 141, Business Combinations, that supersedes APB Opinion No. 16 and FASB Statement No. 38. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for certain qualifying combinations that were initiated prior to July 1, 2001, and requires that intangible assets associated with a business combination be recorded apart from goodwill if they meet certain criteria. SFAS 141 also significantly increases the disclosures required about business combinations. SFAS 141 is effective for all business combinations completed after June 30, 2001. The adoption of SFAS 141 did not have an impact on our consolidated financial statements. In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets, that supersedes APB Opinion No. 17. Under SFAS 142 goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are to be reviewed at least annually for impairment under impairment guidelines established in the statement. SFAS 142 also changes the amortization methodology on intangible assets that are deemed to have finite lives. Finally, SFAS 142 adds to required disclosures regarding goodwill and intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 142 at January 1, 2002 did not have a material impact on our consolidated financial statements. Our goodwill balance at December 31, 2001 was $1 million, and amortization expense was less than $100,000 per year. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that supersedes FASB Statement No. 121 and APB Opinion No. 30. SFAS 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal other than by sale, and the required valuation of such assets based on the criteria. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 at January 1, 2002 did not have a material impact on our consolidated financial statements. 51 Forward Looking Statements Certain statements contained in this annual report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this annual report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to the ongoing or future bankruptcies of the Company's customers; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; possible future litigation; the actions or inactions of third parties, including those that are parties to the existing bankruptcies of the Company's customers or litigation related thereto; unanticipated developments in connection with the bankruptcy actions or litigation described above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in this annual report and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on March 14, 2001; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See Item 7."Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management - Risk Sensitive Assets and Liabilities" and Item 1."Business Mortgage Servicing Activities - Hedging of Servicing Rights." Item 8. Financial Statements and Supplementary Data See Index to Financial Statements on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On April 3, 2001, our Audit Committee recommended to our Board of Directors that we not renew our engagement with Ernst & Young LLP as our independent auditors and to appoint KPMG LLP to be our principal independent auditors and to audit our consolidated financial statements for the fiscal year ending December 31, 2001. Our Board of Directors accepted the recommendation of the Audit Committee on April 3, 2001. The Audit Committee and the Board of Directors based their decisions on competitive bids submitted by the two firms. The dismissal of Ernst & Young and the appointment of KPMG both were effective as of April 16, 2001. Ernst & Young's reports on our consolidated financial statements for fiscal years of 1999 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were the reports qualified or modified as to uncertainty, audit scope or accounting principles. During fiscal years 1999 and 2000 and the subsequent interim period, there were no disagreements between us and Ernst & Young on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which would have caused Ernst & Young to make a reference to the subject matter of the disagreements in connection with their reports. Ernst & Young further has not performed any work on any subsequent period to December 31, 2000. We did not consult with KPMG with regard to any matter concerning the application of accounting principles to any specific transactions, either completed or proposed, or the type of audit opinion that might be rendered with respect to our financial statements prior to engaging the firm. PART III Items 10 through 13. The information for these items is incorporated from the definitive proxy statement to be filed with the Commission. 52 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (a) (2) Financial statements and financial statement schedules See Index to Financial Statements on page F-1. (b) Reports on Form 8-K None. (c) Exhibits See Exhibit Index, beginning on page II-1. (d) Financial Statement Schedules None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 13th day of March, 2002. Matrix Bancorp, Inc. By: /s/ Guy A. Gibson ----------------------------------- Guy A. Gibson President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date /s/ Guy A. Gibson President, Chief Executive March 13, 2002 - ------------------------------------ Guy A. Gibson Officer and a Director (Principal Executive Officer) /s/ Richard V. Schmitz Chairman of the Board March 13, 2002 - ------------------------------------ Richard V. Schmitz /s/ D. Mark Spencer Vice Chairman and Director March 13, 2002 - ------------------------------------ D. Mark Spencer /s/ David W. Kloos Senior Vice President, Chief March 13, 2002 - ------------------------------------ Financial Officer and a Director David W. Kloos (Principal Accounting and Financial Officer) /s/ David A. Frank Director March 13, 2002 - ------------------------------------ David A. Frank /s/ Robert T. Slezak Director March 13, 2002 - ------------------------------------ Robert T. Slezak /s/ Lester Ravitz Director March 13, 2002 - ------------------------------------ Lester Ravitz
INDEX TO EXHIBITS 3.1 /// Amended and Restated Articles of Incorporation of the Registrant (3.1) 3.2 + Bylaws, as amended, of the Registrant (3.2) 4.1 ++ Indenture by and among the Registrant and First Trust National Association, as trustee, relating to 11.50% Senior Notes due 2004 (4.1) 4.2 * First Amendment to the Indenture, dated as of December 5, 2001, by and between the Registrant and U.S. Bank National Association (the successor to First Trust National Association), as trustee, relating to 11.50% Senior Notes due 2004 4.3 + Specimen certificate for Common Stock of the Registrant (4.1) 4.4 + o Amended and Restated 1996 Stock Option Plan (4.2) 4.5 ******o Amendment No. 1 to the 1996 Amended and Restated Employee Stock Option Plan of the Registrant (4.1) 4.6 ******o Amendment No. 2 to the 1996 Amended and Restated Employee Stock Option Plan of the Registrant (4.2) 4.7 // o Employee Stock Purchase Plan, as amended (4.4) 4.8 ^ Indenture by and among the Registrant and State Street Bank and Trust Company, as trustee, relating to the 10% Junior Subordinated Debentures due 2029 (4.7) 4.9 ^ Form of Junior Subordinated Debentures (4.8) 4.10 ^ Certificate of Trust of Matrix Bancorp Capital Trust I (4.9) 4.11 ^ Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust I (4.10) 4.12 ^ Preferred Security Certificate for Matrix Bancorp Capital Trust I (4.11) 4.13 ^ Preferred Securities Guarantee Agreement of the Company relating to the Preferred Securities (4.12) 4.14 ^ Agreement as to the Expenses and Liabilities (4.13) 4.15 ^^o Matrix Bancorp, Inc. Executive Deferred Compensation Plan (4.1) 4.16 ^^ Trust Agreement, dated December 7, 2000 between Matrix Bancorp, Inc. and Matrix Bancorp, Inc., as Trustee (4.2) 4.17 ^^^ Amended and Restated Trust Agreement, dated May 11, 2001, between Matrix Bancorp, Inc. and Matrix Bancorp, Inc., as Trustee (14.2) 4.18 **** Indenture between the Registrant and Wilmington Trust Company, as debenture trustee, dated as of March 28, 2001, relating to the 10.18% junior subordinated deferrable interest debentures due June 8, 2031 (10.5) 4.19 **** Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust II, dated as of March 28, 2001 (10.6) 4.20 **** Common Securities Guarantee Agreement of the Registrant, dated as of March 28, 2001 (10.7) 4.21 **** Capital Securities Agreement of the Registrant, dated as of March 28, 2001 (10.8) 4.22 ***** Indenture between the Registrant and The Bank of New York, as debenture trustee, dated as of July 16, 2001, relating to the 10.25% junior subordinated deferrable interest debentures due July 25, 2031 (10.3) 4.23 ***** Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust III, dated as of July 16, 2001 (10.4) 4.24 ***** Common Securities Subscription Agreement of the Registrant, dated as of July 16, 2001 (10.5) 4.25 ***** Capital Securities Agreement of the Registrant, dated as of June 28, 2001 (10.6) 4.26 * Indenture between the Registrant and Wilmington Trust Company, as trustee, dated as of November 28, 2001, relating to Floating Rate Junior Subordinated Debt Securities due 2031 4.27 * Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust IV, dated as of November 28, 2001 4.28 * Guarantee Agreement of the Registrant, dated as of November 28, 2001 4.29 *****o Amended and Restated Executive Deferred Compensation Plan of Registrant (4.1) 10.1 * Lease dated as of December 21, 2001 by and between Matrix Bancorp, Inc. and WXI/SEV Realty, LLC 10.2 + Assignment and Assumption Agreement, dated as of June 28, 1996, by and among Mariano C. DeCola, William M. Howdon, R. James Nicholson and Matrix Funding Corp. (10.30) 10.3 + Development Management Agreement, dated as of June 28, 1996, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.31) 10.4 /// Coyote Creek Planned Unit Development Agreement, dated as of July 1, 1998, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.12) 10.5 + Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as of November 28, 1995 (10.36) 10.6 *** Credit Agreement, dated as of September 29, 2000, between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.7 **** First Amendment to Credit Agreement, dated as of March 5, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.8 **** Second Amendment to Credit Agreement, dated as of April 11, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.9 ***** Third Amendment to Credit Agreement, dated as of June 29, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.10 ****** Fourth Amendment to Credit Agreement, dated as of September 28, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.11 * Fifth Amendment to Credit Agreement, dated as of November 20, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders 10.12 *** Guaranty, dated as of September 29, 2000, from the Registrant to U.S. Bank National Association, as agent (10.3) 10.13 / o Employment Agreement, dated as of February 4, 1997, by and between The Vintage Group, Inc. and Paul Skretny (10.38) 10.14 +o Amendment of Employment Agreement (dated as of February 4, 1997) dated as of February 4, 2000, by and between The Vintage Group, Inc. and Paul E. Skretny (10.32) 10.15 *o Amendment of Employment Agreement (dated as of February 4, 1997) dated as of February 4, 2002, by and between The Vintage Group, Inc. and Paul E. Skretny 10.16 //// Credit Agreement, dated as of December 27, 2000, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.15) 10.17 **** First Amendment to Credit Agreement, dated as of March 5, 2001, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.3) 10.18 ***** Second Amendment to Credit Agreement, dated as of July 27, 2001, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.19 * Third Amendment to Credit Agreement, dated as of December 26, 2001, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders 10.20 +++ Agreement and Plan of Merger, dated as of March 25, 1998, among Fidelity National Financial, Inc., MCC Merger, Inc. and Matrix Capital Corporation (99.2) 10.21 ++ Merger Termination Agreement between Matrix Capital Corporation, Fidelity National Financial, Inc., and MCC Merger Sub, Inc., dated August 28, 1998 (10.1) 10.22 ** Executive Employment Agreement, dated as of April 20, 2000, by and between United Financial, Inc. and Carl G. de Rozario (10.6) 10.23 //// Lease dated as of September 1, 1999, by and between Matrix Financial Services Corporation and Suncor Development Company (10.22) 10.24 //// Lease with a reference date of 1999, by and between the Registrant and the Regents of the University of Colorado (10.23) 10.25 //// First Amendment to Lease, dated as of July, 2000, by and between the Registrant and the Regents of the University of Colorado, amending the Lease with a reference date of 1999 between the parties (10.24) 10.26 //// Second Amendment to Lease, dated as of October, 2000, by and between the Registrant and the Regents of the University of Colorado, amending the Lease with a reference date of 1999 between the parties (10.25) 10.27 ////o Matrix Bancorp, Inc. Executive Incentive Plan (10.27) 10.28 * Promissory Note, dated as of January 31, 2002, from D. Mark Spencer, as maker, to the Registrant, as payee 10.29 *o Matrix Bancorp, Inc. (f/k/a Matrix Capital Corporation) 401(k) Profit Sharing Plan 10.30 *o Amendment No. 1, effective as of January 1, 1994, to the Registrant's 401(k) Profit Sharing Plan 10.31 *o Amendment No. 2, effective as of May 20, 1996, to the Registrant's 401(k) Profit Sharing Plan 10.32 *o Amendment No. 3, effective as of July 20, 1998, to the Registrant's 401(k) Profit Sharing Plan 10.33 *o Amendment No. 4, effective as of December 30, 2001, to the Registrant's 401(k) Profit Sharing Plan 12 * Statement Re: Computations of Ratios 21 * Subsidiaries of the Registrant 23 * Consent of KPMG LLP - ---------- * Filed herewith + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-10223), filed by the Registrant with the Commission on August 15, 1996. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-34977), filed by the Registrant with the Commission on September 4, 1997. +++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K, filed by the Registrant with the Commission on April 8, 1998. / Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1996, filed by the Registrant with the Commission. // Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1997, filed by the Registrant with the Commission. /// Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1998, filed by the Registrant with the Commission. ////Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000, filed by the Registrant with the Commission. + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's current report on Form 8-K filed by the Registrant with the Commission on June 30, 2000. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1998, filed by the Registrant with the Commission. ** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000, filed by the Registrant with the Commission. *** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2000, filed by the Registrant with the Commission. ****Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2001, filed by the Registrant with the Commission. ***** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2001, filed by the Registrant with the Commission. ****** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed by the Registrant with the Commission. ^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-79731), filed by the Registrant with the Commission on June 1, 1999. ^^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-8 (No. 333-51516), filed by the Registrant with the Commission on December 8, 2000. ^^^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-8 (No. 75000), filed by the Registrant with the Commission on December 12, 2001. o Management contract or compensatory plan or arrangement.
INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of Matrix Bancorp, Inc. and Subsidiaries Independent Auditors' Report, December 31, 2001.............................F-1 Report of Independent Auditors, December 31, 2000 and 1999..................F-2 Consolidated Balance Sheets--December 31, 2001 and 2000.....................F-3 Consolidated Statements of Income--for the years ended December 31, 2001, 2000 and 1999............................................F-4 Consolidated Statements of Shareholders' Equity and Comprehensive Income-- for the years ended December 31, 2001, 2000 and 1999........................F-6 Consolidated Statements of Cash Flows--for the years ended December 31, 2001, 2000 and 1999............................................F-7 Notes to Consolidated Financial Statements..................................F-9 Independent Auditors' Report The Board of Directors and Shareholders Matrix Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities. /s/ KPMG LLP KPMG LLP Denver, Colorado February 7, 2002 F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Matrix Bancorp, Inc. We have audited the accompanying consolidated balance sheet of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of Matrix Bancorp, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Matrix Bancorp, Inc. and subsidiaries at December 31, 2000, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Ernst & Young LLP Phoenix, Arizona February 23, 2001 F-2 Matrix Bancorp, Inc. Consolidated Balance Sheets (Dollars in thousands)
December 31 2001 2000 ------------------------------------ Assets Cash and cash equivalents $ 52,501 $ 17,539 Interest-earning deposits and federal funds sold 31,959 35,631 Securities available for sale 6,963 66,616 Loans held for sale, net 1,157,989 942,496 Loans held for investment, net 191,161 173,525 Mortgage servicing rights, net 78,712 71,529 Other receivables 71,239 58,262 Federal Home Loan Bank of Dallas stock, at cost 18,181 27,814 Premises and equipment, net 13,631 13,189 Other assets, net 24,451 12,194 ------------------------------------ Total assets $ 1,646,787 $ 1,418,795 ==================================== Liabilities and shareholders' equity Liabilities: Deposits $ 866,235 $ 602,669 Custodial escrow balances 129,665 77,647 Draft Payable 28,875 656 Payable for purchase of mortgage servicing rights 4,738 12,666 Federal Home Loan Bank of Dallas borrowings 303,361 519,433 Borrowed money 162,532 97,003 Guaranteed preferred beneficial interests 59,500 27,500 Other liabilities 8,348 13,848 Income taxes payable 12,221 3,350 ------------------------------------ Total liabilities 1,575,475 1,354,772 ------------------------------------ Commitments and contingencies (Note 14) Shareholders' equity: Preferred stock, par value $.0001; authorized 5,000,000 shares; no shares outstanding - - Common stock, par value $.0001; authorized 50,000,000 shares; issued and outstanding 6,518,604 shares at December 31, 2001 and issued 6,795,904 shares and outstanding 6,558,904 shares at December 31,2000 1 1 Additional paid-in capital 20,800 23,004 Treasury shares at cost, 237,000 shares at December 31, 2000 - (1,775) Retained earnings 50,486 41,974 Accumulated other comprehensive income 25 819 ------------------------------------ Total shareholders' equity 71,312 64,023 ------------------------------------ Total liabilities and shareholders' equity $ 1,646,787 $ 1,418,795 ====================================
See accompanying notes to consolidated financial statements. F-3 Matrix Bancorp, Inc. Consolidated Statements of Income (Dollars in thousands except share information)
Year Ended December 31 2001 2000 1999 ------------------------------------------------------ Interest income: Loans, mortgage-backed and SBA securities $ 103,393 $ 93,965 $ 72,355 Interest-earning deposits 2,004 3,421 1,395 ------------------------------------------------------ Total interest income 105,397 97,386 73,750 Interest expense: Savings and time deposits 29,652 22,603 15,233 Demand and money market deposits 5,220 3,672 6,356 Federal Home Loan Bank of Dallas borrowings 16,071 27,242 9,184 Borrowed money 13,944 14,084 13,514 ------------------------------------------------------ Total interest expense 64,887 67,601 44,287 ------------------------------------------------------ Net interest income before provision for loan and valuation losses 40,510 29,785 29,463 Provision for loan and valuation losses 2,980 4,235 3,180 ------------------------------------------------------ Net interest income after provision for loan and valuation losses 37,530 25,550 26,283 Noninterest income: Loan administration 30,113 23,850 23,686 Brokerage 2,959 5,476 6,156 Trust services 4,036 4,923 4,840 Real estate disposition services 2,572 3,677 3,659 Gain on sale of loans, mortgage-backed and SBA securities 1,475 982 3,247 Gain on sale of mortgage servicing rights, net 167 2,634 363 Loan origination 35,483 7,587 6,218 School services 5,427 4,240 2,813 Other 9,474 5,423 9,378 ------------------------------------------------------ Total noninterest income 91,706 58,792 60,360 Noninterest expense: Compensation and employee benefits 52,573 34,245 29,336 Amortization of mortgage servicing rights 21,862 9,851 16,403 Occupancy and equipment 6,525 4,785 3,727 Postage and communication 4,063 2,812 2,688 Professional fees 2,883 4,687 2,385 Data processing 2,907 2,413 1,688 Other general and administrative 25,086 19,048 13,359 ------------------------------------------------------ Total noninterest expense 115,899 77,841 69,586 ------------------------------------------------------ Income before income taxes 13,337 6,501 17,057 Provision for income taxes 4,465 2,243 6,278 ------------------------------------------------------ F-4 Matrix Bancorp, Inc. Consolidated Statements of Income (continued) (Dollars in thousands except share information) Year Ended December 31 2001 2000 1999 ------------------------------------------------------ Income before cumulative effect of a change in accounting principle 8,872 4,258 10,779 Less cumulative effect of a change in accounting principle, net of tax benefit of $190,000 360 - - ====================================================== Net income $ 8,512 $ 4,258 $ 10,779 ====================================================== Net income per common share before accounting change $ 1.36 $ 0.63 $ 1.60 Less cumulative effect of a change in accounting principle 0.05 - - ------------------------------------------------------ Net income per common share $ 1.31 $ 0.63 $ 1.60 ====================================================== Net income per common share assuming dilution before accounting change 1.35 0.63 1.58 Less cumulative effect of a change in accounting principle 0.05 - - ------------------------------------------------------ Net income per common share - assuming dilution $ 1.30 $ 0.63 $ 1.58 ====================================================== Weighted average common shares 6,495,583 6,713,251 6,728,211 ====================================================== Weighted average common shares - assuming dilution 6,560,454 6,748,857 6,833,546 ======================================================
See accompanying notes to consolidated financial statements. F-5
Matrix Bancorp, Inc. Consolidated Statements of Shareholders' Equity and Comprehensive Income (Dollars in thousands) Accumulated Common Stock Additional Other ------------------------- Paid-In Treasury Retained Comprehensive Comprehensive Shares Amount Capital Shares Earnings Income Total Income ------------------------------------------------------------------------------------------------- Balance at December 31, 1998 6,723,911 $ 1 $ 22,416 - $ 26,937 - $ 49,354 Issuance of stock related to employee stock purchase plan and options 35,330 - 364 - - - 364 ------------- Net income - - - - 10,779 - 10,779 $ 10,779 -----------------------------------------------------------------------------------============= Balance at December 31, 1999 6,759,241 1 22,780 - 37,716 - 60,497 ----------------------------------------------------------------------------------- Shares repurchased (237,000) - - (1,775) - - (1,775) Issuance of stock related to employee stock purchase plan and options 36,663 - 224 - - - 224 Comprehensive income: Net income - - - - 4,258 - 4,258 4,258 Net unrealized holding gains - - - - 819 819 819 ------------- Comprehensive income $ 5,077 -----------------------------------------------------------------------------------============= Balance at December 31, 2000 6,558,904 1 23,004 (1,775) 41,974 819 64,023 ------------------------------------------------------------------------------------------------ Shares repurchased (86,500) (746) (746) Shares retired (323,500 shares) (1,775) 1,775 Issuance of stock related to employee stock purchase plan and options 46,200 317 317 Comprehensive income: Net income 8,512 8,512 $ 8,512 Net unrealized holding losses(1) - - - - (794) (794) (794) ------------- Comprehensive income $ 7,718 ----------------------------------------------------------------------------------============= Balance at December 31, 2001 6,518,604 $ 1 $ 20,800 - $ 50,486 $ 25 $ 71,312 =============================================================================================== (1) Disclosure of reclassification amount Unrealized holding loss arising during year ended December 31, 2001 $ (4) Less: reclassification adjustment of gains included in net income (790) ------------- Net unrealized holding losses $ (794) =============
See accompanying notes to consolidated financial statements. F-6 Matrix Bancorp, Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
Year Ended December 31 2001 2000 1999 ------------------------------------------------- Operating activities Net income $ 8,512 $ 4,258 $ 10,779 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,116 2,583 4,424 Provision for loan and valuation losses 2,980 4,235 3,180 Amortization of mortgage servicing rights 21,862 9,851 16,403 Impairment of mortgage servicing rights 181 - - Unrealized gain on securities - 819 - Deferred income taxes 12,003 (518) (391) Gain on sale of loans, mortgage-backed and SBA securities (1,475) (982) (3,247) Gain on sale of mortgage servicing rights (167) (2,634) (363) Gain on sale of building and equipment (3,425) (1,159) - Loans originated for sale, net of loans sold (364,857) (125,944) 69,722 Loans purchased for sale (105,936) (225,898) (701,952) Proceeds from sale of loans purchased for sale 76,074 108,466 192,722 Proceeds from sale of securities 59,586 - - Originated mortgage servicing rights, net (30,266) (16) (1,514) (Increase) decrease in other receivables and other assets (22,513) 6,777 (6,796) (Decrease) increase in other liabilities and income taxes payable (8,483) (3,682) 2,369 ------------------------------------------------- Net cash used in operating activities (352,808) (216,480) (414,664) Investing activities Loans originated and purchased for investment (159,619) (202,300) (118,327) Principal repayments on loans 345,031 353,713 303,026 Redemption (purchase) of Federal Home Loan Bank of Dallas stock 9,633 (5,400) (6,771) Purchases of premises and equipment (14,415) (7,089) (2,615) Hedging of servicing portfolio, net - 95 (3,257) Acquisition of mortgage servicing rights (8,321) (22,380) (28,694) Proceeds from the sale of building and equipment 14,601 3,664 - Proceeds from sale of mortgage servicing rights 1,600 3,537 2,827 ------------------------------------------------- Net cash provided by investing activities 188,510 123,840 146,189
F-7
Matrix Bancorp, Inc. Consolidated Statements of Cash Flows (continued) (Dollars in thousands) Year Ended December 31 2001 2000 1999 ------------------------------------------------- Financing activities Net increase in deposits $ 263,566 $ 40,475 $ 71,678 Net increase (decrease) in custodial escrow balances 52,018 (16,559) (2,618) (Decrease) increase in revolving lines and repurchase agreements, net (138,946) 125,743 174,334 Payments of notes payable (13,298) (31,169) (31,890) Proceeds from notes payable 1,786 2,325 33,395 Payment of financing arrangements (86) (63) (117) Payment of subordinated debt - - (2,910) Proceeds from junior subordinated debentures 30,977 - 26,063 Treasury shares repurchased (746) (1,775) - Proceeds from issuance of common stock related to employee stock purchase plan and options 317 224 364 ------------------------------------------------- Net cash provided by financing activities 195,588 119,201 268,299 ------------------------------------------------- Increase (decrease) in cash and cash equivalents 31,290 26,561 (176) Cash and cash equivalents at beginning of the year 53,170 26,609 26,785 ------------------------------------------------- Cash and cash equivalents at end of the year $ 84,460 $ 53,170 $ 26,609 ================================================= Supplemental disclosure of cash flow information Cash paid for interest expense $ 62,520 $ 68,298 $ 41,139 ================================================= Cash paid for income taxes $ 4,557 $ 1,592 $ 5,248 =================================================
See accompanying notes to consolidated financial statements. F-8 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements 1. Organization Matrix Bancorp, Inc. (the Company) is a unitary thrift holding company that, through its subsidiaries, is a diversified financial services company headquartered in Denver, Colorado. The Company's operations are conducted primarily through Matrix Capital Bank (Matrix Bank), Matrix Financial Services Corporation (Matrix Financial), Matrix Capital Markets, Inc. (Matrix Capital), Matrix Asset Management Corporation (Matrix Asset Management), ABS School Services, L.L.C. (ABS), Sterling Trust Company (Sterling) and First Matrix Investment Services Corporation (First Matrix), all of which are wholly owned subsidiaries of the Company. Matrix Bank, a federally chartered savings and loan association, serves its local communities of Las Cruces, New Mexico, and Phoenix, Arizona, by providing personal and business depository services, offering residential loans and providing, on a limited basis, commercial real estate and consumer loans. During 2001, Matrix Bank announced the relocation of its domicile from Las Cruces to Denver, Colorado. The relocation will be completed in the second quarter of 2002. Matrix Bank intends to offer all of its existing banking services in the Denver market. The Company's mortgage banking business is primarily conducted through Matrix Financial, and was established with the primary objective of originating, acquiring and servicing residential mortgage loan servicing rights. Matrix Financial originates residential loans primarily through its wholesale loan origination offices in Atlanta, Dallas, Denver, Chicago, Houston, Phoenix, Santa Ana and St. Louis. Servicing mortgage loans involves the contractual right to receive a fee for processing and administering mortgage loan payments. Matrix Capital Markets, formerly known as United Financial, Inc., provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry, primarily related to the brokerage and analysis of residential mortgage loan servicing rights and residential mortgage loans, corporate and mortgage loan servicing portfolio valuations and, to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Matrix Asset Management provides real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions. ABS provides outsourced business services and financing primarily to charter schools. Sterling is a nonbank trust company specializing in the administration of self-directed individual retirement accounts, qualified business retirement plans and personal custodial F-9 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) accounts, as well as corporate escrow and paying agent services. First Matrix is registered with the National Association of Securities Dealers as a fully disclosed broker-dealer. First Matrix relocated its headquarters to Denver, Colorado from Fort Worth, Texas in June of 2001, and has branch offices in Fort Worth, Texas and Memphis, Tennessee, which was opened in late 2001. First Matrix offers a wide range of investment options for both individual and institutional investors, long-term investing and retirement planning, and the acquisition, brokering and sale of Small Business Administration (SBA) loan pools. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America. The following is a description of the more significant policies that the Company follows in preparing and presenting its consolidated financial statements. 2. Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation. The Company contributed 100 percent of Matrix Financial's stock to Matrix Bank on August 1, 2000. All of Matrix Financial's assets and liabilities were transferred at their carrying or book basis. This transaction had no impact on the consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the consolidated financial statements, and disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Derivative Instruments and Hedging Activities In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133." SFAS 133 and SFAS 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS 133 and SFAS F-10 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the Company adopted SFAS 133 and SFAS 138 on January 1, 2001. The adoption of SFAS 133 resulted in a pre-tax transition loss of $550,000, or $360,000 after tax which was recorded as a cumulative effect of a change in accounting principle for the year ended December 31, 2001. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items were not adjusted. Due to the nature of the asset hedged and the derivative relationship, the transition loss recorded effective January 1, 2001, reversed and was recorded as loan origination income during the quarter ended March 31, 2001. All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge.) The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value hedges to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk are recorded in earnings. Changes in the fair value of derivative trading instruments are reported in current-period earnings. The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is dedesignated as a hedging instrument, because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Company continues to carry the derivative on the consolidated balance sheet at its fair value, and no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is F-11 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Company continues to carry the derivative on the consolidated balance sheet at its fair value, removes any asset or liability that was recorded pursuant to recognition of the firm commitment from the consolidated balance sheet and recognizes any gain or loss in earnings. In all other situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings. For the year ended December 31, 2000, prior to the adoption of SFAS No, 133, the Company used a program of exchange-traded futures and options to hedge approximately 6.4% of its mortgage servicing portfolio. Prior to January 1, 2001, unrealized gains and losses on derivatives used for hedging purposes were generally not required to be recorded in the consolidated financial statements. Realized gains and losses on futures or options contracts either settled or terminated were recorded as a adjustment to the mortgage servicing rights being hedged and amortized into the income statement over either the remaining life of the derivative instrument or the expected life of the mortgage servicing assets. Due to the cost of the requirements that must be met to achieve hedge accounting under SFAS No. 133 for mortgage servicing rights, the Company did not attempt to qualify for hedge accounting and effective March 31, 2001 the Company sold, repurchased or allowed to mature all derivative instruments recorded on the books associated with mortgage servicing. SFAS No. 133 requires the Company to record its best effort and mandatory commitments associated with its mortgage loan origination activities on the consolidated balance sheet. In order to hedge against the changes in the fair value of mortgage loans the Company enters into best effort and mandatory commitments to deliver mortgage loans, which locks the price at which the loan will be sold into the secondary market. These derivatives are recorded on the consolidated balance sheet and qualify for hedge accounting, as the commitments are highly effective in offsetting changes in fair values of the hedged items. Securities Available for Sale Securities available for sale include mortgage-backed securities and SBA securities. Securities available for sale are carried at estimated fair values with the net unrealized gains or losses reported in accumulated other comprehensive income, which is included as a separate component in shareholders' equity. The Company records its securities F-12 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) portfolio at estimated fair value at the end of each quarter based on public market quotes. At disposition, the realized gain or loss is included in earnings on a specific identification basis. Loans Held for Sale Loans originated or purchased with the intent for sale in the secondary market are carried at the lower of aggregate cost, net of discounts or premiums and a valuation allowance, or estimated fair market value. Estimated fair market value is determined using forward commitments to sell loans or mortgage-backed securities to permanent investors or current market rates for loans of similar quality and type. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income. Discounts or premiums on loans held for sale are not accreted or amortized into income on the interest method; however, discounts and premiums related to payments of loan principal are recorded in interest income. The loans are primarily secured by one-to-four family residential real estate located throughout the United States. Loans are considered sold when the Company surrenders control over the transferred assets to the purchaser, with standard representations and warranties. At such time, the loan is removed from the loan portfolio and a gain or loss is recorded on the sale. Gains and losses on loan sales are determined based on the difference between the allocated cost basis of the assets sold and the proceeds, which includes the estimated fair value of any assets or liabilities that are newly created as a result of the transaction. Losses related to recourse provisions in excess of the amount originally provided are accrued as a liability at the time such additional losses are determined, and recorded as part of noninterest expense. Loans Held for Investment Loans held for investment are stated at unpaid principal balances, less unearned discounts and premiums, deferred loan fees, loans in process and allowance for loan losses. The loans are residential mortgage loans, commercial and SBA loans, and school financing loans, and are primarily secured by real estate. Allowance for Loan Losses The allowance for loan losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors such as any qualitative evaluations of individual classified assets, geographic portfolio concentrations, new products or markets, evaluations of the changes in the historical loss experience component, and projections of this component into the current and future periods based on current knowledge and conditions. The loss factors are applied to the outstanding principal balance of loans in their F-13 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) respective categories, plus additional loan review is performed on all significant commercial and school finance loans. After an allowance has been established for the loan portfolio, management establishes a portion of the allowance for loan losses, which is attributable to factors that cannot be associated with a specific loan or loan portfolio. The Company evaluates its residential loans collectively due to their homogeneous nature. These factors include general economic conditions, recognition of specific regional geographic concerns, loan type and trends in portfolio growth. Loan losses are charged against the allowance when the probability of collection is considered remote. In the opinion of management, the allowance is adequate to absorb the inherent losses in the current loan portfolio. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted using loan rate, market price of the loan or fair value of the collateral, if collateral dependent. All loans considered impaired are included in nonperforming loans. The Company evaluates its residential loans collectively due to their homogeneous nature. Accordingly, potential impaired loans of the Company include only commercial loans, real estate construction loans, commercial real estate mortgage loans and school financing classified as nonperforming loans. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. Loans are placed on nonaccrual status when full payment of principal or interest is in doubt, or generally when they are past due 90 days as to either principal or interest, unless the interest is guaranteed by a creditworthy entity through recourse provisions. Previously accrued but unpaid interest is reversed and charged against interest income, if not collectible, and future accruals are discontinued. Interest payments received on nonaccrual loans are recorded as interest income unless there is doubt as to the collectibility of the recorded investment. In those cases, cash received is recorded as a reduction in principal. Mortgage Servicing Rights The Company recognizes mortgage servicing rights (MSRs) as an asset separate from the underlying originated mortgage loan. Upon sale of a loan, the Company measures retained MSRs by allocating the previous carrying amount of the originated mortgage loan between the loan and the servicing right based on their estimated fair values. Purchased MSRs are initially measured at cost. MSRs are carried at the lower of cost (allocated cost for originated MSRs), less accumulated amortization, or estimated fair value. MSRs are amortized in proportion to and over the period of the estimated future net servicing income. F-14 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The estimated fair value of MSRs is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its MSRs by product type, interest rate and investor to reflect the predominant risk characteristics. To determine the estimated fair value of MSRs, the Company uses a valuation model that calculates the present value of future cash flows. In using this valuation model, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing per loan, including incremental interest cost of servicer advances, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds and default rates. For purposes of performing an impairment analysis on MSRs, the Company estimates fair value using the following primary assumptions: prepayment speeds ranging from 151 PSA (Public Securities Association prepayment speed measurement) to 835 PSA; discount rates ranging from 9.00 percent to 21.50 percent; and default rates ranging from 0 percent to 100 percent. The Company records a valuation allowance where the estimated fair value is below the carrying amount of individual stratifications, even though the overall fair value of the servicing assets may exceed amortized cost. As of December 31, 2001, a valuation allowance of $181,000 was required, and the fair value of the aggregate MSRs was approximately $81,900,000. As of December 31, 2000, no valuation allowance was required, and the estimated fair value of the aggregate MSRs was approximately $75,185,000. Gain on sale of MSRs is recognized when title to MSRs and the risks and rewards inherent in owning the MSRs have been transferred to the buyer. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated lives of the assets, which range from three to seven years for software, office furniture and equipment and 30 years for buildings. Foreclosed Real Estate Residential or commercial real estate acquired through foreclosure, deed in lieu of foreclosure or in judgment is carried at the lower of estimated fair value, less estimated costs to sell, or the related loan balance at the date of foreclosure. Valuations are periodically performed by management and an allowance for loss is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated costs to sell. The net carrying value of foreclosed real estate, which is classified in other assets, was $8,355,000 and $2,646,000 at December 31, 2001 and 2000, respectively. F-15 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. The subsidiaries are charged for the taxes applicable to their profits calculated on the basis of filing separate income tax returns. Matrix Bank qualifies as a savings and loan association for income tax purposes. The Company uses the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Loan Administration Income Loan administration income represents service fees and other income earned from servicing loans for various investors, as well as gains from activity in our Ginnie Mae portfolios. Loan administration income includes service fees that are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Service fees on loans that are not delinquent or are delinquent by no more than 60 days are recognized when earned. All other income is recognized when the related payments are received. Brokerage Income Brokerage income represents fees earned related to servicing brokerage and consulting services. Brokerage income is recognized when services are performed. Trust Services Income Trust services income represents fees earned related to services provided for self-directed individual retirement accounts, qualified benefit plans and escrow arrangements. Trust services income is recognized over the contract period in proportion to when the services are performed. Real Estate Disposition Services Income Real estate disposition services income represents fees earned related to real estate management and disposition services. Real estate disposition services income is recognized when services are performed. F-16 Loan Origination Income Loan origination income for loans originated for sale, which includes all mortgage origination fees, secondary marketing activity including servicing-released premiums and capitalized servicing on mortgage loans sold, servicing retained, net of outside origination costs, is recognized as income at the time the loan is sold and funded by the investor. Loan origination income for loans originated for investment, which includes mortgage origination fees and certain direct costs associated with loan originations, is deferred and amortized as a yield adjustment over the contractual life of the related loan using the interest method, adjusted for estimated prepayments. School Services Income School services income represents fees earned related to outsourced business and consulting services provided to schools. School services income is recognized when services are performed. Cash and Cash Equivalents Cash equivalents, for purposes of the consolidated statements of cash flows, consist of nonrestricted cash, federal funds sold and interest-earning deposits with banks with original maturities, when purchased, of three months or less. Net Income Per Common Share Basic earnings per share (EPS), or net income per common share, excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Net income per common share assuming dilution is computed by dividing net income by the weighted average number of common shares outstanding for the year and the dilutive effect, if any, of stock options and warrants outstanding for the year. Restructuring Charges During the second quarter of 2001, the Company announced a plan to relocate the domicile of Matrix Bank to Denver, Colorado from Las Cruces, New Mexico. Associated with this relocation, the Company accrued expenses of approximately $984,000 primarily for severance and contract benefits to be paid to certain of Matrix Bank's employees, mainly consisting of back office, accounting and human F-17 resources personnel. The expense was charged to other general and administrative expense on the consolidated income statement. The total number of employees to be involuntarily terminated was 21. Additionally, the accrued liability includes the payout of the contract the Company had with Matrix Bank's prior president and chief executive officer. As of December 31, 2001, approximately $639,000 of the liability remains. Also associated with the planned relocation of Matrix Bank's domicile, Matrix Bank acquired a building in Denver, Colorado for approximately $11.5 million in June 2001. Subsequent to the acquisition, Matrix Bank was notified of the intent of the City and County of Denver to condemn the building in connection with its planned expansion of the Denver Convention Center. In October 2001, the condemnation proceedings were held. The City and County of Denver was granted possession of the building in consideration of a payment totaling approximately $14.9 million. The sale resulted in a $3.4 million pre-tax gain on sale of assets recorded in the consolidated financial statements. Matrix Bank has identified an alternative location and is proceeding with relocation of the domicile and expects such relocation to be completed in the second quarter of 2002. Investment in Joint Venture The Company has a 45 percent-owned investment in Matrix Settlement & Clearance Services, LLC (MSCS) which is accounted for using the equity method. This investment was classified in other assets, and had a carrying value of $589,000 and $653,000 as of December 31, 2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, the Company recorded losses of $175,000 and $478,000, respectively, in other income related to MSCS operations. As of December 31, 2001 and 2000, respectively, MSCS had total assets of $1,626,000 and $1,175,000, total liabilities of $499,000 and $68,000 and equity of $1,127,000 and $1,107,000. For the years ended December 31, 2001 and 2000, respectively, MSCS had revenues of $3,517,000 and $1,470,000 and pre-tax net loss of $177,000 and $955,000. Impact of Recently Issued Accounting Standards. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, that supersedes Accounting Principles Board (APB) Opinion No. 17. Under SFAS 142 goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are to be reviewed at least annually for impairment, under impairment guidelines established in the statement. SFAS 142 also changes the amortization methodology in intangible assets that are deemed to have finite F-18 lives. Finally, SFAS 142 adds to required disclosures regarding goodwill and intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 142 January 1, 2002 did not have a material impact on the consolidated financial statements. The goodwill balance at December 31, 2001 was approximately $1 million, and the amortization expense has been less than $100,000 per year. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that superseded SFAS No. 121 and APB Opinion No. 30. SFAS 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal other than by sale, and the required valuation of such assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 January 1, 2002 did not have a material impact on the consolidated financial statements. Reclassifications Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation. F-19 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 3. Net Income Per Common Share The following table sets forth the computation of net income per share and net income per common share, assuming dilution:
Year Ended December 31 2001 2000 1999 ------------------------------------------------------ (Dollars in thousands) Numerator: Net income available to common shareholders $ 8,512 $ 4,258 $ 10,779 ====================================================== Denominator: Weighted average shares outstanding 6,495,583 6,713,251 6,728,211 Effect of dilutive securities: Common stock options 64,871 35,606 95,899 Common stock warrants - - 9,436 ------------------------------------------------------ Dilutive potential common shares 64,871 35,606 105,335 ------------------------------------------------------ Denominator for net income per share, assuming dilution 6,560,454 6,748,857 6,833,546 ======================================================
4. Securities Available for Sale Securities available for sale were as follows:
December 31, 2001 December 31, 2000 ---------------------------------------------------------------------------- Gross Gross Amortized Unrealized Estimated Amortized Unrealized Estimated Cost Gains Fair Value Cost Gains Fair Value ---------------------------------------------------------------------------- (In thousands) Mortgage-backed securities $ 1,961 $ 38 $ 1,999 $ 65,375 $ 1,241 $66,616 SBA securities 4,964 - 4,964 - - - ---------------------------------------------------------------------------- Total $ 6,925 $ 38 $ 6,963 $ 65,375 $ 1,241 $66,616 ============================================================================
The Company expects to receive payments on securities over periods that are considerably shorter than the contractual maturities of the securities, which range from 6 to 30 years, due to prepayments. Realized gains on the sale of securities available for sale were approximately $1,198,000, $0 and $0 in 2001, 2000 and 1999, respectively. F-20 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 5. Loans Held for Sale and Investment Loans Held for Investment Loans held for investment consist of the following:
December 31 2001 2000 ------------------------------------ (In thousands) Residential loans $ 6,833 $ 8,382 Multi-family, commercial real estate, SBA guaranteed and commercial 147,038 123,118 Construction loans 42,865 50,131 Consumer loans and other 5,431 8,438 ------------------------------------ 202,167 190,069 Less: Loans in process 7,355 13,146 Purchase discounts, net 361 569 Unearned fees 514 722 Allowance for loan losses 2,776 2,107 ------------------------------------ 11,006 16,544 ------------------------------------ Loans held for investment, net $ 191,161 $ 173,525 ====================================
Activity in the allowance for loan losses on loans held for investment is summarized as follows:
Year Ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Balance at beginning of year $ 2,107 $ 1,433 $ 1,136 Provision for loan losses 935 1,508 735 Charge-offs (347) (874) (509) Recoveries 81 40 71 ------------------------------------------------------ Balance at end of year $ 2,776 $ 2,107 $ 1,433 ======================================================
Nonaccrual loans in the loans held for investment portfolio totaled approximately $13,760,000 and $3,087,000, or 7.2 percent and 1.8 percent, of the total loans held for investment portfolio at December 31, 2001 and 2000, respectively. F-21 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Loans Held for Sale Loans held for sale consist of the following:
December 31 2001 2000 ------------------------------------ (In thousands) Residential loans $ 1,051,006 $ 893,034 Commercial loans, school financing and other 107,482 54,540 ------------------------------------ 1,158,488 947,574 Less: Purchase premiums, net (6,063) (1,396) Valuation allowance 6,562 6,474 ------------------------------------ 499 5,078 ------------------------------------ Loans held for sale, net $ 1,157,989 $ 942,496 ====================================
Activity in the valuation allowance for loans held for sale is summarized as follows:
Year Ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Balance at beginning of year $ 6,474 $ 4,921 $ 2,574 Provision for loan losses 2,045 2,727 2,445 Charge-offs (1,961) (1,175) (98) Recoveries 4 1 - ------------------------------------------------------ Balance at end of year $ 6,562 $ 6,474 $ 4,921 ======================================================
Nonaccrual loans related to the commercial loans and school financing held for sale portfolio aggregated approximately $4,743,000 and $2,469,000 at December 31, 2001 and 2000, respectively. Interest income that would have been recorded for nonaccrual loans was approximately $1,374,000, $1,016,000 and $979,000 during the years ended December 31, 2001, 2000 and 1999, respectively. The Company continues to accrue interest on government-sponsored loans such as Federal Housing Administration (FHA) insured and Department of Veterans' Affairs (VA) guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured or guaranteed by the federal government. The F-22 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $55,200,000 and $101,104,000 as of December 31, 2001 and 2000, respectively. 6. Premises and Equipment Premises and equipment consist of the following:
December 31 2001 2000 ------------------------------------ (In thousands) Land $ 830 $ 830 Buildings 6,324 6,314 Leasehold improvements 1,667 1,590 Office furniture and equipment 15,162 12,216 ------------------------------------ 23,983 20,950 Less: accumulated depreciation and amortization 10,352 7,761 ------------------------------------ Premises and equipment, net $ 13,631 $ 13,189 ====================================
Included in occupancy and equipment expense is depreciation and amortization expense of premises and equipment of approximately $2,797,000, $2,212,000 and $2,126,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 7. Mortgage Servicing Rights The activity in the MSRs is summarized as follows:
Year Ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Balance at beginning of year $ 71,529 $ 63,479 $ 57,662 Valuation allowance - - (181) Purchases 530 31,883 19,754 Originated, net of MSRs sold 30,129 16 1,514 Hedging (gain) loss - (95) 3,257 Amortization (21,862) (9,851) (16,403) Sales (1,433) (13,903) (2,305) ------------------------------------------------------ Balance at end of year $ 78,712 $ 71,529 $ 63,479 ======================================================
The Company's servicing activity is diversified throughout 50 states with concentrations at December 31, 2001, in California, Texas, Missouri and Arizona of approximately 14.5 percent, 14.5 percent, 16.4 percent and 8.3 percent, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. As of December 31, 2001, 2000 and 1999, the Company subserviced loans for others of approximately $889,000,000, $1,163,811,000 and $205,929,000, respectively. F-23 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The Company's servicing portfolio (excluding subserviced loans) is comprised of the following:
December 31 2001 2000 -------------------------------------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding -------------------------------------------------------------- (Dollars in thousands) Freddie Mac 12,422 $ 613,527 16,476 $ 836,054 Fannie Mae 31,069 1,885,197 34,706 1,887,925 Ginnie Mae 26,718 1,820,691 20,930 1,106,939 VA, FHA, conventional and other loans 15,946 1,336,950 20,292 1,687,045 -------------------------------------------------------------- 86,155 $ 5,656,365 92,404 $ 5,517,963 ==============================================================
The Company's custodial escrow balances shown in the accompanying consolidated balance sheets at December 31, 2001 and 2000, pertain to payments held in escrow in respect of taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company of approximately $129,665,000 and $77,647,000, respectively. The custodial accounts are maintained at Matrix Bank in noninterest-bearing accounts. The balance of the custodial accounts fluctuates from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of taxes and insurance payments. 8. Deposits Deposit account balances are summarized as follows:
December 31 2001 2000 ---------------------------------------------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------------------------------------------------------------------------- (Dollars in thousands) Passbook accounts $ 4,291 0.50% 3.12% $ 3,010 0.50% 3.42% NOW accounts 107,183 12.37 0.94 85,986 14.27 0.96 Money market accounts 249,234 28.77 2.11 122,992 20.41 2.34 ---------------------------------------------------------------------------- 360,708 41.64 1.74 211,988 35.18 1.91 Certificate accounts 505,527 58.36 5.98 390,681 64.82 6.23 ---------------------------------------------------------------------------- Deposits $ 866,235 100.00% 4.36% $ 602,669 100.00% 4.70% ============================================================================
F-24 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Included in NOW accounts are noninterest-bearing DDA accounts of $67,137,000 and $52,986,000 for the years ended December 31, 2001 and 2000, respectively. Contractual maturities of certificate accounts as of December 31, 2001:
Under 12 12 to 36 36 to 60 months months months Total ------------------------------------------------------------------ (In thousands) 2.00-2.99% $ 90,036 $ 38 $ - $ 90,074 3.00-3.99% 127,430 2,930 4 130,364 4.00-4.99% 53,014 23,084 3,233 79,331 5.00-5.99% 70,425 8,138 3,690 82,253 6.00-6.99% 105,451 12,989 421 118,861 7.00-7.99% 3,871 773 - 4,644 ------------------------------------------------------------------ $ 450,227 $ 47,952 $7,348 $ 505,527 ==================================================================
Approximately $120,428,000 and $131,443,000 of fiduciary assets under administration by Sterling are included in NOW and money market accounts as of December 31, 2001 and 2000, respectively. Included in certificate accounts are $361,271,000 and $203,600,000 of brokered deposits as of December 31, 2001 and 2000, respectively. Interest expense on deposits is summarized as follows:
Year Ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Passbook accounts $ 108 $ 102 $ 96 NOW accounts 929 619 600 Money market 4,291 3,053 5,756 Certificates of deposit 29,544 22,501 15,137 ------------------------------------------------------ Interest expense on deposits $ 34,872 $ 26,275 $ 21,589 ======================================================
The aggregate amount of deposit accounts with a balance greater than $100,000 (excluding brokered deposits) was approximately $22,410,000 and $18,815,000 at December 31, 2001 and 2000, respectively. F-25 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests Borrowed money and guaranteed preferred beneficial interests are summarized as follows:
December 31 2001 2000 ------------------------------------ (In thousands) Borrowed Money $120,000,000 revolving warehouse loan agreement, through March 31, 2002, renewable annually, secured by mortgage loans held for sale, interest at LIBOR plus 1.20 percent at December 31, 2001 and plus 1.07 percent at December 31, 2000 (3.05 percent at December 31, 2001); $24,550,000 available at December 31, 2001 $ 95,450 $ 21,595 Senior notes, interest at 11.50 percent payable semiannually, unsecured and maturing September 30, 2004 10,455 20,000 $10,000,000 note payable to a third party financial institution due in quarterly principal installments of $357,000 plus interest, through December 31, 2003, collateralized by the common stock of Matrix Bank; interest at LIBOR plus 2.65 percent (4.52 percent at December 31, 2001) 8,572 8,214 $10,000,000 revolving line of credit to a third party financial institution, through March 31, 2002, renewable annually, collateralized by the common stock of Matrix Bank; interest at LIBOR plus 2.65 percent (4.52 percent at December 31, 2001); $7,000,000 available at December 31, 2001 3,000 - Financing agreement with a bank, secured by real estate, interest at prime plus 1 percent - 2,325 School financing repurchase agreements with a third-party bank to sell school financing originated by the Company under various agreements Interest rates are variable from prime to 8.00 percent. Total commitment is at the discretion of the third-party bank. 22,807 17,094 School financing agreement, renewable annually, collateralized by school financing; interest rates are 22,157 27,599 variable. Future commitment is at the discretion of the third-party lender. Other financing agreements 91 176 ------------------------------------ Total borrowed money $ 162,532 $ 97,003 ==================================== Guaranteed Preferred Beneficial Interests Matrix Bancorp Capital Trust I, 10% junior subordinated debentures payable quarterly, unsecured and maturing September 30, 2029 $ 27,500 $ 27,500 Matrix Bancorp Capital Trust II, 10.18% junior subordinated debentures payable quarterly, unsecured and maturing June 8, 2031 12,000 - Matrix Bancorp Capital Trust III, 10.25% junior subordinated debentures payable quarterly, unsecured and maturing July 25, 2031 15,000 - Matrix Bancorp Capital Trust IV, LIBOR plus 3.75% (6.007% rate at December 31, 2001) junior subordinated debentures payable quarterly, unsecured and maturing December 8, 2031 5,000 - ------------------------------------ Total Guaranteed Preferred Beneficial Interests $ 59,500 $ 27,500 ====================================
F-26 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) As of December 31, 2001, the maturities of borrowed money and guaranteed preferred beneficial interest are as follows: (In thousands) 2002 $ 144,933 2003 7,144 2004 10,455 Thereafter 59,500 ------------------ $ 222,032 ================== The Company must comply with certain financial and other covenants related to the foregoing debt agreements including, among other things, the maintenance of specific ratios, net income, net worth and other amounts as defined in the credit agreements, limiting the Company's and its subsidiaries' ability to declare dividends or incur additional debt, and requirements to maintain certain capital levels in certain subsidiaries. These covenants include requirements for the Company to maintain consolidated tangible capital of not less than $60,000,000, maintain classified assets of not greater than three percent and maintain the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized," as defined. The credit facility agreement for the $120,000,000 warehouse loan agreement requires Matrix Financial to maintain, among other things, net worth, as defined, of at least $30,000,000, a leverage ratio of no more than 14 to 1 and a minimum cash flow coverage ratio for four consecutive quarters of no less than 1.3 to 1.0. At December 31, 2001, the Company and its subsidiaries were in compliance with these covenants. The Company anticipates that the various borrowed money agreements which are up for a renewal in 2002 will be renewed with similar terms and conditions as those currently in effect. F-27 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) School Financing Agreement The Company placed approximately $22,200,000 and $27,600,000 at December 31,2001 and 2000, respectively, in tax-exempt financing it originated to charter schools into several grantor trusts (Trusts). The Trusts then issued Class "A" Certificates and Class "B" Certificates, with the Class "A" Certificates being sold to various third party investors under a private placement at a price of par. The "A" Certificates are guaranteed by a letter of credit issued by a third party investment bank (Investment Bank) and the underlying financing. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the Investment Bank. Generally, the Trusts are short-term in nature with an average life of one year or less. The "B" Certificates are owned in part by the Company. The interest rate paid on the "A" Certificates is considered the Company's financing cost. The approximate cost of the financing at December 31, 2001 and 2000 was 2.75% and 7.23%, respectively. The interest that the Company receives through its ownership of the "B" Certificates is tax-exempt. Although the Investment Bank acts as a guarantor to the "A" Certificates, the Company provides limited recourse to the Investment Bank in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the Trusts, the transactions have been accounted for as a secured financing. The Company also has in place an agreement to sell and service school financing loans to a third-party financial institution. The loan agreement provides the Company with the option to repurchase some or all of the loans at its sole discretion at a price of par. In addition, the Company provides scheduled interest and full recourse, in the case of loss, to the third-party financial institution. Due to the nature of the recourse and the ability to call the loans, the Company accounts for the transaction as a secured financing. Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated Debentures On July 30, 1999, Matrix Bancorp Capital Trust I (Trust I), a Delaware business trust formed by the Company, completed the sale of $27,500,000 of 10 percent preferred securities. Trust I also issued common securities to the Company and used the net proceeds from the offering to purchase $28,600,000 in principal amount of 10 percent junior subordinated debentures of the Company due September 30, 2029. The junior subordinated debentures are the sole assets of Trust I and are eliminated, along with the related income statement effects, in the consolidated financial statements. F-28 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The preferred securities accrue and pay distributions quarterly at an annual rate of 10 percent of the stated liquidation amount of $25 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust I under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust I. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part on or after September 30, 2004, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On March 28, 2001, Matrix Bancorp Capital Trust II (Trust II), a Delaware business trust formed by the Company, completed the sale of $12,000,000 of 10.18 percent preferred securities. Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase $12,400,000 in principal amount of 10.18 percent junior subordinated debentures of the Company due June 8, 2031. The junior subordinated debentures are the sole assets of Trust II and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at an annual rate of 10.18 percent of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust II under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust II. F-29 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after June 8, 2011, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On July 16, 2001, Matrix Bancorp Capital Trust III (Trust III), a Delaware business trust formed by the Company, completed the sale of $15,000,000 of 10.25 percent preferred securities. Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase $15,464,000 in principal amount of 10.25 percent junior subordinated debentures of the Company due July 25, 2031. The junior subordinated debentures are the sole assets of Trust III and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at an annual rate of 10.25 percent of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust III. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after July 25, 2006, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On November 28, 2001, Matrix Bancorp Capital Trust IV (Trust IV), a Delaware business trust formed by the Company, completed the sale of $5,000,000 of floating rate of six month LIBOR plus 3.75% percent preferred securities. Trust IV also issued common securities to the Company and used the net proceeds from the offering to purchase $5,155,000 in principal amount of floating rate of six month LIBOR plus 3.75 percent junior subordinated debentures of the Company due December 8, 2031. The junior subordinated debentures are the sole assets of Trust IV and are eliminated, along with the related income statement effects, in the consolidated financial statements. The preferred securities accrue and pay distributions quarterly at the floating rate as described above percent of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust IV under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust IV. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after December 8, 2006, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. Capitalized expenses associated with all of the offerings of approximately $2,328,000 and $1,370,000 are included in other assets at December 31, 2001 and 2000, respectively, and are being amortized on a straight-line basis over the life of the junior subordinated debentures. F-30 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 10. Federal Home Loan Bank of Dallas Borrowings Federal Home Loan Bank of Dallas (FHLB) borrowings aggregated $303,361,000 and $519,433,000 at December 31, 2001 and 2000, respectively. Advances of $136,000,000 and $26,000,000 at December 31, 2001 and 2000, respectively, were borrowed under Short Option Advance (SOA) Agreements with the FHLB. These SOA borrowings have a term of ten years, but are callable by the FHLB beginning after a one to five year lockout period, depending on the particular SOA borrowing. After the expiration of the lockout period, the SOA borrowings are callable at various intervals. If the FHLB exercises its call option on a SOA borrowing, the FHLB is required to offer replacement funding to the Company at a market rate of interest for the remaining term of the SOA borrowing. Additionally, under the terms of the SOA Agreement, the Company is not permitted to prepay or otherwise retire a callable SOA borrowing prior to the final maturity date. At December 31, 2001, the interest rates on the SOA borrowings ranged from 2.69 percent to 5.63 percent and their possible call dates varied from February 20, 2002 to November 13, 2006. Advances of $1,361,000 and $151,433,000 at December 31, 2001 and 2000, respectively, were borrowed under a fixed term and rate. At December 31, 2001, the advances are at a rate of 5.84 percent and mature June 2, 2014. Advances of $166,000,000 and $342,000,000 at December 31, 2001 and 2000, respectively, were borrowed on a short-term basis. At December 31, 2001, the advances were at an average rate of 1.97% and mature January 2, 2002 through January 7, 2002. All advances are secured by first lien mortgage loans of Matrix Bank and all of its FHLB stock. Matrix Bank is on full custody status, which requires Matrix Bank to place loan collateral at the FHLB. At December 31, 2001, loans held for sale of $339,274,000 and securities held for sale of $4,448,000 were pledged for FHLB advances. As of December 31, 2001, Matrix Bank had available unused borrowings from the FHLB for advances of approximately $40,362,000. 11. Income Taxes The income tax provision consists of the following:
Year ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Current: Federal $ (7,713) $ 2,350 $ 5,340 State (15) 411 1,329 Deferred: Federal 11,162 (451) (341) State 841 (67) (50) ------------------------------------------------------ $ 4,275 $ 2,243 $ 6,278 ======================================================
F-31 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) A reconciliation of the provision for income taxes with the expected income taxes based on the statutory federal income tax rate follows:
Year ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Expected income tax provision $ 4,470 $ 2,210 $ 5,799 Effect of federal tax brackets - - 52 State income taxes 545 343 827 Other (740) (310) (400) ------------------------------------------------------ Provision for income taxes $ 4,275 $ 2,243 $ 6,278 ======================================================
Deferred tax assets and liabilities result from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes shown below.
December 31 2001 2000 ------------------------------------ (In thousands) Deferred tax assets: Allowance for loan and valuation losses $ 6,614 $ 5,400 Discounts and premiums 71 71 Deferred fees 1,352 1,141 Delinquent interest 552 413 Net operating loss carry-forwards 1,574 - Other 24 197 ------------------------------------ Total deferred tax assets 10,187 7,222 Deferred tax liabilities: Loss on sale of loans $ (14,711) $ (2,773) Amortization of mortgage servicing rights (4,351) (3,178) Gain on sale of building (1,377) - Depreciation (834) (354) ------------------------------------ Total deferred tax liabilities (21,273) (6,305) ------------------------------------ Net deferred tax (liability) asset $ (11,086) $ 917 ====================================
The net deferred tax liability is recorded on the accompanying consolidated balance sheet in income taxes payable. The current income tax receivable of $7,445,000 as of December 31, 2001 is recorded in other receivables. F-32 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) There is no recorded valuation allowance for deferred tax assets as of December 31, 2001 or 2000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, and does not believe that a valuation allowance is necessary. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced. The net operating loss carry-forward of $2,658,000 at December 31, 2001 expires in 2021. 12. Regulatory The Company is a unitary thrift holding company and, as such, is subject to the regulation, examination and supervision of the Office of Thrift Supervision (OTS). Matrix Bank is also subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Matrix Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Matrix Bank must meet specific capital guidelines that involve quantitative measures of Matrix Bank's assets, liabilities and certain off-balance sheet commitments as calculated under regulatory accounting practices. Matrix Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Matrix Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to total assets (as defined). Management believes, as of December 31, 2001 and 2000, that Matrix Bank met all applicable capital adequacy requirements. F-33 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) As of December 31, 2001, the most recent notification from the OTS categorized Matrix Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Matrix Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the institution's category.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------------------------- (Dollars in thousands) As of December 31, 2001 Total Capital (to Risk Weighted Assets) $ 106,310 11.7% $ 72,418 8.0% $ 90,522 10.0% Core Capital (to Adjusted Tangible Assets) 99,949 6.5 61,671 4.0 77,089 5.0 Tier Capital (to Risk Weighted Assets) 99,949 11.0 N/A 54,313 6.0 As of December 31, 2000 Total Capital (to Risk Weighted Assets) $ 100,091 12.2% $ 65,387 8.0% $ 81,734 10.0% Core Capital (to Adjusted Tangible Assets) 94,289 7.0 53,694 4.0 67,117 5.0 Tier Capital (to Risk Weighted Assets) 94,289 11.5 N/A 49,041 6.0
The various federal banking statutes to which Matrix Bank is subject also include other limitations regarding the nature of the transactions in which it can engage or assets it may hold or liabilities it may incur. Matrix Bank is required to maintain vault cash or balances with the Federal Reserve Bank of Dallas in a noninterest-earning account based on a percentage of deposit liabilities. Such balances averaged $11,420,000 and $13,168,000 in 2001 and 2000, respectively. As a wholly owned subsidiary of Matrix Bank, Matrix Financial is subject to OTS regulation. In addition, Matrix Financial is also subject to examination by various regulatory agencies involved in the mortgage banking industry. Each regulatory agency requires the maintenance of a certain amount of net worth, the most restrictive of which required $4,020,000 at December 31, 2001 and $4,566,000 at December 31, 2000. At December 31, 2001 and 2000, Matrix Financial was in compliance with these regulatory requirements. First Matrix, headquartered in Denver, Colorado, a wholly owned subsidiary of Matrix Capital Markets, is a broker-dealer registered with the Securities and Exchange Commission (SEC) under rule 15c3-3(k)(2)(ii). First Matrix is subject to the SEC's Net Capital Rule which requires the maintenance of minimum net F-34 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. At December 31, 2001, First Matrix had net capital of $408,000 which was $395,000 in excess of its required net capital of $13,000. First Matrix's net capital ratio was 0.46 to 1. Sterling, a Texas trust company, is generally required to maintain minimum restricted capital of at least $1,000,000, and may be required to maintain additional capital if the Texas Banking Commissioner determines that it is necessary to protect the safety and soundness of Sterling. At December 31, 2001, Sterling was out of compliance with capital requirements under Texas law. Subsequent to year end, the Company contributed $900,000 to Sterling to meet minimum capital requirements. 13. Shareholders' Equity Stock Option Plan The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. Under Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In September 1996, the board of directors and shareholders adopted the 1996 Stock Option Plan, which amended and restated the Company's stock option plan adopted in 1995. The Company's 1996 Stock Option Plan, as amended, allows for the grant of options to substantially all of the Company's full-time employees and directors for up to 750,000 shares of the Company's common stock. Options granted generally have ten-year terms and vest based on the determination by the Company's compensation committee. The 1996 Stock Option Plan authorized the granting of incentive stock options (Incentive Options) and nonqualified stock options (Nonqualified Options) to purchase common stock to eligible persons. The 1996 Stock Option Plan is currently administered by the compensation committee (administrator) of the board of directors. The 1996 Stock Option Plan provides for adjustments to the number of shares and to the exercise price of outstanding options in the event of a declaration of stock dividend or any recapitalization resulting in a stock split, combination or exchange of shares of common stock. No Incentive Option may be granted with an exercise price per share less than the fair market value of the common stock at the date of grant. The Nonqualified Options may be granted with any exercise price determined by the administrator of the 1996 Stock Option Plan. To date, all grant prices have equaled the market price of the underlying stock on the date of the grant. The expiration date of F-35 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) an option is determined by the administrator at the time of the grant, but in no event may an option be exercisable after the expiration of ten years from the date of grant of the option. All options granted to-date have been nonqualified. The 1996 Stock Option Plan further provides that, in most instances, an option must be exercised by the optionee within 30 days after the termination of the consulting contract between such consultant and the Company or termination of the optionee's employment with the Company, as the case may be, if and to the extent such option was exercisable on the date of such termination. To date, no options have been granted to consultants. Pro forma information regarding net income and earnings per share is required by Statement No. 123, Accounting for Stock-Based Compensation, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of 5.0 percent, 5.1 percent and 5.4 percent; a dividend yield of zero percent; volatility factors of the expected market price of the Company's common stock of 0.57, 0.63 and 0.56; and a weighted-average expected life of the option of four years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: F-36 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued)
Year ended December 31 2001 2000 1999 ------------------------------------------------------ (Dollars in thousands except share data) Pro forma net income $ 8,205 $ 3,980 $ 10,462 Pro forma earnings per share: Basic 1.26 0.59 1.55 Diluted 1.25 0.59 1.53
A summary of the Company's stock option activity and related information is as follows:
Year ended December 31 2001 2000 1999 ------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------------ Outstanding, beginning of year 496,700 $ 10.54 431,600 $ 11.07 387,700 $ 10.90 Granted 250,000 9.32 95,000 7.65 55,500 12.34 Exercised (16,250) 8.55 (500) 10.00 (6,100) 12.36 Forfeited (118,625) 11.09 (29,400) 10.77 (5,500) 12.32 ------------- ------------- ------------- Outstanding, end of year 611,825 9.99 496,700 10.54 431,600 11.07 ============= ============= ============= Exercisable end of year 306,683 10.34 286,500 10.34 226,150 9.70 Weighted average fair value of options granted during the year $ 5.79 $ 4.86 $ 7.68 ============= ============= =============
F-37 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Options outstanding at December 31, 2001, have exercise prices ranging from $5.13 to $26.50 per share as outlined in the following table:
Number of Weighted Weighted Average Number of Weighted Range of Options Average Exercise Remaining Options Average Exercise Exercise Prices Outstanding Price Per Share Contractual Life Exercisable Price Per Share - ---------------------------------------------------------------------------------------------------------------- $ 5.13 79,500 $ 5.13 3.00 79,500 $ 5.13 7.00 - 7.88 7,500 7.29 9.50 -- -- 8.00 - 8.69 127,375 8.54 8.70 17,213 8.32 9.15 - 9.86 140,000 9.67 9.69 -- -- 10.00 - 10.37 107,900 10.03 5.33 100,400 10.02 11.50 - 13.88 64,800 12.40 6.51 41,020 12.46 14.25 - 17.25 81,750 15.13 5.58 65,550 15.12 26.50 3,000 26.50 6.33 3,000 26.50 ---------------------------------------------------------------------------------------------- 611,825 $ 10.54 6.68 306,683 $ 10.34 ==============================================================================================
Employee Stock Purchase Plan In September 1996, the board of directors and shareholders adopted an Employee Stock Purchase Plan (Purchase Plan) and authorized 125,000 shares of common stock (ESPP Shares) for issuance thereunder. The Purchase Plan became effective upon consummation of the initial public offering. The price at which ESPP Shares are sold under the Purchase Plan is 85 percent of the lower of the fair market value per share of common stock on the enrollment or the purchase date. In May 2000, the authorized number of shares available for issuance under the Purchase Plan was increased to 250,000 shares. As of December 31, 2001, there were 115,602 ESPP Shares available for future issuance. 14. Commitments, Contingencies and Related Party Transactions Leases The Company leases office space and certain equipment under noncancelable operating leases. Annual amounts due under the office and equipment leases as of December 31, 2001, are approximately as follows: (In thousands) 2002 $ 2,548 2003 2,555 2004 2,173 2005 2,134 2006 1,784 Thereafter 3,700 ------------------ $ 14,894 ================== F-38 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Total rent expense aggregated approximately $3,011,000, $2,319,000 and $1,327,000 for the years ended December 31, 2001, 2000 and 1999, respectively, and is recorded in occupancy and equipment expense. Off-Balance Sheet Risk The Company is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include undisbursed commercial mortgage construction loans, commercial lines of credit and letters of credit. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The Company's exposure to credit loss, in the event of nonperformance by the other party, to off-balance sheet financial instruments with credit risk is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk. Commercial credit off-balance sheet instruments are agreements to lend to, or provide credit guarantee for, a customer as long as there is no violation of any condition established in the contract. Such instruments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Because many of these instruments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management's credit evaluation of the customer. As of December 31, 2001 and 2000, the Company had commercial credit off-balance sheet instruments of $40,501,000 and $27,905,000, respectively. Matrix Bancorp, Inc. has guaranteed, with 50% recourse to the joint venture partner, the indebtedness of Matrix Settlement and Clearance Services to U.S Bank, N.A., in an amount of no greater than $3,000,000. There was no balance outstanding at Matrix Settlement and Clearance Services on such indebtedness at December 31, 2001. Mortgage Banking Risk Management Activities In the ordinary course of business, the Company makes commitments to originate residential mortgage loans (pipeline) and holds originated loans until delivery to an investor. Inherent in this business is a risk associated with changes in interest rates and the resulting change in the market value of the pipeline and funded loans. The Company mitigates this risk through the use of mandatory and best effort forward commitments to sell loans or mortgage-backed securities. F-39 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The Company uses derivative instruments primarily to protect against the risk of changes in the price or interest rate movements on the value of certain assets and liabilities. Derivative instruments represent contracts between parties that usually require no initial net investment and result on one party delivering cash or another type of asset to the other party based on a notional amount and underlying as specified in the contract. A notional amount represents the number of units of a specific item, such as currency units. An underlying represents a variable, such as an interest rate, security price or price index. The amount of cash or other asset delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying. Derivatives are also implicit in certain contracts and commitments. The Company's primary use of derivative instruments is in connection with its mortgage loan origination activities. Management uses derivative instruments to protect against the risk of changes in fair value caused by changes in market interest rates of originated mortgage loans and a portion of the mortgage loans that are not yet closed but for which the interest rate has been established. These instruments primarily include best effort commitments and mandatory commitments. The nature and volume of the derivative instruments used to manage the risk of change in fair value of mortgage loan originations depends on the level of mortgage loans and commitments to originate mortgage loans on the consolidated balance sheet. As discussed in Note 2, on January 1, 2001, the Company adopted SFAS 133, which requires all derivative instruments to be carried at fair value on the balance sheet. Prior to 2001, unrealized gains and losses on derivatives used for hedging purposes were generally not required to be reported in the financial statements. In order to reduce the earnings volatility that would result from having to recognize in earnings the fair value of certain derivative instruments used to hedge risks associated with financial instruments not carried at fair value, SFAS 133 provides special hedge accounting provisions. These provisions permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in fair value of the derivative. The Company usually designates derivative instruments used to manage interest rate risk into SFAS 133 hedge relationships with the specific assets or liabilities being hedged. As with any financial instrument, derivative instruments have inherent risks. Market risk is the adverse effect a change in interest rates, currency, or implied volatility has on the value of a financial instrument. The Company manages market risk associated with derivative instruments by establishing and monitoring limits as to the amount of mortgage origination commitment coverage obtained. F-40 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Credit risk is the risk that a counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Credit risk is managed by monitoring the size and maturity structure of the derivative portfolio and applying uniform credit standards maintained for all activities with credit risk. During 2001, the Company used best effort and mandatory commitments to hedge the change in fair value of mortgage loans and commitments to originate mortgage loans. At December 31, 2001, the Company had $155,023,000 of commitments to originate mortgage loans and $492,613,000 of funded loans, respectively, hedged with mandatory forward commitments of $434,336,000 and best effort forward commitments of $96,162,000. These commitments mature within 90 days of December 31, 2001. At December 31, 2000, the Company had $109,490,000 and $132,000,000 in commitments to originate mortgage loans and funded loans, respectively, offset with mandatory forward commitments of $70,730,000 and best effort forward commitments of $121,950,000. The fair value of the derivatives of $2,460,000 is recorded in other assets and is offset by a decline in the fair value of the mortgage loans of $2,435,000; the difference representing the ineffective portion of the hedge of $25,000, which was recorded as a charge to loan origination income in 2001. Risk Management Activities for MSRs Ownership of MSRs exposes the Company to impairment of the value of MSRs in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of the Company's mortgage servicing portfolio achieves a level higher than projected by the Company for an extended period of time, then an impairment in the associated basis in the MSRs may occur. In 2001, the Company implemented a strategy to mitigate this risk of retaining a portion of originated servicing as management believes that retaining servicing that was generated in the lower interest rate environment will incur less prepayment risk. This strategy is combined with the continued strategy of attempting to acquire mortgage servicing rights on loans which tend to be more seasoned, lower balance loans. At December 31, 2000, the Company used a program of exchange-traded futures and options to hedge approximately 6.4% of its mortgage servicing portfolio. Due to the cost of the requirements that must be met to achieve hedge accounting under SFAS 133 for mortgage servicing rights the Company did not attempt to qualify for hedge accounting and effective March 31, 2001 the Company sold, repurchased or allowed to mature all derivative instruments recorded on the books associated with mortgage servicing. F-41 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Contingencies The Company and its subsidiaries are parties to various litigation matters, in most cases, involving ordinary and routine claims incidental to the business of the Company. The Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based upon developments to date, the Company's estimates of the outcome of these matters and its experience in contesting, litigating and settling other matters. Based on evaluation of the Company's litigation matters and discussions with internal and external legal counsel, management believes that an adverse outcome on one or more of the matters set forth below, against which no accrual for loss has been made as of December 31, 2001, is reasonably possible but not probable, and that the outcome with respect to one or more of these matters, if adverse, is reasonably likely to have a material adverse impact on the consolidated financial condition, results of operations or cash flows of the Company. In early 1999, Matrix Bancorp and Matrix Bank instituted an arbitration action with the American Arbitration Association in Phoenix, Arizona against Fidelity National Financial, Inc. The arbitration action arose out of an alleged breach by Fidelity of a Merger Termination Agreement entered into between Matrix Bancorp and Fidelity in connection with the termination of their proposed merger. The arbitration panel has ruled that the entire Merger Termination Agreement was unenforceable. Matrix Bancorp and Matrix Bank filed an appeal of the arbitration panel's decision in federal district court in Phoenix, Arizona, which has been denied. In October 2001, Fidelity initiated a second arbitration to determine the validity of a release given in connection with the Merger Termination Agreement. Matrix Bancorp and Matrix Bank contest that the releases are valid and, in the alternative, have filed a counterclaim against Fidelity demanding restitutional damages for the value of the releases if they are determined valid . Sterling Trust has been named a defendant in an action that was tried in Tarrant County, Texas, district court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of twelve theories of liability posed by the plaintiffs, and the court has signed a judgment for certain of the plaintiffs in the amount of approximately $6,400,000. Sterling Trust has filed an appeal of this judgment and believes it has meritorious points of appeal. It intends to vigorously prosecute the appeal of this action. The ultimate resolution of this appeal, which is expected to occur in mid-2002, could result in a loss of up to $6,400,000 plus post-judgment interest and additional attorneys' fees. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty at this time. Related to the matter described in the previous paragraph, Sterling Trust and several officers have been named defendants in an action in which the plaintiffs have asserted various theories of liability, including control person theories of liability under the Texas Securities Act and fraudulent transfer theories of F-42 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) liability, to seek to impose liability on the defendants for the judgment described above. The parties have agreed to abate this action pending the outcome of the appeal mentioned in the previous paragraph. The defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Sterling Trust was named a defendant in an action in the Superior Court of the State of California for the County of Los Angeles. The plaintiffs in this action sought to certify a class action on behalf of all persons and entities that invested in promissory notes issued by Personal Choice Opportunities. The plaintiffs alleged, among other things, that Sterling Trust, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. In January 2002, this matter was settled. The settlement requires no payment from Sterling other than the $5,000 retention amount pursuant to the terms of the Company's insurance policy. The remainder of the settlement consideration is to be paid the by Company's insurer. The settlement is subject to, among other things, approval of the settlement by the Court and negotiation and execution of appropriate releases between Sterling Trust and its insurer. If these conditions are met, the case will be dismissed with prejudice. Sterling Trust was named a defendant in several putative class action lawsuits instituted in November 2000 by one law firm in Pennsylvania. All of such lawsuits were originally filed in the United States District Court for the Western District of Pennsylvania. On April 26, 2001, the District Court for the Western District of Pennsylvania ordered that all of such cases, except as discussed below, be transferred to the United States District Court for the Western District of Texas so that Sterling Trust could properly present its motion to compel arbitration. Sterling Trust filed separate motions to compel arbitration in these actions, all of which were granted. Each of the six plaintiffs timely filed arbitration demands with the American Arbitration Association. The demands seek damages and allege Sterling Trust breached fiduciary duties and was negligent in administering each claimant's self-directed individual retirement accounting holding a nine-month promissory note. Sterling Trust believes it has meritorious defenses and is defending the matters vigorously. With respect to one of these actions, Sterling Trust filed a motion to dismiss because it can find no evidence that the named plaintiff in the case ever had accounts with Sterling Trust. On December 7, 2001, the Court stayed Sterling Trust's motion to dismiss and granted the named plaintiff thirty days to file an amended petition adding a Sterling Trust accountholder as a nominal plaintiff. The named plaintiff filed an amended petition within the 30-day period, F-43 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) however, he did not add any additional plaintiffs. On February 5, 2002, the court granted Sterling Trust's motion to dismiss the case. In addition to the other litigation matters described above, Sterling Trust has been the subject of numerous lawsuits and arbitration proceedings in which customers and, in some cases, persons who are not customers allege various theories of liability against Sterling Trust for losses suffered by these claimants in connection with their failed investments in several enterprises. To the extent that Sterling Trust has had any relationship with any of such claimants, it has been solely as custodian of such claimant's self-directed IRAs pursuant to contracts that specify the limited nature of Sterling Trust's obligations. The Company believes Sterling Trust has in each case acted in accordance with its obligations under the contracts and/or as otherwise imposed by law. The Company further believes that the ultimate outcome of each of these cases will not be material to the consolidated financial statements of the Company; but, there can be no assurances that there will not be an adverse outcome in any one or more of these cases or that any such adverse outcome will not have a material adverse effect on the consolidated financial statements of the Company. A former customer of the Company is a debtor in a Chapter 11 proceeding under the Bankruptcy Code. Prior to the bankruptcy filing, the Company had provided the customer with a purchase/repurchase facility under which the Company purchased residential mortgage loans from the customer, with the customer having the right or obligation to repurchase such mortgage loans within a specified period of time. Several other financial institutions had provided the customer with warehouse financing or additional purchase/repurchase facilities (the Origination Facilities). At this time, it appears that no other financial institution that provided an Origination Facility to the customer has a conflicting interest with the Company in respect of the loans purchased by the Company, which were approximately $12,400,000 in original principal amount (the Purchased Loans). Various third parties have instituted lawsuits, adversary proceedings or competing bankruptcy claims against Matrix Bank claiming an equitable interest in approximately eighteen of the Purchased Loans (approximately $2.1 million in original principal amount). These third parties consist primarily of title companies, closing attorneys and other closing agents that provided settlement funds in connection with the funding of a borrower's mortgage loan, in many cases, we believe in violation of various "good funds" laws, which typically require a closing agent to wait for receipt of "good funds" prior to disbursement of settlement funds on the origination of a loan. After providing settlement funds, these closing agents discovered that Island Mortgage had either provided company checks with insufficient funds or had inappropriately placed a stop payment on the checks. To date, Matrix Bank has fully resolved one claim and has reached tentative agreements to settle claims asserted against five others upon terms satisfactory to Matrix Bank. F-44 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Additionally, certain parties in the chain of title to property securing approximately $2.7 million of loans, including sellers and prior lien holders, are seeking to void or rescind their transactions on the theory that they never received consideration. Matrix Bank has reached tentative agreement to settle claims arising from thirteen of these Purchased Loans upon terms satisfactory to Matrix Bank and is awaiting approval of the Bankruptcy Court. The trustee for the customer mentioned above has received an order from the Bankruptcy Court finding that the Purchased Loans are a part of the estate of the customer. Nevertheless, the trustee and the Company have reached an agreement, in principle, whereby the trustee will release all of its right in and to the Purchased Loans if the trustee, after performance of a "due diligence" review determines that the Company owns the Purchased Loans or, would otherwise have a perfected security interest in the Purchased Loans. The Company believes it can adequately demonstrate to the trustee that it is the owner of the Purchased Loans, or otherwise has a perfected security interest in the Purchased Loans. The Company intends to vigorously defend its position in this matter. The ultimate legal and financial liability of the Company, if any, in this bankruptcy cannot be estimated with certainty at this time. Related Party Transactions At December 31, 2001, the Company had an unsecured loan receivable from an executive officer of $80,000, which bears interest at prime and is renewable at the Company's option. From time to time, Matrix Financial has originated mortgage loans to various employees, including executive officers of the Company. These mortgage loans generally are sold to third party investors on a servicing released basis within 30 to 60 days after closing, and are made in the ordinary course of business, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectibility or present other unfavorable features. At December 31, 2001, the Company had approximately $874,000 of closed mortgage loans, and approximately $830,000 of commitments for mortgage loans to related parties. F-45 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 15. Defined Contribution Plan The Company has a 401(k) defined contribution plan (Plan) covering all employees who have elected to participate in the Plan. Each participant may make pretax contributions to the Plan up to 15 percent of such participant's earnings with a maximum of $10,500 in 2001. The Company makes a matching contribution of 25 percent of the participant's total contribution. Matching contributions made by the Company vest over six years. The cost of the plan approximated $324,000, $261,000 and $211,000 during the years ended December 31, 2001, 2000 and 1999, respectively, and was recorded in compensation and employee benefits expense in the consolidated statements of income. 16. Fair Value of Financial Instruments The carrying amounts and estimated fair value of financial instruments are as follows:
December 31 2001 2000 ------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------ (In thousands) Financial assets: Cash and cash equivalents $ 84,460 $ 84,460 $ 53,170 $ 53,170 Mortgage-backed and SBA securities 6,963 6,963 66,616 66,616 Loans held for sale, net 1,157,989 1,161,381 942,496 948,069 Loans held for investment, net 191,161 191,661 173,525 174,581 FHLB stock 18,181 18,181 27,814 27,814 Financial liabilities: Deposits 866,235 869,215 602,669 604,423 Custodial escrow balances 129,665 129,665 77,647 77,647 Payable for purchase of MSRs 4,738 4,738 12,666 12,666 FHLB borrowings 303,361 309,931 519,433 521,194 Borrowed money and guaranteed preferred beneficial interests 222,032 222,032 124,503 119,253
The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments: The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, mortgage-backed and SBA securities, FHLB stock, payable for purchase of MSRs and certain components of borrowed money approximate those assets' and liabilities' fair values. F-46 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The fair values of loans are based on quoted market prices where available or outstanding commitments from reputable investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The value of derivative financial instruments used to hedge the loan portfolio is included in the carrying amount and fair value of the loans. The fair value disclosed for FHLB borrowings is estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLB borrowings. The fair value for the remainder of borrowed money, which includes the Company's 11.50 percent senior notes and guaranteed preferred beneficial interests, is based on over the counter (OTC) market prices. The fair value disclosed for demand deposits (e.g., interest and noninterest checking, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. The component commonly referred to as deposit base intangible, was not estimated at December 31, 2001 and 2000, and is not considered in the fair value amount. The fair value disclosed for custodial escrow balances liabilities (noninterest checking) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). 17. Parent Company Condensed Financial Information Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows:
December 31 2001 2000 ------------------------------------ (In thousands) Condensed Balance Sheets Assets: Cash $ 155 $ - Loans receivable 3,500 - Other receivables 9 279 Premises and equipment, net 1,139 989 Other assets 3,168 2,489 Investment in and advances to subsidiaries 151,755 123,755 ------------------------------------ Total assets $ 159,726 $ 127,512 ==================================== Liabilities and shareholders' equity: Borrowed money and guaranteed preferred beneficial interests (a) $ 81,527 $ 55,714 Other liabilities 6,887 7,775 ------------------------------------ Total liabilities 88,414 63,489 Shareholders' equity: Common stock 1 1 Treasury shares - (1,775) Additional paid-in capital 20,800 23,004 Retained earnings 50,511 42,793 ------------------------------------ Total shareholders' equity 71,312 64,023 ------------------------------------ Total liabilities and shareholders' equity $ 159,726 $ 127,512 ====================================
F-47 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) (a) The Parent's debt is set forth in a table following the condensed statements of cash flows. The Parent also guarantees the revolving warehouse loan agreement and the financing related to charter schools. See Note 9 for additional information regarding the debt.
Year ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Condensed Statements of Income Income: Interest income on intercompany advances $ 2,395 $ 2,202 $ 1,257 Other 1,230 1,362 616 ------------------------------------------------------ Total income 3,625 3,564 1,873 Expenses: Compensation and employee benefits 3,529 3,686 2,628 Occupancy and equipment 748 674 718 Interest on borrowed money 8,511 6,923 5,521 Professional fees 437 510 400 Other general and administrative 2,553 2,209 1,948 ------------------------------------------------------ Total expenses 15,778 14,002 11,215 ------------------------------------------------------ Loss before income taxes and equity income of subsidiaries (12,153) (10,438) (9,342) Income taxes (b) - - - ------------------------------------------------------ Loss before equity income of subsidiaries (12,153) (10,438) (9,342) Equity income of subsidiaries 20,665 14,696 20,121 ------------------------------------------------------ Net income $ 8,512 $ 4,258 $ 10,779 ======================================================
F-49 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) (b) The Company's tax-sharing agreement with its subsidiaries provides that the subsidiaries will pay the Parent an amount equal to its individual current income tax provision calculated on the basis of the subsidiary filing a separate return. In the event a subsidiary incurs a net operating loss in future periods, the subsidiary will be paid an amount equal to the current income tax refund the subsidiary would be due as a result of carry-back of such loss, calculated on the basis of the subsidiary filing a separate return. Accordingly, the Parent's condensed statements of income do not include any income tax benefit for the current losses.
Year ended December 31 2001 2000 1999 ------------------------------------------------------ (In thousands) Condensed Statements of Cash Flows Operating activities: Net income $ 8,512 $ 4,258 $ 10,779 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity income of subsidiaries (20,665) (14,696) (20,121) Dividend from subsidiaries 11,996 6,509 11,468 Depreciation and amortization 703 621 763 Unrealized gain (loss) on securities available for sale (794) 819 - Gain on sale of building - (823) - Increase (decrease) in other (888) 3,800 2,556 liabilities Decrease (increase) in other receivables and other assets (3,133) 1,459 (1,754) ------------------------------------------------------ Net cash (used) provided by operating activities (4,269) 1,947 3,691 Investing activities: Purchases of premises and equipment (606) (457) (221) Proceeds from sale of building - 2,191 - Investment in and advances to subsidiaries (19,331) 1,722 (19,846) ------------------------------------------------------ Net cash (used) provided by investing activities (19,937) 3,456 (20,067) Financing activities: Repayments of notes payable and revolving line of credit (49,437) (39,554) (30,007) Proceeds from notes payable and revolving line of credit 43,250 35,700 19,800 Shares repurchased (746) (1,775) - Proceeds from junior subordinated - 26,063 debentures 30,977 Proceeds from issuance of common stock 317 224 364 ------------------------------------------------------ Net cash provided (used) by financing activities 24,361 (5,405) 16,220 ------------------------------------------------------ Increase (decrease) in cash 155 (2) (156) Cash at beginning of year - 2 158 ------------------------------------------------------ Cash at end of year $ 155 $ - $ 2 ======================================================
Parent Company Debt is set forth below:
December 2001 2000 ------------------------------------ (In thousands) Senior notes $ 10,455 $ 20,000 Bank stock loan 8,572 8,214 ------------------------------------ Total term notes 19,027 28,214 Bank stock revolving line of credit 3,000 - Guaranteed preferred beneficial interests 59,500 27,500 ------------------------------------ Total debt $ 81,527 $ 55,714 ====================================
F-50 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) As of December 31, 2001, the maturities of term notes payable are as follows: (In thousands) 2002 $ 4,428 2003 7,144 2004 10,455 Thereafter 59,500 ------------------ $ 81,527 ================== 18. Selected Quarterly Financial Data (Unaudited)
2001 ---------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ---------------------------------------------------------------- (In thousands except share data) Operations Net interest income before provision for loan and valuation losses $ 11,378 $ 9,335 $ 11,133 $ 8,664 Provision for loan and valuation losses 829 648 526 977 Noninterest income 28,678 22,500 21,951 18,577 Noninterest expense 32,669 30,415 30,006 22,809 ---------------------------------------------------------------- Income before income taxes 6,558 772 2,552 3,455 Provision for income taxes 2,250 144 924 1,147 Less cumulative effect of a change in accounting principle, net of tax benefit - - - 360 ---------------------------------------------------------------- Net income $ 4,308 $ 628 $ 1,628 $ 1,948 ================================================================ Net Income per Share Data Basic before accounting change $ 0.66 $ 0.10 $ 0.25 $ 0.35 Cumulative effect of a change in accounting principle - - - 0.05 ---------------------------------------------------------------- Basic $ 0.66 $ 0.10 $ 0.25 $ 0.30 ================================================================ Diluted before accounting change 0.66 0.10 0.25 0.34 Cumulative effect of a change in accounting principle - - - 0.05 ---------------------------------------------------------------- Diluted $ 0.66 $ 0.10 $ 0.25 $ 0.29 ================================================================
F-51 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued)
2001 ---------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ---------------------------------------------------------------- (In thousands except share data) Balance Sheet Total assets $ 1,637,000 $ 1,530,000 $ 1,685,000 $ 1,692,000 Total loans, net 1,349,000 1,256,000 1,387,000 1,455,000 Shareholders' equity 71,000 67,000 66,000 65,000 2000 ---------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ---------------------------------------------------------------- ---------------------------------------------------------------- (In thousands except share data) Operations Net interest income after provision for loan and valuation losses $ 7,084 $ 6,191 $ 6,242 $ 6,033 Noninterest income 14,971 15,340 14,705 13,440 Noninterest expense 20,234 19,849 20,462 16,960 ---------------------------------------------------------------- Income before income taxes 1,821 1,682 485 2,513 Income taxes 513 615 151 964 ---------------------------------------------------------------- Net income $ 1,308 $ 1,067 $ 334 $ 1,549 ================================================================ Net Income per Share Data Basic $ 0.20 $ 0.16 $ 0.05 $ 0.23 ================================================================ Diluted $ 0.20 $ 0.16 $ 0.05 $ 0.23 ================================================================ Balance Sheet Total assets $ 1,419,000 $ 1,368,000 $ 1,294,000 $ 1,303,000 Total loans, net 1,116,000 1,086,000 1,074,000 1,088,000 Shareholders' equity 64,000 64,000 63,000 62,000
19. Transactions with Harbor Financial Mortgage Corporation During 1999 and 1998, the Company entered into several transactions with Harbor Financial Mortgage Corporation and its wholly owned subsidiary New America Financial Inc. (collectively Harbor). The transactions included the purchase of nonperforming FHA/VA loans, servicing retained, on a scheduled/actual remittance; the purchase of performing residential mortgage loans including sub-prime loans, servicing retained, on a scheduled/scheduled remittance with full recourse; the acquisition of MSRs; and the purchase of receivables related to servicing sales by Harbor to third parties. In July 1999, Harbor, as servicer for the nonperforming FHA/VA loans, breached its servicing contract. As a result, in September 1999, the Company transferred the servicing of the loans to Matrix Financial. F-52 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) In October 1999, Harbor filed for bankruptcy. Subsequent to the bankruptcy there were several lawsuits filed by and against the Company and third parties, generally surrounding the ownership and competing interest in certain of the Harbor assets that the Company had acquired. In August 2000, the Company entered into a global settlement with all of the third parties. As part of the settlement, the Company acquired additional assets from the Harbor estate and was required to make settlement payments. Related to the settlement, curtailments and legal expenses, the Company expensed approximately $2,800,000, the majority of which was recorded in other general and administrative expense in the consolidated statement of income for the year ended December 31, 2000. The most significant assets which remain from the Harbor transactions are the nonperforming FHA/VA loans with a balance of $45,062,000 at December 31, 2001. Because the principal and interest is largely insured or guaranteed by the federal government at a stated debenture rate, the Company continues to accrue interest on the loans. However, both the interest and advances made on the loans are subject to certain curtailments. The interest and advances are analyzed quarterly by the Company for collectibility. 20. Transactions with Island Mortgage Network In 2000 and 1999, the Company provided Island Mortgage Network (Island), a New York mortgage banking entity, with a purchase/repurchase facility under which the Company purchased residential mortgage loans from Island, with Island having the right or obligation to repurchase such mortgage loans within a specified period of time. In June 2000, Island breached terms of its agreement with the Company and, in July 2000, Island filed for bankruptcy. At the time of the bankruptcy, the Company had approximately $12,400,000 of loans that it had acquired from Island. At December 31, 2001, relating to $2,100,000 of the loans, there have been lawsuits initiated by third parties alleging a competing interest in the loans. With respect to an additional $2,700,000 of loans, the Company believes that the loans were never closed with good funds. As of December 31, 2001, the Company had $10,100,000 of loans and receivables originated by Island. The Company has an allowance for loan losses for these loans of approximately $2,900,000 and $2,600,000 as of December 31, 2001 and 2000, respectively. 21. Segments of the Company and Related Information The Company has four reportable segments under SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information: a traditional banking subsidiary, a mortgage banking subsidiary, a servicing brokerage and consulting subsidiary and a school services subsidiary. The traditional banking subsidiary provides deposit and lending services to its customers and also makes investments in residential mortgage loans. The mortgage banking subsidiary originates residential mortgage loans through its wholesale loan origination offices, as well as acquires residential MSRs and services the mortgage loans underlying those MSRs. The servicing brokerage subsidiary offers brokerage and consulting services for residential MSRs. The school services subsidiary provides outsourced business and consulting services, as well as financing to charter schools. The remaining subsidiaries are included in the "all other" category for purposes of Statement No. 131 disclosures and consist of the Company's trust operations, real estate disposition services, a broker-dealer and the Parent company operations. F-53 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) The Company evaluates performance and allocates resources based on operating profit or loss before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices (i.e., prices that would be paid if the companies were not affiliates). For the years ended December 31:
Servicing Brokerage Traditional Mortgage and School Banking Banking Consulting Services All Others Total --------------------------------------------------------------------------------- (In thousands) 2001 Revenues from external customers: Interest income $ 67,752 $ 30,602 $ - $ 6,854 $ 189 $ 105,397 Noninterest income 9,651 62,177 4,126 7,252 8,500 91,706 Intersegment revenues 20,821 6,260 411 - 3,345 30,837 Interest expense 51,008 23,548 85 4,931 (14,685) 64,887 Depreciation/amortization 489 22,832 115 360 1,115 24,911 Segment income (loss) before income taxes 21,529 7,803 (1,293) (1,177) (13,525) 13,337 Segment assets (a) 1,420,812 669,165 5,659 78,027 47,255 2,220,918 2000 Revenues from external customers: Interest income $ 86,535 $ 5,973 $ - $ 4,691 $ 187 $ 97,386 Noninterest income 9,144 27,430 6,871 4,240 11,107 58,792 Intersegment revenues 3,620 5,746 220 - 2,233 11,819 Interest expense 47,978 8,296 7 4,413 6,907 67,601 Depreciation/amortization 2,447 8,469 155 269 1,094 12,434 Segment income (loss) before income taxes 17,170 2,209 1,431 (4,019) (10,290) 6,501 Segment assets (a) 1,286,971 259,726 2,304 62,245 30,740 1,641,986 1999 Revenues from external customers: Interest income $ 66,057 $ 4,433 $ - $ 3,249 $ 11 $ 73,750 Noninterest income 13,903 24,779 9,662 2,813 9,203 60,360 Intersegment revenues (68) 2,782 861 - 3,183 6,758 Interest expense 30,812 6,572 1 2,586 4,316 44,287 Depreciation/amortization 3,691 13,498 216 183 942 18,530 Segment income (loss) before income taxes 29,047 (4,529) 3,871 (1,895) (9,437) 17,057 Segment assets (a) 1,138,650 93,252 1,803 37,640 29,446 1,300,791
F-54 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) (a) See reconciliation to total consolidated assets in the following table.
2001 2000 1999 ------------------------------------------------------ (In thousands) Revenues for year ended December 31: Interest income for reportable segments $ 105,208 $ 97,199 $ 73,739 Noninterest income for reportable segments 83,206 47,685 51,157 Intersegment revenues for reportable segments 27,492 9,586 3,575 Other revenues 12,034 13,527 12,397 Elimination of intersegment revenues (30,837) (11,819) (6,758) ------------------------------------------------------ Total consolidated revenues $ 197,103 $ 156,178 $ 134,110 ====================================================== Income for year ended December 31: Total profit for reportable segments $ 26,862 $ 16,791 $ 26,494 Other loss (13,858) (10,803) (9,152) Elimination of intersegment profit (loss) 333 513 (285) ------------------------------------------------------ Income before income taxes $ 13,337 $ 6,501 $ 17,057 ====================================================== Assets as of December 31: Total assets for reportable segments $ 2,173,663 $ 1,611,246 $ 1,271,345 Other assets 47,255 30,740 29,446 Elimination of intersegment receivables (563,277) (215,998) (16,689) Other intersegment eliminations (10,854) (7,193) (356) ------------------------------------------------------ Total consolidated assets $ 1,646,787 $ 1,418,795 $ 1,283,746 ====================================================== Other significant items for the year ended December 31: Depreciation/amortization expense: Segment totals $ 23,796 $ 11,340 $ 17,588 Intersegment adjustments 1,115 1,094 942 ------------------------------------------------------ Consolidated totals $ 24,911 $ 12,434 $ 18,530 ====================================================== Interest expense: Segment totals $ 79,572 $ 60,694 $ 39,971 Intersegment adjustments (14,685) 6,907 4,316 ------------------------------------------------------ Consolidated totals $ 64,887 $ 67,601 $ 44,287 ======================================================
F-55 EX-4 3 firstamdtoindenture.txt 4.2 EXHIBIT 4.2 FIRST AMENDMENT TO INDENTURE This First Amendment to Indenture (this "Amendment") is entered into as of December 5, 2001, by and among (i) Matrix Capital Corporation, a Colorado corporation (the "Company") and (ii) U.S. Bank National Association (as successor Trustee to First Trust National Association), as trustee (the "Trustee"). WHEREAS, the Company, as Issuer, and Trustee, as Trustee, entered into that certain Indenture dated as of September 29, 1997 (the "Indenture"); and WHEREAS, the parties to the Indenture desire to amend certain terms in the Indenture as provided herein in accordance with Section 9.1 of the Indenture; NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Section 7.10(a) of the Indenture is hereby amended to read in its entirety as follows: Section 7.10 Eligibility; Disqualification. (a) The Trustee hereunder shall have no other relationship with the Company or any of its subsidiaries except as Trustee under this Indenture; provided, however, that the Trustee or an affiliate of the Trustee may have a relationship with the Company or a Subsidiary if such relationship is in the ordinary course of business. 2. The parties hereto hereby confirm and acknowledge that the Indenture shall continue in full force and effect according to its original terms, except as expressly as amended hereby. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. Matrix Capital Corporation, a Colorado Corporation By: /s/ Guy A. Gibson ------------------------------------------- Guy A. Gibson President and Chief Executive Officer U.S. Bank National Association By: /s/ Seth Dodson ------------------------------------------- Seth Dodson Assistant Vice President EX-4 4 indenture-nov282001.txt 4.26 EXHIBIT 4.26 MATRIX BANCORP, INC. as Issuer INDENTURE Dated as of November 28, 2001 WILMINGTON TRUST COMPANY as Trustee FLOATING RATE JUNIOR SUBORDINATED DEBT SECURITIES DUE 2031
TABLE OF CONTENTS Page Parties..................................................................................................1 Recitals.................................................................................................1 Authorization of Indenture...............................................................................1 Compliance with Legal Requirements.......................................................................1 Purpose of and Consideration for Indenture...............................................................1 ARTICLE I SECTION 1.01.Definitions.................................................................................1 Additional Interest......................................................................................1 Additional Provisions....................................................................................1 Authenticating Agent.....................................................................................1 Bankruptcy Law ..........................................................................................1 Board of Directors.......................................................................................2 Board Resolution.........................................................................................2 Business Day.............................................................................................2 Calculation Agent........................................................................................2 Capital Securities.......................................................................................2 Capital Securities Guarantee.............................................................................2 Capital Treatment Event..................................................................................2 Certificate..............................................................................................3 Common Securities........................................................................................3 Company..................................................................................................3 Comparable Treasury Issue................................................................................3 Comparable Treasury Price................................................................................3 Debt Security or Debt Securities.........................................................................3 Debt Security Register...................................................................................3 Declaration..............................................................................................3 Default..................................................................................................3 Defaulted Interest.......................................................................................4 Deferred Interest........................................................................................4 Event of Default.........................................................................................4 Extension Period.........................................................................................4 Federal Reserve..........................................................................................4 Indenture................................................................................................4 Institutional Trustee....................................................................................4 Interest Payment Date....................................................................................4 Interest Rate............................................................................................4 Investment Company Event.................................................................................4 LIBOR....................................................................................................4 LIBOR Banking Day........................................................................................4 i LIBOR Business Day.......................................................................................4 LIBOR Determination Date.................................................................................4 Liquidation Amount.......................................................................................4 Maturity Date............................................................................................4 Officers' Certificate....................................................................................5 Opinion of Counsel.......................................................................................5 OTS......................................................................................................5 Person...................................................................................................5 Predecessor Security.....................................................................................5 Primary Treasury Dealer..................................................................................6 Principal Office of the Trustee..........................................................................6 Quotation Agent..........................................................................................6 Redemption Date..........................................................................................6 Redemption Price.........................................................................................6 Reference Treasury Dealer................................................................................6 Reference Treasury Dealer Quotations.....................................................................6 Remaining Life...........................................................................................6 Responsible Officer......................................................................................6 Securityholder, Holder of Debt Securities................................................................7 Senior Indebtedness......................................................................................7 Special Event............................................................................................7 Special Redemption Date..................................................................................7 Special Redemption Price.................................................................................7 Subsidiary...............................................................................................7 Tax Event................................................................................................8 Treasury Rate............................................................................................8 Trust....................................................................................................9 Trust Indenture Act......................................................................................9 Trust Securities.........................................................................................9 Trustee..................................................................................................9 United States............................................................................................9 U.S. Person..............................................................................................9 ARTICLE II SECTION 2.01. Authentication and Dating...........................................................9 SECTION 2.02. Form of Trustee's Certificate of Authentication....................................10 SECTION 2.03. Form and Denomination of Debt Securities...........................................10 SECTION 2.04. Execution of Debt Securities.......................................................10 SECTION 2.05. Exchange and Registration of Transfer of Debt Securities...........................11 SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Debt Securities...............................13 SECTION 2.07. Temporary Debt Securities..........................................................14 SECTION 2.08. Payment of Interest................................................................15 SECTION 2.09. Cancellation of Debt Securities Paid, etc..........................................16 SECTION 2.10. Computation of Interest............................................................17 SECTION 2.11. Extension of Interest Payment Period...............................................18 ii SECTION 2.12. CUSIP Numbers......................................................................19 ARTICLE III SECTION 3.01. Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities...................................................19 SECTION 3.02. Offices for Notices and Payments, etc..............................................20 SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office.................................21 SECTION 3.04. Provision as to Paying Agent.......................................................21 SECTION 3.05. Certificate to Trustee.............................................................22 SECTION 3.06. Additional Interest................................................................22 SECTION 3.07. Compliance with Consolidation Provisions...........................................22 SECTION 3.08. Limitation on Dividends............................................................23 SECTION 3.09. Covenants as to the Trust..........................................................23 ARTICLE IV SECTION 4.01. Securityholders' Lists.............................................................24 SECTION 4.02. Preservation and Disclosure of Lists...............................................24 ARTICLE V SECTION 5.01. Events of Default..................................................................26 SECTION 5.02. Payment of Debt Securities on Default; Suit Therefor...............................27 SECTION 5.03. Application of Moneys Collected by Trustee.........................................29 SECTION 5.04. Proceedings by Securityholders.....................................................29 SECTION 5.05. Proceedings by Trustee.............................................................30 SECTION 5.06. Remedies Cumulative and Continuing.................................................30 SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders.....31 SECTION 5.08. Notice of Defaults.................................................................31 SECTION 5.09. Undertaking to Pay Costs...........................................................32 ARTICLE VI SECTION 6.01. Duties and Responsibilities of Trustee.............................................32 SECTION 6.02. Reliance on Documents, Opinions, etc...............................................33 SECTION 6.03. No Responsibility for Recitals, etc................................................35 SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities............................................................35 SECTION 6.05. Moneys to be Held in Trust.........................................................35 SECTION 6.06. Compensation and Expenses of Trustee...............................................35 SECTION 6.07. Officers' Certificate as Evidence..................................................36 SECTION 6.08. Eligibility of Trustee.............................................................36 SECTION 6.09. Resignation or Removal of Trustee..................................................37 SECTION 6.10. Acceptance by Successor Trustee....................................................38 SECTION 6.11. Succession by Merger, etc..........................................................39 iii SECTION 6.12. Authenticating Agents..............................................................40 ARTICLE VII SECTION 7.01. Action by Securityholders..........................................................41 SECTION 7.02. Proof of Execution by Securityholders..............................................42 SECTION 7.03. Who Are Deemed Absolute Owners.....................................................42 SECTION 7.04. Debt Securities Owned by Company Deemed Not Outstanding............................42 SECTION 7.05. Revocation of Consents; Future Holders Bound.......................................43 ARTICLE VIII SECTION 8.01. Purposes of Meetings...............................................................43 SECTION 8.02. Call of Meetings by Trustee........................................................44 SECTION 8.03. Call of Meetings by Company or Securityholders.....................................44 SECTION 8.04. Qualifications for Voting..........................................................44 SECTION 8.05. Regulations........................................................................44 SECTION 8.06. Voting.............................................................................45 SECTION 8.07. Quorum; Actions....................................................................45 ARTICLE IX SECTION 9.01. Supplemental Indentures without Consent of Securityholders.........................46 SECTION 9.02. Supplemental Indentures with Consent of Securityholders............................48 SECTION 9.03. Effect of Supplemental Indentures..................................................49 SECTION 9.04. Notation on Debt Securities........................................................49 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee...............................................................49 ARTICLE X SECTION 10.01. Optional Redemption................................................................50 SECTION 10.02. Special Event Redemption...........................................................50 SECTION 10.03. Notice of Redemption; Selection of Debt Securities.................................50 SECTION 10.04. Payment of Debt Securities Called for Redemption...................................51 ARTICLE XI SECTION 11.01. Company May Consolidate, etc., on Certain Terms....................................52 SECTION 11.02. Successor Entity to be Substituted.................................................52 SECTION 11.03. Opinion of Counsel to be Given to Trustee..........................................53 ARTICLE XII SECTION 12.01. Discharge of Indenture.............................................................53 SECTION 12.02. Deposited Moneys to be Held in Trust by Trustee....................................54 SECTION 12.03. Paying Agent to Repay Moneys Held..................................................54 iv SECTION 12.04. Return of Unclaimed Moneys.........................................................54 ARTICLE XIII SECTION 13.01. Indenture and Debt Securities Solely Corporate Obligations.........................54 ARTICLE XIV SECTION 14.01. Successors.........................................................................55 SECTION 14.02. Official Acts by Successor Entity..................................................55 SECTION 14.03. Surrender of Company Powers........................................................55 SECTION 14.04. Addresses for Notices, etc.........................................................55 SECTION 14.05. Governing Law......................................................................55 SECTION 14.06. Evidence of Compliance with Conditions Precedent...................................56 SECTION 14.07. Non-Business Days..................................................................56 SECTION 14.08. Table of Contents, Headings, etc...................................................56 SECTION 14.09. Execution in Counterparts..........................................................56 SECTION 14.10. Separability.......................................................................57 SECTION 14.11. Assignment.........................................................................57 SECTION 14.12. Acknowledgment of Rights...........................................................57 ARTICLE XV SECTION 15.01. Agreement to Subordinate...........................................................58 SECTION 15.02. Default on Senior Indebtedness.....................................................58 SECTION 15.03. Liquidation; Dissolution; Bankruptcy...............................................58 SECTION 15.04. Subrogation........................................................................60 SECTION 15.05. Trustee to Effectuate Subordination................................................61 SECTION 15.06. Notice by the Company..............................................................61 SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness..............................62 SECTION 15.08. Subordination May Not Be Impaired..................................................62 EXHIBITS EXHIBIT A............FORM OF DEBT SECURITY
v THIS INDENTURE, dated as of November 28, 2001, between Matrix Bancorp, Inc., a savings and loan holding company incorporated in the State of Colorado (hereinafter sometimes called the "Company"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (hereinafter sometimes called the "Trustee"), W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Debt Securities due 2031 (the "Debt Securities") under this Indenture and to provide, among other things, for the execution and authentication, delivery and administration thereof, the Company has duly authorized the execution of this Indenture, NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Debt Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debt Securities as follows: ARTICLE I DEFINITIONS SECTION 1.01 Definitions. ----------- The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Additional Interest" shall have the meaning set forth in Section 3.06. "Additional Provisions" shall have the meaning set forth in Section 15.01. "Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. 1 "Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware, New York City or Denver, Colorado are permitted or required by any applicable law or executive order to close. "Calculation Agent" means the Person identified as "Trustee" in the first paragraph hereof with respect to the Debt Securities and the Institutional Trustee with respect to the Trust Securities. "Capital Securities" means undivided beneficial interests in the assets of the Trust which are designated as "MMCapS SM " and rank pari passu with Common Securities issued by the Trust; provided, however, that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" means the guarantee agreement that the Company will enter into with Wilmington Trust Company or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust. "Capital Treatment Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or any rules, guidelines or policies of an applicable regulatory authority for the Company or (b) any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate Liquidation Amount of the Capital Securities as "Tier 1 Capital" (or its then equivalent if the Company were subject to such capital requirement) applied as if the Company (or its successors) were a bank holding company for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies), or any capital adequacy guidelines as then in effect and applicable to the Company, provided, however, that the distribution of the Debt Securities in connection with the liquidation of the Trust by the Company shall not in and 2 of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" means undivided beneficial interests in the assets of the Trust which are designated as "Common Securities" and rank pari passu with Capital Securities issued by the Trust; provided, however, that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Company" means Matrix Bancorp, Inc., a savings and loan holding company incorporated in Colorado, and, subject to the provisions of Article XI, shall include its successors and assigns. "Comparable Treasury Issue" means with respect to any Special Redemption Date, the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Trustee receives fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Debt Security" or "Debt Securities" has the meaning stated in the first recital of this Indenture. "Debt Security Register" has the meaning specified in Section 2.05. "Declaration" means the Amended and Restated Declaration of Trust of the Trust, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning set forth in Section 2.08. 3 "Deferred Interest" has the meaning set forth in Section 2.11. "Event of Default" means any event specified in Section 5.01, which has continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Extension Period" has the meaning set forth in Section 2.11. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both. "Institutional Trustee" has the meaning set forth in the Declaration. "Interest Payment Date" means June 8 and December 8 of each year, commencing on June 8, 2002, during the term of this Indenture. "Interest Rate" means a per annum rate of interest, reset semi-annually, equal to LIBOR, as determined on the LIBOR Determination Date immediately preceding each Interest Payment Date, plus 3.75%; provided, that the applicable Interest Rate may not exceed 11.0% through the Interest Payment Date in December 2006. "Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be, considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debt Securities. "LIBOR" means the London Interbank Offered Rate for six-month Eurodollar deposits in Europe as determined by the Calculation Agent according to Section 2.10(b). "LIBOR Banking Day" has the meaning set forth in Section 2.10(b)(1). "LIBOR Business Day" has the meaning set forth in Section 2.10(b)(1). "LIBOR Determination Date" has the meaning set forth in Section 2.10(b). "Liquidation Amount" means the stated amount of $1,000 per Trust Security. "Maturity Date" means December 8, 2031. 4 "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman, the President or any Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section. "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section. "OTS" means the Office of Thrift Supervision. The term "outstanding," when used with reference to Debt Securities, subject to the provisions of Section 7.04, means, as of any particular time, all Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except (a) Debt Securities theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debt Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, that, if such Debt Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Articles Ten and Fourteen or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debt Securities paid pursuant to Section 2.06 or in lieu of or in substitution for which other Debt Securities shall have been authenticated and delivered pursuant to the terms of Section 2.06 unless proof satisfactory to the Company and the Trustee is presented that any such Debt Securities are held by bona fide holders in due course. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt as that evidenced by such particular Debt Security; and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 2.06 in 5 lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security. "Primary Treasury Dealer" means a primary United States Government securities dealer in New York City. "Principal Office of the Trustee," or other similar term, means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at all times shall be located within the United States and at the time of the execution of this Indenture shall be Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Company shall substitute therefor another Primary Treasury Dealer. "Redemption Date" has the meaning set forth in Section 10.01. "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Remaining Life" means, with respect to any Debt Security, the period from the Special Redemption Date for such Debt Security to December 8, 2006. "Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee with direct responsibility for the administration of the Indenture, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. 6 "Securityholder," "holder of Debt Securities" or other similar terms, means any Person in whose name at the time a particular Debt Security is registered on the Debt Security Register. "Senior Indebtedness" means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred, unless, with the prior approval of the OTS if not otherwise generally approved, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior or are pari passu in right of payment to the Debt Securities. "Special Event" means any of a Tax Event, an Investment Company Event or a Capital Treatment Event. "Special Redemption Date" has the meaning set forth in 10.02. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debt Securities being redeemed pursuant to Section 10.02 or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006, together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debt Securities, discounted to the Special Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 0.50%, plus, in the case of either (a) or (b), accrued and unpaid interest on such Debt Securities to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. "Subsidiary" means, with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such 7 Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debt Securities; (ii) interest payable by the Company on the Debt Securities is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes (including withholding taxes), duties, assessments or other governmental charges. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, 8 calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. "Trust" means Matrix Bancorp Capital Trust IV, the Delaware business trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debt Securities under this Indenture, of which the Company is the sponsor. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Trust Securities" means Common Securities and Capital Securities of Matrix Bancorp Capital Trust IV. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. "United States" means the United States of America and the District of Columbia. "U.S. Person" has the meaning given to United States Person as set forth in Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended. ARTICLE II DEBT SECURITIES SECTION 2.01 Authentication and Dating. ------------------------- Upon the execution and delivery of this Indenture, or from time to time thereafter, Debt Securities in an aggregate principal amount not in excess of $5,155,000 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debt Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Vice Presidents, without any further action by the Company hereunder. In authenticating such Debt Securities, and accepting the additional responsibilities under this Indenture in relation to such Debt Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company as the case may be. The Trustee shall have the right to decline to authenticate and deliver any Debt Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if a Responsible 9 Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders. The definitive Debt Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debt Securities, as evidenced by their execution of such Debt Securities. SECTION 2.02 Form of Trustee's Certificate of Authentication. ----------------------------------------------- The Trustee's certificate of authentication on all Debt Securities shall be in substantially the following form: This is one of the Debt Securities referred to in the within-mentioned Indenture. __________________________________, not in its individual capacity but solely as trustee By_________________________ Authorized Officer SECTION 2.03 Form and Denomination of Debt Securities. ---------------------------------------- The Debt Securities shall be substantially in the form of Exhibit A hereto. The Debt Securities shall be in registered, certificated form without coupons and in minimum denominations of $100,000 and any multiple of $1,000 in excess thereof. The Debt Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. SECTION 2.04 Execution of Debt Securities. The Debt Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents, under its corporate seal which may be affixed thereto or printed, engraved or otherwise reproduced thereon, by facsimile or otherwise, and which need not be attested. Only such Debt Securities as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized officer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debt Security executed by the Company shall be conclusive evidence that the Debt Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. 10 In case any officer of the Company who shall have signed any of the Debt Securities shall cease to be such officer before the Debt Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debt Securities nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debt Securities had not ceased to be such officer of the Company; and any Debt Security may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debt Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Every Debt Security shall be dated the date of its authentication. SECTION 2.05 Exchange and Registration of Transfer of Debt Securities. --------------------------------------------- - ---------- The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.02, a register (the "Debt Security Register") for the Debt Securities issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debt Securities as in this Article Two provided. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. Debt Securities to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debt Security or Debt Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debt Security at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debt Security for a like aggregate principal amount. Registration or registration of transfer of any Debt Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Debt Security, shall be deemed to complete the registration or registration of transfer of such Debt Security. All Debt Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and either the Trustee or the Authenticating Agent duly executed by, the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debt Securities, but the Company or the Trustee may require payment 11 of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of any Debt Security for a period of 15 days next preceding the date of selection of Debt Securities for redemption. Notwithstanding the foregoing, Debt Securities may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company in accordance with applicable law, which legend shall be placed on each Debt Security: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN 12 OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. SECTION 2.06 Mutilated, Destroyed, Lost or Stolen Debt Securities. ---------------------------------------------------- In case any Debt Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debt Security bearing a number not 13 contemporaneously outstanding, in exchange and substitution for the mutilated Debt Security, or in lieu of and in substitution for the Debt Security so destroyed, lost or stolen. In every case the applicant for a substituted Debt Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debt Security and of the ownership thereof. The Trustee may authenticate any such substituted Debt Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debt Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debt Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debt Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debt Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Debt Security issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any such Debt Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debt Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities duly issued hereunder. All Debt Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.07 Temporary Debt Securities. ------------------------- Pending the preparation of definitive Debt Securities, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debt Securities that are typed, printed or lithographed. Temporary Debt Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Debt Securities but with such omissions, insertions and variations as may be appropriate for temporary Debt Securities, all as may be determined by the Company. Every such temporary Debt Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same 14 effect, as the definitive Debt Securities. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debt Securities and thereupon any or all temporary Debt Securities may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debt Securities a like aggregate principal amount of such definitive Debt Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debt Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Debt Securities authenticated and delivered hereunder. SECTION 2.08 Payment of Interest. ------------------- Each Debt Security will bear interest at the then applicable Interest Rate from and including each Interest Payment Date or, in the case of the first interest period, the original date of issuance of such Debt Security to, but excluding, the next succeeding Interest Payment Date or, in the case of the last interest period, the Redemption Date, Special Redemption Date or Maturity Date, as applicable, on the principal thereof, on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on Deferred Interest and on any overdue installment of interest (including Defaulted Interest), payable (subject to the provisions of Article XII) on each Interest Payment Date commencing on June 8, 2002. Interest and any Deferred Interest on any Debt Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name said Debt Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, except that interest and any Deferred Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. In the event that any Debt Security or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debt Security will be paid upon presentation and surrender of such Debt Security. Any interest on any Debt Security, other than Deferred Interest, that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder, and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Company shall deposit 15 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 not be more than fifteen nor less than ten days prior to the date of the proposed payment and not less than ten days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Debt Security Register, not less than ten days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered on such special record date and thereafter the Company shall have no further payment obligation in respect of the Defaulted Interest. Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debt Securities. The term "regular record date" as used in this Section shall mean the fifteenth day prior to an Interest Payment Date whether or not such date is a Business Day. Subject to the foregoing provisions of this Section, each Debt Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debt Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debt Security. SECTION 2.09 Cancellation of Debt Securities Paid, etc. ----------------------------------------- All Debt Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debt Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debt Securities canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debt Securities unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debt Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debt Securities unless and until the same are surrendered to the Trustee for cancellation. 16 SECTION 2.10 Computation of Interest. ----------------------- (a) The amount of interest payable for any interest period will be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period; provided, however, that upon the occurrence of a Special Event Redemption pursuant to Section 10.02 the amounts payable pursuant to this Indenture shall be calculated as set forth in the definition of Special Redemption Price. (b) LIBOR shall be determined by the Calculation Agent in accordance with the following provisions: (1) On the second LIBOR Business Day (provided, that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to December 15 and June 15 (except, with respect to the first interest payment period, on November 26, 2001), (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent for six-month Eurodollar deposits in Europe which appears on Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions) or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Markets Commodities News. "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in New York, New York or Wilmington, Delaware, are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on the same LIBOR Determination Date, the corrected rate as so substituted will be the applicable LIBOR for that LIBOR Determination Date. (2) If, on any LIBOR Determination Date, such rate does not appear on Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for six-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (New York time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in The City of New York (as selected by the Calculation Agent) are quoting on the relevant LIBOR Determination Date for six-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (New York time) (in an amount determined by 17 the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent. (3) If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR in effect on the previous LIBOR Determination Date (whether or not LIBOR for such period was in fact determined on such LIBOR Determination Date). (c) All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (d) On each LIBOR Determination Date, the Calculation Agent shall notify, in writing, the Company and the Paying Agent of the applicable Interest Rate in effect for the related Interest Payment. The Calculation Agent shall, upon the request of the holder of any Debt Securities, provide the Interest Rate then in effect. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company and the Holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Company as to the Interest Rate. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for taxable income calculation purposes. SECTION 2.11 Extension of Interest Payment Period. ------------------------------------ So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time and without causing an Event of Default, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to ten consecutive semi-annual periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). No Extension Period may end on a date other than an Interest Payment Date. During any Extension Period, interest will continue to accrue on the Debt Securities and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at the Interest Rate, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, both to the extent permitted by law. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date; and provided further, however, that during any such Extension 18 Period, the Company shall be subject to the restrictions set forth in Section 3.08 of this Indenture. Prior to the termination of any Extension Period, the Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed ten consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company must give the Trustee notice of its election to begin such Extension Period at least one Business Day prior to the earlier of (i) the next succeeding date on which interest on the Debt Securities would have been payable except for the election to begin such Extension Period or (ii) the date such interest is payable, but in any event not later than the related regular record date. The Trustee shall give notice of the Company's election to begin a new Extension Period to the Securityholders. SECTION 2.12 CUSIP Numbers. ------------- The Company in issuing the Debt Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Securityholders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debt Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debt Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01 Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities. -------------------------------------------------- (a) The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Debt Securities at the place, at the respective times and in the manner provided in this Indenture and the Debt Securities. At the option of the Company, each installment of interest on the Debt Securities may be paid (i) by mailing checks for such interest payable to the order of the holders of Debt Securities entitled thereto as they appear on the Debt Security Register or (ii) by wire transfer to any account with a banking institution located in the United States designated by such Person to the paying agent no later than the related record date. (b) The Company will treat the Debt Securities as indebtedness, and the interest payable in respect of such Debt Securities as interest, for all U.S. federal income tax purposes. All payments in respect of such Debt Securities will be made free and clear of U.S. withholding tax to any beneficial owner 19 thereof that has provided an Internal Revenue Service Form W8 BEN (or any substitute or successor form) establishing its non-US status for U.S. federal income tax purposes. (c) As of the date of this Indenture, the Company has no intention to exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period. (d) As of the date of this Indenture, the Company believes that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period at any time during which the Debt Securities are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debt Securities. SECTION 3.02 Offices for Notices and Payments, etc. ------------------------------------- So long as any of the Debt Securities remain outstanding, the Company will maintain in Wilmington, Delaware or in the State of Colorado, an office or agency where the Debt Securities may be presented for payment, an office or agency where the Debt Securities may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debt Securities or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.05, such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware or in Colorado, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware or Colorado, where the Debt Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware or in Colorado, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. 20 SECTION 3.03 Appointments to Fill Vacancies in Trustee's Office. -------------------------------------------------- The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.09, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.04 Provision as to Paying Agent. ---------------------------- (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.04, (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Debt Securities (whether such sums have been paid to it by the Company or by any other obligor on the Debt Securities) in trust for the benefit of the holders of the Debt Securities; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debt Securities) to make any payment of the principal of and premium, if any, or interest, if any, on the Debt Securities when the same shall be due and payable; and (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest, if any, on the Debt Securities, set aside, segregate and hold in trust for the benefit of the holders of the Debt Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debt Securities) to make any payment of the principal of and premium, if any, or interest, if any, on the Debt Securities when the same shall become due and payable. Whenever the Company shall have one or more paying agents for the Debt Securities, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debt Securities, deposit with a paying agent a sum sufficient to pay the principal, premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debt Securities, or for any other reason, pay, or direct any paying agent to pay to the Trustee all sums held in trust by the Company or any such paying agent, such sums to be held by the Trustee upon the same terms and conditions herein contained. 21 (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 12.03 and 12.04. (e) The Company hereby initially appoints the Trustee to act as paying agent. SECTION 3.05 Certificate to Trustee. ---------------------- The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debt Securities are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.06 Additional Interest. ------------------- If and for so long as the Trust is the holder of all Debt Securities and is subject to any additional taxes (including withholding taxes), duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts (the "Additional Interest") on the Debt Securities as shall be required so that the net amounts received and retained by the Trust after paying taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes, duties, assessments or other governmental charges had been imposed. Whenever in this Indenture or the Debt Securities there is a reference in any context to the payment of principal of or interest on the Debt Securities, such mention shall be deemed to include mention of payments of the Additional Interest provided for in this paragraph to the extent that, in such context, Additional Interest is, was or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Interest (if applicable) in any provisions hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made, provided, however, that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Interest that may be due and payable. SECTION 3.07 Compliance with Consolidation Provisions. ---------------------------------------- The Company will not, while any of the Debt Securities remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article XI hereof are complied with. 22 SECTION 3.08 Limitation on Dividends. ----------------------- If Debt Securities are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debt Securities continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (iii) the Company shall have given notice of its election to defer payments of interest on the Debt Securities by extending the interest payment period as provided herein and such period, or any extension thereof, shall have commenced and be continuing, then the Company may not (A) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (B) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the occurrence of (i), (ii) or (iii) above, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). SECTION 3.09 Covenants as to the Trust. ------------------------- For so long as such Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture that is a U.S. Person may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall use commercially reasonable efforts to cause the Trust (a) to remain a statutory business trust, except in connection with a distribution of Debt Securities to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes and (c) to cause 23 each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debt Securities. ARTICLE IV LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01 Securityholders' Lists. ---------------------- The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) on each regular record date for an Interest Payment Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debt Securities as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.01 so long as the Trustee is in possession thereof by reason of its acting as Debt Security registrar. SECTION 4.02 Preservation and Disclosure of Lists. ------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debt Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Debt Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case three or more holders of Debt Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debt Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debt Securities with respect to their rights under this Indenture or under such Debt Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within five Business Days after the receipt of such application, at its election, either: 24 (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, or (2) inform such applicants as to the approximate number of holders of Debt Securities whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of Debt Securities whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debt Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debt Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debt Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). 25 ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT SECTION 5.01 Events of Default. ----------------- The following events shall be "Events of Default" with respect to Debt Securities: (a) the Company defaults in the payment of any interest upon any Debt Security when it becomes due and payable, and continuance of such default for a period of 30 days; for the avoidance of doubt, an extension of any interest payment period by the Company in accordance with Section 2.11 of this Indenture shall not constitute a default under this clause 5.01(a); or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debt Securities as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration or otherwise; or (c) the Company defaults in the performance of, or breaches, any of its covenants or agreements in Sections 3.06, 3.07, 3.08 and 3.09 of this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of not less than 25% in aggregate principal amount of the outstanding Debt Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or orders the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (1) the distribution of the Debt Securities to holders of such Trust Securities in liquidation of their interests in the Trust, (2) the 26 redemption of all of the outstanding Trust Securities or (3) certain mergers, consolidations or amalgamations, each as permitted by the Declaration. If an Event of Default occurs and is continuing with respect to the Debt Securities, then, and in each and every such case, unless the principal of the Debt Securities shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debt Securities and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debt Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debt Securities and the principal of and premium, if any, on the Debt Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Deferred Interest, to the extent permitted by law) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.06, if any, and (ii) all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on Debt Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debt Securities then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debt Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debt Securities shall continue as though no such proceeding had been taken. SECTION 5.02 Payment of Debt Securities on Default; Suit Therefor. ---------------------------------------------------- The Company covenants that upon the occurrence of an Event of Default pursuant to clause 5.01(a) or 5.01(b) and upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debt Securities, the whole amount that then shall have become due and payable on all 27 Debt Securities for principal and premium, if any, or interest, or both, as the case may be, including Deferred Interest accrued on the Debt Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.06. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debt Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Debt Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debt Securities under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debt Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debt Securities shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debt Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.06) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debt Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debt Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.06. 28 Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debt Securities or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debt Securities, may be enforced by the Trustee without the possession of any of the Debt Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debt Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Debt Securities, and it shall not be necessary to make any holders of the Debt Securities parties to any such proceedings. SECTION 5.03 Application of Moneys Collected by Trustee. ------------------------------------------ Any moneys collected by the Trustee shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debt Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.06; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debt Securities for principal (and premium, if any), and interest on the Debt Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debt Securities for principal (and premium, if any) and interest, respectively; and Fourth: The balance, if any, to the Company. SECTION 5.04 Proceedings by Securityholders. ------------------------------ No holder of any Debt Security shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debt Securities and unless the holders of not less than 25% 29 in aggregate principal amount of the Debt Securities then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding; provided, that no holder of Debt Securities shall have any right to prejudice the rights of any other holder of Debt Securities, obtain priority or preference over any other such holder or enforce any right under this Indenture except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debt Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debt Security to receive payment of the principal of, premium, if any, and interest on such Debt Security when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 5.05 Proceedings by Trustee. ---------------------- In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06 Remedies Cumulative and Continuing. ---------------------------------- Except as otherwise provided in Section 2.06, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debt Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debt Securities, and no delay or omission of the Trustee or of any holder of any of the Debt Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. 30 SECTION 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. -------------------------------------------------- The holders of a majority in aggregate principal amount of the Debt Securities affected (voting as one class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debt Securities; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Debt Securities, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may on behalf of the holders of all of the Debt Securities waive (or modify any previously granted waiver of) any past default or Event of Default and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debt Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants contained in Section 3.09; provided, however, that if the Debt Securities are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in liquidation preference of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Debt Security is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debt Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes of the Debt Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08 Notice of Defaults. ------------------ The Trustee shall, within 90 days after a Responsible Officer of the Trustee shall have actual knowledge or received written notice of the occurrence of a default with respect to the Debt Securities, mail to all Securityholders, as the names and addresses of such holders appear upon the Debt Security Register, notice of all defaults with respect to the Debt Securities known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in subsections (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein); provided, that, except in the case of default in the payment of the 31 principal of, premium, if any, or interest on any of the Debt Securities, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders. SECTION 5.09 Undertaking to Pay Costs. ------------------------ All parties to this Indenture agree, and each holder of any Debt Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debt Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debt Security against the Company on or after the same shall have become due and payable. ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01 Duties and Responsibilities of Trustee. -------------------------------------- With respect to the holders of Debt Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debt Securities and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debt Securities, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Debt Securities has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default with respect to Debt Securities and after the curing or waiving of all Events of Default which may have occurred 32 (1) the duties and obligations of the Trustee with respect to Debt Securities shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debt Securities as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debt Securities unless either (1) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debt Securities or by any holder of the Debt Securities, except with respect to an Event of Default pursuant to Sections 5.01(a) or 5.01(b) hereof (other than an Event of Default resulting from the default in the payment of Additional Interest or premium, if any, if the Trustee does not have actual knowledge or written notice that such payment is due and payable), of which the Trustee shall be deemed to have knowledge. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. SECTION 6.02 Reliance on Documents, Opinions, etc. ------------------------------------ Except as otherwise provided in Section 6.01: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, 33 debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debt Securities (that has not been cured or waived) to exercise with respect to Debt Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in principal amount of the outstanding Debt Securities affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care. 34 SECTION 6.03 No Responsibility for Recitals, etc. ----------------------------------- The recitals contained herein and in the Debt Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debt Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debt Securities or the proceeds of any Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities. ---------------------------------------------------- The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debt Security registrar, in its individual or any other capacity, may become the owner or pledgee of Debt Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debt Security registrar. SECTION 6.05 Moneys to be Held in Trust. -------------------------- Subject to the provisions of Section 12.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys, if any, shall be paid from time to time to the Company upon the written order of the Company, signed by the Chairman of the Board of Directors, the President, the Chief Operating Officer, a Vice President, the Treasurer or an Assistant Treasurer of the Company. SECTION 6.06 Compensation and Expenses of Trustee. ------------------------------------ The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its written request for all documented reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the reasonable expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance that arises from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee (including in its individual capacity) and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, 35 any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee), except to the extent such loss, damage, claim, liability or expense results from the negligence or bad faith of such indemnitee, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for documented expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debt Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debt Securities. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in subsections (d), (e) or (f) of Section 5.01, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. SECTION 6.07 Officers' Certificate as Evidence. --------------------------------- Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08 Eligibility of Trustee. ---------------------- The Trustee hereunder shall at all times be a U.S. Person that is a banking corporation organized and doing business under the laws of the United States of America or any state thereof or of the District of Columbia and authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.08 the combined capital and 36 surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee, notwithstanding that such corporation shall be otherwise eligible and qualified under this Article. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.08, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.09. If the Trustee has or shall acquire any "conflicting interest" within the meaning of ss. 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Indenture. SECTION 6.09 Resignation or Removal of Trustee. --------------------------------- (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debt Securities at their addresses as they shall appear on the Debt Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, subject to the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee. (b) In case at any time any of the following shall occur -- (1) the Trustee shall fail to comply with the provisions of the last paragraph of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months, (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.08 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or 37 (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.09, if no successor Trustee shall have been so appointed and have accepted appointment within 30 days of the occurrence of any of (1),(2) or (3) above, any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within ten Business Days after such nomination the Company objects thereto, in which case or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.09 provided, may petition any court of competent jurisdiction for an appointment of a successor. (d) Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section 6.09 shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10. SECTION 6.10 Acceptance by Successor Trustee. ------------------------------- Any successor Trustee appointed as provided in Section 6.09 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of the amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights 38 and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section 6.10 unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.08. In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debt Securities at their addresses as they shall appear on the Debt Security Register. If the Company fails to mail such notice within ten Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.11 Succession by Merger, etc. ------------------------- Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such corporation shall be otherwise eligible and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debt Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debt Securities so authenticated; and in case at that time any of the Debt Securities shall not have been authenticated, any successor to the Trustee may authenticate such Debt Securities either in the name of any predecessor hereunder or in the 39 name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debt Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debt Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.12 Authenticating Agents. --------------------- There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debt Securities issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debt Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debt Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debt Securities by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under 40 this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debt Securities as the names and addresses of such holders appear on the Debt Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01 Action by Securityholders. ------------------------- Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debt Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debt Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debt Securities for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debt Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debt Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. 41 SECTION 7.02 Proof of Execution by Securityholders. ------------------------------------- Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debt Securities shall be proved by the Debt Security Register or by a certificate of the Debt Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03 Who Are Deemed Absolute Owners. ------------------------------ Prior to due presentment for registration of transfer of any Debt Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debt Security registrar may deem the Person in whose name such Debt Security shall be registered upon the Debt Security Register to be, and may treat him as, the absolute owner of such Debt Security (whether or not such Debt Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debt Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debt Security. SECTION 7.04 Debt Securities Owned by Company Deemed Not Outstanding. ------------------------------------------- In determining whether the holders of the requisite aggregate principal amount of Debt Securities have concurred in any direction, consent or waiver under this Indenture, Debt Securities which are owned by the Company or any other obligor on the Debt Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debt Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debt Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debt Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debt Securities and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or 42 any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05 Revocation of Consents; Future Holders Bound. -------------------------------------------- At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debt Securities specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.01) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.01) of a Debt Security (or any Debt Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debt Securities the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Debt Security (or so far as concerns the principal amount represented by any exchanged or substituted Debt Security). Except as aforesaid any such action taken by the holder of any Debt Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Debt Security, and of any Debt Security issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debt Security or any Debt Security issued in exchange or substitution therefor. ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01 Purposes of Meetings. -------------------- A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debt Securities under any other provision of this Indenture or under applicable law. 43 SECTION 8.02 Call of Meetings by Trustee. --------------------------- The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in New York or Wilmington, Delaware, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debt Securities affected at their addresses as they shall appear on the Debt Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03 Call of Meetings by Company or Securityholders. ---------------------------------------------- In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debt Securities, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in Denver, Colorado for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04 Qualifications for Voting. ------------------------- To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Debt Securities with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debt Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05 Regulations. ----------- Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debt Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the 44 Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.04, at any meeting each holder of Debt Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Debt Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debt Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debt Securities held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 8.06 Voting. ------ The vote upon any resolution submitted to any meeting of holders of Debt Securities with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debt Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Debt Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 8.07 Quorum; Actions. --------------- The Persons entitled to vote a majority in outstanding principal amount of the Debt Securities shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of 45 not less than a specified percentage in outstanding principal amount of the Debt Securities, the Persons holding or representing such specified percentage in outstanding principal amount of the Debt Securities will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.02, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the outstanding principal amount of the Debt Securities which shall constitute a quorum. Except as limited by the proviso in the first paragraph of Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of not less than a majority in outstanding principal amount of the Debt Securities; provided, however, that, except as limited by the proviso in the first paragraph of Section 9.02, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be given by the holders of not less than a specified percentage in outstanding principal amount of the Debt Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of not less than such specified percentage in outstanding principal amount of the Debt Securities. Any resolution passed or decision taken at any meeting of holders of Debt Securities duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01 Supplemental Indentures without Consent of Securityholders. ------------------------------------------ The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes: 46 (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debt Securities as the Board of Directors shall consider to be for the protection of the holders of such Debt Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities; (d) to add to, delete from, or revise the terms of Debt Securities, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debt Securities, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities as required by Section 2.05 (for purposes of assuring that no registration of Debt Securities is required under the Securities Act of 1933, as amended); provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debt Securities substantially similar to those that were applicable to Capital Securities shall not be deemed to adversely affect the holders of the Debt Securities); (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debt Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.10; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debt Securities, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debt Securities, or to add to the rights of the holders of Debt Securities. 47 The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Debt Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02 Supplemental Indentures with Consent of Securityholders. --------------------------------------- With the consent (evidenced as provided in Section 7.01) of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act, then in effect, applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall without such consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of any Debt Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debt Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debt Securities the holders of which are required to consent to any such supplemental indenture; and provided, further, that if the Debt Securities are held by the Trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in liquidation preference of Trust Securities shall have consented to such supplemental indenture; provided, further, that if the consent of the Securityholder of each outstanding Debt Security is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as 48 aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders thereby as their names and addresses appear upon the Debt Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03 Effect of Supplemental Indentures. --------------------------------- Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debt Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04 Notation on Debt Securities. --------------------------- Debt Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debt Securities so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debt Securities then outstanding. SECTION 9.05 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. --------------------------------------------------- The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall, in addition to the documents required by Section 14.06, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as 49 conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. ARTICLE X REDEMPTION OF SECURITIES SECTION 10.01 Optional Redemption. ------------------- At any time the Company shall have the right, subject to the receipt by the Company of prior approval from the OTS, if then required under applicable capital guidelines or policies of the OTS, to redeem the Debt Securities, in whole or in part, on any June 8 or December 8 on or after December 8, 2006 (the "Redemption Date"), at the Redemption Price. SECTION 10.02 Special Event Redemption. ------------------------ If a Special Event shall occur and be continuing, the Company shall have the right, subject to the receipt by the Company of prior approval from the OTS if then required under applicable capital guidelines or policies of the OTS, to redeem the Debt Securities, in whole but not in part, at any time within 90 days following the occurrence of such Special Event (the "Special Redemption Date"), at the Special Redemption Price. SECTION 10.03 Notice of Redemption; Selection of Debt Securities. -------------------------------------------------- In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debt Securities, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Debt Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Debt Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debt Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debt Security. Each such notice of redemption shall specify the CUSIP number, if any, of the Debt Securities to be redeemed, the date fixed for redemption, the redemption price at which Debt Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debt Securities are to be redeemed the notice of redemption shall specify the numbers of the Debt Securities to be redeemed. In case the 50 Debt Securities are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debt Security, a new Debt Security or Debt Securities in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m. New York City time on the Redemption Date or the Special Redemption Date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Debt Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. The Company will give the Trustee notice not less than 45 nor more than 60 days prior to the redemption date as to the redemption price at which the Debt Securities are to be redeemed and the aggregate principal amount of Debt Securities to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debt Securities or portions thereof (in integral multiples of $1,000) to be redeemed. SECTION 10.04 Payment of Debt Securities Called for Redemption. ------------------------------------------------ If notice of redemption has been given as provided in Section 10.03, the Debt Securities or portions of Debt Securities with respect to which such notice has been given shall become due and payable on the Redemption Date or the Special Redemption Date (as the case may be) and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said Redemption Date or the Special Redemption Date (unless the Company shall default in the payment of such Debt Securities at the redemption price, together with interest accrued to said date) interest on the Debt Securities or portions of Debt Securities so called for redemption shall cease to accrue. On presentation and surrender of such Debt Securities at a place of payment specified in said notice, such Debt Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the Redemption Date or the Special Redemption Date (as the case may be). Upon presentation of any Debt Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debt Security or Debt Securities of authorized denominations in principal amount equal to the unredeemed portion of the Debt Security so presented. 51 ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 11.01 Company May Consolidate, etc., on Certain Terms. ----------------------------------------------- Nothing contained in this Indenture or in the Debt Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property or capital stock of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other corporation (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debt Securities in accordance with their terms, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property or capital stock. SECTION 11.02 Successor Entity to be Substituted. ---------------------------------- In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debt Securities. Such successor entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Debt Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debt Securities which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debt Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debt Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debt Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debt Securities had been issued at the date of the execution hereof. 52 SECTION 11.03 Opinion of Counsel to be Given to Trustee. ----------------------------------------- The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive, in addition to the Opinion of Counsel required by Section 9.05, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI. ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE SECTION 12.01 Discharge of Indenture. ---------------------- When (a) the Company shall deliver to the Trustee for cancellation all Debt Securities theretofore authenticated (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) and not theretofore canceled, or (b) all the Debt Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debt Securities (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debt Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 12.04, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.05, 2.06, 3.01, 3.02, 3.04, 6.06, 6.09 and 12.04 hereof, which shall survive until such Debt Securities shall mature or are redeemed, as the case may be, and are paid. Thereafter, Sections 6.06, 6.09 and 12.04 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debt Securities. 53 SECTION 12.02 Deposited Moneys to be Held in Trust by Trustee. ----------------------------------------------- Subject to the provisions of Section 12.04, all moneys deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debt Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. SECTION 12.03 Paying Agent to Repay Moneys Held. --------------------------------- Upon the satisfaction and discharge of this Indenture, all moneys then held by any paying agent of the Debt Securities (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 12.04 Return of Unclaimed Moneys. -------------------------- Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debt Securities and not applied but remaining unclaimed by the holders of Debt Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Debt Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debt Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 13.01 Indenture and Debt Securities Solely Corporate Obligations. ---------------------------------------------- No recourse for the payment of the principal of or premium, if any, or interest on any Debt Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debt Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Company or of any successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such 54 liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debt Securities. ARTICLE XIV MISCELLANEOUS PROVISIONS SECTION 14.01 Successors. ---------- All the covenants, stipulations, promises and agreements of the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. SECTION 14.02 Official Acts by Successor Entity. --------------------------------- Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. SECTION 14.03 Surrender of Company Powers. --------------------------- The Company by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor. SECTION 14.04 Addresses for Notices, etc. -------------------------- Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Securityholders on the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company at 1380 Lawrence Street, Suite 1400, Denver, CO 80204, Attention: T. Allen McConnell. Any notice, direction, request or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of Wilmington Trust Company at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration. SECTION 14.05 Governing Law. ------------- This Indenture and each Debt Security shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles thereof. 55 SECTION 14.06 Evidence of Compliance with Conditions Precedent. ------------------------------------------------ Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture (except certificates delivered pursuant to Section 3.05) shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 14.07 Non-Business Days. ----------------- In any case where the date of payment of interest on or principal of the Debt Securities is not a Business Day, the payment of such interest on or principal of the Debt Securities need not be made on such date but may be made on the next succeeding Business Day, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date, except if such Business Day is in the next succeeding calendar year, such payment will be made on the immediately preceding Business Day. SECTION 14.08 Table of Contents, Headings, etc. -------------------------------- The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 14.09 Execution in Counterparts. ------------------------- This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 56 SECTION 14.10 Separability. ------------ In case any one or more of the provisions contained in this Indenture or in the Debt Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debt Securities, but this Indenture and such Debt Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 14.11 Assignment. ---------- The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided, that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 14.12 Acknowledgment of Rights. ------------------------ The Company acknowledges that, with respect to any Debt Securities held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debt Securities held as the assets of the Trust after the holders of a majority in Liquidation Amount of the Capital Securities of the Trust have so directed in writing such Institutional Trustee, a holder of record of such Capital Securities may to the fullest extent permitted by law institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debt Securities on the date such interest (or premium, if any) or principal is otherwise due and payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the Debt Securities having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debt Securities. 57 ARTICLE XV SUBORDINATION OF DEBT SECURITIES SECTION 15.01 Agreement to Subordinate. ------------------------ The Company covenants and agrees, and each holder of Debt Securities issued hereunder and under any supplemental indenture (the "Additional Provisions") by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debt Securities shall be issued subject to the provisions of this Article XV; and each holder of a Debt Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, and premium, if any, and interest on all Debt Securities issued hereunder and under any Additional Provisions shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any default or Event of Default hereunder. SECTION 15.02 Default on Senior Indebtedness. ------------------------------ In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any applicable grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full then, in either case, no payment shall be made by the Company with respect to the principal of, or premium, if any, or interest on the Debt Securities. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall, subject to Section 15.06, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. SECTION 15.03 Liquidation; Dissolution; Bankruptcy. ------------------------------------ Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in 58 money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debt Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness of the Company, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debt Securities to the payment of all Senior Indebtedness of the Company, that may at the time be outstanding, provided, that (a) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (b) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article IX of this Indenture shall not be 59 deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article IX of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04 Subrogation. ----------- Subject to the payment in full of all Senior Indebtedness of the Company, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debt Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debt Securities be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Debt Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture, any Additional Provisions or in the Debt Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Debt Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debt Securities the principal of (and premium, if any) and interest on the Debt Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debt Securities and creditors of the Company, other than the holders of Senior Indebtedness of the Company, nor shall anything herein or therein prevent the Trustee or the holder of any Debt Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, 60 agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.05 Trustee to Effectuate Subordination. ----------------------------------- Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. SECTION 15.06 Notice by the Company. --------------------- The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture or any Additional Provisions, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Debt Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the 61 Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 15.07 Rights of the Trustee; Holders of Senior Indebtedness. ---------------------------------------- The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture or any Additional Provisions shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture or any Additional Provisions against the Trustee. The Trustee shall not owe or be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06. SECTION 15.08 Subordination May Not Be Impaired. --------------------------------- No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debt Securities to the holders of such Senior Indebtedness, do any one or more of the following: (a) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which 62 such Senior Indebtedness is outstanding; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (c) release any Person liable in any manner for the collection of such Senior Indebtedness; and (d) exercise or refrain from exercising any rights against the Company, and any other Person. Wilmington Trust Company, in its capacity as Trustee, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions herein above set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. MATRIX BANCORP, INC. By -------------------------------------- Name: Title: WILMINGTON TRUST COMPANY, as Trustee By --------------------------------------- Name: Title: 63 EXHIBIT A FORM OF FLOATING RATE JUNIOR SUBORDINATED DEBT SECURITY DUE 2031 [FORM OF FACE OF SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY A-1-1 REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED. A-1-2 Floating Rate Junior Subordinated Debt Security due 2031 of MATRIX BANCORP, INC. -------------------- Matrix Bancorp, Inc., a savings and loan holding company (the "Company"), for value received promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Institutional Trustee for Matrix Bancorp Capital Trust IV (the "Holder") or registered assigns, the principal sum of Five Million One Hundred Fifty Five Thousand Dollars ($5,155,000) on December 8, 2031, and to pay interest on said principal sum from November 28, 2001, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, semi-annually (subject to deferral as set forth herein) in arrears on June 8 and December 8 of each year commencing June 8, 2002, at a variable per annum rate equal to LIBOR (as defined in the Indenture) plus 3.75% (the "Interest Rate") (provided, that the applicable Interest Rate may not exceed 11.0% through the Interest Payment Date in December 2006) until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at an annual rate equal to the Interest Rate in effect for each such Extension Period compounded semi-annually. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. In the event that any date on which the principal or interest is payable on this Debt Security is not a Business Day, then payment payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debt Security (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, except that interest and any Deferred Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date and may be paid to the Person in whose name this Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debt Securities not less than 10 days prior to such special record date, all as more fully provided in the Indenture. The principal of and interest on this Debt Security shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment A-1-3 of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debt Security Register or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debt Security is the Institutional Trustee, the payment of the principal of and interest on this Debt Security will be made in immediately available funds at such place and to such account as may be designated by the Trustee. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to 10 consecutive semi-annual periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at the Interest Rate, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, both to the extent permitted by law. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date and provided, further, however, during any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extension Period, the A-1-4 Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. The Company must give the Trustee notice of its election to begin such Extension Period at least one Business Day prior to the earlier of (i) the date interest on the Debt Securities would have been payable except for the election to begin such Extension Period or (ii) the date such interest is payable, but in any event not later than the related regular record date. The indebtedness evidenced by this Debt Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debt Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee such holder's attorney-in-fact for any and all such purposes. Each holder hereof, by such holder's acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. The Company waives demand, presentment for payment, notice of nonpayment, notice of protest, and all other notices. This Debt Security shall not be entitled to any benefit under the Indenture hereinafter referred to and shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debt Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. A-1-5 IN WITNESS WHEREOF, the Company has duly executed this certificate. MATRIX BANCORP, INC. By: ------------------------------------- Name: Title: Dated: _______ CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Debt Securities referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Trustee By: ------------------------------------ Authorized Officer Dated: _______ A-1-6 [FORM OF REVERSE OF SECURITY] --------------------------- This Debt Security is one of a duly authorized series of Debt Securities of the Company, all issued or to be issued pursuant to an Indenture (the "Indenture") dated as of November 28, 2001, duly executed and delivered between the Company and Wilmington Trust Company, as Trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debt Securities (referred to herein as the "Debt Securities") of which this Debt Security is a part. The summary of the terms of this Debt Security contained herein does not purport to be complete and is qualified by reference to the Indenture. Upon the occurrence and continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event, this Debt Security may become due and payable, in whole but not in part, at any time, within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event (the "Special Redemption Date"), as the case may be, at the Special Redemption Price. The Company shall also have the right to redeem this Debt Security at the option of the Company, in whole or in part, on any June 8 or December 8 on or after December 8, 2006 (a "Redemption Date"), at the Redemption Price. Any redemption pursuant to the preceding paragraph will be made, subject to the receipt by the Company of prior approval from the Office of Thrift Supervision (the "OTS") if then required under applicable capital guidelines or policies of the OTS, upon not less than 30 days' nor more than 60 days' notice. If the Debt Securities are only partially redeemed by the Company, the Debt Securities will be redeemed pro rata or by lot or by any other method utilized by the Trustee. "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debt Securities being redeemed pursuant to Section 10.02 or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006, together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debt Securities, discounted to the Special Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 0.50%, plus, in the case of either (a) or (b), accrued and unpaid interest on such Debt Securities to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. A-1-7 "Comparable Treasury Issue" means with respect to any Special Redemption Date the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Trustee receives fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Primary Treasury Dealer" shall mean a primary United States Government securities dealer in New York City. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Company shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, A-1-8 calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. In the event of redemption of this Debt Security in part only, a new Debt Security or Debt Securities for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debt Securities may be declared due and payable, and upon such declaration of acceleration shall become due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby, as specified in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of the Debt Securities, or reduce the principal amount thereof or any redemption premium thereon, or reduce the rate or extend the time of payment of interest thereon, or make the principal of, or any interest or premium on, the Debt Securities payable in any coin or currency other than that provided in the Debt Securities, or impair or affect the right of any holder of Debt Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Debt Securities, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding, on behalf of all of the holders of the Debt Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Debt Securities. Any such consent or waiver by the registered holder of this Debt Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debt Security and of any Debt Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debt Security. No reference herein to the Indenture and no provision of this Debt Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Debt Security at the time and place and at the rate and in the money herein prescribed. A-1-9 As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debt Security is transferable by the registered holder hereof on the Debt Security Register of the Company, upon surrender of this Debt Security for registration of transfer at the office or agency of the Trustee in Wilmington, Delaware accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Debt Securities of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such registration of transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debt Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and the Debt Security registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debt Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Debt Securities are issuable only in registered certificated form without coupons. As provided in the Indenture and subject to certain limitations herein and therein set forth, Debt Securities are exchangeable for a like aggregate principal amount of Debt Securities of a different authorized denomination, as requested by the holder surrendering the same. All terms used in this Debt Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE DEBT SECURITIES, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. A-1-10 EX-4 5 amdrestdectrust.txt 4.27 EXHIBIT 4.27 ============================================== AMENDED AND RESTATED DECLARATION OF TRUST MATRIX BANCORP CAPITAL TRUST IV Dated as of November 28, 2001 ==============================================
TABLE OF CONTENTS Page ARTICLE I SECTION 1.1. Definitions..........................................................................2 ARTICLE II SECTION 2.1. Name..................................................................................10 SECTION 2.2. Office................................................................................10 SECTION 2.3. Purpose...............................................................................10 SECTION 2.4. Authority.............................................................................10 SECTION 2.5. Title to Property of the Trust........................................................10 SECTION 2.6. Powers and Duties of the Trustees and the Administrators..............................11 SECTION 2.7. Prohibition of Actions by the Trust and the Trustees..................................16 SECTION 2.8. Powers and Duties of the Institutional Trustee........................................16 SECTION 2.9. Certain Duties and Responsibilities of the Trustees and Administrators................18 SECTION 2.10. Certain Rights of Institutional Trustee...............................................20 SECTION 2.11. Delaware Trustee......................................................................23 SECTION 2.12. Execution of Documents................................................................23 SECTION 2.13. Not Responsible for Recitals or Issuance of Securities................................23 SECTION 2.14. Duration of Trust.....................................................................23 SECTION 2.15. Mergers...............................................................................23 ARTICLE III SECTION 3.1. Sponsor's Purchase of Common Securities...............................................25 SECTION 3.2. Responsibilities of the Sponsor.......................................................26 ARTICLE IV SECTION 4.1. Number of Trustees....................................................................26 SECTION 4.2. Delaware Trustee......................................................................26 SECTION 4.3. Institutional Trustee; Eligibility....................................................27 SECTION 4.4. Certain Qualifications of the Delaware Trustee Generally..............................27 SECTION 4.5. Administrators........................................................................27 SECTION 4.6. Initial Delaware Trustee..............................................................27 SECTION 4.7. Appointment, Removal and Resignation of Trustees and Administrators...................27 SECTION 4.8. Vacancies Among Trustees..............................................................29 SECTION 4.9. Effect of Vacancies...................................................................30 SECTION 4.10. Meetings of the Trustees and the Administrators.......................................30 SECTION 4.11. Delegation of Power...................................................................30 SECTION 4.12. Conversion, Consolidation or Succession to Business...................................31 ARTICLE V SECTION 5.1. Distributions.........................................................................31 i ARTICLE VI SECTION 6.1. General Provisions Regarding Securities...............................................31 SECTION 6.2. Paying Agent, Transfer Agent, Calculation Agent and Registrar.........................32 SECTION 6.3. Form and Dating.......................................................................33 SECTION 6.4. Mutilated, Destroyed, Lost or Stolen Certificates.....................................33 SECTION 6.5. Temporary Securities..................................................................34 SECTION 6.6. Cancellation..........................................................................34 SECTION 6.7. Rights of Holders; Waivers of Past Defaults...........................................34 ARTICLE VII SECTION 7.1. Dissolution and Termination of Trust..................................................36 ARTICLE VIII SECTION 8.1. General...............................................................................37 SECTION 8.2. Transfer Procedures and Restrictions..................................................38 SECTION 8.3. Deemed Security Holders...............................................................41 ARTICLE IX SECTION 9.1. Liability.............................................................................41 SECTION 9.2. Exculpation...........................................................................42 SECTION 9.3. Fiduciary Duty........................................................................42 SECTION 9.4. Indemnification.......................................................................43 SECTION 9.5. Outside Businesses....................................................................46 SECTION 9.6. Compensation; Fee.....................................................................46 ARTICLE X SECTION 10.1. Fiscal Year..........................................................................46 SECTION 10.2. Certain Accounting Matters...........................................................47 SECTION 10.3. Banking..............................................................................47 SECTION 10.4. Withholding..........................................................................48 ARTICLE XI SECTION 11.1. Amendments...........................................................................48 SECTION 11.2. Meetings of the Holders of Securities; Action by Written Consent.....................50 ARTICLE XII SECTION 12.1. Representations and Warranties of Institutional Trustee..............................52 SECTION 12.2. Representations and Warranties of Delaware Trustee...................................52 ARTICLE XIII SECTION 13.1. Notices..............................................................................53 SECTION 13.2. Governing Law........................................................................55 SECTION 13.3. Submission to Jurisdiction...........................................................55 SECTION 13.4. Intention of the Parties.............................................................55 SECTION 13.5. Headings.............................................................................56 SECTION 13.6. Successors and Assigns...............................................................56 SECTION 13.7. Partial Enforceability...............................................................56 SECTION 13.8. Counterparts.........................................................................56
ii ANNEXES AND EXHIBITS ANNEX I Terms of Floating Rate MMCapSSM EXHIBIT A-1 Form of Capital Securities Certificate EXHIBIT A-2 Form of Common Security Certificate EXHIBIT B Form of Transferee Certificate to be Executed by Transferees Other than QIBs EXHIBIT C Form of Transferee Certificate to be Executed for QIBs iii AMENDED AND RESTATED DECLARATION OF TRUST OF MATRIX BANCORP CAPITAL TRUST IV November 28, 2001 AMENDED AND RESTATED DECLARATION OF TRUST (this "Declaration") dated and effective as of November 28, 2001, by the Trustees (as defined herein), the Administrators (as defined herein), the Sponsor (as defined herein) and the holders, from time to time, of undivided beneficial interests in the assets of the Trust (as defined herein) to be issued pursuant to this Declaration; WHEREAS, certain of the Trustees, the Administrators and the Sponsor established Matrix Bancorp Capital Trust IV (the "Trust"), a statutory business trust under the Business Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of November 9, 2001 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on November 9, 2001, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain debentures of the Debenture Issuer (as defined herein) in connection with the MM Community Funding II, Ltd transaction; WHEREAS, as of the date hereof, no interests in the assets of the Trust have been issued; and WHEREAS, all of the Trustees, the Administrators and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a statutory business trust under the Business Trust Act and that this Declaration constitutes the governing instrument of such statutory business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration and, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties, intending to be legally bound hereby, amend and restate in its entirety the Original Declaration and agree as follows: 1 ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1. Definitions Unless the context otherwise requires: (a) Capitalized terms used in this Declaration but not defined in the preamble above or elsewhere herein have the respective meanings assigned to them in this Section 1.1 or, if not defined in this Section 1.1 or elsewhere herein, in the Indenture; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act (as defined herein) has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Additional Interest" has the meaning set forth in Section 3.06 of the Indenture. "Administrative Action" has the meaning set forth in paragraph 4(a) of Annex I. "Administrators" means each of T. Allen McConnell and David W. Kloos, solely in such Person's capacity as Administrator of the Trust created and continued hereunder and not in such Person's individual capacity, or such Administrator's successor in interest in such capacity, or any successor appointed as herein provided. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Authorized Officer" of a Person means any Person that is authorized to bind such Person. "Bankruptcy Event" means, with respect to any Person: 2 (a) a court having jurisdiction in the premises enters a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or for any substantial part of its property, or orders the winding-up or liquidation of its affairs, and such decree, appointment or order remains unstayed and in effect for a period of 90 consecutive days; or (b) such Person commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, consents to the entry of an order for relief in an involuntary case under any such law, or consents to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of such Person of any substantial part of its property, or makes any general assignment for the benefit of creditors, or fails generally to pay its debts as they become due. "Business Day" means any day other than Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware, New York City or Denver, Colorado are permitted or required by any applicable law or executive order to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Codess.3801 et seq., as it may be amended from time to time, or any successor legislation. "Calculation Agent" has the meaning set forth in Section 1.01 of the Indenture. "Capital Securities" has the meaning set forth in Section 6.1(a). "Capital Security Certificate" means a definitive Certificate representing a Capital Security substantially in the form of Exhibit A-1. "Capital Treatment Event" has the meaning set forth in paragraph 4(a) of Annex I. "Certificate" means any certificate evidencing Securities. "Certificate of Trust" means the certificate of trust filed with the Secretary of State of the State of Delaware with respect to the Trust, as amended and restated from time to time. "Closing Date" has the meaning set forth in the Placement Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the Securities and Exchange Commission. 3 "Common Securities" has the meaning set forth in Section 6.1(a). "Common Security Certificate" means a definitive Certificate registered in the name of the Holder representing a Common Security substantially in the form of Exhibit A-2. "Company Indemnified Person" means (a) any Administrator; (b) any Affiliate of any Administrator; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrator; or (d) any officer, employee or agent of the Trust or its Affiliates. "Comparable Treasury Issue" has the meaning set forth in paragraph 4(a) of Annex I. "Comparable Treasury Price" has the meaning set forth in paragraph 4(a) of Annex I. "Corporate Trust Office" means the office of the Institutional Trustee at which the corporate trust business of the Institutional Trustee shall, at any particular time, be principally administered, which office shall at all times be located in the United States and at the date of execution of this Declaration is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. "Coupon Rate" has the meaning set forth in paragraph 2(a) of Annex I. "Covered Person" means: (a) any Administrator, officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holder of Securities. "Debenture Issuer" means Matrix Bancorp, Inc., a savings and loan holding company incorporated in the State of Colorado, in its capacity as issuer of the Debentures under the Indenture. "Debenture Trustee" means Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the Floating Rate Junior Subordinated Debt Securities due 2031 to be issued by the Debenture Issuer under the Indenture. "Deferred Interest" means any interest on the Debentures that would have been overdue and unpaid for more than one Distribution Payment Date but for the imposition of an Extension Period, and the interest that shall accrue (to the extent that the payment of such interest is legally enforceable) on such interest at the Coupon Rate in effect for each such Extension Period, compounded 4 semi-annually from the date on which such Deferred Interest would otherwise have been due and payable until paid or made available for payment. "Definitive Capital Securities" means any Capital Securities in definitive form issued by the Trust. "Delaware Trustee" has the meaning set forth in Section 4.2. "Direct Action" has the meaning set forth in Section 2.8(e). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 5.1. "Distribution Payment Date" has the meaning set forth in paragraph 2(b) of Annex I. "Event of Default" means the occurrence of an Indenture Event of Default. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Extension Period" has the meaning set forth in paragraph 2(b) of Annex I. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Fiduciary Indemnified Person" shall mean each of the Institutional Trustee (including in its individual capacity), the Delaware Trustee (including in its individual capacity), any Affiliate of the Institutional Trustee or the Delaware Trustee, and any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Institutional Trustee and the Delaware Trustee. "Fiscal Year" has the meaning set forth in Section 10.1 "Guarantee" means the guarantee agreement to be dated as of November 28, 2001, of the Sponsor in respect of the Capital Securities. "Holder" means a Person in whose name a Certificate representing a Security is registered on the register maintained by or on behalf of the Registrar, such Person being a beneficial owner within the meaning of the Business Trust Act. "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture dated as of November 28, 2001, among the Debenture Issuer and the Debenture Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued. 5 "Indenture Event of Default" means an "Event of Default" as defined in the Indenture. "Institutional Trustee" means the Trustee meeting the eligibility requirements set forth in Section 4.3. "Interest" means any interest due on the Debentures, including any Deferred Interest and Defaulted Interest (as each such term is defined in the Indenture). "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Investment Company Event" has the meaning set forth in paragraph 4(a) of Annex I. "Legal Action" has the meaning set forth in Section 2.8(e). "LIBOR Banking Day" has the meaning set forth in paragraph 2(b)(1) of Annex I. "LIBOR Business Day" has the meaning set forth in paragraph 2(b)(1) of Annex I. "LIBOR Determination Date" has the meaning set forth in paragraph 2(b)(1) of Annex I. "Liquidation" has the meaning set forth in paragraph 3 of Annex I. "Liquidation Distribution" has the meaning set forth in paragraph 3 of Annex I. "Majority in liquidation amount of the Securities" means Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "OTS" has the meaning set forth in paragraph 3 of Annex I. "Officers' Certificates" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' 6 Certificate delivered with respect to compliance with a condition or covenant provided for it in this Declaration shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Paying Agent" has the meaning specified in Section 6.2. "Payment Amount" has the meaning set forth in Section 5.1. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Placement Agreement" means the Placement Agreement relating to the offering and sale of Capital Securities. "PORTAL" has the meaning set forth in Section 2.6(a)(i). "Primary Treasury Dealer" has the meaning set forth in paragraph 4(a) of Annex I. "Property Account" has the meaning set forth in Section 2.8(c). "Pro Rata" has the meaning set forth in paragraph 8 of Annex I. "QIB" means a "qualified institutional buyer" as defined under Rule 144A. "Quorum" means a majority of the Administrators or, if there are only two Administrators, both of them. "Quotation Agent" has the meaning set forth in paragraph 4(a) of Annex I. 7 "Redemption/Distribution Notice" has the meaning set forth in paragraph 4(e) of Annex I. "Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I. "Registrar" has the meaning set forth in Section 6.2. "Reference Treasury Dealer" has the meaning set forth in paragraph 4(a) of Annex I. "Reference Treasury Dealer Quotations" has the meaning set forth in paragraph 4(a) of Annex I. "Relevant Trustee" has the meaning set forth in Section 4.7(a). "Remaining Life" has the meaning set forth in paragraph 4(a) of Annex I. "Responsible Officer" means, with respect to the Institutional Trustee, any officer within the Corporate Trust Office of the Institutional Trustee with direct responsibility for the administration of this Declaration, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Corporate Trust Office of the Institutional Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Restricted Securities Legend" has the meaning set forth in Section 8.2(c). "Rule 144A" means Rule 144A under the Securities Act. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act. "Rule 3a-7" means Rule 3a-7 under the Investment Company Act. "Securities" means the Common Securities and the Capital Securities. "Securities Act" means the Securities Act of 1933, as amended. "Sponsor" means Matrix Bancorp, Inc., a savings and loan holding company that is a U.S. Person incorporated in Colorado, or any successor entity in a merger, consolidation or amalgamation that is a U.S. Person, in its capacity as sponsor of the Trust. "Successor Delaware Trustee" has the meaning set forth in Section 4.7(a). 8 "Successor Entity" has the meaning set forth in Section 2.15(b). "Successor Institutional Trustee" has the meaning set forth in Section 4.7(a). "Successor Securities" has the meaning set forth in Section 2.15(b). "Super Majority" has the meaning set forth in paragraph 5(b) of Annex I. "Tax Event" has the meaning set forth in paragraph 4(a) of Annex I. "10% in liquidation amount of the Securities" means Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Transfer Agent" has the meaning set forth in Section 6.2. "Treasury Rate" has the meaning set forth in paragraph 4(a) of Annex I. "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Property Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Institutional Trustee pursuant to the trusts of this Declaration. "U.S. Person" means a United States Person as defined a Section 7701(a)(30) of the Code. 9 ARTICLE II ORGANIZATION SECTION 2.1. Name. The Trust is named "Matrix Bancorp Capital Trust IV," as such name may be modified from time to time by the Administrators following written notice to the Institutional Trustee and the Holders of the Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrators. SECTION 2.2. Office. The address of the principal office of the Trust, which shall be in a State of the United States or the District of Columbia, is 1380 Lawrence Street, Suite 1400, Denver, CO 80204. On ten Business Days written notice to the Institutional Trustee and the Holders of the Securities, the Administrators may designate another principal office, which shall be in a State of the United States or the District of Columbia. SECTION 2.3. Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell the Securities representing undivided beneficial interests in the assets of the Trust, (b) to invest the gross proceeds from such sale to acquire the Debentures and (c) except as otherwise limited herein, to engage in only those other activities incidental thereto that are deemed necessary or advisable by the Institutional Trustee, including, without limitation, those activities specified in this Declaration. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. SECTION 2.4. Authority. Except as specifically provided in this Declaration, the Institutional Trustee shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by a Trustee on behalf of the Trust and in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. The Administrators shall have only those ministerial duties set forth herein with respect to accomplishing the purposes of the Trust and are not intended to be trustees or fiduciaries with respect to the Trust or the Holders. The Institutional Trustee shall have the right, but shall not be obligated except as provided in Section 2.6, to perform those duties assigned to the Administrators. SECTION 2.5. Title to Property of the Trust. Except as provided in Section 2.8 with respect to the Debentures and the Property Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. 10 SECTION 2.6. Powers and Duties of the Trustees and the Administrators. (a) The Trustees and the Administrators shall conduct the affairs of the Trust in accordance with the terms of this Declaration. Subject to the limitations set forth in paragraph (b) of this Section, and in accordance with the following provisions (i) and (ii), the Administrators and, at the direction of the Administrators, the Trustees, shall have the authority to enter into all transactions and agreements determined by the Administrators to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees or the Administrators, as the case may be, under this Declaration, and to perform all acts in furtherance thereof, including without limitation, the following: (i) Each Administrator shall have the power, duty and authority, and is hereby authorized, to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Securities; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, such agreements as may be necessary or desirable in connection with the purposes and function of the Trust, including agreements with the Paying Agent, a debenture subscription agreement between the Trust and the Sponsor and a common securities subscription agreement between the Trust and the Sponsor; (C) ensuring compliance with the Securities Act, applicable state securities or blue sky laws; (D) if and at such time determined by the Sponsor at the request of the Holders, assisting in the designation of the Capital Securities for trading in the Private Offering, Resales and Trading through the Automatic Linkages ("PORTAL") system if available; (E) the sending of notices (other than notices of default) and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration, including notice of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (F) the appointment of a Paying Agent, Transfer Agent and Registrar in accordance with this Declaration; (G) execution and delivery of the Securities in accordance with this Declaration; 11 (H) execution and delivery of closing certificates, pursuant to the Placement Agreement and the application for a taxpayer identification number; (I) unless otherwise determined by the Holders of a Majority in liquidation amount of the Securities or as otherwise required by the Business Trust Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrators) any documents that the Administrators have the power to execute pursuant to this Declaration; (J) the taking of any action incidental to the foregoing as the Sponsor or an Administrator may from time to time determine is necessary or advisable to give effect to the terms of this Declaration for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder); (K) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Capital Securities and Holders of Common Securities as to such actions and applicable record dates; (L) to duly prepare and file on behalf of the Trust all applicable tax returns and tax information reports that are required to be filed with respect to the Trust; (M) to negotiate the terms of, and the execution and delivery of, the Placement Agreement providing for the sale of the Capital Securities; (N) to employ or otherwise engage employees, agents (who may be designated as officers with titles), managers, contractors, advisors, attorneys and consultants and pay reasonable compensation for such services; (O) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (P) to give the certificate required by ss. 314(a)(4) of the Trust Indenture Act to the Institutional Trustee, which certificate may be executed by an Administrator; and (Q) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of each jurisdiction (other than the State of Delaware) in which such existence is 12 necessary to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created. (ii) As among the Trustees and the Administrators, the Institutional Trustee shall have the power, duty and authority, and is hereby authorized, to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Property Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Property Account; (D) the distribution through the Paying Agent of amounts owed to the Holders in respect of the Securities; (E) the exercise of all of the rights, powers and privileges of a holder of the Debentures; (F) the sending of notices of default and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration; (G) the distribution of the Trust Property in accordance with the terms of this Declaration; (H) to the extent provided in this Declaration, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (I) after any Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) (provided, that such Event of Default is not by or with respect to the Institutional Trustee), the taking of any action incidental to the foregoing as the Institutional Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Declaration and protect and conserve the Trust Property for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder); (J) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware to protect the limited liability of the Holders of 13 the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created; and (K) to undertake any actions set forth in ss. 317(a) of the Trust Indenture Act. (iii) The Institutional Trustee shall have the power and authority, and is hereby authorized, to act on behalf of the Trust with respect to any of the duties, liabilities, powers or the authority of the Administrators set forth in Section 2.6(a)(i)(E) and (F) herein but shall not have a duty to do any such act unless specifically requested to do so in writing by the Sponsor, and shall then be fully protected in acting pursuant to such written request; and in the event of a conflict between the action of the Administrators and the action of the Institutional Trustee, the action of the Institutional Trustee shall prevail. (b) So long as this Declaration remains in effect, the Trust (or the Trustees or Administrators acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, neither the Trustees nor the Administrators may cause the Trust to (i) acquire any investments or engage in any activities not authorized by this Declaration, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Holders, except as expressly provided herein, (iii) take any action that would cause (or in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer would cause) the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a lien on any of the Trust Property. The Institutional Trustee shall, at the sole cost and expense of the Trust subject to reimbursement under Section 9.6(b), defend all claims and demands of all Persons at any time claiming any lien on any of the Trust Property adverse to the interest of the Trust or the Holders in their capacity as Holders. (c) In connection with the issuance and sale of the Capital Securities, the Sponsor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Sponsor in furtherance of the following prior to the date of this Declaration are hereby ratified and confirmed in all respects): (i) the taking of any action necessary to obtain an exemption from the Securities Act; (ii) the determination of the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and the determination of any and all such acts, other than actions which must be taken by or on behalf of the Trust, and the advisement of and direction to the Trustees of actions they must take on behalf of the Trust, and the preparation for execution and 14 filing of any documents to be executed and filed by the Trust or on behalf of the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States in connection with the sale of the Capital Securities; and (iii) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrators, the Institutional Trustee and the Holders of a Majority in liquidation amount of the Common Securities are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that (i) the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act (in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer), and (ii) the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes(in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer) and (iii) the Trust will not take any action inconsistent with the treatment of the Debentures as indebtedness of the Debenture Issuer for United States federal income tax purposes (in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer). In this connection, the Institutional Trustee, the Administrators and the Holders of a Majority in liquidation amount of the Common Securities are authorized to take any action, not inconsistent with applicable laws or this Declaration, as amended from time to time, that each of the Institutional Trustee, the Administrators and such Holders determine in their discretion to be necessary or desirable for such purposes, even if such action adversely affects the interests of the Holders of the Capital Securities. (e) All expenses incurred by the Administrators or the Trustees pursuant to this Section 2.6 shall be reimbursed by the Sponsor, and the Trustees shall have no obligations with respect to such expenses. (f) The assets of the Trust shall consist of the Trust Property. (g) Legal title to all Trust Property shall be vested at all times in the Institutional Trustee (in its capacity as such) and shall be held and administered by the Institutional Trustee for the benefit of the Trust in accordance with this Declaration. (h) If the Institutional Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Declaration and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Institutional Trustee or to such Holder, then and in every such case the Sponsor, the Institutional Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Institutional Trustee and the Holders shall continue as though no such proceeding had been instituted. 15 SECTION 2.7. Prohibition of Actions by the Trust and the Trustees. The Trust shall not, and the Institutional Trustee and the Administrators shall not, and the Administrators shall cause the Trust not to, engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not, and the Institutional Trustee and the Administrators shall not cause the Trust to: (a) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of the Securities pursuant to the terms of this Declaration and of the Securities; (b) acquire any assets other than as expressly provided herein; (c) possess Trust Property for other than a Trust purpose; (d) make any loans or incur any indebtedness other than loans represented by the Debentures; (e) possess any power or otherwise act in such a way as to vary the Trust Property or the terms of the Securities; (f) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (g) other than as provided in this Declaration (including Annex I), (i) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received a written opinion of counsel experienced in such matters to the effect that such amendment, modification or termination will not cause the Trust to cease to be classified as a grantor trust for United States federal income tax purposes. SECTION 2.8. Powers and Duties of the Institutional Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Institutional Trustee in trust for the benefit of the Trust. The right, title and interest of the Institutional Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Institutional Trustee in accordance with Section 4.7. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Institutional Trustee shall not transfer its right, title and interest in the Debentures to the Administrators or to the Delaware Trustee. 16 (c) The Institutional Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Account") in the United States (as defined in Treasury Regulations section 301.7701-7), in the name of and under the exclusive control of the Institutional Trustee, and maintained in the Institutional Trustee's trust department, on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Institutional Trustee, deposit such funds into the Property Account and make payments to the Holders of the Capital Securities and Holders of the Common Securities from the Property Account in accordance with Section 5.1. Funds in the Property Account shall be held uninvested until disbursed in accordance with this Declaration; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Administrators in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain circumstances pursuant to the terms of the Securities. (d) The Institutional Trustee shall take all actions and perform such duties as may be specifically required of the Institutional Trustee pursuant to the terms of the Securities. (e) The Institutional Trustee may bring or defend, pay, collect, compromise, arbitrate, resort to legal action with respect to, or otherwise adjust claims or demands of or against, the Trust (a "Legal Action") which arise out of or in connection with an Event of Default of which a Responsible Officer of the Institutional Trustee has actual knowledge or the Institutional Trustee's duties and obligations under this Declaration or the Trust Indenture Act; provided, however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of the Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Holders of the Common Securities will be subrogated to the rights of such Holder of the Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of the Capital Securities in such 17 Direct Action; provided, however, that a Holder of the Capital Securities may exercise such right of subrogation only so long as an Event of Default with respect to the Capital Securities has occurred and is continuing. (f) The Institutional Trustee shall continue to serve as a Trustee until either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of the Securities pursuant to the terms of the Securities and this Declaration (including Annex I); or (ii) a Successor Institutional Trustee has been appointed and has accepted that appointment in accordance with Section 4.7. (g) The Institutional Trustee shall have the legal power to exercise all of the rights, powers and privileges of a Holder of the Debentures under the Indenture and, if an Event of Default occurs and is continuing, the Institutional Trustee may, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to this Declaration (including Annex I) and the terms of the Securities. The Institutional Trustee must exercise the powers set forth in this Section 2.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 2.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 2.3. SECTION 2.9. Certain Duties and Responsibilities of the Trustees and Administrators. (a) The Institutional Trustee, before the occurrence of any Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read into this Declaration against the Institutional Trustee. In case an Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)), has occurred (that has not been cured or waived pursuant to Section 6.7), the Institutional Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) The duties and responsibilities of the Trustees and the Administrators shall be as provided by this Declaration and, in the case of the Institutional Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Declaration shall require any Trustee or Administrator to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise 18 of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Declaration relating to the conduct or affecting the liability of or affording protection to the Trustees or Administrators shall be subject to the provisions of this Article. Nothing in this Declaration shall be construed to release a Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct. Nothing in this Declaration shall be construed to release an Administrator from liability for its own gross negligent action, its own gross negligent failure to act, or its own willful misconduct. To the extent that, at law or in equity, a Trustee or an Administrator has duties and liabilities relating to the Trust or to the Holders, such Trustee or Administrator shall not be liable to the Trust or to any Holder for such Trustee's or Administrator's good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of the Administrators or the Trustees otherwise existing at law or in equity, are agreed by the Sponsor and the Holders to replace such other duties and liabilities of the Administrators or the Trustees. (c) All payments made by the Institutional Trustee or a Paying Agent in respect of the Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Institutional Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Holder, by its acceptance of a Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees and the Administrators are not personally liable to it for any amount distributable in respect of any Security or for any other liability in respect of any Security. This Section 2.9(c) does not limit the liability of the Trustees expressly set forth elsewhere in this Declaration or, in the case of the Institutional Trustee, in the Trust Indenture Act. (d) No provision of this Declaration shall be construed to relieve the Institutional Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct with respect to matters that are within the authority of the Institutional Trustee under this Declaration, except that: (i) the Institutional Trustee shall not be liable for any error or judgment made in good faith by an Authorized Officer of the Institutional Trustee, unless it shall be proved that the Institutional Trustee was negligent in ascertaining the pertinent facts; (ii) the Institutional Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Capital Securities or the Common Securities, as applicable, relating to the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under this Declaration; 19 (iii) the Institutional Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Property Account shall be to deal with such property in a similar manner as the Institutional Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Institutional Trustee under this Declaration and the Trust Indenture Act; (iv) the Institutional Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor; and money held by the Institutional Trustee need not be segregated from other funds held by it except in relation to the Property Account maintained by the Institutional Trustee pursuant to Section 2.8(c)(i) and except to the extent otherwise required by law; and (v) the Institutional Trustee shall not be responsible for monitoring the compliance by the Administrators or the Sponsor with their respective duties under this Declaration, nor shall the Institutional Trustee be liable for any default or misconduct of the Administrators or the Sponsor. SECTION 2.10. Certain Rights of Institutional Trustee. Subject to the provisions of Section 2.9: (a) the Institutional Trustee may conclusively rely and shall fully be protected in acting or refraining from acting in good faith upon any resolution, written opinion of counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (b) if (i) in performing its duties under this Declaration, the Institutional Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Declaration, the Institutional Trustee finds the same ambiguous or inconsistent with any other provisions contained herein, or (iii) the Institutional Trustee is unsure of the application of any provision of this Declaration, then, except as to any matter as to which the Holders of Capital Securities are entitled to vote under the terms of this Declaration, the Institutional Trustee may deliver a notice to the Sponsor requesting the Sponsor's opinion as to the course of action to be taken and the Institutional Trustee shall take such action, or refrain from taking such action, as the Institutional Trustee in its sole discretion shall deem advisable and in the best interests of the Holders, in which event the Institutional Trustee shall have no liability except for its own negligence or willful misconduct; (c) any direction or act of the Sponsor or the Administrators contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate; 20 (d) whenever in the administration of this Declaration, the Institutional Trustee shall deem it desirable that a matter be proved or established before undertaking, suffering or omitting any action hereunder, the Institutional Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrators; (e) the Institutional Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Institutional Trustee may consult with counsel of its selection (which counsel may be counsel to the Sponsor or any of its Affiliates) and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice; the Institutional Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (g) the Institutional Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any of the Holders pursuant to this Declaration, unless such Holders shall have offered to the Institutional Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; provided, that nothing contained in this Section 2.10(g) shall be taken to relieve the Institutional Trustee, upon the occurrence of an Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) that has not been cured or waived, of its obligation to exercise the rights and powers vested in it by this Declaration; (h) the Institutional Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Holders, but the Institutional Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Institutional Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys and the Institutional Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent or attorney appointed with due care by it hereunder; 21 (j) whenever in the administration of this Declaration the Institutional Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Institutional Trustee (i) may request instructions from the Holders of the Common Securities and the Capital Securities, which instructions may be given only by the Holders of the same proportion in liquidation amount of the Common Securities and the Capital Securities as would be entitled to direct the Institutional Trustee under the terms of the Common Securities and the Capital Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be fully protected in acting in accordance with such instructions; (k) except as otherwise expressly provided in this Declaration, the Institutional Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; (l) when the Institutional Trustee incurs expenses or renders services in connection with a Bankruptcy Event, such expenses (including the fees and expenses of its counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally; (m) the Institutional Trustee shall not be charged with knowledge of an Event of Default unless a Responsible Officer of the Institutional Trustee has actual knowledge of such event or the Institutional Trustee receives written notice of such event from any Holder, except with respect to an Event of Default pursuant to Sections 5.01(a) or 5.01(b) of the Indenture (other than an Event of Default resulting from the default in the payment of Additional Interest or premium, if any, if the Institutional Trustee does not have actual knowledge or written notice that such payment is due and payable), of which the Institutional Trustee shall be deemed to have knowledge; (n) any action taken by the Institutional Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Institutional Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Institutional Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Institutional Trustee's or its agent's taking such action; and (o) no provision of this Declaration shall be deemed to impose any duty or obligation on the Institutional Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Institutional Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Institutional Trustee shall be construed to be a duty. 22 SECTION 2.11. Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 4.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of any of the Trustees or the Administrators described in this Declaration (except as may be required under the Business Trust Act). Except as set forth in Section 4.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of ss. 3807 of the Business Trust Act. SECTION 2.12. Execution of Documents. Unless otherwise determined in writing by the Institutional Trustee, and except as otherwise required by the Business Trust Act, the Institutional Trustee, or any one or more of the Administrators, as the case may be, is authorized to execute and deliver on behalf of the Trust any documents, agreements, instruments or certificates that the Trustees or the Administrators, as the case may be, have the power and authority to execute pursuant to Section 2.6. SECTION 2.13. Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration, the Debentures or the Securities. SECTION 2.14. Duration of Trust. The Trust, unless dissolved pursuant to the provisions of Article VII hereof, shall have existence for thirty-five (35) years from the Closing Date. SECTION 2.15. Mergers. (a) The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person, except as described in this Section 2.15(b) and (c) and except with respect to the distribution of Debentures to Holders of Securities pursuant to Section 7.1(a)(iv) of the Declaration or Section 4 of Annex I. (b) The Trust may, with the consent of the Administrators (which consent will not be unreasonably withheld) and without the consent of the Institutional Trustee, the Delaware Trustee or the Holders of the Capital Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to a trust organized as such under the laws of any State; provided, that: (i) if the Trust is not the survivor, such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust under the Securities; or 23 (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so that the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon Liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints, as the holder of the Debentures, a trustee of the Successor Entity that possesses the same powers and duties as the Institutional Trustee; (iii) the Capital Securities or any Successor Securities (excluding any securities substituted for the Common Securities) are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Capital Securities are then listed or quoted, if any; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, if the Capital Securities are then rated; (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of such Holders' interests in the Successor Entity as a result of such merger, consolidation, amalgamation or replacement); (vi) such Successor Entity has a purpose substantially identical to that of the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust has received a written opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of the Holders' interest in the Successor Entity); (B) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and 24 (C) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust (or the Successor Entity) will continue to be classified as a grantor trust for United States federal income tax purposes; (viii) the Sponsor guarantees the obligations of such Successor Entity under the Successor Securities to the same extent provided by the Guarantee, the Debentures and this Declaration; and (ix) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Institutional Trustee shall have received an Officers' Certificate of the Administrators and an opinion of counsel, each to the effect that all conditions precedent of this paragraph (b) to such transaction have been satisfied. (c) Notwithstanding Section 2.15(b), the Trust shall not, except with the consent of Holders of 100% in liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE III SPONSOR SECTION 3.1. Sponsor's Purchase of Common Securities. On the Closing Date, the Sponsor will purchase all of the Common Securities issued by the Trust, in an amount at least equal to 3% of the capital of the Trust, at the same time as the Capital Securities are sold. SECTION 3.2. Responsibilities of the Sponsor. In connection with the issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility to engage in, or direct the Administrators to engage in, the following activities: (a) to determine the States in which to take appropriate action to qualify or register for sale of all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States; 25 (b) to prepare for filing and request the Administrators to cause the filing by the Trust, as may be appropriate, of an application to the PORTAL system, for listing or quotation upon notice of issuance of any Capital Securities, as requested by the Holders of not less than a Majority in liquidation amount of the Capital Securities; and (c) to negotiate the terms of and/or execute and deliver on behalf of the Trust, the Placement Agreement and other related agreements providing for the sale of the Capital Securities. ARTICLE IV TRUSTEES AND ADMINISTRATORS SECTION 4.1. Number of Trustees. The number of Trustees initially shall be two, and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holder of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holder of the Common Securities; provided, however, that there shall be a Delaware Trustee if required by Section 4.2; and there shall always be one Trustee who shall be the Institutional Trustee, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements, in which case Section 2.11 shall have no application to such entity in its capacity as Institutional Trustee. SECTION 4.2. Delaware Trustee. If required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be: (a) a natural person who is a resident of the State of Delaware; or (b) if not a natural person, an entity which is organized under the laws of the United States or any State thereof or the District of Columbia, has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, including ss.3807 of the Business Trust Act. SECTION 4.3. Institutional Trustee; Eligibility. (a) There shall at all times be one Trustee which shall act as Institutional Trustee which shall: (i) not be an Affiliate of the Sponsor; (ii) not offer or provide credit or credit enhancement to the Trust; and 26 (iii) be a banking corporation organized and doing business under the laws of the United States of America or any State thereof or of the District of Columbia and authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 4.3(a)(iii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Institutional Trustee shall cease to be eligible to so act under Section 4.3(a), the Institutional Trustee shall immediately resign in the manner and with the effect set forth in Section 4.7(a). (c) If the Institutional Trustee has or shall acquire any "conflicting interest" within the meaning of ss. 310(b) of the Trust Indenture Act, the Institutional Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Declaration. (d) The initial Institutional Trustee shall be Wilmington Trust Company. SECTION 4.4. Certain Qualifications of the Delaware Trustee Generally. The Delaware Trustee shall be a U.S. Person and either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. SECTION 4.5. Administrators. Each Administrator shall be a U.S. Person. There shall at all times be at least one Administrator. Except where a requirement for action by a specific number of Administrators is expressly set forth in this Declaration and except with respect to any action the taking of which is the subject of a meeting of the Administrators, any action required or permitted to be taken by the Administrators may be taken by, and any power of the Administrators may be exercised by, or with the consent of, any one such Administrator acting alone. SECTION 4.6. Initial Delaware Trustee. The initial Delaware Trustee shall be Wilmington Trust Company. SECTION 4.7. Appointment, Removal and Resignation of Trustees and Administrators. (a) No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of this Section 4.7. 27 Subject to the immediately preceding paragraph, a Relevant Trustee may resign at any time by giving written notice thereof to the Holders of the Securities and by appointing a successor Relevant Trustee. Upon the resignation of the Institutional Trustee, the Institutional Trustee shall appoint a successor by requesting from at least three Persons meeting the eligibility requirements, its expenses and charges to serve as the successor Institutional Trustee on a form provided by the Administrators, and selecting the Person who agrees to the lowest expense and charges (the "Successor Institutional Trustee"). If the instrument of acceptance by the successor Relevant Trustee required by Section 4.7 shall not have been delivered to the Relevant Trustee within 60 days after the giving of such notice of resignation or delivery of the instrument of removal, the Relevant Trustee may petition, at the expense of the Trust, any federal, State or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Relevant Trustee. The Institutional Trustee shall have no liability for the selection of such successor pursuant to this Section 4.7. Unless an Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by an act of the Holder of a Majority in liquidation amount of the Common Securities. If any Trustee shall be so removed, the Holders of the Common Securities, by act of the Holders of a Majority in liquidation amount of the Common Securities then outstanding delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee, and such successor Trustee shall comply with the applicable requirements of this Section 4.7. If an Event of Default shall have occurred and be continuing, the Institutional Trustee or the Delaware Trustee, or both of them, may be removed by the act of the Holders of a Majority in liquidation amount of the Capital Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). If any Trustee shall be so removed, the Holders of Capital Securities, by act of the Holders of a Majority in liquidation amount of the Capital Securities then outstanding delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees, and such successor Trustee shall comply with the applicable requirements of this Section 4.7. If no successor Relevant Trustee shall have been so appointed by the Holders of a Majority in liquidation amount of the Capital Securities and accepted appointment in the manner required by this Section 4.7, within 30 days after delivery of an instrument of removal, the Relevant Trustee or any Holder who has been a Holder of the Securities for at least six months may, on behalf of himself and all others similarly situated, petition any federal, State or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a successor Relevant Trustee or Trustees. The Institutional Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 4.7(b) and shall give notice to the Sponsor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Institutional Trustee. 28 Notwithstanding the foregoing or any other provision of this Declaration, in the event a Delaware Trustee who is a natural person dies or is adjudged by a court to have become incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by the Institutional Trustee following the procedures in this Section 4.7 (with the successor being a Person who satisfies the eligibility requirement for a Delaware Trustee set forth in this Declaration) (the "Successor Delaware Trustee"). (b) In case of the appointment hereunder of a successor Relevant Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Securities and the Trust and (b) shall add to or change any of the provisions of this Declaration as shall be necessary to provide for or facilitate the administration of the Trust by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee; but, on request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Securities and the Trust subject to the payment of all unpaid fees, expenses and indemnities of such retiring Relevant Trustee. (c) No Institutional Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Institutional Trustee or Successor Delaware Trustee, as the case may be. (d) The Holders of the Capital Securities will have no right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Holders of the Common Securities. (e) Any successor Delaware Trustee shall file an amendment to the Certificate of Trust with the Delaware Secretary of State identifying the name and principal place of business of such Delaware Trustee in the State of Delaware. SECTION 4.8. Vacancies Among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 4.1, or if the number of Trustees is increased pursuant to Section 4.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Trustees or, if there are more than two, a majority of the Trustees shall be 29 conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 4.7. SECTION 4.9. Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, terminate or annul the Trust or terminate this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled by the appointment of a Trustee in accordance with Section 4.7, the Institutional Trustee shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. SECTION 4.10. Meetings of the Trustees and the Administrators. Meetings of the Trustees or the Administrators shall be held from time to time upon the call of any Trustee or Administrator, as applicable. Regular meetings of the Trustees and the Administrators, respectively, may be in person in the United States or by telephone, at a place (if applicable) and time fixed by resolution of the Trustees or the Administrators, as applicable. Notice of any in-person meetings of the Trustees or the Administrators shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Trustees or the Administrators or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Trustee or an Administrator, as the case may be, at a meeting shall constitute a waiver of notice of such meeting except where a Trustee or an Administrator, as the case may be, attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Trustees or the Administrators, as the case may be, may be taken at a meeting by vote of a majority of the Trustees or the Administrators present (whether in person or by telephone) and eligible to vote with respect to such matter; provided, that, in the case of the Administrators, a Quorum is present, or without a meeting by the unanimous written consent of the Trustees or the Administrators, as the case may be. Meetings of the Trustees and the Administrators together shall be held from time to time upon the call of any Trustee or Administrator. SECTION 4.11. Delegation of Power. (a) Any Trustee or any Administrator, as the case may be, may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 that is a U.S. Person his or her power for the purpose of executing any documents, instruments or other writings contemplated in Section 2.6; and (b) the Trustees shall have power to delegate from time to time to such of their number or to any officer of the Trust that is a U.S. Person, the doing of such things and the execution of such instruments or other writings either in the name of the Trust or the names of the Trustees or otherwise as the Trustees 30 may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. SECTION 4.12. Conversion, Consolidation or Succession to Business. Any Person into which the Institutional Trustee or the Delaware Trustee, as the case may be, may be merged or converted or with which either may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Institutional Trustee or the Delaware Trustee, as the case may be, shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Institutional Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Institutional Trustee or the Delaware Trustee, as the case may be, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such Person shall be otherwise qualified and eligible under this Article and, provided, further, that such Person shall file an amendment to the Certificate of Trust with the Delaware Secretary of State as contemplated in Section 4.7(e). ARTICLE V DISTRIBUTIONS SECTION 5.1. Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. Distributions shall be made on the Capital Securities and the Common Securities in accordance with the preferences set forth in their respective terms. If and to the extent that the Debenture Issuer makes a payment of interest (including any Additional Interest or Deferred Interest) and/or principal on the Debentures held by the Institutional Trustee (the amount of any such payment being a "Payment Amount"), the Institutional Trustee shall and is directed, to the extent funds are available in the Property Account for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders. ARTICLE VI ISSUANCE OF SECURITIES SECTION 6.1. General Provisions Regarding Securities. (a) The Administrators shall on behalf of the Trust issue one series of capital securities, evidenced by a certificate substantially in the form of Exhibit A-1, representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Capital Securities") and one series of common securities, evidenced by a certificate substantially in the form of Exhibit A-2, representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Common Securities"). The Trust shall issue no securities or other interests in the assets of the Trust other than the Capital Securities and the Common Securities. The Capital Securities rank pari passu and payment thereon shall be made Pro Rata with the Common Securities except that, where an Event of Default has 31 occurred and is continuing, the rights of Holders of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights to payment of the Holders of the Capital Securities. (b) The Certificates shall be signed on behalf of the Trust by one or more Administrators. Such signature shall be the facsimile or manual signature of any Administrator. In case any Administrator of the Trust who shall have signed any of the Securities shall cease to be such Administrator before the Certificates so signed shall be delivered by the Trust, such Certificates nevertheless may be delivered as though the person who signed such Certificates had not ceased to be such Administrator; and any Certificate may be signed on behalf of the Trust by such person who, at the actual date of execution of such Security, shall be an Administrator of the Trust, although at the date of the execution and delivery of the Declaration any such person was not such an Administrator. A Capital Security shall not be valid until authenticated by the manual signature of an Authorized Officer of the Institutional Trustee. Such signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. Upon written order of the Trust signed by one Administrator, the Institutional Trustee shall authenticate the Capital Securities for original issue. The Institutional Trustee may appoint an authenticating agent that is a U.S. Person acceptable to the Trust to authenticate the Capital Securities. A Common Security need not be so authenticated and shall be valid upon execution by one or more Administrators. (c) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (d) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable, and each Holder thereof shall be entitled to the benefits provided by this Declaration. (e) Every Person, by virtue of having become a Holder in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration and the Guarantee. SECTION 6.2. Paying Agent, Transfer Agent, Calculation Agent and Registrar. The Trust shall maintain in Wilmington, Delaware, an office or agency where the Securities may be presented for payment (the "Paying Agent"), and an office or agency where Securities may be presented for registration of transfer or exchange (the "Transfer Agent"). The Trust shall keep or cause to be kept at such office or agency a register for the purpose of registering Securities and transfers and exchanges of Securities, such register to be held by a registrar (the "Registrar"). The Administrators may appoint the Paying Agent, the Registrar and the Transfer Agent, and may appoint one or more additional Paying Agents or one or more co-Registrars, or one or more co-Transfer Agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent, the term "Registrar" includes any additional registrar or co-Registrar and the term "Transfer Agent" includes any additional transfer agent. The Administrators may change any Paying Agent, Transfer Agent or 32 Registrar at any time without prior notice to any Holder. The Administrators shall notify the Institutional Trustee of the name and address of any Paying Agent, Transfer Agent and Registrar not a party to this Declaration. The Administrators hereby initially appoint the Institutional Trustee to act as Paying Agent, Transfer Agent and Registrar for the Capital Securities and the Common Securities at its Corporate Trust Office. The Institutional Trustee or any of its Affiliates in the United States may act as Paying Agent, Transfer Agent or Registrar. The Trust shall also appoint a Calculation Agent, which shall determine the Coupon Rate in accordance with the terms of the Securities. The Trust initially appoints the Institutional Trustee as Calculation Agent. SECTION 6.3. Form and Dating. The Capital Securities and the Institutional Trustee's certificate of authentication thereon shall be substantially in the form of Exhibit A-1, and the Common Securities shall be substantially in the form of Exhibit A-2, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates may be typed, printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrators, as conclusively evidenced by their execution thereof. The Securities may have letters, numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject, if any, or usage (provided, that any such notation, legend or endorsement is in a form acceptable to the Sponsor). The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibit A-1 to the Institutional Trustee in writing. Each Capital Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1 and A-2 are part of the terms of this Declaration and to the extent applicable, the Institutional Trustee, the Delaware Trustee, the Administrators and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. Capital Securities will be issued only in blocks having a stated liquidation amount of not less than $100,000. The Capital Securities are being offered and sold by the Trust pursuant to the Placement Agreement in definitive form, registered in the name of the Holder thereof, without coupons and with the Restricted Securities Legend. SECTION 6.4. Mutilated, Destroyed, Lost or Stolen Certificates. If: (a) any mutilated Certificates should be surrendered to the Registrar, or if the Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Certificate; and (b) there shall be delivered to the Registrar, the Administrators and the Institutional Trustee such security or indemnity as may be required by them to keep each of them harmless; then, in the absence of notice that such 33 Certificate shall have been acquired by a bona fide purchaser, an Administrator on behalf of the Trust shall execute (and in the case of a Capital Security Certificate, the Institutional Trustee shall authenticate) and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 6.4, the Registrar or the Administrators may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Certificate issued pursuant to this Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. SECTION 6.5. Temporary Securities. Until definitive Securities are ready for delivery, the Administrators may prepare and, in the case of the Capital Securities, the Institutional Trustee shall authenticate, temporary Securities. Temporary Securities shall be substantially in form of definitive Securities but may have variations that the Administrators consider appropriate for temporary Securities. Without unreasonable delay, the Administrators shall prepare and, in the case of the Capital Securities, the Institutional Trustee shall authenticate definitive Securities in exchange for temporary Securities. SECTION 6.6. Cancellation. The Administrators at any time may deliver Securities to the Institutional Trustee for cancellation. The Registrar shall forward to the Institutional Trustee any Securities surrendered to it for registration of transfer, redemption or payment. The Institutional Trustee shall promptly cancel all Securities surrendered for registration of transfer, payment, replacement or cancellation and shall dispose of such canceled Securities as the Administrators direct. The Administrators may not issue new Securities to replace Securities that have been paid or that have been delivered to the Institutional Trustee for cancellation. SECTION 6.7. Rights of Holders; Waivers of Past Defaults. (a) The legal title to the Trust Property is vested exclusively in the Institutional Trustee (in its capacity as such) in accordance with Section 2.5, and the Holders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Securities shall be personal property giving only the rights specifically set forth therein and in this Declaration. The Securities shall have no, and the issuance of the Securities shall not be subject to, preemptive or other similar rights and when issued and delivered to Holders against payment of the purchase price therefor, the Securities will be fully paid and nonassessable by the Trust. (b) For so long as any Capital Securities remain outstanding, if, upon an Indenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of not less than a Majority in liquidation amount of the Capital 34 Securities then outstanding shall have the right to make such declaration by a notice in writing to the Institutional Trustee, the Sponsor and the Debenture Trustee. At any time after a declaration of acceleration with respect to the Debentures has been made and before a judgment or decree for payment of the money due has been obtained by the Debenture Trustee as provided in the Indenture, if the Institutional Trustee subject to the provisions hereof fails to annul any such declaration and waive such default, the Holders of not less than a Majority in liquidation amount of the Capital Securities, by written notice to the Institutional Trustee, the Sponsor and the Debenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Sponsor has paid or deposited with the Debenture Trustee a sum sufficient to pay (A) all overdue installments of interest on all of the Debentures, (B) any accrued Deferred Interest on all of the Debentures, (C) the principal of (and premium, if any, on) any Debentures that have become due otherwise than by such declaration of acceleration and interest and Deferred Interest thereon at the rate borne by the Debentures, and (D) all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, documented expenses, disbursements and advances of the Debenture Trustee and the Institutional Trustee, their agents and counsel; and (ii) all Events of Default with respect to the Debentures, other than the non-payment of the principal of the Debentures that has become due solely by such acceleration, have been cured or waived as provided in Section 5.07 of the Indenture. The Holders of not less than a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default or Event of Default, except a default or Event of Default in the payment of principal or interest (unless such default or Event of Default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debenture Trustee) or a default or Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. No such rescission shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Institutional Trustee of written notice declaring such an acceleration, or rescission and annulment thereof by Holders of any part of the Capital Securities, a record date shall be established for determining 35 Holders of outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Institutional Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 6.7. (c) Except as otherwise provided in paragraphs (a) and (b) of this Section 6.7, the Holders of not less than a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default or Event of Default and its consequences. Upon such waiver, any such default or Event of Default shall cease to exist, and any default or Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. ARTICLE VII DISSOLUTION AND TERMINATION OF TRUST SECTION 7.1. Dissolution and Termination of Trust. (a) The Trust shall dissolve on the first to occur of : (i) unless earlier dissolved, on December 8, 2036, the expiration of the term of the Trust; (ii) Bankruptcy Event with respect to the Sponsor, the Trust or the Debenture Issuer; (iii) other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, this Declaration or the Guarantee, as the case may be) the filing of a certificate of dissolution or its equivalent with respect to the Sponsor or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof; 36 (iv) the distribution of the Debentures to the Holders of the Securities, upon exercise of the right of the Holders of all of the outstanding Common Securities to dissolve the Trust as provided in Annex I hereto; (v) the entry of a decree of judicial dissolution of any Holder of the Common Securities, the Sponsor, the Trust or the Debenture Issuer; (vi) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; or (vii) before the issuance of any Securities, with the consent of all of the Trustees and the Sponsor. (b) As soon as is practicable after the occurrence of an event referred to in Section 7.1(a), and after satisfaction of liabilities to creditors of the Trust as required by applicable law, including Section 3808 of the Business Trust Act, and subject to the terms set forth in Annex I, the Institutional Trustee shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 2.9 and Article IX shall survive the termination of the Trust. ARTICLE VIII TRANSFER OF INTERESTS SECTION 8.1. General. (a) Where Capital Securities are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal number of Capital Securities represented by different certificates, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfer and exchanges, the Trust shall issue and the Institutional Trustee shall authenticate Capital Securities at the Registrar's request. (b) Upon issuance of the Common Securities, the Sponsor shall acquire and retain beneficial and record ownership of the Common Securities and for so long as the Securities remain outstanding, the Sponsor shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Sponsor under the Indenture that is a U.S. Person may succeed to the Sponsor's ownership of the Common Securities. (c) Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Capital Securities. To the fullest extent permitted by applicable law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void and will be deemed to be of no legal effect whatsoever and any such transferee shall be deemed not to be 37 the holder of such Capital Securities for any purpose, including but not limited to the receipt of Distributions on such Capital Securities, and such transferee shall be deemed to have no interest whatsoever in such Capital Securities. (d) The Registrar shall provide for the registration of Securities and of transfers of Securities, which will be effected without charge but only upon payment (with such indemnity as the Registrar may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Securities, the Registrar shall cause one or more new Securities to be issued in the name of the designated transferee or transferees. Any Security issued upon any registration of transfer or exchange pursuant to the terms of this Declaration shall evidence the same Security and shall be entitled to the same benefits under this Declaration as the Security surrendered upon such registration of transfer or exchange. Every Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form similar to Exhibits B and C satisfactory to the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Security surrendered for registration of transfer shall be canceled by the Institutional Trustee pursuant to Section 6.6. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Security. By acceptance of a Security, each transferee shall be deemed to have agreed to be bound by this Declaration. (e) Neither the Trust nor the Registrar shall be required (i) to issue, register the transfer of, or exchange any Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Securities to be redeemed, or (ii) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 8.2. Transfer Procedures and Restrictions. (a) General. (i) The Capital Securities shall bear the Restricted Securities Legend, which shall not be removed unless there is delivered to the Trust such satisfactory evidence, which may include an opinion of counsel licensed to practice law in the State of New York, as may be reasonably required by the Trust, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of the Securities Act or that such Securities are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence, the Institutional Trustee, at the written direction of the Trust, shall authenticate and deliver Capital Securities that do not bear the Restricted Securities Legend, as defined below. (b) Transfer and Exchange of Capital Securities. When Capital Securities are presented to the Registrar (x) to register the transfer of such Capital Securities, or (y) to exchange such Capital Securities for an equal 38 number of Capital Securities of another number, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Capital Securities surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Trust and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing and (i) if such Capital Securities are being transferred to a QIB, accompanied by a certificate of the transferee substantially in the form set forth as Exhibit C hereto or (ii) if such Capital Securities are being transferred otherwise than to a QIB, accompanied by a certificate of the transferee substantially in the form set forth as Exhibit B hereto. (c) Legend. Except as permitted by Section 8.2(a), each Capital Security shall bear a legend (the "Restricted Securities Legend") in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE DEBENTURE ISSUER'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH 39 MAY BE OBTAINED FROM THE DEBENTURE ISSUER OR THE TRUST. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14.38 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. 40 (d) Minimum Transfers. Capital Securities may only be transferred in minimum blocks of $100,000 aggregate liquidation amount (100 Capital Securities) and multiples of $1,000 in excess thereof. Any attempted transfer of Capital Securities in a block having an aggregate liquidation amount of less than $100,000 shall be deemed to be voided and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a Holder of such Capital Securities for any purpose, including, but not limited to, the receipt of Distributions on such Capital Securities, and such purported transferee shall be deemed to have no interest whatsoever in such Capital Securities. SECTION 8.3. Deemed Security Holders. The Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar may treat the Person in whose name any Certificate shall be registered on the books and records of the Trust as the sole holder of such Certificate and of the Securities represented by such Certificate for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Certificate or in the Securities represented by such Certificate on the part of any Person, whether or not the Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar shall have actual or other notice thereof. ARTICLE IX LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 9.1. Liability. (a) Except as expressly set forth in this Declaration, the Guarantee and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and (ii) required to pay to the Trust or to any Holder of the Securities any deficit upon dissolution of the Trust or otherwise. (b) The Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to ss. 3803(a) of the Business Trust Act, the Holders of the Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware; except as otherwise specifically set forth herein. 41 SECTION 9.2. Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person (other than an Administrator) shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions and except that an Administrator shall be liable for any such loss, damage or claim incurred by reason of such Administrator's gross negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and, if selected by such Indemnified Person, has been selected by such Indemnified Person with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 9.3. Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Institutional Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of the Indemnified Person. (b) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. 42 SECTION 9.4. Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was an Indemnified Person against expenses (including attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was an Indemnified Person against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that an Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 9.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification of an Administrator under paragraphs (i) and (ii) of this Section 9.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Indemnified Person is proper in the circumstances because he has met the applicable standard of 43 conduct set forth in paragraphs (i) and (ii). Such determination shall be made (A) by the Administrators by a majority vote of a Quorum consisting of such Administrators who were not parties to such action, suit or proceeding, (B) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion, or (C) by the Common Security Holder of the Trust. (v) To the fullest extent permitted by law, expenses (including attorneys' fees and expenses) incurred by an Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 9.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Sponsor as authorized in this Section 9.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (1) in the case of a Company Indemnified Person (A) by the Administrators by a majority vote of a Quorum of disinterested Administrators, (B) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion or (C) by the Common Security Holder of the Trust, that, based upon the facts known to the Administrators, counsel or the Common Security Holder at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Indemnified Person believed or had reasonable cause to believe his conduct was unlawful, or (2) in the case of a Fiduciary Indemnified Person, by independent legal counsel in a written opinion that, based upon the facts known to the counsel at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Indemnified Person either believed to be opposed to or did not believe to be in the best interests of the Trust, or, with respect to any criminal proceeding, that such Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made (i) to a Company Indemnified Person in instances where the Administrators, independent legal counsel or the Common Security Holder reasonably determine that such Person deliberately breached his duty to the Trust or its Common or Capital Security Holders or (ii) to a Fiduciary Indemnified Person in instances where independent legal counsel promptly and reasonably determines in a written opinion that such Person deliberately breached his duty to the Trust or its Common or Capital Security Holders. (b) The Sponsor shall indemnify, to the fullest extent permitted by applicable law, each Indemnified Person from and against any and all loss, damage, liability, tax (other than taxes based on the income of such Indemnified Person), penalty, expense or claim of any kind or nature whatsoever incurred by such Indemnified Person arising out of or in connection with or by reason of the creation, administration or termination of the Trust, or any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the 44 Trust and in a manner such Indemnified Person reasonably believed to be within the scope of authority conferred on such Indemnified Person by this Declaration, except that no Indemnified Person shall be entitled to be indemnified in respect of any loss, damage, liability, tax, penalty, expense or claim incurred by such Indemnified Person by reason of negligence or willful misconduct with respect to such acts or omissions. (c) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 9.4 shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Capital Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 9.4 shall be deemed to be provided by a contract between the Sponsor and each Indemnified Person who serves in such capacity at any time while this Section 9.4 is in effect. Any repeal or modification of this Section 9.4 shall not affect any rights or obligations then existing. (d) The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was an Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Sponsor would have the power to indemnify him against such liability under the provisions of this Section 9.4. (e) For purposes of this Section 9.4, references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any Person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 9.4 with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 9.4 shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be an Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person. The provisions of this Section shall survive the termination of this Declaration or the earlier resignation or removal of the Institutional Trustee. The obligations of the Sponsor under this Section 9.4 to compensate and indemnify the Trustees and to pay or reimburse the Trustees for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustees as 45 such, except funds held in trust for the benefit of the holders of particular Capital Securities, provided, that the Sponsor is the holder of the Common Securities. SECTION 9.5. Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Institutional Trustee (subject to Section 4.3(c)) may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. None of any Covered Person, the Sponsor, the Delaware Trustee or the Institutional Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Institutional Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Institutional Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. SECTION 9.6. Compensation; Fee. The Sponsor agrees: (a) to pay to the Trustees from time to time such compensation for all services rendered by them hereunder as the parties shall agree in writing from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable documented expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Declaration (including the reasonable compensation and the expenses and disbursements of their respective agents and counsel), except any such expense, disbursement or advance attributable to their negligence or willful misconduct. The provisions of this Section 9.6 shall survive the dissolution of the Trust and the termination of this Declaration and the removal or resignation of any Trustee. ARTICLE X ACCOUNTING SECTION 10.1. Fiscal Year. The fiscal year (the "Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. 46 SECTION 10.2. Certain Accounting Matters. (a) At all times during the existence of the Trust, the Administrators shall keep, or cause to be kept at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, full books of account, records and supporting documents, which shall reflect in reasonable detail each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. (b) The Administrators shall either (i) cause each Form 10K and Form 10Q prepared by the Sponsor and filed with the Commission in accordance with the Securities Exchange Act of 1934 to be delivered to each Holder of Securities, within 90 days after the filing of each Form 10K and within 30 days after the filing of each Form 10Q or (ii) cause to be prepared at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, and delivered to each of the Holders of Securities, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss. (c) The Administrators shall cause to be duly prepared and delivered to each of the Holders of Securities Form 1099 or such other annual United States federal income tax information statement required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrators shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust. (d) The Administrators shall cause to be duly prepared in the United States, as defined for purposes of Treasury regulations section 301.7701-7, and filed an annual United States federal income tax return on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Administrators on behalf of the Trust with any state or local taxing authority. (e) So long as the only Holder of the Capital Securities is MM Community Funding II, Ltd, the Administrators will cause the Sponsor's reports on Form H-b(11) to be delivered to the Holder promptly following their filing with the OTS. SECTION 10.3. Banking. The Trust shall maintain one or more bank accounts in the United States, as defined for purposes of Treasury regulations section 301.7701-7, in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Institutional Trustee shall be made directly to the Property Account and no other funds of the Trust shall be deposited in the Property Account. The sole signatories for such accounts (including the Property Account) shall be designated by the Institutional Trustee. 47 SECTION 10.4. Withholding. The Institutional Trustee or any Paying Agent and the Administrators shall comply with all withholding requirements under United States federal, state and local law. The Institutional Trustee or any Paying Agent shall request, and each Holder shall provide to the Institutional Trustee or any Paying Agent, such forms or certificates as are necessary to establish an exemption from withholding with respect to the Holder, and any representations and forms as shall reasonably be requested by the Institutional Trustee or any Paying Agent to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrators shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Institutional Trustee or any Paying Agent is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution to the Holder in the amount of the withholding. In the event of any claimed overwithholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Institutional Trustee or any Paying Agent may reduce subsequent Distributions by the amount of such withholding. ARTICLE XI AMENDMENTS AND MEETINGS SECTION 11.1. Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by (i) the Institutional Trustee, (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee, (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Administrators, the Administrators, and (iv) the Holders of a Majority in liquidation amount of the Common Securities. (b) Notwithstanding any other provision of this Article XI, no amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless the Institutional Trustee shall have first received 48 (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (B) an opinion of counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities) and that all conditions precedent to the execution and delivery of such amendment have been satisfied; or (ii) if the result of such amendment would be to (A) cause the Trust to cease to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Institutional Trustee in contravention of the Trust Indenture Act; (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act; or (D) cause the Debenture Issuer to be unable to treat an amount equal to the Liquidation Amount of the Debentures as "Tier 1 Capital" or its then equivalent in the guidelines or regulations issued by the OTS; provided that, the Debenture Issuer shall have become, or pursuant to law or regulation will become within 180 days, subject to capital requirements. (c) Except as provided in Section 11.1(d), (e) or (g), no amendment shall be made, and any such purported amendment shall be void and ineffective unless the Holders of a Majority in liquidation amount of the Capital Securities shall have consented to such amendment. (d) In addition to and notwithstanding any other provision in this Declaration, without the consent of each affected Holder, this Declaration may not be amended to (i) change the amount or timing of any Distribution on the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date or (ii) restrict the right of a Holder to institute suit for the enforcement of any such payment on or after such date. (e) Sections 9.1(b) and 9.1(c) and this Section 11.1 shall not be amended without the consent of all of the Holders of the Securities. (f) The rights of the Holders of the Capital Securities and Common Securities, as applicable, under Article IV to increase or decrease the number of, and appoint and remove, Trustees shall not be amended without the consent of 49 the Holders of a Majority in liquidation amount of the Capital Securities or Common Securities, as applicable. (g) This Declaration may be amended by the Institutional Trustee and the Holder of a Majority in liquidation amount of the Common Securities without the consent of the Holders of the Capital Securities to: (i) cure any ambiguity; (ii) correct or supplement any provision in this Declaration that may be defective or inconsistent with any other provision of this Declaration; (iii) add to the covenants, restrictions or obligations of the Sponsor; (iv) modify, eliminate or add to any provision of this Declaration to such extent as may be necessary or desirable, including, without limitation, to ensure that the Trust will be classified for United States federal income tax purposes at all times as a grantor trust and will not be required to register as an Investment Company under the Investment Company Act (including without limitation to conform to any change in Rule 3a-5, Rule 3a-7 or any other applicable rule under the Investment Company Act or written change in interpretation or application thereof by any legislative body, court, government agency or regulatory authority) which amendment does not have a material adverse effect on the right, preferences or privileges of the Holders of Securities; provided, however, that no such modification, elimination or addition referred to in clauses (i), (ii), (iii) or (iv) shall adversely affect the powers, preferences or rights of Holders of Capital Securities. SECTION 11.2. Meetings of the Holders of Securities; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrators (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, if any. The Administrators shall call a meeting of the Holders of such class if directed to do so by the Holders of not less than 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Administrators one or more calls in a writing stating that the signing Holders of the Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of the Securities calling a meeting shall specify in writing the Certificates held by the Holders of the Securities exercising the right to call a meeting and only those Securities represented by such Certificates shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. 50 (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of the Securities: (i) notice of any such meeting shall be given to all the Holders of the Securities having a right to vote thereat at least 7 days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders of the Securities is permitted or required under this Declaration or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, if any, such vote, consent or approval may be given at a meeting of the Holders of the Securities. Any action that may be taken at a meeting of the Holders of the Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of the Securities owning not less than the minimum amount of Securities that would be necessary to authorize or take such action at a meeting at which all Holders of the Securities having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders of the Securities entitled to vote who have not consented in writing. The Administrators may specify that any written ballot submitted to the Holders of the Securities for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrators; (ii) each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of the Securities executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation; each meeting of the Holders of the Securities shall be conducted by the Administrators or by such other Person that the Administrators may designate; and (iii) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Capital Securities are then listed for trading, if any, otherwise provides, the Administrators, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of the Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote; provided, however, 51 that each meeting shall be conducted in the United States (as that term is defined in Treasury regulations section 301.7701-7). ARTICLE XII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE SECTION 12.1. Representations and Warranties of Institutional Trustee. The Trustee that acts as initial Institutional Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Institutional Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Institutional Trustee's acceptance of its appointment as Institutional Trustee, that: (a) the Institutional Trustee is a banking corporation with trust powers, duly organized, validly existing and in good standing under the laws of the State of Delaware with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the Institutional Trustee has a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000); (c) the Institutional Trustee is not an affiliate of the Sponsor, nor does the Institutional Trustee offer or provide credit or credit enhancement to the Trust; (d) the execution, delivery and performance by the Institutional Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Institutional Trustee. This Declaration has been duly executed and delivered by the Institutional Trustee, and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Institutional Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether considered in a proceeding in equity or at law); (e) the execution, delivery and performance of this Declaration by the Institutional Trustee does not conflict with or constitute a breach of the charter or by-laws of the Institutional Trustee; and (f) no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority governing the trust powers of the Institutional Trustee is required for the execution, delivery or performance by the Institutional Trustee of this Declaration. SECTION 12.2. Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the 52 Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) if it is not a natural person, the Delaware Trustee is duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) if it is not a natural person, the execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee. This Declaration has been duly executed and delivered by the Delaware Trustee, and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether considered in a proceeding in equity or at law); (c) if it is not a natural person, the execution, delivery and performance of this Declaration by the Delaware Trustee does not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee; (d) it has trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (e) no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority governing the trust powers of the Delaware Trustee is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and (f) the Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, it is an entity which has its principal place of business in the State of Delaware and, in either case, a Person that satisfies for the Trust the requirements of Section 3807 of the Business Trust Act. ARTICLE XIII MISCELLANEOUS SECTION 13.1. Notices. All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied (which telecopy shall be followed by notice delivered or mailed by first class mail) or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Administrators at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders of the Securities): 53 Matrix Bancorp Capital Trust IV c/o Matrix Bancorp, Inc. 1380 Lawrence Street Suite 1400 Denver, CO 80204 Attention: T. Allen McConnell (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as the Delaware Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopy: (302) 651-8882 Telephone: (302) 651-1000 (c) if given to the Institutional Trustee, at the Institutional Trustee's mailing address set forth below (or such other address as the Institutional Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopy: (302) 651-8882 Telephone: (302) 651-1000 (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice of to the Trust): Matrix Bancorp, Inc. 1380 Lawrence Street Suite 1400 Denver, CO 80204 Attention: T. Allen McConnell (e) if given to any other Holder, at the address set forth on the books and records of the Trust. 54 All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 13.2. Governing Law. This Declaration and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the law of the State of Delaware and all rights, obligations and remedies shall be governed by such laws without regard to the principles of conflict of laws of the State of Delaware or any other jurisdiction that would call for the application of the law of any jurisdiction other than the State of Delaware. SECTION 13.3. Submission to Jurisdiction. Each of the parties hereto agrees that any suit, action or proceeding arising out of or based upon this Declaration, or the transactions contemplated hereby, may be instituted in any of the courts of the State of New York and the United State District Courts, in each case located in the Borough of Manhattan, City and State of New York, and further agrees to submit to the jurisdiction of any competent court in the place of its corporate domicile in respect of actions brought against it as a defendant. In addition, each such party irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of such suit, action or proceeding brought in any such court and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum and irrevocably waives any right to which it may be entitled on account of its place of corporate domicile. Each such party hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Declaration or the transactions contemplated hereby. Each such party agrees that final judgment in any proceedings brought in such a court shall be conclusive and binding upon it and may be enforced in any court to the jurisdiction of which it is subject by a suit upon such judgment. Each of the Sponsor and the Holder of the Common Securities irrevocably consents to the service of process on it in any such suit, action or proceeding in any such court by the mailing thereof by registered or certified mail, postage prepaid, to it at its address given in or pursuant to Section 13.1 hereof. To the extent permitted by law, nothing herein contained shall preclude any party from effecting service of process in any lawful manner or from bringing any suit, action or proceeding in respect of this Declaration in any other state, country or place. SECTION 13.4. Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. 55 SECTION 13.5. Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 13.6. Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether or not so expressed. SECTION 13.7. Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 13.8. Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees and Administrators to any of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 56 IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. WILMINGTON TRUST COMPANY, as Delaware Trustee By: _____________________________ Name: Title: WILMINGTON TRUST COMPANY, as Institutional Trustee By: _____________________________ Name: Title: MATRIX BANCORP, INC. as Sponsor By: ______________________________ Name: Title: By: ______________________________ Administrator By: ______________________________ Administrator 57 ANNEX I TERMS OF FLOATING RATE MMCapS SM Pursuant to Section 6.1 of the Amended and Restated Declaration of Trust, dated as of November 28, 2001 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration): 1. Designation and Number. (a) Capital Securities. 5,000 Capital Securities of Matrix Bancorp Capital Trust IV (the "Trust"), with an aggregate stated liquidation amount with respect to the assets of the Trust of Five Million Dollars ($5,000,000) and a stated liquidation amount with respect to the assets of the Trust of $1,000 per Capital Security, are hereby designated for the purposes of identification only as the "Floating Rate MMCapSSM " (the "Capital Securities"). The Capital Security Certificates evidencing the Capital Securities shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Capital Securities are listed, if any. (b) Common Securities. 155 Common Securities of the Trust (the "Common Securities") will be evidenced by Common Security Certificates substantially in the form of Exhibit A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. In the absence of an Event of Default, the Common Securities will have an aggregate stated liquidation amount with respect to the assets of the Trust of One Hundred Fifty Five Thousand dollars ($155,000) and a stated liquidation amount with respect to the assets of the Trust of $1,000 per Common Security. 2. Distributions. (a) Distributions payable on each Security will be payable at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Indenture) plus 3.75% (the "Coupon Rate") of the stated liquidation amount of $1,000 per Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee; provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December 2006. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the A-I-1 Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual period on the basis of a 360-day year and the actual number of days elapsed in the relevant period. (b) LIBOR shall be determined by the Calculation Agent in accordance with the following provisions: (1) On the second LIBOR Business Day (provided that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to December 15 and June 15 (except, with respect to the first interest payment period, on November 26, 2001), (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent for six-month Eurodollar deposits in Europe which appears on Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions) or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Markets Commodities News. "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in New York, New York or Wilmington, Delaware, are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on the same LIBOR Determination Date, the corrected rate as so substituted will be the applicable LIBOR for that LIBOR Determination Date. (2) If, on any LIBOR Determination Date, such rate does not appear on Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for six-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (New York time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in The City of New York (as selected by the Calculation Agent) are quoting on the relevant LIBOR Determination Date for six-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (New York time) (in an amount determined by the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent. A-I-2 (3) If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR in effect on the previous LIBOR Determination Date (whether or not LIBOR for such period was in fact determined on such LIBOR Determination Date). (c) All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (d) On each LIBOR Determination Date, the Calculation Agent shall notify, in writing, the Company and the Paying Agent of the applicable Coupon Rate in effect for the related interest payment period. The Calculation Agent shall, upon the request of the holder of any Debt Securities, provide the Coupon Rate then in effect. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company and the Holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Company as to the Coupon Rate. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for taxable income calculation purposes. (e) Distributions on the Securities will be cumulative, will accrue from the date of original issuance, and will be payable, subject to extension of distribution payment periods as described herein, semi-annually in arrears on June 8 and December 8 of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period the Debenture Issuer shall pay all Deferred Interest; provided, however, that no Extension Period may extend beyond the Maturity Date and provided, further, that, during any such Extension Period, the Debenture Issuer may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Debenture Issuer's capital stock or (ii) make any payment of principal of or A-I-3 interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Debenture Issuer that rank pari passu in all respects with or junior in interest to the Debentures (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Debenture Issuer (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Debenture Issuer (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Debenture Issuer's capital stock (or any capital stock of a subsidiary of the Debenture Issuer) for any class or series of the Debenture Issuer's capital stock or of any class or series of the Debenture Issuer's indebtedness for any class or series of the Debenture Issuer's capital stock, (c) the purchase of fractional interests in shares of the Debenture Issuer's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. (f) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Registrar on the relevant record dates. The relevant record dates shall be selected by the Administrators, A-I-4 which dates shall be 15 days before the relevant payment dates. Distributions payable on any Securities that are not punctually paid on any Distribution Payment Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, as the case may be, when due (taking into account any Extension Period), will cease to be payable to the Person in whose name such Securities are registered on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with the Indenture. If any date on which Distributions are payable on the Securities is not a Business Day, then payment of the Distribution payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such payment date. (g) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed pro rata (as defined herein) among the Holders of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of the voluntary or involuntary liquidation, dissolution, winding-up or termination of the Trust (each, a "Liquidation") other than in connection with a redemption of the Debentures, the Holders of the Securities will be entitled to receive out of the assets of the Trust available for distribution to Holders of the Securities, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer), distributions equal to the aggregate of the stated liquidation amount of $1,000 per Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless in connection with such Liquidation, the Debentures in an aggregate stated principal amount equal to the aggregate stated liquidation amount of such Securities, with an interest rate equal to the Coupon Rate of, and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on, and having the same record date as, such Securities, after paying or making reasonable provision to pay all claims and obligations of the Trust in accordance with Section 3808(e) of the Business Trust Act, shall be distributed on a Pro Rata basis to the Holders of the Securities in exchange for such Securities. The Sponsor, as the Holder of all of the Common Securities, has the right at any time to dissolve the Trust (including without limitation upon the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event), subject to the receipt by the Debenture Issuer of prior approval from the Office of Thrift Supervision (the "OTS"), if then required under applicable capital guidelines or policies of the OTS and, after satisfaction of liabilities to creditors of the Trust, cause the Debentures to be distributed to the Holders of the Securities on a Pro Rata basis in accordance with the aggregate stated liquidation amount thereof. The Trust shall dissolve on the first to occur of (i) December 8, 2036, the expiration of the term of the Trust, (ii) a Bankruptcy Event with respect to the Sponsor, Trust or the Debenture Issuer, (iii) (other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, A-I-5 this Declaration or the Guarantee, as the case may be) the filing of a certificate of dissolution of the Sponsor or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof, (iv) the distribution to the Holders of the Securities of the Debentures, upon exercise of the right of the Holder of all of the outstanding Common Securities to dissolve the Trust as described above, (v) the entry of a decree of a judicial dissolution of the Sponsor or the Trust, or (vi) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities. As soon as practicable after the dissolution of the Trust and upon completion of the winding up of the Trust, the Trust shall terminate upon the filing of a certificate of cancellation with the Secretary of State of the State of Delaware. If a Liquidation of the Trust occurs as described in clause (i), (ii), (iii) or (v) in the immediately preceding paragraph, the Trust shall be liquidated by the Institutional Trustee of the Trust as expeditiously as such Trustee determines to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to the Holders of the Securities, the Debentures on a Pro Rata basis to the extent not satisfied by the Debenture Issuer, unless such distribution is determined by the Institutional Trustee not to be practical, in which event such Holders will be entitled to receive out of the assets of the Trust available for distribution to the Holders, after satisfaction of liabilities to creditors of the Trust to the extent not satisfied by the Debenture Issuer, an amount equal to the Liquidation Distribution. An early Liquidation of the Trust pursuant to clause (iv) of the immediately preceding paragraph shall occur if the Institutional Trustee determines that such Liquidation is possible by distributing, after satisfaction of liabilities to creditors of Trust, to the Holders of the Securities on a Pro Rata basis, the Debentures, and such distribution occurs. If, upon any such Liquidation the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on such Capital Securities shall be paid to the Holders of the Securities on a pro rata basis, except that if an Event of Default has occurred and is continuing, the Capital Securities shall have a preference over the Common Securities with regard to such distributions. Upon any such Liquidation of the Trust involving a distribution of the Debentures, if at the time of such Liquidation, the Capital Securities were rated by at least one nationally-recognized statistical rating organization, the Debenture Issuer will use its reasonable best efforts to obtain from at least one such or other rating organization a rating for the Debentures. After the date for any distribution of the Debentures upon dissolution of the Trust, (i) the Securities of the Trust will be deemed to be no longer outstanding, (ii) any certificates representing the Capital Securities will be deemed to represent undivided beneficial interests in such of the Debentures as have an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the distribution rate of, and A-I-6 bearing accrued and unpaid interest equal to accrued and unpaid distributions on, the Securities until such certificates are presented to the Debenture Issuer or its agent for transfer or reissuance (and until such certificates are so surrendered, no payments of interest or principal shall be made to Holders of Securities in respect of any payments due and payable under the Debentures) and (iii) all rights of Holders of Securities under the Capital Securities or the Common Securities, as applicable, shall cease, except the right of such Holders to receive Debentures upon surrender of certificates representing such Securities. 4. Redemption and Distribution. (a) The Debentures will mature on December 8, 2031. The Debentures may be redeemed by the Debenture Issuer, in whole or in part, on any June 8 or December 8 on or after December 8, 2006, at the Redemption Price, upon not less than 30 days nor more than 60 day's notice to Holders of such Debentures. In addition, upon the occurrence and continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event, the Debentures may be redeemed by the Debenture Issuer in whole but not in part, at any time within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event, as the case may be (the "Special Redemption Date"), at the Special Redemption Price, upon not less than 30 nor more than 60 days' notice to Holders of the Debentures so long as such Tax Event, Investment Company Event or Capital Treatment Event, as the case may be, is continuing. In each case, the right of the Debenture Issuer to redeem the Debentures is subject to the Debenture Issuer having received prior approval from the OTS, if then required under applicable capital guidelines or policies of the OTS. "Tax Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Debenture Issuer or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Debenture Issuer on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes (including withholding taxes), duties or other governmental charges. A-I-7 "Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be, considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debentures. "Capital Treatment Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or any rules, guidelines or policies of an applicable regulatory authority for the Company or (b) any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Debenture. Issuer will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate Liquidation Amount of the Capital Securities as "Tier 1 Capital" (or its then equivalent if the Company were subject to such capital requirement) applied as if the Company (or its successors) were a bank holding company for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies), or any capital adequacy guidelines as then in effect and applicable to the Debenture Issuer; provided, however, that the distribution of the Debentures in connection with the Liquidation of the Trust by the Debenture Issuer shall not in and of itself constitute a Capital Treatment Event unless such Liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Special Event" means any of a Capital Treatment Event, a Tax Event or an Investment Company Event. "Redemption Price" means 100% of the principal amount of the Debentures being redeemed plus accrued and unpaid interest on such Debentures to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debentures being redeemed pursuant to Section 10.02 of the Indenture or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006, together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debentures, discounted to the Special Redemption Date on A-I-8 a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 0.50%, plus, in the case of either (a) or (b), accrued and unpaid interest on such Debentures to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. "Comparable Treasury Issue" means, with respect to any Special Redemption Date, the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Quotation Agent obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Primary Treasury Dealer" shall mean a primary United States Government securities dealer in New York City. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Debenture Issuer shall substitute therefor another Primary Treasury Dealer. "Redemption Date" shall mean the date fixed for the redemption of Capital Securities, which shall be any June 8 or December 8 on or after December 8, 2006. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Debenture Trustee after consultation with the Debenture Issuer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Remaining Life" means, with respect to any Debentures the period from the Special Redemption Date for such Debentures to December 8, 2006. A-I-9 "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. (b) Upon the repayment in full at maturity or redemption in whole or in part of the Debentures (other than following the distribution of the Debentures to the Holders of the Securities), the proceeds from such repayment or payment shall concurrently be applied to redeem Pro Rata at the applicable Redemption Price, Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed; provided, however, that holders of such Securities shall be given not less than 30 nor more than 60 days' notice of such redemption (other than at the scheduled maturity of the Debentures). (c) If fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Capital Securities will be redeemed Pro Rata and the Capital Securities to be redeemed will be as described in Section 4(e)(ii) below. (d) The Trust may not redeem fewer than all the outstanding Capital Securities unless all accrued and unpaid Distributions have been paid on all Capital Securities for all semi-annual Distribution periods terminating on or before the date of redemption. (e) Redemption or Distribution Procedures. (i) Notice of any redemption of, or notice of distribution of the Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(e)(i), a Redemption/Distribution Notice A-I-10 shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of such Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of such Securities at the address of each such Holder appearing on the books and records of the Registrar. No defect in the Redemption/Distribution Notice or in the mailing thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the Securities to be redeemed shall be redeemed Pro Rata from each Holder of Capital Securities. (iii) If the Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, which notice may only be issued if the Debentures are redeemed as set out in this Section 4 (which notice will be irrevocable), then, provided, that the Institutional Trustee has a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Institutional Trustee will pay the relevant Redemption Price to the Holders of such Securities by check mailed to the address of each such Holder appearing on the books and records of the Trust on the redemption date. If a Redemption/Distribution Notice shall have been given and funds deposited as required then immediately prior to the close of business on the date of such deposit Distributions will cease to accrue on the Securities so called for redemption and all rights of Holders of such Securities so called for redemption will cease, except the right of the Holders of such Securities to receive the applicable Redemption Price specified in Section 4(a), but without interest on such Redemption Price. If any date fixed for redemption of Securities is not a Business Day, then payment of any such Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Trust or by the Debenture Issuer as guarantor pursuant to the Guarantee, Distributions on such Securities will continue to accrue at the then applicable rate from the original redemption date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. In the event of any redemption of the Capital Securities issued by the Trust in part, the Trust shall not be required to (i) issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before any selection for redemption of the Capital Securities and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Capital Securities to be so redeemed or (ii) register the transfer of or A-I-11 exchange any Capital Securities so selected for redemption, in whole or in part, except for the unredeemed portion of any Capital Securities being redeemed in part. (iv) Redemption/Distribution Notices shall be sent by the Administrators on behalf of the Trust (A) in respect of the Capital Securities, to the Holders thereof, and (B) in respect of the Common Securities, to the Holder thereof. (v) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), and provided, that the acquiror is not the Holder of the Common Securities or the obligor under the Indenture, the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. 5. Voting Rights - Capital Securities. (a) Except as provided under Sections 5(b) and 7 and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. The Administrators are required to call a meeting of the Holders of the Capital Securities if directed to do so by Holders of not less than 10% in liquidation amount of the Capital Securities. (b) Subject to the requirements of obtaining a tax opinion by the Institutional Trustee in certain circumstances set forth in the last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Capital Securities, voting separately as a class, have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including the right to direct the Institutional Trustee, as holder of the Debentures, to (i) exercise the remedies available under the Indenture as the holder of the Debentures, (ii) waive any past default that is waivable under the Indenture, or (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (iv) consent on behalf of all the Holders of the Capital Securities to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required; provided, however, that, where a consent or action under the Indenture would require the consent or act of the holders of greater than a simple majority in principal amount of Debentures (a "Super Majority") affected thereby, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of not less than the proportion in liquidation amount of the Capital Securities outstanding which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. If the Institutional Trustee fails to enforce its rights under the Debentures after the Holders of a Majority in liquidation amount of such Capital Securities have so directed the Institutional Trustee, to the fullest extent permitted by law, a Holder of the Capital Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Institutional Trustee's rights under the Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has A-I-12 occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date the interest or principal is payable (or in the case of redemption, the redemption date), then a Holder of record of the Capital Securities may directly institute a proceeding for enforcement of payment, on or after the respective due dates specified in the Debentures, to such Holder directly of the principal of or interest on the Debentures having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder. The Institutional Trustee shall notify all Holders of the Capital Securities of any default actually known to the Institutional Trustee with respect to the Debentures unless (x) such default has been cured prior to the giving of such notice or (y) the Institutional Trustee determines in good faith that the withholding of such notice is in the interest of the Holders of such Capital Securities, except where the default relates to the payment of principal of or interest on any of the Debentures. Such notice shall state that such Indenture Event of Default also constitutes an Event of Default hereunder. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Institutional Trustee shall not take any of the actions described in clause (i), (ii) or (iii) above unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. In the event the consent of the Institutional Trustee, as the holder of the Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the consent of a Super Majority, the Institutional Trustee may only give such consent at the written direction of the Holders of not less than the proportion in liquidation amount of such Securities outstanding which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The Institutional Trustee shall not take any such action in accordance with the written directions of the Holders of the Securities unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Event of Default hereunder. Any required approval or direction of Holders of the Capital Securities may be given at a separate meeting of Holders of the Capital Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Institutional Trustee will cause a notice of any meeting at which Holders of the Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of the Capital Securities. Each such notice will include a statement setting forth the following information (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution A-I-13 proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of the Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not entitle the Holder thereof to vote or consent and shall, for purposes of such vote or consent, be treated as if such Capital Securities were not outstanding. In no event will Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Sponsor as the Holder of all of the Common Securities of the Trust. Under certain circumstances as more fully described in the Declaration, Holders of Capital Securities have the right to vote to appoint, remove or replace the Institutional Trustee and the Delaware Trustee. 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b), 6(c) and 7 and as otherwise required by law and the Declaration, the Common Securities will have no voting rights. (b) The Holders of the Common Securities are entitled, in accordance with Article IV of the Declaration, to vote to appoint, remove or replace any Administrators. (c) Subject to Section 6.7 of the Declaration and only after each Event of Default (if any) with respect to the Capital Securities has been cured, waived or otherwise eliminated and subject to the requirements of the second to last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Common Securities, voting separately as a class, may direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including (i) directing the time, method, place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee with respect to the Debentures, (ii) waive any past default and its consequences that are waivable under the Indenture or (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable, provided, however, that, where a consent or action under the Indenture would require a Super Majority, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of not less than the proportion in liquidation amount of the Common Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. Notwithstanding this Section 6(c), the Institutional Trustee shall not revoke any action previously authorized or approved by a vote or consent of the Holders of the Capital Securities. Other than with respect to directing the time, method and place of conducting any A-I-14 proceeding for any remedy available to the Institutional Trustee or the Debenture Trustee as set forth above, the Institutional Trustee shall not take any action described in clause (i), (ii) or (iii) above, unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that for the purposes of United States federal income tax the Trust will not be classified as other than a grantor trust on account of such action. If the Institutional Trustee fails to enforce its rights under the Declaration, to the fullest extent permitted by law any Holder of the Common Securities may institute a legal proceeding directly against any Person to enforce the Institutional Trustee's rights under the Declaration, without first instituting a legal proceeding against the Institutional Trustee or any other Person. Any approval or direction of Holders of the Common Securities may be given at a separate meeting of Holders of the Common Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which Holders of the Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of the Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. 7. Amendments to Declaration and Indenture. (a) In addition to any requirements under Section 11.1 of the Declaration, if any proposed amendment to the Declaration provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the Liquidation of the Trust, other than as described in Section 7.1 of the Declaration, then the Holders of outstanding Securities, voting together as a single class, will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of not less than a Majority in liquidation amount of the Securities affected thereby; provided, however, if any amendment or proposal referred to in clause (i) above would adversely affect only the Capital Securities or only the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of a Majority in liquidation amount of such class of Securities. (b) In the event the consent of the Institutional Trustee as the holder of the Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Debentures, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification, or termination as directed by A-I-15 a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require a Super Majority, the Institutional Trustee may only give such consent at the written direction of the Holders of not less than the proportion in liquidation amount of the Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. (c) Notwithstanding the foregoing, no amendment or modification may be made to the Declaration if such amendment or modification would (i) cause the Trust to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise adversely affect the powers of the Institutional Trustee or (iii) cause the Trust to be deemed an "investment company" which is required to be registered under the Investment Company Act. (d) Notwithstanding any provision of the Declaration, the right of any Holder of the Capital Securities to receive payment of distributions and other payments upon redemption or otherwise, on or after their respective due dates, or to institute a suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. For the protection and enforcement of the foregoing provision, each and every Holder of the Capital Securities shall be entitled to such relief as can be given either at law or equity. 8. Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of the Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities Pro Rata according to the aggregate liquidation amount of the Capital Securities held by the relevant Holder relative to the aggregate liquidation amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of the Common Securities Pro Rata according to the aggregate liquidation amount of the Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. 9. Ranking. The Capital Securities rank pari passu with and payment thereon shall be made Pro Rata with the Common Securities except that, where an Event of Default has occurred and is continuing, the rights of Holders of the Common Securities to receive payment of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of the Holders of the Capital Securities with the result that no payment of any Distribution on, or Redemption Price of, any Common Security, and no other payment on account of redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and A-I-16 unpaid Distributions on all outstanding Capital Securities for all distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all outstanding Capital Securities then called for redemption, shall have been made or provided for, and all funds immediately available to the Institutional Trustee shall first be applied to the payment in full in cash of all Distributions on, or the Redemption Price of, the Capital Securities then due and payable. 10. Acceptance of Guarantee and Indenture. Each Holder of the Capital Securities and the Common Securities, by the acceptance of such Securities, agrees to the provisions of the Guarantee, including the subordination provisions therein and to the provisions of the Indenture. 11. No Preemptive Rights. The Holders of the Securities shall have no, and the issuance of the Securities is not subject to, preemptive or similar rights to subscribe for any additional securities. 12. Miscellaneous. These terms constitute a part of the Declaration. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to a Holder without charge on written request to the Sponsor at its principal place of business. A-I-17 EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE DEBENTURE ISSUER'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE DEBENTURE ISSUER OR THE TRUST. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), A-I-1 (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. A-I-2 Certificate Number [_____] Number of Capital Securities [_____] CUSIP NO [___________] Certificate Evidencing Capital Securities of MATRIX BANCORP CAPITAL TRUST IV Floating Rate MMCapSSM (liquidation amount $1,000 per Capital Security) Matrix Bancorp Capital Trust IV, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that [______________] (the "Holder") is the registered owner of 5,000 capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, designated the Floating Rate MMCapS SM (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper form for transfer. The Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of November 28, 2001, among T. Allen McConnell and David W. Kloos, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Matrix Bancorp, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. A-I-3 This Capital Security is governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. IN WITNESS WHEREOF, the Trust has duly executed this certificate. MATRIX BANCORP CAPITAL TRUST IV By: _______________________________ Name: Title: Administrator Dated: ___________________________ CERTIFICATE OF AUTHENTICATION This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Institutional Trustee By: _______________________________ Authorized Officer Dated: ___________________________ A-I-4 [FORM OF REVERSE OF SECURITY] Distributions payable on each Capital Security will be payable at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") (provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December 2006) of the stated liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions, any such compounded distributions and any Additional Interest payable on the Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual Distribution period on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable semi-annually in arrears on June 8 and December 8 of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during A-I-5 such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Capital Securities shall be redeemable as provided in the Declaration. A-I-6 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: ______________________________________ ______________________________________ ______________________________________ (Insert assignee's social security or tax identification number) ______________________________________ ______________________________________ ______________________________________ (Insert address and zip code of assignee), and irrevocably appoints ____________ as agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for it, him or her. Date:_____________________________________ Signature:________________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee: 1 ---------------------------------------- - --------------------------- 1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-I-7 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION. EXCEPT AS SET FORTH IN SECTION 8.1(b) OF THE DECLARATION (AS DEFINED BELOW), THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED. Certificate Number [_____] Number of Common Securities [____] Certificate Evidencing Common Securities of MATRIX BANCORP CAPITAL TRUST IV Matrix Bancorp Capital Trust IV, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Matrix Bancorp, Inc.(the "Holder") is the registered owner of 155 common securities of the Trust representing undivided beneficial interests in the assets of the Trust (the "Common Securities"). The Common Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of November 28, 2001, among T. Allen McConnell and David W. Kloos, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, the Holder, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. As set forth in the Declaration, when an Event of Default has occurred and is continuing, the rights of Holders of Common Securities to payment in respect of Distributions and payments upon Liquidation, redemption or otherwise are subordinated to the rights of payment of Holders of the Capital Securities. A-2-1 Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of undivided beneficial ownership in the Debentures. This Common Security is governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. A-2-2 IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of ____, 2001. MATRIX BANCORP CAPITAL TRUST IV By:__________________________________ Name: Title: Administrator A-2-3 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be identical in amount to the Distributions payable on each Capital Security, which is at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") (provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December 2006) of the stated liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions, any such compounded distributions and any Additional Interest payable on the Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual Distribution period on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. Except as otherwise described below, Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and will be payable semi-annually in arrears on June 8 and December 8 of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during A-2-4 such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Common Securities shall be redeemable as provided in the Declaration. A-2-5 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to: _______________________________ _______________________________ _______________________________ (Insert assignee's social security or tax identification number) _______________________________ _______________________________ _______________________________ (Insert address and zip code of assignee), and irrevocably appoints ____________ as agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for it, him or her. Date:____________________________________ Signature:_______________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:1 ----------------------------------------- - --------------------------- 1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-2-6 EXHIBIT B FORM OF TRANSFEREE CERTIFICATE TO BE EXECUTED BY TRANSFEREES OTHER THAN QIBS ----------, [ ] Matrix Bancorp, Inc. Matrix Bancorp Capital Trust IV 1380 Lawrence Street Suite 1400 Denver, CO 80204 Re: Purchase of $1,000 stated liquidation amount of Floating Rate MMCapSSM (the "Capital Securities") of Matrix Bancorp Capital Trust IV Ladies and Gentlemen: In connection with our purchase of the Capital Securities we confirm that: 1. We understand that the Floating Rate MMCapSSM (the "Capital Securities") of Matrix Bancorp Capital Trust IV (the "Trust") (including the guarantee (the "Guarantee") of Matrix Bancorp, Inc. (the "Company") executed in connection therewith) and the Floating Rate Junior Subordinated Debt Securities due 2031 of the Company (the "Subordinated Debt Securities") (the Capital Securities, the Guarantee and the Subordinated Debt Securities together being referred to herein as "Offered Securities"), have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Offered Securities that, if, we decide to offer, sell or otherwise transfer any such Offered Securities, such offer, sale or transfer will be made only (a) to the Company or the Trust, (b) pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (c) pursuant to an exemption from registration, to an "accredited investor" within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring Offered Securities for its own account or for the account of such an accredited investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act, or (d) pursuant to another available exemption from the registration requirements of the Securities Act, and in each of the foregoing cases in accordance with any applicable state securities laws and any requirements of law that govern the disposition of our property. The foregoing restrictions on resale will not apply subsequent to the date on which, in the written opinion of counsel, the Capital Securities are not "restricted securities" within the meaning of Rule 144 under the Securities Act. If any resale or other transfer of the Offered Securities is proposed to be made pursuant to clause (c) or (d) above the transferor shall deliver a letter from B-1 the transferee substantially in the form of this letter to the Institutional Trustee as Transfer Agent, which shall provide as applicable, among other things, that the transferee is an "accredited investor" within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. We acknowledge on our behalf and on behalf of any investor account for which we are purchasing Securities that the Trust and the Company reserve the right prior to any offer, sale or other transfer pursuant to clause (c) or (d) to require the delivery of any opinion of counsel, certifications and/or other information satisfactory to the Trust and the Company. We understand that the certificates for any Offered Security that we receive will bear a legend substantially to the effect of the foregoing. 2. We are an "accredited investor" within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act purchasing for our own account or for the account of such an "accredited investor," and we are acquiring the Offered Securities for investment purposes and not with view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Offered Securities, and we and any account for which we are acting are each able to bear the economic risks of our or its investment. 3. We are acquiring the Offered Securities purchased by us for our own account (or for one or more accounts as to each of which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Offered Securities, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control. 4. In the event that we purchase any Capital Securities or any Subordinated Debt Securities, we will acquire such Capital Securities having an aggregate stated liquidation amount of not less than $100,000 or such Subordinated Debt Securities having an aggregate principal amount not less than $100,000, for our own account and for each separate account for which we are acting. 5. We acknowledge that we either (A) are not a fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Plan"), or an entity whose assets include "plan assets" by reason of any Plan's investment in the entity and are not purchasing the Offered Securities on behalf of or with "plan assets" by reason of any Plan's investment in the entity and are not purchasing the Offered Securities on behalf of or with "plan assets" of any Plan or (B) are eligible for the exemptive relief available under one or more of the following prohibited transaction class exemptions ("PTCEs") issued by the U.S. Department of Labor: PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. 6. We acknowledge that the Trust and the Company and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations, B-2 warranties and agreements and agree that if any of the acknowledgments, representations, warranties and agreements deemed to have been made by our purchase of the Offered Securities are no longer accurate, we shall promptly notify the Placement Agents. If we are acquiring any Offered Securities as a fiduciary or agent for one or more investor accounts, we represent that we have sole discretion with respect to each such investor account and that we have full power to make the foregoing acknowledgments, representations and agreement on behalf of each such investor account. _______________________________________ (Name of Purchaser) By:___________________________________ Date:_________________________________ Upon transfer, the Offered Securities would be registered in the name of the new beneficial owner as follows. Name:_______________________________________ Address:____________________________________ Taxpayer ID Number:_________________________ B-3 EXHIBIT C FORM OF TRANSFEROR CERTIFICATE TO BE EXECUTED FOR QIBs ----------, [ ] Matrix Bancorp, Inc. Matrix Bancorp Capital Trust IV 1380 Lawrence Street Suite 1400 Denver, CO 80204 Re: Purchase of $1,000 stated liquidation amount of Floating Rate MMCapSSM (the "Capital Securities") of Matrix Bancorp Capital Trust IV Reference is hereby made to the Amended and Restated Declaration dated as of November 28, 2001 (the "Declaration") among T. Allen McConnell and David W. Kloos, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Matrix Bancorp, Inc., as Sponsor, and the holders from time to time of undivided beneficial interest in the assets of Matrix Bancorp Capital Trust IV. Capitalized terms used but not defined herein shall have the meanings given them in the Declaration. This letter relates to $[_______________] aggregate liquidation amount of Capital Securities which are held in the name of [name of transferor] (the "Transferor"). In connection with such request, and in respect to such Capital Securities, the transferor does hereby certify that such Capital Securities are being transferred in accordance with (i) the transfer restrictions set forth in the Capital Securities and (ii) Rule 144A under the United States Securities Act of 1933, as amended ("Rule 144A"), to a transferee that the Transferor reasonably believes is purchasing the Capital Securities for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with applicable securities laws of any state of the United States or any other jurisdiction. You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. ________________________________________ (Name of Transferor) By:_____________________________________ Name:___________________________________ Title:__________________________________ Date:___________________________________ EX-4 6 ex428-guaranteeagt.txt 4.28 EXHIBIT 4.28 GUARANTEE AGREEMENT MATRIX BANCORP, INC. Dated as of November 28, 2001
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions and Interpretation..............................................................1 ARTICLE II POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE SECTION 2.1. Powers and Duties of the Guarantee Trustee .................................................4 SECTION 2.2. Certain Rights of Guarantee Trustee ........................................................5 SECTION 2.3. Not Responsible for Recitals or Issuance of Guarantee ......................................7 SECTION 2.4. Events of Default; Waiver ..................................................................8 SECTION 2.5. Events of Default; Notice ..................................................................8 ARTICLE III GUARANTEE TRUSTEE SECTION 3.1. Guarantee Trustee; Eligibility .............................................................8 SECTION 3.2. Appointment, Removal and Resignation of Guarantee Trustee ..................................9 ARTICLE IV GUARANTEE SECTION 4.1. Guarantee .................................................................................10 SECTION 4.2. Waiver of Notice and Demand ...............................................................10 SECTION 4.3. Obligations Not Affected ..................................................................10 SECTION 4.4. Rights of Holders .........................................................................11 SECTION 4.5. Guarantee of Payment ......................................................................12 SECTION 4.6. Subrogation ...............................................................................12 SECTION 4.7. Independent Obligations ...................................................................12 SECTION 4.8. Enforcement ...............................................................................12 ARTICLE V LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 5.1. Limitation of Transactions ................................................................12 SECTION 5.2. Ranking ...................................................................................13 ARTICLE VI TERMINATION SECTION 6.1. Termination ...............................................................................14 i ARTICLE VII INDEMNIFICATION SECTION 7.1. Exculpation ...............................................................................14 SECTION 7.2. Indemnification ...........................................................................14 SECTION 7.3. Compensation; Reimbursement of Expenses ...................................................16 ARTICLE VIII MISCELLANEOUS SECTION 8.1. Successors and Assigns ....................................................................16 SECTION 8.2. Amendments ................................................................................16 SECTION 8.3. Notices ...................................................................................16 SECTION 8.4. Benefit ...................................................................................17 SECTION 8.5. Governing Law .............................................................................17 SECTION 8.6. Counterparts ..............................................................................18
ii GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Guarantee"), dated as of November 28, 2001, is executed and delivered by Matrix Bancorp, Inc., a savings and loan holding company incorporated in Colorado (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Capital Securities (as defined herein) of Matrix Bancorp Capital Trust IV, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of November 28, 2001, among the trustees named therein of the Issuer, Matrix Bancorp, Inc., as sponsor, and the Holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof securities, having an aggregate liquidation amount of up to $5,000,000, designated the Floating Rate MMCapSSM (the "Capital Securities"); WHEREAS, as incentive for the Holders to purchase the Capital Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Guarantee, to pay to the Holders of Capital Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the purchase by each Holder of the Capital Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions and Interpretation ------------------------------ In this Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Guarantee has the same meaning throughout; (c) all references to "the Guarantee" or "this Guarantee" are to this Guarantee as modified, supplemented or amended from time to time; (d) all references in this Guarantee to Articles and Sections are to Articles and Sections of this Guarantee, unless otherwise specified; 1 (e) terms defined in the Declaration as at the date of execution of this Guarantee have the same meanings when used in this Guarantee, unless otherwise defined in this Guarantee or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Beneficiaries" means any Person to whom the Issuer is or hereafter becomes indebted or liable. "Corporate Trust Office" means the office of the Guarantee Trustee at which the corporate trust business of the Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Guarantee Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. "Covered Person" means any Holder of Capital Securities. "Debentures" means the junior subordinated debentures of Matrix Bancorp, Inc., designated the Floating Rate Junior Subordinated Debt Securities due 2031, held by the Institutional Trustee (as defined in the Declaration) of the Issuer. "Event of Default" has the meaning set forth in Section 2.4. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Capital Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined in the Declaration) which are required to be paid on such Capital Securities to the extent the Issuer shall have funds available in the Property Account (as defined in the Declaration) therefor at such time, (ii) the Redemption Price (as defined in the Indenture) to the extent the Issuer has funds available in the Property Account therefor at such time, with respect to any Capital Securities called for redemption by the Issuer, (iii) the Special Redemption Price (as defined in the Indenture) to the extent the Issuer has funds available in the Property Account therefor at such time, with respect to Capital Securities called for redemption upon the occurrence of a Special Event (as defined in the Indenture), and (iv) upon a voluntary or involuntary liquidation, dissolution, winding-up or termination of the Issuer (other than in connection with the distribution of Debentures to the Holders of the Capital Securities in exchange therefor as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Capital Securities to the date of payment, to the extent the Issuer shall have funds available in the Property Account therefor at such time, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means Wilmington Trust Company, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee and thereafter means each such Successor Guarantee Trustee. "Holder" means any holder, as registered on the books and records of the Issuer, of any Capital Securities; provided, however, that, in determining whether the holders of the requisite percentage of Capital 2 Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor. "Indemnified Person" means the Guarantee Trustee, any Affiliate of the Guarantee Trustee (including in its individual capacity), or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Guarantee Trustee. "Indenture" means the Indenture dated as of November 28, 2001, between the Guarantor and Wilmington Trust Company, not in its individual capacity but solely as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the Institutional Trustee of the Issuer. "Liquidation Distribution" has the meaning set forth in the definition of "Guarantee Payments" herein. "Majority in liquidation amount of the Capital Securities" means Holder(s) of outstanding Capital Securities, voting together as a class, but separately from the holders of Common Securities, of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to, but excluding, the date upon which the voting percentages are determined) of all Capital Securities then outstanding. "Obligations" means any costs, expenses or liabilities (but not including liabilities related to taxes) of the Issuer, other than obligations of the Issuer to pay to holders of any Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities. "Officer's Certificate" means, with respect to any Person, a certificate signed by one Authorized Officer of such Person. Any Officer's Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee shall include: (a) a statement that each officer signing the Officer's Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officer's Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or 3 government or any agency or political subdivision thereof, or any other entity of whatever nature. "Responsible Officer" means, with respect to the Guarantee Trustee, any officer within the Corporate Trust Office of the Guarantee Trustee with direct responsibility for the administration of any matters relating to this Guarantee, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 3.1. "Trust Securities" means the Common Securities and the Capital Securities. ARTICLE II POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE SECTION 2.1. Powers and Duties of the Guarantee Trustee ------------------------------------------ (a) This Guarantee shall be held by the Guarantee Trustee for the benefit of the Holders of the Capital Securities, and the Guarantee Trustee shall not transfer this Guarantee to any Person except a Holder of Capital Securities exercising his or her rights pursuant to Section 4.4 (b) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee for the benefit of the Holders of the Capital Securities. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after curing all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee, and no implied covenants shall be read into this Guarantee against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.4) and is actually known to a Responsible Officer of the Guarantee Trustee, the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. 4 (d) No provision of this Guarantee shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee, and no implied covenants or obligations shall be read into this Guarantee against the Guarantee Trustee; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee; but in the case of any such certificates or opinions furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not on their face they conform to the requirements of this Guarantee; (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that such Responsible Officer of the Guarantee Trustee or the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the Holders of not less than a Majority in liquidation amount of the Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee; and (iv) no provision of this Guarantee shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds is not reasonably assured to it under the terms of this Guarantee, or security and indemnity, reasonably satisfactory to the Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 2.2. Certain Rights of Guarantee Trustee (a) Subject to the provisions of Section 2.1: 5 (i) The Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Guarantee shall be sufficiently evidenced by an Officer's Certificate. (iii) Whenever, in the administration of this Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officer's Certificate of the Guarantor which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument or other writing (or any rerecording, refiling or registration thereof). (v) The Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee from any court of competent jurisdiction. (vi) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such security and indemnity, reasonably satisfactory to the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided, however, that nothing contained in this Section 2.2(a)(vi) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee. (vii) The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, 6 debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii) The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (ix) Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders of the Capital Securities, and the signature of the Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee, both of which shall be conclusively evidenced by the Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Guarantee the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (A) may request instructions from the Holders of a Majority in liquidation amount of the Capital Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (C) shall be protected in conclusively relying on or acting in accordance with such instructions. (xi) The Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Guarantee. (b) No provision of this Guarantee shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty. SECTION 2.3. Not Responsible for Recitals or Issuance of Guarantee ----------------------------------------------------- The recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Guarantee Trustee does not assume any responsibility for their correctness. The Guarantee Trustee makes no representation as to the validity or sufficiency of this Guarantee. 7 SECTION 2.4. Events of Default; Waiver ------------------------- (a) An Event of Default under this Guarantee will occur upon the failure of the Guarantor to perform any of its payment or other obligations hereunder. (b) The Holders of a Majority in liquidation amount of Capital Securities may, voting or consenting as a class, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and shall be deemed to have been cured, for every purpose of this Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.5. Events of Default; Notice ------------------------- (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Capital Securities, notices of all Events of Default actually known to a Responsible Officer of the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, however, that the Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Capital Securities. (b) The Guarantee Trustee shall not be charged with knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice thereof from the Guarantor or a Holder of the Capital Securities, or a Responsible Officer of the Guarantee Trustee charged with the administration of this Guarantee shall have actual knowledge thereof. ARTICLE III GUARANTEE TRUSTEE SECTION 3.1. 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 corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or Person authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 3.1(a) (ii), the combined capital and surplus of such 8 corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 3.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 3.2(c). (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee shall either eliminate such interest or resign to the extent and in the manner provided by, and subject to this Guarantee. SECTION 3.2. Appointment, Removal and Resignation of Guarantee Trustee --------------------------------------------------------- (a) Subject to Section 3.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Guarantee Trustee shall not be removed in accordance with Section 3.2(a) until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed to office shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by an instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 3.2 within 60 days after delivery of an instrument of removal or resignation, the Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. (e) No Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Guarantee Trustee. (f) Upon termination of this Guarantee or removal or resignation of the Guarantee Trustee pursuant to this Section 3.2, the Guarantor shall pay to the Guarantee Trustee all amounts owing to the Guarantee Trustee under Sections 7.2 and 7.3 accrued to the date of such termination, removal or resignation. 9 ARTICLE IV GUARANTEE SECTION 4.1. Guarantee --------- (a) The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense (except as defense of payment by the Issuer), right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. (b) The Guarantor hereby also agrees to assume any and all Obligations of the Issuer and in the event any such Obligation is not so assumed, subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees to each Beneficiary the full payment, when and as due, of any and all obligations to such Beneficiaries. This Agreement is intended to be for the Beneficiaries who have received notice hereof. SECTION 4.2. Waiver of Notice and Demand --------------------------- The Guarantor hereby waives notice of acceptance of this Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 4.3. Obligations Not Affected ------------------------ The obligations, covenants, agreements and duties of the Guarantor under this Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Capital Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Special Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Capital Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Capital Securities (other than an extension of time for payment of Distributions, Redemption Price, Special Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); 10 (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Capital Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 4.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 4.4. Rights of Holders ----------------- (a) The Holders of a Majority in liquidation amount of the Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee; provided, however, that (subject to Sections 2.1 and 2.2) the Guarantee Trustee shall have the right to decline to follow any such direction if the Guarantee Trustee shall determine that the actions so directed would be unjustly prejudicial to the Holders not taking part in such direction or if the Guarantee Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Guarantor Trustee in good faith by its board of directors or trustees, executive committees or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Guarantee Trustee in personal liability. (b) Any Holder of Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Guarantee Trustee's rights under this Guarantee, without first instituting a legal proceeding against the Issuer, the Guarantee Trustee or any other Person. The Guarantor waives any right or remedy to require that any such action be brought first against the Issuer, the Guarantee Trustee or any other Person before so proceeding directly against the Guarantor. 11 SECTION 4.5. Guarantee of Payment -------------------- This Guarantee creates a guarantee of payment and not of collection. SECTION 4.6. Subrogation ----------- The Guarantor shall be subrogated to all (if any) rights of the Holders of Capital Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required by applicable provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if, after giving effect to any such payment, any amounts are due and unpaid under this Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 4.7. Independent Obligations ----------------------- The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Capital Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 4.3 hereof. SECTION 4.8. Enforcement ----------- A Beneficiary may enforce the obligations of the Guarantor contained in Section 4.1(b) directly against the Guarantor, and the Guarantor waives any right or remedy to require that any action be brought against the Issuer or any other person or entity before proceeding against the Guarantor. The Guarantor shall be subrogated to all rights (if any) of any Beneficiary against the Issuer in respect of any amounts paid to the Beneficiaries by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required by applicable provisions of law) be entitled to enforce or exercise any rights that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if, after giving effect to such payment, any amounts are due and unpaid under this Guarantee. ARTICLE V LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 5.1. Limitation of Transactions -------------------------- So long as any Capital Securities remain outstanding, if (a) there shall have occurred and be continuing an Event of Default or (b) the Guarantor shall have selected an Extension Period as provided in the Declaration and such period, or any extension thereof, shall have commenced and be continuing, then the Guarantor may not (x) declare or pay any dividends or 12 distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor that rank pari passu in all respects with or junior in interest to the Debentures (other than (i) payments under this Guarantee, (ii) repurchases, redemptions or other acquisitions of shares of capital stock of the Guarantor (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors, or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Guarantor (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to occurrence of the Event of Default or the applicable Extension Period, (iii) as a result of any exchange of conversion of any class or series of the Guarantor's capital stock (or any capital stock of a subsidiary of the Guarantor) for any class or series of the Guarantor's capital stock or of any class or series of the Guarantor's indebtedness for any class or series of the Guarantor's capital stock, (iv) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (v) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (vi) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). SECTION 5.2. Ranking ------- This Guarantee will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all present and future Senior Indebtedness (as defined in the Indenture) of the Guarantor. By their acceptance thereof, each Holder of Capital Securities agrees to the foregoing provisions of this Guarantee and the other terms set forth herein. The right of the Guarantor to participate in any distribution of assets of any of its subsidiaries upon any such subsidiary's liquidation or reorganization or otherwise is subject to the prior claims of creditors of that subsidiary, except to the extent the Guarantor may itself be recognized as a creditor of that subsidiary. Accordingly, the Guarantor's obligations under this Guarantee will be effectively subordinated to all existing and future liabilities of the Guarantor's subsidiaries, and claimants should look only to the assets of the Guarantor for payments thereunder. This Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Guarantor, including Senior Indebtedness of the Guarantor, under any indenture or agreement that the Guarantor may enter into in the future or otherwise. 13 ARTICLE VI TERMINATION SECTION 6.1. Termination ----------- This Guarantee shall terminate as to the Capital Securities (i) upon full payment of the Redemption Price or the Special Redemption Price, as the case may be, of all Capital Securities then outstanding, (ii) upon the distribution of all of the Debentures to the Holders of all of the Capital Securities or (iii) upon full payment of the amounts payable in accordance with the Declaration upon dissolution of the Issuer. This Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Capital Securities must restore payment of any sums paid under the Capital Securities or under this Guarantee. ARTICLE VII INDEMNIFICATION SECTION 7.1. Exculpation ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Issuer or the Guarantor and upon such information, opinions, reports or statements presented to the Issuer or the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who, if selected by such Indemnified Person, has been selected with reasonable care by such Indemnified Person, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Capital Securities might properly be paid. SECTION 7.2. Indemnification --------------- (a) The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or willful misconduct on the part of the Indemnified Person, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including but not limited to the costs and expenses (including reasonable legal fees and expenses) of the Indemnified Person defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of the Indemnified Person's powers or duties hereunder. The obligation to indemnify as set forth in this Section 7.2 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee. 14 (b) Promptly after receipt by an Indemnified Person under this Section 7.2 of notice of the commencement of any action, such Indemnified Person will, if a claim in respect thereof is to be made against the Guarantor under this Section 7.2, notify the Guarantor in writing of the commencement thereof; but the failure so to notify the Guarantor (i) will not relieve the Guarantor from liability under paragraph (a) above unless and to the extent that the Guarantor did not otherwise learn of such action and such failure results in the forfeiture by the Guarantor of substantial rights and defenses and (ii) will not, in any event, relieve the Guarantor from any obligations to any Indemnified Person other than the indemnification obligation provided in paragraph (a) above. The Guarantor shall be entitled to appoint counsel of the Guarantor's choice at the Guarantor's expense to represent the Indemnified Person in any action for which indemnification is sought (in which case the Guarantor shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person or Persons except as set forth below); provided, however, that such counsel shall be satisfactory to the Indemnified Person. Notwithstanding the Guarantor's election to appoint counsel to represent the Guarantor in an action, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Guarantor shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Guarantor to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Guarantor and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it and/or other Indemnified Persons which are different from or additional to those available to the Guarantor, (iii) the Guarantor shall not have employed counsel satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Guarantor shall authorize the Indemnified Person to employ separate counsel at the expense of the Guarantor. The Guarantor will not, without the prior written consent of the Indemnified Persons, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Persons are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Person from all liability arising out of such claim, action, suit or proceeding. SECTION 7.3. Compensation; Reimbursement of Expenses --------------------------------------- The Guarantor agrees: (a) to pay to the Guarantee Trustee from time to time such compensation for all services rendered by it hereunder as the parties shall agree to from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Guarantee Trustee upon request for all reasonable expenses, disbursements and advances incurred or made by it in accordance with any provision of this Guarantee (including the 15 reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct. The provisions of this Section 7.3 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee. ARTICLE VIII MISCELLANEOUS SECTION 8.1. Successors and Assigns ---------------------- All guarantees and agreements contained in this Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Capital Securities then outstanding. Except in connection with any merger or consolidation of the Guarantor with or into another entity or any sale, transfer or lease of the Guarantor's assets to another entity, in each case, to the extent permitted under the Indenture, the Guarantor may not assign its rights or delegate its obligations under this Guarantee without the prior approval of the Holders of not less than a Majority in liquidation amount of the Capital Securities. SECTION 8.2. Amendments ---------- Except with respect to any changes that do not adversely affect the rights of Holders of the Capital Securities in any material respect (in which case no consent of Holders will be required), this Guarantee may be amended only with the prior approval of the Holders of not less than a Majority in liquidation amount of the Capital Securities. The provisions of the Declaration with respect to amendments thereof shall apply equally with respect to amendments of the Guarantee. SECTION 8.3. Notices ------- All notices provided for in this Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) If given to the Guarantee Trustee, at the Guarantee Trustee's mailing address set forth below (or such other address as the Guarantee Trustee may give notice of to the Holders of the Capital Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopy: 302-651-8882 Telephone: 302-651-1000 16 (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Capital Securities and to the Guarantee Trustee): Matrix Bancorp, Inc. 1380 Lawrence Street Suite 1400 Denver, CO 80204 Attention: T. Allen McConnell (c) If given to any Holder of the Capital Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 8.4. Benefit ------- This Guarantee is solely for the benefit of the Holders of the Capital Securities and, subject to Section 2.1(a), is not separately transferable from the Capital Securities. SECTION 8.5. Governing Law ------------- THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. SECTION 8.6. Counterparts ------------ This Guarantee may contain more than one counterpart of the signature page and this Guarantee may be executed by the affixing of the signature of the Guarantor and the Guarantee Trustee to any of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 17 THIS GUARANTEE is executed as of the day and year first above written. MATRIX BANCORP, INC., as Guarantor By: -------------------------------------- Name: Title: WILMINGTON TRUST COMPANY, as Guarantee Trustee By: ------------------------------------- Name: Title: 18 EX-10 7 legacytowerlease.txt 10.1 EXHIBIT 10.1 LEGACY TOWER OFFICE LEASE THIS LEASE, made and entered this 21st day of December, 2001, by and between WXI/SEV REALTY, LLC, a Delaware limited liability company (hereinafter referred to as "Landlord"), and MATRIX BANCORP, INC., a Colorado corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H: - - - - - - - - - - For and in consideration of the rental and of the covenants and agreements hereinafter set forth to be kept and performed by Tenant, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the leased premises herein described for the Lease Term, at the rental and subject to and upon all of the terms, covenants and agreements hereinafter set forth. 1. LEASED PREMISES. ---------------------- 1.1. Grant of Leased Premises. Landlord hereby leases to Tenant and Tenant leases from Landlord those certain premises set forth in Section 6.1 of the Summary (hereinafter referred to as the "Leased Premises"), which Leased Premises are located in the multi-story commercial office building described in Section 6.2 of the Summary (hereinafter referred to as the "Building"). The Building, any outside plaza areas, land and other improvements surrounding the Building, the Common Areas, as defined below, and the land upon which any of the foregoing are situated are sometimes collectively referred to herein as the "Real Property." The legal description of land comprising the Real Property is set forth in the attached Exhibit A. A floor plan showing the size and location of the Leased Premises within the Building is set forth in the attached Exhibit B. Tenant's use and occupancy of the Leased Premises shall include the use, in common with others, of the Common Areas as hereinafter described, but excepting therefrom and reserving unto Landlord the exterior faces of all exterior walls, the roof and the right to install, use and maintain where necessary in the Leased Premises all pipes, ductwork, conduits and utility lines through hung ceiling space, partitions, beneath the floor or through other parts of the Leased Premises; provided such installation, use and maintenance do not unreasonably interfere with the use and occupancy of the Leased Premises by Tenant or diminish Tenant's access to the Leased Premises. Landlord reserves the right to effect such other tenancies in the Building as Landlord may elect in its sole business judgment. 1.2. Rentable Area. The parties hereby stipulate that (i) the Premises contain the Rentable Area as set forth in Section 6.1 of the Summary, (ii) the third (3rd) floor of the Building which is subject to Tenant's Expansion Option, as set forth in Section 1.4 below, contains 11,833 square feet of Rentable Area, and (iii) such square footage amounts are not subject to adjustment or re-measurement by Landlord or Tenant. Accordingly, there shall be no adjustment in the Base Rent or other amounts set forth in this Lease which are determined based upon the Rentable Area of the initial Premises (or with respect to the third (3rd) floor Expansion Space if leased by Tenant pursuant to Section 1.4 below). If Tenant leases any First Offer Space pursuant to Section 1.5 below, then the "Rentable Area" of such First Offer Space shall be calculated by Landlord pursuant to the Standard Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996 ("BOMA") as modified pursuant to Landlord's standard rentable area measurements for the Building. The square feet of Rentable Area of any such First Offer Space leased by Tenant pursuant to Section 1.5 shall be determined by Landlord or Landlord's architect, after consultation with Tenant, in accordance with the measurement standards set forth above. 1.3. Construction by Landlord. The obligations of Landlord, if any, to perform the work and supply materials and labor to prepare the Leased Premises for Tenant's particular use and occupancy are set forth in detail in Exhibit D attached hereto. Landlord shall have the work, if any, which is Landlord's obligation to perform in Exhibit D performed promptly and diligently in a first-class workmanlike manner, but Landlord shall not be liable in any manner for its failure to complete construction in a timely manner, except as may be set forth in Exhibit D. The parties hereby agree that any furniture, fixtures, equipment or personal property remaining in the initial Leased Premises as of the date this Lease is executed (collectively, the "FF&E") shall remain in the Leased Premises and shall be provided to Tenant, at no cost to Tenant, in their "AS-IS," "WHERE-IS," "WITH ALL FAULTS" condition, and without representation or warranty by Landlord. Contemporaneous with the execution of this Lease, Landlord shall deliver to Tenant a bill of sale duly executed by Landlord in the form of Exhibit J attached hereto transferring to Tenant Landlord's right, title and interest in and to the FF&E effective as of the Lease Commencement Date (the "Bill of Sale"). 1.4. Option to Expand. Tenant shall have a one-time option ("Expansion Option") exercisable by Tenant during the period (the "Expansion Option Availability Period") commencing as of the date of execution of this Lease and continuing until the last day of the ninth (9th) month of the Lease Term, to lease the entire Rentable Area of the third (3rd) floor of the Building, containing 11,833 square feet of Rentable Area (the "Expansion Space"), upon the terms and conditions set forth in this Section 1.4. 1.4.1. Method of Exercise. In the event Tenant elects to exercise the Expansion Option contained in this Section 1.4, Tenant shall deliver irrevocable written notice ("Tenant's Expansion Notice") to Landlord within the Expansion Option Availability Period, and Landlord and Tenant shall, with fifteen (15) business days thereafter, execute an amendment to this Lease (the "Expansion Amendment") memorializing Tenant's lease of the Expansion Space upon the terms and conditions set forth in this Section 1.4 and this Lease. The date Tenant delivers Tenant's Expansion Notice to Landlord within the Expansion Option Availability Period shall be referred to herein as the "Expansion Exercise Date." 1.4.2. Expansion Rent. The annual Base Rent payable by Tenant for the Expansion Space (the "Expansion Rent") during the Expansion Space Term (as defined in Section 1.4.4 below) shall be equal to the same annual Base Rent payable by Tenant under this Lease with respect to the initial Leased Premises, calculated on a per square foot of Rentable Area basis, and subject to increases (calculated on a per square foot of Rentable Area basis) at the same time as the Base Rent increases for the initial Leased Premises as set forth in Section 8 of the Summary. During the Expansion Space Term, Tenant shall pay Tenant's Share of increases in Operating Expenses for the Expansion Space pursuant to the provisions of Article 6 below, with Tenant's Share for the Expansion Space to be equal to the percentage calculated by dividing the Rentable Area of the Expansion Space by the total Rentable Area within the Building. Except as provided in this Section 1.4.2 below, there shall be no abatement of the Expansion Rent, and the abatement provisions of Section 3.1 below shall not apply with respect to the Expansion Space. Notwithstanding the foregoing, in the event Tenant delivers Tenant's Expansion Notice to Landlord prior to July 1, 2002, Landlord shall abate Tenant's obligation to pay the Expansion Rent (the "Abated Expansion Rent") for the period (the "Abated Expansion Rent Period") commencing as of the Expansion Space Commencement Date (as defined below) and continuing until the earlier of (i) six (6) months after the Expansion Space Commencement Date, or (ii) April 30, 2003. During the Abated Expansion Rent Period, Tenant shall remain responsible for the payment of all of its other monetary obligations under this Lease, including, without limitation, the payment of Base Rent for the initial Leased Premises and the payment of Operating Expenses for the entire Leased Premises, including the Expansion Space, and any First Offer Space leased by Tenant pursuant to Section 1.5 below. In the event of a default by Tenant under the terms of this Lease, as amended by the Expansion Amendment, that results in early termination pursuant to the provisions of Section 16.3 below, then as a part of the recovery set forth in Section 16.3 below, Landlord shall be entitled to the recovery of the Abated Expansion Rent. 1.4.3. Construction of Expansion Space. Tenant shall lease the Expansion Space in its "AS-IS" condition as of the Expansion Exercise Date and the Expansion Space Commencement Date, and Landlord shall not be obligated to provide or pay for any improvements, remodeling or refurbishment work or services related to the improvement, remodeling or refurbishment of the Expansion Space. The parties hereby agree that any furniture, fixtures, equipment or personal property remaining in the Expansion Space as of the Expansion Space Commencement Date (collectively referred to herein as the "Expansion Space FF&E") shall remain in the Expansion Space and shall be provided to Tenant, at no cost to Tenant, in their "AS-IS," "WHERE-IS," "WITH ALL FAULTS" condition, and without representation or warranty by Landlord. Contemporaneous with the execution of the Expansion Amendment, Landlord shall deliver to Tenant a bill of sale duly executed by Landlord substantially in the form of Exhibit J attached hereto transferring to Tenant Landlord's right, title and interest in and to the Expansion Space FF&E effective as of the Expansion Space Commencement Date. Any construction of improvements within the Expansion Space by Tenant shall comply with the terms and conditions of Article 9 below. Tenant shall have the option, exercisable by written notice delivered to Landlord concurrently with Tenant's Expansion Notice, to receive an allowance from Landlord (the "Expansion Space Moving/FF&E Allowance") in the amount of $250,000.00 to help reimburse Tenant for the costs incurred by Tenant in moving to the Expansion Space and acquiring and installing furniture, fixtures, equipment and other personal property in the Expansion Space on or before the first (1st) anniversary of the Expansion Space Commencement Date. The amount of the Expansion Space Moving/FF&E Allowance actually provided by Landlord to Tenant shall be amortized on a monthly basis over the first sixty (60) months of the Expansion Space Term together with interest at an interest rate of eleven percent (11%) per annum. As consideration for Landlord providing the Expansion Space Moving/FF&E Allowance to Tenant, such monthly amortized amount of the Expansion Space Moving/FF&E Allowance (the "Expansion Space Improvement Rent") shall be paid by Tenant to Landlord as additional Rent, on the first (1st) day of each month during the first sixty (60) months of the Expansion Space Term. In the event this Lease, as amended by the Expansion Amendment, shall terminate for any reason, including without limitation as a result of a default by Tenant under the terms of this Lease, as amended by the Expansion Amendment, Tenant acknowledges and agrees that the unamortized balance of the Expansion Space Moving/FF&E Allowance which has not been paid by Tenant to Landlord as of the termination date shall become immediately due and payable to Landlord as unpaid Rent which has been earned as of such termination date. In addition, in no event shall the Expansion Space Improvement Rent be abated for any reason whatsoever, including without limitation, pursuant to Sections 1.4.2 or 3.1 or Articles 12 or 18 below. 1.4.4. Expansion Space Term; Expansion Space Commencement Date. The lease term for the Expansion Space (the "Expansion Space Term") and the commencement of Tenant's payment of Expansion Rent for the Expansion Space shall commence upon the date (the "Expansion Space Commencement Date") which is the earlier of: (i) the date Tenant commences business operations in the Expansion Space; or (ii) November 1, 2002. The Expansion Space Term shall expire coterminously with the Lease Term for the initial Leased Premises (as it may be extended pursuant to the Extension Option Rider attached hereto). 1.4.5. Suspension of Expansion Option. Notwithstanding anything in this Lease to the contrary, at Landlord's option, and in addition to all of Landlord's remedies under this Lease, at law or in equity, Tenant's Expansion Option shall not be deemed to be properly exercised if, as of the Expansion Exercise Date or on the Expansion Space Commencement Date, Tenant is in default under this Lease, as amended by the Expansion Amendment. In addition, Tenant's Expansion Option is personal to the original Tenant executing this Lease (the "Original Tenant"), and may not be assigned or exercised, voluntarily or involuntarily, by or to, any person or entity other than the Original Tenant, and shall only be available to and exercisable by the Tenant if as of the Expansion Exercise Date or the Expansion Space Commencement Date the Original Tenant has not assigned or sublet all or any portion of this Lease or the Leased Premises. 1.5. Right of First Offer. Tenant shall have a right of first offer to lease all, but not less than all, of the entire square feet of Rentable Area contained on the twenty-fourth (24th) floor of the Building (the "First Offer Space"), when such space becomes available for lease as provided hereinbelow as determined by Landlord. For purposes hereof, the First Offer Space shall become available for lease immediately prior to the first time Landlord intends to submit to a third party a bona fide proposal or letter of intent to lease all or any portion of the First Offer Space (the "Third Party Proposal"). 1.5.1. Terms of Lease of First Offer Space. If the First Offer Space will or has become available for lease by Tenant as provided above (as such availability is determined by Landlord), then Landlord shall give Tenant written notice of such availability (the "First Offer Notice"), which notice shall set forth the terms upon which Landlord would lease the First Offer Space to Tenant, including, without limitation (i) the anticipated date upon which the First Offer Space will be available for lease by Tenant and the commencement date therefor, (ii) a schedule of construction of tenant improvements for the First Offer Space, if any, (iii) the First Offer Space Rent (as defined in this Section 1.5.3 below), (iv) any tenant improvement allowance for such First Offer Space (as determined in Section 1.5.4 below), and (v) the term of the lease for such space, which shall in all events be coterminous with the Lease Term for the initial Leased Premises (as it may be extended pursuant to the Extension Option Rider attached hereto). Notwithstanding the foregoing to the contrary, if the Third Party Proposal pertains to more space than the 24th floor, Landlord may include such space in Landlord's First Offer Notice delivered to Tenant as provided hereinabove, in which event the "First Offer Space" for purposes hereof shall include the entire space so identified in Landlord's First Offer Notice. 1.5.2. Procedure for Acceptance. On or before the date which is five (5) days after Tenant's receipt of Landlord's First Offer Notice (the "Election Date"), Tenant shall deliver written notice to Landlord ("Tenant's Election Notice") pursuant to which Tenant shall have the one-time right to elect either to: (i) lease the entire First Offer Space described in the First Offer Notice upon the terms set forth in the First Offer Notice; or (ii) refuse to lease the entire First Offer Space described in the First Offer Notice. Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its right of first offer, if at all, with respect to all of the First Offer Space described in any First Offer Notice delivered by Landlord to Tenant hereunder, and Tenant may not elect to lease only a portion thereof. If Tenant does not respond in writing to Landlord's First Offer Notice by the Election Date, Tenant shall be deemed to have elected the option described in clause (ii) of this Section 1.5.2. If Tenant elects or is deemed to have elected the option described in clause (ii) of this Section 1.5.2, then the provisions of Section 1.5.2.1 below shall apply and Tenant's right of first offer set forth in this Section 1.5 shall terminate with respect to the entire First Offer Space described in Landlord's First Offer Notice, and Landlord shall thereafter have the right to lease all or any portion of the First Offer Space described in Landlord's First Offer Notice on any terms Landlord desires to any third party. If Tenant leases any First Offer Space pursuant to this Section 1.5, (A) Landlord and Tenant shall, with fifteen (15) business days thereafter, execute an amendment to this Lease (the "First Offer Amendment") memorializing Tenant's lease of the First Offer Space upon the terms and conditions set forth in this Section 1.5, and (B) thereafter Tenant shall have no further right to lease any other space in the Building pursuant to this Section 1.5 (including Section 1.5.2.1 below). 1.5.2.1. In the event Tenant refuses, or is deemed to have refused, to lease the entire First Offer Space identified in Landlord's First Offer Notice as provided hereinabove, the definition of "First Offer Space" shall thereupon be revised to mean that certain space comprising the next full floor of the Building which is located immediately below the First Offer Space identified in Landlord's First Offer Notice and which is not subject to an executed lease as of the date of such refusal or deemed refusal (such date shall be referred to herein as the "Refusal Date"), and which has not previously been described as available for lease in any First Offer Notice previously delivered by Landlord to Tenant. However, in no event shall the First Offer Space, as a result of the implementation of this Section 1.5.2.1 or otherwise, pertain to any space below the twenty-first (21st) floor of the Building. Upon any such revision to the definition of the First Offer Space, Tenant shall have the right of first offer to lease such revised First Offer Space pursuant to the foregoing provisions of this Section 1.5 when such revised First Offer Space becomes available for lease as described hereinabove as determined by Landlord (i.e., immediately prior to the first time Landlord intends to submit a Third Party Proposal to lease all or any portion of such revised First Offer Space), except that (i) Tenant's right of first offer to lease such revised First Offer Space set forth herein shall be subject and subordinate to all expansion, first offer and similar rights to lease all or any portion of such revised First Offer Space set forth in any lease for space in the Building which has been executed as of the Refusal Date, and (ii) if Tenant refuses, or is deemed to have refused, to lease such entire revised First Offer Space, the definition of the "First Offer Space" shall thereupon again be further revised to mean that certain space comprising the next full floor of the Building which is located immediately below such further revised First Offer Space and which is not subject to an executed lease as of the date of such refusal or deemed refusal. The foregoing process of revising the First Offer Space shall continue until the earlier of (A) the date Tenant leases of any First Offer Space pursuant to this Section 1.5, or (B) the date of Tenant's refusal, or deemed refusal, to lease the last full floor First Offer Space revised pursuant to the foregoing provisions of Section 1.5.2.1. Tenant acknowledges and agrees that Landlord may lease all or any portion of space in the Building prior to the time such space would otherwise become revised First Offer Space pursuant to the foregoing provisions of this Section 1.5.2.1, and if Landlord does so, such leased space and the remaining space on the floor on which the such leased space is located shall no longer be available to become First Offer Space or subject to Tenant's first offer right herein. 1.5.3. First Offer Rent. If Tenant leases any First Offer Space hereunder, during the First Offer Term, Tenant shall pay Tenant's Share of increases in Operating Expenses for such First Offer Space pursuant to the provisions of Article 6 below, with Tenant's Share for such First Offer Space to be equal to the percentage calculated by dividing the Rentable Area of such First Offer Space by the total Rentable Area within the Building. The annual Base Rent payable by Tenant for any First Offer Space leased by Tenant hereunder (the "First Offer Rent") shall be determined as follows: 1.5.3.1. In the event that Tenant delivers to Landlord Tenant's Election Notice prior to July 1, 2002, the Base Rent payable by Tenant for the First Offer Space leased by Tenant shall be equal to the product of $23.00 multiplied by the Rentable Area contained in the First Offer Space. Such First Offer Rent shall increase at the same times and at the same rate per square foot of Rentable Area within the First Offer Space as the Base Rent increases on a per square foot of Rentable Area basis for the initial Leased Premises as set forth in Section 8 of the Summary. Except as provided in this Section 1.5.3.1 below, there shall be no abatement of the First Offer Rent, and the abatement provisions of Section 3.1 below shall not apply with respect to the First Offer Space. Notwithstanding the foregoing, in the event Tenant delivers Tenant's Election Notice to Landlord prior to July 1, 2002, Landlord shall abate Tenant's obligation to pay the First Offer Rent (the "Abated First Offer Rent") for the period (the "Abated First Offer Period") commencing as of the First Offer Space Commencement Date and continuing until the earlier of (i) six (6) months after the First Offer Space Commencement Date, or (ii) April 30, 2003. During the Abated First Offer Period, Tenant shall remain responsible for the payment of all of its other monetary obligations under this Lease, including, without limitation, the payment of Base Rent for the initial Leased Premises and the payment of Operating Expenses for the entire Leased Premises, including the First Offer Space, and any Expansion Space leased by Tenant pursuant to Section 1.4 above. In the event of a default by Tenant under the terms of this Lease, as amended by the First Offer Amendment, that results in early termination pursuant to the provisions of Section 16.3 below, then as a part of the recovery set forth in Section 16.3 below, Landlord shall be entitled to the recovery of the Abated First Offer Rent. 1.5.3.2. In the event that Tenant delivers Tenant's Election Notice to Landlord after to June 30, 2002, the First Offer Rent payable by Tenant for the First Offer Space leased by Tenant shall be equal to the "Fair Market Rental Rate" for such First Offer Space, as that term is defined in and determined pursuant to the provisions of the Extension Option Rider attached to this Lease, and there shall be no abatement of the Expansion Rent, and the abatement provisions of Section 1.5.3.1 above or Section 3.1 below shall not apply. 1.5.4. Construction In First Offer Space. If Tenant timely elects to lease any First Offer Space pursuant to this Section 1.5, such First Offer Space shall be leased by Tenant in its "AS IS" condition as of the date Tenant delivers Tenant's Election Notice and as of the First Offer Space Commencement Date, and Landlord shall construct the initial tenant improvements for the First Offer Space pursuant to a tenant work letter to be attached as an exhibit to the First Offer Amendment (the "First Offer Work Letter"), which First Offer Work Letter shall be substantially the same as the Tenant Work Letter attached to this Lease as Exhibit D, except (i) the tenant improvement allowance to be provided by Landlord for the First Offer Space leased by Tenant shall be determined as provided hereinbelow, and (ii) the time deadlines for submittal and approval of plans and specifications and other actions required to be performed by Landlord and Tenant shall be revised pursuant to a schedule mutually approved by the parties and set forth in such First Offer Work Letter. In the event that Tenant delivers Tenant's Election Notice to Landlord prior to July 1, 2002, Landlord shall provide Tenant a tenant improvement allowance for the First Offer Space leased by Tenant of up to, but not exceeding, the product of $36.00 multiplied by the square feet of Rentable Area contained in the First Offer Space. In the event that Tenant delivers Tenant's Election Notice to Landlord after June 30, 2002, the tenant improvement allowance to be provided by Landlord, if at all, for the First Offer Space leased by Tenant shall be determined as part of the Fair Market Rental Rate payable therefor as set forth in Section 1.5.3.2 above. In addition to such tenant improvement allowance, if at the time Tenant delivers Tenant's Election Notice, Tenant has previously properly exercised Tenant's Expansion Option to lease the Expansion Space pursuant to Section 1.4 above, Tenant shall also have the option, exercisable by written notice delivered to Landlord concurrently with Tenant's Election Notice, to receive an allowance from Landlord (the "First Offer Moving/FF&E Allowance") in the amount of $170,000.00, to help reimburse Tenant for the costs incurred by Tenant in moving to the First Offer Space and acquiring and installing furniture, fixtures, equipment and other personal property in the First Offer Space on or before the first (1st) anniversary of the First Offer Space Commencement Date. The amount of the First Offer Moving/FF&E Allowance actually provided by Landlord to Tenant shall be amortized on a monthly basis over the first sixty (60) months of the First Offer Term (as defined in Section 1.5.5 below) together with interest at an interest rate of eleven percent (11%) per annum. As consideration for Landlord providing the First Offer Moving/FF&E Allowance to Tenant, such monthly amortized amount of the First Offer Moving/FF&E Allowance (the "First Offer Improvement Rent") shall be paid by Tenant to Landlord as additional Rent, on the first (1st) day of each month during the first sixty (60) months of the First Offer Term. In the event this Lease, as amended by the First Offer Amendment, shall terminate for any reason, including without limitation as a result of a default by Tenant under the terms of this Lease, as amended by the First Offer Amendment, Tenant acknowledges and agrees that the unamortized balance of the First Offer Moving/FF&E Allowance which has not been paid by Tenant to Landlord as of the termination date shall become immediately due and payable as unpaid Rent which has been earned as of such termination date. In addition, in no event shall the First Offer Improvement Rent be abated for any reason whatsoever, including without limitation, pursuant to Sections 1.5.3 or 3.1 or Articles 12 or 18 below. 1.5.5. First Offer Space Term; First Offer Space Commencement Date. The lease term for the First Offer Space (the "First Offer Space Term") leased by Tenant hereunder and the commencement of Tenant's payment of the First Offer Rent for such First Offer Space shall commence upon the date (the "First Offer Space Commencement Date") which is the earlier of: (i) the date Tenant commences business operations in the Space; or (ii) the later of (A) the date that the First Offer Space is Ready For Occupancy (to be defined in the First Offer Work Letter), or (B) November 1, 2002. The First Offer Term shall expire coterminously with the Lease Term for the initial Leased Premises. 1.5.6. Suspension of Right of First Offer. Notwithstanding anything in this Lease to the contrary, at Landlord's option, and in addition to all of Landlord's remedies under this Lease, at law or in equity, the right of first offer hereinabove granted to Tenant shall not be deemed to be properly exercised if, as of the date Tenant exercises its right of first offer or on the scheduled First Offer Space Commencement Date for the First Offer Space, Tenant is in default under this Lease, as amended by the First Offer Amendment. In addition, Tenant's right of first offer is personal to the Original Tenant, and may not be assigned or exercised, voluntarily or involuntarily, by or to, any person or entity other than the Original Tenant, and shall only be available to and exercisable by the Tenant if as of date of Tenant's Election Notice or the First Offer Space Commencement Date the Original Tenant has not assigned or sublet all or any portion of this Lease or the Leased Premises. 2. TERM. ----------- 2.1. Basic Term. The term of this Lease ("Lease Term") shall be as set forth in Section 7.1 of the Summary and shall commence on the date ("Commencement Date") set forth in Section 7.2 of the Summary, and shall terminate on the date (the "Expiration Date") set forth in Section 7.3 of the Summary, unless this Lease is extended pursuant to the Extension Option Rider attached hereto or sooner terminated as hereinafter provided. If Landlord does not deliver possession of the Leased Premises to Tenant on or before the anticipated Commencement Date (as set forth in Section 7.2(ii) of the Summary), Landlord shall not be subject to any liability nor shall the validity of this Lease nor the obligations of Tenant hereunder be affected. In the event that the Commencement Date is a date which is other than the anticipated Commencement Date set forth in Section 7.2(ii) of the Summary, within a reasonable period of time after the date Tenant takes possession of the Leased Premises Landlord shall deliver to Tenant an Amendment to Lease in the form attached hereto as Exhibit E, setting forth the Commencement Date and the Expiration Date, and Tenant shall execute and return such Amendment to Lease to Landlord within five (5) days after Tenant's receipt thereof. In the event that Landlord does not deliver such Amendment to Lease to Tenant, the Commencement Date shall be deemed to be the anticipated Commencement Date set forth in Section 7.2(ii) of the Summary. 2.2. Early Possession. If, prior to the Commencement Date, Tenant uses or occupies the Leased Premises or any part thereof with Landlord's prior written consent, for the purpose of completing alterations to the Leased Premises, Tenant agrees to observe and perform all the provisions of this Lease except those which require payment of Rent; provided, however, if Tenant commences business in any part of the Leased Premises prior to the scheduled commencement of the Lease Term, the Lease Term shall commence upon such commencement of business operations as set forth in Section 7.2 of the Summary. 2.3. Delay in Substantial Completion; Special Rent Abatement; Termination Right. 2.3.1 Special Rent Abatement. If Substantial Completion of the Leased Premises has not occurred by April 1, 2002 (the "First Outside Date"), as such date may be extended as provided in Section 2.3.3 below, and the Commencement Date has not otherwise occurred by the First Outside Date (as so extended), then, for each day that Substantial Completion of the Leased Premises is actually delayed beyond the First Outside Date, and as Tenant's sole remedy for any such delay (except as provided in Section 2.3.2 below), Tenant shall be entitled to receive a day-for-day of abatement of Base Rent under this Lease for each day beyond the First Outside Date (as so extended) that Substantial Completion of the Leased Premises has not so occurred. Any such abatement of Base Rent provided in this Section 2.3.1 shall be credited toward the monthly Base Rent first payable under this Lease. If the Base Rent is abated pursuant to this Section 2.3.1, the Lease Term shall be extended by the number of days that Base Rent is so abated. 2.3.2 Termination Right; Second Outside Date. If Substantial Completion of the Leased Premises has not occurred by June 1, 2002 (the "Second Outside Date"), as such date may be extended as provided in Section 2.3.3 below, and the Commencement Date has not otherwise occurred by the Second Outside Date (as may be extended), then the sole remedy of Tenant for such failure (except as provided in Section 2.3.1 above) shall be the right to deliver a notice to Landlord (an "Early Termination Notice") electing to terminate this Lease effective upon the date occurring ten (10) business days following receipt by Landlord of the Early Termination Notice (the "Early Termination Date"). The Early Termination Notice must be delivered by Tenant to Landlord, if at all, not earlier than the Second Outside Date (as the same may be extended pursuant to Section 2.3.3, below) nor later than fifteen (15) days after the Second Outside Date; provided, however, if Substantial Completion of the Leased Premises or the Commencement Date occurs prior to Tenant's delivery of any such Early Termination Notice, such Early Termination Notice shall be ineffective and Tenant shall have no such right to terminate this Lease due to any such delay in Substantial Completion of the Leased Premises beyond the Second Outside Date. The effectiveness of any such Early Termination Notice delivered by Tenant to Landlord shall be governed by the terms of this Section 2.3.2. Following any such termination of this Lease pursuant to this Section 2.3, Landlord and Tenant shall have no further obligation to each other under this Lease, except for those obligations which expressly survive termination of this Lease. 2.3.3 Extension of Outside Dates. The First Outside Date and Second Outside Date as set forth in Sections 2.3.1 and 2.3.2 above shall be extended day-for-day for each day (i) after December 21, 2001 that this Lease has not been executed and delivered by Tenant to Landlord and/or Tenant has not approved the Final Space Plan for the Leased Premises pursuant to Exhibit D, and (ii) that the Commencement Date and/or Substantial Completion of the Leased Premises is delayed due to any "Tenant Delays" (as defined in the Tenant Work Letter) and/or delays described in Article 21 of this Lease. 2.4. Early Termination Option. Notwithstanding anything to the contrary contained in this Lease, during the initial Lease Term, Tenant shall have the one-time option to terminate and cancel this Lease effective as of the last day of the seventh (7th) year of the initial Lease Term (the "Termination Date"), which right is contingent upon Tenant paying to Landlord the "Termination Consideration" (as defined below) in accordance with the following provisions of this Section 2.4. To exercise such termination option, Tenant must deliver to Landlord on or before the date which is six (6) months prior to the Termination Date: (i) written notice of Tenant's exercise of such option (the "Termination Notice"); and (ii) cash in the amount equal to the Termination Consideration. As used herein, the "Termination Consideration" shall mean an amount equal to eighteen (18) monthly installments of Base Rent applicable to the Leased Premises leased by Tenant as of the Termination Date, at the rate which would have been in effect for the eighteen (18) month period immediately following the Termination Date had this Lease not been terminated as provided herein. If Tenant properly and timely exercises the termination option in this Section 2.4, this Lease shall expire at midnight on the Termination Date, and Tenant shall be required to surrender the Leased Premises to Landlord on or prior to such Termination Date in accordance with the applicable provisions of this Lease. The rights contained in this Section 2.4 are personal to the Original Tenant and may only be exercised by the Original Tenant (and not by any assignee, sublessee or other transferee of the Tenant's interest in this Lease or the Leased Premises, or any part thereof), when Tenant is not in default under this Lease beyond any applicable notice and cure periods. 3. RENT. ----------- 3.1. Base Rent. Tenant agrees to pay Landlord, promptly when due, without notice or demand and without deduction or set-off of any amount for any reason whatsoever, as "Base Rent" for the Leased Premises, the annual amounts set forth in Section 8 of the Summary, which shall be payable in the monthly installment amounts set forth in Section 8 of the Summary. Said monthly installments of Base Rent shall be payable in advance on the first day of each calendar month during the Lease Term, except that the Base Rent for the thirteenth (13th) full calendar month of the Lease Term shall be paid at the time of Tenant's execution of this Lease. Notwithstanding anything to the contrary contained herein and provided that Tenant faithfully performs all of the terms and conditions of this Lease, Landlord hereby agrees to abate Tenant's obligation to pay Tenant's monthly Base Rent (the "Abated Rent") for the initial Leased Premises leased by Tenant hereunder (and not any of the Expansion Space or First Offer Space leased by Tenant pursuant to Section 1.4 and 1.5 above) for the first twelve (12) full months of the initial Lease Term (the "Abatement Period"). During the Abatement Period, Tenant shall remain responsible for the payment of all of its other monetary obligations under this Lease. In the event of a default by Tenant under the terms of this Lease that results in early termination pursuant to the provisions of Section 16.3 below, then as a part of the recovery set forth in Section 16.3 below, Landlord shall be entitled to the recovery of the Abated Rent. 3.2. Adjustment of Rent on Commencement or Expiration. In the event the Lease Term commences or expires on a day other than the first day of a calendar month, Tenant shall pay to Landlord on the first day of the Lease Term, or on the first day of the month in which the Lease Term expires, a sum determined by multiplying one-thirtieth (1/30th) of the monthly installment of Base Rent by the number of days in the first or last calendar month of the Lease Term. 3.3. Operating Expenses. In addition to paying the Base Rent specified in Section 3.1 above, Tenant agrees to pay Landlord as additional rent "Tenant's Share" of "Operating Expenses", as those terms are defined in Sections 6.1 and 6.2 below, which are in excess of the Operating Expenses for the "Base Year", as such term is defined in Section 6.2 below. 3.4. Place of Payment. Base Rent, Tenant's Share of Operating Expenses and all other sums or charges required by this Lease to be paid by Tenant to Landlord, all of which are herein sometimes collectively referred to as "Rent," shall be paid at the office of Landlord as set forth herein, or at such other place as Landlord may from time to time designate, in lawful money of the United States. 4. [INTENTIONALLY DELETED]. ------------------------------ 5. USE. ---------- 5.1. Permitted Use. Tenant shall use the Leased Premises solely for general office use consistent with the character of the Building as a first-class office building, and shall not permit the Leased Premises to be used for any other purpose; provided, however, Tenant shall be permitted to use the First Floor Space as a retail banking branch for retail banking purposes and general offices incidental thereto, consistent with the character of the Building as a first-class office building. Tenant shall conduct all retail banking activities on and maintain the First Floor Space as one of its highest quality retail bank branches consistent with the conduct and maintenance one would expect in the most visible ground floor space in comparable first-class office buildings in the central business district of downtown Denver, Colorado. 5.2. Compliance with Laws. Tenant shall, at its sole cost and expense, promptly comply with all applicable laws, statutes, ordinances, rules, regulations, orders and requirements, and all recorded covenants, conditions and restrictions in effect during the Lease Term or any part of the Lease Term hereof, regulating Tenant's particular use or occupancy of the Leased Premises or imposing any duty on Landlord or Tenant with regard thereto or with regard to alteration thereof, including the requirements of federal, state, county and municipal authorities now in force or which may hereinafter be in force. Tenant shall not use or permit the use of the Leased Premises in any manner which may tend to create waste or a nuisance; nor which may tend to obstruct or interfere with the rights of other tenants of the Building or injure or annoy them. 5.3. Insurance Cancellation. Tenant shall not do or permit anything to be done on or about the Leased Premises which may in any way increase the existing rate of any insurance policy covering the Building or Real Property or any of its contents or cause cancellation of any such insurance policy. 5.4. Landlord's Rules and Regulations. Tenant shall observe and comply with the Building Rules and Regulations which are in effect on the date hereof, as set forth in the attached Exhibit C, and such reasonable amendments and additions thereto as Landlord may from time to time promulgate and enforce on a non-discriminatory basis. Landlord shall not be responsible to Tenant for the non-performance of said rules and regulations by any other tenants of the Building. Tenant shall not use or allow another person or entity to use any part of the Leased Premises for the storage, use, treatment, manufacture or sale of "Hazardous Material," as that term is defined below, except for ordinary and general office supplies typically used in the ordinary course of business within office space in first-class office buildings (such as copier, toner, liquid paper, glue, ink and common household cleaning supplies) which Tenant must use in compliance with all applicable laws. As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the state in which the Building is located or the United States Government. 6. OPERATING EXPENSES. --------------------------- 6.1. Tenant's Obligations. In addition to the Base Rent provided hereinabove, Tenant shall pay to Landlord Tenant's Share of Operating Expenses, which are in excess of Tenant's Share of the Operating Expenses for the Base Year, incurred by Landlord on account of operation and maintenance of the Building and Real Property during the Lease Term. For purposes hereof, "Tenant's Share" shall mean the percentage set forth in Section 10 of the Summary which was calculated by dividing the Rentable Area of the Leased Premises set forth in Section 6.1 of the Summary, by the total Rentable Area within the Building set forth in Section 10 of the Summary. Landlord reserves the right, in its sole discretion, to increase or decrease from time to time the total Rentable Area of the Building, but not the initial Premises or Expansion Space, based upon Landlord's standard Rentable Area measurement standards used for the Building as set forth in Section 1.2 of this Lease. 6.2. Definitions. -------------------- 6.2.1. "Base Year" shall mean the calendar year set forth in Section 11 of the Summary. 6.2.2. "Expense Year" shall mean each calendar year during the Lease Term (or partial calendar year if the Lease Term commences or ends on other than the first or last day of a calendar year); provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive-month period, and, in the event of any such change, Tenant's Share of Operating Expenses shall be equitably adjusted for any Expense Year involved in any such change. 6.2.3. "Operating Expenses", for purposes hereof, are intended to be inclusive of all costs of operating and maintaining the Building and the Real Property, except franchise, estate, inheritance, net income, gift, corporate and excess profit taxes of Landlord, interest on and capital retirement of Landlord's mortgage loans, costs charged by Landlord directly to specific tenants (including any utilities separately metered and charged to specific tenants), and those items listed in Section 6.2.4 below. Landlord agrees to make reasonable efforts to minimize operating costs insofar as such efforts are not inconsistent with Landlord's intent to operate and maintain the Building in the first-class manner. Operating Expenses may include, but shall not be limited to the following: 6.2.3.1. "Tax Expenses", which for purposes hereof shall mean, collectively, any and all general and special taxes and impositions of every kind and nature whatsoever levied, assessed, or imposed upon, or with respect to the Building and Real Property, any leasehold improvements, fixtures, installations, additions, and equipment, whether owned by Landlord or Tenant, or either because of or in connection with Landlord's ownership, leasing and operation of the Building and Real Property, including, without limitation, real estate taxes, personal property taxes, sewer rents, water rents, general or special assessments, duties or levies charged or levied upon or assessed against the Building and Real Property and related personal property, transit taxes, all costs and expenses (including legal fees and court costs) charged for the protest or reduction of property taxes or assessments in connection with the Building and Real Property, or any tax or excise on rent or any other tax (however described) on account of rental received for use and occupancy of any or all of the Building or Real Property (except Landlord's net income taxes), whether any such taxes are imposed by the United States, the State of Colorado, the County of Denver, or any local governmental municipality, authority, or agency or any political subdivision of any thereof. In no event, however, shall Tax Expenses for any Expense Year be less than the component of Tax Expenses comprising a portion of the Base Year. 6.2.3.2. All costs and expenses to Landlord in maintaining fire and extended coverage insurance, property damage, liability and rent loss insurance and any other insurance maintained by Landlord covering the use and operation of the Building, Common Areas, and Real Property which is customary in comparable buildings in the area or which is reasonably deemed prudent by Landlord. 6.2.3.3. All costs and expenses of repairing, operating and maintaining the heating, ventilating and air conditioning system for the Building, including the cost of all utilities required in the operation thereof, except those paid directly by tenants of the Building and including the cost of replacements of equipment used in connection with such repair and maintenance work and all costs and expenses incurred in making alterations or additions to the heating, ventilating and air conditioning system in order to comply with governmental rules, regulations and statutes. 6.2.3.4. The costs of capital improvements and structural repairs and replacements made in or to the Building in order to conform to changes subsequent to the Commencement Date in any applicable laws, ordinances, rules, regulations or orders of any governmental or quasi-governmental authority having jurisdiction over the Building (herein "Required Capital Improvements") and the costs of any capital improvements and structural repairs and replacements designed primarily to reduce Operating Expenses or to reduce the rate of increase in Operating Expenses (herein "Cost Savings Improvements"). The expenditures for Required Capital Improvements and Cost Savings Improvements shall be reimbursed to Landlord in equal installments over the useful life of such capital improvement or structural repair or replacement (as reasonably determined by Landlord) together with interest on the balance of the unreimbursed expenditure at a rate equal to the floating commercial loan rate announced from time to time by the Wall Street Journal as the prime rate, plus one percent (1%) per annum (the "Interest Rate") which is in effect on the date the expenditure was incurred by Landlord; provided, however, the amount to be reimbursed for any Cost Savings Improvements shall be limited in any year to the estimated reduction or estimated savings in Operating Expenses as a result thereof. 6.2.3.5. All costs and expenses incurred by Landlord in providing standard services and utilities to tenants of the Building, including office janitorial services, window washing and utilities not separately metered and not charged by Landlord directly to specific tenants; together with the cost of replacement of building standard electric light bulbs and fluorescent tubes and ballasts, which Landlord shall have the exclusive right to provide and install. 6.2.3.6. All costs and expenses incurred by Landlord in operating, managing, repairing and maintaining the Building and Real Property, including all sums expended in connection with the Common Areas for general maintenance and repairs, resurfacing, painting, restriping, cleaning, sweeping and janitorial services, window washing, maintenance and repair of elevators, stairways, sidewalks, curbs and Building signs, sprinkler systems, planting and landscaping, lighting and other utilities, maintenance and repair of any fire protection systems, automatic sprinkler systems, lighting systems, emergency back-up utility systems, storm drainage systems and any other utility systems, personnel to implement such services and to police the Common Areas, rental and/or depreciation of machinery and equipment used in such maintenance and services, police and fire protection services, trash removal services, all costs and expenses pertaining to snow and ice removal, security systems, utilities, premiums and other costs for worker's compensation insurance, wages, withholding taxes, social security taxes, personal property taxes, fees for required licenses and permits, supplies, and charges for management of the Building and Common Areas. Costs and expenses incurred by Landlord in operating, managing, repairing and maintaining the Building and Real Property which are incurred exclusively for the benefit of specific tenants of the Building will be billed accordingly and will not be included within the general Operating Expenses. 6.2.3.7. If the Building is not ninety-five percent (95%) occupied during all or a portion of any calendar year, Landlord shall make an appropriate adjustment to those components of Operating Expenses which vary based upon occupancy for such year or applicable portion thereof, employing sound accounting and management principles, to determine the amount of Operating Expenses that would have been paid had the Building been ninety-five percent (95%) occupied; and the amount so determined shall be deemed to have been the amount of Operating Expenses for such year, or applicable portion thereof. Landlord shall have the right, from time to time, to reasonably and equitably allocate some or all of the Operating Expenses among different cost pools for the Building, including, but not limited to, a separate cost pool for office space tenants of the Building and a separate cost pool for retail space tenants of the Building. 6.2.3.8. Notwithstanding anything to the contrary set forth in this Article 6, when calculating Operating Expenses for the Base Year, Operating Expenses shall exclude market-wide labor-rate increases due to extraordinary circumstances, including, but not limited to, boycotts and strikes, and utility rate increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes, deregulation or other shortages. In addition, if in any Expense Year subsequent to the Base Year, the amount of Operating Expenses decreases due to a reduction in the cost of providing utilities, security and/or other services to the Real Property for any reason, including without limitation, because of deregulation of the utility industry and/or reduction in rates achieved in contracts with utilities and/or service providers, then for purposes of the Expense Year in which such decrease in Operating Expenses occurred and all subsequent Expense Years, the Operating Expenses for the Base Year shall be decreased by an amount equal to such decrease. 6.2.4. Notwithstanding anything herein to the contrary, Operating Expenses shall not include the following: 6.2.4.1. Costs, including permit, license and inspection costs, incurred with respect to the installation of improvements made for other tenants or occupants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for other tenants or occupants of the Building; 6.2.4.2. Costs, including penalties, fines and associated legal expenses, incurred due to the violation by Landlord or any other tenant in the Building of applicable laws, that would not have been incurred but for any such violations by Landlord or any tenant in the Building; 6.2.4.3. Tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments when due or to file any income tax or informational returns when due; 6.2.4.4. Costs associated with the operation of the business of the partnership or entity which constitutes Landlord as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except actions where the default of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Building, costs of any disputes between Landlord and its employees (if any) not engaged in the operation of the Building, disputes of Landlord with building or parking management, or outside fees paid in connection with disputes with other tenants; 6.2.4.5. costs incurred to comply with applicable laws with respect to the cleanup, removal, investigation and/or remediation of any Hazardous Materials (as such term is defined in Section 5.4 above) in, on or under the Real Property and/or the Building to the extent such Hazardous Materials are: (i) in existence as of the date of execution of this Lease and in violation of applicable laws in effect as of such date, and were of such a nature that a federal, state or municipal governmental or quasi-governmental authority, if it had then had knowledge of the presence of such Hazardous Materials, in the state and under the conditions that the same existed in the Building or on the Real Property, would have then required removal, remediation or other action with respect to such Hazardous Materials; or (ii) introduced onto the Real Property and/or the Building after the date of execution of this Lease by Landlord or any of Landlord's agents, employees, contractors or other tenants in violation of applicable laws in effect at the date of introduction, and were of such a nature that a federal, state or municipal governmental or quasi-governmental authority, if it had then had knowledge of the presence of such Hazardous Materials, in the state and under the conditions that the same existed in the Building or on the Real Property, would have then required removal, remediation or other action with respect to such Hazardous Materials; 6.2.4.6. costs of a capital nature for the Real Property, except as specifically set forth in Section 6.2.3 above; 6.2.4.7. marketing costs including any sale/transfer/leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, agreements, leases, subleases and/or assignments, space planning costs, and other costs and expenses (other than tax expenses) incurred in connection with sale/transfer/lease, sublease and/or assignment negotiations and transactions with present or prospective purchasers, tenants or other occupants of the Real Property; and 6.2.4.8. costs (including, without limitation, fines, penalties, interest, and costs of repairs, replacements, alterations and/or improvements) incurred in bringing the Real Property into compliance with applicable laws (including the Americans with Disabilities Act) in effect as of the date of execution of this Lease and as interpreted by applicable governmental authorities as of such date, to the extent such violations exist as of the date of execution of this Lease under any applicable laws in effect and as interpreted by applicable governmental authorities as of such date. 6.3. Calculation and Payment of Operating Expenses. --------------------------------------------------- 6.3.1. Calculation of Excess and Underage. If for any Expense Year ending or commencing within the Lease Term, Tenant's Share of Operating Expenses for such Expense Year exceeds Tenant's Share of Operating Expenses for the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section 6.3.2, below, as additional rent, an amount equal to the excess (the "Excess"). 6.3.2. Statement of Actual Operating Expenses and Payment by Tenant. Landlord shall endeavor to give to Tenant on or before the first day of April following the end of each Expense Year, a statement (the "Statement") which shall state the Operating Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount, if any, of any Excess. Upon receipt of the Statement for each Expense Year ending during the Lease Term, if an Excess is present, Tenant shall pay, within twenty (20) days after receipt of said Statement, the full amount of the Excess for such Expense Year, less the amounts, if any, paid during such Expense Year as Estimated Excess (as defined in Section 6.3.3 below). If any Statement reflects that Tenant has overpaid Tenant's Share of Operating Expenses for such Expense Year, Landlord shall remit to Tenant, within twenty (20) days after delivery of such applicable Statement, the amount of the overpayment. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord from enforcing its rights under this Article 6. Even though the Lease Term has expired and Tenant has vacated the Leased Premises, when the final determination is made of Tenant's Share of the Operating Expenses for the Expense Year in which this Lease terminates, if an Excess is present, Tenant shall immediately pay to Landlord an amount as calculated pursuant to the provisions of Section 6.3.1 of this Lease. The provisions of this Section 6.3.2 shall survive the expiration or earlier termination of the Lease Term. 6.3.3. Statement of Estimated Operating Expenses. In addition, Landlord shall endeavor to give Tenant a yearly expense estimate statement (the "Estimate Statement") which shall set forth Landlord's reasonable estimate (the "Estimate") of what the total amount of Operating Expenses for the then-current Expense Year shall be and the estimated Excess (the "Estimated Excess") as calculated by comparing Tenant's Share of Operating Expenses, which shall be based upon the Estimate, to Tenant's Share of Operating Expenses for the Base Year. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Estimated Excess under this Article 6. If pursuant to the Estimate Statement an Estimated Excess is calculated for the then-current Expense Year, Tenant shall pay, with its next installment of Base Rent due, a fraction of the Estimated Excess for the then-current Expense Year (reduced by any amounts paid pursuant to the last sentence of this Section 6.3.3). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year to the month of such payment, both months inclusive, and shall have twelve (12) as its denominator. Until a new Estimate Statement is furnished, Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated Excess set forth in the previous Estimate Statement delivered by Landlord to Tenant. 7. UTILITIES AND SERVICES. ---------------------------- 7.1. Standard Tenant Services. Landlord shall provide the following services on all days during the Lease Term, unless otherwise stated below. 7.1.1. Subject to reasonable changes implemented by Landlord and to all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning when necessary for normal comfort for normal office use in the Leased Premises, from Monday through Friday, during the period from 7:00 a.m. to 6:00 p.m., and on Saturday during the period from 7:00 a.m. to 1:00 p.m., except for the date of observation of New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and other nationally recognized holidays (collectively, the "Holidays"). 7.1.2. Landlord shall provide adequate electrical wiring and facilities and power for normal general office use for Building standard lighting and standard office equipment, as determined by Landlord. Tenant shall bear the cost of replacement of non-Building standard lamps, starters and ballasts for lighting fixtures within the Leased Premises. 7.1.3. Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes. 7.1.4. Landlord shall provide janitorial services five (5) days per week, except the date of observation of the Holidays, in and about the Leased Premises and window washing services in a manner consistent with other comparable buildings in the vicinity of the Building. 7.1.5. Except when repairs or inspections are being made thereto, and subject to such rules and regulations as established by Landlord from time to time, Landlord shall provide nonexclusive automatic passenger elevator service for use by Tenant, its customers and employees at all times. 7.2. Overstandard Tenant Use. Tenant shall not, without Landlord's prior written consent, use heat-generating machines, machines other than normal fractional horsepower office machines, or equipment or lighting other than building standard lights in the Leased Premises, which may affect the temperature otherwise maintained by the air conditioning system or increase the water normally furnished for the Leased Premises by Landlord pursuant to the terms of Section 7.1 of this Lease. If such consent is given, Landlord shall have the right to install supplementary air conditioning units or other facilities in the Leased Premises, including supplementary or additional metering devices, and the cost thereof, including the cost of installation, operation and maintenance, increased wear and tear on existing equipment and other similar charges, shall be paid by Tenant to Landlord upon billing by Landlord. If Tenant uses water or heat or air conditioning in excess of that supplied by Landlord pursuant to Section 7.1 of this Lease, or if Tenant's consumption of electricity shall exceed five (5) watts connected load per square foot of Rentable Area of the Leased Premises, calculated on an monthly basis for the hours described in Section 7.1.1 above, Tenant shall pay to Landlord, upon billing, the cost of such excess consumption, the cost of the installation, operation, and maintenance of equipment which is installed in order to supply such excess consumption, and the cost of the increased wear and tear on existing equipment caused by such excess consumption; and Landlord may install devices to separately meter any increased use and in such event Tenant shall pay the increased cost directly to Landlord, on demand, including the cost of such additional metering devices. If Tenant desires to use heat, ventilation or air conditioning during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 7.1 of this Lease, Tenant shall give Landlord such prior notice, as Landlord shall from time to time establish as appropriate, of Tenant's desired use and Landlord shall supply such utilities to Tenant at such hourly cost to Tenant as Landlord shall from time to time establish. Amounts payable by Tenant to Landlord for such use of additional utilities shall be deemed additional rent hereunder and shall be billed on a monthly basis. 7.3. Additional Services. Landlord shall also have the exclusive right, but not the obligation, to provide any additional services which may be required by Tenant, including, without limitation, locksmithing, non-Building standard lamp replacement, additional janitorial service and additional repairs and maintenance, provided that Tenant shall pay to Landlord upon billing, the sum of all costs to Landlord of such additional services plus an administration fee. Charges for any service for which Tenant is required to pay from time to time hereunder, shall be deemed additional rent hereunder and shall be billed on a monthly basis. 7.4. Interruption of Services. Subject to Section 7.5 below, Landlord shall not be liable for any damage, loss or expense incurred by Tenant by reason of any interruption or failure of the utilities and services. Landlord may, with notice to Tenant, or without notice in case of emergency, cut off and discontinue utilities and service when such discontinuance is necessary in order to make repairs or alterations. No such action shall be construed as an eviction or disturbance of possession by Landlord or relieve Tenant from paying Rent (except as provided in Section 7.5 below) or performing any of its obligations under this Lease. 7.5. Abatement of Rent When Tenant Is Prevented From Using Leased Premises. In the event that Tenant is prevented from using, and does not use, the Leased Premises or any portion thereof, for seven (7) consecutive business days (the "Eligibility Period") as a result of Landlord's failure to provide to the Leased Premises any of the essential utilities and services required to be provided in Sections 7.1.1 and 7.1.2 above, then Tenant's obligation to pay Base Rent and Operating Expenses shall be abated or reduced, as the case may be, from and after the first (1st) day following the Eligibility Period and continuing until such time that Tenant continues to be so prevented from using, and does not use, the Leased Premises or a portion thereof, in the proportion that the Rentable Area of the portion of the Leased Premises that Tenant is prevented from using, and does not use, bears to the total Rentable Area of the Leased Premises; provided, however, that Tenant shall only be entitled to such abatement of rent if the matter described in this sentence is caused by Landlord's negligence or willful misconduct. To the extent Tenant shall be entitled to abatement of rent because of a damage or destruction pursuant to Article 12 or a taking pursuant to Article 18, then the Eligibility Period shall not be applicable. Notwithstanding anything to the contrary set forth in this Lease, in the event that Tenant is prevented from using, and does not use, the Leased Premises or any portion thereof, for one hundred eighty (180) consecutive days as a result of the matters described above in this Section 7.5, then Tenant shall have the right to terminate this Lease by delivering to Landlord written termination notice within five (5) days after the end of such one hundred eighty (180) day period; provided, however, Tenant shall not have such termination right if any of such events described in this Section 7.5 are caused by a damage or destruction pursuant to Article 12 or a taking pursuant to Article 18, as Tenant's termination rights for such casualty and taking events are expressly provided in and are governed by Articles 12 and 18 of this Lease, respectively. 8. MAINTENANCE AND REPAIRS. ------------------------------ 8.1. Tenant's Repairs. Subject to Landlord's repair obligations in Section 8.2 below, and subject to Section 22.18 below, Tenant shall, at Tenant's own expense, keep the Leased Premises, including all improvements, fixtures and furnishings therein, in good order, repair and condition at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, promptly and adequately repair all damage to the Leased Premises and replace or repair all damaged or broken fixtures and appurtenances; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Landlord may, but shall not be required to, enter the Leased Premises at all reasonable times to make such repairs, alterations, improvements and additions to the Leased Premises or at the Building or to any equipment located in the Building as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. 8.2. Landlord's Repairs. Anything contained in Section 8.1 above to the contrary notwithstanding, Landlord shall repair and maintain the structural portions of the Building, including the basic plumbing, heating, ventilating, air conditioning and electrical systems installed or furnished by Landlord (but not including any non-base building facilities installed by or on behalf of Tenant); provided, however, to the extent such maintenance and repairs are caused in part or in whole by the act, neglect, fault of or omission of any duty by Tenant, its agents, servants, employees or invitees, Tenant shall pay to Landlord as additional rent, the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs, or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. There shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Leased Premises or in or to fixtures, appurtenances and equipment therein. Tenant hereby waives and releases any right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 8.3. Notification to Landlord. Tenant agrees to promptly notify Landlord or its representative of any accidents or defects in the Building of which Tenant becomes aware, including defects in pipes, electrical wiring and HVAC equipment. In addition, Tenant shall provide Landlord with prompt notification of any matter or condition which may cause injury or damage to the Building or any person or property therein. 8.4. Condition Upon Expiration of Lease. Upon the expiration of the Lease Term, or any sooner termination, Tenant shall remove all of its personal property, including, without limitation, any wiring or cabling installed in the Leased Premises by on or behalf of Tenant, and any alterations and improvements required to be removed pursuant to Section 9.2 below and surrender the Leased Premises in good condition, ordinary wear and tear excepted; provided, however, Tenant shall not be required to remove from the Leased Premises pursuant to this Section 8.4 or Section 9.2 below the bank vault existing in the Leased Premises as of date of execution of this Lease. Tenant shall repair, at its expense, any damage to the Leased Premises occasioned by its removal of any article of personal property, trade fixtures, furnishings, signs, and improvements including but not limited to repairing the floor, patching holes and painting walls. 9. ALTERATIONS AND ADDITIONS. ------------------------------- 9.1. Landlord's Consent Required. Tenant shall not make any alterations or additions to the Leased Premises without first procuring Landlord's written consent, which consent shall not be unreasonably withheld. In no event, however, shall Tenant alter the exterior of the Leased Premises or make any change or alteration which would impair the structural soundness of the Building. Upon obtaining such consent, Tenant shall cause the work to be done promptly and in good and workmanlike manner and in accordance with the plans and specifications submitted to and approved by Landlord. Landlord's consent notwithstanding, all work shall be performed in accordance with applicable building codes and governmental regulations. All work done and materials supplied shall be done or supplied only by contractors approved by Landlord, and Landlord shall have the right to grant such approval conditionally or to withdraw the same at any time. Landlord's approval thereunder shall create no responsibility or liability on the part of Landlord for the completeness, design, sufficiency or compliance with all laws, rules and regulations of governmental agencies or authorities regarding the alterations. The construction of the initial Tenant Improvements for the Leased Premises shall be governed by the provisions of Exhibit D and not this Article 9. Any and all alterations or additions to the Leased Premises to be performed by or on behalf of Tenant shall be further subject to the provisions of Section 22.18 below. 9.2. Surrender at End of Lease Term. Any alterations, additions and improvements made by Tenant on the Leased Premises, except Tenant's trade fixtures, shall at once when made become property of Landlord and remain upon and be surrendered with the Leased Premises at the expiration of the Lease Term, unless prior to the termination date Landlord provides written notice to Tenant to remove the same, in which case Tenant shall remove same on or before the expiration of the Lease Term, and repair any damage resulting from such removal; provided, however, Tenant shall not be required to remove from the Leased Premises pursuant to this Section 9.2 or Section 8.4 above the bank vault existing in the Leased Premises as of date of execution of this Lease. 9.3. Payment for Work. All costs of any such work shall be paid promptly by Tenant so as to avoid the assertion of any mechanic's or materialman's lien. Tenant shall discharge, by bonding, payment or other means, any mechanic's lien filed against the Leased Premises or the Building within thirty (30) days after the receipt of notice thereof, and shall promptly inform Landlord of any such notice. If the lien is not discharged within said thirty (30) day period, Landlord shall have the right, but not the obligation, to discharge said lien by payment, bonding or otherwise, and the costs and expenses to Landlord of obtaining such discharge shall be paid to Landlord by Tenant on demand as additional rent. Whether or not Tenant orders any work directly from Landlord, Tenant shall pay to Landlord a percentage of the cost of such work (such percentage, which shall vary depending upon whether or not Tenant orders the work directly from Landlord, to be established on a uniform basis for the Building, but not to exceed five percent (5%) of the cost of the work) sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work. 9.4. Protection against Liens. At least five (5) days prior to the commencement of any work on the Leased Premises, Tenant shall notify Landlord of the names and addresses of the persons supplying labor and materials for the proposed work so Landlord may avail itself of the provisions of statutes such as Section 38-22-105 of the Colorado Revised Statutes. During the progress of any such work on the Leased Premises, Landlord or its representatives shall have the right to go upon and inspect the Leased Premises at all reasonable times, and shall have the right to post and keep posted thereon notices such as those provided for by CRS Section 38-22-105 or to take any further action which Landlord may deem to be proper for the protection of Landlord's interest in the Leased Premises. 9.5. Automated Teller Machine. The Original Tenant, and any Affiliate to which Tenant's entire interest in this Lease has been assigned pursuant to Section 15.7 below, shall have the exclusive right during the Lease Term to install and use one (1) automated teller machine ("ATM") (and any replacements of such ATM with any other banking safety and service equipment as Tenant may deem desirable, subject to Landlord's prior approval, based on subsequent technical and competitive developments); provided, however, in the event Tenant fails to commence the functioning and service (allowing for customer and non-customer use) of such ATM within one hundred eighty (180) days following the Lease Commencement Date, or fails at any time during the Lease Term to continously provide the funding and service of such ATM for more than ninety (90) consecutive days, such right to use and install the ATM shall be on a non-exclusive basis during the Lease Term. Tenant's right to install the ATM shall be subject to and conditioned upon Tenant obtaining, at Tenant's sole cost and expense, all required governmental approvals and Landlord's prior written approval as to materials, design, exact location, quality and all other specifications thereof (including Tenant's name and/or logo on such ATM). The ATM shall be installed and maintained, at Tenant's sole cost and expense, pursuant to an installation and maintenance program approved by Landlord. Upon the expiration or early termination of this Lease, Tenant shall, at its sole cost and expense, remove the ATM and return that portion of the Building and Leased Premises to the same or substantially similar condition as existing immediately prior to Tenant's installation of such ATM, reasonable wear and tear excepted. If Tenant fails to remove such ATM and restore the Building and Leased Premises as provided in this Section 9.5 within ten (10) days following the expiration or early termination of this Lease, then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing such work shall be reimbursed by Tenant to Landlord within ten (10) days after Tenant's receipt of invoice therefor. 10. INSURANCE. --------------- 10.1. Tenant's Compliance with Landlord's Fire and Casualty Insurance. Tenant shall, at Tenant's expense, comply as to the Leased Premises with all insurance company requirements pertaining to the use of the Leased Premises. If Tenant's conduct or use of the Leased Premises causes any increase in the premium for such insurance policies, then Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body. 10.2. Tenant's Insurance. Tenant shall maintain the following coverages in the following amounts. 10.2.1. Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage arising out of Tenant's operations, assumed liabilities or use of the Leased Premises, including a Broad Form Commercial General Liability endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Article 11 of this Lease, (and with owned and non-owned automobile liability coverage, and liquor liability coverage in the event alcoholic beverages are served on the Leased Premises) for limits of liability not less than: Bodily Injury and $3,000,000 each occurrence Property Damage Liability $3,000,000 annual aggregate Personal Injury Liability $3,000,000 each occurrence $3,000,000 annual aggregate 0% Insured's participation 10.2.2. Physical Damage Insurance covering (i) all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Leased Premises installed by, for, or at the expense of Tenant, (ii) the Tenant Improvements, including any Tenant Improvements which Landlord permits to be installed above the ceiling of the Leased Premises or below the floor of the Leased Premises, and (iii) all other improvements, alterations and additions to the Leased Premises, including any improvements, alterations or additions installed at Tenant's request above the ceiling of the Leased Premises or below the floor of the Leased Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the full replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage. 10.2.3. Workers' compensation insurance as required by law. 10.2.4. Loss-of-income, business interruption and extra-expense insurance in such amounts as will reimburse Tenant for direct and indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of loss of access to the Leased Premises or to the Building as a result of such perils. 10.2.5. Form of Policies. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall: (i) name Landlord, Landlord's lenders, the lessors of a ground or underlying lease with respect to the Real Property and any other party Landlord so specifies, as an additional insured; (ii) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant's obligations under Article 11 of this Lease; (iii) be issued by an insurance company having a rating of not less than A-X in Best's Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the state in which the Real Property is located; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; (v) provide that said insurance shall not be canceled or coverage changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee or ground or underlying lessor of Landlord; (vi) contain a cross-liability endorsement or severability of interest clause acceptable to Landlord; and (vii) with respect to the insurance required in Sections 10.2.1, 10.2.2, 10.2.4 and 10.2.5 above, have deductible amounts not exceeding $5,000.00. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof. If Tenant shall fail to procure such insurance, or to deliver such policies or certificate, within such time periods, Landlord may, at its option, in addition to all of its other rights and remedies under this Lease, and without regard to any notice and cure periods set forth in Section 16.1, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent within ten (10) days after delivery of bills therefor. 10.3. Subrogation. Landlord and Tenant agree to have their respective insurance companies issuing property damage insurance waive any rights of subrogation that such companies may have against Landlord or Tenant, as the case may be. Landlord and Tenant hereby waive any right that either may have against the other on account of any loss or damage to their respective property to the extent such loss or damage is insurable under policies of insurance for fire and all risk coverage, theft, public liability, or other similar insurance. 10.4. Additional Insurance Obligations. Tenant shall carry and maintain during the entire Lease Term, at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10, and such other reasonable types of insurance coverage and in such reasonable amounts covering the Leased Premises and Tenant's operations therein, as may be reasonably requested by Landlord. 11. INDEMNITY. -------------- 11.1. Indemnification of Landlord. Tenant shall indemnify and hold Landlord harmless from and against any and all losses, claims and damages arising from Tenant's use of the Leased Premises or the conduct of its business or from any activity, work or thing done, permitted or suffered by Tenant in or about the Leased Premises, and shall further indemnify and hold Landlord harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of Tenant or any of its agents, contractors or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risks of damage to property or injury to persons in, upon or about the Leased Premises; provided, however, that the foregoing assumption of risk shall not apply to damage or injury to the extent resulting from Landlord's negligence or willful misconduct and not insured or required to be insured by Tenant hereunder. 11.2. Limitation of Liability. Landlord shall not be liable for injury or damage which may be sustained by the person, goods, wares, merchandise or property of Tenant, its employees, invitees or customers, or any other person in or about the Leased Premises caused by or resulting from fire, steam, electricity, gas or water, which may leak or flow from or into any part of the Leased Premises, or from breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the same, whether the said damage or injury results from conditions arising upon the Leased Premises or upon other portions of the Building of which the Leased Premises are a part, or from other sources; provided, however, that the foregoing limitation on Landlord's liability shall not apply to injury or damage to the extent resulting from Landlord's negligence or willful misconduct and not insured or required to be insured by Tenant hereunder. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant of the Building. In no event shall Landlord be liable for consequential damages. 12. DAMAGE, DESTRUCTION AND BUSINESS INTERRUPTION. ---------------------------------------------------- 12.1. Repair of Damage to Leased Premises by Landlord. Tenant shall promptly notify Landlord of any damage to the Leased Premises resulting from fire or any other casualty. If the Leased Premises or any Common Areas of the Building serving or providing access to the Leased Premises shall be damaged by fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 12, restore the structural components of the Leased Premises and such Common Areas. Such restoration shall be to substantially the same condition of the structural components of the Leased Premises and Common Areas prior to the casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Building, or the lessor of a ground or underlying lease with respect to the Real Property and/or the Building, or any other modifications to the Common Areas deemed desirable by Landlord, provided access to the Leased Premises and any common restrooms serving the Leased Premises shall not be materially impaired. Notwithstanding any other provision of this Lease, upon the occurrence of any damage to the Leased Premises, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required under Section 10.2 above pertaining to all tenant improvements and alterations in the Leased Premises (but not Tenant's personal property), and Landlord shall repair any injury or damage to the tenant improvements and alterations installed in the Leased Premises and shall return such tenant improvements and alterations to their original condition; provided that if the cost of such repair of such tenant improvements and alterations by Landlord exceeds the amount of insurance proceeds therefor received by Landlord from Landlord's insurance obtained as part of Operating Expenses and from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. In connection with such repairs and replacements, Tenant shall, prior to the commencement of construction, submit to Landlord, for Landlord's review and approval, all plans, specifications and working drawings relating thereto, and Landlord shall select the contractors to perform such improvement work. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Leased Premises or Common Areas necessary to Tenant's occupancy, and if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, contractors, licensees, or invitees, Landlord shall allow Tenant a proportionate abatement of Base Rent and Tenant's proportionate share of Operating Expenses to the extent Landlord is reimbursed from the proceeds of rental interruption insurance purchased by Landlord as part of Operating Expenses, during the time and to the extent the Leased Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied and used by Tenant as a result thereof. 12.2. Landlord's Option to Repair. Within sixty (60) days after Landlord becomes aware of such damage, Landlord shall notify Tenant in writing ("Landlord's Damage Notice") of the estimated time, in Landlord's reasonable judgment, required to substantially complete the repairs of such damage (the "Estimated Repair Period"). Notwithstanding the terms of Section 12.1 of this Lease, Landlord may elect not to rebuild and/or restore the Leased Premises and/or Building and instead terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after Landlord becomes aware of such damage, such notice to include a termination date giving Tenant up to ninety (90) days to vacate the Leased Premises, but Landlord may so elect only if the Building shall be damaged by fire or other casualty or cause, whether or not the Leased Premises are affected, and one or more of the following conditions is present: (i) repairs cannot reasonably be completed within one hundred eighty (180) days of the date of damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or ground or underlying lessor with respect to the Real Property and/or the Building shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground or underlying lease, as the case may be; or (iii) the damage is not fully covered by Landlord's insurance policies; provided, however, that (A) if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, (B) the damage constitutes a Tenant Damage Event (as defined below), and (C) the repair of such damage cannot, in the reasonable opinion of Landlord, as set forth in Landlord's Damage Notice, be completed within one hundred eighty (180) days after the date of the damage, then Tenant may elect to terminate this Lease by delivering written notice thereof to Landlord within fifteen (15) days after Tenant's receipt of Landlord's Damage Notice, which termination shall be effective as of the date of Tenant's termination notice. As used herein, a "Tenant Damage Event" shall mean damage to all or any part of the Leased Premises or any common areas of the Building providing access to the Leased Premises by fire or other casualty, which damage is not the result of the negligence or willful misconduct of Tenant or any of Tenant's employees, agents, contractors or licensees, and which damage substantially interferes with Tenant's use of or access to the Leased Premises and would entitle Tenant to an abatement of Rent pursuant to Section 12.1 above. In addition, in the event that the Leased Premises or the Building is destroyed or damaged to any substantial extent during the last twelve (12) months of the Lease Term, then notwithstanding anything contained in this Article 12, Landlord shall have the option to terminate this Lease, and to the extent such destruction or damage constitutes a Tenant Damage Event and the repair of same is reasonably expected by Landlord to require more than sixty (60) days to complete, Tenant shall have the option to terminate this Lease, by giving written termination notice to the other party of the exercise of such option within thirty (30) days after the date of such damage or destruction. Upon any such termination of this Lease pursuant to this Section 12.2, Tenant shall pay the Base Rent and additional rent, properly apportioned up to such date of termination (but subject to any abatement as provided in Section 12.1 above), and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease which by their terms survive the expiration or earlier termination of the Lease Term. 12.3. Waiver of Statutory Provisions. The provisions of this Lease, including this Article 12, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Leased Premises, the Building or any other portion of the Real Property, and any statute or regulation of the state in which the Building is located, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Leased Premises, the Building or any other portion of the Real Property. 12.4. Tenant's Responsibilities. There shall be no abatement of rent (except as expressly provided above in Section 12.1) and no liability of Landlord by reason of any injury to or interference with Tenant's business or property arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Leased Premises or in or to fixtures, appurtenances and equipment therein. Tenant understands Landlord will not carry insurance of any kind on Tenant's furniture, furnishings and other personal property, and Landlord shall not be obligated to repair any damage thereto or replace the same. All such property shall be kept, stored and maintained at the sole risk of Tenant. 13. TENANT TAXES. ------------------ 13.1. Personal Property. Tenant shall pay, prior to delinquency, all taxes, assessments, license fees and public charges levied, assessed or imposed upon or measured by the value of Tenant's business operation, and/or the cost or value of any furniture, fixtures, equipment and other personal property of Tenant at any time situated upon or in the Leased Premises. Tenant shall cause all such personal property to be assessed and billed separately from the real property of Landlord. 13.2. Other Taxes for Which Tenant Is Directly Responsible. In addition, Tenant shall reimburse Landlord upon demand for any and all taxes or assessments required to be paid by Landlord, excluding state, local and federal personal or corporate income taxes measured by the net income of Landlord from all sources and estate and inheritance taxes, whether or not now customary or within the contemplation of the parties hereto, when: 13.2.1. Said taxes are measured by or reasonably attributable to the cost or value of any leasehold improvements made in or to the Leased Premises by or for Tenant, to the extent the cost or value of such leasehold improvements exceeds the cost or value of a building standard build-out as determined by Landlord regardless of whether title to such improvements shall be vested in Tenant or Landlord; 13.2.2. Said taxes are assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Leased Premises or any portion of the Real Property; 13.2.3. Said taxes are assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Leased Premises; or 13.2.4. Said assessments are levied or assessed upon the Real Property or any part thereof or upon Landlord and/or by any governmental authority or entity, and relate to the construction, operation, management, use, alteration or repair of mass transit improvements. 13.3. Increase in Taxes. If at any time during the Lease Term any of Tenant's property is assessed as a part of the Leased Premises, or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed on Tenant's property or other improvements made by Tenant, Tenant shall pay to Landlord upon demand, as additional rent, the amount of any such additional taxes as may be levied against the Building or Real Property by reason thereof. 14. COMMON AREAS. ------------------ 14.1. Definition. The term "Common Areas" means all areas and facilities outside the Leased Premises provided and designated for the common use and convenience of Tenant and other tenants of the Building, their respective officers, agents, employees, customers and invitees. Common Areas include, but are not limited to, corridors, lobbies, pedestrian sidewalks, stairways, landscaped areas, restrooms on multi-tenant floors, elevators and shipping and receiving areas of the Building. 14.2. Maintenance. Landlord agrees to maintain, operate and repair (or cause others to do so) all Common Areas consistent with the character of the Building as a first-class office building and to keep same in clean and sightly condition during the Lease Term. The manner in which such areas and facilities shall be maintained and the expenditures therefor shall be at the discretion of Landlord and as to all such Common Areas Landlord shall have the right to adopt and promulgate reasonable rules and regulations from time to time generally applicable to tenants and occupants of the Building and their employees and business invitees. For the purpose of maintenance and repair, or to avoid an involuntary taking, Landlord may temporarily close portions of the Common Areas, and such actions shall not be deemed an eviction of Tenant or a disturbance of Tenant's use of the Leased Premises. 14.3. Tenant's Rights and Obligations. Landlord grants to Tenant, during the Lease Term, the license to use, for the benefit of Tenant and its officers, agents, employees, customers and invitees, in common with others entitled to such use, the Common Areas as they from time to time exist, subject to the rights and privileges of Landlord herein reserved. Tenant shall not at any time interfere with the rights of Landlord and others entitled to use any part of the Common Areas, and shall not store, permanently or temporarily, any materials, supplies or equipment in the Common Areas. 14.4. Changes to Common Area. Landlord shall have the right at any time during the Lease Term to change, alter, remodel, reduce, expand or improve the Common Areas, elevators, drains, pipes, heating and air conditioning apparatus or any other part of the Building, except the Leased Premises, without compensation to Tenant. For such purposes, Landlord or its agents or employees may, if necessary, enter, pass through and work upon the Leased Premises; provided Landlord shall carry out such work diligently and reasonably and provide Tenant with at least 24 hours' prior notice of any such entry into the Leased Premises (except no such notice shall be required in cases of emergency). If there is a change in the area of the Common Areas as a result of any of the foregoing, Landlord shall cause adjustments in the computation of Operating Expenses as shall be necessary to provide for any such changes. 15. ASSIGNMENT AND SUBLETTING. -------------------------------- 15.1. Transfers. Subject to Section 15.7 below, Tenant shall not, without the prior written consent of Landlord, voluntarily or by operation of law, assign, sublet, encumber or transfer all or any part of Tenant's interest in this Lease or in the Leased Premises or permit any part of the Leased Premises to be used or occupied by any person other than Tenant, its employees, customers and others having lawful business with Tenant (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any person or entity to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). If Tenant shall desire Landlord's consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the "Transfer Notice") shall include (i) the proposed effective date of the Transfer, which shall not be less than forty-five (45) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Leased Premises to be transferred (the "Subject Space"), (iii) all of the terms of the proposed Transfer and the consideration thereof, including a calculation of the "Profit Rental," as that term is defined in Section 15.4 below, in connection with such Transfer, the name and address of the proposed Transferee, and a copy of all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, and (iv) current financial statements pertaining to the proposed Transferee certified by an officer, partner or owner thereof, and any other information required by Landlord, which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space, and such other information as Landlord may reasonably require. Each time Tenant requests Landlord's consent to a proposed Transfer, whether or not Landlord shall grant consent, within thirty (30) days after written request by Landlord, as Additional Rent hereunder, Tenant shall pay to Landlord Five Hundred Dollars ($500.00) for Landlord's review and processing fees, and, in addition, Tenant shall reimburse Landlord for any reasonable legal fees incurred by Landlord in connection with Tenant's proposed Transfer. Any attempted Transfer made without Landlord's prior consent shall be wholly void and shall constitute a breach of this Lease. 15.2. Landlord's Consent. Landlord shall not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. The parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply, without limitation as to other reasonable grounds for withholding consent: (i) The Transferee is of a character or reputation or engaged in business which is not consistent with the quality of the Building; (ii) The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease; (iii) The Transferee is either a governmental agency or instrumentality thereof; (iv) The Transfer will result in more than a reasonable and safe number of occupants per floor within the Subject Space; (v) The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the Lease on the date consent is requested; (vi) The proposed Transfer would cause Landlord to be in violation of another lease or agreement to which Landlord is a party, or would give an occupant of the Building a right to cancel its lease; (vii) The terms of the proposed Transfer will allow the Transferee to exercise a right of renewal, right of expansion, right of first offer, or other similar right held by Tenant (or will allow the Transferee to occupy space leased by Tenant pursuant to any such right); or (viii) Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (A) occupies space in the Building at the time of the request for consent (B) is negotiating with Landlord to lease space in the Building at such time, or (C) has negotiated with Landlord during the twelve (12)-month period immediately preceding the Transfer Notice. If Landlord consents to any Transfer pursuant to the terms of this Section 15.2, Tenant may within six (6) months after Landlord's consent, but not later than the expiration of said six-month period, enter into such Transfer of the Leased Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 15.1 of this Lease, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice (A) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 15.2, or (B) which would cause the proposed Transfer to be more favorable to the Transferee than the terms set forth in Tenant's original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 15. 15.3. Intentionally Deleted. ------------------------------ 15.4. Limitation on Profit Rental. In the event Tenant enters into a Transfer, Tenant shall pay to Landlord fifty percent (50%) of the Profit Rental, if any, received from the Transferee, as it is received. "Profit Rental" shall be calculated by deducting from the amount received by Tenant from the Transferee on account of the Transfer, the sum of (i) the amounts payable to Landlord by Tenant pursuant to this Lease for the Subject Space which has been Transferred ,and (ii) the reasonable, actual and out-of-pocket expenses incurred by Tenant for (A) any changes, alterations and improvements to the Leased Premises in connection with the Transfer (and any planning and improvement allowances provided by Tenant to the Transferee in connection therewith), and (B) attorneys' fees, brokerage commissions and advertising expenses in connection with the Transfer. 15.5. Continuing Obligations. No Transfer, even with Landlord's consent, shall relieve Tenant of its obligations to pay the Rent and to perform all of the other obligations to be performed by Tenant under this Lease. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any subsequent Transfer. 15.6. Corporations and Partnerships. Subject to Section 15.7 below, a sale by Tenant of all or substantially all of its assets shall constitute a Transfer for purposes of this Lease. Subject to Section 15.7 below, if Tenant is a corporation, then any assignment or transfer of this Lease by merger, consolidation or liquidation, or any change in ownership of or power to vote of a majority of its outstanding voting stock shall, in Landlord's reasonable discretion, constitute a Transfer for purposes of this Lease. Subject to Section 15.7 below, if Tenant is a partnership, then any change in the identity of the general partners having an aggregate interest in the partnership exceeding fifty percent (50%) shall, in Landlord's reasonable discretion, constitute a Transfer for purposes of this Lease. 15.7. Affiliated Companies/Restructuring of Business Organization. The assignment or subletting by Tenant of all or any portion of this Lease or the Leased Premises to (i) a parent or subsidiary of Tenant, or (ii) any person or entity which controls, is controlled by or under common control with Tenant, or (iii) any entity which purchases all or substantially all of the assets of Tenant, or (iv) any entity into which Tenant is merged or consolidated (all such persons or entities described in (i), (ii), (iii) and (iv) being sometimes hereinafter referred to as "Affiliates") shall not be deemed a Transfer under this Article 15, provided that: 15.7.1. Any such Affiliate was not formed as a subterfuge to avoid the obligations of this Article 15; 15.7.2. Tenant gives Landlord prior notice of any such assignment or sublease to an Affiliate; 15.7.3. Any such Affiliate has, as of the effective date of any such assignment or sublease, a tangible net worth, computed in accordance with generally accepted accounting principles (but excluding goodwill as an asset), which is equal to or greater than Tenant as of the date of execution of this Lease and sufficient to meet the obligations of Tenant under the assignment or sublease; 15.7.4. Any such assignment or sublease shall be subject to all of the terms and provisions of this Lease, and such assignee or sublessee shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease; and 15.7.5. Tenant and any guarantor shall remain fully liable for all obligations to be performed by Tenant under this Lease. 16. TENANT'S DEFAULT. ----------------------- 16.1. Definition. The occurrence of any of the following shall constitute a default and breach of this Lease by Tenant: 16.1.1. Any failure by Tenant to pay when due any Rent or any other monetary sums required to be paid thereunder. 16.1.2. The abandonment or vacation of the Leased Premises. 16.1.3. Any failure by Tenant to observe or perform any provision, covenant, or condition set forth in Articles 5 or 15 hereof. 16.1.4. Any failure by Tenant to observe and perform any other provisions of this Lease to be observed or performed by Tenant within fifteen (15) days after notice thereof has been provided to Tenant by Landlord, or if performance is not possible within said period, any failure of Tenant to commence performance within said period and to diligently prosecute such performance to completion. 16.1.5. Intentionally creating or permitting to be created a nuisance which shall not be abated within five (5) days after written notice thereof from Landlord. 16.1.6. If Tenant, or any guarantor of Tenant's obligations under this Lease ("Guarantor"), admits in writing that it cannot meet its obligations as they become due; or is declared insolvent according to any law; or assignment of Tenant's or Guarantor's property is made for the benefit of creditors; or a receiver or trustee is appointed for Tenant or Guarantor or its property; or the interest of Tenant or Guarantor under this Lease is levied on under execution or other legal process; or any petition is filed by or against Tenant or Guarantor to declare Tenant bankrupt or to delay, reduce or modify Tenant's debts or obligations; or any petition is filed or other action taken to reorganize or modify Tenant's or Guarantor's capital structure, if Tenant or Guarantor is a corporation or other entity; any such levy, execution, legal process or petition filed against Tenant or Guarantor shall not constitute a breach of this Lease provided Tenant or Guarantor shall vigorously contest the same by appropriate proceedings and shall remove or vacate the same within sixty (60) days from the date of its creation, service or filing. 16.1.7. The taking of this Lease or Tenant's interest therein under writ of execution. 16.2. Interest on Unpaid Sums. If any Rent, or any other monetary sum required to be paid thereunder by Tenant to Landlord, is not paid when due, such sum shall accrue interest from the date due until received at the rate which is the lower of (i) the Interest Rate set forth in Section 6.2.3.4 above or (ii) the highest rate permitted by applicable law. 16.3. Remedies. In the event of any such default or breach by Tenant, Landlord may at any time thereafter, without limiting Landlord in the exercise of any other right or remedy which Landlord may have: 16.3.1. Without terminating this Lease, reenter and attempt to relet or take possession pursuant to legal proceedings and remove all persons and property from the Leased Premises. In such event, Landlord may, from time to time, make such alterations and repairs as may be necessary in order to relet the Leased Premises or any part thereof for such term or terms (which may be for a term extending beyond the Lease Term) and at such rental or rentals and upon such other terms and conditions as Landlord, in its sole discretion, may deem advisable. Upon each such reletting, all rentals received by Landlord from such reletting shall be applied: first, to the payment of any costs and expenses of such reletting, including brokerage fees and attorney's fees; second, to the payment of any indebtedness other than Rent due thereunder from Tenant to Landlord; third, to the payment of Rent due and unpaid thereunder; and the residue, if any, shall be held by Landlord and applied to payment of future rent as the same may become due and payable thereunder. If such rentals received from such reletting during any month be less than that to be paid during that month by Tenant thereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the Rent herein reserved. Actions to collect amounts due by Tenant to Landlord as provided in this Section may be brought from time to time, on one or more occasions, without the necessity of Landlord's waiting until expiration of the Lease Term. No such reentry or taking possession of the Leased Premises by Landlord in accordance with this Lease shall be construed as an election on its part to terminate this Lease unless a notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect in writing to terminate this Lease for such previous breach. No such alteration of locks or other security devices and no removal or other exercise of dominion by Landlord over Tenant's Property or others at the Leased Premises shall be deemed unauthorized or constitute a conversion of the Leased Premises or the property of Tenant therein or termination of the Lease, Tenant hereby consenting, after any Tenant default, to the aforesaid exercise of dominion over Tenant's property within the Leased Premises. All claims for damages by reason of such reentry and/or repossession and/or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process. Tenant agrees that any reentry by Landlord may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings to the extent permitted by applicable laws, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise. 16.3.2. [Intentionally Deleted]. 16.3.3. Terminate this Lease and Tenant's right to possession, in which case Tenant shall immediately surrender possession. In addition to any other remedies which Landlord may have, it shall have the right to recover from Tenant (a) the amount equal to any unpaid rent which has been earned at the time of such termination; (b) as liquidated damages for loss of bargain, and not as a penalty, an amount equal to the excess, if any, of the aggregate amount of Rent and other charges which are Tenant's obligation to pay under this Lease for the remainder of the stated term over the aggregate of the then reasonable rental value of the Leased Premises under a lease substantially similar to this Lease for the remainder of the stated term, all of which amounts shall be discounted to present value at the passbook savings rate of U.S. Bank, a national banking association, or its successor, then in effect and shall be immediately due and payable; and (c) all other damages and expenses which Landlord has sustained because of Tenant's default, including reasonable attorney's fees, the cost of recovering the Leased Premises, brokerage commissions and advertising expenses incurred, and expenses of remodeling the Leased Premises or any portion thereof for a new tenant, whether for the same or a different use and any special concessions made to obtain a new tenant. 16.3.4. If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Leased Premises for such purpose), and thereupon Tenant shall be obligated to, and hereby agrees, to pay Landlord, upon demand, all costs, expenses and disbursements (including reasonable attorneys' fees) incurred by Landlord in taking such remedial action as additional rent. 16.3.5. No receipt of money by Landlord from Tenant after the termination of this Lease as herein provided shall reinstate, continue or extend the Lease Term or operate as a waiver of the right of Landlord to enforce the payment of Rent or other money when due by Tenant, or operate as a waiver of the right of Landlord to recover possession of the Leased Premises by proper remedy. 16.3.6. In addition to any other remedies Landlord may have at law or equity and/or under this Lease, Tenant shall pay upon demand all Landlord's costs, charges and expenses, including fees of counsel, agents and others retained by Landlord, whether or not suit is filed, incurred in connection with the recovery under this Lease or for any other relief against Tenant. In the event Landlord or Tenant shall bring any action against the other, the losing party shall pay the successful party's reasonable attorneys fees and court costs. 16.3.7. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent. If Tenant shall fail to perform any of its obligations under this Lease, within a reasonable time after such performance is required by the terms of this Lease, Landlord may, but shall not be obligated to, after reasonable prior notice to Tenant, make any such payment or perform any such act on Tenant's part without waiving its right based upon any default of Tenant and without releasing Tenant from any obligations hereunder. 16.3.8. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15) days after delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of this Section 16; (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 10 of this Lease; and (iii) sums equal to all expenditures made and obligations incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Section 16.3.7 shall survive the expiration or sooner termination of the Lease Term. 16.4. Late Charges. Tenant hereby acknowledges late payment by Tenant to Landlord of Rent and other sums due thereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Leased Premises. Accordingly, if any Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee when due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree such late charge represents a fair and reasonable estimate of the cost Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any of the other rights and remedies granted thereunder. 17. LANDLORD'S DEFAULT. ------------------------- 17.1. Notice to Landlord. Landlord shall in no event be charged with default in the performance of any of its obligations hereunder unless and until Landlord shall have failed to perform such obligations within thirty (30) days (or within such additional time as is reasonably required to correct any such default) after notice to Landlord by Tenant properly specifying wherein Landlord has failed to perform any such obligations. 17.2. Notice to Mortgagee. If the holder of record of the first mortgage covering the Leased Premises shall have given prior notice to Tenant that it is the holder of the first mortgage and such notice includes the address at which notices to such mortgagee are to be sent, then Tenant shall give to the holder of record of such first mortgage notice simultaneously with any notice given to Landlord to correct any default of Landlord as hereinabove provided. The holder of record of such first mortgage shall have the right, within thirty (30) days after receipt of said notice (or within such additional time as is reasonably required to correct any such default including time to obtain possession of the Leased Premises by foreclosure or other means) before Tenant may take any action under this Lease by reason of such default. Any notice of default given Landlord shall be null and void unless simultaneous notice has been given to said first mortgagee. 17.3. Landlord's Exculpation. It is expressly understood and agreed that notwithstanding anything in this Lease to the contrary, and notwithstanding any applicable law to the contrary, the liability of Landlord (including any successor Landlord) and any recourse by Tenant against Landlord shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Building and Real Property, and neither Landlord, nor any of Landlord's officers, members or partners nor their respective officers, agents, directors or employees shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. 18. CONDEMNATION. ------------------- 18.1. Effect of Taking. If the Leased Premises or any portion thereof are taken under the power of eminent domain, or sold by Landlord under the threat of the exercise of said power (all of which is herein referred to as "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever occurs first. If more than twenty-five percent (25%) of the floor area of the Leased Premises is taken by condemnation, Tenant may, at its option, terminate this Lease as of the date the condemning authority takes possession, by providing Landlord notice in writing of its intent to terminate not later than twenty (20) days after Landlord shall have notified Tenant of the taking. Failure of Tenant to so notify Landlord shall constitute Tenant's agreement to continue the Lease in full force and effect as to the balance of the Leased Premises. 18.2. Rent Reduction. If the Lease is not fully terminated after any taking, then it shall remain in full force and effect as to the portion of the Leased Premises remaining; provided the Rent payable thereunder shall be reduced on an equitable basis, taking into account the relative value of the portion taken as compared to the portion remaining. Landlord shall, at its expense, restore the remaining portion to a complete unit of like quality and character as existed prior to the condemnation. 18.3. Awards. All awards for the taking of any part of the Leased Premises under the power of eminent domain shall be the property of Landlord, whether made as compensation for diminution of value of the leasehold or for the taking of the fee; provided however, that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claim is payable separately to Tenant. Notwithstanding anything in this Article 18 to the contrary, Landlord and Tenant shall each be entitled to receive fifty percent (50%) of the "bonus value" of the leasehold estate in connection therewith, which bonus value shall be equal to the difference between the Rent payable under this Lease and the sum actually established and awarded for the leasehold estate by the condemning authority as the award for compensation. All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. 19. SUBORDINATION. -------------------- This Lease, at Landlord's option, shall be subject and subordinate to the liens of any mortgages or deeds of trust and to any ground leases, in any amount or amounts whatsoever now or hereafter placed on or against the land or improvements, or either thereof, of which the Leased Premises are a part, or on or against Landlord's interest or estate therein, without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. If any mortgagee or trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage or deed of trust or ground lease and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage or deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage or deed of trust or ground lease. Tenant covenants and agrees to execute and deliver upon demand, without charge therefor, such further instruments evidencing such subordination of this Lease to the lien of any such ground leases, mortgages or deeds of trust as may be required by Landlord. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage, or if any ground or underlying lease is terminated, to attorn, without any deductions or set-offs whatsoever, to the purchaser upon any such foreclosure sale, or to the lessor of such ground or underlying lease, as the case may be, if so requested to do so by such purchaser or lessor, and to recognize such purchaser or lessor as the lessor under this Lease. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. 20. QUIET ENJOYMENT. ---------------------- Landlord agrees Tenant, upon paying Rent and other monetary sums due under this Lease and performing the covenants and conditions of this Lease, may quietly have, hold and enjoy the Leased Premises during the Lease Term hereof, subject, however, to the provisions herein referring to subordination and condemnation. 21. DELAYS. ------------- Whenever Landlord shall be delayed or restricted in the performance of any obligation of Landlord herein (including any obligation with respect to the provision of any service or utility or the performance of work or repairs) by reason of Landlord's inability to obtain materials, services or labor required for such performance or by reason of any statute, law or regulation of a governmental entity, or by reason of any other cause beyond Landlord's reasonable control, Landlord shall be entitled to extend the time for such performance by a time equal to the extent of the delay or restriction, and Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. 22. GENERAL PROVISIONS. ------------------------- 22.1. Estoppel Certificates. Tenant shall, at any time, upon not less than ten (10) days written notice from Landlord, execute, acknowledge and deliver to Landlord a statement in writing (a) certifying this Lease is unmodified and in full force and effect (or if modified, stating the nature of the modification) and the date to which the Rent and Operating Expenses are paid in advance, (b) acknowledging there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord thereunder or specifying such default if any exist, and (c) containing such other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee or buyer. If Tenant fails to execute and deliver such statement within ten (10) days, it shall be deemed conclusively to have acknowledged the accuracy of the matter set forth in Landlord's statement. 22.2. Transfer of Landlord's Interest. In the event of a sale or conveyance voluntarily or involuntarily by Landlord of Landlord's interest in the Leased Premises, Landlord shall be relieved from and after the date of such transfer of all liability accruing thereafter on the part of Landlord; provided any funds in the hands of Landlord at the time of transfer in which Tenant has an interest shall be delivered to the successor of Landlord. This Lease shall not be affected by any such sale and Tenant agrees to attorn to the transferee. 22.3. Captions. Article and paragraph captions are for convenience only and are not a part of this Lease and shall not be used for interpretation or construction of this Lease. 22.4. Time of Essence. Time is of the essence hereof. 22.5. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 22.6. Modifications for Mortgagee. In the event any lending institution with whom Landlord has negotiated or shall hereafter negotiate for interim or permanent financing for the Building shall require a modification of this Lease as a condition to providing such financing, Landlord shall promptly provide written notice of the requirement to Tenant. If Tenant fails or refuses to make such modification within thirty (30) days after such notice, this Lease may be terminated by Landlord at any time prior to the date on which the Lease Term commences. Provided, however, Tenant shall not be required to make any modifications which materially alters its rights and responsibilities under this Lease. 22.7. Entire Agreement. This Lease, along with any exhibits or attachments hereto, constitutes the entire agreement between the parties relative to the Leased Premises and there are no oral agreements or representations between the parties with respect to the subject matter hereof. This Lease supersedes and cancels all prior agreements and understandings with respect to the subject matter hereof. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. 22.8. Recording. This Lease shall not be recorded and any recordation shall be a breach under this Lease. 22.9. Waiver. The waiver by Landlord of the breach of any provision herein shall not be deemed a waiver of such provision. Acceptance by Landlord of any performance by Tenant after the time the same shall have become due shall not constitute a waiver by Landlord of the breach or default of any covenant, term or condition unless otherwise expressly agreed to by Landlord in writing. 22.10. Intentionally Deleted. 22.11. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assigning or subletting by Tenant and subject to the provisions for the transfer of Landlord's interest, this Lease shall bind the parties, their successors and assigns. This Lease shall be governed by the laws of the State of Colorado. 22.12. Holding Over. If Tenant remains in possession of all or any part of the Leased Premises after the expiration of the Lease Term hereof, with or without the consent of Landlord, such tenancy shall be from month-to-month only, and not a renewal hereof or an extension for any further term, on the same terms and conditions as provided herein, except only as to the Lease Term; provided, however, during such period as a tenant from month-to-month, Tenant shall pay Base Rent at double the rate payable for the month immediately preceding the date of termination of this Lease and, in addition, Tenant shall reimburse Landlord for all damages (consequential as well as direct) sustained by it by reason of Tenant's occupying the Leased Premises past the termination date. 22.13. Entry by Landlord. Landlord and its agents shall have the right to enter the Leased Premises at all reasonable times and upon reasonable notice (which in the case of non-emergency repairs shall be at least twenty-four (24) hours' prior written notice) for the purpose of examining or inspecting the same, to supply janitorial services and any other services to be provided by Landlord or Tenant thereunder, to show the same to prospective purchasers of the Building and make such alterations, repairs, improvements or additions to the Leased Premises or to the Building of which they are a part as Landlord may deem necessary or desirable. Notwithstanding anything to the contrary contained in this Section 22.13, Landlord may enter the Leased Premises at any time, without notice to Tenant, in emergency situations and/or to perform regularly scheduled janitorial and any other services to be provided by Landlord pursuant to this Lease. Tenant shall permit Landlord to show the Leased Premises to prospective tenants during the last six (6) months of the Lease Term hereof or any renewal thereof. If Tenant shall not be personally present to open and permit an entry into the Leased Premises at any time when such entry by Landlord is necessary or permitted thereunder, Landlord may enter by means of master key without liability to Tenant except for any failure to exercise due care for Tenant's property, and without affecting this Lease. If, during the last month of the Lease Term hereof, Tenant shall have removed substantially all of its property from the Leased Premises, Landlord may immediately enter and alter, renovate and redecorate the Leased Premises without elimination or abatement of rent or incurring liability to Tenant for any compensation. Notwithstanding anything in this Section 22.13 to the contrary, Landlord shall use commercially reasonable efforts to exercise its rights under this Section 22.13 in a manner which minimizes interference with the use and occupancy of the Leased Premises by Tenant for the conduct of Tenant's normal business operations from the Leased Premises. 22.14. Corporate Authority. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and this Lease is binding upon said corporation in accordance with its terms. 22.15. Notices. All notices or demands of every kind required or desired to be given by Landlord or Tenant thereunder shall be in writing and shall be deemed delivered forty-eight (48) hours after depositing the notice or demand in the United States mail, certified or registered, postage prepaid, addressed to the Landlord or Tenant at the address set forth in Sections 3 and 5, respectively, of the Summary, or at such other place as such party may designate from time to time. 22.16. Real Estate Broker. Tenant represents Tenant has dealt directly and only with the real estate brokers or agents specified in Section 12 of the Summary as brokers ("Brokers") in connection with this Lease, and insofar as Tenant knows, no other broker negotiated or participated in the negotiations of this Lease, or submitted or showed the Leased Premises, or is entitled to any commission in connection herewith. Tenant agrees to indemnify and defend Landlord against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of Tenant's dealings with any real estate broker or agent other than the Brokers. 22.17. Sign Rights. -------------------- 22.17.1. Building Standard Signage. Landlord shall provide space on the Building directory on the ground floor lobby of the Building for a listing identifying Tenant's name and suite number. Landlord shall also install near the entry door to the Leased Premises signage identifying Tenant's name. All such permitted signage shall use Building standard materials and lettering. Landlord shall pay for the cost of the initial installation of such permitted signage, and Tenant shall pay for the cost of any changes thereto. 22.17.2. Exterior Signage. Subject to Tenant obtaining the approval of all applicable governmental entities and Tenant's compliance with all applicable governmental laws and ordinances and the terms of this Section 22.17.2, Tenant shall have the right to install, at Tenant's sole cost and expense, one (1) identification sign displaying Tenant's logo and Tenant's name, "Matrix Bancorp, Inc." (or "Matrix Bank" or "Matrix Capital Bank") (but no other markings) on each of the following portions of the Building: (i) at the top of the exterior of the Building on each of the following three (3) sides of the Building: (A) the side of the Building facing 16th Street, (B) the side of the Building facing 17th Street, and (C) the side of the Building facing California Street (collectively, the "Building Exterior Signs"); and (ii) on the podium level of the Building on each of the following two (2) sides of the Building: (A) the side of the Building facing 17th Street, and (B) the side of the Building facing California Street (collectively, the "Podium Level Signs"). Notwithstanding the foregoing, subject to Tenant obtaining the approval of all applicable governmental entities and Tenant's compliance with all applicable governmental laws and ordinances and the terms of this Section 22.17.2, Tenant may convert either or both of the Podium Level Signs from static signs to dynamic/electronic/reader signs displaying Tenant's logo and Tenant's name (as set forth above) and such other information thereon (such as, for example, time of day, outside temperature and stock quotes) as shall be approved by Landlord, in Landlord's sole and absolute discretion prior to Tenant's displaying the same. The approximate location of the Building Top Exterior Signs is depicted on Exhibit "H" attached hereto, and the approximate location of the Podium Level Signs is depicted on Exhibit "I" attached hereto. The graphics, materials, color, design, lettering, lighting, size, specifications, manner of affixing and exact location of the Building Top Exterior Signs and the Podium Level Signs (collectively, the "Exterior Signs") shall be subject to Landlord's approval. Tenant shall pay for all costs and expenses related to the Exterior Signs, including, without limitation, costs of the design, construction, installation, maintenance, insurance, utilities, repair and replacement of the Exterior Signs. Tenant shall install and maintain the Exterior Signs in compliance with all laws and subject to the applicable provisions of Articles 8 and 9 above. Tenant shall be responsible for maintaining insurance on the Exterior Signs as part of the insurance required to be carried by Tenant pursuant to Section 10.2 above. 22.17.2.1. Transferability. The rights to the Exterior Signs are personal to the Original Tenant and may not be transferred by the Original Tenant or used by anyone else, except that Tenant shall have the right to transfer Tenant's rights to the Exterior Signs to an Affiliate of Tenant in connection with Tenant's assignment of its entire interest in this Lease to such Affiliate pursuant to Section 15.7 of this Lease, but any such transfer of signage rights to such Affiliate assignee pursuant to this Section 22.17.2.1 shall be subject to Landlord's reasonable approval of the name change on the Exterior Signs to reflect the identity of such Affiliate assignee. In addition, following the Commencement Date, Tenant shall only have such rights to the Exterior Signs when the Original Tenant or such Affiliate assignee is in physical occupancy and possession of the entire Leased Premises (including any First Offer Space) leased to Tenant hereunder. 22.17.2.2. Maintenance of Exterior Signs. Should the Exterior Signs require maintenance, repairs or replacement as determined in Landlord's reasonable judgment, Landlord shall have the right to provide written notice thereof to Tenant and Tenant shall cause such repairs, replacement and/or maintenance to be performed within ten (10) days after receipt of such notice from Landlord, at Tenant's sole cost and expense; provided, however, if such repairs, replacement and/or maintenance are reasonably expected to require longer than ten (10) days to perform, Tenant shall commence such repairs, replacement and/or maintenance within such ten (10) day period and shall diligently prosecute such repairs, replacement and maintenance to completion. Should Tenant fail to perform such maintenance, repairs or replacement within the periods described in the immediately preceding sentence, Landlord shall have the right to cause such work to be performed and to charge Tenant as Additional Rent for the costs of such work. 22.17.2.3. Removal of Exterior Signs. Upon the expiration or earlier termination of this Lease, or upon Tenant's loss of its right to the Exterior Signs pursuant to Section 22.17.2.1 above, Tenant shall, at Tenant's sole cost and expense, cause the Exterior Signs to be removed, and Tenant shall repair all damage occasioned thereby and restore the affected areas to their original condition prior to the installation of the Exterior Signs. If Tenant fails to remove such signage and repair and restore the affected areas as provided in the immediately preceding sentence, within ten (10) days following the expiration or earlier termination of this Lease, then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing such work shall be reimbursed by Tenant to Landlord within ten (10) days after Tenant's receipt of invoice therefor. The immediately preceding sentence shall survive the expiration or earlier termination of this Lease. 22.18. Asbestos Disclosure. Landlord has advised Tenant that there is asbestos-containing material ("ACM") in the Building, which consists of non-friable floor tile, mastic and fireproofing. Such ACM exists behind hard barriers, thus, it will not be accessible to tenants and other occupants of the Building. Attached hereto as Exhibit F is a Notice Concerning Asbestos in the Building. Tenant acknowledges that any construction, remodeling, replacement, maintenance, repair, alterations or other work at the Building, including but not limited to, major alterations, drilling or boring holes, installing electrical, telecommunications or computer lines, sanding floors and removing ceiling tiles could disturb the remaining ACM and possibly release asbestos fibers into the air. Tenant shall not cause or permit any such work in or on the Building (including, without limitation, any alterations, additions or other work to the Leased Premises pursuant to the provisions of Article 9 of this Lease) without the prior written consent of Landlord, and the granting of Landlord's consent shall be conditioned upon, among other things, Landlord's approval of the contractor who Tenant causes or permits to perform such work and Landlord's receipt of an Asbestos Notification and Disturbance Agreement executed by such Landlord-approved contractor in the form attached hereto as Exhibit G. Landlord agrees that in performing any work in the Building, it shall use commercially reasonable efforts not to disturb the remaining ACM in the Building; if any such ACM is so disturbed by Landlord, Landlord shall promptly remediate such disturbance at Landlord's sole cost and expense, which shall not be included in Operating Expenses. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: WXI/SEV REALTY, LLC, a Delaware limited liability company By: LEGACY PARTNERS COMMERCIAL, INC., a Texas corporation, as agent and manager for Landlord By: /s/ Debra Smith ------------------------------------------ Name:_____________________________________ Title_____________________________________ TENANT: MATRIX BANCORP, INC., a Colorado corporation By: /s/ David W. Kloos ------------------------------------------ Name:_____________________________________ Title_____________________________________ By: /s/ Theodore Abariotes ------------------------------------------ Name:_____________________________________ Title_____________________________________ ***If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. The Lease must be executed by the president or vice-president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease. EX-10 8 fifthamdtocreditagmt.txt 10.11 Execution Copy FIFTH AMENDMENT TO CREDIT AGREEMENT This FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and entered into as of November 20, 2001, is by and among MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation (the "Company"), the lenders from time to time party to the Credit Agreement referred to below (each a "Lender" and collectively, the "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, together with any successor agents appointed hereunder, the "Agent"). RECITALS A. The Company, the Lenders and U.S. Bank National Association, in its capacities as a Lender and as Agent, entered into a Credit Agreement dated as of September 29, 2000, as amended by that First Amendment to Credit Agreement dated as of March 5, 2001, that Second Amendment to Credit Agreement dated as of April 11, 2001, that Third Amendment to Credit Agreement dated as of June 29, 2001 and that Fifth Amendment to Credit Agreement dated as of September 28, 2001 (as amended, the "Credit Agreement"); and B. The Company desires to amend certain provisions of the Credit Agreement, and the Lenders and the Agent have agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require. Section 2. Amendments to Credit Agreement. 2.1 Section 1.01. (a) The Credit Agreement is hereby amended by amending the definition of "Adjusted Leverage Ratio", "Applicable Margin", "Swingline Facility Amount" and "Termination Date" contained in Section 1.01 of the Credit Agreement to read in its entirety as follows: "Adjusted Leverage Ratio": As of any date of determination, the ratio of (a) Total Indebtedness to (b) Adjusted Tangible Net Worth. "Applicable Margin": With respect to (a) Prime Rate Advances, 0%; and (b) Eurodollar Advances, 1.20%. "Eurodollar Rate": With respect to any date of determination, the average offered rate for one month deposits in United States dollars, which rate appears on Telerate page 3750 as of 11:00 a.m., London time (or such other time as of which such rate appears) on such date of determination, or the rate for such deposits determined by the Agent at such time based on such other published service of general application as shall be selected by the Agent for such purpose, provided that in lieu of determining the rate in the foregoing manner, at the option of the Agent, the Agent may determine the rate based on rates at which one month deposits in United States dollars are offered to the Agent in the interbank Eurodollar market at such time in an amount approximately equal to the aggregate principal amount of the Advances to which such rate is to apply. "Telerate page 3750" means the display designated as such on the Telerate reporting system operated by Telerate System Incorporated (or such other page as may replace such page 3750 for the purpose of displaying London interbank offered rates of major banks for U.S. Dollar deposits). "Swingline Facility Amount": (i) $48,000,000 on or before November 20, 2001; (ii) $80,000,000 from and after November 20, 2001 to March 31, 2002; and (iii) $60,000,000 from and after April 1, 2002. "Termination Date": The earliest of (a) March 31, 2002, (b) the date on which the Commitments are terminated or reduced to zero pursuant to Section 2.01(g), or (c) the date on which the Commitments are terminated pursuant to Section 6.02. (b) The Credit Agreement is hereby amended by adding the definitions of "Adjusted Tangible Net Worth", "Prime Rate" and "Prime Rate Advance" to Section 1.01 in their correct alphabetical order to read as follows: "Adjusted Tangible Net Worth": As of any date of determination, the sum of the amounts set forth on the consolidated balance sheet of the Company as the sum of the common stock, preferred stock, additional paid-in capital and retained earnings of the Company (excluding treasury stock), minus the book value of all intangible assets of the Company and its Subsidiaries, including all such items as goodwill, trademarks, trade names, service marks, copyrights, patents, licenses, unamortized debt discount and expenses and the excess of the purchase price of the assets of any business acquired by the Company or any of its Subsidiaries over the book value of such assets, plus Indebtedness of the Company subordinated in right of payment to the payment of the Obligations in a manner and to an extent approved by the Required Banks, minus capitalized excess servicing fees and capitalized servicing rights, plus the lesser of (a) 95% of the Appraisal Value of the Eligible Servicing Portfolio or (b) the book value of the Company's capitalized excess servicing fees and capitalized rights. "Appraisal Value": As of any date of determination, the fair market value of the Company's Eligible Servicing Portfolio, as determined by the most recent appraisal conducted by a qualified appraiser acceptable to the Agent to be performed on not less than a quarterly basis. 2 "Eligible Servicing Portfolio": As of any date of determination, the Servicing Portfolio of the Borrower but excluding the principal balance of Mortgage Loans included in the Servicing Portfolio (a) with respect to which the Company is obligated to repurchase or indemnify the holder of the Mortgage Loans as a result of defaults on the Mortgage Loans at any time during the term of such Mortgage Loans, (b) for which the Servicing Contracts are not owned by the Company free and clear of Liens (other than Liens in favor of the Agent), (c) which are serviced by the Company for others under subservicing arrangements, or (d) which are serviced for Persons other than Fannie Mae, Freddie Mac, Ginnie Mae or such other Persons which are acceptable to the Required Lenders in their sole discretion for such purpose. "Prime Rate": The rate of interest from time to time publicly announced by the Agent as its "prime rate". The Agent may lend to its customers at rates that are at, above or below the Prime Rate. For purposes of determining any interest rate hereunder or under any other Loan Document which is based on the Prime Rate, such interest rate shall change as and when the Prime Rate shall change. "Prime Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Prime Rate. (c) Section 1.01 of the Credit Agreement is hereby amended by deleting the definitions of "Reference Rate" and "Reference Rate Advance" in their entirety. 2.2 Prime Rate. Except for references to such terms specifically so amended by this Amendment, all remaining references to the term "Reference Rate" or "Reference Rate Advance" contained in the Credit Agreement are hereby amended to be references to the term "Prime Rate" or "Prime Rate Advance", as applicable. 2.3 Adjusted Tangible Net Worth. Section 4.14 of the Credit Agreement is hereby amended in its entirety to read as follows: Section 4.14 Adjusted Tangible Net Worth. The Company will not permit its Adjusted Tangible Net Worth at any time to be less than $30,000,000. 2.4 Adjusted Leverage Ratio. Section 4.15 of the Credit Agreement is hereby amended in its entirety to read as follows: Section 4.15. Adjusted Leverage Ratio. The Company will not permit the Adjusted Leverage Ratio at any time to be greater than (a) 12 to 1 before November 20, 2001, (b) 14 to 1 from and after November 20, 2001 to March 31, 2002, and (c) 12 to 1 from and after April 1, 2002. 3 2.5 Schedule 1.01(a). Schedule 1.01(a) to the Credit Agreement is hereby amended in its entirety to read as set forth in Schedule 1.01(a) attached to this Amendment, which is made a part of the Credit Agreement as Schedule 1.01(a) thereto. Section 3. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective provided the Agent shall have received at least five (5) counterparts of this Amendment, duly executed by the Company and all of the Lenders, and the Agent shall have received the following, each duly executed or certified: (a) This Amendment, the Second Amended and Restated Promissory Note (Warehousing Note) to U.S. Bank National Association, the Amended and Restated Promissory Note (Warehousing Note) to Residential Funding Corporation and the Second Amended and Restated Swingline Note to U.S. Bank National Association, in each case duly executed by the Company. (b) A copy of the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Certificate of Incorporation or Bylaws of the Company since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Company dated September 29, 2000, and (ii) identifying each officer of the Company authorized to execute this Amendment, the Second Amended and Restated Promissory Note (Warehousing Note) to U.S. Bank National Association, the Amended and Restated Promissory Note (Warehousing Note) to Residential Funding Corporation and the Second Amended and Restated Swingline Note to U.S. Bank National Association and any other instrument or agreement executed by the Company in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. (c) Certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment. (d) The Consent and Reaffirmation of Guaranty, duly executed by the Guarantor. (e) A written opinion, addressed to the Agent and the Lenders, dated the date hereof and in a form satisfactory to the Agent, concerning the authorization, execution, delivery, performance and enforceability of the Amendment Documents executed by the Borrower. (f) The Company shall have satisfied such other conditions as specified by the Agent and the Lenders, including payment of all unpaid legal fees and expenses incurred by the Agent through the date of this Amendment in connection with the Credit Agreement and the Amendment Documents. 4 Section 4. Representations, Warranties, Authority, No Adverse Claim. 4.1 Reassertion of Representations and Warranties, No Default. The Company hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit Agreement, and (b) there will exist no Unmatured Event of Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Agent and the Lenders. 4.2 Authority, No Conflict, No Consent Required. The Company represents and warrants that the Company has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Company in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Company is a party or a signatory or a provision of the Company's Certificate of Incorporation, Bylaws or any other agreement or requirement of law in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Company or any of its property except, if any, in favor of the Agent on behalf of the Lenders. The Company represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Company of the Amendment Documents or other agreements and documents executed and delivered by the Company in connection therewith or the performance of obligations of the Company therein described, except for those which the Company has obtained or provided and as to which the Company has delivered certified copies of documents evidencing each such action to the Agent. 4.3 No Adverse Claim. The Company warrants, acknowledges and agrees that no events have taken place and no circumstances exist at the date hereof which would give the Company a basis to assert a defense, offset or counterclaim to any claim of the Agent or the Lenders with respect to the Obligations or the Company's obligations under the Credit Agreement as amended by this Amendment. Section 5. Affirmation of Credit Agreement and Pledge Agreement, Further References. The Agent, the Lenders, and the Company each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. The Company confirms to the Agent and the Lenders that the Company's obligations under the Credit Agreement, as amended by this Amendment, are and continue to be secured by the security interest granted by the Company in favor of the Agent and the Lenders under the Pledge Agreement and all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Company under such 5 document and any and all other documents and agreements entered into with respect to the obligations under the Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respect by the Company. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. All of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Company under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Company. Section 6. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. Section 7. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 8. Successors. The Amendment Documents shall be binding upon the Company, the Lenders, and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders, and the Agent and the successors and assigns of the Lenders and the Agent. Section 9. Legal Expenses. As provided in Section 8.03 of the Credit Agreement, the Company agrees to reimburse the Agent, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Company under the Amendment Documents, and to pay and save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Company shall survive any termination of the Credit Agreement. 6 Section 10. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. Section 11. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. Section 12. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MATRIX FINANCIAL SERVICES CORPORATION By /s/ Larry G. Sousa -------------------------------- Its Chief Financial Officer -------------------------------- Address for Notices: ------------------- 2133 West Peoria Phoenix, Arizona 85029-4928 Attention: James K. Munford, President Telecopier Number: (602) 749-2200 U.S. BANK NATIONAL ASSOCIATION By /s/ Randy S. Baker --------------------------------- Its Vice President --------------------------------- Address for Notices: ------------------- 601 South Second Street Minneapolis, Minnesota 55402 Attention: Randall Baker Telecopier Number: (612) 973-0826 RESIDENTIAL FUNDING CORPORATION By /s/ Michael K. Nomura --------------------------------- Its Director --------------------------------- Address for Notices: ------------------- 1646 North California Boulevard Suite 400 Walnut Creek, California 94596 Phone: (925) 988-2350 ATTN: Mitchell Nomura [Signature Page to Third Amendment to Credit Agreement] S - 1 EX-10 9 sckretny.txt 10.15 EXHIBIT 10.15 February 4, 2002 Mr. Paul E. Skretny 7901 Fish Pond Road Waco, Texas 76710 Re: Employment Agreement dated as of February 4, 1997, as extended by letter agreement of February 4, 2000 (the "Agreement") Dear Paul: Reference is made to the Agreement. Pursuant to the Agreement, the term of the Agreement is scheduled to expire today. This letter agreement shall evidence the renewal of the Agreement for the period from February 4, 2002 through February 4, 2003. Accordingly, Article 2 is hereby amended to read as follows: "The term of this Agreement shall commence on February 4, 1997 and shall continue until February 4, 2003, unless earlier terminated pursuant to Article 4 hereof." Please acknowledge and agree to the foregoing terms by signing in the space provided below. Sincerely, THE VINTAGE GROUP, INC. By: /s/ Richard V. Schmitz --------------------------------------- Richard V. Schmitz Authorized Signatory ACCEPTED AND AGREED: /s/ Paul E. Skretny - -------------------------------------------- Paul E. Skretny EX-10 10 thirdamdtocreditagt.txt 10.19 THIRD AMENDMENT TO CREDIT AGREEMENT This THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and entered into as of December 26, 2001, is by and between MATRIX BANCORP, INC., a Colorado corporation (the "Borrower"), the lenders from time to time party hereto (each a "Lender" and collectively, the "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, together with any successor agents appointed hereunder, the "Agent"). RECITALS A. The Borrower and U.S. Bank National Association, in its capacities as a Lender and as Agent, entered into a Credit Agreement dated as of December 27, 2000, as amended by a First Amendment to Credit Agreement dated as of March 5, 2001 and a Second Amendment to Credit Agreement dated as of July 27, 2001 (as amended, the "Credit Agreement"); and B. The Borrower desires to amend certain provisions of the Credit Agreement, and the Lenders and Agent have agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require. Section 2. Amendments. 2.1 The definition of "Termination Date" contained in Section 1.1 of the Credit Agreement is hereby amended in its entirety to read as follows: "Termination Date": The earliest of (a) March 31, 2002, (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amounts are reduced to zero pursuant to Section 2.8 hereof. 2.2 Section 1.1 of the Credit Agreement is hereby amended to add the definition of "MBCT IV" in the correct alphabetical order to read as follows: "MBCT IV": Matrix Bancorp Capital Trust IV, a Delaware statutory business trust. 2.3 Section 6.10 of the Credit Agreement is hereby amended to add the following Section 6.10(o): (o) Indebtedness of the Borrower to MBCT IV in the form of junior subordinated debentures, in an aggregate principal amount not to exceed $5,000,000 at any time outstanding. Section 3. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective provided the Agent shall have received at least five (5) counterparts of this Amendment, duly executed by the Company and all of the Lenders, and the Agent shall have received the following, each duly executed or certified: 3.1 This Amendment duly executed by the Borrower. 3.2 A copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Certificate of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Borrower dated December 27, 2000, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. 3.3 Certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment. 3.4 The Consent and Reaffirmation of Guarantors, in the form attached hereto as Exhibit A, duly executed by each Guarantor. 3.5 The Borrower shall have satisfied such other conditions as specified by the Agent and the Lenders, including payment of all unpaid legal fees and expenses incurred by the Agent through the date of this Amendment in connection with the Credit Agreement and the Amendment Documents. Section 4. Representations, Warranties, Authority, No Adverse Claim. 4.1 Reassertion of Representations and Warranties, No Default. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit Agreement, and (b) there will exist no Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Agent and the Lenders. 2 4.2 Authority, No Conflict, No Consent Required. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Borrower is a party or a signatory or a provision of the Borrower's Certificate of Incorporation, Bylaws or any other agreement or requirement of law in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Borrower or any of its property except, if any, in favor of the Agent on behalf of the Lenders. The Borrower represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Borrower of the Amendment Documents or other agreements and documents executed and delivered by the Borrower in connection therewith or the performance of obligations of the Borrower therein described, except for those which the Borrower has obtained or provided and as to which the Borrower has delivered certified copies of documents evidencing each such action to the Agent. 4.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees that no events have taken place and no circumstances exist at the date hereof which would give the Borrower a basis to assert a defense, offset or counterclaim to any claim of the Agent or the Lenders with respect to the Obligations or the Borrower's obligations under the Credit Agreement as amended by this Amendment. Section 5. Affirmation of Credit Agreement, Further References. The Agent, the Lenders, and the Borrower each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. All of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower. Section 6. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. 3 Section 7. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 8. Successors. The Amendment Documents shall be binding upon the Borrower, the Lenders, and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Lenders, and the Agent and the successors and assigns of the Lenders and the Agent. Section 9. Legal Expenses. As provided in Section 9.2 of the Credit Agreement, the Borrower agrees to reimburse the Agent, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Borrower under the Amendment Documents, and to pay and save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Borrower shall survive any termination of the Credit Agreement. Section 10. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. Section 11. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. Section 12. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MATRIX BANCORP, INC. By /s/ David W. Kloos --------------------------------- Its Senior Vice President --------------------------------- U.S. BANK NATIONAL ASSOCIATION By /s/ Randy S. Baker --------------------------------- Its Vice President -------------------------------- RESIDENTIAL FUNDING CORPORATION By /s/ Michael K. Nomura --------------------------------- Its Director --------------------------------- [Signature Page to First Amendment to Credit Agreement] S - 1 EX-10 11 promissory.txt 10.28 EXHIBIT 10.28 PROMISSORY NOTE Dated: January 31, 2002 Principal Amount: $79,340.45 State of Colorado FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to pay to the order of Matrix Bancorp, Inc. The sum of Seventy Nine Thousand Three Hundred Forty and 45/100, Dollars ($79,340.45), together with interest thereon at the rate of Prime per annum on the unpaid balance. Said sum shall be paid in the manner following: All principal and interest shall be due on January 31, 2003. All payments shall be first applied to interest and the balance to principal. This note may be prepaid, at any time, in whole or in part, without penalty. All prepayments shall be applied in reverse order of maturity. This note shall at the option of any holder hereof be immediately due and payable upon the failure to make any payment due hereunder within five (5) days of its due date. This note at the option of any holder hereof may be extended on an annual basis for increments of one (1) year. The terms and interest rate will remain constant. In the event this note shall be in default, and placed with an attorney for collection, then the undersigned agree to pay all reasonable attorney's fees and costs of collection. Payments not made within five (5) days of due date shall be subject to a late charge of 2% of said payment. All payments hereunder shall be made to such address as may from time to time be designed by any holder hereof. The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound hereunder until this note shall be fully paid and waive demand, presentment and protest and all notices thereto and further agree to remain bound, notwithstanding any extension, renewal, modification, waiver, or other indulgence by any holder or upon the discharge or release of any obligor hereunder to this note, or upon the exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing: and any indulgence on any one occasion shall not be an indulgence for any other or future occasion. Any modification or change of terms, hereunder granted by any holder hereof, shall be valid and binding upon each of the undersigned, notwithstanding the acknowledgment of any of the undersigned, and each of the undersigned does hereby irrevocably grant to each of the others a power of attorney to enter into any such modification on their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. This note shall take effect as sealed instrument and shall be construed, governed and enforced in accordance with the laws of the State first appearing at the head of this note. The undersigned hereby execute this note as principals and not as sureties. Maker: /s/ D. Mark Spencer - ------------------------------------ D. Mark Spencer EX-10 12 matrix401kplan.txt 10.29 EXHIBIT 10.29 MATRIX CAPITAL CORPORATION 401(K) PROFIT SHARING PLAN FUNDING POLICY AND METHOD A pension benefit plan (as defined in the Employee Retirement Income Security Act of 1974) has been adopted by the company for the purpose of rewarding long and loyal service to the company by providing to employees additional financial security at retirement. Incidental benefits are provided in the case of disability, death or other termination of employment. Since the principal purpose of the plan is to provide benefits at normal retirement age, the principal goal of the investment of the funds in the plan should be both security and long-term stability with moderate growth commensurate with the anticipated retirement dates of participants. Investments, other than "fixed dollar "investments, should be included among the plan's investments to prevent erosion by inflation. However, investments should be sufficiently liquid to enable the plan, on short notice, to make some distributions in the event of the death or disability of a participant.
TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II TOP HEAVY AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS.............................................................................14 2.2 DETERMINATION OF TOP HEAVY STATUS.......................................................................14 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER.............................................................17 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY.................................................................17 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES...........................................................18 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR..................................................................18 2.7 RECORDS AND REPORTS.....................................................................................19 2.8 APPOINTMENT OF ADVISERS.................................................................................19 2.9 INFORMATION FROM EMPLOYER...............................................................................19 2.10 PAYMENT OF EXPENSES.....................................................................................19 2.11 MAJORITY ACTIONS........................................................................................20 2.12 CLAIMS PROCEDURE........................................................................................20 2.13 CLAIMS REVIEW PROCEDURE.................................................................................20 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY...............................................................................21 3.2 APPLICATION FOR PARTICIPATION...........................................................................21 3.3 EFFECTIVE DATE OF PARTICIPATION.........................................................................21 3.4 DETERMINATION OF ELIGIBILITY............................................................................21 3.5 TERMINATION OF ELIGIBILITY..............................................................................21 3.6 OMISSION OF ELIGIBLE EMPLOYEE...........................................................................22 3.7 INCLUSION OF INELIGIBLE EMPLOYEE........................................................................22 3.8 ELECTION NOT TO PARTICIPATE.............................................................................22 ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION.........................................................22 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION.................................................................23 4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION..............................................................26 4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS....................................................27 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS........................................................................31 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS..........................................................33 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS....................................................................34 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS......................................................37 4.9 MAXIMUM ANNUAL ADDITIONS................................................................................39 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS...............................................................42 4.11 TRANSFERS FROM QUALIFIED PLANS..........................................................................43 ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND.............................................................................44 5.2 METHOD OF VALUATION.....................................................................................45 ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT...............................................................45 6.2 DETERMINATION OF BENEFITS UPON DEATH....................................................................45 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY........................................................46 6.4 DETERMINATION OF BENEFITS UPON TERMINATION..............................................................46 6.5 DISTRIBUTION OF BENEFITS,...............................................................................49 6.6 DISTRIBUTION OF BENEFITS UPON DEATH.....................................................................51 6.7 TIME OF SEGREGATION OR DISTRIBUTION.....................................................................52 6.8 DISTRIBUTION FOR MINOR BENEFICIARY......................................................................52 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN..........................................................52 6.10 ADVANCE DISTRIBUTION FOR HARDSHIP.......................................................................52 6.11 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION.........................................................54 ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE...................................................................54 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE.............................................................54 7.3 OTHER POWERS OF THE TRUSTEE.............................................................................55 7.4 LOANS TO PARTICIPANTS...................................................................................57 7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS................................................................58 7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES...........................................................58 7.7 ANNUAL REPORT OF THE TRUSTEE............................................................................58 7.8 AUDIT...................................................................................................59 7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE..........................................................60 7.10 TRANSFER OF INTEREST....................................................................................60 7.11 DIRECT ROLLOVER.........................................................................................61 ARTICLE VIII AMENDMENT, TERMINATION AND MERGERS 8.1 AMENDMENT...............................................................................................62 8.2 TERMINATION.............................................................................................62 8.3 MERGER OR CONSOLIDATION.................................................................................63 ARTICLE IX MISCELLANEOUS 9.1 PARTICIPANT'S RIGHTS....................................................................................63 9.2 ALIENATION..............................................................................................63 9.3 CONSTRUCTION OF PLAN....................................................................................64 9.4 GENDER AND NUMBER.......................................................................................64 9.5 LEGAL ACTION............................................................................................64 9.6 PROHIBITION AGAINST DIVERSION OF FUNDS..................................................................64 9.7 BONDING.................................................................................................65 9.8 EMPLOYER'S-AND TRUSTEE'S PROTECTIVE CLAUSE..............................................................65 9.9 INSURER'S PROTECTIVE CLAUSE.............................................................................65 9.10 RECEIPT AND RELEASE FOR PAYMENTS........................................................................65 9.11 ACTION BY THE EMPLOYER..................................................................................66 9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY......................................................66 9.13 HEADINGS................................................................................................66 9.14 APPROVAL BY INTERNAL REVENUE SERVICE....................................................................66 9.15 UNIFORMITY..............................................................................................67 ARTICLE X PARTICIPATING EMPLOYERS 10.1 ADOPTION BY OTHER EMPLOYERS.............................................................................67 10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS.................................................................67 10.3 DESIGNATION OF AGENT....................................................................................68 10.4 EMPLOYEE TRANSFERS......................................................................................68 10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION...................................................................68 10.6 AMENDMENT...............................................................................................69 10.7 DISCONTINUANCE OF PARTICIPATION.........................................................................69 10.8 ADMINISTRATOR'S AUTHORITY...............................................................................69
MATRIX CAPITAL CORPORATION 401 (K) PROFIT SHARING PLAN THIS AGREEMENT, hereby made and entered into this _______ day of ________________, 19___, by and between MATRIX CAPITAL CORPORATION (herein referred to as the "Employer") and Dave Kloos, D. Mark Spencer and Cindy Leach (herein referred to as the "Trustee"). W I T N E S S E T H: WHEREAS, the Employer desires to recognize the contribution made to its successful operation by its employees and to reward such contribution by means of a 401(k) Profit Sharing Plan for those employees who, shall qualify as Participants hereunder; NOW, THEREFORE, effective January 1, 1994, (hereinafter called the "Effective Date"), the Employer hereby establishes a 401(k) Profit Sharing Plan and creates this trust (which plan and trust are hereinafter called the "Plan") for the exclusive benefit of the Participants and their Beneficiaries, and the Trustee hereby accepts the Plan on the following terms: ARTICLE I DEFINITIONS 1.1 "Act "means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.2 "Administrator "means the person or entity designated by the Employer pursuant to Section 2.4 to administer the Plan on behalf of the Employer. 1.3 "Affiliated Employer "means any corporation which is a member of a controlled group of corporations (as defined in code Section 414 (b) ) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414 (m) ) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(0). 1.4 "Aggregate Account "means, with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions, subject to the provisions of Section 2.2. 1.5 "Anniversary Date "means December 31. 1.6 "Beneficiary "means the person to whom the share of a deceased Participant's total account is payable, subject to the restrictions of Sections 6.2 and 6.6. 1.7 "Code "means the Internal Revenue Code of 1986, as amended or replaced from time to time. 1 1.8 "Compensation "with respect to any Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). For purposes of this Section, the determination of Compensation shall be made by: (a) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. For a Participant's initial year of participation, Compensation shall be recognized for the entire Plan Year. Compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner "of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation "during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation, or the limitation shall be adjusted in accordance with any other method permitted by Regulation. If, as a result of such rules, the maximum "annual addition "limit of Section 4.9(a) would be exceeded for one or more of the affected Family Members, the prorated Compensation of all affected Family Members shall be adjusted to avoid or reduce any excess. The prorated Compensation of any affected Family Member whose allocation would exceed the limit shall be adjusted downward to the level needed to provide an allocation equal to such limit. The prorated Compensation of affected Family Members not affected by such limit shall then be adjusted upward on a pro rata basis not to exceed each such affected Family Member's Compensation as determined prior to application of the Family Member rule. The resulting allocation shall not exceed such individual's maximum "annual addition "limit. If, after these adjustments, an "excess amount "still 2 results, such "excess amount "shall be disposed of in the manner described in section 4.10(a) pro rata among all affected Family Members. For purposes of this Section, if the Plan is a plan described in Code section 413(c) or 414(f) (a plan maintained by more than one Employer), the $200,000 limitation applies separately with respect to the Compensation of any Participant from each Employer maintaining the Plan. 1.9 "Contract "or "Policy "means any life insurance policy, retirement income or annuity policy, or annuity contract (group or individual) issued pursuant to the terms of the Plan. 1.10 "Deferred Compensation "with respect to any Participant means the amount of the Participant's total Compensation which has been contributed to the Plan in accordance with the Participant's deferral election pursuant to Section 4.2 excluding any such amounts distributed as excess "annual additions "pursuant to Section 4.10(a). 1.11 "Early Retirement Date. "This Plan does not provide for a retirement date prior to Normal Retirement Date. 1.12 "Elective Contribution "means the Employer's contributions to the Plan of Deferred Compensation excluding any such amounts distributed as excess "annual additions "pursuant to Section 4.10(a). In addition, any Employer Qualified Non-Elective Contribution made pursuant to Section 4.1(c) and Section 4.6 shall be considered an Elective Contribution for purposes of the Plan. Any such contributions deemed to be Elective Contributions shall be subject to the requirements of Sections 4.2(b) and 4.2(c) and shall further be required to satisfy the discrimination requirements of Regulation 1.401(k)-l(b)(5), the provisions of which are specifically incorporated herein by reference. 1.13 "Eligible Employee "means any Employee. Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing. 1.14 "Employee "means any person who is employed by the Employer or Affiliated Employer, but excludes any person who is an independent contractor. Employee shall include Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and such Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 1.15 "Employer "means MATRIX CAPITAL CORPORATION and any Participating Employer (as defined in Section 10.1) which shall adopt this Plan; any successor which shall maintain this Plan; and any predecessor which has maintained this Plan. The Employer is a corporation, with principal offices in the State of Colorado. 1.16 "Excess Aggregate Contributions "means, with respect to any Plan Year, the excess of the aggregate amount of the Employer matching contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of 3 Highly Compensated Participants for such Plan Year, over the maximum amount of such contributions permitted under the limitations of Section 4.7(a). 1.17 "Excess Contributions "means, with respect to a Plan Year, the excess of Elective Contributions made on behalf of Highly Compensated Participants for the Plan Year over the maximum amount of such contributions permitted under Section 4.5(a). Excess Contributions shall be treated as an "annual addition "pursuant to Section 4.9(b). 1.18 "Excess Deferred compensation "means, with respect to any taxable year of a Participant, the excess of the aggregate amount of such Participant's Deferred Compensation and the elective deferrals pursuant to Section 4.2(f) actually made on behalf of such Participant for such taxable year, over the dollar limitation provided for in Code Section 402(g), which is incorporated herein by reference. Excess Deferred Compensation shall be treated as an "annual addition "pursuant to Section 4.9(b) when contributed to the Plan unless distributed to the affected Participant not later than the first April 15th following the close of the Participant's taxable year. Additionally, for purposes of Sections 2.2 and 4.4(g), Excess Deferred Compensation shall continue to be treated as Employer contributions even if distributed pursuant to Section 4.2(f). However, Excess Deferred Compensation of Non-Highly Compensated Participants is not taken into account for purposes of Section 4.5(a) to the extent such Excess Deferred Compensation occurs pursuant to Section 4.2(d). 1.19 "Family Member "means, with respect to an affected Participant, such Participant's spouse and such Participant's lineal descendants and ascendants and their spouses, all as described in Code Section 414(q)(6)(B). 1.20 "Fiduciary "means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee, the Employer and its representative body, and the Administrator. 1.21 "Fiscal Year "means the Employer's accounting year of 12 months commencing on January 1st of each year and ending the following December 31st. 1.22 "Forfeiture "means that portion of a Participant's Account that is not Vested, and occurs on the earlier of: (a) the distribution of the entire Vested portion of a Terminated Participant's Account, or (b) the last day of the Plan Year in which the Participant incurs five (5) consecutive 1-Year Breaks in Service. Furthermore, for purposes of paragraph (a) above, in the case of a Terminated Participant whose Vested benefit is zero, such Terminated Participant shall be deemed to have received a distribution of his Vested benefit upon his 4 termination of employment. Restoration of such amounts shall occur pursuant to Section 6.4(e)(2). In addition, the term Forfeiture shall also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan. 1.23 "Former Participant "means a person who has been a Participant, but who has ceased to be a Participant for any reason. 1.24 "415 Compensation "with respect to any Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. "415 Compensation "must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). 1.25 "414(s) Compensation "with respect to any Participant means such Participant's "415 Compensation "paid during a Plan Year. The amount of "414(s) Compensation "with respect to any Participant shall include "414(s) Compensation "for the entire twelve (12) month period ending on the last day of such Plan Year. For purposes of this Section, the determination of "414(s) Compensation "shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402 (e) (3), 402 (h), 403 (b) or 457, and Employee contributions described in Code Section 414 (h) (2) that are treated as Employer contributions. "414(s) Compensation "in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the "414(A) Compensation "limit shall be an amount equal to the "414(s) Compensation "limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner "of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation "during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. 1.26 "Highly Compensated Employee "means an Employee described in Code Section 414(q) and the Regulations thereunder, and generally. means an Employee who performed services for the Employer during the "determination year "and is in one or more of the following groups: (a) Employees who at any time during the "determination year "or "look-back year "were "five percent owners "as defined in Section 1.32(c). 5 (b) Employees who received "415 Compensation "during the "look-back year "from the Employer in excess of $75,000. (c) Employees who received "415 Compensation "during the "look-back year "from the Employer in excess of $50,000 and were in the Top Paid Group of Employees for the Plan Year. (d) Employees who during the "look-back year,, were officers of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) and received "415 Compensation "during the "look-back year "from the Employer greater than 50 percent of the limit in effect under Code Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be limited to the lesser of (i) 50 employees; or (ii) the greater of 3 employees or 10 percent of all employees. For the purpose of determining the number of officers, Employees described in Section 1.55(a), (b), (c) and (d) shall be excluded, but such Employees shall still be considered for the purpose of identifying the particular Employees who are officers. If the Employer does not have at least one officer whose annual "415 Compensation "is in excess of 50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. (e) Employees who are in the group consisting of the 100 Employees paid the greatest "415 Compensation "during the "determination year "and are also described in (b), (c) or (d) above when these paragraphs are modified to substitute "determination year "for "look-back year." The "determination year "shall be the Plan Year for which testing is being performed, and the "look-back year "shall be the immediately preceding twelve-month period. For purposes of this Section, the determination of "415 Compensation "shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402 (e) (3), 402 (h), 403 (b) or 457, and Employee contributions described in Code Section 414 (h) (2) that are treated as Employer contributions. Additionally, the dollar threshold amounts specified in (b) and (c) above shall be adjusted at such time and in such manner as is provided in Regulations. In the case of such an adjustment, the dollar limits which shall be applied are those for the calendar year in which the "determination year "or "look-back year "begins. In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911 (d) (2) ) from the Employer constituting United States source income within the meaning of Code Section 861(a) (3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(0)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. Highly Compensated Former 6 Employees shall be treated as Highly Compensated Employees without regard to whether they performed services during the "determination year." 1.27 "Highly Compensated Former Employee "means a former Employee who had a separation year prior to the "determination year "and was a Highly Compensated Employee in the year of separation from service or in any "determination year "after attaining age 55. Notwithstanding the foregoing, an Employee who separated from service prior to 1987 will be treated as a Highly Compensated Former Employee only if during the separation year (or year preceding the separation year) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received "415 Compensation "in excess of $50,000 or was a "five percent owner. "For purposes of this Section, "determination year, ""415 Compensation "and "five percent owner "shall be determined in accordance with Section 1.26. Highly Compensated Former Employees shall be treated as Highly Compensated Employees. The method set forth in this Section for determining who is a "Highly Compensated Former Employee "shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 1.28 "Highly Compensated Participant "means any Highly Compensated Employee who is eligible to participate in the Plan. 1.29 "Hour of Service "means (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period; (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period; (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages. These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). Notwithstanding the above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this Section, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of 7 whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. An Hour of Service must be counted for the purpose of determining a Year of service, a year of participation for purposes of accrued benefits, a 1-Year Break in Service, and employment commencement date (or reemployment commencement date). In addition, Hours of Service will be credited for employment with other Affiliated Employers. The provisions of Department of Labor regulations 2530.200b-2(b) and. (c) are incorporated herein by reference. 1.30 "Income "means the income or losses allocable to Excess Deferred Compensation which amount shall be allocated in the same manner as income or losses are allocated pursuant to Section 4.4(f). 1.31 "Investment Manager "means an entity that (a) has the power to manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility to the Plan in writing. Such entity must be a person, firm, or corporation registered as an investment adviser under the Investment Advisers Act of 1940, a bank, or an insurance company. 1.32 "Key Employee "means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of his Beneficiaries) is considered a Key Employee if he, at any time during the Plan Year that contains the "Determination Date "or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual "415 Compensation" greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year. (b) one of the ten employees having annual "415 Compensation "from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer. (c) a "five percent owner "of the Employer. "Five percent owner "means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of-the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. 8 (d) a "one percent owner "of the Employer having an annual "415 Compensation "from the Employer of more than $150,000. "One percent owner "means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. However, in determining whether an individual has "415 Compensation "of more than $150,000, "415 Compensation "from each employer required to be aggregated under Code Sections 414 (b), (c), (m) and (o) shall be taken into account. For purposes of this Section, the determination of "415 Compensation "shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402 (e) (3), 402 (h), 403 (b) or 457, and Employee contributions described in Code Section 414 (h) (2) that are treated as Employer contributions. 1.33 "Late Retirement Date "means the first day of the month coinciding with or next following a Participant's actual Retirement Date after having reached his Normal Retirement Date. 1.34 "Leased Employee "means any person (other than an Employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n) (6)) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A Leased Employee shall not be considered an Employee of the recipient: (a) if such employee is covered by a money purchase pension plan providing: (1) a non-integrated employer contribution rate of at least 10% of compensation, as defined in Code Section 415(c)(3), but including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. (2) immediate participation; and 9 (3) full and immediate vesting; and (b) if Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 1.35 "Non-Elective Contribution "means the Employer's contributions to the Plan excluding, however, contributions made pursuant to the Participant's deferral election provided for in Section 4.2 and any Qualified Non-Elective Contribution. 1.36 "Non-Highly Compensated Participant "means any Participant who is neither a Highly Compensated Employee nor a Family Member. 1.37 "Non-Key Employee "means any Employee or former Employee (and his Beneficiaries) who is not a Key Employee. 1.38 "Normal Retirement Age "means the Participant's 59 1/2 birthday. A Participant shall become fully Vested in his Participant's Account upon attaining his Normal Retirement Age. 1.39 "Normal Retirement Date "means the first day of the month coinciding with or next following the Participant's Normal Retirement Age. 1.40 "1-Year Break in Service "means the applicable computation period during which an Employee has not completed more than 500 Hours of Service with the Employer. Further, solely for the purpose of determining whether a Participant has incurred a 1-Year Break in Service, Hours of Service shall be recognized for "authorized leaves of absence "and "maternity and paternity leaves of absence. "Years of Service and 1-Year Breaks in Service shall be measured on the same computation period. "Authorized leave of absence "means an unpaid, temporary cessation from active employment with the Employer pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. A "maternity or paternity leave of absence "means, for Plan Years beginning after December 31, 1984, an absence from work for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee from incurring a 1-Year Break in service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence "shall be those which would normally have been credited but for such absence, or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence "shall not exceed 501. 10 1.41 "Participant "means any Eligible Employee who participates in the Plan as provided in Sections 3.2 and 3.3, and has not for any reason become ineligible to participate further in the Plan. 1.42 "Participant's Account "means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer's Non-Elective Contributions. A separate accounting shall be maintained with respect to that portion of the Participant's Account attributable to Employer matching contributions made pursuant to Section 4.1(b) and Employer discretionary contributions made pursuant to Section 4.1(d). 1.43 "Participant's Combined Account "means the total aggregate amount of each Participant's Elective Account and Participant's Account. 1.44 "Participant's Elective Account "means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer's Elective Contributions. A separate accounting shall be maintained with respect to that portion of the Participant's Elective Account attributable to Elective Contributions pursuant to Section 4.2 and any Employer Qualified Non-Elective contributions. 1.45 "Plan "means this instrument, including all amendments thereto. 1.46 "Plan Year "means the Plan's accounting year of twelve (12) months commencing on January 1st of each year and ending the following December 31st. 1.47 "Qualified Non-Elective Contribution "means the Employer's contributions to the Plan that are made pursuant to Section 4.1(c) and Section 4.6. Such contributions shall be considered an Elective Contribution for the purposes of the Plan and used to satisfy the "Actual Deferral Percentage "tests. In addition, the Employer's contributions to the Plan that are made pursuant to Section 4.8(h) which are used to satisfy the "Actual Contribution Percentage "tests shall be considered Qualified Non-Elective Contributions and be subject to the provisions of Sections 4.2(b) and 4.2(c). 1.48 "Regulation "means the Income Tax Regulations as promulgated by the Secretary of the Treasury or his delegate, and as amended from time to time. 1.49 "Retired Participant "means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 1.50 "Retirement Date "means the date as of which a Participant retires for reasons other than Total and Permanent Disability, whether such retirement occurs on a Participant's Normal Retirement Date or Late Retirement Date (see Section 6.1). 1.51 "Super Top Heavy Plan "means a plan described in Section 2.2(b). 11 1.52 "Terminated Participant "means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement. 1.53 "Top Heavy Plan "means a plan described in Section 2.2 (a). 1.54 "Top Heavy Plan Year "means a Plan Year during which the Plan is a Top Heavy Plan. 1.55 "Top Paid Group "means the top 20 percent of Employees who performed services for the Employer during the applicable year, ranked according to the amount of "415 Compensation "(determined for this purpose in accordance with Section 1.26) received from the Employer during such year. All Affiliated Employers shall be taken into account as a single employer, and Leased Employees within the meaning of Code Sections 414 (n) (2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, for the purpose of determining the number of active Employees in any year, the following additional Employees shall also be excluded; however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top Paid Group: (a) Employees with less than six (6) months of service; (b) Employees who normally work less than 17 1/2 hours per week; (c) Employees who normally work less than six (6) months during a year; and (d) Employees who have not yet attained age 21. In addition, if 90 percent or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 1.56 "Total and Permanent Disability "means a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing any gainful occupation and which condition constitutes total disability under the federal Social Security Acts. 1.57 "Trustee "means the person or entity named as trustee herein or in any separate trust forming a part of this Plan, and any successors. 12 1.58 "Trust Fund "means the assets of the Plan and Trust as the same shall exist from time to time. 1.59 "Vested "means the nonforfeitable portion of any account maintained on behalf of a Participant. 1.60 "Year of Service "means the computation period of twelve (12) consecutive months, herein set forth, during which an Employee has at least 1000 Hours of Service. For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service. The participation computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. The participation computation period shall shift to the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. An Employee who is credited with the required Hours of Service in both the initial computation period (or the computation period beginning after a 1-Year Break in Service) and the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, shall be credited with two (2),Years of Service for purposes of eligibility to participate. For vesting purposes, the computation period shall be the Plan Year, including periods prior to the Effective Date of the Plan. For all other purposes, the computation period shall be the Plan Year. Notwithstanding the foregoing, for any short Plan Year, the determination of whether an Employee has completed a Year of Service shall be made in accordance with Department of Labor regulation 2530.203-2(c). Years of Service with Sandia Merabank Mortgage shall be recognized. Years of Service with any Affiliated Employer shall be recognized. 13 69 ARTICLE II TOP HEAVY AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS For any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.4 of the Plan. 2.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. If any Participant is a Non-Key Employee for any Plan Year, but such Participant was a Key Employee for any prior Plan Year, such Participant's Present Value of Accrued Benefit and/or Aggregate Account balance shall not be taken into account for purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy Group). In addition, if a Participant or Former Participant has not performed any services for any Employer maintaining the Plan at any time during the five year period ending on the Determination Date, any accrued benefit for such Participant or Former Participant shall not be taken into account for the purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan. (b) This Plan shall be a Super Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds ninety percent (90%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. (c) Aggregate Account: A Participant's Aggregate Account as of the Determination Date is the sum of: (1) his Participant's Combined Account balance as of the most recent valuation occurring within a twelve (12) month period ending on the Determination Date; (2) an adjustment for any contributions due as of the Determination Date. Such adjustment shall be the amount of any contributions actually made after the valuation date but due on or before the Determination Date, except for the first Plan 14 Year when such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year. (3) any Plan distributions made within the Plan Year that includes the Determination Date or within the four (4) preceding Plan Years. However, in the case of distributions made after the valuation date and prior to the Determination Date, such distributions are not included as distributions for top heavy purposes to the extent that such distributions are already included in the Participant's Aggregate Account balance as of the valuation date. Notwithstanding anything herein to the contrary, all distributions, including distributions made prior to January 1, 1984, and distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. Further, distributions from the Plan (including the cash value of life insurance policies) of a Participant's account balance because of death shall be treated as a distribution for the purposes of this paragraph. (4) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to tax deductible qualified voluntary employee contributions shall not be considered to be a part of the Participant's Aggregate Account balance. (5) with respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall always consider such rollovers or plan-to-plan transfers as a distribution for the purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall not consider such rollovers or plan-to-plan transfers as part of the Participant's Aggregate Account balance. (6) with respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides the rollover or plan-to-plan transfer, it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to-plan transfer as part of the Participant's Aggregate Account balance, irrespective of the date on which such rollover or plan-to-plan transfer is accepted. (7) For the purposes of determining whether two employers are to be treated as the same employer in (5) and (6) above, all employers aggregated under Code Section 414 (b), (c), (m) and (o) are treated as the same employer. (d) "Aggregation Group "means either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. 15 (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each plan of the Employer in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a) (4) or 410, will be required to be aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy Group. No plan in the Required Aggregation Group will be considered a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group. (2) Permissive Aggregation Group: The Employer may also include any other plan not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of Code Sections 401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group. In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is not a Top Heavy Group. (3) only those plans of the Employer in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top Heavy Plans. (4) An Aggregation Group shall include any terminated plan of the Employer if it was maintained within the last five (5) years ending on the Determination Date. (e) "Determination Date "means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (f) Present Value of Accrued Benefit: In the case of a defined benefit plan, the Present Value of Accrued Benefit for a Participant other than a Key Employee, shall be as determined using the single accrual method used for all plans of the Employer and Affiliated Employers, or if no such single method exists, using a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). The determination of the Present Value of Accrued Benefit shall be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the Determination Date except as provided in Code 16 Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. (g) "Top Heavy Group "means an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Accrued Benefits of Key Employees under all defined benefit plans included in the group, and (2) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Participants. 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) The Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to assure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. (b) The Employer shall establish a "funding policy and method, "i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. The Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method "shall not, however, constitute a directive to the Trustee as to investment of the Trust Funds. Such "funding policy and method "shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. (c) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways. 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer shall appoint one or more Administrators. Any person, including, but not limited to, the Employees of the Employer, shall be eligible to serve as an Administrator. Any person so appointed shall signify his acceptance by filing written acceptance with the Employer. An Administrator may resign by delivering his written resignation to the Employer or be removed by the Employer by delivery of written notice of removal, to take effect at a date specified therein, or upon delivery to the Administrator if no date is specified. 17 The Employer, upon the resignation or removal of an Administrator, shall promptly designate in writing a successor to this position. If the Employer does not appoint an Administrator, the Employer will function as the Administrator. 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES If more than one person is appointed as Administrator, the responsibilities of each Administrator may be specified by the Employer and accepted in writing by each Administrator. In the event that no such delegation is made by the Employer, the Administrators may allocate the responsibilities among themselves, in which event the Administrators shall notify the Employer and the Trustee in writing of such action and specify the responsibilities of each Administrator. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate Administrator until such time as the Employer or the Administrators file with the Trustee a written revocation of such designation. 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator-shall have all powers necessary or appropriate to accomplish his duties under this Plan. The Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to, the following: (a) the discretion to determine all questions relating to the eligibility of Employees to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (c) to authorize and direct the Trustee with respect to all nondiscretionary or otherwise directed disbursements from the Trust; (d) to maintain all necessary records for the administration of the Plan; 18 (e) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; (f) to determine the size and type of any Contract to be purchased from any insurer, and to designate the insurer from which such Contract shall be purchased; (g) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (h) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion in a manner designed to accomplish specific objectives; (i) to prepare and implement a procedure to notify Eligible Employees that they may elect to have a portion of their Compensation deferred or paid to them in cash; (j) to assist any Participant regarding his rights benefits, or elections available under the Plan. 2.7 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 2.8 APPOINTMENT OF ADVISERS The Administrator, or the Trustee with the consent of the Administrator, may appoint counsel, specialists, advisers, and other persons as the Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan. 2.9 INFORMATION FROM EMPLOYER To enable the Administrator to perform his functions, the Employer shall supply full and timely information to the Administrator on all matters relating to the Compensation of all Participants, their Hours of Service, their Years of Service, their retirement, death, disability, or termination of employment, and such other pertinent facts as the Administrator may require; and the Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Administrator may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information. 2.10 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the 19 functioning of the Administrator, including, but not limited to, fees of accountants, counsel, and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. 2.11 MAJORITY ACTIONS Except where there has been an allocation and delegation of administrative authority pursuant to Section 2.5, if there shall be more than one Administrator, they shall act by a majority of their number, but may authorize one or more of them to sign all papers on their behalf. 2.12 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the application is filed. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. 2.13 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.12 shall be entitled to request the Administrator to give further consideration to his claim by filing with the Administrator (on a form which may be obtained from the Administrator) a request for a hearing. Such request, together with a written statement of the reasons why the claimant believes his claim should be allowed, shall be filed with the Administrator no later than 60 days after receipt of the written notification provided for in Section 2.12. The Administrator shall then conduct a hearing within the next 60 days, at which the claimant may be represented by an attorney or any other representative of his choosing and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon 5 business days written notice to the Administrator) the claimant or his representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within 60 days of receipt of the appeal (unless there has been an extension of 60 days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the 60 day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 20 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee who has completed six (6) Months of Service and has attained age 21 shall be eligible to participate hereunder as of the date he has satisfied such requirements. The Employer shall give each prospective Eligible Employee written notice of his eligibility to participate in the Plan prior to the close of the Plan Year in which he first becomes an Eligible Employee. For purposes of this Section, an Eligible Employee will be deemed to have completed six (6) Months of Service if he is in the employ of the Employer at any time six (6) months after his employment commencement date. Employment commencement date shall be the first day that he is entitled to be credited with an Hour of Service for the performance of duty. 3.2 APPLICATION FOR PARTICIPATION In order to become a Participant hereunder, each Eligible Employee shall make application to the Employer for participation in the Plan and agree to the terms hereof. Upon the acceptance of any benefits under this Plan, such Employee shall automatically be deemed to have made application and shall be bound by the terms and conditions of the Plan and all amendments hereto. 3.3 EFFECTIVE DATE OF PARTICIPATION An Eligible Employee shall become a Participant effective as of the earlier of the first day of the Plan Year or the first day of the seventh month of such Plan Year coinciding with or next following the die such Employee met the eligibility requirements of Section 3.1, provided said Employee was still employed as of such date (or if not employed on such date, as of the date of rehire if a 1-Year Break in Service has not occurred). 3.4 DETERMINATION OF ELIGIBILITY The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review per Section 2.13. 3.5 TERMINATION OF ELIGIBILITY (a) In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in his interest in the Plan for each Year of Service completed while a noneligible Employee, until such time as his Participant's Account shall be forfeited or distributed pursuant to the terms of the Plan. Additionally, his interest in the Plan shall continue to share in the earnings of the Trust Fund. 21 (b) In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate but has not incurred a 1-Year Break in Service, such Employee will participate immediately upon returning to an eligible class of Employees. If such Participant incurs a 1-Year Break in Service, eligibility will be determined under the break in service rules of the Plan. 3.6 OMISSION OF ELIGIBLE EMPLOYEE If, in any Plan Year, any Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Employee in the amount which the said Employer would have contributed with respect to him had he not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. 3.7 INCLUSION OF INELIGIBLE EMPLOYEE If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such. contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a Forfeiture (except for Deferred Compensation which shall be distributed to the ineligible person) for the Plan Year in which the discovery is made. 3.8 ELECTION NOT TO PARTICIPATE An Employee may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be communicated to the Employer, in writing, at least thirty (30) days before the beginning of a Plan Year. ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION For each Plan Year, the Employer shall contribute to the Plan: (a) The amount of the total salary reduction elections of all Participants made pursuant to Section 4.2(a), which amount shall be deemed an Employer's Elective Contribution. (b) On behalf of each Participant who is eligible to share in matching contributions for the Plan Year, a matching contribution equal to 25% of each such Participant's Deferred Compensation plus a discretionary percentage of each such Participant's Deferred Compensation, the exact percentage to be determined each year by the 22 Employer, which amount shall be deemed an Employer's Non-Elective Contribution. (c) On behalf of each Participant who is eligible to share in the Qualified Non-Elective Contribution for the Plan Year, a discretionary Qualified Non-Elective Contribution equal to a percentage of each eligible individual's Compensation, the exact percentage to be determined each year by the Employer. The Employer's Qualified Non-Elective Contribution shall be deemed an.,.-Employer's Elective Contribution. (d) A discretionary amount,, which amount shall be deemed an Employer's Non-Elective Contribution. (e) Notwithstanding the foregoing, however, the Employer's contributions for any Plan Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. All contributions by the Employer shall be made in cash or in such property as is acceptable to the Trustee. (f) Except, however, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds the amount which is deductible under Code Section 404. 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION (a) Each Participant may elect to defer his Compensation which would have been received in the Plan Year, but for the deferral election, by up to 15%. A deferral election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election or, if later, the latest of the date the Employer adopts this cash or deferred arrangement, or the date such arrangement first became effective. The amount by which Compensation is reduced shall be that Participant's Deferred compensation and be treated as an Employer Elective Contribution and allocated to that Participant's Elective Account. (b) The balance in each Participant's Elective Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (c) Amounts held in the Participant's Elective Account may not be distributable earlier than: (1) a Participant's termination of employment, Total and Permanent Disability, or death; (2) a Participant's attainment of age 59 1/2; 23 (3) the termination of the Plan without the establishment or existence of a "successor plan," as that term is described in Regulation 1.401 (k) -1 (d) (3) ; (4) the date of disposition by the Employer to an entity that is not an Affiliated Employer of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition with respect to a Participant who continues employment with the corporation acquiring such assets; (5) the date of disposition by the Employer or an Affiliated Employer who maintains the Plan of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to an entity which is not an Affiliated Employer but only with respect to a Participant who continues employment with such subsidiary; or (6) the proven financial hardship of a Participant, subject to the limitations of Section 6.10. (d) For each Plan Year, a Participant's Deferred Compensation made under this Plan and all other plans, contracts or arrangements of the Employer maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(8), as in effect at the beginning of such taxable year. If such dollar limitation is exceeded, a Participant will be deemed to have notified the Administrator of such excess amount which shall be distributed in a manner consistent with 4.2(f). The dollar limitation shall be adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. (e) In the event a Participant has received a hardship distribution from his Participant's Elective Account pursuant to Section 6.10 or pursuant to Regulation 1.401(k)-1(d)(2)(iv)(B) from any other plan maintained by the Employer, then such Participant shall not be permitted to elect to have Deferred Compensation contributed to the plan on his behalf for a period of twelve (12) months following the receipt of the distribution. Furthermore, the dollar limitation under Code Section 402(8) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Deferred compensation, if any, pursuant to this Plan (and any other plan maintained by the Employer) for the taxable year of the hardship distribution. (f) If a Participant's Deferred Compensation under this Plan together with any elective deferrals (as defined in Regulation 1.402(8)-1(b)) under another qualified cash or deferred arrangement (as defined in Code Section 401(k)), a simplified employee pension (as defined in Code Section 408(k)), a salary reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)), a deferred compensation plan under Code Section 457, or a trust described in Code Section 24 501(c)(18) cumulatively exceed the limitation imposed by Code Section 402(8) (as adjusted annually in accordance with the method provided in Code Section 415(d) pursuant to Regulations) for such Participant's taxable year, the Participant may, not later than March 1 following the close of the Participant's taxable year, notify the Administrator in writing of such excess and request that his Deferred Compensation under this Plan be reduced by an amount specified by the Participant. In such event, the Administrator may direct the Trustee to distribute such excess amount (and any Income allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Any distribution of less than the entire amount of Excess Deferred Compensation and Income shall be treated as a pro rata distribution of Excess Deferred Compensation and Income. The amount distributed shall not exceed the Participant's Deferred compensation under the Plan for the taxable year. Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions: (1) the distribution must be made after the date on which the Plan received the Excess Deferred Compensation; (2) the Participant shall designate the distribution as Excess Deferred Compensation; and (3) the Plan-must designate the distribution as a distribution of Excess Deferred Compensation. Matching contributions which relate to Excess Deferred Compensation which is distributed pursuant to this Section 4.2(f) shall be forfeited. (g) Notwithstanding Section 4.2(f) above, a Participant's Excess Deferred Compensation shall be reduced, but not below zero, by any distribution of Excess Contributions pursuant to Section 4.6(a) for the Plan Year beginning with or within the taxable year of the Participant. (h) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Account shall be used to provide additional benefits to the Participant or his Beneficiary. (i) Employer Elective Contributions made pursuant to this Section may be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short-term debt security acceptable to the Trustee until such time as the allocations pursuant to Section 4.4 have been made. 25 (j) The Employer and the Administrator shall implement the salary reduction elections provided for herein in accordance with the following: (1) A Participant may commence making elective deferrals to the Plan only after first satisfying the eligibility and participation requirements specified in Article III. However, the Participant must make his initial salary deferral election within a reasonable time, not to exceed thirty (30) days, after entering the Plan pursuant to Section 3.3. If the Participant fails to make an initial salary deferral election within such time, then such Participant may thereafter make an election in accordance with the rules governing modifications. The Participant shall make such an election by entering into a written salary reduction agreement with the Employer and filing such agreement with the Administrator. Such election shall initially be effective beginning with the pay period following the acceptance of the salary reduction agreement by the Administrator, shall not have retroactive effect and shall remain in force until revoked. (2) A Participant may modify a prior election during the Plan Year and concurrently make a new election by filing a written notice with the Administrator within a reasonable time before the pay period for which such modification is to be effective. However, modifications to a salary deferral election shall only be permitted quarterly, during election periods established by the Administrator prior to the first day of each Plan Year quarter. Any modification shall not have retroactive effect and shall remain in force until revoked. (3) A Participant may elect to prospectively revoke his salary reduction agreement in its entirety at any time during the Plan Year by providing the Administrator with thirty (30) days written notice of such revocation (or upon such shorter notice period as may be acceptable to the Administrator). Such revocation shall become effective as of the beginning of the first pay period coincident with or next following the expiration of the notice period. Furthermore, the termination of the Participant's employment, or the cessation of participation for any reason, shall be deemed to revoke any salary reduction agreement then in effect, effective immediately following the close of the pay period within which such termination or cessation occurs. 4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION The Employer shall generally pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for the filing of the Employer's federal income tax return for the Fiscal Year. However, Employer Elective Contributions accumulated through payroll deductions shall be paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets, but in any event within ninety (90) days from the date on which such amounts would otherwise have been payable to the Participant in cash. The provisions of 26 Department of Labor regulations 2510.3-102 are incorporated herein by reference. Furthermore, any additional Employer contributions which are allocable to the Participant's Elective Account for a Plan Year shall be paid to the Plan no later than the twelve-month period immediately following the close of such Plan Year. 4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date all amounts allocated to each such Participant as set forth herein. (b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate such contribution as follows: (1) With respect to the Employer's Elective Contribution made pursuant to Section 4.1(a), to each Participant's Elective Account in an amount equal to each such Participant's Deferred Compensation for the year. (2) With respect to the Employer's Non-Elective Contribution made pursuant to Section 4.1(b), to each Participant's Account in accordance with Section 4.1(b). Any Participant actively employed during the Plan Year shall be eligible to share in the matching contribution for the Plan Year. However, with respect to Plan Years beginning after December 31, 1989, in lieu of the foregoing, only Participants who are actively employed during 1--he Plan Year shall be eligible to share in the matching contribution for the year. (3) With respect to the Employer's Qualified Non-Elective Contribution made pursuant to Section 4.1(c), to each Participant's Elective Account in accordance with Section 4.1(c). Only Participants who are actively employed on the last day of the Plan Year shall be eligible to share in the Qualified Non-Elective Contribution for the year. However, with respect to Plan Years beginning after December 31, 1989, in lieu of the foregoing, only Participants who are actively employed on the last day of the Plan Year shall be eligible to share in the Qualified Non-Elective Contribution for the year. (4) With respect to the Employer's Non-Elective contribution made pursuant to Section 4.1(d), to each Participant's Account in the same proportion that each such Participant's Compensation for the year bears to the total Compensation of all Participants for such year. 27 Only Participants who are actively employed on the last day of the Plan Year shall be eligible to share in the discretionary contribution for the year. However, with respect to Plan Years beginning after December 31, 1989, in lieu of the foregoing, only Participants who are actively employed on the last day of the Plan Year shall be eligible to share in the discretionary contribution for the year. (c) As of each Anniversary Date any amounts which became Forfeitures since the last Anniversary Date shall first be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with section 6.4(e)(2). The remaining Forfeitures, if any, shall be allocated to Participants' Accounts in the following manner: (1) Forfeitures attributable to Employer matching contributions made pursuant to Section 4.1(b) shall be allocated among the Participants' Accounts in the same proportion that each such Participant's Compensation for the year bears to the total Compensation of all Participants for the year. Except, however, Participants who are not eligible to share in matching contributions (whether or not a deferral election was made or suspended pursuant to Section 4.2(e)) for a Plan Year shall not share in Plan Forfeitures attributable to Employer matching contributions for that year. (2) Forfeitures attributable to Employer discretionary contributions made pursuant to Section 4.1(d) shall be allocated among the Participants' Accounts of Participants otherwise eligible to share in the allocation of discretionary contributions for the year in the same proportion that each such Participant's Compensation for the year bears to the total compensation of all such Participants for the year. Provided, however, that in the event the allocation of Forfeitures provided herein shall cause the "annual addition "(as defined in Section 4.9) to any Participant's Account to exceed the amount allowable by the Code, the excess shall be reallocated in accordance with Section 4.10. (d) For any Top Heavy Plan Year, Employees not otherwise eligible to share in the allocation of contributions and Forfeitures as provided above, shall receive the minimum allocation provided for in Section 4.4(g) if eligible pursuant to the provisions of Section 4.4(i). (e) Participants who are not actively employed on the last day of the Plan Year due to Retirement (Normal or Late), Total and Permanent Disability or death shall share in the allocation of contributions and Forfeitures for that Plan Year only if otherwise eligible in accordance with this Section. 28 (f) As of each Anniversary Date or other valuation date, before one-half of the current valuation period allocation of Employer contributions and after allocation of Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants' and Former Participants' nonsegregated accounts as of such date. Participants' transfers from other qualified plans deposited in the general Trust Fund shall share in any earnings and losses (net appreciation or net depreciation) of the Trust Fund in the same manner provided above. Each segregated account maintained on behalf of a Participant shall be credited or charged with its separate earnings and losses. (g) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Employee shall be equal to at least three percent (3%) of such Employee's "415 Compensation "(reduced by contributions and forfeitures, if any, allocated to each Employee in any defined contribution plan included with this plan in a Required Aggregation Group). However, if (1) the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's "415 Compensation "and (2) this Plan is not required to be included in an Aggregation Group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Employee shall be equal to the largest percentage allocated to the Participant's Combined Account of any Key Employee. However, in determining whether a Non-Key Employee has received the required minimum allocation, such Non-Key Employee's Deferred Compensation and matching contributions needed to satisfy the "Actual Contribution Percentage "tests pursuant to Section 4.7(a) shall not be taken into account. However, no such minimum allocation shall be required in this Plan for any Employee who participates in another defined contribution plan subject to Code Section 412 providing such benefits included with this Plan in a Required Aggregation Group. (h) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Combined Account of any Key Employee shall be equal to the ratio of the sum of the Employer's contributions and Forfeitures allocated on behalf of such Key Employee divided by the "415 Compensation "for such Key Employee. (i) For any Top Heavy Plan Year, the minimum allocations set forth above shall be allocated to the Participant's Combined Account of all Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Employees who have (1) failed to complete a Year of Service; and (2) declined to make 29 mandatory contributions (if required) or, in the case of a cash or deferred arrangement, elective contributions to the Plan. (j) For the purposes of this Section, "415 Compensation "shall be limited to $200,000. Such amount shall be adjusted at the same time and in the same manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the "415 Compensation "limit shall be an amount equal to the "415 Compensation "limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). (k) Notwithstanding anything herein to the contrary, Participants who terminated employment for any reason during the Plan Year shall share in the salary reduction contributions made by the Employer for the year of termination without regard to the Hours of Service credited. (l) If a Former Participant is reemployed after five (5) consecutive 1-Year Breaks in Service, then separate accounts shall be maintained as follows: (1) one account for nonforfeitable benefits attributable to pre-break service; and (2) one account representing his status in the Plan attributable to post-break service. (m) Notwithstanding anything to the contrary, if this is a Plan that would otherwise fail to meet the requirements of Code Sections 401(a)(26), 410(b)(1) or 410(b)(2)(A)(i) and the Regulations thereunder because Employer contributions would not be allocated to a sufficient number or percentage of Participants for a Plan Year, then the following rules shall apply: (1) The group of Participants eligible to share in the Employer's contribution and Forfeitures for the Plan Year shall be expanded to include the minimum number of Participants who would not otherwise be eligible as are necessary to satisfy the applicable test specified above. The specific Participants who shall become eligible under the terms of this paragraph shall be those who are actively employed on the last day of the Plan Year and, when compared to similarly situated Participants, have completed the greatest number of Hours of Service in the Plan Year. (2) If after application of paragraph (1) above, the applicable test is still not satisfied, then the group of Participants eligible to share in the Employer's contribution and Forfeitures for the Plan Year shall be further expanded to include the minimum number of Participants who are not actively employed on the last day of the Plan Year as are necessary to satisfy the applicable test. The specific 30 Participants who shall become eligible to share shall be those Participants, when compared to similarly situated Participants, who have completed the greatest number of Hours of Service in the Plan Year before terminating employment. (3) Nothing in this Section shall permit the reduction of a Participant's accrued benefit. Therefore any amounts that have previously been allocated to Participants may not be reallocated to satisfy these requirements. In such event, the Employer shall make an additional contribution equal to the amount such affected Participants would have received had they been included in the allocations, even if it exceeds the amount which would be deductible under Code Section 404. Any adjustment to the allocations pursuant to this paragraph shall be considered a retroactive amendment adopted by the last day of the Plan Year. 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS (a) Maximum Annual Allocation: For each Plan Year, the annual allocation derived from Employer Elective Contributions to a Participant's Elective Account shall satisfy one of the following tests: (1) The "Actual Deferral Percentage "for the Highly Compensated Participant group shall not be more than the "Actual-Deferral Percentage "of the Non-Highly Compensated Participant group multiplied by 1.25, or (2) The excess of the "Actual Deferral Percentage "for the Highly Compensated Participant group over the "Actual Deferral Percentage "for the Non-Highly Compensated Participant group shall not be more than two percentage points. Additionally, the "Actual Deferral Percentage "for the Highly Compensated Participant group shall not exceed the "Actual Deferral Percentage "for the Non-Highly Compensated Participant group multiplied by 2. The provisions of Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are incorporated herein by reference. However, in order to prevent the multiple use of the alternative method described in (2) above and in Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer shall have his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2, the provisions of which are incorporated herein by reference. (b) For the purposes of this Section "Actual Deferral Percentage "means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group for a Plan Year, the average of the ratios, calculated separately for each Participant in such group, of the amount of Employer Elective Contributions allocated 31 to each Participant's Elective Account for such Plan Year, to such Participant's "414(s) Compensation "for such Plan Year. The actual deferral ratio for each Participant and the "Actual Deferral Percentage "for each group shall be calculated to the nearest one-hundredth of one percent. Employer Elective Contributions allocated to each Non-Highly Compensated Participant's Elective Account shall be reduced by Excess Deferred Compensation to the extent such excess amounts are made under this Plan or any other plan maintained by the Employer. (c) For the purpose of determining the actual deferral ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner "of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation "during the year, the following shall apply: (1) The combined actual deferral ratio for the. family group (which shall be treated as one Highly Compensated Participant) shall be determined by aggregating Employer Elective Contributions and "414 (s) Compensation "of all eligible Family Members (including Highly Compensated Participants). However, in applying the $200,000 limit to "414(s) Compensation, "Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (2) The Employer Elective contributions and "414(s) Compensation "of all Family Members shall be disregarded for purposes of determining the "Actual Deferral Percentage "of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (3) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (d) For the purposes of Sections 4.5(a) and 4.6, a Highly Compensated Participant and a Non-Highly Compensated -Participant shall include any Employee eligible to make a deferral election pursuant to Section 4.2, whether or not such deferral election was made or suspended pursuant to Section 4.2. (e) For the purposes of this Section and Code Sections 401 (a) (4), 410 (b) and 401 (k), if two or more plans which include cash or deferred arrangements are considered one plan for the purposes of Code Section 401 (a) (4) or 410 (b) (other than Code Section 410 (b) (2) (A)(ii)), the cash or deferred arrangements included in such plans shall be treated as one arrangement. In addition, two or more cash or deferred arrangements may be considered as a single arrangement for purposes of determining whether or not such arrangements satisfy Code Sections 401(a) (4), 410(b) and 401(k). In such a case, the cash or 32 deferred arrangements included in such plans and the plans including such arrangements shall be treated as one arrangement and as one plan for purposes of this Section and Code Sections 401 (a) (4), 410 (b) and 401(k). Plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975 (e) (7) or 409 may not be combined with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(k). (f) For the purposes of this Section, if a Highly Compensated Participant is a Participant under two or more cash or deferred arrangements (other than a cash or deferred arrangement which is part of an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) of the Employer or an Affiliated Employer, all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for the purpose of determining the actual deferral ratio with respect to such Highly Compensated Participant. However, if the cash or deferred arrangements have different plan years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS In the event that the initial allocations of the Employer's Elective Contributions made pursuant to Section 4.4 do not satisfy one of the tests set forth in Section 4.5(a), the Administrator shall adjust Excess Contributions pursuant to the options set forth below: (a) On or before the fifteenth day of the third month following the end of each Plan Year, the Highly Compensated Participant having the highest actual deferral ratio shall have his portion of Excess Contributions distributed to him until one of the tests set forth in Section 4.5(a) is satisfied, or until his actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the second highest actual deferral ratio. This process shall continue until one of the tests set forth in Section 4.5(a) is satisfied. For each Highly Compensated Participant, the amount of Excess Contributions is equal to the Elective Contributions on behalf of such Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual deferral ratio (determined after application of this paragraph) by his "414(s) Compensation. "However, in determining the amount of Excess Contributions to be distributed with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced by any Excess Deferred Compensation previously distributed to such affected Highly Compensated Participant for his taxable year ending with or within such Plan Year. (1) With respect to the distribution of Excess Contributions pursuant to (a) above, such distribution: 33 (i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable; (ii) shall cause matching contributions which relate to such Deferred Compensation to be forfeited; (iii) shall be made from Qualified Non-Elective Contributions only to the extent that Excess Contributions exceed the balance in the Participant's Elective Account attributable to Deferred Compensation; (iv) shall be adjusted for Income; and (v) shall be designated by the Employer as a distribution of Excess Contributions (and Income). (2) Any distribution of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution of Excess Contributions and Income. (3) The determination and correction of Excess Contributions of a Highly Compensated Participant whose actual deferral ratio is determined under the family aggregation rules shall be accomplished by reducing the actual deferral ratio as required herein, and the Excess Contributions for the family unit shall then be allocated among the Family Members in proportion to the Elective Contributions of each Family Member that were combined to determine the group actual deferral ratio. (b) Within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.5(a). Such contribution shall be allocated to the Participant's Elective Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total Compensation of all Non-Highly Compensated Participants. (c) If during a Plan Year the projected aggregate amount of Elective contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.5(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 4.6(a) each affected Highly Compensated Participant's deferral election made pursuant to Section 4.2 by an amount necessary to satisfy one of the tests set forth in Section 4.5(a). 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) The "Actual Contribution Percentage "for the Highly Compensated Participant group shall not exceed the greater of: 34 (1) 125 percent of such percentage for the Non-Highly Compensated Participant group; or (2) the lesser of 200 percent of such percentage for the Non-Highly Compensated Participant group, or such percentage for the Non-Highly Compensated Participant group plus 2 percentage points. However, to prevent the multiple use of the alternative method described in this paragraph and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 or any other cash or deferred arrangement maintained by the Employer or an Affiliated Employer and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer shall have his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2. The provisions of code Section 401(m) and Regulations 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by reference. (b) For the purposes of this Section and Section 4.8, "Actual Contribution Percentage "for a Plan Year means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group, the average of the ratios (calculated separately for each Participant in each group) of: (1) the sum of Employer matching contributions made pursuant to Section 4.1(b) on behalf of each such Participant for such Plan Year; to (2) the Participant's "414(s) Compensation "for such Plan Year. (c) For purposes of determining the "Actual Contribution Percentage "and the amount of Excess Aggregate Contributions pursuant to Section 4.8(d), only Employer matching contributions (excluding Employer matching contributions forfeited pursuant to Sections 4.2(f) and 4.6(a)(1) or forfeited pursuant to Section 4.8(a)) contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Employer matching contributions pursuant to Section 4.1(b) allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code Section 401(m)(4)(C)) contributed to any plan maintained by the Employer. Such elective deferrals and qualified non-elective contributions shall be treated as Employer matching contributions subject to Regulation 1.401(m)-1(b)(5) which is incorporated herein by reference. However, the Plan Year must be the same as the plan year of the plan to which the elective deferrals and the qualified non-elective contributions are made. (d) For the purpose of determining the actual ' contribution ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Employee is either a "five percent owner "of the Employer or one of the 35 ten (10) Highly Compensated Employees paid the greatest "415 Compensation "during the year, the following shall apply: (1) The combined actual contribution ratio for the family group (which shall be treated as one Highly Compensated Participant) shall be determined by aggregating Employer matching contributions made pursuant to Section 4.1(b) and "414(s) Compensation "of all eligible Family Members (including Highly Compensated Participants). However, in applying the $200,000 limit to "414(s) Compensation", Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (2) The Employer matching contributions made pursuant to Section 4.1(b) and "414(s) Compensation "of all Family Members shall be disregarded for purposes of determining the "Actual Contribution Percentage "of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (3) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (e) For purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(m), if two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made are treated as one plan for purposes of Code Sections 401(a)(4) or 410(b) (other than the average benefits test under Code Section 410(b)(2)(A)(ii)), such plans shall be treated as one plan. In addition, two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made may be considered as a single plan for purposes of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case, the aggregated plans must satisfy this Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were a single plan. Plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be aggregated with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(m). (f) If a Highly Compensated Participant is a Participant under two or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) which are maintained by the Employer or an Affiliated Employer to which matching contributions, Employee contributions, or both, are made, all such contributions on behalf of such Highly Compensated Participant shall be aggregated for purposes of determining such Highly Compensated Participant's actual 36 contribution ratio. However, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan. (g) For purposes of Sections 4.7(a) and 4.8, a Highly Compensated Participant and Non-Highly Compensated Participant shall include any Employee eligible to have Employer matching contributions pursuant to Section 4.1(b) (whether or not a deferral election was made or suspended pursuant to Section 4.2(e)) allocated to his account for the Plan Year. 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) In the event that the "Actual Contribution Percentage "for the Highly Compensated Participant group exceeds the "Actual Contribution Percentage "for the Non-Highly Compensated Participant group pursuant to Section 4.7(a), the Administrator (on or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year) shall direct the Trustee to distribute to the Highly Compensated Participant having the highest actual contribution ratio, his Vested portion of Excess Aggregate Contributions (and Income allocable to such contributions) and, if forfeitable, forfeit such non-Vested Excess Aggregate Contributions attributable to Employer matching contributions (and Income allocable to such forfeitures) until either one of the tests set forth in Section 4.7(a) is satisfied, or until his actual contribution ratio equals the actual contribution ratio of the Highly Compensated Participant having the second highest actual contribution ratio. This process shall continue until one of the tests set forth in Section 4.7(a) is satisfied. (b) Any distribution and/or forfeiture of less than the entire amount of Excess Aggregate Contributions (and Income) shall be treated as a pro rata distribution and/or forfeiture of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate Contributions shall be designated by the Employer as a distribution of Excess Aggregate Contributions (and Income). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 4.4. However, no such forfeiture may be allocated to a Highly Compensated Participant whose contributions are reduced pursuant to this Section. (c) Excess Aggregate Contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. Forfeited matching contributions that are reallocated to Participants' Accounts for the Plan Year in which the forfeiture occurs shall be treated as an "annual addition "pursuant to Section 4.9(b) for the Participants to whose Accounts they are reallocated and for the Participants from whose Accounts they are forfeited. 37 (d) For each Highly Compensated Participant, the amount of Excess Aggregate Contributions is equal to the Employer matching contributions made pursuant to Section 4.1(b) and Any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of the Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual contribution ratio (determined after application of this paragraph) by his "414(s) Compensation. "The actual contribution ratio must be rounded to the nearest one-hundredth of one percent. In no case shall the amount of Excess Aggregate Contribution with respect to any Highly Compensated Participant exceed the amount of Employer matching contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of such Highly Compensated Participant for such Plan Year. (e) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess contributions, if any, to be treated as voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in code Section 401(k)) maintained by the Employer that ends with or within the Plan Year. (f) If the determination and correction of Excess Aggregate Contributions of a Highly Compensated Participant whose actual contribution ratio is determined under the family aggregation rules, then the actual contribution ratio shall be reduced and the Excess Aggregate Contributions for the family unit shall be allocated among the Family Members in proportion to the sum of Employer matching contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) of each Family Member that were combined to determine the group actual contribution ratio. (g) If during a Plan Year the projected aggregate amount of Employer matching contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.7(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 4.8(a) each affected Highly Compensated Participant's projected share of such contributions by an amount necessary to satisfy one of the tests set forth in Section 4.7(a). (h) Notwithstanding the above, within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.7(a). Such contribution shall be allocated to the Participant's Elective Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total Compensation 38 of all Non-Highly Compensated Participants. A separate accounting shall be maintained for the purpose of excluding such contributions from the "Actual Deferral Percentage "tests pursuant to Section 4.5(a). 4.9 MAXIMUM ANNUAL ADDITIONS (a) Notwithstanding the foregoing, the maximum "annual additions "credited to a Participant's accounts for any "limitation year "shall equal the lesser of: (1) $30,000 (or, if greater, one-fourth of the dollar limitation in effect under Code Section 415(b)(1)(A)) or (2) twenty-five percent (25%) of the Participant's "415 Compensation "for such "limitation year. "For any short "limitation year, "the dollar limitation in (1) above shall be reduced by a fraction, the numerator of which is the number of full months in the short "limitation year "and the denominator of which is twelve (12). (b) For purposes of applying the limitations of Code Section 415, "annual additions "means the sum credited to a Participant's accounts for any "limitation year "of (1) Employer contributions, (2) Employee contributions, (3) forfeitures, (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(1)(2) which is part of a pension or annuity plan maintained by the Employer and (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit plan (as defined in Code Section 419(e)) maintained by the Employer. Except, however,, the "415 Compensation "percentage limitation referred to in paragraph (a)(2) above shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "annual addition, "or (2) any amount otherwise treated as an "annual addition "under Code Section 415(1)(1). (c) For purposes of applying the limitations of Code Section 415, the transfer of funds from one qualified plan to another is not an "annual addition. "In addition, the following are not Employee contributions for the purposes of Section 4.9(b)(2): (1) rollover contributions (as defined in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6). (d) For purposes of applying the limitations of Code Section 415, the "limitation year "shall be the Plan Year. (e) The dollar limitation under Code Section 415 (b) (1) (A) stated in paragraph (a) (1) above shall be adjusted annually as provided in Code Section 415(d) pursuant to the Regulations. The 39 adjusted limitation is effective as of January 1st of each calendar year and is applicable to "limitation years "ending with or within that calendar year. (f) For the purpose of this Section, all qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan, and all qualified defined contribution plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined contribution plan. (g) For the Purpose of this Section, if the Employer is a member of a controlled group of corporations, trades or businesses under common control (as defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by Code Section 415(h)), is a member of an affiliated service group (as defined by Code Section 414(m)), or is a member of a group of entities required to be aggregated pursuant to Regulations under Code Section 414(o), all Employees of such Employers shall be considered to be employed by a single Employer. (h) For the purpose of this Section, if this Plan is a Code Section 413(c) plan, all Employers of a Participant who maintain this Plan will be considered to be a single Employer. (i)(1) If a Participant participates in more than one defined contribution plan maintained by the Employer which have different Anniversary Dates, the maximum "annual additions "under this Plan shall equal the maximum "annual additions "for the "limitation year "minus any "annual additions "previously credited to such Participant's accounts during the "limitation year." (2) If a Participant participates in both a defined contribution plan subject to Code Section 412 and a defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, "annual additions "will be credited to the Participant's accounts under the defined contribution plan subject to Code Section 412 prior to crediting "annual additions "to the Participant's accounts under the defined contribution plan not subject to Code Section 412. (3) If a Participant participates in more than one defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, the maximum "annual additions "under this Plan shall equal the product of (A) the maximum "annual additions "for the "limitation year "minus any "annual additions "previously credited under subparagraphs (1) or (2) above, multiplied by (B) a fraction (i) the numerator of which is the "annual additions "which would be credited to such Participant's accounts under this Plan without regard to the limitations of Code Section 415 and (ii) the denominator of which is such "annual additions "for all plans described in this subparagraph. (j) If an Employee is (or has been) a Participant in one or more defined benefit plans and one or more defined contribution plans maintained by the Employer, the sum of the defined benefit plan 40 fraction and the defined contribution plan fraction. for any "limitation year "may not exceed 1.0. (k) The defined benefit plan fraction for any "limitation year "is a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the "limitation year "under Code Sections 415(b) and (d) or 140 percent of the highest average compensation, including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first "limitation year "beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last "limitation year" beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all "limitation years "beginning before January 1, 1987. (l) The defined contribution plan fraction for any "limitation year "is a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior "limitation years "(including the annual additions attributable to the Participant's nondeductible Employee contributions to all defined benefit plans, whether or not terminated, maintained by the Employer, and the annual additions attributable to all welfare benefit funds, as defined in Code Section 419(e), and individual medical accounts, as defined in Code Section 415(1)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior "limitation years "of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any "limitation year "is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first "limitation year "beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they 41 would be computed as of the end of the last "limitation year "beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first "limitation year "beginning on or after January 1, 1987. The annual addition for any "limitation year "beginning before January 1, 1987 shall not be recomputed to treat all Employee contributions as annual additions. (m) Notwithstanding the foregoing, for any "limitation year "in which the Plan is a Top Heavy Plan, 100 percent shall be substituted for 125 percent in Sections 4.9(k) and 4.9(1) unless the extra minimum allocation is being provided pursuant to Section 4.4. However, for any "limitation year "in which the Plan is a Super Top Heavy Plan, 100 percent shall be substituted for 125 percent in any event. (n) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder, the terms of which are specifically incorporated herein by reference. 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS (a) If, as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any Participant under the limits of Section 4.9 or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions "under this Plan would cause the maximum "annual additions "to be exceeded for any Participant, the Administrator shall (1) distribute any elective deferrals (within the meaning of Code Section 402(g)(3)) or return any voluntary Employee contributions credited for the "limitation year,, to the extent that the return would reduce the "excess amount "in the Participant's accounts (2) hold any "excess amount "remaining after the return of any elective deferrals or voluntary Employee contributions in a "Section 415 suspense account "(3) use the "Section 415 suspense account "in the next "limitation year "(and succeeding "limitation years "if necessary) to reduce Employer contributions for that Participant if that Participant ,.z, covered by the Plan as of the end of the "limitation year, "or if the Participant is not so covered, allocate and reallocate the "Section 415 suspense account "in the next "limitation year "(and succeeding "limitation years "if necessary) to all Participants in the Plan before any Employer or Employee contributions which would constitute "annual additions "are made to the Plan for such "limitation year "(4) reduce Employer contributions to the Plan for such "limitation year "by the amount of the "Section 415 suspense account "allocated and reallocated during such "limitation year." (b) For purposes of this Article, "excess amount "for any Participant for a "limitation year "shall mean the excess, if any, of (1) the "annual additions "which would be credited to his account under the terms of the Plan without regard to the limitations of Code Section 42 415 over (2) the maximum "annual additions "determined pursuant to Section 4.9. (c) For purposes of this Section, "Section 415 suspense account "shall mean an unallocated account equal to the sum of "excess amounts "for all Participants in the Plan during the "limitation year. "The "Section 415 suspense account "shall not share in any earnings or losses of the Trust Fund. 4.11 TRANSFERS FROM QUALIFIED PLANS (a) With the consent of the Administrator, amounts may be transferred from other qualified plans by Employees, provided that the trust from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax exempt status of the Plan or Trust or create adverse tax consequences for the Employer. The amounts transferred shall be set up in a separate account herein referred to as a "Participant's Rollover Account. "Such account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (b) Amounts in a Participant's Rollover Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as provided in paragraphs (c) and (d) of this Section. (c) Except as permitted by Regulations (including Regulation 1.411(d)-4), amounts attributable to elective contributions (as defined in Regulation 1.401(k)-1(g)(3)), including amounts treated as elective contributions, which are transferred from another qualified plan in a plan-to-plan transfer shall be subject to the distribution limitations provided for in Regulation 1.401(k)-1(d). (d) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Participant's Rollover Account shall be used to provide additional benefits to the Participant or his Beneficiary. Any distributions of amounts held in a Participant's Rollover Account shall be made in a manner which is consistent with and satisfies the provisions of section 6.5, including, but not limited to, all notice and Consent requirements of Code Section 411(a)(11) and the Regulations thereunder. Furthermore, such amounts shall be considered as part of a Participant's benefit in determining whether an involuntary cash-out of benefits without Participant consent may be made. (e) The Administrator may direct that employee transfers made after a valuation date be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short term debt security acceptable to the Trustee until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, to be determined by the Administrator. 43 (f) For purposes of this Section, the term "qualified plan "shall mean any tax qualified plan under Code Section 401(a). The term "amounts transferred from other qualified plans "shall mean: (i) amounts transferred to this Plan directly from another qualified plan; (ii) distributions from another qualified plan which are eligible rollover distributions and which are either transferred by the Employee to this Plan within sixty (60) days following his receipt thereof or are transferred pursuant to a direct rollover; (iii) amounts transferred to this Plan from a conduit individual retirement account provided that the conduit individual retirement account has no assets other than assets which (A) were previously distributed to the Employee by another qualified plan as a lump-sum distribution (B) were eligible for tax-free rollover to a qualified plan and (C) were deposited in such conduit individual retirement account within sixty (60) days of receipt thereof and other than earnings on said assets; and (iv) amounts distributed to the Employee from a conduit individual retirement account meeting the requirements of clause (iii) above, and transferred by the Employee to this Plan within sixty (60) days of his receipt thereof from such conduit individual retirement account. (g) Prior to accepting any transfers to which this Section applies, the Administrator may require the Employee to establish that the amounts to be transferred to this Plan meet the requirements of this Section and may also require the Employee to provide an opinion of counsel satisfactory to the Employer that the amounts to be transferred meet the requirements of this Section. (h) This Plan shall not accept any direct or indirect transfers (as that term is defined and interpreted under Code Section 401(a)(11) and the Regulations thereunder) from a defined benefit plan, money purchase plan (including a target benefit plan), stock bonus or profit sharing plan which would otherwise have provided for a life annuity form of payment to the Participant. (i) Notwithstanding anything herein to the contrary, a transfer directly to this Plan from another qualified plan (or a transaction having the effect of such a transfer) shall only be permitted if it will not result in the elimination or reduction of any "Section 411(d)(6) protected benefit "as described in Section 8.1. ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND The Administrator shall direct the Trustee, as of each Anniversary Date, and at such other date or dates deemed necessary by the Administrator, herein called "valuation date to determine the net worth of the assets comprising the Trust Fund as it exists on the "valuation date. "In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value as of the "valuation date "and shall deduct all expenses for which the Trustee has not yet obtained reimbursement from the Employer or the Trust Fund. 44 5.2 METHOD OF VALUATION In determining the fair market value of securities held in the Trust Fund which are listed on a registered stock exchange, the Administrator shall direct the Trustee to value the same at the prices they were last traded on such exchange preceding the close of business on the "valuation date. "If such securities were not traded on the "valuation date, "or if the exchange on which they are traded was not open for business on the "valuation date, "then the securities shall be valued at the prices at which they were last traded prior to the "valuation date. "Any unlisted security held in the Trust Fund shall be valued at its bid price next receding the close of business on the "valuation date, "which bid price shall be obtained from a registered broker or an investment banker. In determining the fair market value of assets other than securities for which trading or bid prices can be obtained, the Trustee may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT Every Participant may terminate his employment with the Employer and retire for the purposes hereof on his Normal Retirement Date. However, a Participant may postpone the termination of his employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.4, shall continue until his Late Retirement Date. Upon a Participant's Retirement Date, or as soon thereafter as is practicable, the Trustee shall distribute all amounts credited to such Participant's Combined Account in accordance with Section 6.5. 6.2 DETERMINATION OF BENEFITS UPON DEATH (a) Upon the death of a Participant before his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. The Administrator shall direct the Trustee, in accordance with the provisions of sections 6.6 and 6.7, to distribute the value of the deceased Participant's accounts to the Participant's Beneficiary. (b) Upon the death of a Former Participant, the Administrator shall direct the Trustee, in accordance with the provisions of Sections 6.6 and 6.7, to distribute any remaining Vested amounts credited to the accounts of a deceased Former Participant to such Former Participant's Beneficiary. (c) Any security interest held by the Plan by reason of an outstanding loan to the Participant or Former Participant shall be taken into account in determining the amount of the death benefit. (d) The Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as 45 the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (e) The Beneficiary of the death benefit payable pursuant to this Section shall be the Participant's spouse. Except, however, the Participant may designate a Beneficiary other than his spouse if: (1) the spouse has waived the right to be the Participant's Beneficiary, or (2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order "as defined in Code Section 414(p) which provides otherwise), or (3) the Participant has no spouse, or (4) the spouse cannot be located. In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke his designation of a Beneficiary or change his Beneficiary by filing written notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. In the event no valid designation of Beneficiary exists at the time of the Participant's death, the death benefit shall be payable to his estate. (f) Any consent by the Participant's spouse to waive any rights to the death benefit must be in writing, must acknowledge the effect of such waiver, and be witnessed by a Plan representative or a notary public. Further, the spouse's consent must be irrevocable and must acknowledge the specific nonspouse Beneficiary. 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY In the event of a Participant's Total and Permanent Disability prior to his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. In the event of a Participant's Total and Permanent Disability, the Trustee, in accordance with the provisions of Sections 6.5 and 6.7, shall distribute to such Participant all amounts credited to such Participant's Combined Account as though he had retired. 6.4 DETERMINATION OF BENEFITS UPON TERMINATION (a) On or before the Anniversary Date coinciding with or subsequent to the termination of a Participant's employment for any reason other than death, Total and Permanent Disability or retirement, the Administrator may direct the Trustee to segregate the amount of the 46 Vested portion of such Terminated Participant's Combined Account and invest the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit, common or collective trust fund of a bank or a deferred annuity. In the event the Vested portion of a Participant's Combined Account is not segregated, the amount shall remain in a separate account for the Terminated Participant and share in allocations pursuant to Section 4.4 until such time as a distribution is made to the Terminated Participant. Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability or Normal Retirement). However, at the election of the Participant, the Administrator shall direct the Trustee to cause the entire Vested portion of the Terminated Participant's Combined Account to be payable to such Terminated Participant. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. If the value of a Terminated Participant's Vested benefit derived from Employer and Employee contributions does not exceed $3,500 and has never exceeded $3,500 at the time of any prior distribution, the Administrator shall direct the Trustee to cause the entire Vested benefit to be paid to such Participant in a single lump sum. For purposes of this Section 6.4, if the value of a Terminated Participant's Vested benefit is zero, the Terminated Participant shall be deemed to have received a distribution of such Vested benefit. (b) The Vested portion of any Participant's Account shall be a percentage of the total amount credited to his Participant's Account determined on the basis of the Participant's number of Years of Service according to the following schedule: Vesting Schedule Years of Service Percentage Less than 2 0 % 2 20 % 3 40 % 4 60 % 5 80 % 6 100 % (c) Notwithstanding the vesting schedule above, upon the complete discontinuance of the Employer's contributions to the Plan or upon any full or partial termination of the Plan, all amounts credited 47 to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture. (d) The computation of a Participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Plan. For this purpose, the Plan shall be treated as having been amended if the Plan provides for an automatic change in vesting due to a change in top heavy status. In the event that the Plan is amended to change or modify any vesting schedule, a Participant with at least three (3) Years of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such amendment. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) the date the Participant receives written notice of the amendment from the Employer or Administrator. (e)(1) If any Former Participant shall be reemployed by the Employer before a 1-Year Break in Service occurs, he shall continue to participate in the Plan in the same manner as if such termination had not occurred. (2) If any Former Participant shall be reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received, or was deemed to have received, a distribution of his entire Vested interest prior to his reemployment, his forfeited account shall be reinstated only if he repays the full amount distributed to him before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of five (5) consecutive 1-Year Breaks in service commencing after the distribution, or in the event of a deemed distribution, upon the reemployment of such Former Participant. In the event the Former Participant does repay the full amount distributed to him, or in the event of a deemed distribution, the undistributed portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Anniversary Date or other valuation date coinciding with or preceding his termination. The source for such reinstatement shall first be any Forfeitures occurring during the year. If such source is insufficient, then the Employer shall contribute an amount which is sufficient to restore any such forfeited Accounts provided, however, that if a discretionary contribution is made for such year pursuant to 48 Section 4.1(d), such contribution shall first be applied to restore any such Accounts and the remainder shall be allocated in accordance with Section 4.4. (3) If any Former Participant is reemployed after a 1-Year Break in Service has occurred, Years of Service shall include Years of Service prior to his 1-Year Break in Service subject to the following rules: (i) If a Former Participant has a 1-Year Break in Service, his pre-break and post-break service shall be used for computing Years of Service for eligibility and for vesting purposes only after he has been employed for one (1) Year of Service following the date of his reemployment with the Employer; (ii) Any Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions shall lose credits otherwise allowable under (i) above if his consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of his pre-break Years of Service; (iii) After five (5) consecutive 1-Year Breaks in Service, a Former Participant's Vested Account balance attributable to pre-break service shall not be increased as a result of post-break service; (iv) If a Former Participant who has not had his Years of Service before a 1-Year Break in Service disregarded pursuant to (ii) above completes one (1) Year of Service for eligibility purposes following his reemployment with the Employer, he shall participate in the Plan retroactively from his date of reemployment; (v) If a Former Participant who has not had his Years of Service before a 1-Year Break in Service disregarded pursuant to (ii) abode completes a Year of Service (a 1-Year Break in Service previously occurred, but employment had not terminated), he shall participate in the Plan retroactively from the first day of the Plan Year during which he completes one (1) Year of Service. 6.5 DISTRIBUTION OF BENEFITS, (a) The Administrator, pursuant to the election of the Participant, shall direct the Trustee to distribute to a Participant or his Beneficiary any amount to which he is entitled under the Plan in one lump-sum payment in cash. (b) Any distribution to a Participant who has a benefit which exceeds, or has ever exceeded, $3,500 at the time of any prior distribution shall require such Participants consent if such distribution occurs prior to the later of his Normal Retirement Age or age 62. With regard to this required consent: 49 (1) The Participant must be informed of his right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the distribution of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions which are required under Section 6.5(c). (2) Notice of the rights specified under this paragraph shall be provided no less than 30 days and no more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. (3) Written consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. (4) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. (c) Notwithstanding any provision in the Plan to the contrary, the distribution of a Participant's benefits shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)-2), the provisions of which are incorporated herein by reference: (1) A Participant's benefits shall be distributed to him not later than April 1st of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or (ii) the calendar year in which the Participant retires, provided, however, that this clause (ii) shall not apply in the case of a Participant who is a "five (5) percent owner "at any time during the five (5) Plan Year period ending in the calendar year in which he attains age 70 1/2 or, in the case of a Participant who becomes a "five (5) percent owner "during any subsequent Plan Year, clause (ii) shall no longer apply and the required beginning date shall be the April 1st of the calendar year following the calendar year in which such subsequent Plan Year ends. Notwithstanding the foregoing, clause (ii) above shall not apply to any Participant unless the Participant had attained age 70 1/2 before January 1, 1988 and was not a "five (5) percent owner "at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year. (2) Distributions to a Participant and his Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. (d) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of 50 any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of the requirements of the Plan. (e) If a distribution is made at a time when a Participant is not fully Vested in his Participant's Account (employment has not terminated) and the Participant may increase the Vested percentage in such account: (1) a separate account shall be established for the Participant's interest in the Plan as of the time of the distribution; and (2) at any relevant time, the Participant's Vested portion of the separate account shall be equal to an amount ("X") determined by the formula: X equals P(AB plus (R x D)) - (R x D) For purposes of applying the formula: P is the Vested percentage at the relevant time, AB is the account balance at the relevant time, D is the amount of distribution, and R is the ratio of the account balance at the relevant time to the account balance after distribution. 6.6 DISTRIBUTION OF BENEFITS UPON DEATH (a) The death benefit payable pursuant to Section 6.2 shall be paid to the Participant's Beneficiary in one lump-sum payment in cash subject to the rules of Section 6.6(b). (b) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. If it is determined pursuant to Regulations that the distribution of a Participant's interest has begun and the Participant dies before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 6.5 as of his date of death. If a Participant dies before he has begun to receive any distributions of his interest under the Plan or before distributions are deemed to have begun pursuant to Regulations, then his death benefit shall be distributed to his Beneficiaries by December 31st of the calendar year in which the fifth anniversary of his date of death occurs. 51 6.7 TIME OF SEGREGATION OR DISTRIBUTION Except as limited by Sections 6.5 and 6.6, whenever the Trustee is to make a distribution on or as of an Anniversary Date, the distribution may be made on such date or as soon thereafter as is practicable. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall occur not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (b) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates his service with the Employer. 6.8 DISTRIBUTION FOR MINOR BENEFICIARY In the event a distribution is to be made to a minor, then the Administrator may direct that such distribution be paid to the legal guardian, or if none, to a parent of such Beneficiary or a responsible adult with whom the Beneficiary maintains his residence, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the Plan. In the event a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored. 6.10 ADVANCE DISTRIBUTION FOR HARDSHIP (a) The Administrator, at the election of the Participant, shall direct the Trustee to distribute to any Participant in any one Plan Year up to the lesser of 100% of his Vested Participant's Elective Account and his Participant's Account valued as of the last Anniversary Date or other valuation date or the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the valuation date immediately preceding the date of distribution, and the Participant's Elective Account and his Participant's Account shall be reduced accordingly. Withdrawal under this Section shall be authorized only if the distribution is on account of: (1) Expenses for medical care described in Code Section 213(d) previously incurred by the Participant, his spouse, or any of his dependents (as defined in Code Section 152) or necessary for these persons to obtain medical care; 52 (2) The costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments); (3) Payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, his spouse, children, or dependents; or (4) Payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. (b) No distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that all of the following conditions are satisfied: (1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. The amount of the immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution; (2) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer; (3) The Plan, and all other plans maintained by the Employer, provide that the Participant's elective deferrals and voluntary Employee contributions will be suspended for at least twelve (12) months after receipt of the hardship distribution or, the Participant, pursuant to a legally enforceable agreement, will suspend his elective deferrals and voluntary Employee contributions to the Plan and all other plans maintained by the Employer for at least twelve (12) months after receipt of the hardship distribution; and (4) The Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective deferrals for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code section 402(g) for such next taxable year less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution. (c) Notwithstanding the above, distributions from the Participant's Elective Account pursuant to this Section shall be 53 limited solely to the Participant's total Deferred Compensation as of the date of distribution, reduced by the amount of any previous distributions pursuant to this Section. (d) Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. 6.11 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee "under a "qualified domestic relations order. "Furthermore, a distribution to an "alternate payee "shall be permitted if such distribution is authorized by a "qualified domestic relations order, "even if the affected Participant has not separated from service and has not reached the "earliest retirement age "under the Plan. For the purposes of this Section, "alternate payee, ""qualified domestic relations order "and "earliest retirement age "shall have the meaning set forth under Code Section 414(p). ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE The Trustee shall have the following categories of responsibilities: (a) Consistent with the "funding policy and method "determined by the Employer, to invest, manage, and control the Plan assets subject, however, to the direction of an Investment Manager if the Trustee should appoint such manager as to all or a portion of the assets of the Plan; (b) At the direction of the Administrator, to pay benefits required under the Plan to be paid to Participants, or, in the event of their death, to their Beneficiaries; (c) To maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report per Section 7.7; and (d) If there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE (a) The Trustee shall invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The 54 Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times the Plan may qualify as a qualified Profit Sharing Plan and Trust. (b) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature. 7.3 OTHER POWERS OF THE TRUSTEE The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of the Plan, shall have the following powers and authorities, to be exercised in the Trustee's sole discretion: (a) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (b) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; (c) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property; (d) To cause any securities or other property to be registered in the Trustee's own name or in the name of one or more of the Trustee's nominees, and to hold any investments in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (e) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any 55 part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (f) To keep such portion of the Trust Fund in cash or cash balances as the Trustee may, from time to time, deem to be in the best interests of the Plan, without liability for interest thereon; (g) To accept and retain for such time as the Trustee may deem advisable any securities or other property received or acquired as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (h) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (i) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (j) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be agent or counsel for the Employer; (k) To apply for and procure from responsible insurance companies, to be selected by the Administrator, as an investment of the Trust Fund such annuity, or other Contracts (on the life of any Participant) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity or other Contracts as and when entitled to do so under the provisions thereof; (1) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest in the Trustee's bank; (m) To invest in Treasury Bills and other forms of United States government obligations; (n) To invest in shares of investment companies registered under the Investment Company Act of 1940; (o) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange; 56 (p) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations; (q) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or an affiliated company of the Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests; (r) To do al such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan. 7.4 LOANS TO PARTICIPANTS (a) The Trustee may, in the Trustee's discretion, make loans to Participants and Beneficiaries under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis; (2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants and Beneficiaries; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) shall provide for repayment over a reasonable period of time. (b) Loans made pursuant to this Section (when added to the outstanding balance of all other loans made by the Plan to the Participant) shall be limited to the lesser of: (1) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans from the Plan to the Participant during the one year period ending on the day before the date on which such loan is made, over the outstanding balance of loans from the Plan to the Participant on the date on which such loan was made, or (2) one-half (1/2) of the present value of the non-forfeitable accrued benefit of the Participant under the Plan. (c) Loans shall provide for level amortization with payments to be made not less frequently than quarterly over a period not to exceed five (5) years. However, loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a principal residence of the Participant shall provide for periodic repayment over a reasonable period of time that may exceed five (5) years. 57 (d) Any loans granted or renewed shall be made pursuant to a Participant loan program. Such loan program shall be established in writing and must include, but need not be limited to, the following: (1) the identity of the person or positions authorized to administer the Participant loan program; (2) a procedure for applying for loans; (3) the basis on which loans will be approved or denied; (4) limitations, if any, on the types and amounts of loans offered; (5) the procedure under the program for determining a reasonable rate of interest; (6) the types of collateral which may secure a Participant loan; and (7) the events constituting default and the steps that will be taken to preserve Plan assets Such Participant loan program shall be contained in a separate written document which, when properly executed, is hereby incorporated by reference and made a part of the Plan. Furthermore, such Participant loan program may be modified or amended in writing from time to time without the necessity of amending this Section. 7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS At the direction of the Administrator, the Trustee shall, from time to time, in accordance with the terms of the Plan, make payments out of the Trust Fund. The Trustee shall not be responsible in any way for the application of such payments. 7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon in writing by the Employer and the Trustee. An individual serving as Trustee who already receives full-time pay from the Employer shall not receive compensation from the Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shaft be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind and all kinds whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 7.7 ANNUAL REPORT OF THE TRUSTEE Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer's contribution for each Plan Year, the Trustee 58 shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth: (a) the net income, or loss, of the Trust Fund; (b) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (c) the increase, or decrease, in the value of the Trust Fund; (d) all payments and distributions made from the Trust Fund; and (e) such further information as the Trustee and/or Administrator deems appropriate. The Employer, forthwith upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding as to all matters embraced therein as between the Employer and the Trustee to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties; provided, however, that nothing herein contained shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 7.8 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall direct the Trustee to engage on behalf of all Participants an independent qualified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of his audit setting forth his opinion as to whether any statements, schedules or lists that are required by Act Section 103 or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently. All auditing and accounting fees shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund. (b) If some or all of the information necessary to enable the Administrator to comply with Act Section 103 is maintained by a bank, insurance company, or similar institution, regulated and supervised and subject to periodic examination by a state or federal agency, it shall transmit and certify the accuracy of that information to the Administrator as provided in Act Section 103(b) within one hundred twenty (120) days after the end of the Plan Year or by such other date as may be prescribed under regulations of the Secretary of Labor. 59 7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) The Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of his resignation. (b) The Employer may remove the Trustee by mailing by registered or certified mail, addressed to such Trustee at his last known address, at least thirty (30) days before its effective date, a written notice of his removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by the Employer; and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with like respect as if he were originally named as a Trustee herein. Until such a successor is appointed, the remaining Trustee or Trustees shall have full authority to act under the terms of the Plan. (d) The Employer may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the Employer and accepts such designation, the successor shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with the like effect as if he were originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of his predecessor. (e) Whenever any Trustee hereunder ceases to serve as such, he shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which he served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 7.7 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for tie Plan Year. The procedures set forth in Section 7.7 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 7.7 shall have the same effect upon the statement as the Employer's approval of an annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has rendered all statements of account required by Section 7.7 and this subparagraph. 7.10 TRANSFER OF INTEREST Notwithstanding any other provision contained in this Plan, the Trustee at the direction of the Administrator shall transfer the Vested interest, if any, of such Participant in his account to another trust forming part of a pension, profit sharing or stock bonus plan maintained by such Participant's new employer and represented by said employer in writing as meeting the requirements 60 of Code Section 401(a), provided that the trust to which such transfers are made permits the transfer to be made. 7.11 DIRECT ROLLOVER (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) For purposes of this Section the following definitions shall apply: (1) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (4) A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. 61 ARTICLE VIII AMENDMENT, TERMINATION AND MERGERS 8.1 AMENDMENT (a) The Employer shall have the right at any time to amend the Plan, subject to the limitations of this Section. However, any amendment which affects the rights, duties or responsibilities of the Trustee and Administrator may only be made with the Trustee's and Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the Trust provisions contained herein are a part of the Plan and the amendment affects the duties of the Trustee hereunder. (b) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes any reduction in the amount credited to the account of any Participant; or causes or permits any portion of the Trust Fund to revert to or become property of the Employer. (c) Except as permitted by Regulations, no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective to the extent it eliminates or reduces any "Section 411(d)(6) protected benefit "or adds o& modifies conditions relating to "Section 411(d)(6) protected benefits "the result of which is a further restriction on such benefit unless such protected benefits are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits "are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. 8.2 TERMINATION (a) The Employer shall have the right at any. time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full or partial termination, all amounts credited to the affected Participants' Combined Accounts shall become 100% Vested as provided in Section 6.4 and shall not thereafter be subject to forfeiture, and all unallocated amounts shall be allocated to the accounts of all Participants in accordance with the provisions hereof. (b) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets of the Trust Fund to Participants in a manner which is consistent with and satisfies the provisions of Section 6.5. Distributions to a Participant shall be made in cash or through the purchase of irrevocable nontransferable deferred commitments from an insurer. Except as permitted by Regulations, the 62 termination of the Plan shall not result in the reduction of "Section 411(d)(6) protected benefits "in accordance with Section 8.1(c). 8.3 MERGER OR CONSOLIDATION This Plan and Trust may be merged or consolidated with, or its assets and/or liabilities may be transferred to any other plan and trust only if the benefits which would be received by a Participant of this Plan, in the event of a termination of the plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation, and such transfer, merger or consolidation does not otherwise result in the elimination or reduction of any "Section 411(d)(6) protected benefits "in accordance with Section 8.1(c). ARTICLE IX MISCELLANEOUS 9.1 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 9.2 ALIENATION (a) Subject to the exceptions provided below, no benefit which shall be payable out of the Trust Fund to any person (including a Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. (b) This provision shall not apply to the extent a Participant or Beneficiary is indebted to the Plan, as a result of a loan from the Plan. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such proportion of the amount distributed as shall equal such loan indebtedness shall be paid by the Trustee to the Trustee or the Administrator, at the direction of the Administrator, to apply against or discharge such loan indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given written notice by the Administrator that such loan indebtedness is to be so paid in whole or part from his Participant's Combined Account. If the Participant or Beneficiary does not agree that 63 the loan indebtedness is a valid claim against his Vested Participant's Combined Account, he shall be entitled to a review of the validity of the claim in accordance with procedures provided in Sections 2.12 and 2.13. (c) This provision shall not apply to a "qualified domestic relations order "defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order, "a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. 9.3 CONSTRUCTION OF PLAN This Plan and Trust shall be construed and enforced according to the Act and the laws of the State of Colorado, other than its laws respecting choice of law, to the extent not preempted by the Act. 9.4 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 9.5 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee or Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 9.6 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any trust fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Retired Participants, or their Beneficiaries. (b) In the event the Employer shall make an excessive contribution under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of 64 payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the excess contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 9.7 BONDING Every Fiduciary, except a bank or an insurance company, unless exempted by the Act and regulations thereunder, shall be bonded in an amount not less than 10% of the amount of the funds such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be a corporate surety company (as such term is used in Act Section 412(a)(2)), and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the cost of such bonds shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund or by the Employer. 9.8 EMPLOYER'S-AND TRUSTEE'S PROTECTIVE CLAUSE Neither the Employer nor the Trustee, nor their successors, shall be responsible for the validity of any Contract issued hereunder or for the failure on the part of the insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part. 9.9 INSURER'S PROTECTIVE CLAUSE Any insurer who shall issue Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The insurer shall be protected and held harmless in acting in accordance with any written direction of the Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the insurer. 9.10 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of the Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 65 9.11 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries "of this Plan are (1) the Employer, (2) the Administrator and (3) the Trustee. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan. In general, the Employer shall have the sole responsibility for making the contributions provided for under Section 4.1; and shall have the sole authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend or terminate, in whole or in part, the Plan. The Administrator shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan. The Trustee shall have the sole responsibility of management of the assets held under the Trust, except those assets, the management of which has been assigned to an Investment Manager, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in any more than one Fiduciary capacity. In the furtherance of their responsibilities hereunder, the "named Fiduciaries "shall be empowered to interpret the Plan and Trust and to resolve ambiguities, inconsistencies and omissions, which findings shall be binding, final and conclusive. 9.13 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 9.14 APPROVAL BY INTERNAL REVENUE SERVICE (a) Notwithstanding anything herein to the contrary, contributions to this Plan are conditioned upon the initial qualification of the Plan under Code Section 401. If the Plan receives an adverse determination with respect to its initial qualification, then the Plan may return such contributions to the Employer within one year after such determination,. provided the application for the determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted, or such later date as the Secretary of the Treasury may prescribe. 66 (b) Notwithstanding any provisions to the contrary, except Sections 3.6, 3.7, and 4.1(f), any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following the disallowance of the deduction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the excess contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned. 9.15 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. In the event of any conflict between the terms of this Plan and any Contract purchased hereunder, the Plan provisions shall control. ARTICLE X PARTICIPATING EMPLOYERS 10.1 ADOPTION BY OTHER EMPLOYERS Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any other corporation or entity, whether an affiliate or subsidiary or not, may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. 10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS (a) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. However, the assets of the Plan shall, on an ongoing basis, be available to pay benefits to all Participants and Beneficiaries under the Plan without regard to the Employer or Participating Employer who contributed such assets. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Combined Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. (d) All rights and values forfeited by termination of employment shall inure only to the benefit of the Participants of the Employer or Participating Employer by which the forfeiting Participant 67 was employed, except if the Forfeiture is for an Employee whose Employer is an Affiliated Employer, then said Forfeiture shall inure to the benefit of the Participants of those Employers who are Affiliated Employers. Should an Employee of one ("First") Employer be transferred to an associated ("Second") Employer which is an Affiliated Employer such transfer shall not cause his account balance (generated while an Employee of "First "Employer) in any manner, or by any amount to be forfeited. Such Employee's Participant Combined Account balance for all purposes of the Plan, including length of service, shall be considered as though he had always been employed by the "Second "Employer and as such had received contributions, forfeitures, earnings or losses, and appreciation or depreciation in value of assets totaling the amount so transferred. (e) Any expenses of the Trust which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 10.3 DESIGNATION OF AGENT Each Participating Employer shall be deemed to be a party to this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates the contrary, the word "Employer "shall be deemed to include each Participating Employer as related to its adoption of the Plan. 10.4 EMPLOYEE TRANSFERS It is anticipated that an Employee may be transferred between Participating Employers, and in the event of any such transfer, the Employee involved shall carry with him his accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION Any contribution subject to allocation during each Plan Year shall be allocated only among those Participants of the Employer or Participating Employer making the contribution, except if the contribution is made by an Affiliated Employer, in which event such contribution shall be allocated among all Participants of all Participating Employers who are Affiliated Employers in accordance with the provisions of this Plan. On the basis of the information furnished by the Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 68 10.6 AMENDMENT Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 10.7 DISCONTINUANCE OF PARTICIPATION Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new Trustee as shall have been designated by such Participating Employer, in the event that it has established a separate pension plan for its Employees, provided however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 411(d)(b) protected benefits "in accordance with Section 8.1(c). If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Article VII hereof. In no such event shall any part of the corpus or income of the Trust as it relates to such Participating Employer be used for or diverted to purposes other than for the exclusive benefit of the Employees of such Participating Employer. 10.8 ADMINISTRATOR'S AUTHORITY The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. IN WITNESS WHEREOF, this Plan has been executed the day and year first above written. MATRIX CAPITAL CORPORATION By ---------------------------------------------- EMPLOYER By ---------------------------------------------- TRUSTEE By ---------------------------------------------- TRUSTEE 69 EX-10 13 amend1to401k.txt 10.30 EXHIBIT 10.30 AMENDMENT NUMBER ONE TO MATRIX CAPITAL CORPORATION 401(K) PROFIT SHARING PLAN BY THIS AGREEMENT, Matrix Capital Corporation 401(k) Profit Sharing Plan (herein referred to as the "Plan") is hereby amended as follows, effective as of January 1, 1994: 1. Section 1.8 is amended to read as follows: 1.8 "Compensation" with respect to an Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Calendar Year ending with or within the Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d), 6051(a) (3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401 (a) (2) ). For purposes of this Section, the determination of Compensation shall be made by: (a) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 4402(e) (3), 402(h), 403(b) or 457, and Employee Contributions described in Code Section 414(h) (2) that are treated as Employer contributions. For a Participant's initial year of participation, Compensation shall be recognized for the entire Calendar Year ending with or within the Plan Year. Compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect of January 1 of any calendar year shall be effective for the Calendar Year beginning with such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Calendar Year the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Calendar Year begins multiplied by the ratio obtained by dividing the number of full months in the short Calendar Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q) (6) because such Participant is either a "five" percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation, or the 1 limitation shall be adjusted in accordance with any other method permitted by Regulations. For purposes of determining the portion of the Compensation of a Family Member which is below the integration level for purposes of Code Section 401(1), the preceding sentence shall not apply. If, as a result of such rules, the maximum "annual addition" limit would be exceeded for one or more of the affected Family Members, the prorated Compensation of all affected Family Members shall be adjusted to avoid or reduce any excess. The prorated Compensation of any affected Family Members whose allocation would exceed the limit shall be adjusted downward to the level needed to provide an allocation equal to such limit. The prorated Compensation of affected Family Members not affected by such limit shall then be adjusted upward on a pro rata basis not to exceed each such affected Family Member rule. The resulting allocation shall not exceed such individual's maximum "annual addition" limit. If, after these adjustments, an "excess amount" still results, such "excess amount" shall be disposed of pro rata among all affected Family Members. 2. Section 1.8, Section 1.25 and the calculation of "415 Compensation" for the purpose of the minimum allocations required for Top Heavy Plan Years, are amended by the addition of the following paragraphs: In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a) (17) (B). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a) (17) shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. 3. Section 1.10 is amended by the addition of the following sentence: Deferred Compensation distributed as excess "annual additions" pursuant to Section 4.10(a) shall be excluded. 2 4. Section 1.12 is amended by the addition of the following sentence immediately following the first sentence: Deferred Compensation distributed as excess "annual additions" pursuant to Section 4.10(a) shall be excluded. 5. Section 1.24 is amended to read as follows: 1.24 "415 Compensation" with respect to any Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Calendar Year ending with or within the Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 6041 (d), 6051 (a) (3) and 6052. "415 Compensation" must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2) ). 6. Section 1.25 is amended to read as follows: 1.25 "414(s) Compensation" with respect to any Participant means such Participant's "415 Compensation" paid during a Plan Year. The amount of "414(s) Compensation" with respect to any Participant shall include "414(s) Compensation" for the entire twelve (12) month period ending on the last day of such Plan Year. For purposes of this Section, the determination of "414(s) Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the participant under Code Sections 125, 402(e) (3), 402(h), 403(b) or 414(h) (2) that are treated as Employer contributions. "414(s) Compensation" in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect of January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the "414 (s) compensation" limit shall be an amount equal to the "414(s) Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated participant who is subject to the Family Member aggregation rules of Code Section 414 (q) (6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. 3 7. Section 1.30 is amended to read as follows: 1.30 "Income" means the income or losses allocable to Excess Deferred Compensation, Excess Contributions or Excess Aggregate Contributions, if applicable which amount shall be allocated in the same manner as income or losses are allocated pursuant to Section 4.4. 8. Section 4.2 (d) is amended to add a new sentence to read as follows: If such dollar limitation is exceeded, a Participant will be deemed to have notified the Administrator of such excess amount which shall be distributed in a manner consistent with Section 4.2(f). 9. Section 4.10 (a) is amended by the addition of the following paragraph: Notwithstanding the above, if, as a result of a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402 (g) (3) ) that may be made with respect to any Participant under the limits of Section 4.9, the "annual additions" under this Plan would cause the maximum "annual additions" to be exceeded for any Participant, the Administrator shall first distribute any elective deferrals (within the meaning of Code Section 402 (g) (3) ) or return any voluntary Employee contributions credited for the "limitation year" to the extent that the return would reduce the "excess amount" in the Participant's accounts and thereafter shall follow steps (2) through (4) above. 10. Article IV is amended as follows: The combined actual deferral ratio and the combined actual contribution ratio for the family group (which shall be treated as one Highly Compensated Participant) shall be determined without regard to the aggregation of only eligible Family Members who are Highly Compensated Participants. 11. Section 6.5(b) is amended by the addition of the following paragraph: If a distribution is one to which Code Sections 401(a) (11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Regulation 1.411(a)-11 (c) is given, provided that: (1) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 12. Items (1), (2), (3) and (4) of Section 6.10 (a) are amended to read as follows: (1) Expenses for medical care described in Code Section 213(d) previously incurred by the Participant, his spouse, or any of his descendants (as defined in Code Section 152) or necessary for these persons to obtain medical care; (2) The costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments); 4 (3) Payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, his spouse, children, or dependents; or (4) Payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. 13. Items (1) through (3) of Section 6.10(b) are amended to read as follows: (1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. The amount of the immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution; (2) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer; (3) The Plan, and all other plans maintained by the Employer, provide that the Participant's elective deferrals and voluntary Employee contributions will be suspended for at least twelve (12) months after receipt of the hardship distribution or, the Participant, pursuant to a legally enforceable agreement, will suspend his elective deferrals and voluntary Employee contributions to the Plan and all other plans maintained by the Employer for at least twelve (12) months after receipt of the hardship distribution; and 14. Article VII is amended by the addition of the following section after Section 7.11: DIRECT ROLLOVER (a) This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly too an eligible retirement plan specified by the distribution in a direct rollover. (b) For the purposes of this Section the following definitions shall apply: (1) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of 5 the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributes with regard to the interest of the spouse or former spouse. (4) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 15. The Article of the Plan concerning amendment and termination is amended by the addition of the following sentence: Any amendment to the Plan shall be adopted by formal action of the Employer's board of directors and executed by an officer authorized to act on behalf of the Employer. 16. Section 1.60 is amended to read as follows: "Year of Service" means the computation period of twelve (12) consecutive months, herein set forth, during which an Employee has at least 1000 Hours of Service. For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service. The participation computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service.. The participation computation period shall shift to the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. An Employee who is credited with the required Hours of Service in both the initial computation period (or the computation period beginning after a 1-Year Break in Service) and the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, shall be credited with two (2) Years of Service for purposes of eligibility to participate. 6 For vesting purposes, the computation period shall be the Plan Year, including periods prior to the Effective Date of the Plan. For all other purposes, the computation period shall be the Plan Year. Notwithstanding the foregoing, for any short Plan Year, the determination of whether an Employee has completed a Year of Service shall be made in accordance with Department of Labor regulation 2530.203-2(c). Years of Service with Mera Bank shall be recognized. Years of Service with United Financial Inc. shall be recognized. Years of Service with Sandia Mortgage shall be recognized. Years of Service with Holland Mortgage shall be recognized. 7 IN WITNESS WHEREOF, this Amendment has been executed this ________ day of __________________, 199_______. Signed, sealed, and delivered in the presence of: MATRIX CAPITAL CORPORATION BY ------------------------------------------ EMPLOYER ------------------------------------------ TRUSTEE ------------------------------------------ TRUSTEE ------------------------------------------ TRUSTEE 8 EX-10 14 amend2to401k.txt 10.31 EXHIBIT 10.31 AMENDMENT NUMBER TWO TO MATRIX CAPITAL CORPORATION 401(K) PROFIT SHARING PLAN BY THIS AGREEMENT, Matrix Capital Corporation 401(k) Profit Sharing Plan ("Plan") is hereby amended as follows: Section 3.1 is amended, effective as of May 20, 1996, by adding at the end of the first paragraph thereof the following: "Notwithstanding any other provision of the Plan to the contrary, persons who are employed as Eligible Employees by Sterling Finance Company, Inc. on May 20, 1996 shall be eligible to participate hereunder on that date, and all other provisions of the Plan shall be construed so as to accommodate, and harmonize with, such participation." IN WITNESS WHEREOF, this Amendment Two has been executed this 30th day of December, 1996. MATRIX CAPITAL CORPORATION By: /s/ Guy A. Gibson -------------------------------------------- EX-10 15 amend3to401k.txt 10.32 EXHIBIT 10.32 AMENDMENT NUMBER THREE TO MATRIX CAPITAL CORPORATION 401(K) PROFIT SHARING PLAN BY THIS AGREEMENT, Matrix Capital Corporation 401(k) Profit Sharing Plan ("Plan") is hereby amended as follows, effective as of April 1, 1997: Section 1.60 is amended to add the following new paragraph at the end thereof: "Years of Service with The Vintage Group, Inc., Sterling Trust Company, and Vintage Financial Services Corporation shall be recognized." IN WITNESS WHEREOF, this Amendment Three has been executed this th day of July, 1998. MATRIX CAPITAL CORPORATION By: /s/ Guy A. Gibson ----------------------------------------- EX-10 16 amend4to401k.txt 10.33 EXHIBIT 10.33 AMENDMENT NUMBER FOUR TO THE MATRIX CAPITAL CORPORATION 401(k) PROFIT SHARING PLAN AMENDMENT made effective as of December 30, 2001 by Matrix Bancorp, Inc., (the "Employer"), a corporation organized and existing under the laws of the State of Colorado. WITNESSETH: WHEREAS, the Employer previously adopted and maintains Matrix Capital Corporation 401 (K) Profit Sharing Plan (the "Plan"), effective January 1, 1994; and WHEREAS, pursuant to Article VIII, Section 8.1 of the Plan, the Employer may amend the Plan at any time; and WHEREAS, the Employer desires to amend the Plan to change the Plan Year and make certain other changes associated with contributions for future plan years. NOW, THEREFORE, BE IT RESOLVED, that effective December 30, 2001, the Plan is hereby amended as follows: I. Definitions: 1. Article I of the Plan is amended to change the following definition: "1.46 "Plan Year" means the Plan's accounting year of twelve (12) months commencing on December 31st of each year and ending the following December 30th. The Plan Year beginning January 1, 2001 and ending December 30, 2001 shall be a short Plan Year." 2. Article I of the Plan is amended to add new definitions as follows: "1.61 , "Applicable Tax Year" means the Tax Year in which the Plan Year begins." "1.62 "First Day Participant" means any Employee who is an Employee and a Participant on the first day through the last day of the Applicable Tax Year." "1.64 "Specified Minimum Employer Contribution" means for each Plan Year, a Participating Employer may make a discretionary Specified Minimum Employer Contribution on behalf of First Day Participants. The Specified Minimum Employer Contribution for each Plan Year shall be in an amount determined by the Chief Financial Officer by appropriate resolution on or before the last day of the Applicable Tax Year. Such Specified Minimum Employer Contribution shall be allocated to First Day Participants in accordance with Section 4.12 of the Plan." "1.65 "Tax Year" means the fiscal year of the Company." II. Contribution and Allocation Amendment: 1. Article IV of the Plan is amended to add a new Section 4.12 as follows: "4.12 SPECIFIED MINIMUM EMPLOYER CONTRIBUTION Notwithstanding any provision of the Plan to the contrary, the following provisions shall govern the treatment of Specified Minimum Employer Contributions: (a) For each Plan Year, the Participating Employer shall make a discretionary Specified Minimum Employer Contribution on behalf of the First Day Participants. The Specified Minimum Employer Contribution will be based on Compensation earned by the First Day Participants in the Applicable Tax Year. The Specified Minimum Employer Contribution for each Plan Year shall be in an amount determined by the Chief Financial Officer by appropriate resolution on or before the last day of the Applicable Tax Year. (b) Each First Day Participant's allocation shall be determined as follows: (1) First, the Specified Minimum Employer Contribution shall be allocated during the Plan Year as Deferred Compensation as described in Section 4.2 of the Plan and Matching Contributions described in Section 4.1 of the Plan, to the Participant's Elective Account and Particpant's Account, respectively, of each First Day Participant. Such Matching Contributions shall be allocated without regard to any last-day requirement, or any other Year of Service or Hour of Service requirement. (2) Second, if any of the Specified Minimum Employer Contribution remains after the allocation in Section 4.12(b)(1), above, the remainder shall, to the extent allowable under Section 415 of the Code, be allocated as an additional Matching Contribution on the last day of the Plan Year to each First Day Participant's Participant's Elective Account, in the ratio that such First Day Participant's Deferred Compensation during the Plan Year bears to the Deferred Compensation of all First Day Participants during the Plan Year. The Specified Minimum Employer Contribution allocated as an additional Matching Contribution shall be treated in the same manner as Matching Contributions for all purposes of the Plan. (3) Third, any balance of the Specified Minimum Employer Contribution remaining unallocated after the allocation in Section 4.12(b)(2), above, shall be allocated as an Employer's Non-Elective Contirbution in accordance with Section 4.4(b)(4), to each First Day Participant's Participant's Account, in the ratio that the First Day Participant's Compensation during the Plan Year bears to the total Compensation of all First Day Participants during the Plan Year. Such 2 Employer's Non-Elective Contribution shall be allocated without regard to any last-day requirement, or any other Year of Service or Hour of Service requirement. (4) The administrator shall reduce the proportionate allocation under Sections 4.12(b)(1), (2), and (3), above, to Participants who are Highly Compensated Employees to the extent necessary to comply with the provisions of Section 401(a)(4) of the Code and the regulations thereunder. Any such amount will be allocated and reallocated to the remaining Participants to the extent allowed under Section 415 of the code. (c) The Participating Employer shall make the Specified Minimum Employer Contribution in cash, in one or more installments without interest, at any time during the Plan Year, and for purposes of deducting such Specified Minimum Employer Contribution, not later than the Participating Employer's federal tax filing date, including extensions, for its Tax Year that ends within such Plan Year. The Trustee shall post such amount to each First Day Participant's Participant's Elective Account or Particpant's Account, once the allocations under Sections 4.12(b)(1) through (4), above, are determined. The Specified Minimum Employer Contribution shall be held in a suspense account until posted. Such suspense account shall not participate in the allocation of investment gains, losses, income and deductions of the trust as a whole, but shall be invested separately. All gains, losses, income and deductions attributable to such suspense account shall be applied to reduce Plan fees and expenses. In no event will amounts remain in the suspense account after the end of the Plan Year. (d) In no event shall the Specified Minimum Employer Contribution, when aggregated with other Employer and Participant contributions for the Employer's Tax Year that ends within such Plan Year, exceed the amount deductible by the Employer for federal income tax purposes for such Tax Year." EXCEPT AS OTHERWISE STATED HEREIN, the Plan remains in effect and unchanged. IN WITNESS WHEREOF, and as evidence of the adoption of this Plan amendment, the Employer has caused the same to be executed by its duly authorized officer(s) the 30th day of December, in the year 2001. MATRIX BANCORP, INC. By /s/ David Kloos ------------------------------------ David Kloos 3 EX-12 17 ex12compratio.txt 12 Exhibit 12 Matrix Bancorp, Inc. Computation of Ratio of Earnings to Fixed Charges (Unaudited) (Dollars in thousands)
Year Ended December 31, 2001 2000 1999 1998 1997 ----------- ------------ ------------ ------------ ------------ A. Matrix Bancorp, Inc. and subsidiaries (consolidated) Earnings: 1. Income before income taxes ......... $ 12,787 $ 6,501 $ 17,057 $ 13,389 $ 13,297 2. Plus interest expense (A) .......... 65,884 68,089 44,234 36,822 18,471 ----------- ------------ ------------ ------------ ------------ 3. Earnings including interest on 78,671 74,590 61,291 50,211 31,768 deposits 4. Less interest on deposits........... 34,872 26,275 21,589 16,221 8,376 ----------- ------------ ------------ ------------ ------------ 5. Earnings excluding interest on $ 43,799 $ 48,315 $ 39,702 $ 33,990 $ 23,392 deposits =========== ============ ============ ============ ============ Fixed Charges: 6. Including interest on deposits excluding capitalized interest ..... $ 66,119 $ 68,218 $ 44,279 $ 36,901 $ 18,551 7. Less interest on deposits (Line 4) . 34,872 26,275 21,589 16,221 8,376 ----------- ------------ ------------ ------------ ------------ 8. Excluding interest on deposits ..... $ 31,247 $ 41,943 $ 22,690 $ 20,680 $ 10,175 =========== ============ ============ ============ ============ Ratio of Earnings to Fixed Charges: Including interest on deposits (Line 3 divided by Line 6) ....... 1.19x 1.09x 1.38x 1.36x 1.71x Excluding interest on deposits (Line 5 divided by Line 8) ....... 1.40x 1.15x 1.75x 1.64x 2.30x - ------------ (A) Includes amounts representing the estimated interest component of net rental payments.
EX-21 18 ex21subsidiaries.txt 21 EXHIBIT 21 Matrix Bancorp, Inc. Subsidiaries of the Registrant 1. Matrix Financial Services Corporation - Incorporated in Arizona 2. Matrix Capital Markets, Inc. - Incorporated in Colorado and formerly known as United Financial, Inc. 3. Matrix Capital Bank - Organized pursuant to a Federal savings and loan charter 4. Matrix Asset Management Corporation - Incorporated in Colorado 5. The Vintage Group, Inc. - Incorporated in Texas 6. Vintage Delaware Holdings, Inc. - Incorporated in Delaware 7. Sterling Trust Company - Incorporated in Texas 8. First Matrix Investment Services Corp. - Incorporated in Texas 9. Matrix Funding Corp. - Incorporated in Colorado 10. MSCS Ventures, Inc. - Incorporated in Colorado 11. Matrix Settlement & Clearance Services, L.L.C. (45%) - Organized in New York 12. MSCS Financial Services, LLC - formed in Delaware 13. Equi-Mor Holdings, Inc. - Incorporated in Nevada 14. ABS School Services, L.L.C. - Organized in Arizona 15. New Century Property Management Group, LLC - Organized in Arizona 16. New Century Educational Management Services, LLC - Organized in Arizona 17. Matrix Aviation Corporation - Incorporated in Colorado 18. MCNP-1 Corp. - Incorporated in New Mexico 19. Matrix Insurance Service Corporation - Incorporated in Arizona 20. Matrix Advisory Services, L.L.C. - Organized in Delaware 21. Matrix Bancorp Capital Trust I - Organized under Delaware law 22. Matrix Bancorp Capital Trust II - Organized under Delaware law 23. Matrix Bancorp Capital Trust III- Organized under Delaware law 24. Matrix Bancorp Capital Trust IV - Organized under Delaware law EX-23 19 ex23to10k.txt EXHIBIT 23 Consent of Independent Auditors The Board of Directors Matrix Bancorp, Inc.: We consent to the incorporation by reference in the registration statement (No. 333-51516) on Form S-8 of Matrix Bancorp, Inc. of our report dated February 7, 2002, with respect to the consolidated balance sheet of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for the year then ended, which report appears in the December 31, 2001, Annual Report on Form 10-K of Matrix Bancorp, Inc. Our report refers to a change in the method of accounting for derivative instruments and hedging activities. /s/ KPMG LLP KPMG LLP Denver, Colorado March 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----