-----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, Qv5zUO4I/vroCl54QPZRORIS7Hf6FFf/DMnvWXYGmKAB29QB7rt+tLzn+zAaDQrX BMUTgUg0xExkjluDnoM2BQ== 0000950148-96-000498.txt : 19960402 0000950148-96-000498.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950148-96-000498 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREMONT GENERAL CORP CENTRAL INDEX KEY: 0000038984 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 952815260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08007 FILM NUMBER: 96542330 BUSINESS ADDRESS: STREET 1: 2020 SANTA MONICA BLVD STREET 2: STE 600 CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 3103155500 MAIL ADDRESS: STREET 1: 2020 SANTA MONICA BLVD CITY: SANTA MONICA STATE: CA ZIP: 90404 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/95 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K ------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-8007 ------------------------ FREMONT GENERAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 95-2815260 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2020 SANTA MONICA BOULEVARD, SANTA MONICA, CALIFORNIA 90404 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 315-5500 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK, $1.00 PAR VALUE LIQUID YIELD OPTION(TM) NOTES DUE 2013 (ZERO COUPON-SUBORDINATED) FREMONT GENERAL FINANCING I -- 9% TRUST ORIGINATED PREFERRED SECURITIES(SM) (TITLE OF EACH CLASS) NEW YORK STOCK EXCHANGE (NAME OF EACH EXCHANGE ON WHICH REGISTERED) 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. / / The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 22, 1996: COMMON STOCK, $1.00 PAR VALUE -- $395,582,000 The number of shares outstanding of each of the issuer's classes of common stock as of March 22, 1996: COMMON STOCK, $1.00 PAR VALUE -- 25,393,000 SHARES DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the 1996 annual meeting of stockholders are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ITEM 1. BUSINESS GENERAL Fremont General Corporation is a nationwide insurance and financial services holding company, operating select businesses in niche markets. The primary operating strategy of Fremont General is to build upon its core business units through acquisition opportunities and new business development. Fremont General's secondary strategy is to achieve income balance and geographic diversity among its business units in order to limit the exposure of Fremont General and its subsidiaries ("Fremont General" or "the Company") to industry, market and regional concentrations. The Company is one of the largest mono-line workers' compensation insurers in the United States, with major market positions in California and Illinois, and a presence in Arizona, Indiana, Michigan and Wisconsin. For the year ended December 31, 1995, the Company's workers' compensation insurance premiums were evenly divided between the western and the mid-western regions. For the year ended December 31, 1995 and 1994, the Company had workers' compensation insurance premiums earned of $575 million and $401 million, respectively. See "Insurance Operations." The Company recently expanded its workers' compensation insurance operations through the acquisition on February 22, 1995 of Casualty Insurance Company ("Casualty") and its wholly-owned subsidiary Workers' Compensation and Indemnity Company ("WCIC"). Casualty is the largest underwriter of workers' compensation insurance in Illinois with additional operations, directly or indirectly, in Indiana, Michigan and Wisconsin. Fremont General believes that this acquisition provides the Company with a national platform upon which to build its workers' compensation insurance business, while providing greater geographic diversification. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note B of Notes to Consolidated Financial Statements. A.M. Best rates the Company's workers' compensation insurance subsidiaries on a consolidated basis as "A-" (Excellent). An "A-" rating is A.M. Best's fourth highest rating category out of fifteen rating categories ranging from "A++" (Superior) to "F" (In Liquidation). The Company also has growing financial services operations engaged primarily in commercial and residential real estate lending in California and commercial finance lending, principally to small and middle market companies nationwide. The Company's financial services loan portfolio has grown from $536 million at December 31, 1991 to $1.5 billion at December 31, 1995. By engaging in several selected businesses which are geographically diverse the Company believes it can achieve greater stability in its operating results. Over the five years ended December 31, 1995, the Company's income before taxes grew at a compound annual rate of approximately 21% to $100 million in 1995. The Company's book value increased from $175 million at December 31, 1990 to $498 million at December 31, 1995. The Company's assets were $4.5 billion at December 31, 1995. See "Financial Services Operations." Management believes that ownership of the Company's Common Stock by employees has been an important element in the Company's success by enabling the Company to attract and retain the best available personnel for positions of substantial responsibility and to provide additional incentive and motivation to such individuals to promote the success of the Company. As of December 31, 1995, officers and directors of the Company, their families and the Company's ESOP beneficially owned approximately 30% of the Company's outstanding Common Stock. The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and elsewhere in this Form 10-K. Fremont General, a Nevada corporation, was incorporated in 1972. INSURANCE OPERATIONS Workers' Compensation Insurance Fremont Compensation Insurance Company and its subsidiaries ("Fremont Compensation") underwrites workers' compensation insurance principally in California and Illinois, with a smaller presence in Arizona, Indiana, Michigan, and Wisconsin. With the acquisition of Casualty in 1995, Fremont Compensation is one of the largest mono-line workers' compensation insurers in the United States. In 1995, Fremont 1 3 Compensation's workers' compensation insurance premiums were evenly divided between the western and mid-western regions. The Company believes this geographic diversity mitigates potential fluctuations in earnings from cyclical downturns in various regional economies. A.M. Best rates the Company's workers' compensation insurance subsidiaries on a consolidated basis as "A-" (Excellent). In 1995, income before taxes from workers' compensation insurance operations was $85 million. Workers' compensation is a statutory system which requires every employer to either purchase insurance or self-insure in order to provide its employees with medical care and other specified benefits for work-related injuries or illnesses. Compensation is payable regardless of who was at fault. Most employers provide for this potential liability by purchasing workers' compensation insurance from insurance carriers. There are four types of benefits payable under workers' compensation policies: medical benefits, vocational rehabilitation benefits, disability benefits and death benefits. The amounts of disability and death benefits payable for claims are established by statute, vocational rehabilitation benefits are provided with certain limitations in some jurisdictions, including California, and no dollar limitation is set forth for medical benefits. See "Regulation -- Insurance Regulation." Premiums. Workers' compensation insurance premiums are based upon the policyholder's payroll and may be significantly affected by changes in general economic conditions which impact employment and wage levels, as well as by government regulation. Insurance premiums are also subject to supervision and regulation by the state insurance authority in each state. In July 1993, the California legislature enacted legislation to reform the workers' compensation system and to, among other things, adopt an open rating system through the repeal of the minimum rate law effective January 1, 1995. Illinois has been operating under an open rating system since 1982. In an open rating system, workers' compensation insurers are provided with advisory rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory rates, companies in Illinois generally follow such rates. However, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. See "Regulation -- Insurance Regulation." The repeal of the minimum rate law has resulted in lower premiums and lower profitability on the Company's California workers' compensation insurance policies due to increased price competition. The Company expects that the premiums earned in California will continue to decrease, principally due to price competition. In addition, the Company anticipates price competition to continue in Illinois, where an additional overall decrease in advisory rates of 13.6% was effective January 1, 1996. See "Competition." Underwriting and Loss Control. Prior to insuring a workers' compensation account, the Company's underwriting department reviews the employer's prior loss experience, safety record, credit history, operations, geographic location and employment classifications. The Company generally avoids industries and businesses involving hazardous conditions or high exposure to multiple injuries resulting from a single occurrence. The Company targets accounts that appear to have a strong work ethic among employees, long-term employees, and a genuine interest in the adoption of and adherence to loss control standards. The loss control department participates in the initial underwriting process and provides continuing services while the policy is in force. In the initial underwriting phase, a Company loss control consultant will generally survey the employer's operations, review the employer's prior loss patterns and assess the extent to which such losses may be prevented. The loss control consultant will also meet with the employer's management to assess the extent to which management is committed to safety in the workplace. After the policy is issued, the loss control department provides continuing assistance to the employer in developing and maintaining safety programs and procedures, reviews periodic loss reports, attempts to identify weaknesses in the employer's loss control procedures and assists the employer in correcting these weaknesses. Policyholders' Dividends. In 1995, the Company's workers' compensation insurance policies, both in California and those underwritten by Casualty, were predominately written as non-participating, which does not include provisions for the insurer to declare and pay dividends to a policyholder after the expiration of the 2 4 policy. In 1994 and prior, the Company's policies were predominately written as participating, thereby obligating the Company to consider the payment of dividends to a policyholder, based upon the policyholder's loss experience, the Company's overall loss experience and competitive conditions. This shift in policy type is due primarily to the increased competition in the California market which has resulted from the repeal of the minimum rate law, effective January 1, 1995. See "Premiums" and "Regulation -- Insurance Regulation." The Company anticipates that this shift to non-participating policies will continue and be a characteristic element of the competitive environment. Claims Administration. The Company's policy is to settle valid claims promptly and to work closely with policyholders to return injured workers to the job quickly, while avoiding litigation if possible. Claims personnel communicate frequently with policyholders, injured employees and medical providers. The Company's policy is to control the number of cases assigned to its claims personnel, to identify and investigate questionable claims and to produce early and cost-effective case settlements of valid claims. As part of its "zero tolerance" program, the Company refuses to settle any claim that it believes to be fraudulent. In most claims litigated administratively, the Company utilizes its own non-lawyer hearing representatives and has found this practice to be significantly less expensive than using legal counsel. The Company provides rehabilitation programs for insured employees and medical cost containment programs. The Company monitors medical care bills to determine if they are reasonable, audits hospital bills, reviews hospital utilization and becomes involved in the selection of treatment facilities. Competition. The insurance industry is characterized by competition on the basis of price and service. Prior to January 1, 1995, minimum premium rates were prescribed for workers' compensation insurance in California by the Department of Insurance, and competition for underwriting such insurance in California had been based principally upon an insurance carrier's financial strength and history of paying policyholders' dividends. Secondary considerations included loss control and claims administration, the ability to respond promptly to agents and brokers, and commission schedules for agents and brokers. The repeal of the California minimum rate law effective January 1, 1995 has resulted in increased price competition which is adversely affecting the Company's results of operations for its workers' compensation insurance business in California. See "Regulation -- Insurance Regulation." The Company recently expanded its workers' compensation operation through the acquisition on February 22, 1995 of Casualty, which underwrites workers' compensation insurance in several mid-western states, primarily in Illinois. Although Casualty is the largest underwriter of workers' compensation insurance in the Illinois market, based on the competitive nature of the insurance industry and the inherent risks associated with the Company entering into a new geographic market, there can be no assurance that Casualty will continue to maintain its market share in the future. In addition, advisory premium rates established by the National Council on Compensation Insurance, which workers' compensation insurance companies in Illinois generally tend to follow, decreased in 1995. An additional average overall decrease in such advisory rates of 13.6% went into effect on January 1, 1996. As a result, the Company anticipates price competition to continue in Illinois. Furthermore, state regulatory changes could affect competition in the states where the Company transacts insurance business. Although the Company is one of the largest writers of workers' compensation insurance in California and Illinois, certain of the Company's competitors are larger and have greater resources than the Company. Marketing. The Company markets its workers' compensation insurance products through more than 1,200 non-exclusive independent insurance agents and brokers, many of whom have been associated with the Company for more than 15 years. During 1995, the ten largest agents accounted for approximately 9% of the Company's workers' compensation insurance premiums written, and no single agent or broker accounted for more than 2% of premiums written. Medical Malpractice Insurance The Company's medical malpractice insurance operation underwrites primarily standard professional liability insurance on a "claims made" basis in California. Coverage is provided for claims reported to the Company during the policy period arising from incidents that occurred at any time that the insured was covered by the policy. Fremont Indemnity Company, within which the medical malpractice insurance is 3 5 written, is currently rated "B++" (Very Good) by A.M. Best. The Company offers coverage for individual medical doctors, anesthesiologists, podiatrists, as well as medical groups, community clinics, laboratories and miscellaneous medical clinics. The Company markets its policies exclusively through approximately 300 non-exclusive independent insurance agents and brokers. Revenues from this subsidiary were not significant in 1995, 1994 and 1993. Reinsurance Ceded Reinsurance is ceded primarily to reduce the liability on individual risks and to protect against catastrophic losses. The Company follows the industry practice of reinsuring a portion of its risks. For this coverage, the Company pays the reinsurer a portion of the premiums received on all policies. The Company maintains excess of loss reinsurance treaties with various reinsurers for each of its insurance lines. Under the current workers' compensation reinsurance treaties, various reinsurers assume liability on that portion of the loss that exceeds $1 million per occurrence, up to a maximum of $199 million per occurrence. Further, in conjunction with the acquisition of Casualty, certain treaties were established between the Company and The Continental Insurance Company ("Continental") whereby certain liabilities of Casualty, which were not part of the business acquired, were ceded to Continental. For medical malpractice insurance, excess of loss reinsurance treaties cover claims and losses above $1 million, up to a maximum of $5 million. Although reinsurance makes the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded, it does not legally discharge an insurer from its primary liability for the full amount of the policy liability. All of the foregoing reinsurance is with non-affiliated reinsurers. The Company believes that the terms of its reinsurance contracts are consistent with industry practice and, based on its review of the reinsurers' financial statements and reputations in the reinsurance marketplace, that its reinsurers are financially sound. The Company encounters disputes from time to time with its reinsurers, which, if not settled, are typically resolved in arbitration. The Company's treaties are generally for annual terms. The Company has maintained reinsurance treaties with many of these same reinsurers for a number of years and believes that suitable alternative reinsurance treaties are readily obtainable at the present time. In general, the reinsurance agreements are of the treaty variety and cover all underwritten risks of types specified in the treaties. As of December 1995, The Continental Insurance Company and General Reinsurance Corporation were the only reinsurers that accounted for more than 10% of total amounts recoverable from all reinsurers on paid and unpaid losses. Operating Data Set forth below is certain information pertaining to the Company's workers' compensation insurance business as determined in accordance with GAAP for the years indicated. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of certain of this information.
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Workers' Compensation Net premiums earned............... $574,952 $401,455 $426,793 $378,468 $371,981 Net investment income and other(1)....................... 87,304 52,747 56,733 67,458 62,370 Underwriting profit (loss)........ (2,295) 9,452 (6,958) (25,659) (21,132) Net income before taxes........... 85,009 62,199 49,775 41,799 41,238 Loss Ratio..................... 75.9% 62.1% 70.4% 82.2% 70.9% Expense ratio.................. 24.5% 23.1% 20.6% 21.8% 25.0% Policyholders' dividend ratio........................ 0.0% 12.4% 10.6% 2.8% 9.8% -------- -------- -------- -------- -------- Total combined ratio...... 100.4% 97.6% 101.6% 106.8% 105.7%
- --------------- (1) Includes net realized investment gains and interest expense. Statutory Combined Ratio. The following table reflects the combined ratios of the Company's insurance subsidiaries determined in accordance with statutory accounting practices, together with the property and 4 6 casualty industry-wide combined ratios after policyholders' dividends, as compiled by A.M. Best for the years indicated.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1995 1994 1993 1992 1991 ------------- ----- ----- ----- ----- Workers' compensation: Company.................................... 100.1% 98.5% 98.8% 110.4% 104.8% Industry(1)................................ not available 101.4% 109.1% 121.5% 122.6%
- --------------- (1) Nationwide statutory combined ratio information for the workers' compensation insurance industry for 1991 through 1994 is from A.M. Best's Aggregates & Averages, Property-Casualty (1992 through 1995 editions). Premium-to-Surplus Ratio. Regulatory authorities regard the premium-to-surplus ratio as an important indicator of operating leverage, since the lower the ratio, the greater the insurer's ability to withstand abnormal loss experience. Guidelines established by the National Association of Insurance Commissioners ("NAIC") provide that a property and casualty insurer's premium-to-surplus ratio is satisfactory if it is below 3 to 1. The following table sets forth the Company's consolidated ratio of net property and casualty premiums written during the period to policyholders' surplus on a statutory basis at the end of the period, for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT RATIOS) Net premiums written during the year.............................. $683,711(1) $425,631 $454,867 $414,218 $404,701 Policyholders' surplus at end of year.............................. 299,408 235,294 221,857 162,714 158,512 Ratio............................... 2.3x 1.8x 2.1x 2.5x 2.6x
- --------------- (1) Includes net written premium for Casualty and WCIC for the period January 1, 1995 through February 21, 1995, which was prior to the Company's acquisition of Casualty on February 22, 1995. Loss and Loss Adjustment Expense Reserves In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer's payment of that loss. To recognize liabilities for future unpaid losses, insurers establish reserves, which are balance sheet liabilities, representing estimates of future amounts needed to pay claims with respect to insured events that have occurred. Reserves are also established for loss adjustment expense reserves ("LAE") representing the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Reserves for losses and LAE are based not only on historical experience but also on management's judgment of the effects of matters such as future economic and social forces likely to impact the insurer's experience with the type of risk involved, circumstances surrounding individual claims, and trends that may affect the probable number and nature of claims arising from losses not yet reported. Consequently, loss reserves are inherently subject to a number of highly variable circumstances. Reserves for losses and LAE are revalued periodically using a variety of actuarial and statistical techniques for producing current estimates of expected claim costs. Claim frequency and severity and other economic and social factors are considered in the reevaluation process. A provision for inflation in the calculation of estimated future claim costs is implicit since reliance is placed on both actual historical data, which reflect past inflation, and on other factors which are judged to be appropriate modifiers of past experience. Adjustments to liabilities are reflected in operating results for the periods to which they are made. Reconciliation of Loss and Loss Adjustment Expense Reserves. The following table shows in accordance with GAAP the reconciliation of the estimated liability for losses and LAE for the Company's property 5 7 and casualty insurance subsidiaries (excluding discontinued operations) and the effect on income for each of the three years indicated. RECONCILIATION OF RESERVES FOR LOSSES AND LAE
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ---------- --------- --------- (THOUSANDS OF DOLLARS) Reserves for losses and LAE, net of reinsurance recoverable, at beginning of year.................... $ 610,510 $ 644,190 $ 633,394 Incurred losses and LAE: Provision for insured events of the current year, net of reinsurance.................................... 459,951 290,833 323,279 Increase (decrease) in provision for insured events of prior years, net of reinsurance................ 1,382 (17,234)(1) (4,126) ---------- --------- --------- Total incurred losses and LAE................ 461,333 273,599 319,153 Payments: Losses and LAE, net of reinsurance, attributable to insured events of: Current year...................................... (132,358) (70,505) (67,805) Prior years....................................... (358,423) (236,774) (240,552) ---------- --------- --------- Total payments............................... (490,781) (307,279) (308,357) ---------- --------- --------- Subtotal..................................... 581,062 610,510 644,190 Liability for losses and LAE for Casualty Insurance Company acquired during the current year............. 604,644 -- -- ---------- --------- --------- Reserves for losses and LAE, net of reinsurance recoverable, at end of year.......................... 1,185,706 610,510 644,190 Reinsurance recoverable for losses and LAE, at end of year................................................. 269,986 136,151 138,737 ---------- --------- --------- Reserves for losses and LAE, gross of reinsurance recoverable, at end of year.......................... $1,455,692 $ 746,661 $ 782,927 ========== ========= =========
- --------------- (1) See "Analysis of Loss and Loss Adjustment Expense Development" below for discussion of the decrease in reserve estimates during 1994. Analysis of Loss and Loss Adjustment Expense Development. The following table shows the cumulative amount paid against the previously recorded liability at the end of each succeeding year and the cumulative development of the estimated liability for the ten years ending December 31, 1995. Conditions and trends that have affected the development of these reserves and payments in the past will not necessarily recur in the future. Accordingly, it would not be appropriate to use this cumulative history to project future performance. The re-estimated liability portion of the following table shows the year by year development of the previously estimated liability at the end of each succeeding year. The re-estimated liabilities are increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The increases or decreases are reflected in the current year's operating earnings. Each column shows the reserve held at the indicated calendar year-end and cumulative data on re-estimated liabilities for the year and all prior years making up those calendar year end liabilities. The effect on income of the charge (credit) during the current period (i.e., the difference between the estimated liability at December 31 and the liability estimated one year later) is shown in the table above for each of three most recent years as "Increase (decrease) in provision for insured events of prior years." 6 8 CHANGES IN HISTORICAL RESERVES FOR LOSS AND LAE FOR THE LAST TEN YEARS GAAP BASIS AS OF DECEMBER 31, 1995
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1985 1986 1987 1988 1989 1990 1991 -------- -------- -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS) Reserves for Loss and LAE, net of reinsurance recoverable.................................... $382,066 $384,923 $390,799 $406,823 $647,559 $652,284 $627,103 Net reserve re-estimated as of: One year later.................................. 409,681 413,549 402,902 396,091 636,039 624,953 668,107 Two years later................................. 406,550 410,654 389,973 377,080 607,253 647,959 660,729 Three years later............................... 390,847 403,767 374,330 356,961 607,492 638,879 651,482 Four years later................................ 392,108 394,868 361,209 350,736 599,052 627,194 654,403 Five years later................................ 385,919 384,891 358,645 375,550 593,527 631,165 Six years later................................. 385,247 385,732 369,320 373,514 596,808 Seven years later............................... 382,482 391,036 371,863 375,364 Eight years later............................... 385,334 394,790 372,920 Nine years later................................ 388,250 396,359 Ten years later................................. 388,744 Net cumulative redundancy (deficiency)........... (6,678) (11,436) 17,879 31,459 50,751 21,119 (27,300) Cumulative amount of reserve paid, net of reserve recoveries, through: One year later.................................. 134,969 136,523 128,565 125,563 226,101 245,777 257,591 Two years later................................. 226,952 228,926 213,323 211,529 374,876 403,105 419,638 Three years later............................... 282,748 286,155 266,605 263,229 461,366 495,707 521,729 Four years later................................ 317,928 320,729 298,956 291,817 514,890 550,404 583,013 Five years later................................ 339,771 342,673 316,483 320,511 547,535 585,094 Six years later................................. 352,179 354,069 333,461 339,998 567,871 Seven years later............................... 359,469 365,410 346,547 351,805 Eight years later............................... 367,029 375,384 353,517 Nine years later................................ 373,853 380,437 Ten years later................................. 377,177 Net reserve -- December 31....................... Reinsurance recoverable.......................... Gross reserve -- December 31..................... Net re-estimated reserve......................... Re-estimated reinsurance recoverable............. Gross re-estimated reserve....................... Gross cumulative redundancy (deficiency)......... YEAR ENDED DECEMBER 31, ------------------------------------------- 1992 1993 1994 1995 -------- -------- -------- ---------- Reserves for Loss and LAE, net of reinsurance recoverable.................................... $633,394 $644,190 $610,510 $1,185,709 Net reserve re-estimated as of: One year later.................................. 629,268 626,956 611,892 -- Two years later................................. 615,747 633,333 Three years later............................... 621,348 Four years later................................ Five years later................................ Six years later................................. Seven years later............................... Eight years later............................... Nine years later................................ Ten years later................................. Net cumulative redundancy (deficiency)........... 12,046 10,857 (1,382) -- Cumulative amount of reserve paid, net of reserve recoveries, through: One year later.................................. 240,552 236,774 241,667(1) -- Two years later................................. 402,048 392,237 Three years later............................... 499,924 Four years later................................ Five years later................................ Six years later................................. Seven years later............................... Eight years later............................... Nine years later................................ Ten years later................................. Net reserve -- December 31....................... $610,510 $1,185,709 Reinsurance recoverable.......................... 136,151 269,983 -------- ---------- Gross reserve -- December 31..................... $746,661 $1,455,692 ========= =========== Net re-estimated reserve......................... $611,892 Re-estimated reinsurance recoverable............. 135,931 -------- Gross re-estimated reserve....................... $747,823 ========= Gross cumulative redundancy (deficiency)......... $ (1,162) =========
- --------------- (1) Excludes $116,756,000 in loss and LAE payments on 1994 and prior years related to reserves acquired from Casualty. The Company is required to maintain reserves to cover its estimated ultimate liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves do not represent an exact calculation of liabilities, but rather are estimates involving actuarial projections at a given time of what the Company expects the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims' frequency and severity and judicial theories of liability as well as other factors. The Company regularly reviews its reserving techniques, overall reserve position and its reinsurance. In light of present facts and current legal interpretations, management believes that adequate provision has been made for loss reserves. In making this determination, management has considered its claims experience to date, loss development history for prior accident years, estimates of future trends of claims frequency and severity, and various external factors such as judicial theories of liability. However, establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. Subsequent actual experience has resulted and could result 7 9 in loss reserves being too high or too low. Future loss development could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. In 1995, there was relatively insignificant development on 1994 and prior accident years of $1.4 million. In 1994, the Company decreased its losses and LAE reserves for 1993 and prior accident years by $17.2 million. This reserve decrease was partially offset by an increase in the liability for dividends to policyholders. Further, this reduction in reserves represents the recognition of a continued decrease in the frequency and severity of reported claims on 1994 and prior accident years. For the 1993 calendar year, losses and LAE development on 1992 and prior accident years was a relatively modest $4.1 million decrease in loss and LAE reserves. The Company is not able to determine with certainty the specific cause or causes of increases and decreases in claims experience that led to these changes in reserves but has reached its own conclusion based on a review of its internal data base and a subjective evaluation of external factors. The following discussion is a summary of the principal considerations that the Company evaluated in determining workers' compensation insurance reserve adjustments during 1994 and 1993. The Company believes that a number of factors including the economic recession in California (including unemployment rates) in the early 1990's, primarily 1990 and 1991, led to increases in the occurrence and magnitude of post-employment stress claims submitted to the Company, including many fraudulent claims. These conditions mirrored those of the California workers' compensation industry in general as private workers' compensation insurers in California, including the Company, substantially increased loss reserves in calendar year 1992 for the 1990 and 1991 accident years. The effect of fraud on the industry during 1990 and 1991 is further supported by the impact of actions taken by the California legislature in 1992 to limit workers' compensation fraud. In connection with this legislation, the Company instituted its "zero tolerance" program and began to aggressively investigate and prosecute those attempting to defraud policyholders through filing and encouraging fraudulent workers' compensation insurance claims. Thus, while unemployment continued to remain high in California during 1992 the number of claims and loss ratios for the industry on the 1992 accident year declined. The Company believes the decline in claim frequency and severity, which continued into 1994, is due primarily to the anti-fraud legislation enacted in California and the anti-fraud campaigns thereafter undertaken by the Company and other members of the workers' compensation insurance industry. In 1993, the Company only partially recognized this decline in claim frequency and severity, due in part to a lack of sufficient information to confirm the continued trend in claim frequency and severity decreases. The significant reserve decrease in 1994 for losses and LAE on 1993 and prior accident years of $17.2 million represents the Company's additional recognition of these claim frequency and severity decreases, and reflects the results of the Company's review of statistical evidence that emerged in 1994 which further confirmed the claim frequency and severity decreases related to the 1993 and prior accident years. INVESTMENT PORTFOLIO The Company manages its investments internally. The following portfolio information reflects the Company's continuing operations. See "Discontinued Operations." 8 10 The following table reflects the amortized cost and fair value of fixed maturity investments and non-redeemable preferred equity securities by major category, as well as the amortized cost and fair value of cash and short-term investments on the dates indicated.
DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------------- ---------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------- ---------- --------- -------- (THOUSANDS OF DOLLARS) Available for sale: United States Treasury securities and obligations of other US government agencies and corporations............. $ 136,626 $ 149,250 $ 53,045 $ 45,152 Redeemable preferred stock............... 15,887 15,764 4,249 3,491 Mortgage-backed securities............... 340,682 337,133 189,551 130,675 Corporate securities Banks................................. 123,144 125,836 24,744 20,125 Financial............................. 117,013 120,242 10,000 8,225 Transportation........................ 16,888 17,241 -- -- Utilities............................. 13,427 13,820 -- -- Industrial............................ 491,767 517,264 30,112 27,774 ---------- ---------- -------- -------- Total............................ 1,255,434 1,296,550 311,701 235,442 Non-redeemable preferred stock........... 285,337 277,451 213,935 189,632 ---------- ---------- -------- -------- Total............................ $1,540,771 $1,574,001 $ 525,636 $425,074 ========== ========== ======== ======== Held to maturity: United States Treasury securities and obligations of other US government agencies and corporations............. $ -- $ -- $ 53,695 $ 51,407 Mortgage-backed securities............... -- -- 152,721 147,696 ---------- ---------- -------- -------- Total............................ $ -- $ -- $ 206,416 $199,103 ========== ========== ======== ======== Short-term investments..................... $ 362,163 $ 362,163 $ 255,751 $255,751 Cash....................................... 39,559 39,559 31,058 31,058
As of December 31, 1995, substantially all of the fixed maturity investments in the portfolio were rated investment grade. Using Standard and Poor's, Moody's and Fitch's rating services, 59% were rated "A" or higher, 40% were rated BBB and 1% were rated BB. As of December 31, 1995, these investment securities had an approximate fair value of $1.3 billion, which was higher than amortized cost by approximately $41 million. The Company does not currently plan or intend to invest in securities rated below investment grade. 9 11 The following table reflects the average cash and investment assets of the Company and its subsidiaries for the periods indicated.
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ---------- ---------- -------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Average cash and investment assets Cash.................................................. $ 24,657 $ 29,693 $ 33,700 Investment assets..................................... 1,591,972 1,060,001 925,794 ----------- ----------- -------- Total......................................... $1,616,629 $1,089,694 $959,494 =========== =========== ======== Percent earned on (excluding realized gains and losses): Cash and investment assets............................ 7.38% 6.99% 7.83% Investment assets only................................ 7.49% 7.19% 8.11% Percent earned on (including realized gains and losses): Cash and investment assets............................ 7.38% 6.97% 8.05% Investment assets only................................ 7.49% 7.16% 8.34%
The Company's general investment philosophy is to hold fixed income securities for long term investment. As a result of changing accounting and industry practice and management's evaluation of the investment portfolio, the Company has segregated its portfolio into investments held to maturity and those that would be available for sale in response to changing market conditions, liquidity requirements, interest rate movements and other investment factors. At December 31, 1995 and 1994, Company held securities having an amortized cost of $1.5 billion and $526 million, respectively, as available for sale. See "Item 7. Management's Discussion and Analysis" and Notes A and C of Notes to Consolidated Financial Statements. The following table sets forth maturities in the fixed maturity and short-term investment portfolios at December 31, 1995:
AMORTIZED COST PERCENTAGE ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) One year or less..................................... $ 389,521 24% Over 1 year through 5 years.......................... 245,447 15 Over 5 years through 10 years........................ 495,154 31 Over 10 years........................................ 146,793 9 Mortgage-backed securities........................... 340,682 21 ----------- --- Totals..................................... $1,617,597 100% =========== ===
Using Standard and Poor's, Moody's and Fitch's rating services, the following table sets forth the quality mix of the Company's fixed maturity investment portfolio at December 31, 1995:
PERCENTAGE ----------- AAA (Including US government obligations)....................... 31% AA.............................................................. 2 A............................................................... 26 BBB............................................................. 40 BB.............................................................. 1 --- Total................................................. 100% ===
10 12 FINANCIAL SERVICES OPERATIONS Real Estate Lending In 1990, the Company acquired Investors Bancor, a holding company for Fremont Investment & Loan (formerly Investors Thrift), a California thrift and loan from Tomar Financial Corporation for approximately $6.7 million. Fremont Investment & Loan ("Fremont I & L") serves more than 23,000 customers through its 12 branches, and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). See "Regulation -- Thrift and Loan Regulation." Fremont I & L's operations are primarily engaged in commercial and residential real estate lending. Income before taxes from the real estate lending operation has increased significantly from $2.5 million in 1991 to $10.6 million in 1995. Assets of the real estate lending operation have grown from $278 million at the end of 1991 to $1.05 billion at the end of 1995, due to increased loan originations and to the purchase of loan portfolios from other financial institutions. Fremont I & L funds its lending activities through its deposits and capital. Deposits consists of full-paid investment certificates (which are similar to certificates of deposit) and installment investment certificates (which are similar to passbook accounts and money market accounts). Deposits totaled $926 million at December 31, 1995. The ability of the Company to continue to originate loans, and of borrowers to repay outstanding loans, may be impaired by adverse changes in local or regional economic conditions which affect such areas or by adverse changes in the real estate market in those areas. Such events could also significantly impair the value of the underlying collateral. If the Company's collateral were to prove inadequate, the Company's results of operations could be adversely affected. In addition, the financial services industry is characterized by competition on the basis of price and service. Loan Origination. Fremont I & L originates loans through independent loan brokers and through its own loan agents. In 1994, Fremont I & L purchased an aggregate of $366 million in primarily California commercial real estate loan portfolios from financial institutions. Acquisition costs of purchased loan portfolios are significantly lower than if loans were originated by the Company. In 1995, no portfolios of commercial real estate loans were purchased, primarily due to increased competition which resulted in inadequate yields or unacceptable risk profiles for the portfolios considered. The Company originates and purchases loans primarily for its own portfolio rather than for resale to third parties. The Company performs an internal evaluation of the underlying collateral at the time each loan is purchased and applies strict underwriting guidelines that include conservative loan-to-value ratios. Fremont I & L has primarily focused on the origination of commercial real estate loans secured by first trust deeds on income-producing properties in California. The real estate securing these loans include a wide variety of property types, such as small office buildings, small shopping centers, owner-user office/warehouses and retail properties. Fremont I & L does not originate commercial real estate construction and development loans. The majority of the commercial real estate loans originated are adjustable rate loans and generally range between $1 to $5 million. As of December 31, 1995, the average loan size was $1,030,000 and the approximate average loan-to-value ratio was 66%, using the most current available appraised values and current balances outstanding. The total amount of commercial real estate loans outstanding at December 31, 1995 was $731 million or 81% of the loan portfolio. Loans secured by commercial real estate are generally considered to entail a higher level of risk than loans secured by residential real estate. Although the properties securing the Company's commercial real estate loans generally have good operating histories, there is no assurance that such properties will continue to generate sufficient funds to allow their owners to make full and timely mortgage loan payments. At December 31, 1995, Fremont I & L had forty-seven non-accrual commercial real estate loans totaling approximately $21.5 million and commercial real estate owned of approximately $4.4 million. Fremont I & L also originates loans secured by single-family residences. At December 31, 1995, single family residential real estate secured loans, represented $166 million, or 18%, of Fremont I & L's loan portfolio. Substantially all of these loans are secured by first trust deeds. These loans have principal amounts primarily below $300,000, have maturities of nine to thirty years and are approved in accordance with lending policies approved by Fremont I & L's Board of Directors which includes standards covering, among other things, collateral value, loan to value and debt ratio. At December 31, 1995, the average single-family loan amount was $118,000, and the approximate average loan-to-value ratio was 74%, using appraised values at the time of loan origination and current balances outstanding. 11 13 The portfolio of Fremont I & L's loans receivable as of the dates indicated are summarized in the following table by type of primary collateral.
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 -------- -------- -------- (THOUSANDS OF DOLLARS) Commercial real estate loans................................... $730,599 $687,198 $302,202 Residential real estate loans.................................. 165,888 103,532 64,608 Contract loans................................................. 547 32,990 52,214 Installment loans.............................................. 1,783 3,191 5,638 Finance leases................................................. -- 114 794 -------- -------- -------- Loans receivable before deferred fees and costs................ 898,817 827,025 425,456 Purchase discount and deferred fees and costs.................. (9,865) (19,498) (24) -------- -------- -------- Total loans receivable, purchase discount and deferred fees and costs.......................................... 888,952 807,527 425,432 Less allowance for possible loan losses........................ (17,498) (14,391) (11,880) -------- -------- -------- Loans receivable, net..................................... $871,454 $793,136 $413,552 ======== ======== ========
Funding Sources. Fremont I & L obtains funds from depositors by offering full-paid investment certificates and installment investment certificates insured by the FDIC to the legal maximum through its 12 branches in California. Fremont I & L has typically offered higher interest rates to its depositors than do most full service financial institutions. At the same time, it has minimized the cost of maintaining these accounts by not offering transaction accounts or services such as checking, safe deposit boxes, money orders, ATM access and other traditional retail services. Fremont I & L generally effects deposit withdrawals by issuing checks rather than disbursing cash, which minimizes operating costs associated with handling and storing cash. Additional financing became available from the Federal Home Loan Bank of San Francisco effective January 1995. This financing is available at varying rates and terms. As of December 31, 1995, $170 million was available under the facility and no borrowings were outstanding. The table below summarizes Fremont I & L's investment certificates as of December 31, 1995 which are stated in amounts of $100,000 or more, by maturity and by type.
INVESTMENT CERTIFICATES $100,000 OR MORE, MATURING ------------------------------------------------------ 3 MONTHS OVER 3 THROUGH OVER 6 THROUGH OVER OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL -------- -------------- -------------- --------- ------- (THOUSANDS OF DOLLARS) Retail.................................. $2,285 $2,500 $3,845 $ 6,624 $15,254 IRA's................................... 227 201 316 436 1,180 Wholesale............................... 311 300 2,967 5,359 8,937 Brokered................................ 5,550 2,494 1,451 46,027 55,522 ------ ------ ------ ------- ------- Total.............................. $8,373 $5,495 $8,579 $58,446 $80,893 ====== ====== ====== ======= =======
Commercial Finance The Company's commercial finance subsidiary, Fremont Financial Corporation ("Fremont Financial"), provides working capital loans, primarily secured by accounts receivable and inventory, to small and middle market companies on a nationwide basis. Fremont Financial's total loan portfolio has grown from $189 million at December 31, 1991 to $569 million at December 31, 1995. This growth has been achieved through development of Fremont Financial's customer base through loan originations and through participation in syndicated loan transactions. In 1995, income before taxes from commercial finance was $22.8 million. The lending market has become increasingly competitive for small to middle market commercial borrowers. As a result, Fremont Financial has experienced decreasing yields on its commercial finance loans. In addition, adverse economic developments can negatively affect the Company's business and results of operations in a number of ways. Such developments can reduce the demand for loans, impair the ability of borrowers to pay loans and impair the value of the underlying collateral. Commercial finance loans made by Fremont Financial 12 14 are primarily on a revolving short-term basis (generally two or three years) and secured by assets which primarily include accounts receivable, inventory, machinery and equipment and, to a lesser extent, real estate and other types of collateral. In addition, Fremont Financial also makes term loans secured primarily by equipment and real estate. The term loans originated in conjunction with revolving loans are cross-collateralized (i.e., the same collateral is used to support both the term loans and all the related revolving loans) and coterminous with the related revolving loan made to the same borrower. The term to maturity for the term loans is generally five to seven years; however, certain term loans are "balloon loans" that amortize over a longer period and therefore do not amortize fully before their respective maturities. Commercial loans also include secured loans originated and serviced by other asset-based lenders and participated in by Fremont Financial. As of December 31, 1995, the average outstanding commercial loan balance was $2.7 million. Loans outstanding to a single borrower generally range in size from $500,000 to $15,000,000. The major avenue of growth for Fremont Financial remains the establishment of new lending relationships. The Company has a national presence with regional offices in Santa Monica, Chicago, New York and Atlanta, as well as eight other marketing offices across the country. To provide a stable source of funds to facilitate the continued expansion of its asset-based lending business, the Company, in 1993, established the Fremont Small Business Loan Master Trust ("Fremont Trust") for the purpose of securitizing the greater part of its commercial finance loan portfolio. The Fremont Trust is a master trust that can issue multiple series of asset-backed certificates which represent undivided interests in the Fremont Trust's assets (primarily commercial finance loans) and Fremont Financial will continue to service the loans thereunder. The proceeds from the sale of the initial series of asset-backed certificates ("Series A") under this program in April 1993 were $200 million bearing interest at the rate of LIBOR plus 0.47%. In November 1993, an additional $100 million of these certificates ("Series B") were sold bearing interest at the rate of LIBOR plus 0.5%. The securities issued in this program have a scheduled maturity of three and four years, but could mature earlier depending on fluctuations in outstanding balances of loans in the portfolio and other factors. During April 1995, the Company issued $30 million in subordinated variable rate asset-backed certificates, which mature in 2000, via a private placement. As of December 31, 1995, up to $500 million in additional publicly offered asset-backed certificates may be issued pursuant to a shelf registration statement to fund future growth in the commercial finance loan portfolio. In February 1996, $135 million in asset-backed certificates ("Series C") were issued which mature in 2000. The proceeds were used, in conjunction with existing cash, to retire the $200 million in Series A certificates. The Series B certificates are scheduled to mature in 1997. In December 1995, a commercial paper facility was established as part of the asset securitization program. This facility provides for the issuance of up to $150 million in commercial paper, dependent upon the level of assets within the asset securitization program. This facility, which expires in December 1998, had no amounts outstanding under it as of December 31, 1995. The commercial finance operation also has an unsecured revolving line of credit with a syndicated bank group that presently permits borrowings of up to $300 million, of which $185 million was outstanding as of December 31, 1995. This credit line is primarily used to finance assets which are not included in the Company's asset securitization program. This credit line expires August 1998. The Company's customer base consists primarily of small to middle market manufacturers and distributors which generally require financing for working capital and debt restructuring. At December 31, 1995, the Company had approximately 195 loans outstanding in 34 states and the District of Columbia. Approximately 32% of total loans outstanding were made to companies based in California, and no other state accounted for more than 10% of total loans outstanding. Asset-based revolving loans permit a company to borrow from the lender at any time during the term of the loan agreement, up to the lesser of a maximum amount set forth in the loan agreement or a percentage of the value of the collateral which primarily secures such loans. Under an asset-based lending agreement, the borrower retains the credit and collection risk with respect to the collateral in which the lender takes a security interest. Cash collections are received as often as daily by or on behalf of the borrower after the loan is initially made. These collections are paid to the lender to reduce the loan balance. While consideration is given to the net worth and profitability of a client, asset-based loans are generally extended to borrowers who do not have bank sources of credit readily available and are based on the estimated liquidation value of the collateral pledged to secure the loan. The largest percentage of realized losses has resulted from fraud or collateral misrepresentations by the borrower. Fremont Financial seeks to protect itself 13 15 against this risk through a comprehensive system of collateral monitoring and control. Fremont Financial's auditors perform auditing procedures of a borrower's books and records and physically inspects the collateral prior to approval and funding, as well as approximately every 90 days during the term of the loan. General economic conditions beyond the Company's control can and do impact the ability of borrowers to repay loans and also the value of the assets collateralizing such loans. Over the past four years, the majority of Fremont Financial's loans that have been liquidated have been fully repaid, as Fremont Financial attempts to work closely with the borrower through the liquidation to ensure repayment of the loan. Fremont Financial seeks to maintain conservative collateral valuations and perfection of security interests. Fremont Financial primarily competes with commercial finance companies and banks, most of whom are larger and have greater financial resources than Fremont Financial. The principal competitive factors are the rates and terms upon which financing is provided and customer service. The lending market has become increasingly competitive for small to middle market commercial borrowers. As a result, Fremont Financial has experienced decreasing yields on its commercial finance loans. Premium Financing and Life Insurance The Company finances property and casualty insurance premiums through its subsidiary, Fremont Premium Finance Corporation. This premium finance loan portfolio is collateralized by the unearned premiums of the underlying insurance policies. Revenues and operating income from this subsidiary were not significant in 1995, 1994 or 1993. Prior to January 1, 1996, the Company offered life insurance products, including annuities, credit life and disability insurance and term life insurance for consumers, through its subsidiary, Fremont Life Insurance Company. On December 31, 1995 and on January 1, 1996, the Company entered into reinsurance and assumption agreements with a reinsurer whereby assets and liabilities related to certain life insurance and annuity policies were ceded to the reinsurer. These reinsurance agreements are part of several other agreements which collectively act to significantly reduce the Company's life insurance operations. The effect on operations from these agreements is not expected to be material, and revenues and operating income from this subsidiary were not significant in 1995, 1994 or 1993. DISCONTINUED OPERATIONS The Company's discontinued operations consist primarily of assumed treaty and facultative reinsurance business that was discontinued between 1986 and 1991. In 1990, the Company established a management group to actively manage the liquidation of this business. The liabilities associated with this business are long term in duration and therefore, the Company continues to be subject to claims being reported. Claims under these reinsurance treaties include professional liability, product liability and general liability which include environmental claims. The Company supports these discontinued operations with $191 million in cash and investment grade fixed income securities, reinsurance recoverables of $54 million and other assets totaling $18 million. The Company estimates that the dedicated assets supporting these operations and all future cash inflows will be adequate to fund future obligations. However, should those assets ultimately prove to be insufficient, the Company believes that its property and casualty subsidiaries would be able to provide whatever additional funds might be needed to complete the liquidation without having a material adverse effect on the Company's consolidated financial position or results of operations. See Note M of Notes to Consolidated Financial Statements. The discontinued operations have investment portfolios which resemble the portfolios in the ongoing operations with regard to asset allocation, quality, performance and maturities. 14 16 REGULATION Insurance Regulation The Company's workers' compensation insurance operations are concentrated in California and Illinois, with additional writings in Arizona, Indiana, Michigan and Wisconsin. Insurance companies are subject to supervision and regulation by the state insurance authority in each state in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance company's business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders rather than investors or shareholders of an insurer. The extent of such regulation varies, but generally derives from state statutes that delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the state insurance departments includes the establishment of standards of solvency which must be met and maintained by insurers, the licensing to do business of insurers and agents, the nature of and limitations on investments by insurers, premium rates for certain property and casualty insurance, and life and disability insurance, the provisions which insurers must make for current losses and future liabilities and the approval of policy forms. Additionally, most states require issuers to participate in assigned risk plans which provide insurance coverage to individuals or entities who are unable to obtain coverage from existing insurers in those states. The net profit or loss incurred in the administration of these plans is allocated back to participant insurers based on the insurers' relative market share (i.e. insurance premiums) in each state. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. The Company's multistate insurance operations require, and will continue to require, significant resources of the Company in order to continue to comply with the regulations of each state in which it transacts business. Workers' Compensation Regulation. Illinois began operating under an open rating system in 1982 and California began operating under such a system effective January 1, 1995. In an open rating system, workers' compensation companies are provided with advisory rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory rates, companies in Illinois generally follow such rates. However, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. In July 1993, California enacted legislation to reform the workers' compensation insurance system and to, among other things, (i) reduce workers' compensation manual premium rates by 7% effective July 16, 1993 and (ii) adopt an open rating system through the repeal of the minimum rate law effective January 1, 1995. In addition to the July 1993 legislation, in December 1993, the California Insurance Commissioner reduced workers' compensation manual premium rates on new and renewal business an additional 12.7% effective January 1, 1994. In September 1994, California workers' compensation manual premium rates were further reduced by 16% effective October 1, 1994 on all business incepting on or after January 1, 1994. The repeal of the minimum rate law on January 1, 1995 has resulted in lower premiums and lower profitability in the Company's California workers' compensation insurance business due to increased price competition. The Company believes that its acquisition of Casualty, with policies written primarily outside of California, has lessened the impact of the repeal of the minimum rate law by providing geographic diversity, which mitigates the impact of economic and regulatory changes within a regional marketplace. Prior to January 1, 1995, the Company's policies were predominately written as participating, thereby obligating the Company to consider the payment of dividends to policyholders. The ability of the Company's subsidiaries to pay policyholder dividends on workers' compensation insurance policies was subject to California regulations which stated in part that dividends under a workers' compensation policy could only be paid from surplus accumulated on workers' compensation policies issued in California. Beginning in 1995, the payment of policyholder dividends in respect of workers' compensation policies written in California is not limited. However, in 1995 the Company's workers' compensation insurance policies, both in California and Illinois, were predominately written as non-participating, which does not include provisions for dividend consideration. This shift in policy type 15 17 is due primarily to the increased competition in the California market which has resulted from the repeal of the minimum rate law, effective January 1, 1995. The Company anticipates that this shift to non-participating policies will continue and be a characteristic element of the competitive environment. In addition, the Company's subsidiaries are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the Company's loss reserves. Insurance Guaranty Association Laws. Under insolvency or guaranty fund laws in most states in which the Company's insurance subsidiaries operate, insurers doing business in those states can be assessed, up to the prescribed limits, for losses incurred by policyholders as a result of the insolvency of other insurance companies. The amount and timing of such assessments are beyond the control of the Company and generally have not had an adverse impact on the Company's earnings in years in which such assessments have been made. Premiums written under workers' compensation policies are subject to assessment only with respect to covered losses incurred by the insolvent insurer under workers' compensation policies. The Company believes it does not face any material exposure to guaranty fund assessments. Holding Company Regulation. The Company is subject to the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). This act, and similar laws in other states, require the Company to periodically file information with the California Department of Insurance and other state regulatory authorities, including information relating to its capital structure, ownership, financial condition and general business operations. Certain transactions between an insurance company and its affiliates, including sales, loans or investments which in any twelve month period aggregate at least 5% of its admitted assets or 25% of its statutory capital and surplus, also are subject to prior approval by the Department of Insurance. The Holding Company Act also provides that the acquisition or change of "control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the Insurance Commissioner. In general, presumption of "control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person that controls a California insurance company, such as Fremont General. The Liquid Yield Option(TM) Notes ("LYONs") constitute a security convertible into the voting Common Stock of the Company, and the shares of Common Stock into which a holder's LYONs are convertible and any other securities convertible into Common Stock must be aggregated with any other shares of Common Stock of the holder for purposes of determining the percentage ownership. A person seeking to acquire "control," directly or indirectly, of the Company must generally file with the Insurance Commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval. The Holding Company Act also limits the ability of the Company's insurance subsidiaries to pay dividends to the Company. The act permits a property and casualty insurance company to pay dividends in any year which, together with other dividends or other distributions made within the preceding twelve months, do not exceed the greater of 10% of its statutory surplus or 100% of its net income as of the end of the preceding year, subject to a limit equal to prior year end unassigned funds less unrealized capital gains contained within unassigned funds. Larger dividends are payable only upon prior regulatory approval. Applicable regulations further require that an insurer's statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to its financial needs. Based upon restrictions presently in effect, the maximum amount available for payment of dividends by the Company's direct property and casualty subsidiaries during 1996 without prior regulatory approval is approximately $30 million. In addition, insurance regulations require that the Department of Insurance be given fifteen days advance notice of any dividend payment. Other Regulations. The NAIC has adopted a formula to calculate risk based capital ("RBC") of property and casualty insurance companies for inclusion in annual statements. The purpose of the RBC model is to help state regulatory authorities monitor the capital adequacy of property and casualty insurance companies by measuring several major areas of risk facing property and casualty insurers including underwriting, credit and investment risks. Companies having less statutory surplus than the RBC model calculates will be required to adequately address these risk factors and will be subject to varying degrees of 16 18 regulatory intervention, depending on the level of capital inadequacy. As of December 31, 1995 the Company's insurance subsidiaries engaged in continuing operations exceed all RBC levels requiring any regulatory intervention. Thrift and Loan Regulation Fremont I & L is subject to supervision and regulation by the Department of Corporations of the State of California (the "DOC") and, as an insured institution, by the FDIC. Neither Investors Bancor nor Fremont I & L is regulated or supervised by the Office of Thrift Supervision, which regulates savings and loan institutions. Fremont General is generally not directly regulated or supervised by the DOC, the FDIC, the Federal Reserve Board or any other bank regulatory authority, except with respect to guidelines concerning its relationship with Investors Bancor and Fremont I & L. Such guidelines include (i) general regulatory and enforcement authority of the DOC and the FDIC over transactions and dealings between Fremont General and Fremont I & L, (ii) specific limitations regarding ownership of the capital stock of the parent company of any thrift and loan company, and (iii) specific limitations regarding the payment of dividends from Fremont I & L as discussed below. Fremont I & L is examined on a regular basis by both agencies. Federal and state regulations prescribe certain minimum capital requirements and, while Fremont I & L is currently in compliance with such requirements, the Company could in the future be required to make additional investments in Fremont I & L in order to maintain compliance with such requirements. Federal and state regulatory authorities have the power to prohibit or limit the payment of dividends by Fremont I & L. Future changes in government regulation and policy could adversely affect the thrift and loan industry, including Fremont I & L. The FDIC conducted an examination of Fremont I & L as of August 31, 1994. The examination resulted in the FDIC requiring Fremont I & L to enter into a Memorandum of Understanding in January 1995 ("the MOU"). The MOU requires, among other things, that Fremont I & L: (a) maintain management acceptable to the FDIC, (b) maintain a ratio of Tier 1 capital as a percentage of average quarterly assets of at least 8.5%, (c) maintain an adequate reserve for loan losses, (d) reduce its dependence on volatile liabilities, (e) not pay cash dividends without the prior written consent of the FDIC, and (f) effect revisions and enhancements to certain policies and procedures, including lending, collection, reserve for loan losses, asset/liability management and affiliate transaction policies and procedures. The FDIC conducted another examination as of March 31, 1995, in conjunction with a DOC examination as of the same date. The FDIC's and DOC's reports issued as a result of this examination indicated that Fremont I & L's compliance with the MOU was satisfactory. The Company does not believe that the restrictions on Fremont I & L's ability to pay dividends imposed by the MOU or by federal or state law will adversely affect the ability of Fremont General to meet its obligations. However, no assurances can be given as to when, or if, the MOU will be terminated. California Law. The thrift and loan business conducted by Fremont I & L is governed by the California Industrial Loan Law and the rules and regulations of the Commissioner which, among other things, regulate the collateral requirements and maximum maturities of the various types of loans that are permitted to be made by California-chartered industrial loan companies, i.e., thrift and loan companies or investment and loans. Subject to restrictions imposed by applicable California law, Fremont I & L is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term for repayment of loans made by thrift and loan companies range up to forty years and thirty days depending upon collateral and priority of secured position, except that loans with repayment terms in excess of thirty years and thirty days may not in the aggregate exceed 5% of total outstanding loans and obligations of the thrift. Consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans are covered under the Garn-St. Germain Depository Institutions Act of 1982 (primarily single-family residential loans). Non-consumer loans may be repayable in unequal periodic payments during their respective terms. California law limits lending activities outside of California by thrift and loan companies to no more than 30% of total assets. 17 19 California law contains extensive requirements for the diversification of the loan portfolios of thrift and loan companies. A thrift and loan with outstanding investment certificates may not, among other things, place more than 5% of its loans or other obligations in loans or obligations which are secured only partially, but not primarily, by real property; may not make any one loan secured primarily by improved real property which exceeds 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; may not lend an amount in excess of 5% of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; may not make loans to, or hold the obligations of, any one person as primary obligor in an aggregate principal amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; and may have no more than 70% of its total assets in loans which have remaining terms to maturity in excess of seven years and are secured solely or primarily by real property. At December 31, 1995, Fremont I & L was in compliance with all of these requirements. A thrift and loan generally may not make any loans to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the DOC. Further, a thrift and loan may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except that this prohibition does not apply to persons who own less than 10% of the stock of a holding company or affiliate which is listed on a national securities exchange, such as Fremont General. Any person who wishes to acquire (i) 10% or more of the voting securities of a California thrift and loan company, or (ii) 10% or more of the voting securities of a holding company of a California thrift and loan company, such as the Company, must obtain the prior approval of the DOC. The LYONs are not voting securities of the Company, but the shares of Common Stock into which such LYONs are convertible constitute voting securities of the Company. Fremont I & L must also obtain prior written approval from the DOC before it may open or relocate any branch or loan production office or close a branch office. The Industrial Loan Law prohibits an industrial loan company from having deposits at any time in an aggregate sum in excess of 20 times the aggregate amount of its paid-up unimpaired capital and such of its unimpaired surplus as is declared by its by-laws not to be available for cash dividends. Fremont I & L currently has an authorized ratio of deposits to such capital of 17 to 1. Federal Law. Fremont I & L's deposits are insured by the FDIC to the full extent permitted by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises the operations of institutions to which it provides deposit insurance. Fremont I & L is subject to the rules and regulations of the FDIC to the same extent as other financial institutions which are insured by that entity. The approval of the FDIC is required prior to any merger, consolidation or change in control or the establishment or relocation of any branch office of Fremont I & L. This supervision and regulation is intended primarily for the protection of the insured deposit funds. Prior written notice to the FDIC is required to close a branch office. Fremont I & L is subject to federal risk-based capital adequacy guidelines which provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on- and off-balance sheet items, including residential real estate loans sold with recourse, legally binding loan commitments and standby letters of credit. A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Financial institutions are generally expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% of qualifying total capital must be in the form of core capital ("Tier 1") -- common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of consolidated subsidiaries and allowed mortgage servicing rights, less all intangible assets other than allowed mortgage servicing rights and eligible purchased credit card relationships. Supplementary capital ("Tier 2") consists of the allowance for loan and lease losses up to 1.25% of risk-weighted assets, cumulative perpetual preferred stock, long-term preferred stock (original maturity of at least 20 years), perpetual preferred stock, hybrid capital instruments, term subordinated debt and intermediate term preferred stock (original average maturity of five years or more). The maximum amount of Tier 2 capital which may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions also apply. At December 31, 1994, the Tier 2 capital of Fremont I & L consisted of 18 20 approximately $10.6 million of allowance for possible loan losses. As of December 31, 1995, Fremont I & L's allowance for possible loan losses for Tier 2 capital increased to $11.9 million. See "Financial Services -- Real Estate Lending." The following table presents Fremont I & L's risk-based capital position at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------------ ------------------------ PERCENT OF PERCENT OF RISK-WEIGHTED RISK-WEIGHTED AMOUNT ASSETS AMOUNT ASSETS --------- ------------- --------- ------------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Tier 1 capital.......................... $ 89,374 9.46% $ 80,385 9.57% Minimum requirement..................... 37,782 4.00 33,590 4.00 -------- ----- -------- ----- Excess........................ $ 51,592 5.46% $ 46,795 5.57% ======== ===== ======== ===== Total capital........................... $ 101,248 10.72% $ 90,937 10.83% Minimum requirement..................... 75,564 8.00 67,179 8.00 -------- ----- -------- ----- Excess........................ $ 25,684 2.72% $ 23,758 2.83% ======== ===== ======== ===== Risk-weighted assets.................... $ 944,553 $ 839,743 ======== ========
The FDIC has adopted a 3% minimum leverage ratio which is intended to supplement risk-based capital requirements and to ensure that all financial institutions continue to maintain a minimum level of core capital. A minimum leverage ratio of 3% is required for institutions which have been determined to be the highest of five categories used by regulators to rate financial institutions. All other institutions (including Fremont I & L) will likely be required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. It is improbable, however, that an institution with a 3% core capital-to-total assets ratio would be rated in the highest category since a strong capital position is so closely tied to the rating system. Therefore, the "minimum" leverage ratio is, for all practical purposes, significantly above 3%. The following table presents Fremont I & L's leverage ratio (the ratio of Tier 1 capital to the quarterly average of total assets) at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------------ ------------------------ PERCENT OF PERCENT OF AVERAGE TOTAL AVERAGE TOTAL AMOUNT ASSETS AMOUNT ASSETS --------- ------------- --------- ------------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Tier 1 capital............................ $ 89,374 9.02% $ 80,385 9.79% Minimum requirement....................... 29,735 3.00 24,643 3.00 -------- ---- -------- ---- Excess.......................... 59,639 6.02% $ 55,742 6.79% ======== ==== ======== ==== Average total assets for the quarter ended December 31,............................ $ 991,163 $ 821,434 ======== ========
The FDIC has designated Fremont I & L as a "well-capitalized" institution under the regulations promulgated under the Federal Deposit Insurance Corporation Improvement Act of 1991. A "well-capitalized" institution has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio of at least 6.0%, has a leverage ratio of at least 5.0% and is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the FDIC under Section 8 or Section 38 of the Federal Deposit Insurance Act to meet and maintain a specific capital level for any capital measure. The total risk-based capital ratio is the ratio of qualifying total capital to risk-weighted assets and the Tier 1 risk-based capital ratio is the ratio of Tier 1 capital to risk-weighted assets. In August 1994, an additional $23 million was contributed to the capital of Fremont I & L to support the growth in the loan portfolio during 1994. As a "well-capitalized" institution, Fremont I & L's annual FDIC insurance premiums were 23 cents per $100 of eligible domestic deposits in 1994. In 1995, this annual insurance premium rate was increased to 26 cents for the period January 1, 1995 through June 30, 1995, and then significantly decreased to 7 cents for the period July 1, 1995 through December 31, 1995. This rate has been further decreased to 3 cents effective for the period January 1, 1996 through June 30, 1996. The insurance premium payable is subject to semi- 19 21 annual adjustment. The FDIC, by the first day of the month preceding each semi-annual period, is required to notify each insured institution of its assessment risk-classification upon which the insurance premium assessment for the following period will be based. The FDIC has the authority to assess to all insured institutions collectively, additional premiums to cover losses and expenses associated with insuring deposits maintained at financial institutions and for other purposes it deems necessary. Limitations on Dividends. Under California law, a thrift is not permitted to declare dividends on its capital stock unless it has at least $750,000 of unimpaired capital plus additional capital of $50,000 for each branch office maintained. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift's retained earnings; (ii) any payment would result in violation of the approved maximum capital to thrift investment certificate ratio; or (iii) in the alternative, after giving effect to the distribution, the sum of a thrift and loan's qualified assets would be not less than 125% of certain of its liabilities, or with certain exceptions, current assets would be not less than current liabilities. In addition, a thrift and loan is prohibited from paying dividends from that portion of capital which its board of directors has declared restricted for dividend payment purposes. In policy statements, the FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. Under the Financial Institutions Supervisory Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible that, depending upon the financial condition of Fremont I & L and other factors, such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and could prohibit payment of dividends even though technically permissible. Fremont I & L is also subject to federal consumer protection laws, including the Truth In Savings Act, the Truth in Lending Act, the Community Reinvestment Act and the Real Estate Settlement Procedures Act. Commercial Finance Fremont Financial is licensed under the California Finance Lenders Law by the California Department of Corporations as a commercial finance lender and a personal property broker and holds certain other licenses. Intercompany Transactions The payment of stockholders' dividends and the advancement of loans to the Company by its subsidiaries are and may continue to be subject to certain statutory and regulatory restrictions. EMPLOYEES At December 31, 1995, the Company had 1,826 employees, none of whom is represented by a collective bargaining agreement. The Company believes its relations with employees are good. ITEM 2. PROPERTIES Substantially all facilities used by the Company are leased. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries and affiliates are parties to various legal proceeding, which in some instances include claims for punitive damages, all of which are considered routine and incidental to their business. The Company believes that ultimate resolution or settlement of such matters will not have a material adverse effect on its consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 20 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange ("NYSE") under the trading symbol "FMT." The following table sets forth the high and low sales prices of the Company's Common Stock adjusted retroactively for a three for two stock split effective January 8, 1996 and a ten percent stock dividend distributed June 15, 1995 as reported as composite transactions on the NYSE and the adjusted cash dividends declared on the Company's Common Stock during each quarter presented.
DIVIDENDS HIGH LOW DECLARED ------ ------ --------- 1995 1st Quarter...................................... 14 5/32 11 3/4 $0.12 2nd Quarter...................................... 17 13/32 17 7/16 0.13 3rd Quarter...................................... 19 5/32 16 0.13 4th Quarter...................................... 24 27/32 17 21/32 0.13 ----- Total.......................................... $0.51 ===== 1994 1st Quarter...................................... 15 1/16 13 1/32 $0.11 2nd Quarter...................................... 14 15/16 13 1/32 0.11 3rd Quarter...................................... 15 3/4 13 7/8 0.11 4th Quarter...................................... 15 13 11/32 0.12 ----- Total.......................................... $0.45 =====
On December 31, 1995, the closing sale price of the Company's Common Stock on the NYSE was $24.50 per share. There were 1,320 stockholders of record as of December 31, 1995. The Company has paid cash dividends in every quarter since its initial public offering in 1977. While the Company intends to continue to pay dividends, the decision to do so is made quarterly by the Board of Directors and is dependent on the earnings of the Company, management's assessment of future capital needs, and other factors. As a holding company, Fremont General's ability to pay dividends to its stockholders is partially dependent on dividends from its subsidiaries. The ability of several of these subsidiaries to distribute dividends is subject to certain statutory and regulatory restrictions and various agreements, principally loan agreements, of the subsidiaries that restrict the ability of the respective subsidiaries to pay cash dividends or advance loans and other payments to the Company and is contingent upon the earnings of those subsidiaries. See Note J to Consolidated Financial Statements and "Business -- Regulation." 21 23 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1995(1) 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS AND PER SHARE DATA) INCOME STATEMENT DATA: Property and casualty premiums earned.......................... $ 606,917 $ 433,584 $ 455,765 $ 411,956 $ 413,156 Net investment income.............. 119,523 76,821 77,198 70,820 73,796 Loan interest income............... 162,992 113,382 87,244 73,310 60,685 Realized investment gains (losses)........................ 1 (315) 2,165 16,208 5,290 Other revenue...................... 34,381 29,676 29,033 26,399 28,247 ---------- ---------- ---------- ---------- ---------- Total revenues..................... $ 923,814 $ 653,148 $ 651,405 $ 598,693 $ 581,174 ========= ========= ========= ========= ========= Property and casualty income....... $ 83,092 $ 61,265 $ 52,092 $ 45,187 $ 37,946 Financial services income.......... 35,737 28,014 21,456 14,878 9,340 Other interest and corporate expense......................... (18,502) (7,708) (9,200) (11,484) (6,277) ---------- ---------- ---------- ---------- ---------- Income before taxes, discontinued operations and cumulative effect of accounting change............ 100,327 81,571 64,348 48,581 41,009 Income tax expense................. (32,305) (25,759) (21,638) (13,381) (8,878) Discontinued operations............ -- -- -- -- (964) Cumulative effect of accounting change for income taxes......... -- -- -- 43,509 -- ---------- ---------- ---------- ---------- ---------- Net income......................... $ 68,022 $ 55,812 $ 42,710 $ 78,709 $ 31,167 ========= ========= ========= ========= ========= GAAP RATIOS FOR PROPERTY AND CASUALTY SUBSIDIARIES: Loss ratio......................... 76.0% 63.1% 70.0% 80.4% 72.7% Expense ratio...................... 24.5% 23.4% 21.3% 22.5% 24.5% Policyholder dividends ratio....... 0.0% 11.5% 9.9% 2.5% 8.8% ---------- ---------- ---------- ---------- ---------- Combined ratio..................... 100.5% 98.0% 101.2% 105.4% 106.0% ========= ========= ========= ========= ========= PER SHARE DATA (2): Cash dividends declared............ $ 0.51 $ 0.45 $ 0.44 $ 0.39 $ 0.35 Stockholders' equity: Including FASB 115 for 1994 and 1995 (3)...................... 19.62 13.82 N/A N/A N/A Excluding FASB 115 for 1994 and 1995 (3)...................... 18.76 16.40 14.55 13.39 9.79 Income before discontinued operations and cumulative effect of accounting change: Primary......................... 2.61 2.16 1.85 1.73 1.57 Fully diluted................... 2.17 1.82 1.65 1.53 1.43 Net income: Primary......................... 2.61 2.16 1.85 3.84 1.52 Fully diluted................... 2.17 1.82 1.65 3.29 1.39 WEIGHTED AVERAGE SHARES USED TO CALCULATE PER SHARE DATA (2): Primary............................ 26,079 25,823 23,039 20,498 20,491 Fully diluted...................... 33,343 33,034 28,243 24,734 24,481
22 24
DECEMBER 31, -------------------------------------------------------------- 1995(1) 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) BALANCE SHEET DATA: Total assets....................... $4,477,399 $3,134,390 $2,669,290 $2,070,533 $1,952,169 Fixed income and other investments..................... 1,937,890 888,918 1,055,289 782,542 772,947 Loans receivable................... 1,499,043 1,440,774 846,443 689,443 519,874 Claims and policy liabilities...... 1,971,719 1,012,704 1,007,054 812,081 838,459 Short-term debt.................... 72,191 176,325 78,087 208,013 147,450 Long-term debt..................... 693,276 468,390 451,581 100,572 101,303 Stockholders' equity: Including FASB 115 for 1994 and 1995(3)....................... 498,090 351,013 N/A N/A N/A Excluding FASB 115 for 1994 and 1995(3)....................... 476,491 416,378 369,369 271,710 198,724
- --------------- (1) The Company acquired Casualty Insurance Company on February 22, 1995. (2) Adjusted for a three-for-two split of the Common Stock distributed on February 7, 1996 to stockholders of record at close of business on January 8, 1996; a ten percent stock dividend distributed June 1995; and a three-for-two split of the Common Stock effected June 1993. (3) Effective January 1994, FASB 115 changed the accounting treatment afforded the Company's investment portfolio wherein unrealized gains and losses on securities designated by the Company as available for sale are included, net of deferred taxes, as a component of stockholders' equity. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Fremont General Corporation, a nationwide property and casualty insurance and financial services holding company, operates through its wholly-owned subsidiaries in select businesses in niche markets. The three core operating lines of business are workers' compensation insurance, real estate lending and commercial finance lending. Additionally, on a smaller scale, the Company is involved in underwriting various other insurance products. The primary operating strategy of the Company is to build upon its core business units through acquisition opportunities and new business development. The Company's secondary strategy is to achieve income balance and geographic diversity among its business units in order to limit the exposure of the Company to industry, market and regional concentrations. The Company began its workers' compensation insurance operations in 1959 and continues to derive the majority of its revenues from this business. The Company's workers' compensation insurance business has grown through internal expansion, as well as through the acquisition of other workers' compensation insurance companies. In 1989, the Company restructured its workers' compensation insurance operations under a single management group. By consolidating duplicate offices and functions, this management group has increased efficiency and achieved substantial cost savings. More recently, on February 22, 1995, the Company completed the acquisition of all outstanding stock of Casualty Insurance Company ("Casualty") and its wholly-owned subsidiary Workers' Compensation and Indemnity Company ("WCIC") from the Buckeye Union Insurance Company ("Buckeye"). Casualty underwrites workers' compensation insurance primarily in Illinois and several other mid-western states, as well as a modest amount through WCIC in California. Casualty currently is the largest underwriter of workers' compensation insurance in Illinois and has provided the Company with a significant presence in the mid- western region. The Casualty acquisition has provided geographic diversity within the Company's workers' compensation insurance business segment and the Company's 1995 revenues from workers' compensation insurance premiums were evenly divided between the west and mid-west regions. The Company believes this geographic diversity mitigates potential fluctuations in earnings from cyclical downturns in various regional economies. 23 25 The Company's balance sheet at December 31, 1995 has been significantly impacted by the acquisition of Casualty. The purchase price was $250 million, comprised of $225 million in cash and $25 million in a note payable to Buckeye. In addition, $6.5 million of costs were incurred in connection with the acquisition bringing the total cost to $256.5 million. The acquisition was treated as a purchase for accounting purposes and approximately ten months of Casualty's operating results are included in the Company's results of operations for the year ended December 31, 1995. At the acquisition date, the assets acquired and liabilities assumed, net of the purchase price and purchase accounting adjustments, are summarized in the following table:
(THOUSANDS OF DOLLARS) Assets acquired: Fixed maturity investments -- at fair value............. $ 15,646 Short-term investments.................................. 472,166 Premiums receivable and agents' balances................ 67,117 Reinsurance recoverable on paid and unpaid losses....... 185,145 Deferred policy acquisition costs....................... 12,656 Deferred income taxes................................... 59,830 Costs in excess of net assets acquired.................. 45,036 Other assets, including cash, accrued investment income, state deferred taxes and trade name.................. 37,719 -------- Total assets acquired........................... $895,315 ======== Liabilities assumed: Losses and loss adjustment expenses..................... $787,663 Unearned premiums....................................... 83,323 Dividends to policyholders.............................. 17,660 Other liabilities....................................... 6,669 -------- Total liabilities assumed....................... $895,315 ========
Since the date of acquisition, the Company has re-invested the short-term investments acquired into longer term investments. This accounts for the significant increase in the Company's fixed maturity and non-redeemable preferred stock portfolios for the year ended December 31, 1995. See Note B of Notes to Consolidated Financial Statements for additional information with respect to the acquisition of Casualty. In July 1993, California enacted legislation to reform the workers' compensation insurance system and to, among other things, adopt an open rating system through the repeal of the minimum rate law effective January 1, 1995. The repeal of the minimum rate law has resulted in lower premiums and lower profitability on the Company's California workers' compensation insurance policies due to increased price competition. The Company expects that the premiums earned in California will continue to decrease, principally due to price competition. See "Results of Operations -- Property and Casualty Insurance Operations -- Premiums." The Company believes that its acquisition of Casualty, with policies written primarily outside of California, has lessened the impact of the repeal of the minimum rate law by providing geographic diversity, which mitigates the impact of economic and regulatory changes within a regional marketplace. In Illinois, where Casualty underwrites the majority of its workers' compensation insurance premiums, price competition will continue to impact workers' compensation companies due to an overall average decrease in advisory rates of 13.6% which became effective January 1, 1996. Although insurance companies are not required to adopt such advisory rates, companies in Illinois generally follow such rates. See "Results of Operations -- Property and Casualty Insurance Operations -- Workers' Compensation Regulation." In 1990, the Company acquired Fremont Investment & Loan (formerly Investors Thrift), a California thrift and loan that now serves more than 23,000 customers through its 12 branches. The thrift and loan operations are primarily engaged in commercial and residential real estate lending. For commercial real estate loans, principal amounts primarily range between $1 to $5 million and for residential real estate loans, principal amounts are generally below $300,000. The Company's operating strategy is to pursue growth of the 24 26 loan portfolio through origination of new loans and acquisition of loan portfolios that meet its underwriting guidelines applied to origination of new loans. Assets of the real estate lending operation grew from $278 million at the end of 1991 to $1.05 billion at the end of 1995, due primarily to increased loan originations and to the purchase of loan portfolios from other financial institutions. See "Item 1. Business -- Financial Services Operations -- Real Estate Lending." The ability of the Company to continue to originate loans, and of borrowers to repay outstanding loans, may be impaired by adverse changes in local or regional economic conditions which affect such areas or by adverse changes in the real estate market in those areas. Such events could also significantly impair the value of the underlying collateral. If the Company's collateral were to prove inadequate, the Company's results of operations could be adversely affected. The Company's commercial finance subsidiary, Fremont Financial Corporation ("Fremont Financial"), provides working capital loans, primarily secured by accounts receivable and inventory, to small and middle market companies on a nationwide basis. Fremont Financial's total loan portfolio grew from $189 million at December 31, 1991 to $569 million at December 31, 1995. This growth has been achieved through development of Fremont Financial's customer base through loan originations and through participation in syndicated loan transactions. See "Item 1. Business -- Financial Service Operations -- Commercial Finance." The lending market has become increasingly competitive for small to middle market commercial borrowers. As a result, Fremont Financial has experienced decreasing yields on its commercial finance loans. Adverse economic developments can negatively affect the Company's business and results of operations in a number of ways. Such developments can reduce the demand for loans, impair the ability of borrowers to pay loans and impair the value of the underlying collateral. Between 1986 and 1991, the Company discontinued its domestic treaty reinsurance business, its other primary and excess property and casualty insurance operations and the underwriting of all remaining assumed reinsurance. In 1990, a single management group was put in charge of all discontinued operations, and it is the intention of the Company to complete the liquidation of these operations by the commutation of liabilities and as claims are paid. See "Item 1. Business -- Discontinued Operations" and Note M of Notes to Consolidated Financial Statements. On December 4, 1995, the Company announced a three-for-two stock split of its Common Stock for stockholders of record at January 8, 1996. The stock split was distributed on February 7, 1996. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a variety of factors, including the risk factors set forth within Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere herein. RESULTS OF OPERATIONS By providing diverse insurance and financial services to small and medium-sized businesses, the Company has achieved growth in both revenues and net income during the three years ended December 31, 1995. Higher revenues and net income in 1995 were also achieved through the acquisition of Casualty. The 25 27 following table presents information for each of the three years in the period ended December 31, 1995 with respect to the Company's core business segments.
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (THOUSANDS OF DOLLARS) Revenues: Workers' compensation............................ $671,110 $458,461 $489,126 Professional medical liability, corporate and other......................................... 37,077 37,251 33,999 -------- -------- -------- Total property and casualty................... 708,187 495,712 523,125 Financial services............................... 214,975 154,398 125,732 Corporate........................................ 652 3,038 2,548 -------- -------- -------- Total......................................... $923,814 $653,148 $651,405 ======== ======== ======== Income (Loss) Before Taxes: Workers' compensation............................ $ 85,009 $ 62,199 $ 49,775 Professional medical liability, corporate and other......................................... (1,917) (934) 2,317 -------- -------- -------- Total property and casualty................... 83,092 61,265 52,092 Financial services............................... 35,737 28,014 21,456 Corporate........................................ (18,502) (7,708) (9,200) -------- -------- -------- Total......................................... $100,327 $ 81,571 $ 64,348 ======== ======== ========
The Company generated revenues of $924 million for 1995, as compared to revenues of $653 million and $651 million for 1994 and 1993, respectively. Revenues were higher in 1995 as compared to 1994, due primarily to higher workers' compensation insurance premiums, net investment income and loan interest income. The higher workers' compensation insurance premiums and net investment income are due primarily to the acquisition of Casualty, partially offset by lower insurance premiums earned in California. See "Property and Casualty Insurance Operations -- Premiums." Revenues between 1994 and 1993 were flat due primarily to the combined effects of higher loan interest, substantially offset by lower workers' compensation insurance premiums. Realized investment gains (losses) were $1,000, $(315,000) and $2,165,000 in 1995, 1994 and 1993, respectively. The Company had net income of $68.0 million or $2.61 per share for 1995, as compared to $55.8 million or $2.16 per share and $42.7 million or $1.85 per share for 1994 and 1993, respectively. Income before taxes for 1995 was $100.3 million as compared to $81.6 million and $64.3 million for 1994 and 1993, respectively. Workers' compensation insurance operations posted income before taxes of $85.0 million for 1995, as compared to $62.2 million for 1994 and $49.8 million for 1993. The 37% increase in income before taxes in 1995 is due primarily to the acquisition of Casualty, offset partially by lower income on the Company's California business. The 25% increase in income before taxes in 1994 is due primarily to the continued decline in the frequency and severity of reported claims incurred on the 1992 through 1994 accident years and lower than expected operating costs, offset partially by lower premiums. The combined ratio for 1995 was 100.4% compared to 97.6% and 101.6% for 1994 and 1993, respectively. The Company's professional medical liability, corporate and other segment is composed principally of revenues and expenses that pertain to the Company's professional medical liability business ("medical malpractice"), as well as miscellaneous expenses associated with the Company's downstream property and casualty insurance holding company, Fremont Insurance Group, Inc., ("Fremont Insurance Group"). Medical malpractice revenues were flat at $34.3 million in 1995 as compared to $33.0 million for 1994. Medical malpractice revenues increased in 1994 from $29.2 million in 1993 due primarily to a shift in underwriting focus towards those medical specialties that had higher premiums. Income before taxes for the medical malpractice business was $5.2 million, $6.6 million and $10.2 million for 1995, 1994 and 1993, respectively. The decrease in income before taxes in 1995 and 1994, as compared to 1993, is due primarily to an increase in the frequency and severity of reported claims. Expenses of Fremont Insurance Group include 26 28 interest expense on debt and other obligations of $6.7 million, $5.5 million and $4.5 million, respectively, for 1995, 1994 and 1993, and overhead expenses of $2.2 million, $3.1 million and $3.3 million for the corresponding periods. Since the operations of Fremont Insurance Group consist primarily of interest expense and overhead expenses management does not expect it to operate at a profit. The financial services business segment posted increases of 28% and 31% in income before taxes for 1995 and 1994, respectively. These increases are consistent with increases in financial services revenues and are due primarily to the significant growth in the average loan portfolio over the three year period ended December 31, 1995 from $783 million in 1993 to $1.5 billion in 1995. Contributing to this growth in the average loan portfolio is the acquisition of approximately $366 million in primarily commercial real estate loan portfolios which were completed during the last six months of 1994. This segment, which consists principally of real estate lending and commercial finance operations, recorded income before taxes of $35.7 million, $28.0 million and $21.5 million for 1995, 1994 and 1993, respectively. Corporate revenues consisted primarily of investment income, while corporate expenses consisted primarily of interest expense and general and administrative expense. The corporate loss before income taxes was $18.5 million, $7.7 million and $9.2 million for 1995, 1994 and 1993, respectively. The increase in the corporate loss before taxes in 1995 over 1994 was due primarily to increased interest expense and decreased investment income. The increase in interest expense is due primarily to additional debt incurred in the acquisition of Casualty, along with modest increases in administrative expenses. The decrease in corporate loss before taxes in 1994 compared to 1993 was primarily due to increased investment income and higher intercompany interest income from the Company's subsidiaries. Income tax expense of $32.3 million, $25.8 million and $21.6 million for 1995, 1994 and 1993, respectively, represent effective tax rates of 32%, 32% and 34% on pretax income of $100.3 million, $81.6 million and $64.3 million for the corresponding periods. The Company's effective tax rates for all years presented are lower than the enacted federal income tax rate of 35%, due primarily to tax exempt investment income which reduces the Company's taxable income. Property and Casualty Insurance Operations The following table represents information with respect to the Company's property and casualty insurance operations:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (THOUSANDS OF DOLLARS) Revenues........................................... $708,187 $495,712 $523,125 Expenses........................................... 625,095 434,447 471,033 -------- -------- -------- Income Before Taxes................................ $ 83,092 $ 61,265 $ 52,092 ======== ======== ========
Revenues from the property and casualty insurance operations consist primarily of workers'compensation insurance premiums earned and net investment income. Expenses consist primarily of loss and loss adjustment expenses, policy acquisition costs, other operating costs and expenses and, for the years ended December 1994 and 1993, dividends to policyholders. Premiums. Premiums earned from the Company's workers' compensation insurance operations were $575.0 million in 1995, as compared to $401.5 million and $426.8 million in 1994 and 1993, respectively. Premiums were significantly higher in 1995 due primarily to the acquisition of Casualty, partially offset by lower premiums earned in California. For the year ended December 31, 1995, the Company's workers' compensation insurance premiums earned in its western region, consisting primarily of California, accounted for $292 million, or 51% of the Company's total workers' compensation insurance premiums earned for such period, representing a decrease of $109 million from 1994. This decrease was due primarily to the increased price competition resulting from California's adoption of an open rating system and the repeal of the minimum rate law. See "Workers' Compensation Regulation." This increased price competition has led to (i) lower premium rates and (ii) a lower average policy size due to the Company's shift in focus to smaller employers. 27 29 Additionally, non-renewing polices have increased in 1995 which has also contributed to the lower premium volume in California. The increase in non-renewing polices occurs as a result of certain premium prices falling below required minimum pricing pursuant to the Company's underwriting standards. The Company expects that the premiums earned in California will continue to decrease, principally due to price competition. For the year ended December 31, 1995, the Company's workers' compensation insurance premiums earned in its mid- western region, consisting primarily of Illinois, accounted for $283 million, or 49% of the Company's total workers' compensation insurance premiums earned. In addition, the Company anticipates price competition to continue in Illinois, where an additional overall average decrease of 13.6% in advisory rates, which workers' compensation insurance companies in Illinois tend to follow, became effective January 1, 1996. Premiums were lower in 1994 as compared to 1993, due primarily to reductions in California workers' compensation manual premium rates which occurred in the last six months of 1993. Net Investment Income. Net investment income within the property and casualty insurance operations was $101.3 million, $62.2 million and $65.7 million in 1995, 1994 and 1993, respectively. Significantly higher invested assets, due primarily to the acquisition of Casualty, resulted in increased investment income in 1995 as compared to 1994 and 1993. The effects of lower invested assets and lower investment yields during 1994 resulted in net investment income levels lower as compared to 1993. See "Item 1. Business -- Investment Portfolio." Loss and Loss Adjustment Expense. Workers' compensation loss and loss adjustment expenses ("LAE") were $436.7 million, $249.4 million and $300.5 million in 1995, 1994 and 1993, respectively. In addition, the ratio of these losses and LAE to workers' compensation insurance premiums earned was 75.9%, 62.1% and 70.4% in 1995, 1994 and 1993, respectively. The increase in incurred loss and LAE in 1995 as compared to 1994 is due primarily to the acquisition of Casualty, partially offset by lower incurred loss and LAE in California. Additionally, the increase in the loss and LAE ratio in 1995 as compared to 1994, is partially due to lower premiums on California policies which resulted from increased competition in 1995. See "Premiums." The decrease in California premiums was greater than the decrease in California incurred loss and LAE, thereby resulting in a higher loss and LAE ratio. The negative impact on the Company's profitability resulting from the higher loss and LAE ratio has been mitigated to an extent by the elimination of dividends accrued on California workers' compensation business in 1995. The dividend elimination occurred as the majority of the workers' compensation policies written in 1995 were non-participating. This type of policy is not eligible for dividend consideration. See "Dividends to Policyholders." The decrease in the loss ratio in 1994 as compared to 1993 is due primarily to the positive impacts of the continued decrease in the frequency and severity of reported claims on the 1992 and subsequent accident years, particularly in Southern California, which began in mid-1992. The Company attributes this reduction in claim frequency and severity to aggressive loss control and improved underwriting. Improved loss control has been achieved through a significant effort to reduce fraudulent workers' compensation claims by California law enforcement and regulatory authorities, the insurance industry and the Company under its "zero tolerance" program. Underwriting improvements were made to focus on businesses with stable work environments and less hazardous occupations. See "Item 1. Business -- Insurance Operations -- Loss and Loss Adjustment Expense Reserves." The Company regularly reviews its reserving techniques, overall reserve position and reinsurance. In light of present facts and current legal interpretations, management believes that adequate provisions have been made for loss reserves. In making this determination, management has considered its claims experience to date, loss development history for prior accident years and estimates of future trends of claims frequency and severity. However, establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. Subsequent actual experience has resulted and could result in loss reserves being too high or too low. Future loss development could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. Policy Acquisition Costs and Other Operating Costs and Expenses. The ratio of policy acquisition costs and other operating costs and expenses to premiums earned is referred to as the expense ratio, which was 24.5%, 23.4% and 21.3% in 1995, 1994 and 1993, respectively. The increase in this ratio in 1995 and 1994, as compared to 1993, was due primarily to higher agents' commission costs. 28 30 Dividends to Policyholders. In 1995 there were no dividends accrued. This is compared to $49.7 million and $45.2 million in dividends accrued in 1994 and 1993, respectively. The ratio of dividends accrued to workers' compensation insurance premiums earned therefore decreased to 0% in 1995 from 12.4% and 10.6% in 1994 and 1993, respectively. The significant decrease in dividends accrued is due in part to a change in the type of workers' compensation insurance policy written on and after January 1, 1995. In 1995, the Company's workers' compensation insurance policies, both in California and those underwritten by Casualty, were predominately written as non-participating, which does not include provisions for dividend consideration. In 1994 and prior, the Company's policies were predominately written as participating, thereby obligating the Company to consider the payment of dividends. This shift in policy type is due primarily to the increased competition in the California market which has resulted from the repeal of the minimum rate law, effective January 1, 1995. The Company anticipates that this shift to non-participating policies will continue and be a characteristic element of the competitive environment established by the July 1993 California legislation. See "Workers' Compensation Regulation." Variability of Operating Results. The Company's profitability can be affected significantly by many factors including competition, the severity and frequency of claims, interest rates, regulations, court decisions, the judicial climate, and general economic conditions and trends, all of which are outside of the Company's control. These factors have contributed, and in the future could contribute, to significant variation of results of operations in different aspects of the Company's business from quarter to quarter and year to year. With respect to the workers' compensation insurance business, changes in economic conditions can lead to reduced premium levels due to lower payrolls as well as increased claims due to the tendency of workers who are laid off to submit workers' compensation claims. Legislative and regulatory changes can also contribute to variable operating results for workers' compensation insurance businesses. For example, in 1995, the Company experienced the negative impact of lower premiums and lower profitability on the Company's California workers' compensation business due to increased price competition resulting from legislation enacted in California in July 1993 which, among other things, repealed the minimum rate law effective January 1, 1995. See "Workers' Compensation Regulation." The Company anticipates that its workers' compensation insurance premiums earned in California will continue to decrease as a result of this increased price competition, which could adversely affect the Company's results of operations and financial condition. See "Premiums." Also, the establishment of appropriate reserves necessarily involves estimates, and reserve adjustments have caused significant fluctuations in operating results from year to year. Workers' Compensation Regulation. Illinois began operating under an open rating system in 1982 and California began operating under such a system effective January 1, 1995. In an open rating system, workers' compensation companies are provided with advisory rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory rates, companies in Illinois generally follow such rates. However, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. In July 1993, California enacted legislation to reform the workers' compensation insurance system and to, among other things, (i) reduce workers' compensation manual premium rates by 7% effective July 16, 1993 and (ii) repeal the minimum rate law effective January 1, 1995. In addition to the July 1993 legislation, in December 1993, the California Insurance Commissioner reduced workers' compensation manual premium rates on new and renewal business an additional 12.7% effective January 1, 1994. In September 1994, California workers' compensation manual premium rates were further reduced by 16% effective October 1, 1994 on all business incepting on or after January 1, 1994. The repeal of the minimum rate law on January 1, 1995 has resulted in lower premiums and lower profitability in the Company's California workers' compensation insurance business due to increased price competition. The Company believes that its acquisition of Casualty, with policies written primarily outside of California, has lessened the impact of the repeal of the minimum rate law by providing geographic diversity, which mitigates the impact of economic and regulatory changes within a regional marketplace. See "Item 1. Business -- Regulation -- Insurance Regulation." 29 31 Financial Services The Company's financial services operations are principally engaged in commercial and residential real estate lending through Fremont Investment & Loan and asset-based lending through Fremont Financial. The Company also has small life insurance and premium finance operations included in this segment. See Note P of Notes to Consolidated Financial Statements. Revenues consist principally of interest income and, to a lesser extent, life insurance premiums, fees and other income. The following table presents information with respect to the Company's financial services operations:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (THOUSANDS OF DOLLARS) Revenues........................................... $214,975 $154,398 $125,732 Expenses........................................... 179,238 126,384 104,276 -------- -------- -------- Income Before Taxes................................ $ 35,737 $ 28,014 $ 21,456 ======== ======== ========
Revenues increased 39% in 1995 and 23% in 1994, due primarily to greater loan interest and fee revenue attributable to the growth in the average loan portfolios of the real estate lending and commercial finance operations from $1.1 billion in 1994 to $1.5 billion in 1995. Contributing to this growth in the average loan portfolio was the acquisition of approximately $366 million in primarily commercial real estate loan portfolios which were completed during the last six months of 1994. In 1995, no portfolios of commercial real estate loans were purchased, primarily due to increased competition which resulted in inadequate yields or unacceptable risk profiles for the portfolios considered. Income before taxes in the financial services operations was $35.7 million, $28.0 million and $21.5 million for 1995, 1994 and 1993, respectively. The 28% increase in income before taxes in 1995 as compared to 1994 is due primarily to continued growth in the loan portfolios, offset partially by increases in the provision for loan losses and other expenses. The 31% increase in 1994 as compared to 1993, is due primarily to the growth in the loan portfolios and a lower provision for loan losses. See "Item 1. Business -- Financial Services Operations." 30 32 The following table identifies the interest income, interest expense, average interest-bearing assets and liabilities, and interest margins for the Company's thrift and loan and commercial finance subsidiaries:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------ 1995 1994 1993 ------------------------------ ------------------------------ ---------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ---------- -------- ------ ---------- -------- ------ -------- -------- ------ (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Interest bearing assets(1): Commercial finance and other assets..................... $ 619,431 $ 73,376 11.85 % $ 483,778 $ 52,128 10.78 % $323,479 $ 33,474 10.35 % Thrift and loan: Cash equivalents........... 105,470 5,883 5.58 56,014 2,282 4.07 34,744 1,032 2.97 Investments................ 1,053 33 3.13 4,503 450 9.99 220 6 2.73 Commercial real estate loans.................... 683,331 67,952 9.94 452,950 43,582 9.62 243,701 23,732 9.74 Residential real estate loans.................... 133,761 12,843 9.60 67,053 8,293 12.37 100,646 14,170 14.08 Contract loans............. 5,640 743 13.17 42,204 5,595 13.26 58,113 8,104 13.95 Installment loans.......... 2,433 310 12.74 4,294 541 12.60 6,799 866 12.74 Finance leases............. 37 3 8.11 377 47 12.47 1,903 223 11.72 ---------- -------- ---------- -------- -------- ------- Total interest bearing assets................... $1,551,156 $161,143 10.39 % $1,111,173 $112,918 10.16 % $769,605 $ 81,607 10.60 % ========== ======== ========== ======== ======== ======= Interest bearing liabilities: Savings deposits............. $ 136,588 $ 7,279 5.33 % $ 81,475 $ 2,940 3.61 % $ 95,674 $ 3,824 4.00 % Time deposits................ 664,397 40,072 6.03 464,960 23,928 5.15 277,765 15,868 5.71 Commercial paper and other... 15,873 1,189 7.49 14,332 820 5.72 14,545 882 6.06 Securitization obligation.... 321,667 21,200 6.59 300,094 14,653 4.88 165,278 6,171 3.73 Debt with banks.............. 174,816 12,308 7.04 80,770 4,921 6.09 71,572 3,561 4.98 Debt from affiliates......... 49,369 2,388 4.84 28,499 2,205 7.74 24,830 1,905 7.67 ---------- -------- ---------- -------- -------- ------- Total interest bearing liabilities................ $1,362,710 $ 84,436 6.20 % $ 970,130 $ 49,467 5.10 % $649,664 $ 32,211 4.96 % ========== ======== ========== ======== ======== ======= Net interest income............ $ 76,707 $ 63,451 $ 49,396 ======== ======== ======= Net yield...................... 4.95 % 5.71 % 6.42 %
- --------------- (1) Average loan balances include non-accrual loan balances. The margin between the Company's interest income and cost of funds decreased in 1995 and 1994, due primarily to changes in the mix of loans in the real estate lending operation, as well as a decrease in the net margins in the commercial finance lending segment. In the real estate lending operation, the change in portfolio mix occurred under a corporate strategy which began in 1993, to shift away from high rate, high risk loans secured by personal property or junior liens on real estate, to lower yielding commercial and residential first trust deed real estate loans. The lower yields on the commercial and residential real estate portfolios are compensated for by the improved underlying collateral and by the improved lien position on the collateral. The net margins decreased in the commercial finance segment due primarily to increases in the credit quality of the loan portfolio which has resulted in lower net margins, as well as to an increase in the competitive environment. Interest rate sensitivity data for the Company's thrift and loan and commercial finance subsidiaries as of December 31, 1995 is presented in the table below. The relationships shown are for one day only and significant changes can occur in the sensitivity relationships as a result of market forces and management decisions. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals and to this degree earnings will be sensitive to interest rate changes. The Company 31 33 attempts to match interest rate sensitive assets and liabilities to minimize the effect of fluctuations in interest rates.
REPRICING PERIODS -------------------------------------------------------------------- WITHIN WITHIN WITHIN OVER 0-3 MONTHS 4-12 MONTHS 1-5 YEARS 5 YEARS TOTAL ---------- ----------- --------- -------- ---------- (THOUSANDS OF DOLLARS) Interest sensitive assets: Commercial finance and other........... $ 577,236 $ 37,571 $ 1,516 $ 28,939 $ 645,262 Thrift and loan: Cash equivalents..................... 152,118 -- -- -- 152,118 Investments.......................... 1,715 -- -- -- 1,715 Commercial real estate loans......... 344,317 215,909 153,175 17,198 730,599 Residential real estate loans........ 58,495 82,972 20,844 3,577 165,888 Contract loans....................... 96 207 244 -- 547 Installment loans.................... 341 739 702 -- 1,782 ---------- -------- -------- -------- -------- Total interest sensitive assets........ $1,134,318 $ 337,398 $ 176,481 $ 49,714 $1,697,911 ========== ======== ======== ======== ======== Interest sensitive liabilities: Savings deposits....................... $ 228,151 $ -- $ -- $ -- $ 228,151 Time deposits.......................... 223,542 308,605 166,014 -- 698,161 Commercial paper and other............. 5,953 1,238 -- -- 7,191 Securitization obligation.............. 330,000 -- -- -- 330,000 Debt with banks........................ 185,000 -- -- -- 185,000 Debt from affiliates................... 34,760 -- 20,000 -- 54,760 ---------- -------- -------- -------- -------- Total interest sensitive liabilities... $1,007,406 $ 309,843 $ 186,014 $ -- $1,503,263 ========== ======== ======== ======== ======== Incremental interest rate sensitivity gap.................................... $ 126,912 $ 27,555 $ (9,533) $ 49,714 $ 194,648 ========== ======== ======== ======== ======== Cumulative gap........................... $ 126,912 $ 154,467 $ 144,934 $194,648 ========== ======== ======== ========
Loans Receivable and Reserve Activity. The following table shows loans receivable in the various financing categories and the percentages of the total represented by each category:
1995 1994 1993 -------------------- -------------------- ------------------ % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ---------- ----- ---------- ----- -------- ----- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Accounts receivable and inventory loans: Commercial finance...................... 415,038 27% $ 409,580 28% $315,467 36% Term loans: Commercial finance...................... 110,647 7 124,379 8 63,814 7 Thrift and loan......................... 888,952 58 807,527 55 425,432 49 Other................................... 116,187 8 126,694 9 66,952 8 ---------- --- ---------- --- -------- --- Total term loans...................... 1,115,786 73 1,058,600 72 556,198 64 ---------- --- ---------- --- -------- --- Total loans........................... 1,530,824 100% 1,468,180 100% 871,665 100% Less allowance for possible loan losses... 31,781 2 27,406 2 25,222 3 ---------- --- ---------- --- -------- --- Loans receivable........................ 1,499,043 98% $1,440,774 98% $846,443 97% ========== === ========== === ======== ===
32 34 The following table illustrates the maturities of the Company's loans receivable:
MATURITIES AT DECEMBER 31, 1995 -------------------------------------------------- 1 TO 24 25 TO 60 OVER 60 MONTHS MONTHS MONTHS TOTAL --------- --------- --------- ----------- (THOUSANDS OF DOLLARS) Accounts receivable and inventory loans -- variable rate.............. $ 415,038 $ -- $ -- $ 415,038 Term loans -- variable rate........... 164,620 147,324 623,402 935,346 Term loans -- fixed rate.............. 90,523 48,911 41,006 180,440 -------- -------- -------- ---------- Total....................... $ 670,181 $ 196,235 $ 664,408 $ 1,530,824 ======== ======== ======== ==========
The Company monitors the relationship of fixed and variable rate loans and interest bearing liabilities in order to minimize interest rate risk. Adverse economic developments can negatively affect the Company's business and results of operations in a number of ways. Such developments can reduce the demand for loans, impair the ability of borrowers to pay loans and impair the value of the underlying collateral. 33 35 The following table describes the asset classifications, loss experience and reserve reconciliation of the real estate lending and commercial finance operations as of or for the periods ended as shown below:
DECEMBER 31, --------------------------------------- 1995 1994 1993 ---------- ---------- -------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Non-accrual loans............................... $ 33,467 $ 21,834 $ 17,304 Accrual loans 90 days past due.................. 3,025 1,711 1,763 Real estate owned ("REO")....................... 4,941 17,467 842 ---------- ---------- -------- Total non-performing assets..................... $ 41,433 $ 41,012 $ 19,909 ========== ========== ======== Beginning allowance for possible loan losses.... $ 27,406 $ 25,222 $ 22,819 Provision for loan losses....................... 14,575 11,980 16,873 Reserves established with portfolio acquisitions.................................. -- 3,605 -- Charge-offs: Commercial finance and other loans............ 2,421 4,265 7,614 Thrift and loan: Commercial real estate loans............... 9,248 4,833 176 Residential real estate loans.............. 1,012 2,685 4,835 Contract and installment loans............. 480 2,434 2,627 Finance leases............................. -- 37 314 ---------- ---------- -------- Total charge-offs............................. 13,161 14,254 15,566 ---------- ---------- -------- Recoveries: Commercial finance and other loans............ 1,034 207 360 Thrift and loan: Commercial real estate loans............... 37 10 -- Residential real estate loans.............. 1,659 265 128 Contract and installment loans............. 230 349 468 Finance leases............................. 1 22 140 ---------- ---------- -------- Total recoveries.............................. 2,961 853 1,096 ---------- ---------- -------- Net charge-offs................................. 10,200 13,401 14,470 ---------- ---------- -------- Ending allowance for possible loan losses....... $ 31,781 $ 27,406 $ 25,222 ========== ========== ======== Allocation of allowance for possible loan losses: Commercial finance and other loans............ $ 14,283 $ 13,015 $ 13,092 Thrift and loan............................... 17,498 14,391 12,130 ---------- ---------- -------- Total allowance for possible loan losses...... $ 31,781 $ 27,406 $ 25,222 ========== ========== ======== Total loans receivable.......................... $1,530,824 $1,468,180 $871,665 Average total loans receivable.................. 1,505,779 1,082,622 783,132 Net charge-offs to average total loans receivable.................................... 0.68% 1.24% 1.85% Non-performing assets to total loans receivable.................................... 2.71% 2.79% 2.28% Allowance for possible loan losses to total loans receivable.............................. 2.08% 1.87% 2.89% Allowance for possible loan losses to non-performing assets......................... 76.70% 66.82% 126.69% Allowance for possible loan losses to non-accrual loans and accrual loans 90 days past due...................................... 87.09% 116.40% 132.28%
Non-performing assets remained relatively stable at December 31, 1995 as compared to December 31, 1994, due primarily to a $11.6 million increase in non-accrual loans, more than offset by a $12.5 million decrease in REO assets. Of the increase in non-accrual loans, $8.9 million is represented by one loan in the 34 36 commercial finance operation. The collateral securing this loan is closely monitored by the Company and the Company believes it currently has adequate reserves in the allowance for possible loan losses to cover any potential loss on this loan. The decrease in REO assets during 1995 relates entirely to the real estate lending operation. At December 31, 1995, the balance in REO includes eight commercial real estate properties totaling $4.4 million. Non-performing assets increased $21.1 million at December 31, 1994 as compared to the prior year end due primarily to a $16.6 million increase in REO assets in the real estate lending operation. The higher provision for loan losses in 1995 as compared to 1994 is consistent with the significant overall growth in average loans receivable. Charge-offs in 1995 as compared to 1994 decreased in the commercial finance operation and remained relatively stable in the real estate lending operation. In 1994 total charge-offs decreased from the prior year due to lower charge-offs in the commercial finance operation, partially offset by higher charge-offs in the real estate lending operation. The commercial finance charge-offs were unusually high in 1993 as the Company charged-off substantially all of the loans from the Company's terminated commercial mortgage banking operation. (These loans had already been provided for in the allowance for possible loan losses in prior years.) Higher charge-offs in the real estate lending operation in 1994 as compared to 1993 are consistent with the significant growth in the real estate loan portfolio in 1994. Overall, total charge-offs have decreased over the three years ended December 31, 1995 and these reductions occurred during a period in which loans receivable increased. Included in the reserves established with portfolio acquisitions in 1994 is $3.2 million in reserves relating to a $225 million commercial real estate loan portfolio acquisition by Fremont Investment & Loan which was completed in August 1994. LIQUIDITY AND CAPITAL RESOURCES The property and casualty insurance operations must have cash and liquid assets available to meet their obligations to policyholders in accordance with contractual obligations, in addition to having the funds available to meet ordinary operating costs. These operations have several sources of funds to meet their obligations, including cash flow from operations, recoveries from reinsurance contracts and investment securities. By statute, the majority of the cash from these operations is required to be invested in investment grade securities to provide protection for policyholders. The Company invests in fixed income and preferred equity securities with an objective of providing a reasonable return while limiting credit and liquidity risk. The Company's investment portfolio had an unrealized gain (loss) of $33.2 million and $(107.9) million at December 31, 1995 and 1994, respectively. The Company's thrift and loan subsidiary finances its lending activities primarily through customer deposits, which have grown from $747 million at December 31, 1994 to $926 million at December 31, 1995. In January 1995, Fremont Investment & Loan became eligible for financing through the Federal Home Loan Bank of San Francisco. This financing is available at varying rates and terms. As of December 31, 1995, $170 million was available under the facility and no borrowings were outstanding. The Company's commercial finance operation funds its lending activities primarily through its asset securitization program, an unsecured revolving line of credit with a syndicated bank group and its capital. The asset securitization program was established to provide a stable and cost effective source of funds to facilitate the expansion of this business. The proceeds from the sale of the initial series of asset-backed certificates ("Series A") under this program in April 1993 were $200 million bearing interest at the rate of LIBOR plus 0.47%. In November 1993, an additional $100 million of these certificates ("Series B") were sold bearing interest at the rate of LIBOR plus 0.5%. The securities issued in this program have a scheduled maturity of three and four years, but could mature earlier depending on fluctuations in outstanding balances of loans in the portfolio and other factors. During April 1995, the Company issued $30 million in subordinated variable rate asset-backed certificates, which mature in 2000, via a private placement. As of December 31, 1995, up to $500 million in additional publicly offered asset-backed certificates may be issued pursuant to a shelf registration statement to fund future growth in the commercial finance loan portfolio. In February 1996, $135 million in asset-backed certificates ("Series C") were issued which mature in 2000. The proceeds were used, in conjunction with existing cash, to retire the $200 million in Series A certificates. The Series B 35 37 certificates are scheduled to mature in 1997. In December 1995, a commercial paper facility was established as part of the asset securitization program. This facility provides for the issuance of up to $150 million in commercial paper, dependent upon the level of assets within the asset securitization program. This facility, which expires in December 1998, had no amounts outstanding under it as of December 31, 1995. The commercial finance operation's unsecured revolving line of credit is with a syndicated bank group that presently permits borrowings of up to $300 million, of which $185 million was outstanding as of December 31, 1995. This credit line is primarily used to finance assets which are not included in the Company's asset securitization program. This credit line expires August 1998. As a holding company, Fremont General pays its operating expenses, meets its other obligations and pays stockholders' dividends from its cash on hand, management fees paid by its subsidiaries and dividends paid by its subsidiaries. During 1995, stockholders' dividends totaling $12.6 million were paid. Stockholders' dividends declared aggregated $13.1 million, $11.5 million and $10.1 million during 1995, 1994 and 1993, respectively. Several of the Company's subsidiaries are subject to certain statutory and regulatory restrictions and various agreements, principally loan agreements, that restrict their ability to distribute dividends to the Company. The Company expects that during the next few years dividends from its subsidiaries will consist of dividends from its property and casualty subsidiaries and dividends on preferred stock of its thrift and loan holding company and commercial finance subsidiaries. The maximum amount available for payment of dividends by the property and casualty subsidiaries at December 31, 1995 without prior regulatory approval is approximately $30 million. To facilitate general corporate operations, in August 1994 the Company obtained a revolving line of credit with a syndicated bank group that permitted borrowings of up to $150 million. In August 1995, the Company negotiated an increase of this line to $200 million, of which $85 million was outstanding as of December 31, 1995. In August 1997, this credit line converts to a term loan of up to $100 million, with scheduled semi-annual payments through August 2001. In addition, in July 1994 the Company replaced its internally financed loan to its Employee Stock Ownership Plan ("ESOP") with an external bank-financed loan totaling $11 million. The maximum principal amount of this loan was increased to $15 million in August 1995. The loan is due in seven equal annual installments commencing on April 1, 1996 and is secured by certain shares of the ESOP. The balance outstanding at December 31, 1995 was $6.6 million. The interest and principal payments are guaranteed by the Company. Interest is based on, at the Company's option, the bank's prime lending rate, LIBOR plus 1% or an applicable certificate deposit rate. The rate at December 31, 1995 was 6.69%. On February 22, 1995, the Company completed the acquisition of Casualty which resulted in the disbursement of funds totaling $256.5 million, comprised of $231.5 million in cash and $25 million in a note payable to the seller. In September 1995, the note payable to the seller was refinanced using the Company's existing revolving line of credit. The cash used to fund the acquisition includes $55 million in borrowings under the Company's existing line of credit and the remainder from internally generated funds. See "General. " On March 1, 1996, Fremont General Financing I, a statutory business trust (the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100 million of 9% Trust Originated Preferred SecuritiesSM ("the Preferred Securities") in a public offering. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust. The proceeds from the sale of the Preferred Securities were invested in 9% Junior Subordinated Debentures of the Company ("the Junior Subordinated Debentures"). The $100 million Junior Subordinated Debentures are the sole asset of the Trust. The Preferred Securities will be redeemed upon maturity of the Junior Subordinated Debentures in 2026, subject to the election available to the Company to extend the maturity up to 2045, and they may be redeemed, in whole or in part, at any time on or after March 31, 2001 and under certain specified circumstances. The Junior Subordinated Debentures rank pari passu with the Company's $373,750,000 aggregate principal amount at maturity of Liquid Yield Option(TM) Notes due 2013, and subordinate and junior to all senior indebtedness of the Company. Payment of distributions out of cash held by the Trust, and payments on liquidation of the Trust or the redemption of the Preferred Securities are guaranteed by the Company. The Company will use the proceeds from the sale of the Junior Subordinated Debentures to reduce outstanding debt under the Company's revolving line of credit by approximately $50 million, with the remaining proceeds used for general corporate purposes. 36 38 Net cash provided by operating activities of continuing operations was $39.5 million, $68.0 million and $85.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. Net cash provided by continuing operations decreased in 1995 over 1994 due primarily to the following items: (i) a smaller net decrease in agents' balances and reinsurance recoverables; (ii) an increase in accrued investment income; (iii) a greater decrease in claims and policy liabilities; (iv) and higher policy acquisition costs deferred, net of amortization. These conditions were partially offset by higher net income, a net increase in other liabilities, net of other assets and a significant increase in the provision for deferred income taxes. The decreases in agents' balances and claims and policy liabilities are primarily due to lower premium volume in the Company's California workers' compensation insurance business. Higher policy acquisition costs deferred are due primarily to increases in annuity contract receipts in the Company's life insurance operation (see Notes F and P of Notes to Consolidated Financial Statements). The net increase in other liabilities, net of other assets, is due primarily to increased accruals for other operating costs. Net cash provided by continuing operations decreased in 1994 compared to the prior year due primarily to a decrease in claims and policy liabilities, partially offset by an increase in net income and a net decrease in agents' balances and reinsurance recoverables. Net cash used in investing activities was $514.0 million, $551.1 million and $448.1 million in 1995, 1994 and 1993, respectively. Net cash used in investing activities decreased in 1995 as compared to 1994, due primarily to a decrease in bulk loan purchases, net of loan repayments, in the real estate lending operation. This net decrease is due in part to $366 million in bulk commercial real estate loan purchases which the Company completed in 1994. The decrease in net loan purchases was offset partially by the acquisition of Casualty and an increase in investment purchases, net of sales, maturities, and calls. Net cash used in investing activities increased in 1994 as compared to 1993, due primarily to an increase in bulk loan purchases and loan originations, net of loan repayments, offset partially by a decrease in investment purchases, net of sales, maturities and calls. Net cash provided by financing activities was $483.0 million, $485.6 million and $346.7 million for 1995, 1994 and 1993, respectively. Net cash provided by financing activities decreased modestly in 1995 as compared to 1994, due primarily to a lower increase in thrift deposits partially offset by a net increase in short-term and long-term debt and an increase in annuity contract receipts. Repayments of short-term debt increased and proceeds from long-term debt increased primarily due to a reclassification of the commercial finance operation's credit line from short-term debt to long-term debt as of December 31, 1995. This reclassification was made pursuant to the terms of the credit line, which was renegotiated in August 1995. Net cash provided by financing activities increased in 1994 as compared to 1993, due primarily to an increase in net thrift deposits, partially offset by a net decrease in short-term and long-term debt. The 1993 year is additionally impacted by $40.8 million in proceeds from a public offering of the Company's Common Stock in July 1993. The amortized cost of the Company's invested assets were $1.91 billion, $.99 billion, and $1.06 billion at December 31, 1995, 1994 and 1993, respectively. Contributing to the $.92 billion increase in the invested assets was approximately $512 million resulting from the Casualty acquisition and $199 million increase in net annuity receipts in the Company's life insurance operation. The modest decrease in 1994 as compared to 1993 is due primarily to a decrease in premium volume. As of July 1, 1995 the Company's held to maturity portfolio totaling $319.4 million was transferred to available for sale in accordance with the provisions of Financial Accounting Standards Board Statement 115 ("FASB 115"), "Accounting for Certain Investments in Debt and Equity Securities." In addition, at this date there was a net unrealized gain of $9.9 million (net of deferred taxes of $5.3 million) on the held to maturity portfolio which was transferred to stockholders' equity. The transfer became necessary as the Company sold certain investment securities in July which were classified as held to maturity at June 30, 1995. These investment sales were part of an overall review and restructuring of the investment portfolio performed in conjunction with the investing of cash received in the acquisition of Casualty. This review and restructuring caused the Company to consider the appropriateness of the remaining held to maturity investments, which resulted in the reclassification. The Company's property and casualty premium to surplus ratio for the year ended December 31, 1995 was 2.3 to 1, which is within industry guidelines. The FDIC has established certain capital and liquidity 37 39 standards for its member institutions, and Fremont Investment & Loan was in compliance with these standards as of December 31, 1995. See "Item 1. Business -- Regulation -- Thrift and Loan Regulation." In August 1994 an additional $23 million was contributed to the capital of Fremont Investment & Loan to support the growth in the loan portfolio during 1994. The Company believes that its existing cash, its bank lines of credit, revenues from operations and other available sources of liquidity will be sufficient to satisfy its liquidity needs for the next several years. The Company's strategy is to expand its business to the extent possible without adversely impacting its loan portfolio and policyholder base. However, the Company's strategic model is not dependent on growth as a source of liquidity. While the level of revenues will obviously affect results of operations, the Company's liquidity is not dependent on future revenue growth. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121 ("FASB 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ", which requires impairment losses to be recorded on long-lived assets used in operations, including intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FASB 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt FASB 121 in the first quarter of 1996 and, based on current circumstances, the effect of adoption will not be material. Also, in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for Stock-Based Compensation" that is effective for fiscal years beginning after December 15, 1995. FASB 123 establishes a method of accounting for stock-based compensation that is based on the fair value of stock options and similar instruments and encourages, but does not require, adoption of that method. The Company has elected to continue following Accounting Principles Board Opinion No. 25 for measuring compensation cost. Pursuant to FASB 123, the Company will disclose pro forma net income and earnings per share calculated as if the recognition and measurement provisions of the new standard had been adopted. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements, including supplementary data, are set forth in the "Index" on page 43 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 38 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the subheadings "Election of Directors," "Executive Officers and Compensation," and the last paragraph under the subheading "Principal and Management Stockholders" in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the subheadings "Election of Directors," "Compensation of Directors," "Officers and Compensation," "Summary Compensation Table," "Summary Compensation Table -- Explanations," "Option/SAR Grants in Last Fiscal Year," "Option Exercises and Year-End Values Table/Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Employment Agreements" and "Retirement and Other Benefit Plans, A-D" in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the subheading "Principal and Management Stockholders" in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information immediately following the caption "Election of Directors" and "Employment Agreements" in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders is incorporated herein by reference. 39 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (a)(2) and (d) FINANCIAL STATEMENTS AND SCHEDULES. Reference is made to the "Index -- Consolidated Financial Statements and Financial Statements Schedules -- Annual Report on Form 10-K" filed as part of this Annual Report. (a)(3) an (c) EXHIBITS.
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------------------------ 2.1 Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 2.2 Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit No. 3.1 to Registration Statement on Form S-3 File No 33-64771 which was declared effective on March 1, 1996, and incorporated herein by reference.) 3.2 Certificate of Amendment of Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit 3.2 to Registration Statement on Form S-3 File No. 33-64771 which was declared effective on March 1, 1996 and herein incorporated by reference.) 3.3 Amended and Restated By-Laws of Fremont General Corporation. 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Filed as Exhibit No. (4)(iv) to Registration Statement on Form S-3 filed on October 1, 1993, and incorporated herein by reference.) 4.3 Indenture among the Registrant, the Trust and First Interstate Bank of California, a California banking corporation, as trustee. 4.4 Declaration of Trust among the Registrant, the Regular Trustees and The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee. 4.5 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. 4.6 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. 4.7 Common Securities Guarantee Agreement by the Registrant. 4.8 Form of Preferred Securities. (included in Exhibit 4.5). 4.9 Form of 9% Junior Subordinated Debenture. (included in Exhibit 4.3). 10.1 Fremont General Corporation Employee Stock Ownership Plan as amended.
40 42
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------------------------ 10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan. 10.3 Fremont General Corporation and Affiliated Companies Investment Incentive Program as amended. 10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit No. (10)(xi) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 10.4(b) Amendment to Trust Agreement for Investment Incentive Program. 10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No. (10)(v) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1990, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(b) Amendment to Supplemental Retirement Plan. 10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior Supplemental Retirement Plan of the Company, as amended. 10.7 Senior Supplemental Retirement Plan, as amended. 10.8(a) Excess Benefit Plan of The Company. (Filed as Exhibit No. (10)(vi) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1993, Commission File No.> 1-8007 and incorporated herein by reference.) 10.8(b) Amendment to Excess Benefit Plan of the Company. 10.8(c) Trust Agreement for Excess Benefit Plan. 10.9 Non-Qualified Stock Option Plan of 1989 of the Company. 10.10 Long-Term Incentive Compensation Plan of the Company. 10.11 1995 Restricted Stock Award Plan. 10.12 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust Company of California. 10.13 Employment Agreement between the Company and James A. McIntyre. (Filed as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(a) Employment Agreement between the Company and Louis J. Rampino. 10.14(b) Employment Agreement between the Company and Wayne R. Bailey. 10.15 Management Continuity Agreement between the Company and Raymond G. Meyers. 10.16 1995 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. (10)(vi) to Quarterly Report on Form 10-Q, for the period ended June 30, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.17 Continuing Compensation Plan for Retired Directors. 10.18 Non-Employee Directors' Deferred Compensation Plan. 10.19(a) Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No. (10)(xiv) to Quarterly Report on Form 10-Q for the period ended September 30, 1994, Commission File Number 1-8007, and incorporated herein by reference.) 10.19(b) Amendment to Credit Agreement.
41 43
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------------------------ 10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in connection with the Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. 10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of California as trustee for the Fremont General Corporation Employee Stock Ownership Trust. The Plan Committee (hereinafter described) on behalf of the Fremont General Corporation Employee Stock Ownership Plan, Fremont General Corporation, and First Interstate Bank of California August 10, 1995. (Filed as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.) (11) Statement re: Computation of per share earnings. (21) Subsidiaries of the Company. (23) Consent of Ernst & Young LLP independent Auditors. (27) Financial Data Schedule (28) Information from reports provided to state insurance regulatory authorities.
(b) REPORT ON FORM 8-K. None filed during the quarter ended December 31, 1995. 42 44 FREMONT GENERAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ANNUAL REPORT ON FORM 10-K ------------------------ INDEX
PAGES ----- Report of Independent Auditors....................................................... 44 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1995 and 1994....................... 45 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993................................................ 46 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993................................................ 47 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993................................................ 48 Notes to Consolidated Financial Statements......................................... 49 Schedules: III -- Condensed Financial Information of Registrant........................... 72 V -- Supplementary Insurance Information..................................... 76 VI -- Reinsurance............................................................. 77 VIII -- Valuation and Qualifying Accounts....................................... 78 Supplemental Information Concerning Property/Casualty Insurance X -- Operations.............................................................. 79
All other schedules are omitted because of the absence of conditions under which they are required or because the necessary information is provided in the consolidated financial statements or notes thereto. 43 45 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Fremont General Corporation We have audited the accompanying consolidated balance sheets of Fremont General Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Fremont General Corporation and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note A to the consolidated financial statements, the Company made certain accounting changes in 1994. ERNST & YOUNG LLP Los Angeles, California March 14, 1996 44 46 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 1995 1994 ---------- ---------- (THOUSANDS OF DOLLARS) ASSETS Securities available for sale at fair value: Fixed maturity investments (cost: 1995 -- $1,255,434; 1994 -- $311,701)................................................ $1,296,550 $ 235,442 Non-redeemable preferred stock (cost: 1995 -- $285,337; 1994 -- $213,935)................................................ 277,451 189,632 ----------- ----------- Total securities available for sale......................... 1,574,001 425,074 Securities held to maturity at amortized cost: Fixed maturity investments (fair value: 1994 -- $199,103)........... -- 206,416 Loans receivable...................................................... 1,499,043 1,440,774 Short-term investments................................................ 362,163 255,751 Other investments..................................................... 1,726 1,677 ----------- ----------- TOTAL INVESTMENTS AND LOANS................................. 3,436,933 2,329,692 Cash.................................................................. 39,559 31,058 Accrued investment income............................................. 30,396 13,622 Premiums receivable and agents' balances.............................. 107,973 48,556 Reinsurance recoverable on paid losses................................ 9,422 7,204 Reinsurance recoverable on unpaid losses.............................. 289,461 136,151 Deferred policy acquisition costs..................................... 76,638 59,286 Costs in excess of net assets acquired................................ 70,656 28,776 Deferred income taxes................................................. 78,619 88,426 Other assets.......................................................... 75,240 54,806 Assets held for discontinued operations............................... 262,502 336,813 ----------- ----------- TOTAL ASSETS................................................ $4,477,399 $3,134,390 =========== =========== LIABILITIES Claims and policy liabilities: Losses and loss adjustment expenses................................. $1,455,692 $ 746,661 Life insurance benefits and liabilities............................. 374,724 172,425 Unearned premiums................................................... 100,481 47,551 Dividends to policyholders.......................................... 40,822 46,067 ----------- ----------- TOTAL CLAIMS AND POLICY LIABILITIES......................... 1,971,719 1,012,704 Reinsurance premiums payable and funds withheld....................... 5,452 6,961 Other liabilities..................................................... 81,371 68,721 Thrift deposits....................................................... 926,312 746,977 Short-term debt....................................................... 72,191 176,325 Long-term debt........................................................ 693,276 468,390 Liabilities of discontinued operations................................ 228,988 303,299 ----------- ----------- TOTAL LIABILITIES........................................... 3,979,309 2,783,377 Commitments and contingencies......................................... STOCKHOLDERS' EQUITY Common Stock, par value $1 per share -- Authorized: 1995 -- 49,500,000 and 1994 -- 30,000,000 shares; issued and outstanding: (1995 -- 25,393,000 and 1994 -- 15,388,000)......................... 25,393 15,388 Additional paid-in capital............................................ 110,103 80,264 Retained earnings..................................................... 347,607 331,713 Unearned Employee Stock Ownership Plan shares......................... (6,612) (10,987) Net unrealized gain (loss) on investments, net of deferred taxes...... 21,599 (65,365) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY.................................. 498,090 351,013 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $4,477,399 $3,134,390 =========== ===========
See notes to consolidated financial statements. 45 47 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES Property and casualty premiums earned.......................... $606,917 $433,584 $455,765 Net investment income.......................................... 119,523 76,821 77,198 Loan interest.................................................. 162,992 113,382 87,244 Realized investment gains (losses)............................. 1 (315) 2,165 Other revenue.................................................. 34,381 29,676 29,033 -------- -------- -------- Total Revenues............................................ 923,814 653,148 651,405 EXPENSES Losses and loss adjustment expenses............................ 461,333 273,599 319,153 Policy acquisition costs....................................... 126,099 86,990 82,255 Provision for loan losses...................................... 14,575 11,980 16,873 Other operating costs and expenses............................. 120,963 90,078 79,180 Dividends to policyholders..................................... -- 49,654 45,218 Interest expense............................................... 100,517 59,276 44,378 -------- -------- -------- Total Expenses............................................ 823,487 571,577 587,057 -------- -------- -------- Income before taxes............................................ 100,327 81,571 64,348 Income tax expense............................................. 32,305 25,759 21,638 -------- -------- -------- NET INCOME........................................... $ 68,022 $ 55,812 $ 42,710 ======== ======== ======== PER SHARE DATA: Net Income: Primary...................................................... $ 2.61 $ 2.16 $ 1.85 Fully diluted................................................ 2.17 1.82 1.65
See notes to consolidated financial statements. 46 48 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- --------- ----------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income......................................................... $ 68,022 $ 55,812 $ 42,710 Adjustments to reconcile net income to net cash provided by operating activities: Change in premiums receivable and agents' balances and reinsurance recoverable on paid losses........................ 7,495 32,411 (10,060) Change in accrued investment income.............................. (21,186) 5,349 (6,429) Change in claims and policy liabilities.......................... (72,824) (43,741) 29,750 Amortization of policy acquisition costs......................... 126,099 86,990 82,255 Policy acquisition costs deferred................................ (148,365) (91,048) (79,936) Provision for deferred income taxes.............................. 22,810 (4,391) (973) Provision for loan losses........................................ 14,575 11,980 16,873 Provision for depreciation and amortization...................... 20,334 15,709 10,512 Net amortization on fixed maturity investments................... (1,793) 1,001 1,270 Realized investment (gains) losses............................... (1) 315 (2,165) Change in other assets and liabilities........................... 24,323 (2,338) 1,316 ----------- ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 39,489 68,049 85,123 INVESTING ACTIVITIES Securities available for sale: Purchases of securities.......................................... (2,773,842) (975,495) (1,079,114) Sales of securities.............................................. 2,000,772 1,302,486 788,946 Securities matured or called..................................... 101,957 61,752 24,907 Securities held to maturity: Purchases of securities.......................................... (117,660) (206,416) -- Sales of securities.............................................. -- -- 6,354 Securities matured or called..................................... 5,464 -- 65,946 Decrease (increase) in short-term and other investments............ 615,705 (116,668) (74,691) Loan originations and bulk purchases funded........................ (458,801) (727,715) (401,493) Receipts from repayments of loans.................................. 377,768 121,404 227,620 Acquisition of Casualty Insurance Company, less cash acquired...... (255,803) -- -- Purchases of property and equipment................................ (9,527) (10,402) (6,557) ----------- ---------- ----------- NET CASH USED IN INVESTING ACTIVITIES......................... (513,967) (551,054) (448,082) FINANCING ACTIVITIES Proceeds from short-term debt...................................... 30,134 140,813 29,740 Repayments of short-term debt...................................... (199,268) (46,646) (159,666) Proceeds from long-term debt....................................... 325,000 26,000 435,013 Repayments of long-term debt....................................... (42,808) (12,500) (56,790) Net increase in thrift deposits.................................... 179,335 334,661 45,141 Annuity contract receipts.......................................... 217,648 57,929 27,315 Annuity contract withdrawals....................................... (18,874) (5,952) (1,221) Dividends paid..................................................... (12,618) (11,344) (9,369) Proceeds from sale of Common Stock................................. -- -- 40,803 Stock options exercised............................................ 80 22 251 Purchase of fractional shares...................................... (25) -- (8) Decrease (increase) in unearned Employee Stock Ownership Plan shares........................................................... 4,375 2,647 (4,475) ----------- ---------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 482,979 485,630 346,734 ----------- ---------- ----------- INCREASE (DECREASE) IN CASH........................................ 8,501 2,625 (16,225) Cash at beginning of year........................................ 31,058 28,433 44,658 ----------- ---------- ----------- CASH AT END OF YEAR................................................ $ 39,559 $ 31,058 $ 28,433 =========== ========== ===========
See notes to consolidated financial statements. 47 49 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET ADDITIONAL UNEARNED UNREALIZED COMMON PAID-IN RETAINED ESOP GAIN (LOSS) ON STOCK CAPITAL EARNINGS SHARES INVESTMENTS TOTAL ------- ---------- -------- -------- -------------- -------- (THOUSANDS OF DOLLARS) Balance at January 1, 1993...... $ 8,200 $ 17,891 $254,778 $ (9,159) $ -- $271,710 Net income for 1993........... -- -- 42,710 -- -- 42,710 Cash dividends to stockholders............... -- -- (10,089) -- -- (10,089) Conversion of 7 1/4% debentures................. 1,201 27,266 -- -- -- 28,467 Issuance of Common Stock...... 1,250 39,553 -- -- -- 40,803 Three-for-two stock split..... 4,725 (4,725) -- -- -- -- Purchase of fractional shares..................... -- (8) -- -- -- (8) Stock options exercised....... 11 240 -- -- -- 251 Additional loan to ESOP less amount collected........... -- -- -- (4,475) -- (4,475) ------- -------- -------- -------- -------- -------- Balance at December 31, 1993.... 15,387 80,217 287,399 (13,634) -- 369,369 Cumulative effect of change in accounting for investments................ -- -- -- -- 28,532 28,532 Net income for 1994........... -- -- 55,812 -- -- 55,812 Cash dividends to stockholders............... -- -- (11,498) -- -- (11,498) Stock options exercised....... 1 21 -- -- -- 22 ESOP contribution accrual cost to market adjustment....... -- 26 -- -- -- 26 ESOP shares allocated less additional shares purchased.................. -- -- -- 2,647 -- 2,647 Net change in unrealized gain (loss) on investments, net of deferred taxes.......... -- -- -- -- (93,897) (93,897) ------- -------- -------- -------- -------- -------- Balance at December 31, 1994.... 15,388 80,264 331,713 (10,987) (65,365) 351,013 Net income for 1995........... -- -- 68,022 -- -- 68,022 Cash dividends to stockholders............... -- -- (13,080) -- -- (13,080) Ten percent stock dividend.... 1,538 37,498 (39,036) -- -- -- Three-for-two stock split..... 8,464 (8,464) -- -- -- -- Purchase of fractional shares..................... -- (13) (12) -- -- (25) Stock options exercised....... 3 77 -- -- -- 80 Accrued reductions to option exercise price............. -- 741 -- -- -- 741 ESOP shares allocated......... -- -- -- 4,375 -- 4,375 Net change in unrealized gain (loss) on investments, net of deferred taxes.......... -- -- -- -- 86,964 86,964 ------- -------- -------- -------- -------- -------- Balance at December 31, 1995.... $25,393 $ 110,103 $347,607 $ (6,612) $ 21,599 $498,090 ======= ======== ======== ======== ======== ========
See notes to consolidated financial statements. 48 50 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Fremont General Corporation, a nationwide insurance and financial services holding company, operates through its wholly-owned subsidiaries in select businesses in niche markets. The three core operating business lines are workers' compensation insurance, real estate lending and commercial finance lending. Additionally, on a smaller scale, various other insurance products are underwritten. Workers' compensation insurance has accounted for over 90% of property and casualty premiums earned. In 1995 workers' compensation premiums were evenly divided between the western region, primarily California, and the mid-west region, primarily Illinois. Prior to 1995, substantially all of the premium revenue was derived from the California market. Real estate lending represents over 50% of loan interest revenues (1994 -- 51%; 1993 -- 54%) and represents both commercial and residential lending secured by real estate located in California. Commercial finance accounts for substantially all of the remaining loan interest revenues (1994 -- 44%; 1993 -- 38%) and represents asset-based loans to middle market companies nationwide (32% in California), primarily secured by accounts receivable and inventory. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, as to the subsidiary insurance companies, differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant accounting policies followed by Fremont General Corporation and subsidiaries ("the Company") that materially affect financial reporting are summarized below. Consolidation: The consolidated financial statements include the accounts and operations, after intercompany eliminations, of Fremont General Corporation and all subsidiaries. See Note M for the accounting treatment of discontinued operations. Use of Estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investments: Fixed maturity investments represent bonds and redeemable preferred stocks that mature more than one year after the purchase date. Non-redeemable preferred stocks are equity securities, the majority of which include adjustable dividend yield provisions. As of January 1, 1994, the Company adopted the provisions of Financial Accounting Standards Board Statement 115 ("FASB 115"), "Accounting for Certain Investments in Debt and Equity Securities." The cumulative effect as of January 1, 1994 of adopting FASB 115 was to increase stockholders' equity by $28,532,000 (net of deferred income taxes of $15,634,000) to reflect the net unrealized holding gains on securities classified as available for sale that were previously carried at amortized cost. There was no effect on net income. Premiums and discounts on investments are amortized using the interest method over the contractual lives of the investments. Adjustments for other-than-temporary market declines are recorded when determination of loss is probable and is reflected with a write-down of amortized cost to net realizable value. Short-term investments are carried at cost, which approximates their fair value. Realized investment gains and losses are included as a component of revenues based on specific identification of the investment sold. Loans: Loans are stated net of unearned income and allowance for possible loan losses. The allowance is increased by provisions charged against operations and reduced by loan amounts charged off by management. The allowance is maintained at a level considered adequate to provide for potential losses on loans based on management's evaluation of the loan portfolio. While management uses all available information to estimate the level of the allowance for credit losses, future additions may be necessary based on changes in the amounts and timing of future cash flows expected due to changes in collateral values supporting loans, general economic conditions and borrowers' financial conditions. 49 51 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Beginning in 1995, the Company adopted FASB Statement No. 114 ("FASB 114"), "Accounting by Creditors for Impairment of a Loan." Under FASB 114, the 1995 allowance for credit losses on loans that are identified for evaluation in accordance with the new standard are based on discounted cash flows using the loans' effective interest rate or the fair value of the collateral for collateral dependent loans. Prior to 1995, the allowance for credit losses on these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The effect on net income was not material. Management classifies loans as non-accrual when the collection of future interest is not assured by the borrower's financial condition and the value of underlying collateral and guarantees securing the loan. Subsequent collections on non-accrual loans are applied as a reduction of principal. The Company's charge-off policy is based on a monthly loan-by-loan review. Loans in process of foreclosure, repossessed assets, and in-substance foreclosures are included in the financial statements at the lower of cost or estimated realizable value (net of estimated costs to sell). Estimated realizable values are based on management's evaluation of numerous factors, including appraisals, sales of comparable assets and estimated market conditions. Furniture and Equipment: Furniture and equipment are included in other assets and are stated at cost, less accumulated depreciation. Leasehold improvements are amortized over the terms of the lease. Generally, depreciation is computed by the straight-line method over periods ranging from three to twelve years. Premium Income: Revenues from property and casualty premiums are recognized proportionately over the terms of the related policies. Direct property and casualty premiums earned but not billed at the end of each accounting period are estimated and accrued, and differences between such estimates and final billings are included in current operations. Revenues for universal life and investment-type insurance products consist of policy charges for the cost of insurance, policy initiation, administration and surrender fees and are included in other revenue. Premiums receivable and agents' balances and reinsurance recoverable on paid and unpaid losses include allowances for doubtful accounts of $11,147,000 and $6,959,000 at December 31, 1995 and 1994, respectively. Losses and Loss Adjustment Expenses: The estimated liabilities for losses and loss adjustment expenses include the accumulation of estimates for losses and claims reported prior to the balance sheet dates, estimates (based on projections of historical developments) of claims incurred but not reported and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. Amounts reported are estimates of the ultimate costs of settlement, net of subrogation and salvage recoveries, which are necessarily subject to the impact of future changes in economic and social conditions. Management believes that, given the inherent variability in any such estimates, the aggregate reserves are within a reasonable and acceptable range of adequacy. Reserves are continually monitored and reviewed, and as settlements are made or reserves adjusted, differences are included in current operations. Included in the loss and loss adjustment expense liability recorded on the consolidated balance sheet at December 31, 1995 is $100,413,000 of workers' compensation accident and health permanent disability and death reserves which have been discounted at 5%. These reserves arise from the acquisition on February 22, 1995 of Casualty Insurance Company ("Casualty"), which is an Illinois domiciled insurance company (see Note B). The Company has continued the practice previously adopted by Casualty of discounting permanent disability loss reserves for both statutory accounting practices and generally accepted accounting principles. Unearned Premiums: Property and casualty insurance unearned premiums are calculated using the monthly pro rata basis. Life Insurance Benefits and Liabilities: Policyholder contract liabilities for universal life and investment-type products represent the premiums received plus accumulated interest, less mortality and other administrative charges under the contracts and before applicable surrender charges. Policy benefits and claims 50 52 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that are charged to expense include benefit claims incurred in excess of related policy account balances. Interest credited on such policies ranged from 4.5% to 6.5% at December 31, 1995. (See Notes F and P). Deferred Policy Acquisition Costs: Commissions, premium taxes and certain sales and underwriting expenses are capitalized and amortized as premiums are earned over the terms of the related property and casualty policies. Anticipated investment income is considered in determining if premium deficiencies exist. The costs of acquiring new and renewal life and annuity insurance contracts, principally commissions and certain variable selling expenses which vary with, and are primarily related to, the acquisition of new and renewal insurance contracts have been deferred. These deferred acquisition costs are being amortized over anticipated gross margins for such contracts. Dividends to Policyholders: Dividends, if applicable, to policyholders on workers' compensation insurance contracts are accrued during the period in which the related premiums are earned. Thrift Deposits: Thrift deposits consist primarily of investment certificates at the Company's California thrift and loan subsidiary. Such balances are credited with interest at rates ranging from 3.60% to 8.81% at December 31, 1995. The estimated fair value of the thrift deposits was $929,560,000 at December 31, 1995. Intangibles: The excess of the costs of acquisitions over net assets acquired (net of accumulated amortization: 1995 -- $17,513,000; 1994 -- $14,357,000) is being amortized over various periods ranging primarily from 7 to 25 years, which represents the estimated life of the intangible assets associated with such acquisitions. Additionally, the trade name acquired in the acquisition of Casualty (net of accumulated amortization: 1995 -- $326,000) is being amortized over 40 years. See Note B regarding intangibles related to the acquisition of Casualty. Per Share Data: Primary earnings per share data have been computed based on the weighted average number of common and common equivalent shares outstanding, which were as follows: 1995 -- 26,079,000, 1994 -- 25,823,000 and 1993 -- 23,039,000. The weighted average number of shares were adjusted retroactively for a 10% stock dividend distributed June 15, 1995 and a three-for-two stock split effected January 8, 1996. Stock options granted to certain key members of management are considered common stock equivalents for the computation of primary earnings per share. For the computation of fully-diluted earnings per share, stock options (see Note J) and convertible securities (see Note I) had a dilutive effect of $0.44, $0.34 and $0.20 per share for 1995, 1994 and 1993, respectively. Fully-diluted earnings per share were computed based on 33,343,000, 33,034,000 and 28,243,000 weighted average number of shares outstanding for 1995, 1994 and 1993, respectively. Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, fixed maturity securities, preferred stocks, mortgage and commercial finance loans and reinsurance recoverables. The Company places its temporary cash investments with high credit quality financial institutions and limits the amounts of credit exposure to any one financial institution. Concentrations of credit risk with respect to investments in fixed maturities, preferred stocks and commercial finance loans are limited due to the large number of such investments and their distribution across many different industries and geographics. Concentration of credit risk with respect to thrift and loan finance receivables is limited due to the large number of borrowers; however, substantially all thrift and loan finance receivables are from borrowers within the state of California. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. As of December 1995, Continental Insurance Company and General Reinsurance Corporation, were the only reinsurers that accounted for more than 10% of total amounts recoverable from all reinsurers on paid and unpaid losses. The remaining reinsurance recoverables were spread over 146 reinsurers. 51 53 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Fair Values of Financial Instruments: The Company uses various methods and assumptions in estimating its fair value disclosures for financial instruments. For fixed maturity investments and preferred stocks, fair values are determined from certain valuation services, as well as from quoted market prices. Loans receivable with variable rates, as well as thrift deposits for passbook and money market type accounts, are deemed to be at fair value. The fair values of thrift investment certificates, mortgage loans and other fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar accounts or loans to borrowers with similar credit ratings. For short-term debt, the carrying amount of the Company's borrowings approximates fair value. The fair value of the Company's long-term debt is based on quoted market prices for securities actively traded. For long-term debt not actively traded, and for bank borrowings, the fair value is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments at December 31, 1995 are summarized in the following table:
ESTIMATED CARRYING FAIR AMOUNT VALUE ---------- ---------- (THOUSANDS OF DOLLARS) ASSETS Fixed maturity investments (Note C)......................... $1,296,550 $1,296,550 Non-redeemable preferred stock (Note C)..................... 277,451 277,451 Loans receivable (Note D)................................... 1,499,043 1,503,101 LIABILITIES Thrift deposits (Note A).................................... 926,312 929,560 Short-term debt (Note H).................................... 72,191 72,191 Long-term debt (Note I)..................................... 693,276 717,304
Insurance related financial instruments, other than those classified as investment contracts, are exempt from fair value disclosure requirements. The carrying amount of reinsurance paid recoverables approximates their fair value as they are expected to be realized within one year. New Accounting Standards: In March 1995, the FASB issued Statement No. 121 ("FASB 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations, including intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FASB 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt FASB 121 in the first quarter of 1996 and, based on current circumstances, the effect of adoption will not be material. Also in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for Stock-Based Compensation," that is effective for fiscal years beginning after December 15, 1995. FASB 123 establishes a method of accounting for stock-based compensation that is based on the fair value of stock options and similar instruments and encourages, but does not require, adoption of that method. The Company has elected to continue following Accounting Principles Board Opinion No. 25 for measuring compensation cost. Pursuant to FASB 123, the Company will disclose pro forma net income and earnings per share calculated as if the recognition and measurement provisions of the new standard had been adopted. Reclassifications: Certain 1994 and 1993 amounts have been reclassified to conform to the 1995 presentation. 52 54 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- ACQUISITION On February 22, 1995 the Company, through its subsidiary Fremont Compensation Insurance Company, completed the acquisition of 100% of the outstanding common stock of Casualty Insurance Company ("Casualty") from the Buckeye Union Insurance Company ("Buckeye"). The purchase price paid by the Company was $250 million, comprised of $225 million in cash and $25 million in a note payable to Buckeye. In addition, $6.5 million of costs were incurred in connection with the acquisition bringing the total cost to $256.5 million. The acquisition, accounted for as a purchase, included approximately $45 million of costs in excess of net assets acquired which is being amortized over 25 years, and approximately $15 million of an intangible asset for the trade name which is being amortized over 40 years. Income from Casualty has been included in the consolidated income statement since February 22, 1995. Casualty, based in Chicago, Illinois and its California-based subsidiary, Workers' Compensation and Indemnity Company, underwrites workers' compensation insurance primarily in Illinois and California. Casualty is currently the largest underwriter of workers' compensation insurance in Illinois and is licensed in six states. The following schedule summarizes certain proforma unaudited results of operations for the years ended December 31, 1995 and 1994, assuming the purchase of Casualty had been consummated as of January 1, 1994:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 -------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Property and casualty premiums earned........................ $663,917 $ 819,981 Net investment income........................................ 124,523 115,261 Other revenues............................................... 197,374 149,680 -------- ---------- Total revenues............................................. 985,814 1,084,922 Losses and loss adjustment expenses.......................... 509,327 579,383 Policy acquisition costs..................................... 128,483 161,646 Other operating costs and expenses........................... 244,274 230,390 -------- ---------- 882,084 971,419 -------- ---------- Income before taxes.......................................... 103,730 113,503 Income tax expense........................................... 33,708 40,360 -------- ---------- Net income................................................. $ 70,022 $ 73,143 ======== ========== Per share data: Net income................................................. $ 2.68 $ 2.83 ======== ==========
53 55 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assets acquired and liabilities assumed, net of the purchase price, at the date of the acquisition of Casualty, are summarized in the following table:
(THOUSANDS OF DOLLARS) Assets acquired: Fixed maturity investments -- at fair value..................... $ 15,646 Short-term investments.......................................... 472,166 Premiums receivable and agents' balances........................ 67,117 Reinsurance recoverable on paid and unpaid losses............... 185,145 Deferred policy acquisition costs............................... 12,656 Deferred income taxes........................................... 59,830 Costs in excess of net assets acquired.......................... 45,036 Other assets, including cash, accrued investment income, state deferred taxes and trade name................................ 37,719 -------- Total assets acquired................................... $895,315 ======== Liabilities assumed: Losses and loss adjustment expenses............................. $787,663 Unearned premiums............................................... 83,323 Dividends to policyholders...................................... 17,660 Other liabilities............................................... 6,669 -------- Total liabilities assumed............................... $895,315 ========
54 56 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- INVESTMENTS The amortized cost and fair values of the fixed maturity investments and non-redeemable preferred stock by major category are summarized in the following table:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Available for sale: At December 31, 1995 United States Treasury securities and obligations of other US government agencies and corporations............................ $ 136,626 $ 13,914 $ 1,290 $ 149,250 Redeemable preferred stock.................... 15,887 1,940 2,063 15,764 Mortgage-backed securities.................... 340,682 11,223 14,772 337,133 Corporate securities Banks....................................... 123,144 4,944 2,252 125,836 Financial................................... 117,013 3,266 37 120,242 Transportation.............................. 16,888 353 -- 17,241 Utilities................................... 13,427 393 -- 13,820 Industrial.................................. 491,767 25,771 274 517,264 ---------- -------- -------- ---------- Total.................................... 1,255,434 61,804 20,688 1,296,550 Non-redeemable preferred stock................ 285,337 5,392 13,278 277,451 ---------- -------- -------- ---------- Total.................................... $1,540,771 $ 67,196 $ 33,966 $1,574,001 ========== ======== ======== ========== Available for sale: At December 31, 1994 United States Treasury securities and obligations of other US government agencies and corporations............................ $ 53,045 $ 78 $ 7,971 $ 45,152 Redeemable preferred stock.................... 4,249 -- 758 3,491 Mortgage-backed securities.................... 189,551 -- 58,876 130,675 Corporate securities Banks....................................... 24,744 -- 4,619 20,125 Financial................................... 10,000 -- 1,775 8,225 Industrial.................................. 30,112 -- 2,338 27,774 ---------- -------- -------- ---------- Total.................................... 311,701 78 76,337 235,442 Non-redeemable preferred stock................ 213,935 -- 24,303 189,632 ---------- -------- -------- ---------- Total.................................... $ 525,636 $ 78 $ 100,640 $ 425,074 ========== ======== ======== ========== Held to maturity: At December 31, 1994 United States Treasury securities and obligations of other US government agencies and corporations............................ $ 53,695 $ 31 $ 2,319 $ 51,407 Mortgage-backed securities.................... 152,721 -- 5,025 147,696 ---------- -------- -------- ---------- Total.................................... $ 206,416 $ 31 $ 7,344 $ 199,103 ========== ======== ======== ==========
55 57 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair value of debt securities at December 31, 1995 by contractual maturity, are summarized in the following table:
AMORTIZED FAIR COST VALUE ---------- ---------- (THOUSANDS OF DOLLARS) Available for sale: One year or less.......................................... $ 27,358 $ 27,461 Over 1 year through 5 years............................... 245,447 247,933 Over 5 years through 10 years............................. 495,154 520,484 Over 10 years............................................. 146,793 163,539 Mortgage-backed securities................................ 340,682 337,133 ---------- ---------- Totals............................................ $1,255,434 $1,296,550 ========== ==========
The contractual maturities in the foregoing table may differ from actual maturities because certain borrowers have the right to sell or repay obligations with or without call or prepayment penalties. Proceeds from sales of investments in debt securities and related realized gains and losses are summarized in the following table:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ---------- ---------- -------- (THOUSANDS OF DOLLARS) Proceeds from sales............................. $2,000,772 $1,302,486 $795,300 Gross realized gains............................ 20,923 13,987 14,028 Gross realized losses........................... 20,922 14,302 11,863
Investment income by major category of investments is summarized in the following table:
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 -------- ------- ------- (THOUSANDS OF DOLLARS) Fixed maturities..................................... $ 75,581 $48,677 $71,476 Non-redeemable preferred stock....................... 25,661 19,407 238 Short-term........................................... 19,354 9,520 5,701 Other................................................ 109 206 255 -------- ------- ------- 120,705 77,810 77,670 Investment expenses.................................. 1,182 989 472 -------- ------- ------- Net investment income...................... $119,523 $76,821 $77,198 ======== ======= =======
The Company relies on external rating agencies to establish quality ratings for its investments. The Company only purchases securities that are rated investment grade by at least one rating agency, but may hold investments that are subsequently downgraded to non-investment grade. As of December 31, 1995, all investments held by the Company are current as to principal and interest, with no investment in default. Included in investments is $27,794,000 of fixed maturity investments and $31,223,000 of non-redeemable preferred stock of Bankers Trust Company that in total exceeds 10% of stockholders' equity at December 31, 56 58 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1995. Using Standard and Poor's, Moody's and Fitch's rating services, the quality mix of the Company's fixed maturity investment portfolio at December 31, 1995 is summarized in the following table: AAA (including US government obligations).............................. 31% AA..................................................................... 2 A...................................................................... 26 BBB.................................................................... 40 BB..................................................................... 1 --- 100% ===
As of July 1, 1995 the Company's held to maturity portfolio totaling $319.4 million was transferred to available for sale in accordance with the provisions of FASB 115. In addition, at this date there was a net unrealized gain of $9.9 million (net of deferred taxes of $5.3 million) on the held to maturity portfolio which was transferred to stockholders' equity. The transfer became necessary as the Company sold certain investment securities in July which were classified as held to maturity at June 30, 1995. These investment sales were part of an overall review and restructuring of the investment portfolio performed in conjunction with the investing of cash received in the acquisition of Casualty (see Note B). This review and restructuring caused the Company to consider the appropriateness of the remaining held to maturity investments, which resulted in the reclassification. The par value of fixed maturity investments and cash totaling $834,433,000 at December 31, 1995 were on deposit with regulatory authorities in compliance with legal requirements related to the insurance operations. The Company currently holds no derivative financial instruments subject to FASB Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." NOTE D -- LOANS RECEIVABLE Loans receivable consist of commercial finance, commercial and residential real estate loans, and insurance premium notes receivable. Commercial finance loans are asset-based loans that are secured by the borrowers' eligible trade accounts receivable, inventories and equipment. Commercial and residential real estate loans are secured by real property. Insurance premium notes receivable are collateralized by security interests in return premiums. Commercial finance loans are stated at the unpaid balance of cash advanced net of allowance for possible loan losses of $12,554,000 and $12,464,000 at December 31, 1995 and 1994, respectively. The amount of cash advanced under these loans is based on stated percentages of the borrowers' eligible collateral. The majority of the loans are callable within 30 days at the option of the Company. Interest on the commercial loans is computed on the basis of daily outstanding balances times the contractual interest rate and is reported as earned income on the accrual method. Total loan balances on which income recognition has been suspended were $9,344,000 and $380,000 at December 31, 1995 and 1994, respectively. The 1995 balance consists of three loans, including one with a balance of $8,881,000. The 1994 balance consists of six loans. Commercial finance loans are shown net of participation by other financial institutions of $8,119,000 at December 31, 1995 and $9,764,000 at December 31, 1994. The participation agreements are generally made for a fixed percentage of the commercial loan balance and are made without recourse to the Company. The Company's thrift and loan subsidiary generates primarily real estate loans. Commercial and residential real estate loans have terms ranging from one to thirty years. Finance charges are recognized as revenue over the life of the loan using the interest method. Loan origination fees and the related costs are deferred and amortized over the life of the loan using the interest method. The loans are net of allowance for 57 59 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) possible loan losses of $17,498,000 and $14,391,000 at December 31, 1995, and 1994, respectively. Included in loans receivable are real estate loans which have been placed on non-accrual status totaling $23,544,000 and $21,454,000 at December 31, 1995 and 1994, respectively. Real estate acquired in foreclosure, which is classified under other assets, totaled $4,942,000 and $17,467,000 at December 31, 1995 and 1994, respectively, and is recorded at the lower of the carrying value of the loan or the estimated fair value less disposal costs. Insurance premium notes receivable mature within one year and are net of allowances for possible loan losses of $1,024,000 and $551,000 at December 31, 1995 and 1994, respectively. Interest income on these notes is recognized using the rule-of-seventy-eight method which results in approximately level interest rate yield over the life of the notes. Activity in the allowance for possible loan losses is summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (THOUSANDS OF DOLLARS) Balance, beginning of year.................................... $27,406 $25,222 $22,819 Provision for loan losses..................................... 14,575 11,980 16,873 Recoveries.................................................... 2,961 853 1,096 Charge-offs................................................... (13,161) (14,254) (15,566) Reserves established with portfolio acquisitions.............. -- 3,605 -- ------- ------- ------- Balance, end of year.......................................... $31,781 $27,406 $25,222 ======= ======= =======
At December 31, 1995, the recorded investment in loans that are considered to be impaired under FASB 114 was $33,425,000, of which $32,889,000 were on a non-accrual basis. The Company's policy is to place on a non-accrual basis any loans deemed impaired under FASB 114 as the Company's loans are generally collateral dependent. As a result of charge-offs, these impaired loans do not necessarily have a related specific reserve for credit losses allocated to them. However, $18,427,000 of loans considered impaired do have an allowance that totaled $2,575,000. The average net investment in impaired loans during the year ended December 31, 1995 was $31,325,000 and no interest income has been recognized on loans classified as impaired during the year ended December 31, 1995. The carrying amounts at December 31, 1995 and 1994 and estimated fair values at December 31, 1995 of loans receivable are summarized in the following table:
1995 1994 ------------------------- ---------- CARRYING ESTIMATED CARRYING AMOUNT FAIR VALUE AMOUNT ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Commercial finance loans............................... $ 532,693 $ 532,693 $ 472,193 Real estate loans...................................... 980,283 984,341 969,921 Other loans............................................ 45,896 45,896 67,809 ---------- ---------- ---------- 1,558,872 1,562,930 1,509,923 Purchase discount and deferred fees.................... (28,048) (28,048) (41,743) Allowance for possible loan losses..................... (31,781) (31,781) (27,406) ---------- ---------- ---------- Loans receivable....................................... $1,499,043 $1,503,101 $1,440,774 ========== ========== ==========
58 60 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE E -- CLAIM LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances for the Company's claim liabilities for losses and loss adjustment expenses ("LAE") on a net-of-reinsurance basis to the gross amounts reported in the Company's consolidated balance sheets.
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ---------- ---------- --------- (THOUSANDS OF DOLLARS) Reserves for losses and LAE, net of reinsurance recoverable, at beginning of year.................... $ 610,510 $ 644,190 $ 633,394 Incurred losses and LAE: Provision for insured events of the current year, net of reinsurance.................................... 459,951 290,833 323,279 Increase (decrease) in provision for insured events of prior years, net of reinsurance................ 1,382 (17,234) (4,126) ---------- -------- --------- Total incurred losses and LAE................ 461,333 273,599 319,153 Payments: Losses and LAE, net of reinsurance, attributable to insured events of: Current year...................................... (132,358) (70,505) (67,805) Prior years....................................... (358,423) (236,774) (240,552) ---------- -------- --------- Total payments............................... (490,781) (307,279) (308,357) ---------- -------- --------- Subtotal................................... 581,062 610,510 $ 644,190 Liability for losses and LAE for Casualty Insurance Company acquired during the current year............. 604,644 -- -- ---------- -------- --------- Reserves for losses and LAE, net of reinsurance recoverable, at end of year.......................... 1,185,706 610,510 $ 644,190 Reinsurance recoverable for losses and LAE, at end of year................................................. 269,986 136,151 138,737 ---------- -------- --------- Reserves for losses and LAE, gross of reinsurance recoverable, at end of year.......................... $1,455,692 $ 746,661 $ 782,927 ========== ======== =========
The foregoing reconciliation shows that a $17 million redundancy in the December 31, 1993 reserve emerged in 1994. This redundancy resulted primarily from lower than previously estimated claim frequency and severity on workers' compensation claims incurred in 1993 and prior years. NOTE F -- REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. The failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition and economic characteristics of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. 59 61 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effect of ceded reinsurance on property and casualty premiums are summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1995 1994 1993 --------------------- --------------------- --------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED -------- -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS) Direct..................... $564,675 $580,442 $431,500 $438,482 $460,164 $459,293 Assumed.................... 41,613 55,572 4,264 4,224 3,109 3,916 Ceded...................... 22,498 29,097 9,332 9,122 7,606 7,444 -------- -------- -------- -------- -------- -------- Net property and casualty premiums............... $583,790 $606,917 $426,432 $433,584 $455,667 $455,765 ======== ======== ======== ======== ======== ========
The effect of ceded reinsurance on losses and loss adjustment expenses was a decrease (increase) in expenses of $19,651,000, $7,456,000 and $(12,427,000) for the three years ended December 31, 1995, 1994 and 1993, respectively. Effective December 31, 1995, the Company entered into a reinsurance and assumption agreement with a reinsurer whereby all of the Company's universal life insurance business was ceded to the reinsurer. This reinsurance agreement was entered into as of December 31, 1995 as part of several other agreements that became effective January 1, 1996. These agreements collectively act to significantly reduce the Company's life insurance operations. (See Note P). The effect of reinsurance on life insurance premiums and life insurance benefits was not significant for the three years ended December 31, 1995. NOTE G -- INCOME TAXES The major components of income tax expense (benefit) are summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (THOUSANDS OF DOLLARS) Federal income tax Current............................................. $ 6,964 $30,132 $20,460 Deferred............................................ 22,810 (4,391) (973) ------- ------- ------- 29,774 25,741 19,487 State income tax...................................... 2,531 18 2,151 ------- ------- ------- Total income tax provision.......................... $32,305 $25,759 $21,638 ======= ======= =======
60 62 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the effective federal tax rates in the consolidated statements of income with the prevailing federal income tax rate of 35% is summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (THOUSANDS OF DOLLARS) Federal income tax at 35%............................. $35,114 $28,550 $21,769 Effects of: Dividends received deduction........................ (5,678) (3,865) (229) Dividends in Employee Stock Ownership Plan shares... (432) (455) (402) Amortization of costs in excess of net assets acquired......................................... 839 366 511 Change in tax rate.................................. -- -- (1,408) Other............................................... (69) 1,145 (754) ------- ------- ------- Federal income tax provision..................... $29,774 $25,741 $19,487 ======= ======= =======
The deferred income tax balance includes the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Details of the deferred tax expense (benefit) are summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (THOUSANDS OF DOLLARS) Discount on loss reserves............................. $22,134 $ 703 $ 1,460 Dividends to policyholders............................ 7,985 60 (2,508) Life insurance benefits and liabilities............... (6,862) (1,669) (83) Deferred loan origination costs....................... 3,832 -- -- Accrued compensation expense.......................... (2,441) (1,131) -- Unearned premiums..................................... 2,373 (811) (235) Retrospective premium payable......................... (1,400) 1,228 (1,604) Provisions for loan losses and other doubtful accounts............................................ (1,164) (1,984) (50) Deferred policy acquisition costs..................... (128) 2,008 (1,568) Earned but unbilled premiums.......................... -- (3,363) -- Deferred income....................................... -- -- 1,454 Salvage and subrogation............................... -- -- 1,268 Effect of change in tax rate.......................... -- -- (1,408) Other................................................. (1,519) 568 2,301 ------- ------- ------- Deferred tax expense (benefit)...................... $22,810 $(4,391) $ (973) ======= ======= =======
Net payments made for federal and state income taxes were $13,429,000, $18,471,000 and $9,000,000 for 1995, 1994 and 1993, respectively. 61 63 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the Company's deferred tax assets as of December 31, 1995 and 1994 are summarized in the following table:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (THOUSANDS OF DOLLARS) Discount on loss reserves...................................... $ 68,619 $ 35,656 Net unrealized loss on investments............................. -- 35,196 Dividends to policyholders..................................... 14,288 16,088 Life insurance benefits and liabilities........................ 13,432 6,570 Allowance for possible loan losses and other doubtful accounts..................................................... 12,507 10,739 Unearned premiums.............................................. 12,316 3,538 Other, net..................................................... 3,431 3,123 -------- -------- Deferred income tax asset amounts.................... 124,593 110,910 Deferred policy acquisition costs.............................. (26,814) (19,731) Net unrealized gain on investments............................. (11,630) -- Deferred loan origination costs................................ (3,832) -- Earned but unbilled premiums................................... (3,698) -- Excess intangibles amortization................................ -- (2,753) -------- -------- Deferred income tax liability amounts................ (45,974) (22,484) -------- -------- Net deferred income tax asset................... $ 78,619 $ 88,426 ======== ========
The Company's principal deferred tax assets arise due to the discounting of loss reserves (which delays a portion of the loss reserve deduction for income tax purposes), the accrual of dividends to policyholders, certain life insurance benefits and liabilities, the provision for doubtful loan accounts and a portion of the unearned premiums. The effect of discounting the loss reserves for tax purposes is to effectively tax the future investment income stream associated with holding the investments necessary to support the reserves. Future investment income, irrespective of other operating income, should be sufficient to allow the future loss reserve deduction (i.e., the accretion of the discount for income tax purposes) to be utilized. Similarly, the recognition of the tax benefits in future periods associated with life insurance benefits and liabilities will be realized through future investment income to be earned on the underlying policies. With respect to the accrual of policyholders' dividends, the future periods will permit the recognition of the tax benefits associated with these accruals as the amounts are linked to future taxable income arising from existing policyholders of the Company. In the Company's opinion, the deferred tax assets will be fully realized and no valuation allowance is necessary because the Company has the ability to generate sufficient future taxable income in both the insurance and financial services segments to realize the tax benefits. 62 64 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- SHORT-TERM DEBT Short-term debt is summarized in the following table:
DECEMBER 31, -------------------- 1995 1994 ------- -------- (THOUSANDS OF DOLLARS) Bank lines of credit by a subsidiary of the Company (weighted average interest rate; 1994 - 6.91%).......................... $ -- $157,000 Commercial paper issued by a subsidiary, maturity dates through May 10, 1996 (weighted average interest rate, 1995 - 7.13%; 1994 - 6.68%)................................................. 7,191 17,754 Current portion of long-term debt............................... 65,000 1,571 -------- --------- $72,191 $176,325 ======== =========
The commercial finance subsidiary has lines of credit with banks totaling $15,000,000 that expire September 30, 1996. Interest is based on the prime lending rate. At December 31, 1995, there were no outstanding advances under these lines of credit. NOTE I -- LONG-TERM DEBT Long-term debt is summarized in the following table:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (THOUSANDS OF DOLLARS) Fremont General Corporation Liquid Yield Option Notes due 2013, less discount (1995 - $222,115; 1994 - $229,810)........................ $151,635 $143,940 $200 million Revolving Credit Facility....................... 85,000 15,000 Note Payable due 2002........................................ 6,620 11,000 Subsidiaries: Variable Rate Asset Backed Certificates...................... 330,000 300,000 $300 million Senior Revolving Credit Facility................ 185,000 -- Other Notes Payable, interest rate at year end, 7.25%........ 21 21 -------- -------- 758,276 469,961 Less current portion......................................... 65,000 1,571 -------- -------- $693,276 $468,390 ======== ========
In August 1995, the Company amended and restated an agreement on a $200,000,000 Revolving Credit Facility with several banks. Borrowings and repayments are at the option of the Company until the conversion date of August 31, 1997, at which time the facility converts to a term loan with a limit of $100 million that matures in 2001. Interest is based on, at the Company's option, the higher of the Federal Funds rate plus 1/2% or the banks' prime lending rate plus an applicable margin, Eurodollar rates plus an applicable margin or by competitive bids by the banks. All applicable margins are based on the Company's credit rating. The rate at December 31, 1995 on the outstanding balance of $85,000,000 was 6.20%. A facility fee ranging from .25% to .45%, dependent on the Company's credit rating, is charged on the total facility. The facility fee rate during 1995 was .30%. The stock of a subsidiary insurance holding company has been pledged as collateral for this loan. During July 1994, the Fremont General Employee Stock Ownership Plan ("ESOP") borrowed $11,000,000 (see Note K) from a bank due in seven equal annual installments commencing on April 1, 1996. 63 65 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The maximum principal amount of this loan was increased to $15 million in August, 1995 and the term was extended to April 1, 2002. The note payable is secured by certain shares of the ESOP and the interest and principal payments are guaranteed by the Company. Interest is based on, at the Company's option, the bank's prime lending rate, LIBOR plus 1%, or an applicable certificate of deposit rate. The rate at December 31, 1995 was 6.69%. In October 1993 the Company sold in a public offering an aggregate $373,750,000 principal amount at maturity of Liquid Yield Option Notes due October 12, 2013 (Zero Coupon-Subordinated) (the "LYONs") at an issue price of $372.42 for a total net proceeds to the Company of approximately $135,000,000. The yield to maturity is 5% with no periodic payments of interest. The LYONs are convertible into the Company's Common Stock at a price of $19.31 per share and are non-callable for 5 years. The Variable Rate Asset Backed Certificates reflect the sale of certificates pursuant to the asset securitization program established in 1993 by a commercial finance subsidiary of the Company. The proceeds from the sale of the initial series of certificates ("Series A") under this program in April 1993 were $200 million bearing interest at the rate of LIBOR plus 0.47%. In November 1993, this subsidiary sold an additional $100 million principal amount of these certificates ("Series B") bearing interest at the rate of LIBOR plus 0.5%. The securities issued in this program have a scheduled maturity of three to four years but could mature earlier depending on fluctuations in outstanding balances of loans in the portfolio and other factors. In April 1995, $30 million principal amount of certificates which mature in 2000, bearing interest at the rate of LIBOR plus .95%, were sold via a private placement. In February 1996, $135 million in certificates ("Series C") were issued which mature in 2000. The proceeds were used, in conjunction with existing cash, to retire the $200 million in Series A certificates. In December 1995, a commercial paper facility was established as part of the asset securitization program. This facility provides for the issuance of up to $150 million in commercial paper, dependent upon the level of assets within the asset securitization program. This facility, which expires in December 1998, had no amounts outstanding under it as of December 31, 1995. This subsidiary also has an unsecured revolving line of credit with a syndicated bank group that presently permits borrowings of up to $300 million, of which $185 million was outstanding as of December 31, 1995. This credit line which expires August 1998 replaced a short-term credit facility that expired in August, 1995. The weighted average interest rate at December 31, 1995 was 6.39% The carrying amounts and the estimated fair values of long-term borrowings at December 31, 1995 are summarized in the following table:
CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (THOUSANDS OF DOLLARS) LYONs.......................................................... $151,635 $ 175,663 Variable Rate Asset Backed Certificates........................ 330,000 330,000 $200 million Revolving Credit Facility, expiring 1997.......... 85,000 85,000 $300 million Senior Revolving Credit Facility.................. 185,000 185,000 Note Payable due 2002.......................................... 6,620 6,620 Other Notes Payable............................................ 21 21 -------- -------- Total long-term borrowings........................... $758,276 $ 782,304 ======== ========
64 66 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate amount of maturities on long-term debt and sinking fund requirements are summarized in the following table (thousands of dollars): 1996.............................................................. $ 65,000 1997.............................................................. 100,356 1998.............................................................. 197,196 1999.............................................................. 16,446 2000.............................................................. 194,197 Thereafter........................................................ 185,081 -------- $758,276 ========
Total interest payments on all debt were $91,278,000, $49,294,000, and $37,433,000 in 1995, 1994 and 1993, respectively. NOTE J -- STOCKHOLDERS' EQUITY AND RESTRICTIONS On December 4, 1995, the Board of Directors declared a three-for-two Common Stock split for stockholders of record on January 8, 1996 that was distributed on February 7, 1996. Also during 1995, a ten percent stock dividend was distributed June 15, 1995 to stockholders of record May 30, 1995. In 1993 the Company distributed a three-for-two split of Common Stock and sold 3,094,000 shares of Common Stock in a public offering. The Company is authorized to issue up to 2,000,000 shares of $.01 par value Preferred Stock; however none has been issued to date. Consolidated stockholders' equity is restricted by the provisions of certain long-term debt agreements. At December 31, 1995, the most restrictive loan covenants require the Company to maintain total stockholders' equity before FASB 115 adjustments of at least $375,000,000. The Company has adopted a stock option plan for the benefit of certain key members of management. Under the plan, up to 2,681,000 shares are allocable to participants. Options are granted at exercise prices not less than the fair value of the stock on the date of grant. Upon the fifth anniversary of the date of the option grant and on each successive anniversary thereafter (until that option is either exercised or expires) the exercise price of each unexercised option is automatically reduced by one-sixth of the original option price, as reflected in the table below and a charge to compensation expense is recorded. Grantees vest at the rate of 25% 65 67 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) per year beginning on the first anniversary of the grant. The stock option activity is summarized in the following table:
NUMBER OF SHARES OPTION PRICES --------- -------------- Outstanding at January 1, 1993............................ 1,237,985 $ 5.05 - 10.81 Granted................................................. 227,123 13.44 - 15.00 Exercised............................................... (17,162) 5.05 - 10.10 Forfeited............................................... (14,334) 5.05 - 10.10 ---------- Outstanding at December 31, 1993.......................... 1,433,612 5.05 - 15.00 Granted................................................. 367,538 14.32 - 14.62 Exercised............................................... (1,546) 8.89 ---------- Outstanding at December 31, 1994.......................... 1,799,604 5.05 - 15.00 Granted................................................. 30,938 15.68 Exercised............................................... (19,488) 8.89 - 13.43 Forfeited............................................... (11,013) 10.81 - 15.00 ---------- Outstanding at December 31, 1995.......................... 1,800,041 4.21 - 15.68 ==========
The portion of the consolidated stockholders' equity represented by the Company's investment in its insurance subsidiaries and its thrift and loan subsidiary is subject to various laws and regulations, whereby amounts available for payment of dividends are restricted. Retained earnings and additional paid-in capital of the property and casualty companies currently available for dividend distribution is $29,941,000. No dividends are currently available from the thrift and loan subsidiary. Net income and stockholders' equity of domestic insurance subsidiaries, as filed with regulatory authorities on the basis of statutory accounting practices, are summarized in the following table:
1995 1994 1993 -------- -------- -------- (THOUSANDS OF DOLLARS) Statutory net income for the year.................. $104,032 $ 48,220 $ 56,366 Statutory stockholder's equity at year end......... 321,148 250,633 234,604
NOTE K -- EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) Plan and a leveraged Employee Stock Ownership Plan ("ESOP"), both of which cover substantially all employees with at least one year of service. Contribution expense for these plans amounted to $11,015,000, $8,464,000 and $5,947,000 for 1995, 1994 and 1993, respectively, of which $8,656,000, $5,961,000 and $4,227,000 related to the ESOP. Cash contributions to the ESOP, which relate to 1995, 1994 and 1993, were $3,000,000, $4,375,000 and $4,147,000, respectively. The contributions, which are generally discretionary, are based on total compensation of the participants. From 1990 to 1994, the ESOP purchased 2,904,000 shares of the Company's Common Stock with funds provided by the Company in return for a note maturing in 2000 and bearing interest at 8%. In July 1994 the ESOP borrowed $11 million from a bank under a term loan due 2001 (See Note I). Proceeds from the loan were used to repay the note with the Company. The principal of the bank loan has been recorded as a liability of the Company. The maximum principal amount of this loan was increased to $15,000,000 in August, 1995 and the term was extended to April 1, 2002. Shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. The annual contributions made by the Company to the ESOP are used to repay the loan. As the debt is repaid, shares are released from collateral and are allocated to participants based on total compensation. Dividends received by the ESOP on its investment in the Company's Common Stock, amounting to $374,000, $545,000 and $645,000 in 1995, 1994 and 1993, 66 68 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively, were additionally used to service these loans. Interest expense was $196,000 for the year ended December 31, 1995. All shares held by the ESOP are considered outstanding for earnings per share purposes. Of the 2,814,000 shares of Company stock owned by the plan at December 31, 1995, 2,088,000 shares are allocated to participants and 726,000 shares are not allocated to participants. Unearned shares acquired prior to December 31, 1992 continue to be accounted for in accordance with the historical cost approach (AICPA Statement of Opinion 76-3). All of the unearned ESOP shares held as of December 31, 1995 were acquired prior to December 31, 1992. NOTE L -- COMMITMENTS AND CONTINGENCIES The Company is a defendant in a number of legal actions arising primarily from claims made under insurance polices or in connection with previous reinsurance agreements. Those actions have been considered in establishing the Company's liabilities. Management and its legal counsel are of the opinion that the settlement of those actions will not have a material effect on the Company's financial position or results of operations. An insurance subsidiary of the Company outsourced its data processing operation to Electronic Data Systems in 1992. Under terms of the contract, this subsidiary will pay a minimum $7,500,000 per year for a period of ten years, until 2002. Total rental expense for 1995, 1994 and 1993, was $14,909,000, $9,115,000, and $8,926,000, respectively. The Company leases office facilities and certain equipment under non-cancelable operating leases, the terms of which range from one to ten years. Certain leases provide for an increase in the basic rental to compensate the lessor for increases in operating and maintenance costs. The leases also provide renewal options. Under present leases, rental commitments are summarized in the following table (thousands of dollars): 1996............................................................... $13,604 1997............................................................... 12,808 1998............................................................... 11,194 1999............................................................... 9,876 2000............................................................... 7,570 Thereafter......................................................... 2,238 ------- $57,290 =======
NOTE M -- DISCONTINUED OPERATIONS The Company discontinued all of its assumed reinsurance operations, as well as certain other insurance operations, during the period 1986 to 1991. These operations consisted primarily of facultative and treaty reinsurance covering primary and excess property and casualty insurance coverages. All discontinued insurance operations are accounted for using the liquidation basis of accounting whereby all future cash inflows and outflows are considered in determining whether dedicated assets are sufficient to meet all future obligations. The Company determines the adequacy of the assets dedicated to fund the liabilities of discontinued operations by: (i) estimating the ultimate remaining liabilities; (ii) discounting these liabilities using estimates of payment patterns and investment yields derived from the dedicated investment portfolio; and (iii) comparing this discounted estimate of liabilities to the dedicated assets. The Company estimates that the dedicated assets (primarily cash, investment securities and reinsurance recoverables) supporting these operations and all future cash inflows will be adequate to fund future 67 69 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) obligations. However, should those assets ultimately prove to be insufficient, the Company believes that its property and casualty subsidiaries would be able to provide whatever additional funds might be needed to complete the liquidation without having a material adverse effect on the Company's consolidated financial position or results of operations. A statement of financial condition of the discontinued operations is summarized in the following table:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (THOUSANDS OF DOLLARS) Assets Cash and invested assets, at amortized cost.................. $190,777 $249,737 Reinsurance recoverables..................................... 54,448 71,493 Federal income taxes......................................... 6,125 5,762 Other assets................................................. 11,152 9,821 -------- -------- Total................................................ $262,502 $336,813 ======== ======== Liabilities Reserves for loss and loss adjustment expenses............... $162,219 $190,433 Deferred income taxes........................................ 41,810 34,736 Reinsurance payable and funds withheld....................... 21,713 30,658 Other liabilities............................................ 3,246 47,472 -------- -------- Total................................................ $228,988 $303,299 ======== ========
The amortized cost and fair value of cash and invested assets of the discontinued operations as of December 31, 1995 are summarized in the following table:
AMORTIZED FAIR COST VALUE -------- -------- (THOUSANDS OF DOLLARS) Fixed maturities............................................... $ 87,920 $ 88,725 Non-redeemable preferred stock................................. 71,878 69,808 Cash and other invested assets................................. 30,979 30,979 -------- -------- Cash and invested assets..................................... $190,777 $189,512 ======== ========
The average maturity of the fixed income portfolio was 5.10 years at December 31, 1995. The quality mix of the fixed maturity portfolio as of December 31, 1995 is summarized in the following table: AAA (including US government obligations)...................................... 50% A.............................................................................. 10 BBB............................................................................ 11 BB............................................................................. 29 ---- 100% ====
At December 31, 1995, all investments included in discontinued operations were current with respect to principal and interest. It is the Company's belief that the carrying value of the investments will be fully realized. 68 70 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE N -- OPERATIONS BY INDUSTRY SEGMENT The following data for the years ended December 31, 1995, 1994 and 1993 provide certain information necessary for industry segment disclosure.
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) REVENUES Workers' compensation.................................. $ 671,110 $ 458,461 $ 489,126 Professional medical liability, corporate and other.... 37,077 37,251 33,999 ---------- ---------- ---------- Total property and casualty.................. 708,187 495,712 523,125 Financial services..................................... 214,975 154,398 125,732 Corporate.............................................. 652 3,038 2,548 ---------- ---------- ---------- $ 923,814 $ 653,148 $ 651,405 ========== ========== ========== INCOME (LOSS) BEFORE INCOME TAXES Workers' compensation.................................. $ 85,009 $ 62,199 $ 49,775 Professional medical liability, corporate and other.... (1,917) (934) 2,317 ---------- ---------- ---------- Total property and casualty.................. 83,092 61,265 52,092 Financial services..................................... 35,737 28,014 21,456 Corporate.............................................. (18,502) (7,708) (9,200) ---------- ---------- ---------- $ 100,327 $ 81,571 $ 64,348 ========== ========== ========== AMORTIZATION AND DEPRECIATION EXPENSE Workers' compensation.................................. $ 8,501 $ 4,808 $ 5,051 Professional medical liability, corporate and other.... 176 377 517 ---------- ---------- ---------- Total property and casualty.................. 8,677 5,185 5,568 Financial services..................................... 3,032 2,442 1,962 Corporate.............................................. 8,625 8,082 2,982 ---------- ---------- ---------- $ 20,334 $ 15,709 $ 10,512 ========== ========== ========== CAPITAL EXPENDITURES Property and casualty*................................. $ 7,404 $ 5,642 $ 3,362 Financial services..................................... 1,931 4,107 2,982 Corporate.............................................. 192 653 213 ---------- ---------- ---------- $ 9,527 $ 10,402 $ 6,557 ========== ========== ==========
69 71 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) IDENTIFIABLE ASSETS Property and casualty*................................. $2,055,511 $1,096,781 $1,139,899 Financial services..................................... 2,131,412 1,678,039 1,119,534 Corporate.............................................. 27,974 22,757 85,661 ---------- ---------- ---------- $4,214,897 $2,797,577 $2,345,094 ========== ========== ==========
- --------------- * It is not practicable to allocate asset amounts among lines of business within the property and casualty insurance segment. Assets held for discontinued operations are excluded from the above table. NOTE O -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1995 Revenues.................................... $ 199,157 $252,995 $ 238,499 $233,163 Net Income.................................. 14,206 16,867 18,265 18,684 Net income per share........................ 0.55 0.65 0.70 0.71 1994 Revenues.................................... $ 156,058 $157,992 $ 173,749 $165,349 Net Income.................................. 13,487 14,077 14,095 14,153 Net income per share........................ 0.52 0.55 0.55 0.55
The revenues, net income, and net income per share for the quarters ended after March 31, 1995 are greater than all other quarters presented, due primarily to the acquisition of Casualty Insurance Company which was completed on February 22, 1995. (See Note B). NOTE P -- SUBSEQUENT EVENTS Public Offering: On March 1, 1996, Fremont General Financing I, a statutory business trust (the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100 million of 9% Trust Originated Preferred Securities(SM) ("the Preferred Securities") in a public offering. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust. The proceeds from the sale of the Preferred Securities were invested in 9% Junior Subordinated Debentures of the Company ("the Junior Subordinated Debentures"). The $100 million Junior Subordinated Debentures are the sole asset of the Trust. The Preferred Securities will be redeemed upon maturity of the Junior Subordinated Debentures in 2026, subject to the election available to the Company to extend the maturity up to 2045, and they may be redeemed, in whole or in part, at any time on or after March 31, 2001 and under certain specified circumstances. The Junior Subordinated Debentures rank pari passu with the Company's $373,750,000 aggregate principal amount at maturity of Liquid Yield Option Notes due 2013, and subordinate and junior to all senior indebtedness of the Company. Payment of distributions out of cash held by the Trust, and payments on liquidation of the Trust or the redemption of the Preferred Securities are guaranteed by the Company. 70 72 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reinsurance: On January 1, 1996, the Company entered into a reinsurance and assumption agreement with a reinsurer whereby assets and liabilities related to certain life and annuity insurance polices, primarily investment-type contracts and credit life and accident and health, were ceded to the reinsurer. This reinsurance agreement is part of several other agreements which collectively act to significantly reduce the Company's life insurance operations (see Note F). The effect on operations from these agreements is not expected to be material. Stockholders' Equity: During the first quarter of 1996, the Company completed a stock repurchase program. This program, previously announced on November 17, 1995, was initiated to fund stock-based management and employee benefit programs. A total of 819,300 shares (adjusted for the three-for-two stock split effected January 8, 1996) were purchased at a cost of $19,535,000. 71 73 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
DECEMBER 31, --------------------- 1995 1994 -------- -------- (THOUSANDS OF DOLLARS) ASSETS Cash................................................................... $ 304 $ 794 Notes receivable from subsidiaries*.................................... 85,310 91,403 Investment in subsidiaries*............................................ 660,663 413,529 Short-term investments................................................. 8,554 7,405 Excess of cost of acquisition of subsidiaries over net assets acquired............................................................. 7,876 8,204 Other receivables from subsidiaries*................................... 4,033 3,330 Deferred income taxes.................................................. 78,619 88,426 Other assets........................................................... 27,222 5,709 -------- -------- TOTAL ASSETS......................................................... $872,581 $618,800 ======== ======== LIABILITIES Accrued expenses and other liabilities................................. $ 14,318 $ 18,818 Amounts due to subsidiaries*........................................... 110,793 73,267 Amounts due to run-off subsidiaries*................................... 6,125 5,762 Current portion of long-term debt...................................... -- 1,571 Long-term debt......................................................... 243,255 168,369 -------- -------- TOTAL LIABILITIES.................................................... 374,491 267,787 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred Stock, par value $.01-authorized 2,000,000 shares; none issued Common Stock, par value $1 per share -- Authorized: 1995 - 49,500,000 and 1994 - 30,000,000 shares; issued and outstanding: (1995 - 25,393,000 and 1994 - 15,388,000)............................ 25,393 15,388 Additional paid-in capital............................................. 110,103 80,264 Retained earnings...................................................... 347,607 331,713 Unearned Employee Stock Ownership Plan shares.......................... (6,612) (10,987) Net unrealized gain (loss) on investments, net of deferred taxes....... 21,599 (65,365) -------- -------- TOTAL STOCKHOLDERS' EQUITY........................................... 498,090 351,013 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $872,581 $618,800 ======== ========
- --------------- * Eliminated in consolidation See notes to condensed financial statements. 72 74 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 -------- ------- ------- (THOUSANDS OF DOLLARS) INCOME Interest income from subsidiaries*........................... $ 4,170 $ 3,623 $ 654 Dividends from consolidated subsidiary*...................... 6,051 3,407 6,155 Net investment income........................................ 648 3,014 2,296 Realized investment gains.................................... -- -- 248 Other income*................................................ 8,518 5,508 5,221 ------- ------- ------- TOTAL INCOME............................................... 19,387 15,552 14,574 EXPENSES Interest expense............................................. 13,282 8,163 6,439 General and administrative................................... 18,883 12,018 11,505 ------- ------- ------- TOTAL EXPENSES............................................. 32,165 20,181 17,944 ------- ------- ------- (12,778) (4,629) (3,370) Income tax expense (benefit)................................. (1,632) (3,351) 1,573 ------- ------- ------- Loss before equity in undistributed income of subsidiary companies.................................................. (11,146) (1,278) (4,943) Equity in undistributed income of subsidiary companies....... 79,168 57,090 47,653 ------- ------- ------- NET INCOME................................................. $ 68,022 $55,812 $42,710 ======= ======= =======
- --------------- * Eliminated in consolidation See notes to condensed financial statements. 73 75 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE III-CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 -------- -------- --------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income................................................ $ 68,022 $ 55,812 $ 42,710 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income from continuing operations of subsidiaries......................... (79,168) (57,090) (47,653) Change in accrued investment income.................. (1) 216 (220) Change in amounts due to or from subsidiaries........ 6,676 102 3,337 Provision for (reduction in) deferred income taxes... 22,810 (4,391) (973) Provision for depreciation and amortization.......... 8,612 8,082 2,982 Realized investment gains............................ -- -- (248) Change in other assets and liabilities............... (9,002) 6,022 (1,693) --------- --------- ---------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS.................................... 17,949 8,753 (1,758) Effect of discontinued operations....................... 363 (9,573) 9,380 --------- --------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................................... 18,312 (820) 7,622 INVESTING ACTIVITIES Purchases of fixed maturity investments................. (4,988) (46,712) (113,569) Sales of fixed maturity investments..................... -- 92,003 113,817 Fixed maturity investments matured or called............ 5,000 11,600 -- Decrease (increase) in short-term and other investments.......................................... (1,149) 7,928 (69,273) Net decrease (increase) in credit lines with subsidiaries......................................... 6,094 (57,652) (18,648) Purchase of and additional investments in subsidiaries......................................... (81,000) (23,000) (35,088) Purchase of property and equipment...................... (192) (653) (213) --------- --------- ---------- NET CASH USED IN INVESTING ACTIVITIES........... (76,235) (16,486) (122,974) FINANCING ACTIVITIES Repayment of short-term debt............................ (1,571) -- (8,250) Proceeds from long-term debt............................ 110,000 26,000 135,013 Repayment of long-term debt............................. (42,808) -- (38,040) Dividends paid.......................................... (12,618) (11,344) (9,369) Proceeds from sale of Common Stock...................... -- -- 40,803 Stock options exercised................................. 80 22 251 Purchase of fractional shares........................... (25) -- (8) Decrease (increase) in unearned Employee Stock Stock Ownership Plan shares................................ 4,375 2,647 (4,475) --------- --------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES....... 57,433 17,325 115,925 --------- --------- ---------- INCREASE (DECREASE) IN CASH..................... (490) 19 573 Cash at beginning of year............................... 794 775 202 --------- --------- ---------- CASH AT END OF YEAR............................. $ 304 $ 794 $ 775 ========= ========= ==========
See notes to condensed financial statements. 74 76 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION In the parent company financial statements, the parent's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since date of acquisition. Parent company financial statements should be read in conjunction with the Company's consolidated financial statements. 75 77 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, ------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ----------- ------------ -------- --------- RESERVES DEFERRED FOR CLAIMS, DIVIDENDS POLICY BENEFITS AND TO ACQUISITION SETTLEMENT UNEARNED POLICY- SEGMENT COSTS EXPENSES PREMIUMS HOLDERS ------- ----------- ------------ -------- --------- (THOUSANDS OF DOLLARS) 1995 Life insurance.................................... $48,938 $ 374,724 $ -- $ -- Workers' compensation............................. 25,610 1,419,821 93,229 40,822 Professional medical liability, corporate and other............................. 2,090 35,871 7,252 -- ------- ---------- ------- ------- $76,638 $1,830,416 $100,481 $40,822 ======= ========== ======= ======= 1994 Life insurance.................................... $42,156 $ 172,425 $ -- $ -- Workers' compensation............................. 13,237 703,567 37,690 46,067 Professional medical liability, corporate and other............................. 3,893 43,094 9,861 -- ------- ---------- ------- ------- $59,286 $ 919,086 $47,551 $46,067 ======= ========== ======= ======= 1993 Life insurance.................................... $37,985 $ 123,066 $ -- $ -- Workers' compensation............................. 13,364 728,582 45,472 46,337 Professional medical liability, corporate and other............................. 3,879 54,345 9,252 -- ------- ---------- ------- ------- $55,228 $ 905,993 $54,724 $46,337 ======= ========== ======= ======= YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K -------- ---------- ------------ ------------ --------- -------- AMORTIZATION CLAIMS, OF DEFERRED NET BENEFITS AND POLICY OTHER NET PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN ------- -------- ---------- ------------ ------------ --------- -------- (THOUSANDS OF DOLLARS) 1995 Life insurance.................................... $ 14,469 $ 19,457 $ 19,928 $ 7,716 $ 4,412 $ N/A Workers' compensation............................. 574,952 96,158 435,040 113,404 24,074 554,459 Professional medical liability, corporate and other............................. 31,965 5,112 26,293 4,979 2,821 29,331 -------- -------- -------- -------- ------- -------- $621,386 $120,727 $481,261 $126,099 $31,307 $583,790 ======== ======== ======== ======== ======= ======== 1994 Life insurance.................................... $ 14,689 $ 10,595 $ 13,002 $ 6,669 $ 3,453 $ N/A Workers' compensation............................. 401,455 57,047 249,370 74,621 17,137 393,755 Professional medical liability, corporate and other............................. 32,129 5,122 24,229 5,700 2,629 32,677 -------- -------- -------- -------- ------- -------- $448,273 $ 72,764 $286,601 $ 86,990 $23,219 $426,432 ======== ======== ======== ======== ======= ======== 1993 Life insurance.................................... $ 14,268 $ 11,404 $ 8,829 $ 9,809 $ 4,276 $ N/A Workers' compensation............................. 426,793 60,710 300,468 66,911 19,933 427,651 Professional medical liability, corporate and other............................. 28,972 5,027 18,685 5,535 2,681 28,016 -------- -------- -------- -------- ------- -------- $470,033 $ 77,141 $327,982 $ 82,255 $26,890 $455,667 ======== ======== ======== ======== ======= ========
76 78 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE VI -- REINSURANCE
COLUMN D COLUMN F COLUMN C --------- ---------- COLUMN B --------- ASSUMED COLUMN E PERCENTAGE ---------- CEDED TO FROM ---------- OF AMOUNT GROSS OTHER OTHER NET ASSUMED COLUMN A AMOUNT COMPANIES COMPANIES AMOUNT TO NET - --------------------------------- ---------- --------- --------- ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) YEAR ENDED DECEMBER 31, 1995 Life insurance in force*......... $1,513,199 $822,309 $ 8,742 $ 699,632 1% ========== ======== ======== ========== Premium Revenue Life insurance premiums........ $ 15,166 $ 2,333 $ 1,636 $ 14,469 11% Workers' compensation.......... 543,892 22,368 53,428 574,952 9% Professional medical liability, corporate and other......... 35,953 6,729 2,741 31,965 9% ---------- -------- -------- ---------- $ 595,011 $ 31,430 $ 57,805 $ 621,386 ========== ======== ======== ========== YEAR ENDED DECEMBER 31, 1994 Life insurance in force*......... $1,559,869 $380,609 $334,124 $1,513,384 22% ========== ======== ======== ========== Premium Revenue Life insurance premiums........ $ 11,990 $ (1,114) $ 1,585 $ 14,689 11% Workers' compensation.......... 408,519 7,064 -- 401,455 0% Professional medical liability, corporate and other......... 34,187 2,058 -- 32,129 0% ---------- -------- -------- ---------- $ 454,696 $ 8,008 $ 1,585 $ 448,273 ========== ======== ======== ========== YEAR ENDED DECEMBER 31, 1993 Life insurance in force*......... $1,769,668 $460,946 $297,060 $1,605,782 18% ========== ======== ======== ========== Premium Revenue Life insurance premiums........ $ 13,427 $ 551 $ 1,392 $ 14,268 10% Workers' compensation.......... 432,743 5,950 -- 426,793 0% Professional medical liability, corporate and other......... 29,658 1,494 808 28,972 3% ---------- -------- -------- ---------- $ 475,828 $ 7,995 $ 2,200 $ 470,033 ========== ======== ======== ==========
- --------------- * Balance at end of year. Intercompany transactions have been eliminated. 77 79 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C --------------------------- COLUMN B ADDITIONS COLUMN E ---------- --------------------------- COLUMN D ---------- COLUMN A BALANCE AT CHARGED TO CHARGED TO ---------- BALANCE AT - ------------------------------------- BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD - ------------------------------------- ---------- ---------- -------------- ---------- ---------- (THOUSANDS OF DOLLARS) YEAR ENDED DECEMBER 31, 1995 Deducted from asset accounts: Allowance for possible loan losses........................ $ 27,406 $ 14,575 $ -- $ 10,200(2) $ 31,781 Premiums receivable and agents' balances and reinsurance recoverable................... 6,959 2,465 1,723(1) -- 11,147 ------- ------- ------ ------- ------- Totals..................... $ 34,365 $ 17,040 $1,723 $ 10,200 $ 42,928 ======= ======= ====== ======= ======= YEAR ENDED DECEMBER 31, 1994 Deducted from asset accounts: Allowance for possible loan losses........................ $ 25,222 $ 11,980 $3,605(1) $ 13,401(2) $ 27,406 Premiums receivable and agents' balances and reinsurance recoverable................... 6,991 320 -- 352(2) 6,959 ------- ------- ------ ------- ------- Totals..................... $ 32,213 $ 12,300 $3,605 $ 13,753 $ 34,365 ======= ======= ====== ======= ======= YEAR ENDED DECEMBER 31, 1993 Deducted from asset accounts: Allowance for possible loan losses........................ $ 22,819 $ 16,873 $ -- $ 14,470(2) $ 25,222 Premiums receivable and agents' balances and reinsurance recoverable................... 5,866 3,143 -- 2,018(2) 6,991 ------- ------- ------ ------- ------- Totals..................... $ 28,685 $ 20,016 $ -- $ 16,488 $ 32,213 ======= ======= ====== ======= =======
- --------------- (1) Reserves established with company and portfolio acquisitions. (2) Uncollectible accounts written off, net of recoveries and reclassifications. 78 80 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE X -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------------- DECEMBER 31, COLUMN H ---------------------------------------------- -------------------------- COLUMN C ---------- COLUMN D CLAIMS AND CLAIM COLUMN B RESERVES -------- ADJUSTMENT ----------- FOR UNPAID DISCOUNT COLUMN G EXPENSES INCURRED COLUMN A DEFERRED CLAIMS IF ANY COLUMN E COLUMN F ---------- RELATED TO - ------------------------ POLICY AND CLAIM DEDUCTED -------- -------- NET -------------------------- AFFILIATION WITH ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT (1) (2) REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME CURRENT YEAR PRIOR YEARS - ------------------------ ----------- ---------- -------- -------- -------- ---------- ------------ ----------- (THOUSANDS OF DOLLARS) Fremont Insurance Group and Consolidated Subsidiaries 1995.................... $27,700 $1,455,692 $23,126 $100,481 $606,917 $101,270 $459,951 $ 1,382 1994.................... $17,130 $ 746,661 $ -- $ 47,551 $433,584 $ 62,169 $290,833 $ (17,234) 1993.................... $17,243 $ 782,927 $ -- $ 54,724 $455,765 $ 65,737 $323,279 $ (4,126) YEAR ENDED DECEMBER 31, ----------------------------------- COLUMN I ----------- COLUMN J AMORTIZA- ---------- TION OF PAID COLUMN A DEFERRED CLAIMS COLUMN K - ------------------------ POLICY AND CLAIM -------- AFFILIATION WITH ACQUISITION ADJUSTMENT PREMIUMS REGISTRANT COSTS EXPENSES WRITTEN - ------------------------ ----------- ---------- -------- (THOUSANDS OF DOLLARS) Fremont Insurance Group and Consolidated Subsidiaries 1995.................... $ 118,383 $490,781 $583,790 1994.................... $ 80,321 $307,279 $426,432 1993.................... $ 72,446 $308,357 $455,667
79 81 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 28th day of March 1996. FREMONT GENERAL CORPORATION By: /s/ JOHN A. DONALDSON -------------------------------- Title: Controller and chief Accounting Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ --------------- /s/ JAMES A. MCINTYRE Chairman of the Board and March 28, 1996 - ------------------------------------------ Chief Executive Officer James A. McIntyre (Principal Executive Officer) /s/ LOUIS J. RAMPINO President, Chief Operating March 28, 1996 - ------------------------------------------ Officer and Director Louis J. Rampino /s/ WAYNE R. BAILEY Executive Vice President, March 28, 1996 - ------------------------------------------ Treasurer and Chief Wayne R. Bailey Financial Officer (Principal Financial Officer) /s/ JOHN A. DONALDSON Controller and March 28, 1996 - ------------------------------------------ Chief Accounting Officer John A. Donaldson (Principal Accounting Officer) /s/ HOUSTON I. FLOURNOY Director March 28, 1996 - ------------------------------------------ Houston I. Flournoy /s/ C. DOUGLAS KRANWINKLE Director March 28, 1996 - ------------------------------------------ C. Douglas Kranwinkle /s/ DAVID W. MORRISROE Director March 28, 1996 - ------------------------------------------ David W. Morrisroe /s/ DICKINSON C. ROSS Director March 28, 1996 - ------------------------------------------ Dickinson C. Ross /s/ KENNETH L. TREFFTZS Director March 28, 1996 - ------------------------------------------ Kenneth L. Trefftzs
80 82 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------ 2.1 Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference)...................................... 2.2 Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference)................... 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit No. 3.1 to Registration Statement on Form S-3 File No 33-64771 which was declared effective on March 1, 1996, and incorporated herein by reference.)..................................... 3.2 Certificate of Amendment of Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit 3.2 to Registration Statement on Form S-3 File No. 33-64771 which was declared effective on March 1, 1996 and herein incorporated by reference)............................. 3.3 Amended and Restated By-Laws of Fremont General Corporation............ 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number 1-8007, and incorporated herein by reference)................... 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Filed as Exhibit No. (4)(iv) to Registration Statement on Form S-3 filed on October 1, 1993, and incorporated herein by reference)...................................... 4.3 Indenture among the Registrant, the Trust and First Interstate Bank of California, a California banking corporation, as trustee............... 4.4 Declaration of Trust among the Registrant, the Regular Trustees and The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee................................................................ 4.5 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee................. 4.6 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee............................................ 4.7 Common Securities Guarantee Agreement by the Registrant................ 4.8 Form of Preferred Securities. (included in Exhibit 4.5)................ 4.9 Form of 9% Junior Subordinated Debenture. (included in Exhibit 4.3).... 10.1 Fremont General Corporation Employee Stock Ownership Plan as amended... 10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan..........................................
83
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------ 10.3 Fremont General Corporation and Affiliated Companies Investment Incentive Program as amended........................................... 10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit No. (10)(xi) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference)................................................... 10.4(b) Amendment to Trust Agreement for Investment Incentive Program.......... 10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No. (10)(v) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1990, Commission File Number 1-8007, and incorporated herein by reference)................................................... 10.5(b) Amendment to Supplemental Retirement Plan.............................. 10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior Supplemental Retirement Plan of the Company, as amended......... 10.7 Senior Supplemental Retirement Plan, as amended........................ 10.8(a) Excess Benefit Plan of The Company. (Filed as Exhibit No. (10)(vi) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1993, Commission File No.> 1-8007 and incorporated herein by reference)............................................................. 10.8(b) Amendment to Excess Benefit Plan of the Company........................ 10.8(c) Trust Agreement for Excess Benefit Plan................................ 10.9 Non-Qualified Stock Option Plan of 1989 of the Company................. 10.10 Long-Term Incentive Compensation Plan of the Company................... 10.11 1995 Restricted Stock Award Plan....................................... 10.12 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust Company of California............................................ 10.13 Employment Agreement between the Company and James A. McIntyre. (Filed as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007, and incorporated herein by reference)................................................... 10.14(a) Employment Agreement between the Company and Louis J. Rampino.......... 10.14(b) Employment Agreement between the Company and Wayne R. Bailey........... 10.15 Management Continuity Agreement between the Company and Raymond G. Meyers................................................................. 10.16 1995 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. (10)(vi) to Quarterly Report on Form 10-Q, for the period ended June 30, 1995, Commission File Number 1-8007, and incorporated herein by reference)................................................... 10.17 Continuing Compensation Plan for Retired Directors..................... 10.18 Non-Employee Directors' Deferred Compensation Plan..................... 10.19(a) Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No. (10)(xiv) to Quarterly Report on Form 10-Q for the period ended September 30, 1994, Commission File Number 1-8007, and incorporated herein by reference)...................................... 10.19(b) Amendment to Credit Agreement.......................................... 10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in connection with the Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent..................................................................
84
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------ 10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of California as trustee for the Fremont General Corporation Employee Stock Ownership Trust. The Plan Committee (hereinafter described) on behalf of the Fremont General Corporation Employee Stock Ownership Plan, Fremont General Corporation, and First Interstate Bank of California August 10, 1995. (Filed as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference).................................. (11) Statement re: Computation of per share earnings........................ (21) Subsidiaries of the Company............................................ (23) Consent of Ernst & Young LLP independent Auditors...................... (27) Financial Data Schedule................................................ (28) Information from reports provided to state insurance regulatory authorities............................................................ P
EX-3.3 2 AMENDED & RESTATED BY-LAWS 1 EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF FREMONT GENERAL CORPORATION A Nevada Corporation Date of adoption by the Board of Directors: November 9, 1995 2 TABLE OF CONTENTS
Page ---- ARTICLE I - OFFICE 1 SECTION 1. PRINCIPAL OFFICE 1 SECTION 2. OTHER OFFICES 1 ARTICLE II - MEETINGS OF STOCKHOLDERS 1 SECTION 1. PLACE OF MEETINGS 1 SECTION 2. ANNUAL MEETINGS 1 SECTION 3. NOTICE OF STOCKHOLDERS' MEETINGS 1 SECTION 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE 2 SECTION 5. SPECIAL MEETINGS 2 SECTION 6. NOTICE OF STOCKHOLDER BUSINESS 2 SECTION 7. ADJOURNED MEETINGS AND NOTICE THEREOF 3 SECTION 8. VOTING 3 SECTION 9. RECORD DATE 5 SECTION 10. QUORUM 5 SECTION 11. CONSENT OF ABSENTEES 6 SECTION 12. ACTION WITHOUT MEETING 6 SECTION 13. PROXIES 6 SECTION 14. INSPECTORS OF ELECTION 7 ARTICLE III - DIRECTORS 7 SECTION 1. POWERS 7 SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS 8 SECTION 3. ELECTION AND TERM OF OFFICE 8 SECTION 4. REMOVAL 8 SECTION 5. VACANCIES 9 SECTION 6. PLACE OF MEETING 9 SECTION 7. REGULAR MEETINGS 9 SECTION 8. SPECIAL MEETINGS; NOTICE 10 SECTION 9. TELEPHONE MEETINGS 10 SECTION 10. WAIVER OF NOTICE 10 SECTION 11. QUORUM 10 SECTION 12. ADJOURNMENT 11 SECTION 13. NOTICE OF ADJOURNMENT 11 SECTION 14. FEES AND COMPENSATION 11 SECTION 15. ACTION WITHOUT MEETING 11
-i- 3 TABLE OF CONTENTS (CONTINUED)
Page ---- ARTICLE IV - COMMITTEES 11 SECTION 1. COMMITTEES OF DIRECTORS 11 SECTION 2. COMMITTEE MINUTES 12 SECTION 3. MEETINGS AND ACTION OF COMMITTEES 12 ARTICLE V - OFFICERS 13 SECTION 1. OFFICERS 13 SECTION 2. ELECTION 13 SECTION 3. SUBORDINATE OFFICERS 13 SECTION 4. REMOVAL AND RESIGNATION 13 SECTION 5. VACANCIES 14 SECTION 6. CHAIRMAN OF THE BOARD 14 SECTION 7. VICE CHAIRMAN OF THE BOARD 14 SECTION 8. PRESIDENT 14 SECTION 9. EXECUTIVE VICE PRESIDENT 14 SECTION 10. VICE PRESIDENT 14 SECTION 11. SECRETARY 15 SECTION 12. CHIEF FINANCIAL OFFICER AND TREASURER 15 SECTION 13. CONTROLLER 16 SECTION 14. CASHIER 16 ARTICLE VI - MISCELLANEOUS 16 SECTION 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER 16 SECTION 2. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. 17 SECTION 3. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS 17 SECTION 4. ANNUAL REPORT 17 SECTION 5. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED 17 SECTION 6. CERTIFICATES OF STOCK 17 SECTION 7. LOST CERTIFICATES 18 SECTION 8. REPRESENTATION OF SHARES OF OTHER CORPORATIONS 18 SECTION 9. MAINTENANCE AND INSPECTION OF BYLAWS 18 ARTICLE VII - AMENDMENTS 19 SECTION 1. POWER OF STOCKHOLDERS 19 SECTION 2. POWER OF DIRECTORS 19
-ii- 4 TABLE OF CONTENTS (CONTINUED)
Page ---- ARTICLE VIII - INDEMNIFICATION 19 SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. 19 SECTION 2. INDEMNIFICATION OF OTHERS. 19 SECTION 3. PAYMENT OF EXPENSES IN ADVANCE. 20 SECTION 4. INDEMNITY NOT EXCLUSIVE. 20 SECTION 5. INSURANCE INDEMNIFICATION. 20 SECTION 6. CONFLICTS. 20 SECTION 7. INDEMNITY AGREEMENTS 20
-iii- 5 AMENDED AND RESTATED BYLAWS OF FREMONT GENERAL CORPORATION ARTICLE I OFFICE SECTION 1. PRINCIPAL OFFICE. The principal office for the transaction of business of the corporation is hereby fixed and located in Carson City, State of Nevada. The Board of Directors is hereby granted full power and authority to change said principal office from one location to another in said state. SECTION 2. OTHER OFFICES. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All annual meetings of stockholders and all other meetings of stockholders shall be held either at the principal office or at any other place within or without the State of Nevada which may be designated either by the Board of Directors pursuant to authority hereinafter granted to said Board. SECTION 2. ANNUAL MEETINGS. Unless a different date is specifically designated in advance by the Board of Directors, the annual meetings of stockholders shall be held on the first Tuesday of May of each year, at 3:00 p.m. of said day; provided, however, that should said day fall upon a legal holiday, then any such annual meeting of stockholders shall be held at the same time and place on the next day thereafter ensuing which is not a legal holiday. At such meetings directors shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers of the stockholders. SECTION 3. NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings with stockholders shall be sent or otherwise given in accordance with Section 4 of these Bylaws not less than ten (10) nor more than sixty (60) days before each annual meeting. The notice shall specify the place, date and hour of such meeting and (i) shall be signed by the President, a Vice-President, the Secretary, or an Assistant Secretary or by such other person or persons designated by the Board of Directors, and (ii) shall state those matters which the Board of Directors, at the time of giving notice, intends to present for action by the stockholders. The notice of -1- 6 any meeting at which directors are to be elected shall include the name of any nominee or nominees intended at the time of the notice to be presented by the Board of Directors for election. SECTION 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of any meeting of stockholders shall be given to each stockholder entitled to vote, either personally or by mail or other means of written communication, charges prepaid, addressed to such stockholder at the stockholder's address appearing on the books of the corporation or given by such stockholder to the corporation for the purpose of notice. If a stockholder gives no address, notice shall be deemed to have been given if sent by mail or other means of written communication addressed to the place where the principal office of the corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the Secretary, Assistant Secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes whatsoever, may be called at any time by the President or by the Board of Directors. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for annual meetings of stockholders. No business other than that specified in the notice may be transacted. SECTION 6. NOTICE OF STOCKHOLDER BUSINESS. To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, each such notice must be given either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation not later than (i) with respect to a matter to be brought before an annual meeting of stockholders or a special meeting in lieu of an annual meeting, sixty (60) days prior to the date set forth in the Bylaws for the annual meeting and (ii) with respect to a matter to be brought before a special meeting of the stockholders not in lieu of an annual meeting, the close of business on the tenth day -2- 7 following the date on which notice of such meeting is first given to stockholders. The notice shall set forth (i) information concerning the stockholder, including the stockholder's name and address, (ii) a lawful representation that the stockholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present the matter specified in the notice, and (iii) such other information with respect to such matter as would be required to be included in a proxy statement soliciting proxies for the presentation of such matter to the meeting. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this section; provided, however, that nothing in this section shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with these Bylaws. SECTION 7. ADJOURNED MEETINGS AND NOTICE THEREOF. Any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 10 of these Bylaws. When any stockholders' meeting, either annual or special, is adjourned for thirty (30) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which such adjournment is taken. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. SECTION 8. VOTING. The stockholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the corporation on the record date determined in accordance with Section 9 of this Article. Voting shall in all cases be subject to the following provisions: (a) Shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. (b) Shares standing in the name of a receiver may be voted by such receiver; and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in the order of the court by which such receiver was appointed. -3- 8 (c) Except where otherwise agreed in writing between the parties, a stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) Shares standing in the name of a minor may be voted and the corporation may treat all rights incident thereto as exercisable by the minor, in person or by proxy, whether or not the corporation has notice, actual or constructive, of the nonage, unless a guardian of the minor's property has been appointed and written notice of such appointment given to the corporation. (e) Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy- holder as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the Board of Directors of such other corporation may determine or, in the absence of such determination, by the chairman of the board, president or any vice president of such other corporation, or by any other person authorized to do so by the board, president or any vice president of such other corporation. (f) If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled to vote under a stockholder voting agreement or otherwise, or if two or more persons (including proxy-holders) have the same fiduciary relationship respecting the same shares, unless the Secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) If only one votes, such act binds all: (ii) If more than one votes, the act of the majority so voting binds all; (iii) If more than one votes, but the votes are evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this Section shall be a majority or even split in interest. The stockholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any stockholder at the meeting and before the voting has begun. Except as may be otherwise provided in the Articles of Incorporation, each outstanding share, regardless of class, shall be entitled to the vote on each matter submitted to a vote of the stockholders. Any stockholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the -4- 9 remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the stockholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the stockholders, unless the vote of a greater number or a vote by classes is required by the Code or by the Articles of Incorporation. SECTION 9. RECORD DATE. The Board may fix, in advance, a record date for the determination of the stockholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than sixty (60) nor less than ten (10) days prior to the date of any meeting and not more than sixty (60) days prior to any other action. When a record date is so fixed, only stockholders of record at the close of business on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the corporation after the record date. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 10. QUORUM. The presence in person or by proxy of persons entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. -5- 10 SECTION 11. CONSENT OF ABSENTEES. The transactions of any meeting of stockholders, either annual or special, however called and noticed, shall be as valid as if taken at a meeting duly held after regular call and notice, if a quorum be present either by person or by proxy, and if, either before or after the meeting, each of the stockholders entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. SECTION 12. ACTION WITHOUT MEETING. The stockholders of the corporation may not take action by written consent without a meeting, but must take any such actions at a duly called annual or special meeting. SECTION 13. PROXIES. Every person entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the Secretary of the corporation. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's duly authorized agent. Except in special cases where other express provision is made by statute, determination of the authenticity and validity of such proxy shall be made by the corporation or its duly appointed agent(s). A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the Secretary of the corporation stating that the proxy is revoked or by executing a subsequent proxy and filing such subsequent proxy with the Secretary of the corporation in accordance with the procedures set forth in these Bylaws for filing proxies, or (ii) lawful written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no such proxy shall be valid after the expiration of six (6) months from the date of its execution unless coupled with an interest, or unless the person executing it specifies therein the length of time for which such proxy is to continue in force, which in no case shall exceed seven (7) years from the date of its execution. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of postmark dates on the envelopes in which they are mailed, or electronic transmission dates if delivered electronically. -6- 11 SECTION 14. INSPECTORS OF ELECTION. In advance of any meeting of stockholders, the Board may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any stockholder or stockholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more stockholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors shall be appointed. The duties of such inspectors shall include: determining the number of shares outstanding and the voting power of each; determining the number of shares represented at the meeting and the existence of a quorum; determining the authenticity, validity, and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents, provided, however, that the Board of Directors may appoint its transfer agent or other such authorized agent to assist with counting and tabulating such votes; determining when the polls shall close; determining the result of any vote; and doing such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there are three inspectors of election, the decision, act, or certificate of a majority is effective in all respects as decision, act, or certificate of all. ARTICLE III DIRECTORS SECTION 1. POWERS. Subject to limitations of the Articles of Incorporation, of the Bylaws, and of the laws of the State of Nevada as to action which shall be authorized or approved by the stockholders, and subject to the duties of directors as prescribed by the Bylaws, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be controlled by, the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the following powers: FIRST: To select and remove all the officers, agents and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with the law, with the Articles of Incorporation or Bylaws, fix their compensation, and require from them security for faithful service. -7- 12 SECOND: To conduct, manage and control the affairs and business of the corporation, and to make such rules and regulations therefor not inconsistent with law, or with the Articles of Incorporation or the Bylaws, as they may deem best. THIRD: To authorize the issue of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled, or tangible or intangible property actually received, or in the case of shares issued as a dividend, against amounts transferred from surplus to stated capital. FOURTH: To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. FIFTH: To appoint an executive committee and other committees, and to delegate to the executive committee any of the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, except as set forth in Article IV of these Bylaws. SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the corporation shall be not less than five nor more than seven until changed by amendment of the Articles of Incorporation or by a Bylaw duly adopted by the stockholders amending this Section 2. The exact number of directors shall be fixed from time to time, within the limits specified in the Articles of Incorporation or in this Section 2, by a Bylaw or amendment thereof duly adopted by the stockholders or by the Board of Directors. Pursuant thereto, it is hereby specified that the corporation shall have seven (7) Directors. SECTION 3. ELECTION AND TERM OF OFFICE. The directors shall be elected at each annual meeting of stockholders, but if any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of stockholders held for that purpose. All directors shall hold office until their respective successors are elected unless removed in the manner provided in Section 4 of this Article III, by resignation, or the director otherwise vacates such office. SECTION 4. REMOVAL. Any or all of the directors may be removed without cause if such removal is approved by not less than two- thirds of the issued and outstanding shares entitled to vote, provided, however, that (i) if the Articles of Incorporation or an amendment thereto provide for the election of directors by cumulative voting, no director shall be removed from office except upon the vote or written consent of stockholders owning -8- 13 sufficient shares to have prevented his election to office in the first instance, (ii) the Articles of Incorporation may require the concurrence of a larger percentage of the stock entitled to voting power in order to remove a director, and (iii) when by the provisions of the Articles of Incorporation the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so selected may be removed only by the applicable vote of the holders of the shares of that class or series. SECTION 5. VACANCIES. Vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. A vacancy or vacancies in the Board of Directors shall be deemed to exist in case (i) of the death, resignation or removal of any director, (ii) the authorized number of directors is increased, (iii) the stockholders fail at any annual or special meeting of stockholders at which any director or directors are elected to elect the full authorized number of directors to be voted for at that meeting, or (iv) the Board of Directors by resolution declares vacant the office of director who has been declared of unsound mind by an order of court or convicted of a felony. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the Board of Directors. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the stockholders shall have the power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. SECTION 6. PLACE OF MEETING. Regular meetings of the Board of Directors shall be held at any place within or without the State of Nevada which has been designated from time to time by resolution of the Board of Directors or by written consent of all members of the Board of Directors. In the absence of such designation, regular meetings shall be held at the principal office of the corporation. Special meetings of the Board may be held either at a place so designated or at the principal office. SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held without call on the first Tuesday of the second month following the close of each calendar quarter; provided, however, should said day fall upon a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is not a legal holiday. Notice of all such regular meetings of the Board of Directors is hereby dispensed with. -9- 14 SECTION 8. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes shall be called at any time by the President or, if he is absent or unable or refuses to act, by any Vice President or by any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least forty-eight (48) hours prior to the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least twenty-four (24) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving notice reasonably believes will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting if the meeting is to be held at the principal executive office of the corporation. SECTION 9. TELEPHONE MEETINGS. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. SECTION 10. WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as if taken at a meeting duly held after regular call and notice, if a quorum is present, and (i) if either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof, or (ii) the director attended the meeting without protesting, prior thereto or at its commencement, to the lack of notice to such director. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. SECTION 11. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 12 of these Bylaws. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number is required by law or by the Articles of Incorporation. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. -10- 15 SECTION 12. ADJOURNMENT. A majority of the directors present, whether or not a quorum, may adjourn any meeting to another time and place. SECTION 13. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 14. FEES AND COMPENSATION. Directors shall not receive any stated salary for their services as directors, but, by resolution of the Board, a fixed fee, with or without expenses for attendance, may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation therefor. SECTION 15. ACTION WITHOUT MEETING. Unless otherwise restricted by the Articles of Incorporation or Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all the members of the Board or of such committee. Such written consent shall be filed with the minutes of the proceedings of the Board or of such committee. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. ARTICLE IV COMMITTEES SECTION 1. COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. -11- 16 Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the Articles of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 78.195 of the Nevada General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement or plan of merger, consolidation or share exchange under the Nevada General Corporation Law, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, (v) amend the Bylaws of the corporation, (vi) approve any action which, under the laws of the State of Nevada also requires stockholders' approval or approval of the outstanding shares, (vii) fill vacancies of the Board of Directors or in any committee, (viii) fix the compensation of the Directors for serving on the Board or any committee, (ix) amend or repeal any resolution of the Board of Directors which by its express terms is not so amendable or repealable, (x) appoint any other committees of the Board of Directors or the members of such committees; and, unless the Board resolution establishing the committee, the Bylaws or the Articles of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a plan of merger pursuant to Section 78.457 of the Nevada General Corporation Law. SECTION 2. COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. SECTION 3. MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of these Bylaws applicable to the full Board of Directors, with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that (i) the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, and (ii) special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right -12- 17 to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS SECTION 1. OFFICERS. The officers of the corporation shall be a President, a Vice President, a Secretary, a Treasurer and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman of the Board, a Cashier, one or more additional Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. One person may hold two or more offices. SECTION 2. ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen annually by the Board of Directors, and each such officer shall hold office until he or she shall resign or shall be removed or otherwise disqualified to serve, or his or her successor shall be elected and qualified. SECTION 3. SUBORDINATE OFFICERS. The Board of Directors may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. SECTION 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors, the President, or to the Secretary of the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified in that notice, the acceptance of such resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. -13- 18 SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to such office. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such officer shall be elected, shall preside at all meetings of the stockholders and at all meetings of the Board of Directors and Executive Committee (and with the advice and consent of the Board of Directors, implement broad policy guidance to the corporation through the Executive Committee). He shall be ex officio a member of all the standing committees, a member of the Executive Committee, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. At the discretion of the Board of Directors, the Chairman of the Board may also be the Chief Executive Officer. The Chief Executive Officer shall have, subject to the control of the Board, general supervision, direction, and control of the business and officers of the corporation. SECTION 7. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board, if such officer shall be elected, shall, if present, and in the absence of the Chairman of the Board, preside at all meetings of the Board of Directors and Executive Committee, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. SECTION 8. PRESIDENT. The President shall have direct supervision and control of the corporate business, and in the absence of the Chairman of the Board and the Vice Chairman of the Board, if such officer shall be elected, shall preside over Board of Directors and Executive Committee meetings and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. At the discretion of the Board of Directors, the President may also be the Chief Operating Officer of the corporation, and/or the Chief Executive Officer is such position is not held by the Chairman of the Board. SECTION 9. EXECUTIVE VICE PRESIDENT. The Executive Vice President shall have such direct supervision and control of the corporate business as shall be assigned to him by the President or Chairman of the Board. He shall be a member of the Executive Committee, and in the absence or disability of the President, the Executive Vice President shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Executive Vice President shall have such other powers and perform such other duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. SECTION 10. VICE PRESIDENT. In the absence or disability of the President and the Executive Vice President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice -14- 19 President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as may be from time to time assigned to them respectively by the Board of Directors or prescribed by the Bylaws. SECTION 11. SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes at the principal office or such other place as the Board of Directors may order, of all meetings of directors (including meetings of committees) and stockholders, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at directors' meetings (including meetings of committees), the number of shares present or represented at stockholders' meetings and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the stockholders and their addresses; the number and classes of shares held by each; the number and date of certificates issued for the same; and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the stockholders and of the Board of Directors required by the Bylaws or by law to be given, and shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. SECTION 12. CHIEF FINANCIAL OFFICER AND TREASURER. The Chief Financial Officer shall be the Treasurer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. Any surplus, including earned surplus, paid-in surplus and surplus arising from a reduction of stated capital, shall be classified according to source and shown in a separate account and shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, whether or not they request it, an account of all transactions as Treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. -15- 20 SECTION 13. CONTROLLER. The Controller shall keep adequate and correct accounts of the corporation's business transactions (except those kept by the Treasurer as herein provided). The Controller shall verify the assets of the corporation and see that all books and accounts of the corporation, wherever located, are audited from time to time, and shall perform such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee and/or other Committee of the Board of Directors. SECTION 14. CASHIER. The Cashier shall, subject to the direction of the Chief Financial Officer, be responsible for the corporate banking transactions. The Cashier shall keep and maintain reporting systems related to banking and cash management; develop internal and external asset-liability analysis programs, alternative banking facilities and relationships; and assist the Chief Financial Officer in executing the corporate commercial paper borrowing policy. The Cashier shall be responsible for cash management and cash flow analysis; foreign bank account operations; and for the taxable fixed income investment reporting system. The Cashier shall execute investment transactions and shall have such other powers, duties and authority as may be set forth elsewhere in these Bylaws and as may be prescribed by the President or the Board of Directors from time to time. ARTICLE VI MISCELLANEOUS SECTION 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. Any person who has been a stockholder of record of the corporation for at least six (6) months immediately preceding such stockholder's demand, or any person holding, or thereunto authorized in writing by the holders of, at least five percent (5%) of all its outstanding shares, upon at least five (5) days' written demand, or any judgment creditor of the corporation without prior demand, shall have the right to inspect in person or by agent or attorney, during usual business hours, the stock ledger or duplicate stock ledger. Holders of voting trust certificates representing shares of the corporation shall be regarded as stockholders for the purpose of this section. Such inspection may be denied to such stockholder or other person upon refusal by such stockholder or other person to furnish to the corporation an affidavit that such inspection is (i) not desired for a purpose which is in the interest of a business or object other than the business of the corporation, and (ii) that such stockholder or other person has not at any time sold or offered for sale any list of stockholders of any domestic or foreign corporation or aided or abetted any person in procuring any such record of stockholders for any such purpose. -16- 21 SECTION 2. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and the minutes of proceedings of the stockholders, of the Board of Directors, and of any committee or committees of the Board of Directors shall be kept at such place or places as are designated by the Board of Directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any stockholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a stockholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. SECTION 3. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. SECTION 4. ANNUAL REPORT. The Board of Directors of this corporation shall cause an Annual Report to be sent to the stockholders. In accordance with the requirements of ___________ _____________ of the Securities and Exchange Commission. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. SECTION 5. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. The Board of Directors, except as otherwise provided in the Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit to render it liable for any purpose or to any amount. SECTION 6. CERTIFICATES OF STOCK. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each stockholder when any such shares are fully paid. All such certificates shall be signed by the President or Executive Vice President or a Vice President and the Secretary or -17- 22 an Assistant Secretary, or be authenticated by facsimiles of the signatures of the President and the Secretary, or by a facsimile of the signature of the President or the Executive Vice President or a Vice President and the written signature of the Secretary or an Assistant Secretary. Every certificate authenticated by a facsimile of a signature must be countersigned by a transfer agent or transfer clerk, and be registered by an incorporated bank or trust company, either domestic or foreign, as registrar of transfer, before issuance. If any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent, or registrar at the date of issue. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board of Directors or the Bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state the amount remaining unpaid and the terms of payment thereof. SECTION 7. LOST CERTIFICATES. Except as provided in this Section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time. The Board may, however, in case any certificate for shares is alleged to have been lost, stolen, or destroyed, authorize the issuance of a new certificate in lieu thereof, and the corporation may require that the corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft, or destruction of such certificate or the issuance of such new certificate. SECTION 8. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President, Executive Vice President, or any Vice President and the Secretary or Assistant Secretary of this corporation are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officer or officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officer or officers in person or by any person authorized to do so by proxy or power of attorney duly executed by said officer or officers. SECTION 9. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep in its principal office for the transaction of business the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the stockholders at all reasonable times during office hours. -18- 23 ARTICLE VII AMENDMENTS SECTION 1. POWER OF STOCKHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote of stockholders entitled to exercise a majority of the voting power of the corporation, except as otherwise provided by law or by the Articles of Incorporation. SECTION 2. POWER OF DIRECTORS. Subject to the right of stockholders as provided in Section 1 of this Article VII to adopt, amend or repeal Bylaws, Bylaws other than a Bylaw or amendment thereof changing the authorized number of directors may be adopted, amended or repealed by the Board of Directors. ARTICLE VIII INDEMNIFICATION SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the law of the State of Nevada, indemnify each of its directors and officers against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. SECTION 2. INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the extent and in the manner permitted by the law of the State of Nevada, to indemnify each of its employees and agents (other than directors and officers) against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VIII, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a -19- 24 corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. SECTION 3. PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 1 or for which indemnification is permitted pursuant to Section 2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VIII. SECTION 4. INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. SECTION 5. INSURANCE INDEMNIFICATION. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article VIII. SECTION 6. CONFLICTS. No indemnification or advance shall be made under this Article VIII, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. SECTION 7. INDEMNITY AGREEMENTS. The corporation may enter into indemnity agreements with the persons who are members of its Board of Directors from time to time, and with such officers, employees and agents of the corporation and with such officers, directors, employees and agents of subsidiaries as the Board of Directors may designate, such indemnity agreements to provide in substance that the corporation will -20- 25 indemnify such persons as contemplated by this Article VIII, and to include any other substantive or procedural provisions regarding indemnification as are not inconsistent with the law of the State of Nevada. The provisions of such indemnity agreements shall prevail to the extent that they limit or condition or differ from the provisions of this Article VIII. Amended and Restated Bylaws Adopted by the Board of Directors on November 9, 1995 -21- 26 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: (1) That I am the duly elected and acting Secretary of FREMONT GENERAL CORPORATION, a Nevada corporation; and (2) That the foregoing Amended and Restated Bylaws, comprising 25 pages constitute the Amended and Restated Bylaws of said corporation in full force and effect as of the date of this certification. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said corporation this 9th day of November, 1995. Secretary -22- EX-4.3 3 INDENTURE (FIRST INTERSTATE BANK) 1 EXHIBIT 4.3 FREMONT GENERAL CORPORATION TO FIRST INTERSTATE BANK OF CALIFORNIA a California banking corporation, Trustee --------- Indenture Dated as of March 6, 1996 9% Junior Subordinated Debentures due March 31, 2026 2 TABLE OF CONTENTS
Page ---- Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Recitals of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Additional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Additional Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . 3 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Board Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Company Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . . . . 3 Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Extension Period . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Fremont Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Global Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Institutional Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 4 Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . 4 Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 4 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Parent Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Predecessor Security . . . . . . . . . . . . . . . . . . . . . . . . . 5 Preferred Securities . . . . . . . . . . . . . . . . . . . . . . . . . 5 Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
i 3 Security Register . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Security Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Tax Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Trust Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . 7 U.S. Government Obligations . . . . . . . . . . . . . . . . . . . . . . 7 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 102. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . 7 SECTION 103. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . 7 SECTION 104. Acts of Holders; Record Dates . . . . . . . . . . . . . . . . . . . . . 8 SECTION 105. Notices, Etc. to Trustee and the Company . . . . . . . . . . . . . . . 9 SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 107. Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . 9 SECTION 108. Effect of Headings and Table of Contents . . . . . . . . . . . . . . . 9 SECTION 109. Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 110. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 111. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 112. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE TWO Security Forms SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 202. Form of Face of Security . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 203. Form of Reverse of Security . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 204. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . 15 ARTICLE THREE The Securities SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 303. Execution, Authentication, Delivery and Dating . . . . . . . . . . . . 17 SECTION 304. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 305. Registration; Registration of Transfer and Exchange . . . . . . . . . . 18 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities . . . . . . . . . . . 19 SECTION 307. Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . 19 SECTION 308. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 309. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 310. Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 311. Right of Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 312. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 313. Global Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ii 4 ARTICLE FOUR Satisfaction and Discharge; Defeasance SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . 23 SECTION 402. Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 403. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 404. Conditions to Defeasance or Covenant Defeasance . . . . . . . . . . . . 24 SECTION 405. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 406. Indemnity for U.S. Government Obligations . . . . . . . . . . . . . . . 25 ARTICLE FIVE Remedies SECTION 501. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 502. Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . 27 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . 27 SECTION 504. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . 28 SECTION 505. Trustee May Enforce Claims Without Possession of Securities . . . . . . 28 SECTION 506. Application of Money Collected . . . . . . . . . . . . . . . . . . . . 29 SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 508. Unconditional Right of Holders to Receive Principal and Interest . . . 29 SECTION 509. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . 30 SECTION 510. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . 30 SECTION 511. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . 30 SECTION 512. Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 515. Waiver of Stay or Extension Laws . . . . . . . . . . . . . . . . . . . 31 SECTION 516. Preferred Security Holders Rights . . . . . . . . . . . . . . . . . . . 31 ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities . . . . . . . . . . . . . . . . . . 32 SECTION 602. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 603. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 604. Not Responsible for Recitals or Issuance of Securities . . . . . . . . 33 SECTION 605. May Hold Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 606. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 607. Compensation; Reimbursement; and Indemnity . . . . . . . . . . . . . . 34 SECTION 608. Disqualification; Conflicting Interests . . . . . . . . . . . . . . . . 34 SECTION 609. Corporate Trustee Required; Eligibility . . . . . . . . . . . . . . . . 34 SECTION 610. Resignation and Removal; Appointment of Successor . . . . . . . . . . . 35 SECTION 611. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . 36 SECTION 612. Merger, Conversion, Consolidation or Succession to Business . . . . . . 36 SECTION 613. Preferential Collection of Claims Against Company . . . . . . . . . . . 36
iii 5 ARTICLE SEVEN Holders' Lists and Reports by Trustee and Company SECTION 701. Company to Furnish Trustee Names and Addresses of Holders . . . . . . . 36 SECTION 702. Preservation of Information; Communications to Holders . . . . . . . . 37 SECTION 703. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 704. Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE EIGHT Consolidation, Merger, Conveyance, Transfer or Lease SECTION 801. Successor Substituted . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE NINE Supplemental Indentures SECTION 901. Supplemental Indentures Without Consent of Holders . . . . . . . . . . 38 SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . . . . . . . 38 SECTION 903. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . 39 SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . 39 SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . 39 SECTION 906. Reference in Securities to Supplemental Indentures . . . . . . . . . . 39 ARTICLE TEN Covenants; Representations and Warranties SECTION 1001. Payment of Principal and Interest . . . . . . . . . . . . . . . . . . . 40 SECTION 1002. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . 40 SECTION 1003. Money for Security Payments to Be Held in Trust . . . . . . . . . . . . 40 SECTION 1004. Statement by Officers as to Default . . . . . . . . . . . . . . . . . . 41 SECTION 1005. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 1006. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 1007. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . 41 SECTION 1008. Additional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 1009. Additional Covenants . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 1010. Waiver of Certain Covenants . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE ELEVEN Subordination of Securities SECTION 1101. Securities Subordinate to Senior Indebtedness . . . . . . . . . . . . . 43 SECTION 1102. Default on Senior Indebtedness . . . . . . . . . . . . . . . . . . . . 43 SECTION 1103. Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . 44 SECTION 1104. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 1105. Trustee to Effectuate Subordination . . . . . . . . . . . . . . . . . . 46 SECTION 1106. Notice by the Company . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 1107. Rights of the Trustee; Holders of Senior Indebtedness . . . . . . . . . 46 SECTION 1108. Subordination May Not be Impaired . . . . . . . . . . . . . . . . . . . 47
iv 6 ARTICLE TWELVE Redemption of Securities SECTION 1201. Optional Redemption; Conditions to Optional Redemption . . . . . . . . 47 SECTION 1202. Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 1203. Election to Redeem; Notice to Trustee . . . . . . . . . . . . . . . . . 48 SECTION 1204. Selection by Trustee of Securities to Be Redeemed . . . . . . . . . . . 48 SECTION 1205. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 1206. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 1207. Securities Payable on Redemption Date . . . . . . . . . . . . . . . . . 49 SECTION 1208. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . 49 ARTICLE THIRTEEN Expenses SECTION 1301. Payment of Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 1302. Payment Upon Resignation or Removal . . . . . . . . . . . . . . . . . . 50
v 7 Sections 310 through 318 of the Trust Indenture Act of 1939:
TRUST INDENTURE INDENTURE ACT SECTION SECTION ----------- ------- Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608, 610 Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702(b) (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702(c) Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703(a) (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101, 1004 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703(a) (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703(b) Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514 Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104(c) Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1003 Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
vi 8 INDENTURE, dated as of March 6, 1996, between Fremont General Corporation, a corporation duly organized and existing under the laws of the State of Nevada (herein called the "Company"), having its principal office at 2020 Santa Monica Boulevard, Suite 600, Santa Monica, California 90404, and First Interstate Bank of California, a California banking corporation, as Trustee (herein called the "Trustee"). Unless otherwise defined herein, all capitalized items used herein shall have the meanings ascribed to them in the Amended and Restated Declaration of Trust between the Company, as Depositor, and The Chase Manhattan Bank, N.A., (the "Institutional Trustee") The Chase Manhattan Bank (USA), (the "Delaware Trustee") Louis J. Rampino and Wayne R. Bailey as "Regular Trustees," dated as of March 6, 1996 (the "Declaration" or "Trust Agreement"), as in effect on the date hereof, and which is incorporated by reference hereto. RECITALS OF THE COMPANY WHEREAS, Fremont Financing (as defined herein) will pursuant to the Purchase Agreement dated March 1, 1996 (the "Purchase Agreement"), and a Pricing Agreement, dated March 1, 1996 (the "Pricing Agreement") among the Company, Fremont Financing and the Underwriters named therein, issue $103,092,784 (or $118,556,702 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full) aggregate liquidation preference of its 9% Trust Originated Preferred Securities (the "Preferred Securities") with a liquidation preference of $25 per Preferred Security (or $115,000,000 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full); WHEREAS, this Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions; WHEREAS, the Company is guaranteeing the payment of distributions on the Preferred Securities and the Common Securities, liquidation preference $25 per Common Security (the "Common Securities") (together with the Preferred Securities, the "Trust Securities"), of Fremont Financing and payment of the Redemption Price and payments on liquidation with respect to the Trust Securities, to the extent provided in the Preferred Securities Guarantee Agreement and the Common Securities Guarantee Agreement, both dated March 6, 1996, by the Company and The Chase Manhattan Bank, N.A., as guarantee trustee (collectively the "Parent Guarantees") for the benefit of the holders of the Trust Securities; WHEREAS, the Company wishes to sell to Fremont Financing, and Fremont Financing wishes to purchase from the Company, Securities (as defined below) in an aggregate principal amount of $103,092,784 (or $118,556,702 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full) and in satisfaction of the purchase price for such Securities, the trustees of Fremont Financing, on behalf of Fremont Financing, wish (i) to execute and deliver to the Company Common Securities certificates evidencing an ownership interest in Fremont Financing, registered in the name of the Company, in an aggregate amount of 123,711 (or 142,268 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full) Common Securities having an aggregate liquidation amount of up to $3,092,784 (or $3,556,701 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full), and (ii) to deliver to the Company the sum of $3,092,784 (or $3,556,701 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full); WHEREAS, the Company has duly authorized the creation of an issue of its 9% Junior Subordinated Debentures due March 31, 2026 (the "Securities"), of substantially the tenor and amount hereinafter set 1 9 forth and to provide therefor the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holder thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (4) 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; (5) a reference to any Person shall include its successors and assigns; (6) a reference to any agreement or instrument shall mean such agreement or instrument as supplemented, modified, amended or amended and restated and in effect from time to time; (7) a reference to any statute, law, rule or regulation, shall include any amendments thereto applicable to the relevant Person, and any successor statute, law, rule or regulation; and (8) a reference to any particular rating category shall be deemed to include any corresponding successor category, or any corresponding rating category issued by a successor or subsequent rating agency. "Act," when used with respect to any Holder, has the meaning specified in Section 104. "Additional Interest" has the meaning specified in Section 1008. "Additional Taxes" means the sum of any additional taxes, duties and other governmental charges to which Fremont Financing has become subject from time to time as a result of a Tax Event. 2 10 "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate Securities. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board, as the context requires. "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 or Sunday or a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or a day on which the Corporate Trust Office of the Trustee, or the principal office of the Institutional Trustee, under the Trust Agreement, is closed for business. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities" has the meaning specified in the Recitals to this Indenture. "Common Stock" means the common stock, par value $1.00 per share, of the Company. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Compound Interest" has the meaning specified in Section 301. "Corporate Trust Office" means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered. As of the date hereof, the Corporate Trust Office of the Trustee is located at 707 Wilshire Boulevard, W11-1, Los Angeles, California 90017, Attn.: Corporate Trust. "Covenant Defeasance" has the meaning specified in Section 403. "Declaration" has the meaning specified in the Recitals. "Defaulted Interest" has the meaning specified in Section 307. 3 11 "Defeasance" has the meaning specified in Section 402. "Depositary" means, with respect to Securities issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor legislation. "Extension Period" has the meaning specified in Section 301. "Fremont Financing" means the statutory business trust Fremont General Financing I declared and established pursuant to the Delaware Business Trust Act by the Trust Agreement. "Global Security" means a Security that evidences all or part of the Securities and is authenticated and delivered to, and registered in the name of, the Depositary for such Securities or a nominee thereof. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Institutional Trustee" has the meaning set forth in the Declaration. "Interest Payment Date," when used with respect to any installment of interest on a Security, means the date specified in such Security as the fixed date on which an installment of interest with respect to the Securities is due and payable. "Maturity," when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Officers' Certificate" means a certificate signed by (a) the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President, and (b) the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Indenture 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; 4 12 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company (and who may be an employee of the Company), and who shall be reasonably acceptable to the Trustee. An opinion of counsel may rely on certificates as to matters of fact. "Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities which have been paid pursuant to Section 306, or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company. "Parent Guarantees" has the meaning specified in the Recitals to this instrument. "Paying Agent" means any Person authorized by the Company to pay the principal of or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, partnership, association, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Preferred Securities" has the meaning specified in the Recitals to this instrument. "Purchase Agreement" has the meaning specified in the Recitals to this instrument. "Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price," when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the Business Day next preceding such Interest Payment Date. 5 13 "Responsible Officer," when used with respect to the Trustee, means an officer of the Trustee with primary responsibility for administering Trustee's duties under this Indenture. "Securities" has the meaning specified in the Recitals to this instrument. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Senior Indebtedness" means, with respect to the Company and its Subsidiaries, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company and its Subsidiaries, for money borrowed and (B) indebtedness evidenced by securities, debentures, bonds or other similar instruments issued by the Company and its Subsidiaries, including, without limitation, all obligations of the Company and its Subsidiaries under the $200 million Credit Facility due 2001, $300 million Senior Revolving Credit Facility due 1998, and Variable Rate Asset Backed Certificates, and certain other notes payable, short term debt and open letters of credit of the Company currently outstanding, (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 on any letter of credit, banker's acceptance, security purchase facility or similar credit transaction, (v) all obligations arising under any rate or basis swap, forward contract, commodity swap or option, equity or equity index swap or option, bond, note or bill option, interest rate option, foreign currency exchange transaction, crosscurrency rate swap, currency option, cap, collar or floor transaction, swap option, synthetic trust product, synthetic lease or any similar transaction or agreement (vi) all obligations of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise including all obligations of the Company and its Subsidiaries to insure specified levels of equity capital for another person or otherwise to maintain the net worth or solvency of another person and (vii) all obligations of the type referred to in clauses (i) through (vi) 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), except for (1) any such indebtedness that is by its terms subordinated to or pari passu with the Securities and (2) any indebtedness between or among the Company or its affiliates, including all other debt securities and guarantees in respect of those debt securities, issued to any other trust, or a trustee of such trust, partnership or other entity affiliated with the Company that is a financing vehicle of the Company (a "financing entity") in connection with the issuance by such financial entity of Preferred Securities or other securities that rank pari passu with, or junior to, the Preferred Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the benefits of the subordination provisions irrespective of any amendment, modification, waiver, refinancing, whether by the same creditor or group of creditors or a successor creditor or group or restructuring of any Senior Indebtedness, including any of the foregoing which increase the principal amount thereof, the interest rate thereon or other amounts payable in respect thereof, shortens the term to maturity thereof, enhances the relative priority thereof, requires or establishes sinking fund payments, guarantees, collateral security or other credit support therefore or otherwise renders the terms thereof more favorable to the holders thereof. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity," when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the date on which the principal, together with any accrued and unpaid interest (including Additional Interest), of such Security or such installment of interest is due and payable (whether the initial such date or, if pursuant to Section 301 the Company elects to extend the Stated Maturity of any principal or, as the case may be, defer such interest payment, such later date as is chosen by the Company pursuant to Section 301). 6 14 "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Tax Event" means the receipt by Fremont Financing of an Opinion of Counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or (b) as a result of any amendment to, or change in an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, (in each case on or after the date of issuance of the Preferred Securities), there is more than an insubstantial risk that (i) Fremont Financing is, or will be within 90 days of the date thereof, subject to United States Federal income tax with respect to interest received on the Securities, (ii) interest payable by the Company on the Securities is not, or within 90 days of the date thereof will not be, deductible, in whole or in part, for United States Federal income tax purposes or (iii) Fremont Financing is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Trust Agreement" has the meaning specified in the Recitals to this Indenture. "Trust Securities" has the meaning specified in the Recitals to this Indenture. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "U.S. Government Obligations" has the meaning specified in Section 404. "Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. SECTION 103. Form of Documents Delivered to Trustee. 7 15 In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee at its Corporate Trust Office and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. 8 16 With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. (d) The ownership of Securities shall be proved by the Security Register. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. Notices, Etc. to Trustee and the Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office; or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. Notwithstanding anything to the contrary set forth in this Indenture, any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted under this Indenture shall not be deemed to be made, given, filed or furnished to the Trustee unless made, given, filed or furnished in writing to the Trustee at its Corporate Trust Office. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Trust Indenture Act to be a part of and govern this Indenture, the latter provision 9 17 shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness, the holders of Preferred Securities (to the extent provided herein) and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 111. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF. THIS INDENTURE IS SUBJECT TO THE PROVISIONS OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED, THAT ARE REQUIRED TO BE PART OF THIS INDENTURE AND SHALL, TO THE EXTENT APPLICABLE, BE GOVERNED BY SUCH PROVISIONS. SECTION 112. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal of the Securities need not be made on such date, but may be made on the next succeeding Business Day (except that, if such Business Day is in the next succeeding calendar year, such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, shall be the immediately preceding Business Day) with the same force and effect as if made on the Interest Payment Date, the Redemption Date, or at the Stated Maturity, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be. SECTION 113. Indenture and Notes Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any 10 18 assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE TWO Security Forms SECTION 201. Forms Generally. The Securities and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these or other methods, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 202. Form of Face of Security. FREMONT GENERAL CORPORATION 9% Junior Subordinated Debenture, Due March 31, 2026 $_________________ No. ____ CUSIP No. 357288AG4 FREMONT GENERAL CORPORATION, a corporation duly organized and existing under the laws of the State of Nevada (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ________________________ or registered assigns, the principal sum of ____________________________________________________ on March 31, 2026, provided that the Company may extend the maturity date subject to certain conditions specified in Section 301 of the Indenture, which extended maturity date shall in no case be later than March 31, 2045, and to pay interest on said principal sum from March 6, 1996 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, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30, and December 31 of each year, commencing March 31, 1996, at the rate of 9% per annum plus Additional Interest, if any, 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 the same rate per annum. The Company will pay Compound Interest, if any, in accordance with the provisions of Section 301 of the Indenture. The amount of interest payable for any period will be computed on the basis of twelve 30-day months and a 360- day year. The amount of interest payable for any period shorter than a full quarterly period for which interest is computed, will be computed on the basis of actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on this Security is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), 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 the date the payment was originally payable. A "Business Day" 11 19 shall mean any day other than a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or a day on which the Corporate Trust Office of the Trustee, or the principal office of the Institutional Trustee under the Trust Agreement, is closed for business. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities, as defined in the Indenture) is registered at the close of business on the Regular Record Date for such interest installment, which shall be the close of business on the Business Day next preceding such Interest Payment Date, subject to certain exceptions provided in said Indenture. Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. The Company shall have the right at any time during the term of this Security, from time to time, to extend the interest payment period of such Security for up to 20 consecutive quarters (an "Extension Period"), during which periods interest will compound quarterly and the Company shall have the right to make partial payments of interest on any Interest Payment Date, and at the end of which Extension Period the Company shall pay all interest then accrued and unpaid (including any Additional Interest), together with interest thereon at the rate specified for the Securities to the extent that payment of such interest is permitted by applicable law ("Compound Interest"); provided that during any such Extension Period, the Company shall not, and shall cause any Subsidiary of the Company (other than its wholly owned Subsidiaries) not to, (a) declare or pay any dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases or acquisitions of shares of the Common Stock of the Company as contemplated by any employment arrangement, benefit plan or other similar contract with or for the benefit of employees, officers or directors entered into in the ordinary course of business, (ii) as a result of an exchange or conversion of any class or series of the Company's capital stock for the Company's Common Stock, (iii) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such Company capital stock or the security being converted or exchanged, or (iv) the payment of any stock dividend by the Company payable in the Company's Common Stock) or make any guarantee payments with respect to the foregoing and (b) make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Security except as (i) required in accordance with the terms thereof (including, in the case of junior debt, the subordination provisions thereof), (ii) in connection with a contemporaneous refinancing of such debt securities with the proceeds of a new issuance of debt securities which have terms and provisions no more favorable to the holder than those of the debt securities repurchased or refinanced (iii) in connection with the contemporaneous conversion or exchange of such debt securities for Common Stock of the Company; provided, however, that in no event shall the amount to be paid by the Company or any of its subsidiaries under (a) or (b)(ii) or (iii) above exceed in the aggregate $500,000 per year. Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that such Extension Period together with all such previous and further extensions thereof shall not exceed 20 consecutive quarters or extend beyond the Maturity of this Security. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due, the Company may select a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. The Company shall give the Trustee notice of its selection of an Extension Period at least one Business Day prior to the earlier of (i) the Interest Payment Date or (ii) 12 20 the date Fremont Financing is required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Preferred Securities of the record date or the date such distributions are payable, but in any event not less than one Business Day prior to such record date. If the Institutional Trustee shall not be the sole holder of the Securities, the Company shall give the holders of the Securities notice of its selection of such Extension Period ten Business Days prior to the earlier of (i) the Interest Payment Date or (ii) the date upon which the Company is required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Securities of the record or payment date of such related interest payment. Payment of the principal of and interest on this Security will be made at the office or agency of the Paying Agent maintained for that purpose in the United States, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. Each Holder hereof, by his acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. Reference is hereby made to the further provisions of the Indenture summarized on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Fremont General Corporation has caused this instrument to be duly executed under its corporate seal. Dated: __________________ FREMONT GENERAL CORPORATION By: _______________________________ Name: Title: Attest: _______________________________ 13 21 SECTION 203. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the "Company", designated as its 9% Junior Subordinated Debentures, due March 31, 2026 (provided that the Company may extend the maturity date subject to certain conditions specified in Section 301 of the Indenture), (herein called the "Securities"), limited in aggregate principal amount to $118,556,702 issued under an Indenture, dated as of March 6, 1996 (herein called the "Indenture"), between the Company and First Interstate Bank of California, a California banking corporation, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. All terms used in this Security which are defined in the Indenture or in the Declaration attached as Annex A thereto shall have the meanings assigned to them in the Indenture or the Declaration, as the case may be. At any time on or after March 31, 2001, the Company shall have the right, subject to the terms and conditions of Article Twelve of the Indenture, to redeem this Security at the option of the Company, without premium or penalty, in whole or in part, at a Redemption Price equal to 100% of the principal amount to be redeemed plus accrued but unpaid interest, including any Additional Interest, if any, to, but excluding, the Redemption Date. If a Tax Event as defined in Article Twelve of the Indenture shall occur and be continuing, the Company shall have the right, subject to the terms and conditions of Article Twelve of the Indenture, to redeem this Security at the option of the Company, without premium or penalty, in whole but not in part, at a Redemption Price equal to 100% of the principal amount thereof plus accrued but unpaid interest, including any Additional Interest, if any, to the Redemption Date. Any redemption pursuant to this paragraph will be made upon not less than 30 nor more than 60 days' notice to the Holders, at the Redemption Price. If the Securities are only partially redeemed by the Company, the Securities will be redeemed pro rata. If a partial redemption of the Preferred Securities resulting from a partial redemption of the Securities would result in the delisting of the Preferred Securities, the Company may only redeem the Securities in whole. In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default with respect to the Securities shall occur and be continuing, the principal of the Securities may be declared due and payable in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for satisfaction and discharge at any time of the entire indebtedness of this Security upon compliance by the Company with certain conditions set forth in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of Holders of not less than a majority in principal amount of the Outstanding Securities affected by such modification, to modify the Indenture in a manner affecting the rights of the Holders of the Securities; provided that no such modification may, without the consent of the Holder of each Outstanding Security affected (or if the Securities are held by Fremont Financing, the holders of each of the Preferred Securities) thereby, (i) change the fixed maturity of the Securities except as provided in the Indenture, or reduce the principal amount thereof, or reduce the rate or, except as described below, extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, or (ii) reduce the percentage of principal amount of the Securities, the Holders of which are required to consent to any such modification of the Indenture. The Indenture also contains provisions permitting Holders of 14 22 specified percentages in principal amount of the Securities at the time Outstanding, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in New York, New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. The Securities are issuable only in registered form without coupons. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. SECTION 204. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. FIRST INTERSTATE BANK OF CALIFORNIA as Trustee By: _______________________________________ Authorized Officer ARTICLE THREE The Securities SECTION 301. Title and Terms. 15 23 The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $103,092,784 (or $118,556,702 if the over-allotment option set forth in Section 2 of the Purchase Agreement is exercised in full) except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306, 906 or 1208. The Securities shall be known and designated as the "9% Junior Subordinated Debentures, Due March 31, 2026" of the Company. Their initial Stated Maturity shall be March 31, 2026. Not more than one year or less than one month prior to the initial Stated Maturity, the Company may, in its sole discretion, extend the Stated Maturity no more than one time for up to an additional 19 years from the initial Maturity Date, provided that all of the following conditions are satisfied at the time the Company elects to extend the Stated Maturity: (i) the Company is not in bankruptcy, insolvent or in liquidation, (ii) the Company is not in default in the payment of any interest or principal under this Indenture, or to any trustee of the Trust in connection with the issuance of the Trust Securities, (iii) the Company has made timely payments on the Securities for the immediately preceding six quarters without deferrals or extensions of the interest payment period, (iv) Fremont Financing is not in arrears on payments of distributions on the Preferred Securities, (v) the Securities are rated not less than BBB or better by Standard & Poors Ratings Group or Baa2 or better by Moody's Investors Service, Inc. or the equivalent by any other nationally recognized statistical rating organization, and (vi) the extended Stated Maturity is no later than the 49th anniversary of the issuance of the Preferred Securities. The Securities shall bear interest at the rate of 9% per annum, from March 6, 1996 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable quarterly (subject to deferral as set forth herein), in arrears, on March 31, June 30, September 30, and December 31 of each year, commencing March 31, 1996 until the principal thereof is paid or made available for payment. Interest will compound quarterly and will accrue at the rate of 9% per annum on any interest installment in arrears for more than one quarter or during an Extension Period of an interest payment period as set forth below in this Section 301. In the event that any date on which interest is payable on the Securities is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (except that, if such Business Day is in the next succeeding calendar year, such Interest Payment Date shall be the immediately preceding Business Day) (and without any interest or other payment in respect of any such delay). The Company shall have the right, at any time during the term of the Securities, to extend the interest payment period, from time to time, for up to 20 consecutive quarters (the "Extension Period") during which period interest will compound quarterly and the Company shall have the right to make partial payments of interest on any Interest Payment Date, and at the end of which Extension Period the Company shall pay all interest then accrued and unpaid thereon (together with Additional Interest at the rate specified for the Securities to the extent permitted by applicable law ("Compound Interest"), provided, however, that during any such Extension Period, the Company shall not, and shall cause any Subsidiary (other than its wholly owned Subsidiaries) not to, (a) declare or pay any dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases or acquisitions of shares of the Common Stock of the Company as contemplated by any employment arrangement, benefit plan or other similar contract with or for the benefit of employees, officers or directors entered into in the ordinary course of business, (ii) as a result of an exchange or conversion of any class or series of the Company's capital stock for the Company's Common Stock, (iii) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such Company capital stock or the security being converted or exchanged, or (iv) the payment of any stock dividend by the Company payable in the Company's Common Stock) or make any guarantee payments with respect to the foregoing and (b) make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Security except as (i) required 16 24 in accordance with the terms thereof (including, in the case of junior debt, the subordination provisions thereof), (ii) in connection with a contemporaneous refinancing of such debt securities with the proceeds of a new issuance of debt securities which have terms and provisions no more favorable to the holder than those of the debt securities repurchased or refinanced or (iii) in connection with the contemporaneous conversion or exchange of such debt securities for Common Stock of the Company; provided, however, that in no event shall the amount to be paid by the Company or any of its Subsidiaries under (a) or (b)(ii) or (iii) above exceed in the aggregate $500,000 per year. Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that such Extension Period together with all such previous and further extensions thereof shall not exceed 20 consecutive quarters or extend beyond the Maturity of the Securities. Upon termination of any Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due, the Company may select a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. The Company shall give the Institutional Trustee and the Administrative Trustees (as defined in the Declaration) and the Trustee notice of its selection of such Extension Period at least one Business Day prior to the earlier of (i) the Interest Payment Date or (ii) the date the Administrative Trustees are required to give notice to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Preferred Securities of the record date or the date such distributions are payable, but in any event not less than one Business Day prior to such record date. If the Institutional Trustee shall not be the sole holder of the Securities, the Company shall give the holders of the Securities notice of its selection of such Extension Period ten Business Days prior to the earlier of (i) the Interest Payment Date or (ii) the date upon which the Company is required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Securities of the record or payment date of such related interest payment. The Trustee shall promptly give notice of the Company's selection of such Extension Period to the holders of the Preferred Securities. The principal of and interest on the Securities shall be payable at the office or agency of the Paying Agent in the United States maintained for such purpose and at any other office or agency maintained by the Company for such purpose in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Securities shall be subordinated in right of payment to Senior Indebtedness as provided in Article Eleven. The Securities shall be redeemable as provided in Article Twelve. SECTION 302. Denominations. The Securities shall be issuable only in registered form, without coupons. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents, under its manual or facsimile corporate seal reproduced thereon attested by its Treasurer or one of its Assistant Treasurers or Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. 17 25 Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 305. Registration; Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 1002 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. 18 26 At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to the Holder for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1208 not involving any transfer. If the Securities are to be redeemed in part, the Company shall not be required (A) 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 the mailing of a notice of redemption of any such Securities selected for redemption under Section 1203 and ending at the close of business on the day of such mailing, or (B) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. 19 27 The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable (including any Additional Interest), and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. The Company shall pay Compound Interest, if any, in accordance with the provisions of Section 301 hereof. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the 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 Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the proposed payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the written notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and, if so listed, upon such notice as may be required by such exchange, if, after notice given by the Company in writing to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue (including in each such case Additional Interest), which were carried by such other Security. 20 28 SECTION 308. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee shall treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Section 307) interest (including Additional Interest) on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order. SECTION 310. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any period shorter than a full quarterly period for which interest is computed, will be computed on the basis of actual number of days elapsed per 30-day month. SECTION 311. Right of Set-Off. Notwithstanding anything to the contrary in the Indenture, the Company shall have the right to set-off any payment it is otherwise required to make thereunder to the extent the Company has theretofore made, or is concurrently on the date of such payment making, a payment under the Parent Guarantees. The Company shall promptly provide notice in writing to the Trustee of any payment it makes under the Parent Guarantees that it intends to set-off against any payment the Company is required to make pursuant to this Indenture. SECTION 312. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. SECTION 313. Global Securities. If the Securities are distributed to holders of Preferred Securities in liquidation of such holder's interests in Fremont Financing, such Securities will initially be issued as a Global Security. If the Company shall establish that the Securities are to be issued in the form of one or more Global Securities, then the Company shall execute and the Trustee shall, in accordance with Section 303 and the Company Order, authenticate and deliver one or more Global Securities that (i) shall represent and shall be 21 29 denominated in an amount equal to the aggregate principal amount of all of the Securities to be issued in the form of Global Securities and not yet cancelled, (ii) shall be registered in the name of the Depositary for such Global Security or Securities or the nominee of such Depositary, and (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions. Global Securities shall bear a legend substantially to the following effect: This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This Global Security is exchangeable for Securities registered in the name of a Person other than the Depositary or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Security (other than a transfer of this Security as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in such limited circumstances. Every Security delivered upon registration of transfer of, or in exchange for, or in lieu of, this Global Security shall be a Global Security subject to the foregoing, except in the limited circumstances described above. Unless this certificate is presented by an authorized representative of The Depositary Trust Company, a New York corporation ("DTC"), to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is to be made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. Notwithstanding the provisions of Section 305, unless and until it is exchanged in whole or in part for Securities in definitive registered form, a Global Security representing all or a part of the Securities may not be transferred in the manner provided in Section 305 except as a whole by the Depositary to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. If at any time the Depositary for any Securities represented by one or more Global Securities notifies the Company that it is unwilling or unable to continue as Depositary for such Securities or if at any time the Depositary for such Securities shall no longer be eligible under this Section 313, the Company shall appoint a successor Depositary with respect to such Securities. If a successor Depositary for such Securities is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company's election that such Securities be represented by one or more Global Securities shall no longer be effective and the Company shall execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Securities, will authenticate and deliver Securities in definitive registered form, in any authorized denominations, in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing such Securities in exchange for such Global Security or Securities. The Company may at any time and in its sole discretion determine that the Securities issued in the form of one or more Global Securities shall no longer be represented by a Global Security or Securities. In such event the Company shall execute, and the Trustee, upon receipt of a Company Order or an Officers' Certificate for the authentication and delivery of definitive Securities, shall authenticate and deliver, Securities in definitive registered form, in any authorized denominations, in an aggregate principal 22 30 amount equal to the principal amount of the Global Security or Securities representing such Securities, in exchange for such Global Security or Securities. In accordance with the provisions of this Section 313, the Depositary for such Global Security shall surrender such Global Security in exchange in whole or in part for Securities in definitive registered form on such terms as are reasonably acceptable to the Company and such Depositary. Thereupon, the Company shall execute, and the Trustee shall authenticate and deliver, without service charge to the Holder; (i) to the Person specified by such Depositary, a new Security or Securities, of any authorized denominations as requested by such Person, in an aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Security; and (ii) to such Depositary a new Global Security in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of Securities authenticated and delivered pursuant to clause (i) above. Upon the exchange of a Global Security for Securities in definitive registered form in authorized denominations, such Global Security shall be cancelled by the Trustee or an agent of the Company or the Trustee. Securities in definitive registered form issued in exchange for a Global Security pursuant to this Section 313 shall be registered in such names and in such authorized denominations as the Depositary for such Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or an agent of the Company or the Trustee. The Trustee or such agent shall deliver at its office such Securities to or as directed by the Persons in whose names such Securities are so registered. ARTICLE FOUR Satisfaction and Discharge; Defeasance SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on written demand of and at the expense of the Company, shall execute instruments supplied by the Company acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or 23 31 (iii) if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest (including Additional Interest) to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Defeasance and Discharge. The following provisions shall apply to the Securities unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 301. In addition to discharge or defeasance of this Indenture pursuant to Sections 401 and 403, in the case of any Securities with respect to which the exact amount described in subparagraph (a) of Section 404 can be determined at the time of making the deposit referred to in such subparagraph (a), the Company shall be deemed to have paid and discharged the entire indebtedness on all the Securities as provided in this Section on and after the date the conditions set forth in Section 404 are satisfied, and the provisions of this Indenture with respect to the Securities shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of Holders of Securities to receive, solely from the trust fund described in subparagraph (a) of Section 404, payments of principal thereof and interest, if any, thereon upon the original stated due dates therefor (but not upon acceleration), (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) this Section 402 and (vi) the rights of the Holders of Securities as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them) (hereinafter called "Defeasance"), and the Trustee at the cost and expense of the Company, shall execute proper instruments acknowledging the same. SECTION 403. Covenant Defeasance. In the case of any Securities with respect to which the exact amount described in subparagraph (a) of Section 404 can be determined at the time of making the deposit referred to in such subparagraph (a), (i) the Company shall be released from its obligations under any covenants specified in or pursuant to this Indenture (except as to (i) rights of registration of transfer and exchange of Securities, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of Holders of Securities to receive, from the Company pursuant to Section 1001, payments of principal thereof and interest, if any, thereon upon the original stated due dates therefor (but not upon acceleration), (iv) the rights, obligations, duties and 24 32 immunities of the Trustee hereunder and (v) the rights of the Holders of Securities as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them), and (ii) the occurrence of any event specified in Section 501(3) (with respect to any of the covenants specified in or pursuant to this Indenture) shall be deemed not to be or result in an Event of Default, in each case with respect to the Outstanding Securities as provided in this Section on and after the date the conditions set forth in Section 404 are satisfied (hereinafter called "Covenant Defeasance"), and the Trustee, at the cost and expense of the Company, shall execute proper instruments acknowledging the same. For this purpose, such Covenant Defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant (to the extent so specified in the case of Section 501(4)), whether directly or indirectly by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document, but the remainder of this Indenture and the Securities shall be unaffected thereby. SECTION 404. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 402 or 403 to the Outstanding Securities: (a) with reference to Section 402 or 403, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee as funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of Securities (i) cash in an amount, or (ii) direct obligations of the United States of America, backed by its full faith and credit ("U.S. Government Obligations"), maturing as to principal and interest, if any, at such times and in such amounts as will insure the availability of cash, or (iii) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge (A) the principal of and interest, if any, on all Securities on each date that such principal or interest, if any, is due and payable, and (B) any mandatory sinking fund payments on the dates on which such payments are due and payable in accordance with the terms of this Indenture and the Securities; (b) in the case of Defeasance under Section 402, the Company has delivered to the Trustee an Opinion of Counsel based on the fact that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y), since the date hereof, there has been a change in the applicable United States federal income tax law, in either case to the effect that, and such opinion shall confirm that, the Holders of the Securities of such series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, Defeasance and discharge and will be subject to federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, Defeasance and discharge had not occurred; (c) in the case of Covenant Defeasance under Section 403, the Company has delivered to the Trustee an Opinion of Counsel to the effect that, and such opinion shall confirm that, the Holders of the Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of such deposit and Covenant Defeasance and will be subject to federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit and Covenant Defeasance had not occurred; (d) such Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound; and 25 33 (e) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent contemplated by this provision have been complied with. SECTION 405. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations deposited with the Trustee pursuant to Section 401 shall be held in trust and such money and all money from such U.S. Government Obligations shall be applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money and U.S. Government Obligations has been deposited with the Trustee. SECTION 406. Indemnity for U.S. Government Obligations. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 404 or the principal or interest received in respect of such obligations other than any such tax, fee or other charge that by law is for the account of the Holders of Outstanding Securities. ARTICLE FIVE Remedies SECTION 501. Events of Default. "Event of Default," wherever used herein, means any one of the following events that has occurred and is continuing (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Eleven or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) failure for 30 days to pay any interest on the Securities, including any Additional Interest in respect thereof, when due; provided, however, that during an Extension Period, no such failure shall be deemed to exist with respect to interest payments due during such Extension Period; or (2) failure to pay any principal on the Securities when due whether at Stated Maturity, following notice of redemption, by declaration or otherwise; provided, however, that the Securities shall not be deemed to have matured solely by virtue of an extension of their maturity in accordance with the terms of the Indenture; or (3) failure to observe or perform in any material respect any other covenant herein for 90 days after written notice to the Company from the Trustee or the Holders of at least 25% in principal amount of the Outstanding Securities; or (4) default under any bond, debenture or any other evidence of indebtedness for money borrowed by the Company having an aggregate outstanding principal amount in excess of $15 million, which default shall have resulted in such indebtedness being accelerated, without such indebtedness being discharged or such acceleration having been rescinded or annulled within 30 days after receipt of notice thereof by the Company from the Trustee or by the 26 34 Company and the Trustee from the Holders of not less than 25% in aggregate principal amount at Maturity of the Securities then Outstanding; or (5) the voluntary or involuntary dissolution, winding-up or other termination of the existence of Fremont Financing except in connection with the distribution of Securities to the holders of Preferred Securities in liquidation of Fremont Financing, the redemption of all of the Trust Securities of Fremont Financing or certain mergers, consolidations or amalgamations, each as permitted by the Declaration; or (6) entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of substantially all of the property of the Company, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (7) (A) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or (B) the consent by the Company or to the entry of a decree or order for relief in respect of itself in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Company, or (C) the filing by the Company of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or (D) the consent by the Company to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of all or substantially all of the property of the Company, or (E) the making by the Company of an assignment for the benefit of creditors. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities shall have the right to declare the principal of and the interest on all the Securities (including any Additional Interest) and any other amounts payable hereunder to be due and payable immediately, provided, however, that if upon an Event of Default, the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Securities fail to declare the payment of all amounts on the Securities to be immediately due and payable, the holders of at least 50% in aggregate liquidation preference of Preferred Securities then outstanding shall have such right, by a notice in writing to the Company (and to the Trustee if given by Holders or the holders of Preferred Securities) to declare all amounts outstanding in respect of the Preferred Securities to be due and payable and upon any such declaration such principal and all accrued interest shall become immediately due and payable. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if 27 35 (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest (including any Additional Interest) on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (2) all Events of Default, other than the non-payment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest (including any Additional Interest) on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest (including any Additional Interest), and, to the extent that payment thereof shall be legally enforceable, interest on any overdue principal and on any overdue interest (including any Additional Interest), at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the 28 36 Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Subject to Article Eleven, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; and SECOND: To the payment of the amounts then due and unpaid for principal of and interest (including any Additional Interest) on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest (including any Additional Interest), respectively. THIRD: Any remainder, to any other Person lawfully entitled thereto or to the Company. SECTION 507. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; 29 37 (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and (subject to Section 307) interest (including any Additional Interest) on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any 30 38 such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities 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, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture; and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 513. Waiver of Past Defaults. Subject to Sections 902 and 1010 hereof, the Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of or interest (including any Additional Interest) on any Security (unless such 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 Trustee); or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected; provided, however, that such waiver or modification to such waiver shall not be effective until the holders of a majority in liquidation preference of Trust Securities shall have consented to such waiver or modification to such waiver; provided further, that if the consent of the Holder of each of the Outstanding Securities is required, such waiver shall not be effective until each Holder of the Trust Securities shall have consented to such waiver. Upon any such waiver, such default shall cease to exist, effective as of the date specified in such waiver (and effective retroactively to the date of default, if so specified) and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. 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, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided, that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or the Trustee or in any suit for the enforcement of the right to receive the principal of and interest (including any Additional Interest) on any Security. 31 39 SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 516. Preferred Security Holders Rights. If an Event of Default constituting the failure to pay interest or principal on the Securities on the date such interest or principal is otherwise payable has occurred and is continuing, then a holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such holder directly of the principal of or interest on the Securities having a principal amount equal to the aggregate liquidation amount of the Preferred Securities or such holder on or after the respective due date specified in the Securities. The holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Securities under this Indenture unless the Institutional Trustee fails to do so. ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities. (a) The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. (b) All indemnifications and releases from liability granted herein to the Trustee shall extend to the directors, officers, employees and agents of the Trustee. SECTION 602. Notice of Defaults. The Trustee shall give the Holders notice of any default hereunder which is made known to the officer of the Trustee having primary responsibility for administering this Indenture, confirmed in writing, and as and to the extent provided by the Trust Indenture Act; provided, however, that except in the case of a default in the payment of the principal of or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Holders of Securities; provided, further, that in the case of any default of the character specified in Section 501(3), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. For purposes of this Section, the Trustee shall not be deemed to have knowledge of a default unless the officer of the Trustee having responsibility for administering this Indenture has actual knowledge of such default or has received written notice of such default in the manner contemplated by Section 105. 32 40 SECTION 603. Certain Rights of Trustee. Subject to the provisions of Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel of its choice and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. 33 41 SECTION 605. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar, or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar, or such other agent. Money held by the Trustee in trust hereunder shall not be invested by the Trustee pending distribution thereof to the holders of the Securities. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 607. Compensation; Reimbursement; and Indemnity. The Company agrees (1) to pay to the Trustee from time to time such reasonable compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee promptly upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify each of the Trustee and any predecessor Trustee for, and to hold it harmless against, any and all loss, damage, claim, liability or expense, including taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust or the trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any, on) or interest on particular Securities. SECTION 608. Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning 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 the provisions of, the Trust Indenture Act and this Indenture. SECTION 609. Corporate Trustee Required; Eligibility. 34 42 There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 and has its Corporate Trust Office in New York, New York or Los Angeles, California. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 611. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf 35 43 of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; provided that, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). ARTICLE SEVEN Holders' Lists and Reports by Trustee and Company SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semiannually, not later than February 15 and August 15 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders to the extent the Company has knowledge thereof as of a date not more than 15 days prior to the delivery thereof, and 36 44 (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; provided that the Company shall not be required to furnish any such list so long as the Trustee is acting as Security Registrar or the Securities are represented by one or more Global Securities. SECTION 702. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 supplied to the Trustee by the Depository at the Trustee's request, and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 703. Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. SECTION 704. Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. In addition, the Company shall promptly notify the Trustee in the event that the Preferred Securities are delisted. ARTICLE EIGHT Consolidation, Merger, Conveyance, Transfer or Lease SECTION 801. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety, the 37 45 successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. Such successor Person shall promptly provide notice in writing to the Trustee of such event. ARTICLE NINE Supplemental Indentures SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided that such action pursuant to this clause (3) shall not adversely affect the interests of the Holders of the Securities or, so long as any of the Preferred Securities shall remain outstanding, the holders of the Preferred Securities; or (4) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security (or, if the Securities are held by the Trust, the holders of each of the Preferred Securities) affected thereby, (1) except to the extent permitted and subject to the conditions set forth in Section 301 with respect to the extension of the Stated Maturity of the Securities, change the Stated Maturity of, the principal of, or any installment of interest (including any Additional Interest) on, any Security, or reduce the principal amount thereof or the rate of interest thereon, or change the place of payment where, or the coin or currency in which, any Security or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, 38 46 (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, Section 513 or Section 1010, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, that, so long as any of the Preferred Securities remains outstanding, no such amendment shall be made that adversely affects the holders of the Preferred Securities, and no termination of this Indenture shall occur, and no waiver of any Event of Default or compliance with any covenant under this Indenture shall be effective, without the prior consent of the holders of at least a majority of the aggregate liquidation preference of the outstanding Preferred Securities unless and until the principal of and any premium on the Securities and all accrued and unpaid interest (including any Additional Interest) thereon have been paid in full, provided further, that any amendment or modification of the terms of this Indenture shall require the prior approval of the California Insurance Commissioner. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected and shall incur no liability which may result from relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such 39 47 supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. ARTICLE TEN Covenants; Representations and Warranties SECTION 1001. Payment of Principal and Interest. The Company will duly and punctually pay the principal of and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain in The City of New York an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. In the event that the Securities go out of book entry form, the Company will provide an office for authentication in The City of New York. The Company may also from time to time designate one or more other offices or agencies (in the United States) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the United States for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 1003. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or at the option of the Company on or before each due date of the principal of or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. In such case the Company shall not invest the amount so segregated and held in trust pending the distribution thereof. Whenever the Company shall have one or more Paying Agents, it will, on or prior to each due date of the principal of or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act; provided, however, that any such deposit on a due date shall be initiated prior to 1:00 p.m. (New York time) in same-day funds. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the 40 48 written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent as such. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Security and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease. SECTION 1004. Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the material terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 1005. Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders and, while any Preferred Securities are outstanding, the holders of the Preferred Securities. SECTION 1006. Maintenance of Properties. The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or 41 49 any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary that comprise more than 10% of the assets of the Company and its Subsidiaries taken as a whole; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1008. Additional Interest. In the event that (i) Fremont Financing is the Holder of all of the Outstanding Securities, (ii) a Tax Event shall have occurred and be continuing and (iii) the Company shall have elected to pay Additional Interest (as defined below) and shall not have revoked any such election, the Company shall pay to Fremont Financing (and its permitted successors or assigns under the Declaration) for so long as Fremont Financing (or its permitted successor or assignee) is the registered holder of any Securities such additional amounts as may be necessary in order that the amount of distributions (including any Additional Amounts) then due and payable by Fremont Financing on the Preferred Securities that at any time remain outstanding in accordance with the terms thereof shall not be reduced as a result of any Additional Taxes (the "Additional Interest"). Whenever in this Indenture there is a reference in any context to the payment of principal of or interest on the Securities, such mention shall be deemed to include mention of the payment 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. SECTION 1009. Additional Covenants. The Company covenants and agrees that it shall not, and shall not permit any Subsidiary of the Company (other than its wholly owned Subsidiaries) to, (a) declare or pay any dividends on or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases or acquisitions of shares of the Common Stock of the Company as contemplated by any employment arrangement, benefit plan or other similar contract with or for the benefit of employees, officers or directors entered into in the ordinary course of business, (ii) as a result of an exchange or conversion of any class or series of the Company's capital stock for the Company's Common Stock, (iii) 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, or (iv) the payment of any stock dividend by the Company payable in the Company's Common Stock or the same stock as that on which the dividend is being paid) or make any guarantee payments with respect to the foregoing and (b) make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Securities except as (i) required in accordance with the terms thereof (including, in the case of junior debt, the subordination provisions thereof), (ii) in connection with a contemporaneous refinancing of such debt securities with the proceeds of a new issuance of debt securities which have terms and provisions no more favorable to the holder than those of the debt securities repurchased or refinanced (iii) in connection with the contemporaneous conversion or exchange of such debt securities for Common Stock of the Company; provided, however, that in no event shall the amount to be paid by the Company or any of its Subsidiaries under (a) or (b)(ii) or (iii) above exceed in the aggregate $500,000 per year if at such time (i) there shall have occurred and be continuing any event that (a) with the giving of notice or the lapse of time or both, would constitute an Event of Default hereunder and (b) in respect of which the Company shall not have taken reasonable steps to cure, (ii) the Company shall be in default with respect to its payment of any obligations under the Parent Guarantees, or (iii) the 42 50 Company shall have given notice of its election of an Extension Period as provided herein and such period, or any extension thereof, shall be continuing. The Company also covenants (i) to maintain 100% ownership of the Common Securities of Fremont Financing; provided, however, that any permitted successor of the Company hereunder may succeed to the Company's ownership of such Common Securities, (ii) not to cause or permit the dissolution, winding-up or termination of Fremont Financing, except in connection with a distribution of the Securities to the holders of Preferred Securities in liquidation of Fremont Financing or in connection with certain mergers, consolidations or amalgamations permitted by the Declaration and (iii) to use its reasonable efforts, consistent with the terms and provisions of the Trust Agreement, to cause Fremont Financing to remain a business trust and to be classified as a grantor trust and not to be classified as an association taxable as a corporation for United States federal income tax purposes, except in connection with a distribution of the Securities to the holders of Preferred Securities in liquidation of Fremont Financing. SECTION 1010. Waiver of Certain Covenants. Except as otherwise specified as contemplated by Section 301 for Securities, the Company may, with respect to the Securities, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Section 901(2) for the benefit of the Holders if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN Subordination of Securities SECTION 1101. Securities Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Security, by such Holder's acceptance thereof, likewise covenants and agrees, that, (i) to the extent and in the manner hereinafter set forth in this Article (subject to Article Four), the payment of the principal of and interest (including any Additional Interest) on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full in cash of all Senior Indebtedness; and (ii) the obligations of the Company under the Securities rank pari passu with the Company's obligations with respect to the Company's $373,750,000 aggregate principal amount at maturity of Liquid Yield(TM) Option Notes Due 2013. All references in this Article Eleven to "payment in full" of Senior Indebtedness shall be construed to mean such payment in full in cash. This Article Eleven shall constitute a continuing offer to all Persons who become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness and such holders are made obligees hereunder and any one or more of them may enforce such provisions. Holders of Senior Indebtedness need not prove reliance on the subordination provisions hereof. SECTION 1102. Default on Senior Indebtedness. In the event and during the continuation of any default in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness (and any applicable grace period with respect to such default has ended and such default has not been cured or waived) or in the event that the maturity of 43 51 any Senior Indebtedness has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption payments) of, or interest on, the Securities. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Holder when such payment is prohibited by the preceding paragraph of this Section 1102, such payment shall 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 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 1103. 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 principal of, and premium, if any, and interest due or to become due upon all Senior Indebtedness shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made on account of the principal or interest on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization any payment by the Company, or distribution of substantially all of the assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Security or the Trustee would be entitled, except for the provisions of this Article Eleven, 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 Holders of the Securities or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (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 any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full or to provide for such payment in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the Holders of Securities or to the Trustee. 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 or the Holders of the Securities before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any 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 remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness. Any holder of Senior Indebtedness may file any proof of claim or similar instrument on behalf of the Trustee and the Holders if such instrument has not been filed by the date which is 30 days prior to the last date specified for filing thereof. 44 52 For purposes of this Article Eleven, 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 Eleven with respect to the Securities to the payment of all Senior Indebtedness that may at the time be outstanding, provided, however, that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of the 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 Eight hereof shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 1103 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Eight hereof. Notwithstanding anything herein to the contrary, nothing in Section 1102 or in this Section 1103 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1104. Subrogation. Subject to the payment in full of all Senior Indebtedness, the rights of the Holders of the Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article Eleven, and no payment over pursuant to the provisions of this Article Eleven, to or for the benefit of the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. It is understood that the provisions of this Article Eleven are and are intended solely for the purposes of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of the Senior Indebtedness on the other hand. Nothing contained in this Article Eleven or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Eleven of the holders of 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 Eleven, the Trustee, subject to the provisions of Section 601, and the Holders of the Securities, shall be entitled to rely upon (and shall incur no liability whatsoever in relying upon), any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of the Securities, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the 45 53 amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Eleven. SECTION 1105. Trustee to Effectuate Subordination. Each Holder of a Security by acceptance thereof authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article Eleven and appoints the Trustee such Holder's attorney-in- fact for any and all such purposes. SECTION 1106. Notice by the Company. The Company shall give prompt written notice to a Responsible Officer 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 Securities pursuant to the provisions of this Article Eleven. Notwithstanding the provisions of this Article Eleven or any other provision of this Indenture, 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 Securities pursuant to the provisions of this Article Eleven, unless and until a Responsible Officer of the Trustee shall have received written notice thereof at the Corporate Trust Office of the Trustee 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 Section 601, 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 1106 at least five 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 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 five Business Days prior to such date. The Trustee, subject to the provisions of Section 601, shall be entitled to rely on (and shall incur no liability whatsoever in relying upon), the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee 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 Senior Indebtedness to participate in any payment or distribution pursuant to this Article Eleven, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of 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 Eleven, 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 1107. 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 Eleven in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Eleven, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this 46 54 Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the provisions of Section 601, the Trustee shall not be liable to any holder of Senior Indebtedness if it shall pay over or deliver to holders of Securities, the Company or any other Person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article Eleven or otherwise. SECTION 1108. Subordination May Not be Impaired. No right of any present or future holder of any Senior Indebtedness 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 may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. ARTICLE TWELVE Redemption of Securities SECTION 1201. Optional Redemption; Conditions to Optional Redemption. At any time on or after March 31, 2001, the Company shall have the right, subject to the last paragraph of this Section 1201, to redeem the Securities, in whole or in part, from time to time, at a Redemption Price equal to 100% of the principal amount of Securities to be redeemed plus any accrued but unpaid interest, including Additional Interest, if any, to the Redemption Date. If a Tax Event shall occur and be continuing, the Company shall have the right, subject to the last paragraph of this Section 1201, either (i) to redeem the Securities in whole but not in part, at a Redemption Price equal to 100% of the principal amount of Securities then outstanding plus accrued but unpaid interest, including Additional Interest, if any, to the Redemption Date or (ii) to direct the trustees of Fremont Financing to dissolve Fremont Financing and distribute the Securities to the holders of the Preferred Securities and Common Securities. For so long as Fremont Financing is the Holder of all Securities Outstanding, the proceeds of any redemption described in this Section 1201 shall be used by Fremont Financing to redeem Preferred Securities in accordance with their terms. The Company shall not redeem the Securities in part unless all accrued and unpaid interest (including any Additional Interest) has been paid in full on all Securities Outstanding for all quarterly interest periods terminating on or prior to the Redemption Date. SECTION 1202. Applicability of Article. 47 55 Redemption of Securities at the election of the Company, as permitted by Section 1201, shall be made in accordance with such provision and this Article. SECTION 1203. Election to Redeem; Notice to Trustee. The election of the Company to redeem Securities pursuant to Section 1201 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 30 days and no more than 60 days prior to the Redemption Date fixed by the Company, notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed and provide a copy of the notice of redemption given to Holders of Securities to be redeemed pursuant to Section 1204. In the event the Securities are at any time hereafter held by more than one Holder, the minimum 30 day notice stated above shall be increased to 45 days. SECTION 1204. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed (unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected on a pro rata basis (or such other method of selection as the Trustee may customarily employ) not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed. The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. If a partial redemption of the Preferred Securities resulting from a partial redemption of the Securities would result in the delisting of the Preferred Securities, the Company may only redeem Securities in whole. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1205. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall identify the Securities to be redeemed (including CUSIP number) and shall state: (1) the Redemption Date, (2) the Redemption Price, (3) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date, (4) the place or places where such Securities are to be surrendered for payment of the Redemption Price, and 48 56 (5) whether, in the case of a partial redemption, such partial redemption would result in a delisting of Preferred Securities remaining outstanding. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1206. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date; provided, however, that any such deposit on a Redemption Date shall be initiated prior to 1:00 p.m. (New York time) in same-day funds. SECTION 1207. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. SECTION 1208. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at a place of payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE THIRTEEN Expenses SECTION 1301. Payment of Expenses. In connection with the offering, sale and issuance of the Securities to the Institutional Trustee and in connection with the sale of the Trust Securities by Fremont Financing, the Company, in its capacity as borrower with respect to the Securities, shall: 1. pay all costs and expenses relating to the offering, sale and issuance of the Securities, includ ing commissions to the underwriters payable pursuant to the Purchase Agree- 49 57 ment and the Pricing Agree ment and compensation of the Trustee under the Indenture in accordance with the provisions of Section 607 of the Indenture; 2. pay all costs and expenses of Fremont Financing (including, but not limited to, costs and expenses relating to the organization of Fremont Financing, the offering, sale and issuance of the Trust Securities (including commissions to the underwriters in connection therewith), the fees and expenses of the Institutional Trustee and the Delaware Trustee, the costs and expenses relating to the operation of Fremont Financing, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommu nications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Fremont Financing assets); 3. be primarily liable for any indemnification obligations arising with respect to the Declaration; and 4. pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. SECTION 1302. Payment Upon Resignation or Removal. Upon termination of this Indenture or the removal or resignation of the Trustee pursuant to Section 610, the Company shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Institutional Trustee, as the case may be, pursuant to Section 5.7 of the Declaration, the Company shall pay to the Delaware Trustee or the Institutional Trustee, as the case may be, all amounts accrued to the date of such termination, removal or resignation. _______________________ This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 50 58 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. FREMONT GENERAL CORPORATION By: /s/ Louis J. Rampino ---------------------------------------- Name: Louis J. Rampino Title: Presidential and Chief Operating Officer Attest: /s/ Alan W. Faigin - --------------------------------------- Name: Alan W. Faigin Title: General Counsel and Secretary FIRST INTERSTATE BANK OF CALIFORNIA By: /s/ Vicki L. Herrick ---------------------------------------- Name: Vicki L. Herrick Title: Assistant Vice President 51 EX-4.4 4 DECLARATION OF TRUST 1 EXHIBIT 4.4 ======================================== DECLARATION OF TRUST FREMONT GENERAL FUNDING I DATED AS OF DECEMBER 1, 1995 ======================================== 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.2 Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.3 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.5 Title to Property of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.6 Powers of the Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.7 Filing of Certificate of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.8 Duration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.9 Responsibilities of the Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 3.1 Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 3.2 Regular Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 3.3 Delaware Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 3.4 Property Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV LIMITATION OF LIABILITY OF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4.1 Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4.2 Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.3 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 4.4 Outside Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE V AMENDMENTS, TERMINATION, MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 5.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 5.2 Termination of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 5.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 5.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 5.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 5.6 Partial Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 5.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-i- 3 DECLARATION OF TRUST OF FREMONT GENERAL FINANCING I 1995 DECLARATION OF TRUST ("Declaration") dated and effective as of December 1, 1995 by the Trustees (as defined herein), the Sponsor (as defined herein), and by the holders, from time to time, of undivided beneficial interests in the Trust to be issued pursuant to this Declaration; WHEREAS, the Trustees and the Sponsor desire to establish a trust (the "Trust") pursuant to the Delaware Business Trust Act 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; and NOW, THEREFORE, it being the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. ARTICLE I DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires: (a) Capitalized terms used in this Declaration 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 Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration of Trust as modified, supplemented or amended from time to time; 4 (d) all references in this Declaration to Articles and Sections are to Articles and Sections of this Declaration unless otherwise specified; and (e) a reference to the singular includes the plural and vice versa. "Affiliate," has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Business Day" means any day other than a day on which banking institutions in New York, New York are authorized or required by law to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time, or any successor legislation. "Commission" means the Securities and Exchange Commission. "Common Security" means a security representing an undivided beneficial interest in the assets of the Trust with such terms as may be set out in any amendment to this Declaration. "Company Indemnified Person" means (a) any Regular Trustee; (b) any Affiliate of any Regular Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Regular Trustee; or (d) any employee or agent of the Trust or its Affiliates. "Covered Person" means (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates and (b) any holder of Securities. "Debenture Issuer" means the Parent in its capacity as the issuer of the Debentures under the Indenture. "Debentures" means the series of Debentures to be issued by the Debenture Issuer and acquired by the Trust. "Debenture Trustee" means First Interstate Bank of California, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. 2 5 "Delaware Trustee" has the meaning set forth in Section 3.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time or any successor legislation. "Fiduciary Indemnified Person" has the meaning set forth in Section 4.3(b). "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the indenture to be entered into between the Parent and the Debenture Trustee and any indenture supplemental thereto pursuant to which the Debentures are to be issued. "Parent" means Fremont General Corporation, a Nevada corporation or any successor entity in a merger. "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. "Preferred Security" means a security representing an undivided beneficial interest in the assets of the Trust with such terms as may be set out in any amendment to this Declaration. "Regular Trustee" means any Trustee other than the Delaware Trustee and the Institutional Trustee (as hereinafter defined). "Securities" means the Common Securities and the Preferred Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Sponsor" means the Parent in its capacity as sponsor of the Trust. "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 3 6 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. ARTICLE II ORGANIZATION SECTION 2.1 Name. The Trust created by this Declaration is named "Fremont General Financing I." The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Regular Trustees. SECTION 2.2 Office. The address of the principal office of the Trust is c/o Fremont General Corporation, 2020 Santa Monica Boulevard, Suite 600, Santa Monica, California 90404. At any time, the Regular Trustees may designate another principal office. SECTION 2.3 Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell Securities and use the proceeds from such sale to acquire the Debentures, and (b) except as otherwise limited herein, to engage in only those other activities necessary, or incidental thereto. 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. Subject to the limitations provided in this Declaration, the Regular Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by the Regular Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust. In dealing with the Regular Trustees acting on behalf of the Trust, no person shall be required to inquire into the authority of the Regular Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and 4 7 authority of the Regular Trustees as set forth in this Declaration. SECTION 2.5 Title to Property of the Trust. Legal title to all assets of the Trust shall be vested in the Trust. SECTION 2.6 Powers of the Trustees. The Regular Trustees shall have the exclusive power and authority to cause the Trust to engage in the following activities: (a) to issue and sell the Preferred Securities and the Common Securities in accordance with this Declaration; provided, however, that the Trust may issue no more than one series of Preferred Securities and no more than one series of Common Securities, and, provided further, that there shall be no interests in the Trust other than the Securities and the issuance of the Securities shall be limited to a onetime, simultaneous issuance of both Preferred Securities and Common Securities; (b) in connection with the issue and sale of the Preferred Securities, at the direction of the Sponsor, to: (i) execute and file with the Commission a registration statement on Form S-3 prepared by the Sponsor, including any amendments thereto in relation to the Preferred Securities; (ii) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Preferred Securities in any State in which the Sponsor has determined to qualify or register such Preferred Securities for sale; (iii) execute and file an application, prepared by the Sponsor, to the New York Stock Exchange or any other national stock exchange or the Nasdaq Stock Market's National Market for listing upon notice of issuance of any Preferred Securities; (iv) execute and file with the Commission a registration statement on Form 8A, including any amendments thereto, prepared by the Sponsor relating to 5 8 the registration of the Preferred Securities under Section 12(b) of the Exchange Act; and (v) execute and enter into an underwriting agreement and pricing agreement providing for the sale of the Preferred Securities; (c) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and provide for reasonable compensation for such services; (d) to incur expenses which are necessary or incidental to carry out any of the purposes of this Declaration; and (e) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing. SECTION 2.7 Filing of Certificate of Trust. On or after the date of execution of this Declaration, the Trustees shall cause the filing of the Certificate of Trust for the Trust in the form attached hereto as Exhibit A with the Secretary of State of the State of Delaware. SECTION 2.8 Duration of Trust. The Trust, absent termination pursuant to the provisions of Section 5.2, shall have existence for fifty-five (55) years from the date hereof. SECTION 2.9 Responsibilities of the Sponsor. In connection with the issue and sale of the Preferred Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare for filing by the Trust with the Commission a registration statement on Form S-3 in relation to the Preferred Securities, including any amendments thereto; (b) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and to do any and all such 6 9 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; (c) to prepare for filing by the Trust an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market for listing upon notice of issuance of any Preferred Securities; (d) to prepare for filing by the Trust with the Commission a registration statement on Form 8A relating to the registration of the class of Preferred Securities under Section 12(b) of the Exchange Act, including any amendments thereto; and (e) to negotiate the terms of an underwriting agreement and pricing agreement providing for the sale of the Preferred Securities. Section 2.10 Declaration Binding on Securities Holders. Every Person by virtue of having become a holder of a Security or any interest therein 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. ARTICLE III TRUSTEES SECTION 3.1 Trustees. The number of Trustees initially shall be three (3), and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Sponsor. The Sponsor is entitled to appoint or remove without cause any Trustee at any time; provided, however, that the number of Trustees shall in no event be less than two (2); provided further that one Trustee, in the case of a natural person, shall be a person who is a resident of the State of Delaware or that, if not a natural person, is an entity which maintains a principal place of business in the State of Delaware (the "Delaware Trustee"); provided further that there shall be at least one trustee who is an employee or officer of, or is affiliated with the Parent (a "Regular Trustee"). 7 10 SECTION 3.2 Regular Trustees. The initial Regular Trustees shall be: Louis J. Rampino Wayne R. Bailey (a) Except as expressly set forth in this Declaration, any power of the Regular Trustees may be exercised by, or with the consent of, any one such Regular Trustee. (b) Unless otherwise determined by the Regular Trustees, and except as otherwise required by the Business Trust Act, any Regular Trustee is authorized to execute on behalf of the Trust any documents which the Regular Trustees have the power and authority to cause the Trust to execute pursuant to Section 2.6 provided, that, the registration statement referred to in Section 2.6(b)(i), including any amendments thereto, shall be signed by a majority of the Regular Trustees; and (c) a Regular Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents which the Regular Trustees have power and authority to cause the Trust to execute pursuant to Section 2.6. SECTION 3.3 Delaware Trustee. The initial Delaware Trustee shall be: The Chase Manhattan Bank (USA) Notwithstanding any other provision of this Declaration, the Delaware Trustee shall not be entitled to exercise any of the powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Regular Trustees described in this Declaration. The Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. Notwithstanding anything herein to the contrary, the Delaware Trustee shall not be liable for the acts or omissions to act of the Trust or of the Regular Trustees except such acts as the Delaware Trustee is expressly obligated or authorized to undertake under this Declaration and except for the gross negligence or willful misconduct of the Delaware Trustee. 8 11 SECTION 3.4 Property Trustee. Prior to the issuance of the Preferred Securities and Common Securities, the Sponsor shall appoint another trustee (the "Institutional Trustee") meeting the requirements of an eligible trustee of the Trust Indenture Act of 1939, as amended, by the execution of an amendment to this Declaration executed by the Regular Trustees, the Sponsor, the Institutional Trustee and the Delaware Trustee. Section 3.5 Not Responsible for Recitals or Sufficiency of Declaration. The recitals contained in this Declaration 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. ARTICLE IV LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 4.1 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions; and (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 who has been selected with reasonable care by or on behalf of the Trust, including 9 12 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 4.2 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, are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person; (b) unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise; and (c) whenever in this Declaration an Indemnified Person is permitted or required to make a decision: 10 13 (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 4.3 Indemnification. (a) (i) The Debenture Issuer shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Debenture Issuer shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including 11 14 attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 4.3(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) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 4.3(a) (unless ordered by a court) shall be made by the Debenture Issuer only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Regular Trustees by a majority vote of a quorum consisting of such Regular Trustees who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorneys, fees) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative 12 15 action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 4.3(a) shall be paid by the Debenture Issuer in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Debenture Issuer as authorized in this Section 4.3(a). Notwithstanding the foregoing, no advance shall be made by the Debenture Issuer if a determination is reasonably and promptly made (i) by the Regular Trustees by a majority vote of a quorum of disinterested Regular Trustees, (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion or (iii) the Common Security Holder of the Trust, that, based upon the facts known to the Regular Trustees, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that 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 Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Regular Trustees, independent legal counsel or Common Security Holder reasonably determine that such person deliberately breached his duty to the Trust or its Common or Preferred Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 4.3(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Debenture Issuer or Preferred 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 4.3(a) shall be deemed to be provided by a contract between the Debenture Issuer and each Company Indemnified Person who serves in such capacity at any time while this Section 4.3(a) is in effect. Any repeal or 13 16 modification of this Section 4.3(a) shall not affect any rights or obligations then existing. (vii) The Debenture Issuer or the Trust may purchase and maintain insurance on behalf of any person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Debenture Issuer would have the power to indemnify him against such liability under the provisions of this Section 4.3(a). (viii) For purposes of this Section 4.3(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 4.3(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 4.3(a) shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a person. (b) The Debenture Issuer agrees to indemnify the (i) the Delaware Trustee, (ii) any Affiliate of the Delaware Trustee, and (iii) any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Delaware Trustee (each of the Persons in (i) through (iii) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any loss, liability or expense incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself 14 17 against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 4.3(b) shall survive the termination of this Declaration. SECTION 4.4 Outside Businesses. Any Covered Person, the Sponsor and the Delaware Trustee 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. No Covered Person, the Sponsor or the Delaware 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 and the Delaware 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 and the Delaware 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 may act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE V AMENDMENTS, TERMINATION, MISCELLANEOUS SECTION 5.1 Amendments. At any time before the issue of any Securities, this Declaration may be amended by, and only by, a written instrument executed by all of the Trustees and the Sponsor. SECTION 5.2 Termination of Trust. (a) The Trust shall terminate and be of no further force or effect: (i) upon the bankruptcy of the Sponsor; 15 18 (ii) upon the filing of a certificate of dissolution or its equivalent with respect to the Sponsor or the revocation of the Sponsor's charter or of the Trust's certificate of trust; (iii) upon the entry of a decree of judicial dissolution of the Sponsor, or the Trust; and (iv) before the issue of any Securities, with the consent of all of the Regular Trustees and the Sponsor; and (b) as soon as is practicable after the occurrence of an event referred to in Section 5.2(a), the Trustees shall file a certificate of cancellation with the Secretary of State of the State of Delaware. SECTION 5.3 Governing Law. This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. SECTION 5.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 5.5 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 5.6 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other 16 19 than those to which it is held invalid, shall not be affected thereby. SECTION 5.7 Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one 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 20 IN WITNESS WHEREOF, the undersigned has caused these presents to be executed as of the day and year first above written. /s/ Louis J. Rampino ----------------------------------- Name: Louis J. Rampino Title: Regular Trustee /s/ Wayne R. Bailey ----------------------------------- Name: Wayne R. Bailey Title: Regular Trustee The Chase Manhattan Bank (USA), as Delaware Trustee By: /s/ John W. Mack -------------------------------- Name: John W. Mack Title: Second Vice President FREMONT GENERAL CORPORATION, as Sponsor By: /s/ Wayne R. Bailey ------------------------------- Name: Wayne R. Bailey, Title: Executive Vice- President and Chief Financial Officer 18 EX-4.5 5 AMENDED & RESTATED DECLARATION OF TRUST 1 EXHIBIT 4.5 ============================================================================= AMENDED AND RESTATED DECLARATION OF TRUST FREMONT GENERAL FINANCING I DATED AS OF MARCH 6, 1996 ============================================================================= 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I - INTERPRETATION AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.1 Trust Indenture Act; Application . . . . . . . . . . . . . . . . . . . . 7 Section 2.2 Lists of Holders of Securities . . . . . . . . . . . . . . . . . . . . . 8 Section 2.3 Reports by the Institutional Trustee . . . . . . . . . . . . . . . . . . 8 Section 2.4 Periodic Reports to Institutional Trustee . . . . . . . . . . . . . . . . 8 Section 2.5 Evidence of Compliance with Conditions Precedent . . . . . . . . . . . . 9 Section 2.6 Events of Default; Waiver . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2.7 Event of Default; Notice . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE III - ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.2 Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.3 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.5 Title to Property of the Trust . . . . . . . . . . . . . . . . . . . . . 12 Section 3.6 Powers and Duties of the Regular Trustees . . . . . . . . . . . . . . . . 12 Section 3.7 Prohibition of Actions by the Trust and the Trustees . . . . . . . . . . 15 Section 3.8 Powers and Duties of the Institutional Trustee . . . . . . . . . . . . . 15 Section 3.9 Certain Duties and Responsibilities of the Institutional Trustee . . . . 17 Section 3.10 Certain Rights of Institutional Trustee . . . . . . . . . . . . . . . . . 19 Section 3.11 Delaware Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.12 Execution of Documents . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.13 Not Responsible for Recitals or Issuance of Securities . . . . . . . . . 21 Section 3.14 Duration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.15 Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.16 Filing of Amendments to Certificate of Trust . . . . . . . . . . . . . . 23 ARTICLE IV - SPONSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 4.1 Sponsor's Purchase of Common Securities . . . . . . . . . . . . . . . . . 23 Section 4.2 Responsibilities of the Sponsor . . . . . . . . . . . . . . . . . . . . . 23
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PAGE ---- ARTICLE V - TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.1 Number of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.2 Delaware Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.3 Institutional Trustee; Eligibility . . . . . . . . . . . . . . . . . . . . . . . 25 Section 5.4 Certain Qualifications of Regular Trustees and Delaware Trustee Generally . . . . 26 Section 5.5 Regular Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 5.6 Delaware Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 5.7 Appointment, Removal and Resignation of Trustees . . . . . . . . . . . . . . . . 26 Section 5.8 Vacancies Among Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 5.9 Effect of Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 5.10 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 5.11 Delegation of Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 5.12 Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . 29 ARTICLE VI - DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 6.1 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE VII - ISSUANCE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 7.1 General Provisions Regarding Securities . . . . . . . . . . . . . . . . . . . . . 30 Section 7.2 Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE VIII - TERMINATION OF TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 8.1 Termination of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE IX - TRANSFER OF INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.1 Transfer of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.2 Transfer of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.3 Deemed Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.4 Book Entry Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.5 Notices to Clearing Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.6 Appointment of Successor Clearing Agency . . . . . . . . . . . . . . . . . . . . 34 Section 9.7 Definitive Preferred Security Certificates . . . . . . . . . . . . . . . . . . . 34 Section 9.8 Mutilated, Destroyed, Lost or Stolen Certificates . . . . . . . . . . . . . . . . 34
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Page ---- ARTICLE X - LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS . . . . . . . 35 Section 10.1 Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 10.2 Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 10.3 Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 10.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 10.5 Outside Businesses . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE XI - ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 11.1 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 11.2 Certain Accounting Matters . . . . . . . . . . . . . . . . . . . . . 40 Section 11.3 Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 11.4 Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE XII - AMENDMENTS AND MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 12.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 12.2 Meeting of the Holders of Securities; Action by Written Consent . . 43 ARTICLE XIII - REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE . . . . . . . . . 44 Section 13.1 Representations and Warranties of Institutional Trustee . . . . . . 44 Section 13.2 Representations and Warranties of Delaware Trustee . . . . . . . . . 45 ARTICLE XIV - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 14.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 14.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 14.3 Intention of the Parties . . . . . . . . . . . . . . . . . . . . . . 47 Section 14.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 14.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . 47 Section 14.6 Partial Enforceability . . . . . . . . . . . . . . . . . . . . . . . 47 Section 14.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
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Page ---- ANNEX I TERMS OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 EXHIBIT A-1 FORM OF PREFERRED SECURITY CERTIFICATE . . . . . . . . . . . . . . . . . A1-1 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE . . . . . . . . . . . . . . . . . . A2-1 EXHIBIT B SPECIMEN OF DEBENTURE . . . . . . . . . . . . . . . . . . . . . . . . . B-1 EXHIBIT C UNDERWRITING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . C-1
-iv- 6 CROSS-REFERENCE TABLE*
SECTION OF TRUST INDENTURE ACT SECTION OF OF 1939, AS AMENDED DECLARATION ------------------------------ ------------- 310(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3(a) 310(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 311(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2(a) 312(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2(b) 313 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 314(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 314(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9(b) 315(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9(a) 315(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9(a) 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex I 316(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6(e)
* This Cross-Reference Table does not constitute part of the Declaration and shall not affect the interpretation of any of its terms or provisions. -v- 7 AMENDED AND RESTATED DECLARATION OF TRUST OF FREMONT GENERAL FINANCING I As of March 6, 1996 This AMENDED AND RESTATED DECLARATION OF TRUST (this "Declaration") dated and effective as of March 6, 1996, is made by the Trustees (as defined herein), the Sponsor (as defined herein) and the holders, from time to time, of undivided beneficial interests in the Trust to be issued pursuant to this Declaration; WHEREAS, the Trustees and the Sponsor established Fremont General Financing I (the "Trust"), a statutory business trust under the Business Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of December 1, 1995 (the "Original Declaration") (as defined herein) and a Certificate of Trust filed with the Secretary of State of the State of Delaware on December 4, 1995 (the "Certificate of Trust"), 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 such terms are defined below); WHEREAS, as of the date hereof, no interests in the Trust have been issued; WHEREAS, all of the Trustees and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; and NOW, THEREFORE, it being the intention of the parties hereto that the Trust continue as a statutory business trust under the Business Trust Act (as defined below) and that this Declaration constitute the governing instrument of such statutory business trust, the Trustees hereby 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 or to be issued hereunder, subject to the provisions of this Declaration. 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 have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; 8 (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time in accordance with the terms hereof; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "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. "Book Entry Interest" means a beneficial interest in a Global Certificate, ownership and transfers of which shall be maintained and made through book entries by a Clearing Agency as described in Section 9.4. "Business Day" means any day other than a day on which banking institutions in New York, New York are authorized or required by law to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. C Section 3801 et. seq., as it may be amended from time to time, or any successor legislation. "Certificate" means a Common Security Certificate or a Preferred Security Certificate. "Clearing Agency" means an organization registered as a "Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as depositary for the Preferred Securities and in whose name or in the name of a nominee of that organization shall be registered a Global Certificate and which shall undertake to effect book entry transfers and pledges of the Preferred Securities. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Clearing Agency effects book entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means the Closing Time and each subsequent "Date of Delivery" under the Purchase Agreement. "Closing Time" means 7:00 a.m. on March 6, 1996. -2- 9 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the Securities and Exchange Commission. "Common Securities Guarantee" means the guarantee agreement dated or to be dated as of March 6, 1996 by the Sponsor in respect of the obligations of the Trust under the Common Securities. "Common Security" has the meaning specified in Section 7.1. "Common Security Certificate" means a definitive certificate in fully registered form representing a Common Security substantially in the form of Exhibit A-2. "Company Indemnified Person" means (a) any Regular Trustee; (b) any Affiliate of any Regular Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Regular Trustee; or (d) any officer, employee or agent of the Trust or its Affiliates. "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 at the date of execution of this Declaration is located at The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn, N.Y. 11245, Attention: Institutional Trust Group, Telecopy: (718) 242-5885. "Covered Person" means: (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holder of Securities. "Debenture Issuer" means Fremont General Corporation, a Nevada corporation, in its capacity as issuer of the Debentures under the Indenture. "Debenture Trustee" means First Interstate Bank of California, a California banking corporation, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the series of debentures to be issued by the Debenture Issuer under the Indenture to be held by the Institutional Trustee, each in substantially the form of the specimen certificate attached hereto as Exhibit B. "Delaware Trustee" has the meaning set forth in Section 5.2. "Definitive Preferred Security Certificates" has the meaning set forth in Section 9.4. "Distribution" means a distribution of any kind payable to Holders of Securities in accordance with Section 6.1. -3- 10 "DTC" means The Depository Trust Company, which is acting as the initial Clearing Agency. "Event of Default" in respect of the Securities means any Event of Default (as defined in the Indenture) in respect of the Debentures that has occurred and is continuing. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Fiduciary Indemnified Person" has the meaning set forth in Section 10.4(b). "Global Certificate" has the meaning set forth in Section 9.4. "Holder" means a Person in whose name a Certificate representing a Security is registered, 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 March 6, 1996, by and between the Debenture Issuer and the Debenture Trustee pursuant to which the Debentures are to be issued, as such indenture may be amended or supplemented from time to time in accordance with the terms thereof. "Institutional Trustee" means the Trustee meeting the eligibility requirements set forth in Section 5.3. "Institutional Trustee Account" has the meaning set forth in Section 3.8(c). "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. "Legal Action" has the meaning set forth in Section 3.6(g). "Majority in Liquidation Amount of the Common Securities" means, except as otherwise provided in the Trust Indenture Act, Holder(s) of outstanding Common Securities 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 Common Securities. -4- 11 "Majority in Liquidation Amount of the Preferred Securities" means, except as otherwise provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holder(s) of outstanding Preferred Securities 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 Preferred Securities. "Majority in Liquidation Amount of the Securities" means, except as otherwise provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holder(s) of outstanding Securities, voting together as a single 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. "Ministerial Action" has the meaning set forth in the terms of the Securities as set forth in Annex I. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that each officer signing the 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 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 7.2. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, business trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Preferred Securities Guarantee" means the guarantee agreement dated or to be dated as of March 6, 1996, by the Sponsor in respect of the obligations of the Trust under the Preferred Securities. -5- 12 "Preferred Security" has the meaning specified in Section 7.1. "Preferred Security Beneficial Owner" means, with respect to a Book Entry Interest, a Person who is the beneficial owner of such Book Entry Interest, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Preferred Security Certificate" means a certificate in fully registered form representing a Preferred Security substantially in the form of Exhibit A-1. "Pricing Agreement" means the pricing agreement entered into pursuant to the Purchase Agreement between the Trust, the Debenture Issuer, and the underwriters designated by the Regular Trustees governing the terms of the offer and sale of the Preferred Securities. "Purchase Agreement" means the Purchase Agreement for the offering and sale of Preferred Securities in substantially the form of Exhibit C. "Quorum" means a majority of the Regular Trustees or, if there are only two Regular Trustees, both of them. "Regular Trustee" has the meaning set forth in Section 5.1. "Related Party" means, with respect to the Sponsor, any direct or indirect wholly owned subsidiary of the Sponsor or any other Person that owns, directly or indirectly, 100% of the outstanding voting securities of the Sponsor. "Responsible Officer" means, with respect to the Institutional Trustee, any officer within the Corporate Trust Office of the Institutional Trustee, including any vice-president, any assistant vice-president, the secretary, any assistant secretary, the treasurer, any assistant treasurer 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. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act. "Securities" means the Common Securities and the Preferred Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time or any successor legislation. -6- 13 "Sponsor" means Fremont General Corporation, a Nevada corporation, or any successor entity in a merger, consolidation or amalgamation, in its capacity as sponsor of the Trust. "Successor Delaware Trustee" has the meaning specified in Section 5.7(c). "Successor Institutional Trustee" has the meaning specified in Section 5.7(b). "Tax Event" has the meaning set forth in Annex I hereto. "10% in Liquidation Amount of the Securities" means, except as otherwise provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holder(s) of outstanding Securities voting together as a single class, or, as the context may require, Holder(s) of outstanding Preferred 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, or classes. "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). "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 Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. ARTICLE II TRUST INDENTURE ACT Section 2.1 Trust Indenture Act; Application. (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and shall, to the extent applicable, be governed by such provisions. (b) The Institutional Trustee shall be the only Trustee which is a "Trustee" for the purposes of the Trust Indenture Act. -7- 14 (c) If and to the extent that any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. Section 2.2 Lists of Holders of Securities. (a) Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide the Institutional Trustee (i) within 14 days after each record date for payment of Distributions, a list, in such form as the Institutional Trustee may reasonably require, of the names and addresses of the Holders of the Securities ("List of Holders") as of such record date, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Institutional Trustee; provided that neither the Sponsor nor the Regular Trustees on behalf of the Trust shall be obligated to provide such List of Holders if at any time (A) the Securities are represented by one or more Global Certificates, or (B) the List of Holders does not differ from the most recent List of Holders given to the Institutional Trustee by the Sponsor and the Regular Trustees on behalf of the Trust. The Institutional Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity); provided that the Institutional Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Institutional Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. Section 2.3 Reports by the Institutional Trustee. Within 60 days after May 1 of each year, the Institutional Trustee shall provide to the Holders of the Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Institutional Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. Section 2.4 Periodic Reports to Institutional Trustee. Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Institutional Trustee such documents, reports and information as required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. -8- 15 Section 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Institutional Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. Section 2.6 Events of Default; Waiver. (a) The Holders of a Majority in Liquidation Amount of the Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any past Event of Default in respect of the Preferred Securities and its consequences (which waiver may be retroactive to the date on which such Event of Default occurred); provided that, if the underlying Event of Default under the Indenture is not waivable under the Indenture, the consequent Event of Default under this Declaration shall also not be waivable. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such default shall cease to exist, and any Event of Default with respect to the Preferred Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration from the stated effective date of such waiver, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Preferred Securities or impair any right or remedy of the Holders of the Preferred Securities consequent thereon. Any waiver by the Holders of the Preferred Securities of an Event of Default with respect to the Preferred Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Declaration from the stated effective date of such waiver without any further act, vote, or consent of the Holders of the Common Securities. (b) The Holders of a Majority in Liquidation Amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences; provided that, if the underlying Event of Default under the Indenture is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default under this Declaration as provided above in Section 2.6(a) or below in this Section 2.6(b), the Event of Default under this Declaration shall also not be waivable; provided, further, that each Holder of Common Securities will be deemed to have waived all Events of Default and all consequences thereof with respect to the Common Securities until all Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated, and until such Events of Default with respect to the Preferred Securities have been so cured, waived or other wise eliminated, the Institutional Trustee will be deemed to be acting solely on behalf of the Holders of the Preferred Securities and only the Holders of the Preferred Securities will have the right to direct the Institutional Trustee in accordance with the terms of the Securities. The foregoing provisions of this -9- 16 Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon any waiver by the Holders of the Majority Liquidation Amount of the Preferred Securities or by the Holders of the Majority Liquidation Amount of the Common Securities, any such default shall cease to exist and any Event of Default with respect to the Common Securities arising therefrom shall be deemed to have been cured for every purpose of this Declaration from the stated effective date of such waiver, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Common Securities or impair any right or remedy of the Holders of the Common Securities consequent thereon. (c) A waiver of an Event of Default under the Indenture by the Institutional Trustee at the direction of the Holders of the Preferred Securities constitutes a waiver of the corresponding Event of Default under this Declaration. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Section 2.7 Event of Default; Notice. (a) The Institutional 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 Securities, notices of all defaults with respect to the Securities actually known to a Responsible Officer of the Institutional Trustee, unless such defaults have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 2.7(a) being hereby defined to be an Event of Default as defined in the Indenture, not including any periods of grace provided for therein and irrespective of the giving of any notice provided therein); provided that, except for a default in the payment of principal of (or premium, if any) or interest on any of the Debentures or in the payment of any sinking fund installment established for the Debentures, the Institutional Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Institutional Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Securities. (b) The Institutional Trustee shall not be deemed to have knowledge of any default except: (i) a default under Sections 501(1) and 501(2) of the Indenture; or (ii) any default as to which the Institutional Trustee shall have received written notice or of which a Responsible Officer of the Institutional Trustee charged with the administration of this Declaration shall have actual knowledge. -10- 17 ARTICLE III ORGANIZATION Section 3.1 Name. The Trust continued by this Declaration is named "Fremont General Financing I," as such name may be modified from time to time by the Regular Trustees following written notice to the Holders of Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Regular Trustees. Section 3.2 Office. The address of the principal office of the Trust is c/o Fremont General Corporation, 2020 Santa Monica Boulevard, Suite 600, Santa Monica, California 90404. On ten Business Days' prior written notice to the Holders of Securities, the Regular Trustees may designate another principal office. Section 3.3 Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell Securities and use the proceeds from such sale to acquire the Debentures, (b) to enter into such agreements and arrangements as may be necessary in connection with the sale of the Securities (including the Purchase Agreement and the Pricing Agreement) and to take all action, and exercise such discretion, as may be necessary or desirable in connection therewith and to file such registration statements or make such other filings under the Securities Act, the Exchange Act or state securities or "Blue Sky" laws as may be necessary or desirable in connection therewith, and (c) except as otherwise limited herein, to engage in only those other activities necessary to effect the foregoing, or incidental thereto. 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 3.4 Authority. Subject to the limitations provided in this Declaration and to the specific duties of the Institutional Trustee, the Regular Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by the Regular Trustees in accordance with their powers shall constitute the act of, and serve to bind, the Trust and an action taken by the Institutional Trustee on behalf of the Trust in accordance with its powers shall constitute the act of, and serve to bind, the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. -11- 18 Section 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Institutional Trustee 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 each have an undivided beneficial interest in the assets of the Trust. Section 3.6 Powers and Duties of the Regular Trustees. The Regular Trustees shall have the exclusive power, duty and authority to cause the Trust, and shall cause the Trust, to engage in the following activities: (a) to issue and sell the Preferred Securities and the Common Securities in accordance with this Declaration; provided, however, that the Trust may issue no more than one series of Preferred Securities and no more than one series of Common Securities, and, provided, further, that there shall be no interests in the Trust other than the Securities, and the issuance of Securities shall be limited to a simultaneous issuance of both Preferred Securities and Common Securities on each Closing Date; (b) in connection with the issue and sale of the Preferred Securities, at the direction of the Sponsor: (i) to execute and file with the Commission the registration statement on Form S-3 prepared by the Sponsor and the Trust, including any amendments thereto, pertaining to the Preferred Securities; (ii) to execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor on behalf of the Trust to be necessary in order to qualify or register all or part of the Preferred Securities in any State in which the Sponsor has determined to qualify or register such Preferred Securities for sale; (iii) to execute and file an application, prepared by the Sponsor, to the New York Stock Exchange, Inc. or any other national stock exchange or the Nasdaq Stock Market's National Market for listing upon notice of issuance of any Preferred Securities and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to effect such listing; (iv) to execute and file with the Commission a registration statement on Form 8-A, including any amendments thereto, prepared by the Sponsor, relating to the registration of the Preferred Securities under Section 12(b) of the Exchange Act; and -12- 19 (v) to execute and enter into, on behalf of the Trust, the Purchase Agreement and Pricing Agreement providing for the sale of the Preferred Securities, and from time to time to execute and enter into, on behalf of the Trust, such other agreements and arrangements as may be necessary or desirable in connection with the sale of the Securities to the initial purchasers thereof and the consummation thereof, and to take all action, and exercise all discretion, as may be necessary or desirable in connection with the consummation thereof; (c) to acquire as Trust assets the Debentures with the proceeds of the sale of the Preferred Securities and the Common Securities; provided, however, that the Regular Trustees shall cause legal title to the Debentures to be vested in and held of record in the name of, the Institutional Trustee for the benefit of the Holders of the Preferred Securities and the Holders of Common Securities, as their respective interests appear; (d) to give the Sponsor and the Institutional Trustee prompt written notice of the occurrence of a Tax Event; provided that the Regular Trustees shall consult with the Sponsor and the Institutional Trustee before taking or refraining from taking any Ministerial Action in relation to a Tax Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Preferred Securities and Holders of Common Securities as to such actions and applicable record dates; (f) to take all actions and perform such duties as may be required of the Regular Trustees pursuant to the terms of the Securities; (g) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Institutional Trustee has the exclusive power to bring such Legal Action; (h) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (j) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Institutional Trustee, which certificate may be executed by any Regular Trustee; (k) to incur reasonable expenses that are necessary or incidental to carry out any of the purposes of the Trust; -13- 20 (l) to act as, or appoint another Person to act as, registrar and transfer agent for the Securities; (m) to give prompt written notice to the Holders of the Securities of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (n) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing; (o) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Preferred Securities or to enable the Trust to effect the purposes for which the Trust was created; (p) to take any action, not inconsistent with this Declaration or with applicable law, that the Regular Trustees determine in their discretion to be necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) causing the Trust to be classified for United States federal income tax purposes as a grantor trust; and (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes; provided that such action does not adversely affect the interests of Holders; and (q) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Regular Trustees, on behalf of the Trust. The Regular Trustees must exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Regular Trustees shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Except as otherwise specifically set forth in this Section 3.6, the Regular Trustees shall have none of the powers or the authority of the Institutional Trustee set forth in Section 3.8. -14- 21 Any expenses incurred by the Regular Trustees pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. Section 3.7 Prohibition of Actions by the Trust and the Trustees. (a) The Trust shall not, and the Trustees (including the Institutional Trustee) shall not permit the Trust to, engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not and the Trustees (including the Institutional Trustee) shall not cause the Trust to: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of Securities pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; (iii) possess Trust property for other than a permitted Trust purpose; (iv) make any loans or incur any indebtedness other than loans represented by the purchase of the Debentures; (v) exercise any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (vii) other than as provided in this Declaration or Annex I, (A) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (D) consent to any amendment, supplement, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Regular Trustees shall have received an opinion of counsel to the effect that any such amendment, supplement, modification or termination will not cause more than an insubstantial risk that for United States federal income tax purposes the Trust will not be classified as a grantor trust. Section 3.8 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 Holders of the Securities. 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 5.7. Such vesting and cessation of title -15- 22 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 Regular Trustees or to the Delaware Trustee (if the Institutional Trustee does not also act as Delaware Trustee). (c) The Institutional Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Institutional Trustee Account") in the name of and under the exclusive control of the Institutional Trustee 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 Institutional Trustee Account and make payments to the Holders of the Preferred Securities and Holders of the Common Securities from the Institutional Trustee Account in accordance with Section 6.1. Funds in the Institutional Trustee Account shall be held uninvested until disbursed in accordance with this Declaration. The Institutional Trustee Account shall be an account that is maintained with a banking institution the rating on whose long-term unsecured indebtedness is at least equal to the highest rating assigned to the Preferred Securities by a "nationally recognized statistical rating organization," as that term is defined for purposes of Rule 436(g)(2) under the Securities Act; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Preferred Securities and the Common Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Regular Trustees 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 special events (as may be defined in the terms of the Securities) arising from a change in law or a change in legal interpretation or other specified 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 shall take any Legal Action which arises 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, the Business Trust Act or the Trust Indenture Act. (f) The Institutional Trustee shall not resign as a Trustee unless either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of Securities pursuant to the terms of the Securities; or -16- 23 (ii) a Successor Institutional Trustee has been appointed and has accepted that appointment in accordance with Section 5.7. (g) The Institutional Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer of the Institutional Trustee occurs and is continuing, the Institutional Trustee shall, 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 the terms of such Securities. (h) Except as otherwise specifically set forth in this Section 3.8, the Institutional Trustee shall have none of the duties, liabilities, powers or the authority of the Regular Trustees set forth in Section 3.6. The Institutional Trustee must exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. Section 3.9 Certain Duties and Responsibilities of the Institutional Trustee. (a) The Institutional Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read into this Declaration against the Institutional Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Institutional Trustee has actual knowledge, 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) 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, except that: (i) prior to the occurrence of an 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 Institutional Trustee shall be determined solely by the express provisions of this Declaration and the Institutional Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration, and no implied covenants or obligations shall be read into this Declaration against the Institutional Trustee; and -17- 24 (B) in the absence of bad faith on the part of the Institutional Trustee, the Institutional 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 Institutional Trustee and conforming to the requirements of this Declaration; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Institutional Trustee, the Institutional Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration; (ii) the Institutional Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Institutional Trustee, unless it shall be proved that the Institutional Trustee was negligent in ascertaining the pertinent facts; (iii) 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 Securities 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; (iv) no provision of this Declaration shall require the Institutional Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or indemnity satisfactory to the Institutional Trustee against such risk or liability is not reasonably assured to it; (v) the Institutional Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Institutional Trustee 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; (vi) the Institutional Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Institutional Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Sponsor. Money held by the Institutional Trustee need not be segregated from other funds held by it except in relation to the Institutional Trustee Account maintained by the Institutional Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and -18- 25 (viii) the Institutional Trustee shall not be responsible for monitoring the compliance by the Regular Trustees or the Sponsor with their respective duties under this Declaration, nor shall the Institutional Trustee be liable for any default or misconduct of the Regular Trustees or the Sponsor. Section 3.10 Certain Rights of Institutional Trustee. (a) Subject to the provisions of Section 3.9: (i) the Institutional Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Regular Trustees contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Declaration, the Institutional Trustee shall deem it desirable that a matter be proved or established before taking, 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 Regular Trustees; (iv) 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 registration thereof; (v) the Institutional Trustee may consult with counsel or other experts and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion, such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees. 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; (vi) 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 Holder, unless such Holder shall have provided to the Institutional Trustee security and indemnity, satisfactory to the Institutional Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Institutional 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 Institutional Trustee; provided, that, nothing contained in this Section 3.10(a)(vi) shall be taken to relieve -19- 26 the Institutional Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Declaration; (vii) 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, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document furnished to it, but the Institutional Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Institutional Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys, and the Institutional 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 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; (x) 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 Securities which instructions may only be given by the Holders of the same proportion in liquidation amount of the Securities as would be entitled to direct the Institutional Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in or accordance with such instructions; and (xi) except as otherwise expressly provided by this Declaration, the Institutional Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration. (b) 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. -20- 27 Section 3.11 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Regular Trustees or the Institutional Trustee described in this Declaration. Except as set forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. Section 3.12 Execution of Documents. Unless otherwise determined by the Regular Trustees, and except as otherwise required by the Business Trust Act, (i) any Regular Trustee is authorized to execute on behalf of the Trust any documents that the Regular Trustees have the power and authority to execute pursuant to this Declaration with the consent of a majority of the Regular Trustees if there are then more than two, or, (ii) if there are only two, any Regular Trustee is authorized to execute such documents on behalf of the Trust, or (iii) if there is only one, such Regular Trustee is authorized to execute any such documents on behalf of the Trust; provided that, the registration statement referred to in Section 3.6(b)(i), including any amendments thereto, shall be signed by all of the Regular Trustees. Section 3.13 Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration or the Securities. Section 3.14 Duration of Trust. The Trust, unless terminated pursuant to the provisions of Article VIII hereof, shall have existence for fifty-five (55) years from the initial Closing Date. Section 3.15 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 body, except as described in Section 3.15(b) and (c). (b) The Trust may, with the consent of the Regular Trustees or, if there are more than two, a majority of the Regular Trustees and without the consent of the Holders of the Securities, the Delaware Trustee or the Institutional Trustee, consolidate, amalgamate, merge with or into, or be replaced by a trust organized as such under the laws of any State; provided that: (i) such successor entity (the "Successor Entity") -21- 28 either: (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities enjoy the same preferences and priority as the Preferred Securities with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Debenture Issuer expressly acknowledges a trustee of the Successor Entity that possesses the same powers and duties as the Institutional Trustee as the holder of the Debentures; (iii) the Preferred Securities or any Successor 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 Preferred Securities are then listed or quoted; (iv) such merger, consolidation, amalgamation or replacement does not cause the rating of the Preferred Securities (or any Successor Securities) to be downgraded by any nationally recognized statistical rating organization; (v) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the Holders of the Securities (or any Successor Securities) in any material respect (other than with respect to any dilution of such Holders' interests in the Preferred Securities as a result of such merger, consolidation, amalgamation or replacement); (vi) such Successor Entity has a purpose identical to that of the Trust; (vii) prior to such merger, consolidation, amalgamation or replacement, the Sponsor has received an opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the Holders of the Securities (or any Successor Securities) in any material respect (other than with respect to any dilution of the Holders, interest in the new entity); (B) following such merger, consolidation, amalgamation or replacement, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and (C) following such merger, consolidation, amalgamation or replacement, the Trust (or the Successor Entity) will continue to be classified as a grantor trust for United States federal income tax purposes; and -22- 29 (viii) the Sponsor guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Preferred Securities Guarantee. (c) Notwithstanding Section 3.15(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 any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger or replacement would cause the Trust or Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes. Section 3.16 Filing of Amendments to Certificate of Trust. The Certificate of Trust as filed with the Secretary of State of the State of Delaware on December 4, 1995 is attached hereto as Exhibit D. On or after the date of execution of this Declaration, the Trustees shall cause the filing with the Secretary of State of the State of Delaware of such amendments to the Certificate of Trust as the Trustees deem necessary or desirable to reflect this Declaration. ARTICLE IV SPONSOR Section 4.1 Sponsor's Purchase of Common Securities. At the Closing Time, the Sponsor will purchase the Common Securities issued by the Trust, in an aggregate amount at least equal to 3% of the capital of the Trust, at the same time as the Preferred Securities are sold. Section 4.2 Responsibilities of the Sponsor. In connection with the issue and sale of the Preferred Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare for filing by the Trust with the Commission a registration statement on Form S-3 in relation to the Preferred Securities, including any amendments thereto; (b) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Preferred 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; -23- 30 (c) to prepare for filing by the Trust an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market for listing upon notice of issuance of any Preferred Securities; (d) to prepare for filing by the Trust with the Commission a registration statement on Form 8-A relating to the registration of the Preferred Securities under Section 12(b) of the Exchange Act, including any amendments thereto; and (e) to negotiate the terms of the Purchase Agreement and Pricing Agreement providing for the sale of the Preferred Securities. ARTICLE V TRUSTEES Section 5.1 Number of Trustees. The number of Trustees initially shall be three (3), and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of, and appoint, remove and replace, the Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased solely by, and Trustees may be appointed, removed or replaced solely by, vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided, however, that, the number of Trustees shall in no event be less than two (2); provided further that (1) one Trustee, in the case of a natural person, shall be a person who is a resident of the State of Delaware or that, if not a natural person, is an entity which has its principal place of business in the State of Delaware; (2) there shall be at least one Trustee who is an employee or officer of, or is affiliated with the Sponsor (a "Regular Trustee"); and (3) one Trustee shall be the Institutional Trustee for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. Section 5.2 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 has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law; -24- 31 provided that, if the Institutional Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Institutional Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. Section 5.3 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; and (ii) be a corporation or banking or trust association organized and doing business under the laws of the United States of America or any State or territory thereof or of the District of Columbia, or a corporation or Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, 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 Person publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Institutional Trustee shall cease to be eligible to so act under Section 5.3(a), the Institutional Trustee shall immediately resign in the manner and with the effect set forth in Section 5.7(c). (c) If the Institutional Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Institutional Trustee and the Holders of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. (d) The Preferred Securities Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. (e) The initial Institutional Trustee shall be: The Chase Manhattan Bank, N.A. -25- 32 Section 5.4 Certain Qualifications of Regular Trustees and Delaware Trustee Generally. Each Regular Trustee and the Delaware Trustee (unless the Institutional Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. Section 5.5 Regular Trustees. The initial Regular Trustees shall be: Louis J. Rampino Wayne R. Bailey (a) Except as expressly set forth in this Declaration and except if a meeting of the Regular Trustees is called with respect to any matter over which the Regular Trustees have power to act, any power of the Regular Trustees may be exercised by, or with the consent of, any one such Regular Trustee. (b) Unless otherwise determined by the Regular Trustees, and except as otherwise required by the Business Trust Act or applicable law, any Regular Trustee is authorized to execute on behalf of the Trust any documents which the Regular Trustees have the power and authority to cause the Trust to execute pursuant to this Declaration; provided, that, the registration statement referred to in Section 3.6, including any amendments thereto, shall be signed by a majority of the Regular Trustees (except as otherwise provided in Section 3.12); and (c) A Regular Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents which the Regular Trustees have power and authority to cause the Trust to execute pursuant to this Declaration. Section 5.6 Delaware Trustee. The initial Delaware Trustee shall be: The Chase Manhattan Bank (USA). Section 5.7 Appointment, Removal and Resignation of Trustees. (a) Subject to subsection (b) of this Section 5.7, Trustees may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; and -26- 33 (ii) after the issuance of any Securities, by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities. (b) (i) The Trustee that acts as Institutional Trustee shall not be removed in accordance with Section 5.7(a) until a Successor Institutional Trustee (the "Successor Institutional Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Institutional Trustee and delivered to the Regular Trustees and the Sponsor; and (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with Section 5.7(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the Regular Trustees and the Sponsor. (c) A Trustee appointed to office shall hold office until its successor shall have been appointed or until his death, removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) No such resignation of the Trustee that acts as the Institutional Trustee shall be effective: (A) until a Successor Institutional Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Institutional Trustee and delivered to the Trust, the Sponsor and the resigning Institutional Trustee; or (B) until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the Holders of the Securities in accordance with the terms hereof; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee. (d) The Holders of the Common Securities shall use their best efforts to promptly appoint a Successor Delaware Trustee or Successor Institutional Trustee, as the case may be, if the Institutional Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 5.7. (e) If no Successor Institutional Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.7 within 60 days after delivery to the Sponsor and the Trust of an instrument of resignation, the resigning Institutional Trustee or Delaware -27- 34 Trustee, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Institutional Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper and prescribe, appoint a Successor Institutional Trustee or Successor Delaware Trustee, as the case may be. (f) 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. Section 5.8 Vacancies Among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1, or if the number of Trustees is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Regular Trustees or, if there are more than two, a majority of the Regular Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.7. Section 5.9 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 annul the Trust. Whenever a vacancy in the number of Regular Trustees shall occur, until such vacancy is filled by the appointment of a Regular Trustee in accordance with Section 5.7, the Regular Trustees in office, regardless of their number, shall have all the powers granted to the Regular Trustees and shall discharge all the duties imposed upon the Regular Trustees by this Declaration. Section 5.10 Meetings. If there is more than one Regular Trustee, meetings of the Regular Trustees shall be held from time to time upon the call of any Regular Trustee. Regular meetings of the Regular Trustees may be held at a time and place fixed by resolution of the Regular Trustees. Notice of any in-person meetings of the Regular Trustees 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 Regular Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Regular Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Regular Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Regular Trustees may be taken at a meeting by vote of a majority of the Regular Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Regular Trustees. In -28- 35 the event there is only one Regular Trustee, any and all action of such Regular Trustee shall be evidenced by a written consent of such Regular Trustee. Section 5.11 Delegation of Power. (a) Any Regular Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in this Declaration, including any registration statement or amendment thereto filed with the Commission, or making any other governmental filing; and (b) the Regular Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Regular Trustees or otherwise as the Regular Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. Section 5.12 Merger, Conversion, Consolidation or Succession to Business. Any corporation 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, provided such Person shall be otherwise qualified and eligible under this Article V, without the execution or filing of any paper or any further act on the part of any of the parties hereto. ARTICLE VI DISTRIBUTIONS Section 6.1 Distributions. Holders shall receive Distributions in accordance with the applicable terms of their respective Securities. Distributions shall be made on the Preferred 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 Compounded Interest (as defined in the Indenture) or Additional Interest (as defined in the Indenture)), premium 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 for that purpose, to make a Distribution of the Payment Amount to Holders. -29- 36 ARTICLE VII ISSUANCE OF SECURITIES Section 7.1 General Provisions Regarding Securities. (a) The Regular Trustees shall cause the Trust to issue one class of preferred securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Preferred Securities") and one class of common securities 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 have and issue no securities or other interests in the assets of the Trust other than the Preferred Securities and the Common Securities. (b) The Certificates shall be signed on behalf of the Trust by a Regular Trustee. Such signature shall be the manual signature of any present or any future Regular Trustee. Typographical and other minor defects or errors in any such reproduction of any such signature shall not affect the validity of any Certificate. In case any Regular Trustee of the Trust who shall have signed any of the Certificates shall cease to be such Regular Trustee before the Certificates so signed shall be delivered by the Trust, such Certificate nevertheless may be delivered as though the person who signed such Certificate had not ceased to be such Regular Trustee; and any Certificate may be signed on behalf of the Trust by such Persons who, at the actual date of execution of such Certificate, shall be the Regular Trustees of the Trust, although at the date of the execution and delivery of this Declaration any such Person was not such a Regular Trustee. Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Regular Trustees, as evidenced by their execution thereof, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements as the Regular Trustees may deem appropriate, or as may be required to comply with any law or with any rule or regulation of any stock exchange on which Securities may be listed, or to conform to usage. (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. (e) Every Person, by virtue of having become a Holder or a Preferred Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. Section 7.2 Paying Agent. In the event that the Preferred Securities are not in book-entry only form, the Trust shall maintain in the City of New York, State of New York, an office or agency where the Preferred Securities may be presented for payment ("Paying Agent"). The Trust may appoint the Paying Agent and may appoint one -30- 37 or more additional paying agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent. The Trust may change any Paying Agent without prior notice to any Holder. The Trust shall notify the Institutional Trustee of the name and address of any Paying Agent not a party to this Declaration. If the Trust fails to appoint or maintain another entity as Paying Agent, the Institutional Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent. The Institutional Trustee shall initially act as Paying Agent for the Preferred Securities and the Common Securities. ARTICLE VIII TERMINATION OF TRUST Section 8.1 Termination of Trust. (a) The Trust shall terminate upon the occurrence of any of the following events: (i) Upon the expiration of the term of the Trust as set forth in Section 3.14; (ii) upon the bankruptcy of the Holder of the Common Securities or the Sponsor; (iii) upon the filing of a certificate of dissolution or its equivalent with respect to the Holder of the Common Securities or the Sponsor; the filing of a certificate of cancellation with respect to the Trust or the revocation of the Holder of the Common Securities or the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iv) upon the entry of a decree of judicial dissolution of the Holder of the Common Securities, the Sponsor or the Trust; (v) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities or deposited in the Institutional Trustee Account for payment to the Holders; (vi) upon the occurrence and continuation of a Tax Event pursuant to which the Trust shall have been dissolved in accordance with the terms of the Securities and all of the Debentures shall have been distributed to the Holders of Securities in exchange for all of the Securities; or (vii) before the issuance of any Securities, with the consent of all of the Regular Trustees and the Sponsor. (b) As soon as is practicable after the occurrence of an event referred to in Section 8.1(a), the Trustees shall file a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 3.9 and Article X shall survive the termination of the Trust. -31- 38 ARTICLE IX TRANSFER OF INTERESTS Section 9.1 Transfer of Securities. (a) Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Securities. Any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (b) Subject to this Article IX, Preferred Securities shall be freely transferable. (c) Subject to this Article IX, the Sponsor and any Related Party may only transfer Common Securities to the Sponsor or a Related Party of the Sponsor; provided that, any such transfer is subject to the condition precedent that the transferor obtain the written opinion of nationally recognized independent counsel experienced in such matters that such transfer would not cause more than an insubstantial risk that: (i) the Trust would not be classified for United States federal income tax purposes as a grantor trust; and (ii) the Trust would be an Investment Company or the transferee would become an Investment Company. Section 9.2 Transfer of Certificates. The Regular Trustees shall provide for the registration of Certificates and of transfers of Certificates, which will be effected without charge but only upon payment (with such indemnity as the Regular Trustees may require) in respect of any tax or other government charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Certificate, the Regular Trustees shall cause one or more new Certificates to be issued in the name of the designated transferee or transferees. Every Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Regular Trustees duly executed by the Holder or such Holder's attorney-in-fact duly authorized in writing. Each Certificate surrendered for registration of transfer shall be canceled by the Regular Trustees. A transferee of a Certificate shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Certificate. By acceptance of a Certificate, each transferee shall be deemed to have agreed to be bound by this Declaration. -32- 39 Section 9.3 Deemed Security Holders. The Trustees 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 shall have actual or other notice thereof. Section 9.4 Book Entry Interests. Unless otherwise specified in the terms of the Preferred Securities, the Preferred Securities Certificates, on original issuance, will be issued in the form of one or more, fully registered, global Preferred Security Certificates (each a "Global Certificate"), to be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Trust. Such Global Certificates shall initially be registered on the books and records of the Trust in the name of Cede & Co., the nominee of DTC, and no Preferred Security Beneficial Owner will receive a definitive Preferred Security Certificate representing such Preferred Security Beneficial Owner's interests in such Global Certificates, except as provided in Section 9.7. Unless and until definitive, fully registered Preferred Security Certificates (the "Definitive Preferred Security Certificates") have been issued to the Preferred Security Beneficial Owners pursuant to Section 9.7: (a) the provisions of this Section 9.4 shall be in full force and effect; (b) the Trust and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Declaration (including the payment of Distributions on the Global Certificates and receiving approvals, votes or consents hereunder) as the Holder of the Preferred Securities and the sole holder of the Global Certificates and shall have no obligation to the Preferred Security Beneficial Owners; (c) to the extent that the provisions of this Section 9.4 conflict with any other provisions of this Declaration, the provisions of this Section 9.4 shall control; and (d) the rights of the Preferred Security Beneficial Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Preferred Security Beneficial Owners and the Clearing Agency and/or the Clearing Agency Participants. DTC will make book entry transfers among the Clearing Agency Participants and receive and transmit payments of Distributions on the Global Certificates to such Clearing Agency Participants. Section 9.5 Notices to Clearing Agency. Whenever a notice or other communication to the Preferred Security Holders is required under this Declaration, unless and until Definitive Preferred Security Certificates shall have been issued to the Preferred Security Beneficial Owners pursuant to Section 9.7, the Regular Trustees shall give all such -33- 40 notices and communications specified herein to be given to the Preferred Security Holders to the Clearing Agency, and shall have no notice obligations to the Preferred Security Beneficial Owners. Section 9.6 Appointment of Successor Clearing Agency. If any Clearing Agency elects to discontinue its services as securities depositary with respect to the Preferred Securities, the Regular Trustees may, in their sole discretion, appoint a successor Clearing Agency with respect to such Preferred Securities. Section 9.7 Definitive Preferred Security Certificates. If: (a) a Clearing Agency elects to discontinue its services as securities depositary with respect to the Preferred Securities and a successor Clearing Agency is not appointed within 90 days after such discontinuance pursuant to Section 9.6; or (b) the Regular Trustees elect after consultation with the Sponsor to terminate the book entry system through the Clearing Agency with respect to the Preferred Securities, then: (c) Definitive Preferred Security Certificates shall be prepared by the Regular Trustees on behalf of the Trust to evidence to such Preferred Securities; and (d) upon surrender of the Global Certificates by the Clearing Agency, accompanied by registration instructions, the Regular Trustees shall cause Definitive Certificates to be delivered to Preferred Security Beneficial Owners in accordance with the instructions of the Clearing Agency. Neither the Trustees nor the Trust shall be liable for any delay in delivery of such instructions and each of them may conclusively rely on and shall be protected in relying on, said instructions of the Clearing Agency. The Definitive Preferred Security Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Regular Trustees, as evidenced by their execution thereof, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements as the Regular Trustees may deem appropriate, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which Preferred Securities may be listed, or to conform to usage. Section 9.8 Mutilated, Destroyed, Lost or Stolen Certificates. If: (a) any mutilated Certificates should be surrendered to the Regular Trustees, or if the Regular Trustees shall receive evidence to their satisfaction of the destruction, loss or theft of any Certificate; and -34- 41 (b) there shall be delivered to the Regular Trustees such security or indemnity as may be required by them to keep each of them harmless, then, in the absence of notice that such Certificate shall have been acquired by a bona fide purchaser, any Regular Trustee on behalf of the Trust shall execute 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 9.8, the Regular Trustees 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. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS Section 10.1 Liability. (a) Except as expressly set forth in this Declaration, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and (ii) be required to pay to the Trust or to any Holder of Securities any deficit upon dissolution of the Trust or otherwise. (b) The Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Preferred Securities, in their capacities as Holders, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. Section 10.2 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be -35- 42 liable for any such loss, damage or claim incurred by reason of such Indemnified Person'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 who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. Section 10.3 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Institutional Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between an Indemnified Person and any Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: -36- 43 (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. Section 10.4 Indemnification. (a) (i) The Sponsor shall indemnify, to the fullest extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the fullest extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) or (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full -37- 44 extent permitted by law, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Debenture Issuer only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) or (ii). Such determination shall be made (1) by the Regular Trustees by a majority vote of a quorum consisting of such Regular Trustees who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorneys' fees) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a) shall be paid by the Debenture Issuer in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Debenture Issuer as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Debenture Issuer if a determination is reasonably and promptly made (i) by the Regular Trustees by a majority vote of a quorum of disinterested Regular Trustees, (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion or (iii) the Common Security Holder of the Trust, that, based upon the facts known to the Regular Trustees, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that 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 Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Regular Trustees, independent legal counsel or Common Security Holder reasonably determine that such Person deliberately breached his duty to the Trust or its Common or Preferred Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Debenture Issuer or Preferred Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Debenture Issuer and each Company Indemnified Person who serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any person who is or was a Company Indemnified Person against any liability asserted against him and -38- 45 incurred by him in any such capacity, or arising out of his status as such, whether or not the Debenture Issuer would have the power to indemnify him against such liability under the provisions of this Section 10.4(a). (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a person. (b) The Sponsor agrees to indemnify the (i) Institutional Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Institutional Trustee and the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Institutional Trustee and the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration or the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the satisfaction and discharge of this Declaration. Section 10.5 Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Institutional Trustee 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. No 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, as a partner or fiduciary, or on behalf of another Person in which the first Person holds an interest) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Institutional -39- 46 Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE XI ACCOUNTING Section 11.1 Fiscal Year. The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code, or, if there is no applicable requirement, selected by the Regular Trustees from time to time following written notice to the Institutional Trustee. Section 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Regular Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Regular Trustees. (b) The Regular Trustees shall cause to be prepared 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 Regular Trustees shall cause to be duly prepared and delivered to each of the Holders of Securities, any annual United States federal income tax information statement, required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Regular Trustees shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust. (d) The Regular Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Regular Trustees on behalf of the Trust with any state or local taxing authority. -40- 47 Section 11.3 Banking. The Trustees shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Institutional Trustee shall be made directly to the Institutional Trustee Account and no other funds of the Trust shall be deposited in the Institutional Trustee Account. The sole signatories for such accounts shall be designated by the Regular Trustees; provided, however, that the Institutional Trustee shall designate the signatories for the Institutional Trustee Account. Section 11.4 Withholding. The Trust and the Regular Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Regular Trustees 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 Trust is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a distribution in the amount of the withholding to the Holder. In the event of any claimed over withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS Section 12.1 Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by: (i) the Regular Trustees (or, if there are more than two Regular Trustees a majority of the Regular Trustees); (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Institutional Trustee, the Institutional Trustee; provided, that the Institutional Trustee shall have no obligation to execute any amendment which affects it adversely; and (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee; -41- 48 (b) no amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless, in the case of any proposed amendment, the Institutional Trustee shall have first received an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Institutional Trustee, the Institutional Trustee shall have first received: (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (B) an opinion of counsel (who may be counsel to, and may be an employee of, 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 (iii) if the result of such amendment would be to: (A) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Institutional Trustee in contravention of the Trust Indenture Act; or (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act; (c) at such time after the Trust has issued any Securities that remain outstanding, any amendment that would adversely affect the rights, privileges or preferences of any Holder of Securities may be effected only with such additional requirements as may be set forth in the terms of such Securities; (d) Section 9.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders of the Securities; (e) Article IV shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities and; (f) the rights of the Holders of the Common Securities under Article V to increase or decrease the number of, and appoint and remove Trustees shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities; and -42- 49 (g) notwithstanding Section 12.1(c), this Declaration may be amended without the consent of the Holders of the 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) to conform to any change in Rule 3a-5 or written change in interpretation or application of Rule 3a-5 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; and (v) to modify, eliminate and add to any provision of this Declaration to such extent as may be necessary to comply with applicable law or otherwise. Section 12.2 Meeting 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 Regular Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading. The Regular Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Regular Trustees one or more calls in a writing stating that the signing Holders of Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of Securities calling a meeting shall specify in writing the Security Certificates held by the Holders of Securities exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of Securities: (i) notice of any such meeting shall be given to all the Holders of Securities having a right to vote thereat at least 7 days and not more than 60 days before the date of such meeting. When ever a vote, consent or approval of the Holders of Securities is permitted or required under this Declaration or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders of Securities. Any action that may be taken at a meeting of the Holders of Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of Securities owning not less -43- 50 than the minimum amount of Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders of 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 Securities entitled to vote who have not consented in writing. The Regular Trustees may specify that any written ballot submitted to the Security Holder for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Regular Trustees; (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 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; (iii) each meeting of the Holders of the Securities shall be conducted by the Regular Trustees or by such other Person that the Regular Trustees may designate; and (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Preferred Securities are then listed or trading, otherwise provides, the Regular Trustees, 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 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. ARTICLE XIII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE Section 13.1 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 national banking association maintaining corporate trust powers, duly organized, validly existing and in good standing under the laws of the United States, with power and authority to execute and deliver, and to carry out and perform its obligations under the terms -44- 51 of, this Declaration and all other documents, agreements and instruments, the execution, delivery and performance of which by the Institutional Trustee is contemplated by this Declaration; (b) 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, and this Declaration has been duly executed and delivered by the Institutional Trustee; (c) the execution, delivery and performance of this Declaration by the Institutional Trustee does not conflict with or constitute a breach of the Articles of Association, By-laws or other organizational or charter documents of the Institutional Trustee; and (d) no consent, approval or authorization of, or registration with or notice to, any State or Federal banking authority is required for the execution, delivery or performance by the Institutional Trustee, of this Declaration or any other documents, agreements or instruments, the execution delivery and performance of which by the Institutional Trustee is contemplated by this Declaration. Section 13.2 Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) The Delaware Trustee has been duly authorized to perform its obligations under the Certificate of Trust and this Declaration. This Declaration under Delaware law has been duly executed and delivered by the Delaware Trustee; (b) No consent, approval or authorization of, or registration with or notice to, any State or Federal banking authority is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and (c) The Delaware Trustee is either a natural person who is a resident of the State of Delaware or, if not a natural person, a Delaware banking corporation which maintains its principal place of business in the State of Delaware, with trust powers and 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 and all other documents, agreements and instruments, the execution, delivery and performance of which by the Delaware Trustee is contemplated by this Declaration. -45- 52 ARTICLE XIV MISCELLANEOUS Section 14.1 Notices. All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) if given to the Trust, in care of the Regular Trustees at the Trust's mailing address set forth below (or such other address as the Trust may provide to the Holders of the Securities): Fremont General Financing I 2020 Santa Monica Boulevard Suite 600 Santa Monica, California 90404 Attention: (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as Delaware Trustee may provide to the Holders of the Securities and the Sponsor in writing): The Chase Manhattan Bank (USA) 802 Delaware Avenue, 13th Floor Wilmington, DE 19801 Attention: Trust Department (c) if given to the Institutional Trustee, at its Corporate Trust Office, to the attention of (or such other address as the Institutional Trustee may provide to the Holders of the Securities and the Sponsor in writing); (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 provide to the Trust in writing): Fremont General Corporation 2020 Santa Monica Boulevard Suite 600 Santa Monica, California 90404 Attention: (e) if given to any other Holder, at the address set forth on the books and records of the Trust. -46- 53 All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. Section 14.2 Governing Law. This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. Section 14.3 Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. Section 14.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. Section 14.5 Successors and Assigns Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether or not so expressed. Section 14.6 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. Section 14.7 Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one 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. -47- 54 IN WITNESS WHEREOF, each of the undersigned has caused these presents to be executed as of the day and year first above written. /s/ Louis J. Rampino ------------------------------------- Louis J. Rampino as Regular Trustee /s/ Wayne R. Bailey ------------------------------------- Wayne R. Bailey as Regular Trustee THE CHASE MANHATTAN BANK (USA) as Delaware Trustee By: /s/ John W. Mack ------------------------------ Name: John W. Mack Title: Second Vice President THE CHASE MANHATTAN BANK, N.A. as Institutional Trustee By: /s/ Timothy E. Burke ------------------------------ Name: Timothy E. Burke Title: Second Vice President FREMONT GENERAL CORPORATION as Sponsor By: /s/ Wayne R. Bailey ------------------------------ Wayne R. Bailey Executive Vice President and Chief Financial Officer -48- 55 I TERMS OF 9% TRUST ORIGINATED PREFERRED SECURITIES 9% TRUST ORIGINATED COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust, dated as of March 6, 1996 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred 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 or, if not defined in such Declaration, as defined in the Prospectus referred to below): 1. Designation and Number. (a) Preferred Securities. Four million (4,000,000) Preferred Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of one hundred million dollars ($100,000,000) and a liquidation amount with respect to the assets of the Trust of $25 per preferred security, are hereby designated for the purposes of identification only as "9% Trust Originated Preferred Securities(sm) ('TOPrS'(sm))" (the "Preferred Securities"). The Preferred Security Certificates evidencing the Preferred Securities shall each be substantially in the form of Exhibit A-1 to the Declaration, appropriately completed and 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 Preferred Securities are listed. (b) Common Securities. One hundred twenty thousand (123,711) Common Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of three million ninety-two thousand seven hundred and eighty-four dollars ($3,092,784.00) and a liquidation amount with respect to the assets of the Trust of $25 per common security, are hereby designated for the purposes of identification only as "9% Trust Originated Common Securities" (the "Common Securities"). The Common Security Certificates evidencing the Common Securities shall be each substantially in the form of Exhibit A-2 to the Declaration, appropriately completed and with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. 2. Distributions. (a) Distributions payable on each Security will be fixed at a rate per annum of 9% (the "Coupon Rate") of the stated liquidation amount of $25 per Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarter will bear interest thereon compounded quarterly at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes such cash distributions and any such I-1 56 interest payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. The amount of Distributions payable for any period will be compu ted for any full quarterly Distribution period on the basis of a 360-day year of twelve 30-day months, and for any period shorter than a full quarterly Distribution period for which Distributions are computed, Distributions will be computed on the basis of the actual number of days elapsed per 90-day quarter. (b) Distributions on the Securities will be cumulative, will accrue from March 6, 1996, and will be payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 1996, except as otherwise described below. The Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 20 consecutive quarters (each an "Extension Period"), during which Extension Period no interest shall be due and payable on the Debentures; provided that no Extension Period shall extend beyond the date of maturity of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, quarterly Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the Coupon Rate compounded quarterly during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 20 consecutive quarters or extend beyond the date of maturity of the Debentures. Payments of accrued Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. The Debenture Issuer will notify the Debenture Trustee of its election of any Extension Period, whereupon the Debenture Trustee will promptly notify the Trustee thereof. The Trustee will in turn notify the holders within five Business Days following its receipt of notice from the Debenture Trustee. (c) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Trust on the relevant record dates. While the Preferred Securities remain in book-entry only form, the relevant record dates shall be one Business Day prior to the relevant payment dates which payment dates correspond to the interest payment dates on the Debentures. Subject to any applicable laws and regulations and the provisions of the Declaration, each such payment in respect of the Preferred Securities will be made as described under the heading "Description of the Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust Company" in the Prospectus dated March 1, 1996 (the "Prospectus") of the Trust included in the Registration Statement on Form S-3 Reg. No. 33-64771 of the Sponsor and the Trust, as amended. The relevant record dates for the Common Securities shall be the same as the corresponding record dates for the Preferred Securities. If the Preferred Securities shall not continue to remain in book-entry only form, the relevant record dates for the Preferred Securities, shall conform to the rules of any securities exchange on which the securities are listed and, if none, shall be selected by the Regular Trustees, which dates shall be at least one Business Day but less than 60 Business Days before the relevant payment dates, which payment dates correspond to the interest payment dates on the Debentures. Distributions payable on any Securities that are not I-2 57 punctually paid on any Distribution payment date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, 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 date. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined in Section 8 of this Annex I) among the Holders of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of any voluntary or involuntary dissolution, winding-up or termination of the Trust, the Holders of the Securities on the date of the dissolution, winding-up or termination, as the case may be, will be entitled to receive out of the assets of the Trust available for distribution to Holders of Securities after satisfaction of liabilities of creditors an amount equal to the aggregate of the stated liquidation amount of $25 per Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless, in connection with such dissolution, winding-up or termination, Debentures in an aggregate 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, such Securities, shall be distributed on a Pro Rata basis to the Holders of each class of Securities in exchange for such Securities. If, upon any such dissolution, 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 each class of Securities shall be paid on a Pro Rata basis. 4. Redemption and Distribution. (a) Upon the repayment of the Debentures in whole or in part, whether at maturity or upon redemption (either at the option of the Debenture Issuer or pursuant to a Tax Event as described below), the proceeds from such repayment or payment shall be simultaneously applied to redeem Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed at a redemption price of $25 per Security plus an amount equal to accrued and unpaid Distributions thereon at the date of the redemption, payable in cash (the "Redemption Price"). Holders will be given not less than 30 nor more than 60 days notice of such redemption. I-3 58 (b) If fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Preferred Securities will be redeemed Pro Rata and the Preferred Securities to be redeemed will be as described in Section 4(f)(ii) below. (c) If a Tax Event shall occur and be continuing the Regular Trustees shall, except in certain limited circumstances in relation to a Tax Event described in this Section 4(c), dissolve the Trust and, after satisfaction of creditors, cause Debentures held by the Institutional Trustee, having an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the Coupon Rate of, and accrued and unpaid interest equal to accrued and unpaid Distributions on, and having the same record date for payment as the Securities, to be distributed to the Holders of the Securities in liquidation of such Holders' interests in the Trust on a Pro Rata basis, within 90 days following the occurrence of such Tax Event (the "90 Day Period"); provided, however, that, as a condition of such dissolution and distribution, the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may rely on published revenue rulings of the Internal Revenue Service, to the effect that the Holders of the Securities will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust and the distribution of Debentures, and provided, further, that, if at the time there is available to the Trust the opportunity to eliminate, within the 90 Day Period, the Tax Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure that has no adverse effect on the Trust, the Debenture Issuer, the Sponsor or the Holders of the Securities ("Ministerial Action"), the Trust will pursue such Ministerial Action in lieu of dissolution. If (i) in the event of a Tax Event, after receipt of a Tax Event Opinion (as defined hereinafter) by the Regular Trustees, the Debenture Issuer has received an opinion (a "Redemption Tax Opinion") of a nationally recognized independent tax counsel experienced in such matters that, as a result of a Tax Event, there is more than an insubstantial risk that the Debenture Issuer would be precluded from deducting the interest on the Debentures for United States federal income tax purposes, even if the Debentures were distributed to the Holders of Securities in liquidation of such Holders' interests in the Trust as described in this Section 4(c), or (ii) in the event of any Tax Event, after receipt of a Tax Event Opinion the Regular Trustees shall have been informed by such tax counsel that a No Recognition Opinion cannot be delivered to the Trust, the Debenture Issuer shall have the right at any time, upon not less than 30 nor more than 60 days notice, to redeem the Debentures in whole or in part for cash within 90 days following the occurrence of such Tax Event, and, following such redemption, Securities with an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so redeemed shall be redeemed by the Trust at the Redemption Price on a Pro Rata basis; provided, however, that, if at the time there is available to the Trust the opportunity to eliminate, within such 90 day period, the Tax Event by taking some Ministerial Action, the Trust or the Debenture Issuer will pursue such Ministerial Action in lieu of redemption. "Tax Event" means that the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters (a "Tax Event Opinion") to the effect that on or after the date of the Prospectus, as a result of (a) any amendment to, or change (including any I-4 59 announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority therefor or therein, or (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the date of the Prospectus, there is more than an insubstantial risk that (i) the Trust is, or will within 90 days of the date thereof become, subject to United States federal income tax with respect to interest accrued or received on the Debentures, (ii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of taxes, duties or other governmental charges, or (iii) interest payable by the Debenture Issuer to the Trust on the Debentures is not, or within 90 days of the date thereof will not be, deductible, in whole or in part, by the Debenture Issuer for United States federal income tax purposes. On and from the date fixed by the Regular Trustees for any distribution of Debentures and upon dissolution of the Trust: (i) the Securities will no longer be deemed to be outstanding, (ii) the Depository Trust Company (the "Depository") or its nominee (or any successor Clearing Agency or its nominee), as the record Holder of the Preferred Securities, will receive a registered global certificate or certificates representing the Debentures to be delivered upon such distribution and any certificates representing Securities, except for certificates representing Preferred Securities held by the Depository or its nominee (or any successor Clearing Agency or its nominee), will be deemed to represent beneficial interests in the Debentures having an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the Coupon Rate of, and accrued and unpaid interest equal to accrued and unpaid Distributions on such Securities until such certificates are presented to the Debenture Issuer or its agent for transfer or reissue. (d) The Trust may not redeem fewer than all the outstanding Securities unless all accrued and unpaid Distributions have been paid on all Securities for all quarterly Distribution periods terminating on or before the date of redemption. (e) If the Debentures are distributed to Holders of the Securities, pursuant to the terms of the Indenture, the Debenture Issuer will use its best efforts to have the Debentures listed on the New York Stock Exchange or on such other exchange as the Preferred Securities were listed immediately prior to the distribution of the Debentures. (f) Redemption or Distribution Procedures. (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for the Securities (a "Redemption/Distribution Notice") will be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(f)(i), a Redemption/ Distribution Notice shall I-5 60 be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Preferred Securities are to be redeemed, the Preferred Securities to be redeemed shall be redeemed Pro Rata from each Holder of Preferred Securities, it being understood that, in respect of Preferred Securities registered in the name of and held of record by the Depository or its nominee (or any successor Clearing Agency or its nominee) or any other nominee, the distribution of the proceeds of such redemption will be made to each Clearing Agency Participant (or Person on whose behalf such nominee holds such securities) in accordance with the procedures applied by such agency or nominee. (iii) If 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 (A) while the Preferred Securities are in book-entry only form, with respect to the Preferred Securities, by 12:00 noon, New York City time, on the redemption date, provided that the Debenture Issuer has paid the Institutional Trustee a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Institutional Trustee will deposit irrevocably with the Depository or its nominee (or successor Clearing Agency or its nominee) funds sufficient to pay the applicable Redemption Price with respect to the Preferred Securities and will give the Depository irrevocable instructions and authority to pay the Redemption Price to the Holders of the Preferred Securities and (B) with respect to Preferred Securities issued in definitive form and Common Securities, provided that the Debenture Issuer has paid the Institutional Trustee 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 the relevant 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, if applicable, then immediately prior to the close of business on the date of such deposit, or on the redemption date, as applicable, Distributions will cease to 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 Redemption Price, but without interest on such Redemption Price. Neither the Regular Trustees nor the Trust shall be required to register or cause to be registered the transfer of any Securities that have been so called for redemption. If any date fixed for redemption of Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of I-6 61 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 Institutional Trustee or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, Distributions on such Securities will continue to accrue 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. (iv) Redemption/Distribution Notices shall be sent by the Regular Trustees on behalf of the Trust to (A) in respect of the Preferred Securities, the Depository or its nominee (or any successor Clearing Agency or its nominee) if the Global Certificates have been issued or, if Definitive Preferred Security Certificates have been issued, to the Holder thereof, and (B) in respect of the Common Securities, the Holder thereof. (v) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), provided 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 Preferred Securities by tender, in the open market or by private agreement. 5. Voting Rights - Preferred Securities. (a) Except as provided under Sections 5(b) and 7 of this Annex I and as otherwise required by law and the Declaration, the Holders of the Preferred Securities will have no voting rights. (b) Subject to the requirements set forth in this paragraph, the Holders of a Majority in Liquidation Amount of the Preferred 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 Deben ture 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 is waivable under Section 513 of 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. The Institutional Trustee shall not revoke any action previously authorized or approved by a vote of the Holders of the Preferred Securities. Other than with respect to directing the time, method and place of conducting any remedy available to the Institutional Trustee or the Debenture Trustee as set forth above, the Institutional Trustee shall not take any action in accordance with the directions of the Holders of the Preferred Securities under this paragraph 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 I-7 62 law, any Holder of Preferred 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 Preferred Securities may be given at a separate meeting of Holders of Preferred Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which Holders of Preferred 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 Preferred 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 Preferred Securities will be required for the Trust to redeem and cancel Preferred Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Preferred Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. 6. Voting Rights -- Common Securities. (a) Except as provided under Sections 6(b) and (c) and 7 of this Annex I, as otherwise required by law and this Declaration, the Holders of the Common Securities will have no voting rights. (b) The Holders of the Common Securities are entitled, in accordance with Article V of the Declaration, to vote to appoint, remove or replace any Trustee or to increase or decrease the number of Trustees. (c) Subject to Section 2.6 of the Declaration and only after the Event of Default with respect to the Preferred 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 is waivable under Section 513 of 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. Pursuant to this Section 6(c), the Institutional Trustee shall not revoke any action I-8 63 previously authorized or approved by a vote of the Holders of the Preferred Securities. Other than with respect to directing the time, method and place of conducting any remedy available to the Institutional Trustee or the Debenture Trustee as set forth above, the Institutional Trustee shall not take any action in accordance with the directions of the Holders of the Common Securities under this paragraph 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 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 Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities of the Trust or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. 7. Amendments to Declaration and Indenture. (a) In addition to any requirements under Section 12.1 of the Declaration, if any proposed amendment to the Declaration provides for, or the Regular 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 dissolution, winding-up or termination of the Trust, other than as described in Section 8.1 of the Declaration, then the Holders of outstanding Securities as a class, will be entitled to vote on such amendment or proposal (but not on any other amendment or proposal) and such amendment or proposal shall not be effective except with the approval of the Holders of at least a Majority in Liquidation Amount of the Securities, voting together as a single class; provided, however, if any amendment or proposal referred to in clause (i) above would adversely affect only the Preferred 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 the Preferred Securities, or, as the case might be, the Majority in Liquidation Amount of the Common Securities. I-9 64 (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 of the Debentures, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a Majority in Liquidation Amount of the Securities voting together as a single class; provided, however, that the Institutional Trustee shall not take any action in accordance with the directions of the Holders of the Securities under this Section 7(b) 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. 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 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 under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Preferred Securities pro rata according to the aggregate liquidation amount of Preferred Securities held by the relevant Holder relative to the aggregate liquidation amount of all Preferred Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Preferred Securities, to each Holder of Common Securities pro rata according to the aggregate liquidation amount of Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. 9. Ranking. The Preferred Securities rank pari passu with, and payment thereon shall be made Pro Rata with, the Common Securities except that, so long as an Event of Default occurs and is continuing under the Indenture in respect of the Debentures held by the Institutional Trustee, 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 Preferred Securities until the obligations of the Trust to the Holders of Preferred Securities have been satisfied in full; provided, that the Holders of Common Securities may receive securities in respect thereof which are likewise subordinated to the Preferred Securities on terms no less favorable to the Holders of the Preferred Securities than the terms of the Common Securities. 10. Listing. The Regular Trustees shall use their best efforts to cause the Preferred Securities to be listed for quotation on the New York Stock Exchange, Inc. I-10 65 11. Acceptance of Securities Guarantee and Indenture. Each Holder of Preferred Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Preferred Securities Guarantee and the Common Securities Guarantee, respectively, including the subordination provisions therein, and to the provisions of the Indenture. 12. No Preemptive Rights. The Holders of the Securities shall have no preemptive or other similar rights to subscribe for any additional Securities. 13. Miscellaneous. These terms constitute a part of the Declaration. The Sponsor will provide a copy of the Declaration, the Preferred Securities Guarantee or the Common Securities Guarantee (as may be appropriate), and the Indenture to a Holder without charge on written request to the Sponsor at its principal place of business. I-11 66 EXHIBIT A-1 FORM OF PREFERRED SECURITY CERTIFICATE [This Preferred Security is a Global Certificate within the meaning of the Declaration hereinafter referred to and is registered in the name of The Depository Trust Company (the "Depositary") or a nominee of the Depositary. This Preferred Security is exchangeable for Preferred Securities registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Declaration and no transfer of this Preferred Security (other than a transfer of this Preferred Security as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances.] [Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Trust or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.] Certificate Number of Preferred Securities CUSIP NO. [356905208] Certificate Evidencing Preferred Securities of FREMONT GENERAL FINANCING I 9% Trust Originated Preferred Securities(sm) ("TOPrS"(sm)) (liquidation amount $25 per Preferred Security) FREMONT GENERAL FINANCING I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that ______________ (the "Holder") is the registered owner of ______________________________________ preferred securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 9% Trust Originated Preferred Securities(sm) (liquidation amount $25 per Preferred Security) (the "Preferred Securities"). The Preferred 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 A1-1 67 designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of March 6, 1996, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Preferred Securities as set forth in Annex I to 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 Preferred Securities Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Preferred Securities Guarantee and the Indenture to a Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Preferred Securities as evidence of indirect beneficial ownership in the Debentures. IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of ________, 1996. FREMONT GENERAL FINANCING I By: ------------------------------------ Name: Louis J. Rampino Title: Regular Trustee A1-2 68 [FORM OF REVERSE OF SECURITY] Distributions payable on each Preferred Security will be fixed at a rate per annum of 9% (the "Coupon Rate") of the stated liquidation amount of $25 per Preferred Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarter will bear interest thereon compounded quarterly at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes such cash distributions and any such interest payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. The amount of Distributions payable for any period will be computed for any full quarterly Distribution period on the basis of a 360-day year of twelve 30-day months, and for any period shorter than a full quarterly Distribution period for which Distributions are computed, Distributions will be computed on the basis of the actual number of days elapsed per 90-day quarter. Except as otherwise described below, distributions on the Preferred Securities will be cumulative, will accrue from the date of original issuance and will, subject to deferral as provided below, be payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 1996, [to Holders of record as of the preceding Business Day] [to Holders of record fifteen (15) days prior to such payment dates, which payment dates shall correspond to the interest payment dates on the Debentures]. The Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 20 consecutive quarters (each an "Extension Period"), during which Extension Period no interest shall be due and payable on the Debentures; provided that no Extension Period shall extend beyond the date of maturity of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, quarterly Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the Coupon Rate compounded quarterly during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 20 consecutive quarters or extend beyond the maturity of the Debentures. Payments of accrued Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. The Preferred Securities shall be redeemable as provided in the Declaration. A1-3 69 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security Certificate to: - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- agent to transfer this Preferred Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: -------------------------------- Signature: ---------------------------------------------------- (Sign exactly as your name appears on the other side of this Preferred Security Certificate) A1-4 70 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE Certificate Number Number of Common Securities Certificate Evidencing Common Securities of FREMONT GENERAL FINANCING I 9% Trust Originated Common Securities (liquidation amount $25 per Common Security) FREMONT GENERAL FINANCING I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _____________________ (the "Holder") is the registered owner of common securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 9% Trust Originated Common Securities (liquidation amount $25 per Common Security) (the "Common Securities"). The Common Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of March 6, 1996, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration. Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Common Securities Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Common Securities Guarantee and the Indenture to a Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Sponsor is bound by the Declaration and is entitled to the benefits thereunder. By acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. A2-1 71 IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of __________, 1996. FREMONT GENERAL FINANCING I By: ---------------------------------- Name: Louis J. Rampino Title: Regular Trustee A2-2 72 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be fixed at a rate per annum of 9% (the "Coupon Rate") of the stated liquidation amount of $25 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarter will bear interest thereon compounded quarterly at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes such cash distributions and any such interest payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. The amount of Distributions payable for any period will be computed for any full quarterly Distribution period on the basis of a 360-day year of twelve 30-day months, and for any period shorter than a full quarterly Distribution period for which Distributions are computed, Distributions will be computed on the basis of the actual number of days elapsed per 90-day quarter. 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 quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 1996, [to Holders of record as of the preceding Business Day][to Holders of record fifteen (15) days prior to such payment dates, which payment dates shall correspond to the interest payment dates on the Debentures]. The Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 20 consecutive quarters (each an "Extension Period") during which Extension Period no interest shall be due and payable on the Debentures; provided, that no Extension Period shall extend beyond the date of maturity of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Despite such deferral, quarterly Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the Coupon Rate compounded quarterly during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 20 consecutive quarters or extend beyond the date of maturity of the Debentures. Payments of accrued Distributions will be payable to Holders as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. The Common Securities shall be redeemable as provided in the Declaration. A2-3 73 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 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- agent to transfer this Common Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: --------------------------- Signature: ----------------------------------------- (Sign exactly as your name appears on the other side of this Common Security Certificate) A2-4 74 EXHIBIT B SPECIMEN OF DEBENTURE B-1 75 EXHIBIT C PURCHASE AGREEMENT C-1 EX-4.6 6 PREFERRED SECURITIES GUARANTEE AGREEMENT 1 EXHIBIT 4.6 ==================================== PREFERRED SECURITIES GUARANTEE AGREEMENT Fremont General Financing I Dated as of March 6, 1996 ==================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Definitions and Interpretation . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application . . . . . . . . . . . . . . . . . . . 4 SECTION 2.2 Lists of Holders of Securities . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.3 Reports by the Preferred Guarantee Trustee . . . . . . . . . . . . . . 4 SECTION 2.4 Periodic Reports to Preferred Guarantee Trustee . . . . . . . . . . . 4 SECTION 2.5 Evidence of Compliance with Conditions Precedent . . . . . . . . . . . 5 SECTION 2.6 Events of Default; Waiver . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.7 Event of Default; Notice . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.8 Conflicting Interests . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Preferred Guarantee Trustee . . . . . . . . . 5 SECTION 3.2 Certain Rights of Preferred Guarantee Trustee . . . . . . . . . . . . 7 SECTION 3.3. Not Responsible for Recitals or Issuance of Guarantee . . . . . . . . 8 ARTICLE IV PREFERRED GUARANTEE TRUSTEE SECTION 4.1 Preferred Guarantee Trustee; Eligibility . . . . . . . . . . . . . . . 8 SECTION 4.2 Appointment, Removal and Resignation of Preferred Guarantee Trustees . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE V GUARANTEE SECTION 5.1 Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 5.2 Waiver of Notice and Demand . . . . . . . . . . . . . . . . . . . . . 10 SECTION 5.3 Obligations Not Affected . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 5.4 Rights of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.5 Guarantee of Payment . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.6 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.7 Independent Obligations . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION
i 3 SECTION 6.1 Limitation of Transactions . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 6.2 Ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VII TERMINATION SECTION 7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VIII INDEMNIFICATION SECTION 8.1 Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 8.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 9.2 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 9.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 9.4 Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 9.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ii 4 PREFERRED SECURITIES GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Preferred Securities Guarantee"), dated as of March 6, 1996, is executed and delivered by Fremont General Corporation, a Nevada corporation (the "Guarantor"), in favor of The Chase Manhattan Bank, N.A., as trustee (the "Preferred Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of Fremont General Financing I, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of March 6, 1996, among the trustees of the Issuer named therein, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof 4,000,000 preferred securities, having an aggregate liquidation amount of $100,000,000 (plus up to an additional 600,000 preferred securities, having an aggregate liquidation amount of $15,000,000, to cover over-allotments), designated the 9% Trust Originated Preferred Securities(sm) (the "Preferred Securities"); WHEREAS, as incentive for the Holders to purchase the Preferred Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Preferred Securities Guarantee, to guarantee the obligations of the Issuer to the Holders of the Preferred Securities on the terms and conditions set forth herein. WHEREAS, the Guarantor is also executing and delivering a guarantee agreement (the "Common Securities Guarantee") in substantially identical terms to this Preferred Securities Guarantee for the benefit of the holders of the Common Securities (as defined herein), except that if an Event of Default (as defined in the Indenture), has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee shall be subordinated to the rights of Holders of Preferred Securities to receive Guarantee Payments under this Preferred Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Preferred Securities Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Definitions and Interpretation In this Preferred Securities Guarantee, unless the context otherwise requires: (a) Capitalized terms used in this Preferred Securities 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 Preferred Securities Guarantee has the same meaning throughout; (c) all references to "the Preferred Securities Guarantee" or "this Preferred Securities Guarantee" are to this Preferred Securities Guarantee as modified, supplemented or amended from time to time; 1 5 (d) all references in this Preferred Securities Guarantee to Articles and Sections are to Articles and Sections of this Preferred Securities Guarantee, unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Preferred Securities Guarantee, unless otherwise defined in this Preferred Securities Guarantee or unless the context otherwise requires; (f) a reference to the singular includes the plural and vice versa; (g) a reference to any Person shall include its successors and assigns; (h) a reference to any agreement or instrument shall mean such agreement or instrument or instrument as supplemented, modified, amended or amended and restated and in effect from time to time; and (i) a reference to any statute, law, rule or regulation, shall include any amendments thereto applicable to the relevant Person, and any successor statute, law, rule or regulation. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" means any day other than a day on which banking institutions in the City of New York, New York are authorized or required by any applicable law to close. "Common Securities" means the securities representing common undivided beneficial interests in the assets of the Issuer. "Corporate Trust Office" means the office of the Preferred Guarantee Trustee at which the corporate trust business of the Preferred Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at 4 Chase MetroTech Center, Brooklyn, New York 11245, Attention: Institutional Trust Group. "Covered Person" means any Holder or beneficial owner of Preferred Securities. "Debentures" means the 9% Junior Subordinated Deferrable Interest Debentures due March 31, 2026 of the Issuer held by the Institutional Trustee (as defined in the Declaration). "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Preferred Securities Guarantee. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined in the Declaration) that are required to be paid on such Preferred Securities to the extent the Issuer shall have funds available therefor, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price") to the extent the Issuer has funds available therefor, with respect to any Preferred Securities called for redemption by the Issuer, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Issuer (other than in connection with the distribution of Debentures to the Holders in exchange for Preferred Securities as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all 2 6 accrued and unpaid Distributions on the Preferred Securities to the date of payment, to the extent the Issuer shall have funds available therefor, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer (in either case, the "Liquidation Distribution"). If an event of default under the Indenture has occurred and is continuing, the rights of holders of the Common Securities to receive payments under the Common Securities Guarantee Agreement are subordinated to the rights of Holders of Preferred Securities to receive Guarantee Payments. "Holder" shall mean any holder, as registered on the books and records of the Issuer of any Preferred Securities; provided, however, that, in determining whether the holders of the requisite percentage of Preferred 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 Preferred Guarantee Trustee, any Affiliate of the Preferred Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Preferred Guarantee Trustee. "Indenture" means the Indenture dated as of March 6, 1996, among the Guarantor (the "Debenture Issuer") and First Interstate Bank of California, a California banking corporation, as trustee, pursuant to which the Debentures are to be issued to the Property Trustee of the Issuer. "Indenture Trustee" means the Person acting as trustee under the Indenture, initially First Interstate Bank of California. "Majority in liquidation amount of the Securities" means, except as provided by the Trust Indenture Act, a vote by Holder(s) of Preferred Securities, voting separately as a class, of more than 50% of the 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 Preferred Securities. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Preferred Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definition 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. 3 7 "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. "Preferred Guarantee Trustee" means The Chase Manhattan Bank, N.A., until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Preferred Securities Guarantee and thereafter means each such Successor Preferred Guarantee Trustee. "Responsible Officer" means, with respect to the Preferred Guarantee Trustee, any officer within the Corporate Trust Office of the Preferred Guarantee Trustee, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Corporate Trust Office of the Preferred Guarantee 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. "Successor Preferred Guarantee Trustee" means a successor Preferred Guarantee Trustee possessing the qualifications to act as Preferred Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application (a) This Preferred Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Preferred Securities Guarantee and shall, to the extent applicable, be governed by such provisions; and (b) If and to the extent that any provision of this Preferred Securities Guarantee limits, qualifies or conflicts with the duties imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2 Lists of Holders of Securities (a) The Guarantor shall provide the Preferred Guarantee Trustee with a list, in such form as the Preferred Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Preferred Securities ("List of Holders") as of such date, (i) within one Business Day after January 1 and June 30 of each year, and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Preferred Guarantee Trustee provided, that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Preferred Guarantee Trustee by the Guarantor or the Preferred Securities are represented by one or more Global Securities (as defined in the Indenture). The Preferred Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Preferred Guarantee Trustee shall comply with its obligations under Section 311(a), 311(b) and Section 312(b) of the Trust Indenture Act. 4 8 SECTION 2.3 Reports by the Preferred Guarantee Trustee Within 60 days after May 15 of each year, the Preferred Guarantee Trustee shall provide to the Holders of the Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Preferred Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Preferred Guarantee Trustee The Guarantor shall provide to the Preferred Guarantee Trustee such documents, reports and information as required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent The Guarantor shall provide to the Preferred Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Preferred Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver The Holders of a Majority in liquidation amount of Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Preferred Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7 Event of Default; Notice (a) The Preferred 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 Preferred Securities, notices of all Events of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, that, the Preferred Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Preferred Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Preferred Securities. (b) The Preferred Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Preferred Guarantee Trustee shall have received written notice, or of which a Responsible Officer of the Preferred Guarantee Trustee charged with the administration of the Declaration shall have obtained actual knowledge. SECTION 2.8 Conflicting Interests The Declaration shall be deemed to be specifically described in this Preferred Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. 5 9 ARTICLE III POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Preferred Guarantee Trustee (a) This Preferred Securities Guarantee shall be held by the Preferred Guarantee Trustee for the benefit of the Holders of the Preferred Securities, and the Preferred Guarantee Trustee shall not transfer this Preferred Securities Guarantee to any Person except a Holder of Preferred Securities exercising his or her rights pursuant to Section 5.4(b) or to a Successor Preferred Guarantee Trustee on acceptance by such Successor Preferred Guarantee Trustee of its appointment to act as Successor Preferred Guarantee Trustee. The right, title and interest of the Preferred Guarantee Trustee shall automatically vest in any Successor Preferred 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 Preferred Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee has occurred and is continuing, the Preferred Guarantee Trustee shall enforce this Preferred Securities Guarantee for the benefit of the Holders of the Preferred Securities. (c) The Preferred Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall exercise such of the rights and powers vested in it by this Preferred Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Preferred Securities Guarantee shall be construed to relieve the Preferred 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 Preferred Guarantee Trustee shall be determined solely by the express provisions of this Preferred Securities Guarantee, and the Preferred Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants or obligations shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee; and (B) in the absence of bad faith on the part of the Preferred Guarantee Trustee, the Preferred 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 Preferred Guarantee Trustee 6 10 and conforming to the requirements of this Preferred Securities Guarantee; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Preferred Securities Guarantee; (ii) the Preferred Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Preferred Guarantee Trustee, unless it shall be proved that the Preferred Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Preferred Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Preferred Guarantee Trustee, or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee; and (iv) no provision of this Preferred Securities Guarantee shall require the Preferred 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 Preferred Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Preferred Securities Guarantee or indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 3.2 Certain Rights of Preferred Guarantee Trustee (a) Subject to the provisions of Section 3.1: (i) The Preferred 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 Preferred Securities Guarantee shall be sufficiently evidenced by a Direction or an Officers' Certificate. (iii) Whenever, in the administration of this Preferred Securities Guarantee, the Preferred Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Preferred Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor. 7 11 (iv) The Preferred Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof). (v) The Preferred Guarantee Trustee may consult with counsel, and the written 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 Preferred Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Preferred Securities Guarantee from any court of competent jurisdiction. (vi) The Preferred Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Preferred Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Preferred Guarantee Trustee such security and indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Preferred 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 Preferred Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Preferred Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Preferred Securities Guarantee. (vii) The Preferred Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Preferred Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii) The Preferred 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 Preferred 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 Preferred Guarantee Trustee or its agents hereunder shall bind the Holders of the Preferred Securities, and the signature of the Preferred 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 Preferred Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Preferred Securities Guarantee, both of which shall be conclusively evidenced by the Preferred Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Preferred Securities Guarantee the Preferred Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Preferred Guarantee Trustee (i) may request instructions from the 8 12 Holders of a Majority in liquidation amount of the Preferred Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions. (b) No provision of this Preferred Securities Guarantee shall be deemed to impose any duty or obligation on the Preferred 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 Preferred 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 Preferred Guarantee Trustee shall be construed to be a duty. SECTION 3.3. 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 Preferred Guarantee Trustee does not assume any responsibility for their correctness. The Preferred Guarantee Trustee makes no representation as to the validity or sufficiency of this Preferred Securities Guarantee. ARTICLE IV PREFERRED GUARANTEE TRUSTEE SECTION 4.1 Preferred Guarantee Trustee; Eligibility (a) There shall at all times be a Preferred 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 a corporation or Person permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust Indenture Act, 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 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Preferred Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Preferred Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Preferred Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Preferred Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. 9 13 Section 4.2 Appointment, Removal and Resignation of Preferred Guarantee Trustees (a) Subject to Section 4.2(b), the Preferred Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor. (b) The Preferred Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor. (c) The Preferred Guarantee Trustee appointed to office shall hold office until a Successor Preferred Guarantee Trustee shall have been appointed or until its removal or resignation. The Preferred Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Preferred Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor and the resigning Preferred Guarantee Trustee. (d) If no Successor Preferred Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery to the Guarantor of an instrument of resignation, the resigning Preferred Guarantee Trustee may petition any court of competent jurisdiction for appointment of a Successor Preferred Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Preferred Guarantee Trustee. (e) No Preferred Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Preferred Guarantee Trustee. (f) Upon termination of this Preferred Securities Guarantee or removal or resignation of the Preferred Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Preferred Guarantee Trustee all amounts accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE Section 5.1 Guarantee The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. Section 5.2 Waiver of Notice and Demand The Guarantor hereby waives notice of acceptance of this Preferred Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 5.3 Obligations Not Affected 10 14 The obligations, covenants, agreements and duties of the Guarantor under this Preferred Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred 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 Preferred Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. Section 5.4 Rights of Holders (a) The Holders of a Majority in liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting of any proceeding for any remedy available to the Preferred Guarantee Trustee in respect of this Preferred Securities Guarantee or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee. (b) If the Preferred Guarantee Trustee fails to enforce this Preferred Securities Guarantee, any Holder of Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce its rights under this Preferred Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Preferred Guarantee Trustee or any other Person. (c) If an Event of Default with respect to the Debentures (an "Indenture Event of Default"), 11 15 constituting the failure to pay interest or principal on the Debentures on the date such interest or principal is otherwise payable has occurred and is continuing, then a holder of Preferred Securities may at any time directly institute a proceeding for enforcement of payment to such holder directly of the principal of or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due date specified in the Debentures. The holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Debentures unless the Institutional Trustee fails to do so. SECTION 5.5 Guarantee of Payment This Preferred Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6 Subrogation The Guarantor shall be subrogated to all (if any) rights of the Holders of Preferred Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Preferred Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Preferred Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Preferred Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7 Independent Obligations The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Preferred Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions So long as any Preferred Securities remain outstanding, if there shall have occurred an Event of Default or an event of default under the Declaration, then (a) the Guarantor shall not and shall not allow any of its subsidiaries (other than its wholly owned subsidiaries) to, declare or pay dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases or acquisitions of shares of the common stock of the Guarantor as contemplated by any employment arrangement, benefit plan or other similar contract with or for the benefit of employees, officers or directors entered into in the ordinary course of business), (ii) as a result of an exchange or conversion of any class or series of the Guarantor's capital stock for the Guarantor's common stock, (iii) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such Guarantor capital stock or the security being converted or exchanged, or (iv) the payment of any stock dividend by the Guarantor payable in the Guarantor's common stock) or make any guarantee payments with respect to the foregoing and (b) the 12 16 Guarantor shall not, and shall not allow any of its subsidiaries to, make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Guarantor that rank pari passu with or junior to the Junior Subordinated Debentures except as (i) required in accordance with the terms thereof (including, in the case of junior debt, the subordination provisions thereof, (ii) in connection with a contemporaneous refinancing of such debt securities with the proceeds of a new issuance of debt securities repurchased or refinanced (iii) in connection with the contemporaneous conversion or exchange of such debt securities for common stock of the Guarantor; provided, however, that in no event shall the amount to be paid by the Guarantor or any of its subsidiaries under (a) or (b) (ii) or (iii) above exceed in the aggregate $500,000 per year. SECTION 6.2 Ranking (a) This Preferred Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all other liabilities of the Guarantor, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. (b) The holders of any obligations of the Guarantor which are senior in priority to the obligations under this Preferred Securities Guarantee will be entitled to all of the rights inuring to the holders of "Senior Indebtedness" under Article 11 of the Indenture, and the Holders of the Preferred Securities will be subject to all of the terms and conditions of such Article 11 with respect to any claims or rights hereunder with the same effect as though fully set forth herein. ARTICLE VII TERMINATION SECTION 7.1 Termination This Preferred Securities Guarantee shall terminate upon (i) full payment of the Redemption Price of all Preferred Securities, (ii) upon the distribution of the Debentures to the Holders of all of the Preferred Securities or (iii) upon full payment of the amounts payable in accordance with the Declaration upon liquidation of the Issuer. Notwithstanding the foregoing, this Preferred Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Preferred Securities must restore payment of any sums paid under the Preferred Securities or under this Preferred Securities Guarantee. ARTICLE VIII INDEMNIFICATION SECTION 8.1 Exculpation (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Preferred Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Preferred Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or 13 17 omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Preferred Securities might properly be paid. SECTION 8.2 Indemnification The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.2 shall survive the termination of this Preferred Securities Guarantee. ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns All guarantees and agreements contained in this Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. SECTION 9.2 Amendments Except with respect to any changes that do not adversely affect the rights of Holders (in which case no consent of Holders will be required), this Preferred Securities Guarantee may only be amended with the prior approval of the Holders of at least a Majority in 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 the outstanding Preferred Securities. The provisions of Section 12.2 of the Declaration with respect to meetings of Holders of the Securities apply to the giving of such approval. SECTION 9.3 Notices All notices provided for in this Preferred Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) If given to the Preferred Guarantee Trustee, at the Preferred Guarantee Trustee's mailing address set forth below (or such other address as the Preferred Guarantee Trustee may give notice of to the Holders of the Preferred Securities): The Chase Manhattan Bank, N.A. 14 18 4 Chase MetroTech Center Brooklyn, New York 11245 Attention: Institutional Trust Group (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 Preferred Securities): Fremont General Corporation 2020 Santa Monica Boulevard Suite 600 Santa Monica, California 90404 Attention: Louis J. Rampino, President and Chief Operating Officer (c) If given to any Holder of Preferred Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 9.4 Benefit This Preferred Securities Guarantee is solely for the benefit of the Holders of the Preferred Securities and, subject to Section 3.1(a), is not separately transferable from the Preferred Securities. SECTION 9.5 Governing Law THIS PREFERRED SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 15 19 THIS PREFERRED SECURITIES GUARANTEE is executed as of the day and year first above written. FREMONT GENERAL CORPORATION, as Guarantor By: /s/ Louis J. Rampino -------------------------------------------------- Name: Louis J. Rampino Title: President and Chief Operating Officer The Chase Manhattan Bank, N.A., as Preferred Guarantee Trustee By: /s/ Timothy E. Burke -------------------------------------------------- Name: Timothy E. Burke Title: Second Vice President 16 EX-4.7 7 COMMON SECURITIES GUARANTEE AGREEMENT 1 EXHIBIT 4.7 ===================================== COMMON SECURITIES GUARANTEE AGREEMENT Fremont General Financing I Dated as of March 6, 1996 ===================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions Interpretation . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II GUARANTEE SECTION 2.1. Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 2.2. Waiver of Notice and Demand . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 2.3. Obligations Not Affected . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.4. Rights of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.5. Guarantee of Payment . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.6. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.7. Independent Obligations . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE III LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 3.1. Limitation of Transactions . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 3.2. Ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE IV TERMINATION SECTION 4.1. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE V MISCELLANEOUS SECTION 5.1. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 5.2. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 5.3. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 5.4. Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 5.5. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3 COMMON SECURITIES GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Common Securities Guarantee"), dated as of March 6, 1996, is executed and delivered by Fremont General Corporation, a Nevada corporation (the "Guarantor"), for the benefit of the Holders (as defined herein) from time to time of the Common Securities (as defined herein) of Fremont General Financing I, a Delaware business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of March 6, 1996, among the Trustees of the Issuer named therein, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof 123,711 common securities, having an aggregate stated liquidation amount of $3,092,784 (plus up to an additional 18,557 common securities, having an aggregate liquidation amount of $463,925, to meet the capital requirements of the Trust in the event of an issuance of Additional Preferred Securities (as such term is defined in the Declaration)), designated the 9% Trust Originated Common Securities (the "Common Securities"); WHEREAS, as incentive for the Holders to purchase the Common Securities, the Guarantor desires to irrevocably and unconditionally agree, to the extent set forth in this Common Securities Guarantee, to pay to the Holders of the Common Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; and WHEREAS, the Guarantor is also executing and delivering a guarantee agreement (the "Preferred Securities Guarantee") in substantially identical terms to this Common Securities Guarantee for the benefit of the holders of the Preferred Securities (as defined herein), except that if an Event of Default (as defined in the Indenture), has occurred and is continuing, the rights of Holders of the Common Securities to receive Guarantee Payments under this Common Securities Guarantee are subordinated to the rights of holders of Preferred Securities to receive Guarantee Payments under the Preferred Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of Common Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Common Securities Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions Interpretation In this Common Securities Guarantee, unless the context otherwise requires: (a) Capitalized terms used in this Common Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) Terms defined in the Declaration as at the date of execution of this Common Securities Guarantee have the same meaning when used in this Common Securities Guarantee unless otherwise defined in this Common Securities Guarantee; (c) a term defined anywhere in this Common Securities Guarantee has the same meaning throughout; (d) all references to "the Common Securities Guarantee" or "this Common Securities Guarantee" are to this Common Securities Guarantees modified, supplemented or amended from time to time; 4 (e) all references in this Common Securities Guarantee to Articles and Sections are to Articles and Sections of this Common Securities Guarantee unless otherwise specified; and (f) a reference to the singular includes the plural and vice versa. "Guarantee Payments" shall mean the following payments or distributions, without duplication, with respect to the Common Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions which are required to be paid on such Common Securities to the extent the Issuer shall have funds available therefor, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price") to the extent the Issuer has funds available therefor, with respect to any Common Securities called for redemption by the Issuer, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Issuer (other than in connection with the distribution of Debentures to the Holders in exchange for Common Securities as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Common Securities to the date of payment, to the extent the Issuer has funds available therefor, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer (in either case, the "Liquidation Distribution"). If an Event of Default (as defined in the Indenture), has occurred and is continuing, the rights of Holders of the Common Securities to receive Guarantee Payments under this Common Securities Guarantee are subordinated to the rights of holder of Preferred Securities to receive Guarantee Payments. "Holder" shall mean any holder, as registered on the books and records of the Issuer, of any Common Securities. "Preferred Securities" mean the securities representing preferred undivided beneficial interests in the assets of the Issuer. ARTICLE II GUARANTEE SECTION 2.1. Guarantee The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim which the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 2.2. Waiver of Notice and Demand The Guarantor hereby waives notice of acceptance of this Common Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 2.3. Obligations Not Affected The obligations, covenants, agreements and duties of the Guarantor under this Common Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: 2 5 (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Common Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Common Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Common Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Common Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Common Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 2.3 that the obligations of the Guarantor 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 2.4. Rights of Holders The Guarantor expressly acknowledges that any Holder of Common Securities may institute a legal proceeding directly against the Guarantor to enforce its rights under this Common Securities Guarantee, without first instituting a legal proceeding against the Issuer or any other Person. SECTION 2.5. Guarantee of Payment This Common Securities Guarantee creates a guarantee of payment and not of collection. SECTION 2.6. Subrogation The Guarantor shall be subrogated to all (if any) rights of the Holders of Common Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Common Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Common 3 6 Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Common Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 2.7. Independent Obligations The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Common Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Common Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 2.3 hereof. ARTICLE III LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 3.1. Limitation of Transactions So long as any Common Securities remain outstanding, if (i) the Guarantor shall be in default with respect to its Guarantee Payments or other obligations hereunder, or (ii) there shall have occurred any Event of Default under the Indenture, then (a) the Guarantor shall not, and shall not allow any of its subsidiaries (other than its wholly owned subsidiaries) to, declare or pay dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases or acquisitions of shares of the common stock of the Guarantor as contemplated by any employment arrangement, benefit plan or other similar contract with or for the benefit of employees, officers or directors entered into in the ordinary course of business), (ii) as a result of an exchange or conversion of any class or series of the Guarantor's capital stock for the Guarantor's common stock, (iii) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such Guarantor capital stock or the security being converted or exchanged, or (iv) the payment of any stock dividend by the Guarantor payable in the Guarantor's common stock) or make any guarantee payments with respect to the foregoing and (b) the Guarantor shall not, and shall not allow any of its subsidiaries to, make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Guarantor that rank pari passu with or junior to the Junior Subordinated Debentures except as (i) required in accordance with the terms thereof (including, in the case of junior debt, the subordination provisions thereof), (ii) in connection with a contemporaneous refinancing of such debt securities with the proceeds of a new issuance of debt securities which have terms and provisions no more favorable to the holder than those of the debt securities repurchased or refinanced (iii) in connection with the contemporaneous conversion or exchange of such debt securities for common stock of the Guarantor; provided, however, that in no event shall the amount to be paid by the Guarantor or any of its subsidiaries under (a) or (b) (ii) or (iii) above exceed in the aggregate $500,000 per year. SECTION 3.2. Ranking (a) This Common Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all other liabilities of the Guarantor, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. (b) The holders of any obligations of the Guarantor which are senior in priority to the obligations under this Common Securities Guarantee will be entitled to all of the rights inuring to the holders of "Senior Indebtedness" under Article 11 of the Indenture, and the Holders of the Common Securities will be 4 7 subject to all of the terms and conditions of such Article 11 with respect to any claims or rights hereunder with the same effect as though fully set forth herein. ARTICLE IV TERMINATION SECTION 4.1. Termination This Common Securities Guarantee shall terminate upon full payment of the Redemption Price of all Common Securities, upon the distribution of the Debentures to the Holders of all of the Common Securities or upon full payment of the amounts payable in accordance with the Declaration upon liquidation of the Issuer. Notwithstanding the foregoing, this Common Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Common Securities must restore payment of any sums paid under the Common Securities or under this Common Securities Guarantee. ARTICLE V MISCELLANEOUS SECTION 5.1. Successors and Assigns All guarantees and agreements contained in this Common Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Common Securities then outstanding. SECTION 5.2. Amendments Except with respect to any changes which do not adversely affect the rights of Holders (in which case no consent of Holders will be required), this Common Securities Guarantee may only be amended with the prior approval of the Holders of at least a majority in liquidation amount of all the outstanding Common Securities. The provisions of Section 12.2 of the Declaration with respect to meetings of Holders of the Securities apply to the giving of such approval. SECTION 5.3. Notices All notices provided for in this Common Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) if given to the Issuer, in care of the Regular Trustee at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Holders of the Common Securities): Fremont General Financing I 2020 Santa Monica Boulevard Suite 600 Santa Monica, California 90404 Attention: Louis J. Rampino, President (b) if given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Common Securities): Fremont General Corporation 2020 Santa Monica Boulevard Suite 600 Santa Monica, California 90404 5 8 Attention: Louis J. Rampino, President (c) if given to any Holder of Common Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 5.4. Benefit This Common Securities Guarantee is solely for the benefit of the Holders of the Common Securities and is not separately transferable from the Common Securities. SECTION 5.5. Governing Law THIS COMMON SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6 9 THIS COMMON SECURITIES GUARANTEE is executed as of the day and year first above written. FREMONT GENERAL CORPORATION By: /s/ Louis J. Rampino ------------------------------------------ Name: Louis J. Rampino Title: President and Chief Operating Officer 7 EX-10.1 8 ESOP 1 EXHIBIT 10.1 FREMONT GENERAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN RESTATEMENT EFFECTIVE JANUARY 1, 1994 WILSON, SONSINI, GOODRICH & ROSATI 650 PAGE MILL ROAD PALO ALTO, CA 94304-1050 (415) 493-9300 2 TABLE OF CONTENTS
Page ---- SECTION I - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Affiliated Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Break in Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.6 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.7 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.8 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.9 Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.10 Employer: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.11 Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.12 Employment Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.13 Entry Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.14 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.15 Hour of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.16 Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.17 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.18 Participating Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.19 Permanent and Total Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.20 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.21 Plan Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.22 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.23 Section 415 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.24 Special Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.25 Special Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.26 Suspense Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.27 Trust, Trust Fund or Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.28 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.29 Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.30 Year of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION II - PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 Eligibility Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2 Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.3 Change in Employment Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.4 Election Not to Participate in the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION III - CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.1 Employer Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Limitations on Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 No Right or Duty of Inquiry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.4 Non-Reversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-i- 3 SECTION IV - ACCOUNTS AND ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Allocation of Employer Stock Released from Encumbrance, Employer Contributions and Forfeitures . . . . 13 4.3 Allocation of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.4 Dividends on Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.5 Annual Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.6 Benefit Limitations: Multiple Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.7 Correction of Error . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.8 Trust as Single Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION V - VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.1 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.2 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION VI - BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.1 Normal Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.2 Disability Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.3 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.4 Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.5 Commencement of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.6 Form of Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.7 Location of Former Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.8 Benefits to Minors and Incompetents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.9 Diversification of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.10 Period of Payment/Certain Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.11 Direct Rollovers; Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION VII - ACQUISITION AND DISTRIBUTION OF EMPLOYER STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.1 Loans Used to Acquire Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.2 Put Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.3 Fair Market Value of Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.4 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.5 Basis of Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION VIII - ADMINISTRATION BY THE COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.1 Appointment of the Plan Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.2 Powers of the Plan Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.3 Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.4 Meetings and Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.5 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.6 Domestic Relations Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION IX - DUTIES AND POWERS OF THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.2 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.3 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.4 Power of Trustee to Carry Out the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.5 Plan Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION X - AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-ii- 4 TABLE OF CONTENTS (continued)
Page ---- 10.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.3 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION XI - CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.1 Right to File Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.2 Denial of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.3 Claims Review Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION XII - ADOPTION OF PLAN BY AFFILIATED COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 12.1 Adoption of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 12.2 Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION XIII - TOP HEAVY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 13.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 13.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 13.3 Minimum Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 13.4 Vesting Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION XIV - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 14.1 Receipt of Rollovers and Trustee to Trustee Transfers . . . . . . . . . . . . . . . . . . . . . . . . . 36 14.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 14.3 Exclusive Benefit Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.4 No Right to the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.5 Rights of Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.6 Non-Alienation of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.7 Construction and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.8 Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.9 Request for Tax Ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-iii- 5 FREMONT GENERAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN BACKGROUND The Fremont General Corporation Employee Stock Ownership Plan was originally adopted effective December 1, 1988. Fremont General Corporation deems it appropriate to restate the Plan in its entirety. The Plan and the related trust are intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986 and are created and maintained for the exclusive benefit of eligible employees of Participating Employers, and their beneficiaries, to enable them to acquire shares of stock in the Employer, to provide retirement funds, and to provide benefits in the event of disability. The Plan and trust are also intended to be an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Internal Revenue Code, and are designed to invest primarily in Employer stock. 6 SECTION I DEFINITIONS Where indicated by initial capital letters, the following terms shall have the following meanings: 1.1 ACCOUNT: An account maintained for the benefit of a Participant pursuant to Section 4.1. 1.2 AFFILIATED COMPANY: Any corporation which is a member of a controlled group of corporations (as defined under Section 414(b) of the Code as modified by Section 415(h) of the Code) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined under Section 414(c) of the Code as modified by Section 415(h) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined under Section 414(m) of the Code) which includes the Employer; and any other organization or entity which is required to be aggregated with the Employer pursuant to Section 414(o) of the Code. 1.3 BENEFICIARY: The person or entity who is to receive any benefits payable from the Plan on account of a Participant's death. If the Participant is married, the Beneficiary is the Participant's spouse and no written designation is required. If the Participant is not married, the Beneficiary is the person designated to receive such benefits. A married Participant may designate a Beneficiary other than the Participant's spouse provided (i) the Participant's spouse consents in writing (on a form provided by the Plan Committee) to such designation and to the form thereof; (ii) such Beneficiary designation may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the Participant without any further consent by the spouse); and (iii) the spouse's consent acknowledges the effect of such Beneficiary designation and is witnessed by a plan representative or a notary public. Such spousal consent shall not be required if it is established to the satisfaction of the Plan Committee that the consent required under the preceding sentence cannot be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as the Secretary of the Treasury or the Secretary's delegate may by regulations prescribe. If at the time of his or her death, the Participant has no spouse or designated Beneficiary, the Beneficiary is the personal representative of the Participant's estate. A Participant may designate a person or entity to be his or her Beneficiary by filing a properly completed and executed form provided by the Plan Committee. A Participant's Beneficiary is bound by the terms of the Plan. 1.4 BOARD OF DIRECTORS: The Board of Directors of Fremont General Corporation. 1.5 BREAK IN SERVICE: For purposes of vesting, a Plan Year during which the Employee does not perform more than 500 Hours of Service. Reference is also made to Section 1.30 which provides that an Employee must complete at least 1,000 Hours of Service in order to have a Year of Service for vesting purposes. Employees who perform or complete more than 500 Hours of Service, but less than 1,000 Hours of Service in a Plan Year have neither a Break in Service nor a Year of Service. 1.6 CODE: The Internal Revenue Code of 1986, as amended. 1.7 COMPENSATION: (a) Compensation means all of an Employee's Code Section 3401(a) [W-2] wages. Wages as defined in Section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules 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 Section 3401(a)(2) of the Code). (b) Compensation shall include only that compensation which is actually paid to the Employee during the Plan Year. Notwithstanding the foregoing, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includable in the gross income of the Employee under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code. -2- 7 (c) For Plan Years beginning after December 31, 1988, the annual Compensation of each Employee taken into account for determining all benefits provided under the Plan for any determination period shall not exceed $200,000 (as adjusted by the Adjustment Factor). If Compensation is to be determined on a period of time that contains fewer than 12 calendar months, the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins, multiplied by the ratio obtained by dividing the number of full months in the period by 12. In determining the Compensation of a Participant for purposes of the foregoing $200,000 limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 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 individuals in proportion to each such individual's Compensation as determined under this section prior to the application of this limitation. If Compensation for any prior determination period is taken into account in determining a Participant's allocations or benefits for the current determination period, the Compensation for such prior year is subject to the applicable annual Compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual Compensation limit is $200,000. (d) For limitation years beginning after December 31, 1991, for purposes of applying the limitations of this Section, Compensation for a limitation year is the Compensation actually paid or made available during such limitation year. (e) 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 annual compensation limit under the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"). The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. 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 in the number of months in the determination period, and the denominator of which 12. For plan years beginning on or after January 1, 1994, any reference in this plan to the limitation under section 401(a)(17) of the Code 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. 1.8 EFFECTIVE DATE: The Effective Date of the Plan is December 1, 1988. Except as otherwise expressly provided herein, the Effective Date of this Restatement is January 1, 1994; provided, however, that any provision of this Plan required as result of the Tax Reform Act of 1986 or any subsequent legislation shall be effective as of the earliest date required by such legislation. The Effective Date for an Affiliated Company is the date as of which the Plan is adopted by the Affiliated Company. 1.9 EMPLOYEE: Any person employed by the Employer, other than as an independent contractor. The term Employee shall include leased employees within the meaning of Code Section 414(n)(2) ("Leased Employees"). Notwithstanding the foregoing, if such Leased Employees constitute less than 20% of the Employer's non-highly compensated work force within the meaning of Section 414(n)(1)(C)(ii) of the Code, the term Employee shall not include those Leased Employees covered by a plan described in Section 414(n)(5) of the Code unless otherwise provided by the terms of this Plan. 1.10 EMPLOYER: Fremont General Corporation and any Affiliated Company. 1.11 EMPLOYER STOCK: Common or preferred stock of Fremont General Corporation, or any successor by merger consolidation or otherwise, that meets the requirements of "qualifying employer security" under ERISA Section 407(d)(5) and "employer securities" under Code Section 409(1). 1.12 EMPLOYMENT COMMENCEMENT DATE: The date on which an Employee first performs an Hour of Service for the Employer, within the meaning of 29 CFR Section 2530.200b-2(a). -3- 8 1.13 ENTRY DATES: June 30 and December 31 of each Plan Year. 1.14 ERISA: The Employee Retirement Income Security Act of 1974, as amended. 1.15 HOUR OF SERVICE: An Employee shall be credited with one Hour of Service for: (a) Each hour for which the Employee is directly or indirectly paid, or entitled to payment, by the Employer or an Affiliated Company for the performance of duties. These hours shall be credited to the Employee for the computation period in which the duties are performed. (b) Each hour for which the Employee is paid or entitled to payment by the Employer or an Affiliated Company for a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) because of vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or authorized leave of absence. These hours shall be credited to the Employee for the computation period in which the duties would have been performed. Hours under this subparagraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations, which are incorporated in the Plan by this reference. (c) Each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer or an Affiliated Company. The same Hours of Service shall not be credited both under subparagraphs (a), (b) or (d), as the case may be, and under this subparagraph (c). These hours shall be credited to the Employee for the computation period to which the award or agreement pertains, rather than the computation period in which the award, agreement or payment is made. (d) For purposes of determining whether an Employee has a Break in Service, each hour (up to a maximum of 501 hours in a single continuous period) for which the Employee is absent because of (i) the pregnancy of the Employee, (ii) the birth of a child of the Employee, (iii) the placement of a child with the Employee in connection with the Employee's adoption of the child, or (iv) the Employee's caring for a child immediately after the birth or placement of the child. These hours shall be credited to the Employee for the computation period in which the leave of absence begins only if the Participant would otherwise incur a Break in Service in that computation period. In all other cases, these hours shall be credited to the next following computation period. 1.16 NORMAL RETIREMENT DATE: A Participant's 65th birthday. 1.17 PARTICIPANT: An Employee who meets the requirements of Section II. 1.18 PARTICIPATING EMPLOYER: The Affiliated Companies listed on Exhibit A, which have, from time to time, adopted the Plan. 1.19 PERMANENT AND TOTAL DISABILITY: The inability to engage in any substantial, gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, or such other standard as expressed in Section 22(e)(3) of the Code or any successor provision. The permanence and degree of such impairment shall be supported by medical evidence. 1.20 PLAN: The Fremont General Corporation Employee Stock Ownership Plan, as set forth herein and as amended from time to time. 1.21 PLAN COMMITTEE: The committee established pursuant to Section 8.1 to be responsible for the general administration of the Plan and supervision of the Trust Fund, and to be responsible pursuant to Section 9.5 for advising the Trustee regarding the management, disposition and investment of Trust assets (including the power to direct the Trustee with -4- 9 respect to the voting of Employer Stock, subject to the right of Participants to direct the Trustee with regard to allocated shares pursuant to the Trust Agreement). 1.22 PLAN YEAR: The 12 consecutive month period beginning on January 1 and ending on December 31 of each year. 1.23 SECTION 415 COMPENSATION: For purposes of Section 415 of the Code, (a) The term "Section 415 Compensation" includes: (1) The Participant's wages, salaries, fees for professional service and other amounts received for personal services actually rendered in the course of employment with an Employer maintaining the Plan (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses). (2) For purposes of subdivision (1) of this subparagraph, earned income from sources outside the United States (as defined in Section 911(b)), whether or not excludable from gross income under Section 911 or deductible under Section 913 of the Code. (3) Amounts described in Sections 104(a)(3), 105(a) and 105(h), but only to the extent that these amounts are includable in the gross income of the Employee. (4) Amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that these amounts are not deductible by the Employee under Section 217 of the Code. (5) The value of a nonqualified stock option granted to an Employee by the Employer, but only to the extent that the value of the option is includable in the gross income of the Employee for the taxable year in which granted. (6) The amount includable in the gross income of an Employee upon making the election described in Section 83(b) of the Code. (b) The term "Section 415 Compensation" does not include items such as: (1) Contributions made by the Employer to a plan of deferred compensation to the extent that, before the application of Code Section 415 limitations to that plan, the contributions are not includable in the gross income of the Employee for the taxable year in which contributed. In addition, Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408(k) are not considered as compensation for the taxable year in which contributed to the extent such contributions are deductible by the Employee under Section 219(b)(1) of the Code. Additionally, any distributions from a plan of deferred compensation are not considered as compensation for Section 415 purposes, regardless of whether such amounts are includable in the gross income of the Employee when distributed. However, any amounts received by an Employee pursuant to an unfunded nonqualified plan may be considered as compensation for Code Section 415 purposes in the year such amounts are includable in the gross income of the Employee. (2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture (under Section 83 of the Code). (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option. (4) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includable in the gross income of the Employee), or contributions made -5- 10 by an Employer (whether or not under a salary deferral agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are excludable from the gross income of the Employee). 1.24 SPECIAL ALLOCATION: The amount to be allocated to the Account of a Special Participant. Such amount shall be an amount which, when added to the value of the Employer Stock released from a Suspense Account pursuant to Section 4.1, and after the application of Sections 4.5 and 4.6, allocated to such Participant's Account, equals (as a percentage of Compensation) the value of Employer Stock so released and allocated to other non-Highly Compensated Employees who are not Special Participants, subject to the limitations of Sections 4.5 and 4.6. 1.25 SPECIAL PARTICIPANT: Any Participant who, as of the time of a particular allocation of Employer Stock released from a Suspense Account pursuant to Section 4.1, (a) is not a Highly Compensated Employee, and (b) as a result of the limitations of Sections 4.5 and 4.6, would be allocated proportionately less value in the form of Employer Stock released from a Suspense Account pursuant to Section 4.1 (as a percentage of Compensation) than any other Participant who is not a Highly Compensated Employee. 1.26 SUSPENSE ACCOUNT: The account established to hold Employer Stock that has been pledged as security for a loan, as described in Section 4.1(b). 1.27 TRUST, TRUST FUND OR FUND: The trust implementing the Plan and the Plan assets held in the trust. 1.28 TRUSTEE: Effective as of August 1, 1994, Merrill Lynch Trust Company of California, and any successor trustee(s) appointed by the Employer and accepting the Trust. 1.29 VALUATION DATE: Each December 31. The Plan Committee may establish more frequent Valuation Dates, if the Plan Committee deems it appropriate. 1.30 YEAR OF SERVICE: (a) For purposes of determining eligibility, a Year of Service is a twelve consecutive month period during which an Employee is credited with 1,000 Hours of Service. The initial computation period is the 12-consecutive month period beginning on the Employee's Employment Commencement Date. Succeeding 12-consecutive month periods (if necessary) commence on the anniversary of the Employee's Employment Commencement Date. (b) For purposes of vesting, a Year of Service is a Plan Year during which an Employee is credited with 1,000 Hours of Service. (c) The Administrator will credit each Employee with Hours of Service on the basis of months of employment. Each Employee will be credited with 190 Hours of Service for each month in which he or she performs at least one Hour of Service. (d) Each Year of Service completed by a Participant in this Plan while he or she was an employee of Beaver Insurance Company, Pacific Compensation Insurance Company, or Investors Bancor shall be deemed a Year of Service for all purposes under this Plan. -6- 11 SECTION II PARTICIPATION 2.1 ELIGIBILITY REQUIREMENTS: (a) Each Employee, except Employees employed by an Affiliated Company which is not a Participating Employer, Leased Employees, Part-Time Employees, Temporary Employees, and Union Employees may commence participation in the Plan on the Entry Date following his or her completion of one (1) Year of Service. (b) For purposes of this Section, the following definitions shall apply: (i) Part-time Employees - Employees scheduled to work less than 25 hours per week. (ii) Temporary Employees - Employees hired on a temporary or seasonal basis who are classified as such in the records of the Employer. (iii) Union Employees - Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees who are covered pursuant to that agreement are professionals as defined in Treasury Regulations Section 1.410(b)-9. For this purpose, the term "Employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers or executives of the Employer. 2.2 REEMPLOYMENT: If an eligible Employee who has satisfied the service requirement in Section 2.1 terminates employment with the Employer, is thereafter reemployed by the Employer, and is again an eligible Employee, the Employee will be eligible to participate in the Plan as of his or her Reemployment Commencement Date. An Employee who terminates employment prior to satisfying the service requirement specified in Section 2.1, and who is thereafter reemployed by the Employer, will become eligible to participate in the Plan in accordance with the provisions of Section 2.1. 2.3 CHANGE IN EMPLOYMENT STATUS: In the event a Participant becomes an Employee excluded from participation in the Plan under Section 2.1 and therefore becomes ineligible to participate, such Employee will participate immediately upon returning to an eligible class of Employees. In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately if such Employee has satisfied the service requirement in Section 2.1. 2.4 ELECTION NOT TO PARTICIPATE IN THE PLAN: An Employee who has met the requirements for participation pursuant to Section 2.1 and who meets one of the following requirements may elect not to participate in the Plan for one or more Plan Years: (a) The Participant has sold Employer Stock to the Trust and has elected, pursuant to Code Section 1042, not to recognize gain on the sale of the Employer Stock; (b) The Participant is a member of the family of a Participant described in subsection (a) (as determined pursuant to Code Section 409(n)); or (c) The Participant owns more than 25% in value of any class of outstanding Employer Stock (as determined pursuant to Code Section 409(n)). The Employee may elect not to participate in the Plan by filing a written election with the Plan Committee. An election not to participate in the Plan shall be effective for the first Plan Year ending after the date of the election and for -7- 12 subsequent Plan Years, until the election is revoked. An Employee may revoke his or her election for Plan Years ending after the date of the revocation by filing a written revocation with the Plan Committee. The Plan Committee may establish rules relating to when and how elections and revocations of elections must be made. -8- 13 SECTION III CONTRIBUTIONS 3.1 EMPLOYER CONTRIBUTIONS: (a) For each Plan Year, the Employer shall contribute to the Trust such amount as the Board of Directors may deem appropriate and reasonable considering the condition of the business and the interests of the Plan Participants. The Employer contribution for each Plan Year shall be at least equal to the amount of the current installments of principal and interest that are due on any loan secured by Employer Stock held in the Trust Fund. (b) The Employer's contribution may be made in cash or in Employer Stock; provided that the Employer shall contribute annually an amount of cash that is at least equal to the current installments of principal and interest on any loan secured by Employer Stock held in the Trust Fund. The contribution of the Employer for any Plan Year may be made in one or more payments at any time; provided that the total amount of the contribution for any Plan Year shall be paid to the Trustee not later than the date on which the Employer's income tax return is required to be filed, including any extensions for filing obtained. (c) The Employer's cash contribution, earnings on that contribution, and earnings attributable to Employer Stock that is used as collateral for a loan shall be used to pay the current installments of principal and interest on any outstanding loan that is secured by Employer Stock held in the Trust Fund. To the extent that the Employer contribution is not used to pay the current installments of principal and interest on such a loan, the Employer contribution shall be allocated to Participants' Accounts as described in Section 4.2. (d) Notwithstanding the foregoing, if at any time the Employer contributes an amount to repay all or a portion of an outstanding loan secured by Employer Stock held in the Trust Fund, and the amount of loan principal repaid is less than the value of Employer Stock released from a Suspense Account pursuant to Section 4.1, the Employer will contribute in cash or shares an amount sufficient to allocate to the Accounts of all Special Participants (if any) value that is equal to the Special Allocation applicable to all such Participants. 3.2 LIMITATIONS ON CONTRIBUTION: Notwithstanding the foregoing, the Employer's contribution for any Plan Year shall not exceed, (a) the amount that may be allowed as a deduction from the gross income of the Employer under Code Section 404, or (b) any limitation imposed by Section 4.5 or 4.6. 3.3 NO RIGHT OR DUTY OF INQUIRY: Neither the Trustee, the Plan Committee, nor any Participant shall have any right or duty to inquire into the amount of the Employer's annual contribution or the method used in determining the amount of the Employer's contribution. The Trustee shall be accountable only for funds actually received by the Trustee. 3.4 NON-REVERSION: It shall be impossible, at any time before satisfaction of all liabilities with respect to Participants and their Beneficiaries, for any part of the principal or income of the Trust Fund to be used for, or diverted to, purposes other than for the exclusive benefit of such Participants and their Beneficiaries, provided, however, that: (a) If a contribution is made by the Employer under a mistake of fact (including a contribution that exceeds the limitation imposed by Section 4.5 or 4.6), this Section shall not prohibit the return of the contribution to the Employer within one year after the payment of such contribution; (b) If a contribution is conditioned on the initial qualification of the Plan under Code Section 401, this condition is not satisfied, the Plan was submitted to the Internal Revenue Service for qualification 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, and the amount is returned to the Employer within one year after the date on which initial qualification is denied; or -9- 14 (c) If a contribution is conditioned upon the deductibility of the contribution, then, to the extent the deduction is disallowed, this Section shall not prohibit the return of the contribution (to the extent disallowed) to the Employer within one year after the disallowance of the deduction. -10- 15 SECTION IV ACCOUNTS AND ALLOCATIONS 4.1 ACCOUNTS: (a) An Account shall be maintained for each Participant, to which Employer contributions and earnings shall be credited. The following subaccounts shall be established for each Participant: (i) An "Employer Stock Account", to which shall be credited all Employer Stock that is allocated to the Participant's Account, and (ii) An "Other Investments Account", to which shall be credited all investments other than Employer Stock that are allocated to the Participant's Account. (b) If Employer Stock has been pledged as collateral for a loan, the encumbered Employer Stock will be held in a Suspense Account pending repayment of the loan. As the loan is repaid, the Employer Stock that was originally pledged as collateral for the portion of the loan that is repaid shall be released from encumbrance. The number of shares of Employer Stock released from encumbrance for each Plan Year during the duration of the loan shall equal the number of encumbered shares of Employer Stock held by the Plan immediately before the release, multiplied by the following fraction (which shall not exceed one): (i) The numerator is the amount of principal and interest paid for the Plan Year, and (ii) The denominator is the sum of the numerator plus the principal and interest to be paid for all future Plan Years (determined without taking into account any possible extension or renewal periods). (c) Notwithstanding paragraph (b) above of this Section 4.1, if (aa) the loan provides for annual payments of principal and interest at a cumulative rate which is not less rapid at any time than level annual payments of such amounts for 10 years, (bb) the interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables, and (cc) by reason of a renewal, extension or refinancing, the sum of the expired duration of the original loan, any renewal period, any extension period and the duration of any new loan does not exceed 10 years, the Plan Committee, in its discretion, may direct that Shares of Employer Stock released from encumbrance for each Plan Year during the duration of the loan shall equal the number of encumbered shares of Employer Stock held by the Plan immediately before the release, multiplied by the following fraction (which shall not exceed one): (i) The numerator is the amount of principal paid for the Plan Year, and (ii) The denominator is the sum of the numerator plus the principal to be paid for all future Plan Years. (d) In determining the number of Shares of Employer Stock to be released for any Plan Year under either paragraphs (b) or (c) above; (i) The number of future years under the loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods; (ii) If the loan provides for a variable interest rate, the interest to be paid for all future Plan Years must be computed by using the interest rate applicable as of the end of the Plan Year for which the determination is made; and -11- 16 (iii) If the Employer Stock allocated to the Suspense Account includes more than one class of shares, to be withdrawn from the number of shares of such class Suspense Account for a Plan Year must be determined by applying the applicable fraction (determined pursuant to (b) or (c) above) to each such class. (e) Allocations of Employer Stock shall be separately made for each class of such stock, and the Plan Committee shall maintain adequate records of the aggregate cost basis of Employer Stock allocated to each Participant's Employer Stock Account. (f) Shares of Employer Stock released from encumbrance for each Plan Year shall be allocated to Participants' Accounts in the manner described in Section 4.2. 4.2 ALLOCATION OF EMPLOYER STOCK RELEASED FROM ENCUMBRANCE, EMPLOYER CONTRIBUTIONS AND FORFEITURES: (a) As of the last day of each Plan Year, the Plan Committee shall allocate to Participants' Accounts any Employer Stock released from encumbrance for the Plan Year, any part of the Employer contribution for the Plan Year that is not required and/or used to pay the current installments of principal and interest on a loan secured by Employer Stock, and any forfeitures. (b) Notwithstanding the preceding sentence, the Plan Committee may direct the Trustee to allocate to the Participants' Employer Stock Accounts shares of Employer Stock released from a Suspense Account pursuant to Section 4.1 which have become available for allocation in lieu of the cash dividends with respect to Employer Stock released from a Suspense Account pursuant to Section 4.1 which have been allocated to their Employer Stock Accounts and which cash dividends were used by the Trustee to satisfy current obligations as provided in Section 4.4. (c) The allocation shall be made among the Accounts of the Participants who complete 1,000 Hours of Service during the Plan Year, and who are employed by the Employer on the last day of the Plan Year, in the proportion that each such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year; provided that, effective as of January 1, 1993, if an allocation is made of Employer Stock released from a Suspense Account, such stock and other cash or stock contributions shall be allocated (1) first, to the Accounts of Special Participants in an amount equal to the Special Allocation, and (2) next, to the Accounts of all Participants in the same manner described in this Section as if there was no allocation made pursuant to a release of Employer Stock from a Suspense Account. For purposes of this Section, an Employee whose employment with the Employer terminates during the Plan Year because the Employee (i) retires on or after reaching his or her Normal Retirement Date, (ii) incurs a Permanent and Total Disability, or (iii) dies, shall be deemed to have completed 1,000 Hours of Service during the Plan Year and to have been employed by the Employer on the last day of the Plan Year. 4.3 ALLOCATION OF EARNINGS: (a) Subject to Sections 7.3 and 8.2(ix), as of each Valuation Date, the Trustee shall determine the current fair market value of the assets of the Trust Fund. Before crediting the contributions allocated under Section 4.2, the Plan Committee shall adjust proportionately each Participant's Account and the Suspense Account so as to reflect any increase or decrease in value of the Trust Fund since the last Valuation Date as it relates to the assets actually invested. (b) As of each Valuation Date, before the allocations under Section 4.2 are made, the Plan Committee shall allocate net income or losses generated on any investments other than Employer Stock since the last Valuation Date among Participant's Accounts on the basis of the balance in each Participant's Other Investments Account as of the preceding Valuation Date. (c) Cash dividends on Employer Stock held in Participants' Accounts are paid to the Trust, and the dividends shall be allocated to Participants' Accounts and the Suspense Account on the basis of the number of shares of Employer Stock held in each Participant's Account and the Suspense Account as of the record date for the dividend. (d) All Employer Stock received by the Trustee as a result of a stock split or stock dividend or as a result of a reorganization or other recapitalization of the Employer shall be allocated among Participants' Accounts and the Suspense -12- 17 Account by applying the applicable stock split or stock dividend factor to the number of shares in each Participant's Account and the Suspense Account on the record date for the stock split, stock dividend, or recapitalization. 4.4 DIVIDENDS ON EMPLOYER STOCK: Cash dividends paid to the Trust on Employer Stock acquired by a loan described in Section 7.1 shall first be used to satisfy current obligations of the Trust; provided, however, that the Trustee may hold in cash such portion of such dividends as is consistent with its obligations as Trustee. Any excess of cash dividends paid to the Trust on Employer Stock may be used to acquire Employer Stock, or, at the direction of the Plan Committee, may be distributed directly to Participants. 4.5 ANNUAL ADDITIONS: (a) Notwithstanding the foregoing, the total amount of the Annual Addition (defined below) that may be allocated to the accounts of any Participant for any Limitation Year (defined below) shall not exceed the lesser of (i) $30,000, or (ii) 25% of the Participant's Section 415 Compensation. The amount referred to in (i) of this Section shall be adjusted from time to time to correspond to the amount prescribed by law under Code Section 415(c)(1)(A) or by the Secretary of the Treasury pursuant to Code Section 415(d), determined as of the last day of the year to which the limitation applies. (b) For purposes of this Section, the "Limitation Year" is the Plan Year and the term "Employer" includes Affiliated Companies. Except to the extent modified by subsection (c), "Annual Addition" means the total of the Employer's contribution and forfeitures credited to the Participant's Accounts under all defined contribution plans of the Employer for a Plan Year. (c) If not more than one-third of the Employer Contributions for a Plan Year are allocated to the group of Participants consisting of highly compensated employees as defined in Code Section 414(q), then the foregoing rules shall be modified to provide that Annual Additions will not include Employer contributions that are applied to the payment of interest on a loan secured by Employer Stock or forfeitures of Employer Stock acquired with the proceeds of such a loan, provided that the amount of Employer contributions and forfeitures allocated to a Participant's Accounts in excess of the regular dollar limitation is in the form of Employer Stock or cash used to purchase Employer Stock within 30 days of the due date for filing the Employer's federal income tax return for that year, including extensions. (d) Notwithstanding any of the foregoing to the contrary, any amounts attributable to postretirement medical benefits allocated to the account of a key Employee under any welfare benefits plan, as defined in Section 419A of the Code, shall be treated as an Annual Addition for purposes of the dollar limitation under (a) above. A restored forfeiture, a transfer from another qualified plan and a rollover contribution shall not be counted as an Annual Addition. (e) If the Annual Additions to a Participant's Account in any Limitation Year exceed the limitation of this Section, then the amounts that would have been credited to the Participant's Account but for this Section in excess of the limitation shall be administered as follows: (i) Any excess amount shall be deemed to be a forfeiture as of the end of the Plan Year to which the limitation applies and shall be reallocated among the Accounts of the Participants (other than Participants to whom the limitation applies) as a forfeiture in such manner that no allocation to an Account exceeds the limitation imposed by this Section; and (ii) If the allocation or reallocation of the excess amount causes the limitation imposed by this Section to be exceeded with respect to each Participant, then the excess amount as finally determined shall be held unallocated in a separate Suspense Account. The amount held in a Suspense Account shall be used to reduce Employer contributions for the next Plan Year (and succeeding Plan Years, as necessary). A Suspense Account shall not be subject to adjustment for investment gains or losses. Upon termination of the Plan, the assets of any Suspense Account then in existence shall be returned to the Employer. -13- 18 (f) If the Employer and Related Companies maintain more than one defined contribution plan qualified under Code Section 401, then this Section shall be applied in such a way that the total Annual Additions under all such plans shall not exceed the amount specified in subsection (a). For purposes of this Section and Section 4.6, the term "Employer" includes Affiliated Companies. 4.6 BENEFIT LIMITATIONS: MULTIPLE PLANS. If an Employee is a Participant in one or more defined benefit plans and one or more defined contribution plans maintained by the Employer, then the sum of the Employee's "defined benefit plan fraction" and "defined contribution plan fraction" for any Limitation Year as applied to the plans shall not exceed 1.0. Either the benefits provided under the defined benefit plans or the contributions made to the defined contribution plans shall be reduced to the extent necessary to comply with this limitation. For purposes of this Section: (a) The "defined benefit plan fraction" for any Limitation Year is a fraction, the numerator of which is the Participant's projected annual benefit under all defined benefit plans of the Employer (determined as of the close of the Limitation Year), and the denominator of which is the lesser of: (i) The product of 1.25 multiplied by the dollar limitation in effect pursuant to Code Section 415(b)(1)(A); or (ii) The product of 1.4 multiplied by 100% of the Participant's average Compensation from the Employer for the three consecutive years that will produce the highest average. (b) 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 Accounts as of the close of the Limitation Year under all defined contribution plans of the Employer and the denominator of which is the sum of the lesser of the following amounts determined for the Limitation Year and for each previous year of service with the Employer: (i) The product of 1.25 multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A); (ii) The product of 1.4 multiplied by 25% of the Participant's Compensation for the year. (c) As an alternative to the foregoing, in determining the limits of this Section, the Plan Committee may use any method permissible under Code Section 415. 4.7 CORRECTION OF ERROR: If, due to forfeitures, reasonable error in estimating compensation, or other limited facts and circumstances as determined by the Commissioner, the Account balances or the Annual Additions to a Participant's Accounts would exceed the limitation described in Section 4.5 above, the aggregate of the Annual Additions to this Plan and the Annual Additions to any other plan described in Section 4.5(f) shall be reduced until the applicable limitation is satisfied. The reduction shall be treated the same as forfeitures and shall be allocated in accordance with Section 4.2 of the Plan to the Accounts of Participants who are not affected by this limitation. If any amount cannot be reallocated under the foregoing provision, such amount shall be deposited in a suspense account and allocated to the maximum extent possible in succeeding years, provided that (i) no Employer Contributions are made until Section 415 of the Code will permit their allocation, (ii) no investment gains or losses are allocated to such suspense account, and (iii) the amounts in such suspense account are allocated at the earliest possible date. 4.8 TRUST AS SINGLE FUND: The creation of separate Accounts for accounting and bookkeeping purposes shall not restrict the Trustee in operating the Trust as a single Fund. Allocations to the Accounts of Participants in accordance with this Section IV shall not vest any right or title to any part of the assets of the Fund in such Participants, except as provided in Section V. -14- 19 SECTION V VESTING 5.1 VESTING: (a) A Participant shall become vested in his or her Account according to the following schedule:
Years of Service Vested Percentage ------------------ ----------------- less than 1 year 0% 1 but less than 2 10% 2 but less than 3 20% 3 but less than 4 30% 4 but less than 5 40% 5 but less than 6 60% 6 but less than 7 80% 7 years or more 100%
(b) Notwithstanding the foregoing, a Participant's Account shall become fully vested on the first to occur of the following events, if he or she is then an Employee: (i) The Participant's Normal Retirement Date; (ii) The Participant's death; or (iii) The Participant's Permanent and Total Disability. (c) In the case of an Employee who has five consecutive one-year Breaks in Service, all Years of Service after such Breaks in Service will be disregarded for the purpose of the vesting schedule in paragraph (a) above with respect to the Participant's Account balance that accrued before such Breaks in Service, but both pre-break and post-break service will count for the purposes of vesting the Account balance accruing after such Breaks in Service. In the case of an Employee who does not have five consecutive one-year Breaks in Service, both the pre-break and post-break service will count in vesting both the pre-break and post-break Account balance. (d) If the vesting schedule in paragraph (a) above is amended to provide less rapid vesting than that shown in paragraph (a) above, if the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to a Top-Heavy vesting schedule, each Participant (i) who has completed three Years of Service with the Employer and (ii) whose Account would have vested more rapidly prior to the amendment, may irrevocably elect during the election period to have the nonforfeitable percentage of his or her Account calculated without regard to such amendment. For purposes of this Section, the election period shall begin the date the amendment is adopted, and shall end on the date 60 days after the later of (i) the date the amendment is adopted, (ii) the date the amendment becomes effective, or (iii) the date the Participant is issued written notice of the amendment by the Employer or the Plan Committee. 5.2 FORFEITURES: (a) If an Employee's employment terminates for any reason other than death, Permanent and Total Disability or attainment of Normal Retirement Age, and the value of the Employee's vested Account balance is not greater than $3,500 (and the Employee's vested Account balance at the time of any prior distribution was not greater than $3,500), the Employee will receive a distribution of the value of the entire vested portion of such Account balance and the nonvested portion -15- 20 will be treated as a forfeiture. For purposes of this Section, if the value of an Employee's vested Account balance is zero, the Employee shall be deemed to have received a distribution of such vested Account balance. (b) If an Employee's employment terminates for any reason other than death, Permanent and Total Disability or attainment of Normal Retirement Age, and the Employee elects, in accordance with the requirements of Sections 6.5 and 6.6, to receive the value of the Employee's vested Account balance, the nonvested portion will be treated as a forfeiture. (c) If an Employee receives a distribution pursuant to this Section and the Employee resumes employment covered under this Plan, the Employee's Account balance will be restored to the amount on the date of distribution if the Employee repays to the Plan the full amount of the distribution attributable to Employer contributions before the earlier of 5 years after the date the Employee resumes employment covered under this Plan, or the date the Participant incurs 5 consecutive Breaks in Service following the date of the distribution. If an Employee is deemed to receive a distribution pursuant to this Section, and the Employee resumes employment covered under this Plan before the date the Participant incurs 5 consecutive Breaks in Service, upon the date the Employee resumes employment covered under this Plan, the Account balance of the Employee will be restored to the amount on the date of such deemed distribution. (d) If an Employee's employment terminates for any reason other than death, Permanent and Total Disability or attainment of Normal Retirement Age, the value of the Employee's vested Account balance is greater than $3,500 (or at the time of a prior distribution the value of the Employee's vested Account balance was greater than $3,500), and the Employee does not elect, in accordance with the requirements of Sections 6.5 and 6.6, to receive the value of the Employee's vested Account balance, the nonvested portion of the Employee's Account will be treated as a forfeiture as of the last day of the Plan Year in which the Employee incurs five consecutive Breaks in Service. (e) Any amounts forfeited pursuant to this Section not used to restore the Accounts of Participants repaying partially vested distributions in accordance with paragraph (c) above shall be allocated as additional Employer contributions in accordance with Section 4.2. -16- 21 SECTION VI BENEFITS 6.1 NORMAL RETIREMENT: A Participant may retire as of his or her Normal Retirement Date or as of any day thereafter. The Participant's Account shall be valued as of the Valuation Date coinciding with or next following the date on which the Participant retires and shall be distributed in accordance with Sections 6.5 and 6.6. 6.2 DISABILITY RETIREMENT: If a Participant incurs a Permanent and Total Disability while employed by the Employer, the Participant's retirement shall be effective as of the date on which the Plan Committee determines that the Participant is Permanently and Totally Disabled. The Participant's Account shall be valued as of the Valuation Date coinciding with or next following the date on which the Participant retires and shall be distributed in accordance with Sections 6.5 and 6.6. 6.3 TERMINATION OF EMPLOYMENT: A Participant who terminates employment for any reason other than retirement on or after his or her Normal Retirement Date, death or Permanent and Total Disability shall be entitled to receive distribution of his or her vested interest in his or her Account, determined under Section V, in accordance with Sections 6.5 and 6.6 below. 6.4 DEATH BENEFITS: If a Participant or former Participant dies before the Participant's vested interest in his or her Account has been distributed, the Participant's vested interest remaining in his or her Account will be paid to the Participant's Beneficiary in a form selected pursuant to Section 6.6. The deceased Participant's Account will be valued as of the Valuation Date coinciding with or next following the date of the Participant's death. The Plan Committee may authorize advance payments to be made to the Beneficiary after the Participant's death and before benefit payments begin. 6.5 COMMENCEMENT OF DISTRIBUTION: (a) Subject to subsections (b) (c), and (d) a retired, disabled or deceased Participant's vested Account balance shall be distributed (or shall begin to be distributed) at a date designated by the Plan Committee, which shall not be later than the 60th day following the close of the Plan Year during which the Participant retires, incurs a Permanent and Total Disability or dies. Subject to subsections (b) (c) and (d) of this section, a terminated Participant's Account balance shall be distributed (or begin to be distributed) as follows: (i) In the case of a Participant whose Account balances do not exceed $3,500, the vested portion of such Participant's Account shall be paid to the terminated Participant in accordance with Section 6.3 not later than 60 days after the end of the Plan Year in which he or she has a Break in Service. (ii) In the case of a Participant whose Account balance exceeds $3,500, distribution of his Plan benefit will normally be made not later than 60 days after the end of the Plan Year in which such Participant terminates employment, dies, suffers a Permanent and Total Disability, or attains his or her Normal Retirement Date. (iii) Notwithstanding any of the forgoing to the contrary, in the case of Employer Stock acquired after December 31, 1986, distribution of the portion of a Participant's vested Account balance shall begin not later than one year after the end of the fifth plan year following the plan year in which such Participant's employment terminated; provided, however, the Participant must consent in writing to such distribution before it will be made. If the Participant does not consent in writing to such distribution, the Participant's vested interest in his or her Account shall be distributed in accordance with paragraph (ii) above. Further if such Participant is employed by the Employer as of the last day of the fifth Plan Year following the Plan Year in which his or her employment terminated, distribution of his or her vested Account balance shall be in accordance with (ii) above. -17- 22 (b) Each Participant's vested Account balance must be distributed (or must begin to be distributed) not later than the April 1 following the calendar year in which the Participant reaches age 70-1/2. (c) Notwithstanding the foregoing, distributions to former Participants must commence no later than 60 days following the close of the Plan Year in which occurs the latest of: (i) The date the Participant attains age 65, (ii) The 10th anniversary of the date on which the Participant first commenced participation in the Plan, or (iii) The Participant's date of termination of employment. (d) Notwithstanding anything in this Section 6.5 to the contrary, if the value of the Participant's Account balance cannot be ascertained within 60 days following the close of the Plan Year in which such Account is otherwise required to be distributed, distribution shall commence no later than the 60th day following the date such value can be ascertained. (e) Notwithstanding any contrary provision of this instrument, Employer Stock acquired with the proceeds of a loan described in Section 404(a)(9) of the Code shall not be distributed sooner than the close of the Plan Year in which such loan is paid in full. 6.6 FORM OF BENEFIT: (a) Benefits from the Plan will be paid in whole shares of Employer Stock, cash, or a combination of both, as determined by the Plan Committee; provided, however, that a Participant shall have the right to demand distribution of his or her entire vested Account balance entirely in shares of Employer Stock (with the value of any fractional shares paid in cash). In the event that a Participant demands distribution entirely in Employer Stock, any balance in the Participant's other investment accounts shall be liquidated and shall be applied to provide whole shares of Employer Stock at the then fair market value of the Participant's other investment accounts. All purchases, sales and distributions of Employer Stock shall be valued as of the date of distribution. In the event that the Employer Stock ceases to be readily tradeable on an established securities market, each Participant shall be given a "put option" right to require the Employer to repurchase the Employer Stock distributed to the Employee as provided in Section 7.2. (b) Benefits shall be paid to the Participant or his or her Beneficiary in a lump sum payment; (c) The following rules apply to payments after a Participant's death: (i) If a Participant dies after payments have begun, then his or her remaining vested Account balance, if any, must be distributed to the Participant's Beneficiary at least as rapidly as under the method of distribution elected by the Participant; and (ii) If a Participant dies before his or her vested Account balance has begun to be distributed, then the Participant's remaining vested Account balance, if any, must be distributed within five years after the Participant's death. 6.7 LOCATION OF FORMER PARTICIPANTS: If a former Participant who is entitled to a distribution cannot be located and the Plan Committee has made reasonable efforts to locate the former Participant, then the former Participant's vested interest shall be forfeited. The Plan Committee will be deemed to have made reasonable efforts to locate the Participant if the Plan Committee is unable to locate the former Participant (or, in the case of a deceased former Participant, his or her Beneficiary) after having made two successive certified or similar mailings to the last address on file with the Plan Committee. The former Participant's Account shall be forfeited as of the last day of the Plan Year in which occurs the close of the 12 consecutive calendar month period following the last of the two successive mailings. If the former Participant or Beneficiary makes a written claim for the vested interest after it has been forfeited, the Employer shall cause the vested interest to be reinstated. -18- 23 6.8 BENEFITS TO MINORS AND INCOMPETENTS: (a) If any person entitled to receive payment under the Plan is a minor, the Plan Committee, in its discretion, may dispose of such amount in any one or more of the following ways: (i) By payment of the amount directly to the minor; (ii) By application of the amount for the benefit of the minor; (iii) By payment of the amount to a parent of the minor or to any adult person with whom the minor is living at the time or to any person who is legally qualified and is acting as guardian of the minor or of the property of the minor, provided that the parent or adult person to whom any amount is to be paid has advised the Plan Committee in writing that he or she will hold or use the amount for the benefit of the minor. (iv) By payment of the amount to a custodian selected by the Trustee under the appropriate Uniform Gifts to Minors Act. (b) If a person who is entitled to receive payment under the Plan is physically or mentally incapable of personally receiving and giving a valid receipt for any payment due (unless a previous claim has been made by a duly qualified committee or other legal representative), the payment may be made to the person's spouse, son, daughter, parent, brother, sister or other person deemed by the Plan Committee to have incurred expense for the person otherwise entitled to payment. (c) The selection of a method of distribution under this Section shall be in the discretion of the Plan Committee, and the Plan Committee may not be compelled to select any method that it does not deem to be in the best interest of the distributee. 6.9 DIVERSIFICATION OF INVESTMENTS: (a) Each Qualified Participant shall be permitted to direct the Plan as to the investment of 25% of the value of the Participant's Account balance attributable to Employer Stock within 90 days after the last day of each Plan Year during the Participant's Qualified Election Period. Within 90 days after the close of the last Plan Year in the Participant's Qualified Election Period, a Qualified Participant may direct the Plan as to the investment of 50% of the value of such Account balance. For these purposes, a "Qualified Participant" shall mean a Participant who has attained age 55 and who has completed at least 10 years of Participation, and a "Qualified Election Period" shall mean the six (6) Plan Year period beginning with the Plan Year in which the Participant first becomes a Qualified Participant. (b) The Participant's direction shall be provided to the Plan Committee in writing; shall be effective no later than 180 days after the close of the Plan Year to which the direction applies; and shall specify which, if any, of the options set forth in Section 6.9(c) the Participant selects. (c) The Plan Committee shall offer at least three investment options (determined in accordance with any applicable regulations) to each Participant who makes a direction under this Section. If no such investment options are offered: (i) At the election of the Qualified Participant, the Plan shall distribute (notwithstanding Section 409(d) of the Code) the portion of the Participant's account that is covered by the election within 90 days after the last day of the period during which the election can be made. Such distribution shall be subject to such requirements of the Plan concerning put options as would otherwise apply to a distribution of Employer Stock from the Plan. This Section 6.9(c)(i) shall apply notwithstanding any other provision of the Plan other than such provisions as require the consent of the Participant to a distribution with a present value in excess of $3,500. If the Participant does not consent, such amount shall be retained in this Plan. -19- 24 (ii) In lieu of distribution under Section 6.9(c)(i), the Qualified Participant who has the right to receive a cash distribution under Section 6.9(c)(i) may direct the Plan to transfer the portion of the Participant's account that is covered by the election to another qualified plan of the Employer which accepts such transfers, provided that such a plan then exists, that such plan permits employee-directed investment and that such plan does not invest in Employer securities to a substantial degree. Such transfer shall be made no later than ninety days after the last day of the period during which the election can be made. 6.10 PERIOD OF PAYMENT/CERTAIN ACCOUNTS: Notwithstanding any contrary provision herein, if the fair market value of a Participant's account attributable to Employer Stock is in excess of $500,000 (multiplied by the adjustment factor as prescribed by the Secretary of the Treasury) as of the date distribution is required to begin under Section 6.5, distributions required under Section 6.5 shall be made in substantially equal annual payments over a period not longer than five years plus an additional one year (up to an additional five years) for each $100,000 increment, or fraction of such increment, by which the value of the Participant's account exceeds $500,000, unless the Participant otherwise elects under the provisions of the Plan other than this Section. In no event shall such distribution period exceed the period permitted under Section 401(a)(9) of the Code. 6.11 DIRECT ROLLOVERS; WITHHOLDING: (a) Effective Date: The provisions of this Section shall apply to all distributions from the Plan made on or after January 1, 1993. (b) General Rule: If the Distributee of any Eligible Rollover Distribution elects to have the Eligible Rollover Distribution paid directly to an Eligible Retirement Plan, and specifies the Eligible Retirement Plan to which the Eligible Rollover Distribution is to be paid, then the Eligible Rollover Distribution will be paid to that Eligible Retirement Plan in a Direct Rollover. (c) Waiver of 30 Day Notice Requirement: If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations 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. (d) Definitions: For purposes of this Section, the following definitions shall apply: (i) Direct Rollover: An Eligible Rollover Distribution paid directly to an Eligible Retirement Plan for the benefit of a Distributee. (ii) Distributee: An Employee, surviving spouse of a deceased employee, or a spouse entitled to payment under a Qualified Domestic Relations Order. (iii) Eligible Retirement Plan: (A) With respect to any Distributee, an individual retirement account described in Section 408(a) of the Code. (B) With respect to a Distributee who is an Employee or a spouse or former spouse of an Employee who is an Alternate Payee under a Qualified Domestic Relations Order as defined in Section 7.2 below, an Eligible Retirement Plan shall also mean an individual retirement annuity (other than an endowment contract) described in Section 408(b) of the Code, a qualified trust described in Section 401(a) of the Code or an annuity plan described in Section 403(a) of the Code. (iv) Eligible Rollover Distribution: 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 -20- 25 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 section 401(a)(9) of the Code; 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). (e) If a Participant does not elect to have an Eligible Rollover Distribution transferred directly to an Eligible Retirement Plan, or in the case of any distribution which is not an Eligible Rollover Distribution, the Plan Committee shall direct the Trustee as to any required withholding. Under no circumstances shall Company Stock be sold to satisfy any such withholding requirement. -21- 26 SECTION VII ACQUISITION AND DISTRIBUTION OF EMPLOYER STOCK 7.1 LOANS USED TO ACQUIRE EMPLOYER STOCK: (a) The Plan Committee may direct the Trustee to incur Plan loans from time to time to carry out the purposes of the Trust, provided that if the loan is for the purposes of acquiring Employer Stock, the terms of the loan shall comply with the following requirements: Any such loan shall be for a specified term, shall bear a reasonable rate of interest, may not exceed fifteen (15) years in duration, and may only be secured by a collateral pledge of the Employer Stock so acquired. Any such loan shall be primarily for the benefit of Plan Participants and their Beneficiaries. No other Trust assets may be pledged as collateral by the Trustee, and no lender shall have recourse against Trust assets other than any shares of Employer Stock remaining subject to pledge. Any pledge of Employer Stock must provide for the release of shares so pledged pursuant to either the "General Rule" or the "Special Rule" set forth in Section 4.1. Repayments of principal and interest on any such loan shall be made by the Trustee as directed by the Plan Committee only from Employer contributions in cash to the Trust, from any cash dividends received by the Trust on such Employer Stock or from earnings attributable to the investment of Employer contributions made to the Trust in cash to meet its obligations under the loan. The proceeds of such a loan may be used only to acquire Employer Stock, to repay such loan or to repay a prior such loan. The protections and rights described in Section VII are nonterminable. Should this Plan cease to be an Employee Stock Ownership Plan, or should said loan be repaid, all Employer Stock will continue to be subject to the provisions of this Section VII. (b) In the event of default upon a loan used to acquire Employer Stock, the value of Plan assets transferred in satisfaction of the loan must not exceed the amount of default. If the lender is a disqualified person (within the meaning of Section 4975 of the Code) a loan must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the loan. For purposes of this paragraph, the making of a guarantee does not make a person a lender. 7.2 PUT OPTION: (a) If Employer Stock is distributed from the Plan at a time when the Employer Stock is not readily tradable on an established securities market, then the Participant or Beneficiary receiving the Employer Stock shall have the right to require that the Employer repurchase the Employer Stock. The Participant or Beneficiary may exercise this put option for a period of 60 days following the date on which the Employer Stock is distributed and, if the Participant or Beneficiary does not exercise the put option at that time, for an additional period of 60 days during the next following Plan Year. The period during which the put option is exercisable shall not include any period during which the Participant or Beneficiary is unable to exercise the put option because the Employer is prohibited from honoring it by federal or state law. In order to exercise the put option, the Participant or Beneficiary must notify the Employer in writing, during the exercise period, that the put option is being exercised. (b) If a Participant or Beneficiary exercises a put option, the Employer (or, if the Trustee deems it appropriate and the Employer consents, the Trustee) shall purchase the Employer Stock that was distributed to the Participant or Beneficiary at a purchase price equal to the fair market value of the Employer Stock as of the most recent Valuation Date; provided that, if the Participant or Beneficiary exercising the put option is a "disqualified person", as defined in Code Section 4975, the purchase price shall equal the fair market value of the Employer Stock as of the date of the purchase. The purchase price shall be paid in one or more installments over a period determined by the Employer or Trustee, but not to exceed five (5) substantially equal annual payments. The first installment shall be paid not later than 30 days after the Participant exercises the put option. Interest shall be payable at a reasonable interest rate and with adequate security on amounts not paid after 30 days. The Employer or Trustee shall determine what constitutes a reasonable interest rate and adequate security, based on interest terms in effect in the community at the time of the purchase. -22- 27 (c) Notwithstanding any of the foregoing to the contrary, if the distribution does not constitute a "Total Distribution" within the meaning of the Code, the Plan shall pay the Participant an amount equal to the fair market value of the Employer Stock repurchased no later than 30 days after the Participant exercises the put option. 7.3 FAIR MARKET VALUE OF EMPLOYER STOCK: The Plan Committee shall determine the fair market value of Employer Stock, and the Plan Committee's determination shall be binding on all persons, including the Trustee, for all purposes of this Plan. The Plan Committee may rely on an appraisal made by a disinterested qualified appraiser in determining fair market value. Notwithstanding any of the foregoing to the contrary, all valuations of Employer Stock which are not readily tradable on an established securities market with respect to activities carried on by the Plan shall be made by an independent appraiser meeting requirements similar to those contained in Treasury regulations under Section 170(a)(1) of the Code. 7.4 LEGENDS: The Plan Committee shall direct the Trustee to cause shares of Employer Stock that are distributed to bear a legend setting forth such representations as the Plan Committee deems appropriate, which may include, without being limited to, representations that (i) the shares have not been registered under federal or state securities law, or (ii) under the law, the transferability of the shares is restricted. In addition, the Plan Committee may require the recipient of a distribution of Employer Stock to sign a letter agreeing that the Employer Stock received shall not be transferred except in compliance with federal and state securities law and making such other agreements and representations as the Plan Committee deems appropriate. Except as otherwise provided in this Section VII, no security acquired with the proceeds of a loan described in Section 7.1 above may be subject to a put, call, buy-sell or similar arrangement while held by or when distributed from the Plan. 7.5 BASIS OF EMPLOYER STOCK: The basis of Employer Stock held in the Trust Fund shall be determined as follows: (a) The basis of Employer Stock purchased by the Trustee shall be the actual cost of the Employer Stock to the Trustee. The basis of all other Employer Stock acquired by the Trustee (including Employer Stock contributed by the Employer to the Trust Fund) shall be the fair market value of the Employer Stock on the date of the acquisition. (b) Any shares of Employer Stock that are held unallocated in a Suspense Account pursuant to Section 4.1 or 4.5 shall retain their original basis, without regard to when the shares are released and allocated to Participants' Accounts. (c) As of each allocation date, the basis of all Employer Stock that is made available for allocation shall be calculated as of that date, as determined pursuant to subsections (a) and (b) above. (d) The basis of all Employer Stock allocated to a Participant's Account for a Plan Year shall be averaged with the basis of all Employer Stock previously allocated to the Participant's Account, and the resulting average, as adjusted annually, shall be the Participant's basis with respect to distributions of Employer Stock from the Participant's Account. -23- 28 SECTION VIII ADMINISTRATION BY THE COMMITTEE 8.1 APPOINTMENT OF THE PLAN COMMITTEE: The members of the Plan Committee shall consist of one or more persons appointed from time to time by the Employer to serve until their death, resignation or removal by the Employer. A person shall not be ineligible to be a member of the Plan Committee because he or she is or may be a Participant in the Plan. The Employer from time to time may increase or decrease the number of members of the Plan Committee. The Plan Committee and each of its members shall be named fiduciaries with respect to the Plan, and shall be indemnified by the Employer against any and all liabilities incurred by reason of any action taken in good faith pursuant to the provisions of the Plan. 8.2 POWERS OF THE PLAN COMMITTEE: (a) The Plan Committee shall be responsible for the general administration and interpretation of the Plan and for carrying out its provisions and shall have such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers and duties: (i) To construe and interpret the Plan, to decide all questions of eligibility and to determine the amount, manner and time of payment of any benefits hereunder; (ii) To prescribe procedures to be followed by Employees in filing applications for benefits; (iii) To make a determination as to the right of any person to a benefit and to afford any person dissatisfied with such determination the right to a hearing; (iv) To request and receive from the Employer and from Employees such information as shall be necessary for the proper administration of the Plan, including but not limited to, such information as the Plan Committee may reasonably require to determine each Participant's eligibility to participate in the Plan and the benefits payable to each Participant upon his or her death, retirement or termination of employment; (v) To prepare and distribute, in such manner as it determines to be appropriate, information explaining the Plan; (vi) To furnish the Employer, upon request, with such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (vii) To direct the Trustee as to the method in which and persons to whom Plan assets will be distributed; (viii) To receive and review reports on the financial condition of the Trust Fund and statements of the receipts and disbursements of the Trust Fund from the Trustee; (ix) To value Employer Stock; and (x) Such other duties and powers as are set forth in Section 9.5. (b) The Plan Committee shall not have the power to add to, subtract from or modify any of the terms of the Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any requirement for eligibility for the receipt of benefits under the Plan. -24- 29 (c) The Plan Committee may adopt such rules, regulations and bylaws and may make such decisions as it deems necessary or desirable for the proper administration of the Plan, and all rules and decisions of the Plan Committee shall be uniformly and consistently applied to all Participants in similar circumstances. Any rule or decision that is not inconsistent with the provisions of the Plan shall be conclusive and binding upon all persons affected by it, and there shall be no appeal from any ruling by the Plan Committee that is within its authority, except as otherwise provided herein. When making a determination or calculation, the Plan Committee shall be entitled to rely upon information furnished by an Employer or anyone acting on behalf of an Employer. 8.3 OPERATION: The members of the Plan Committee shall elect a Chairman. They shall also elect a Secretary who may, but need not, be a member of the Plan Committee. The Plan Committee shall have the power to: (a) appoint from its membership such subcommittees with such powers as the Plan Committee shall determine, (b) authorize one or more of its members or any agent to execute or deliver any instrument or to make any payment on behalf of the Plan Committee, and (c) employ counsel and agents and such clerical and other services as the Plan Committee shall deem requisite or desirable in carrying out the provisions of the Plan. The Plan Committee shall be fully protected in relying on data, information or statistics furnished it by persons performing ministerial and limited discretionary functions as long as the Plan Committee has had no reason to doubt the competence, integrity or responsibility of any such person. 8.4 MEETINGS AND QUORUM: The Plan Committee shall hold meetings upon such notice, at such places, and at such intervals as it may from time to time determine. A majority of the members of the Plan Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Plan Committee at any meeting shall be by the vote of a majority of those present at any such meeting. Action may be taken by the Plan Committee without a meeting by a written consent signed by a majority of the members of the Plan Committee. 8.5 COMPENSATION: The members of the Plan Committee shall not be entitled to any compensation for their services with respect to the Plan, but the Plan Committee members shall be entitled to reimbursement for any and all necessary expenses that each member may incur. The expenses shall be paid by the Employer or from the Trust Fund. Any such payments from the Trust Fund shall be deemed to be for the exclusive benefit of Participants. 8.6 DOMESTIC RELATIONS ORDERS: (a) If the Trustee or the Plan Committee receives a domestic relations order that purports to require the payment of a Participant's benefits to a person other than the Participant, the Plan Committee shall take the following steps: (i) If benefits are in pay status, the Plan Committee shall direct the Trustee to segregate and hold in a Determination Period Account (defined below) the amounts that will be payable to the Alternate Payees (defined below) with respect to the Determination Period (defined below) if the order is a Qualified Domestic Relations Order (defined below). (ii) The Plan Committee shall promptly notify the named Participant and any Alternate Payees of the receipt of the domestic relations order and of the Plan Committee's procedures for determining if the order is a Qualified Domestic Relations Order. (iii) The Plan Committee shall determine whether the order is a Qualified Domestic Relations Order under the provisions of Code Section 414(p). (iv) The Plan Committee shall notify the named Participant and any Alternate Payees of its determination as to whether the order meets the requirements of a Qualified Domestic Relations Order. (b) If, within 18 months of receipt of the domestic relations order, the order is determined to be a Qualified Domestic Relations Order, the Plan Committee shall direct the Trustee to pay the Determination Period Account to the persons entitled to receive the Account pursuant to the order. -25- 30 (c) If, within 18 months of receipt of the domestic relations order, (i) the order is determined not to be a Qualified Domestic Relations Order or (ii) the issue as to whether the order is a Qualified Domestic Relations Order has not been resolved, the Plan Committee shall direct the Trustee to pay the amounts held in the Determination Period Account to the Participant or other person who would have been entitled to such amounts if there had been no order. (d) If an order is determined to be a Qualified Domestic Relations Order after the end of the 18-month period, the determination shall be applied prospectively only. (e) For the purposes of this Section, the following terms shall have the following definitions: Alternate Payee - Any spouse, former spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to all or a portion of the benefits payable under the Plan to the Participant. Determination Period - The period of up to 18 months during which the Plan Committee shall determine the qualified status of a domestic relations order. Determination Period Account - A segregated account established by the Trustee at the direction of the Plan Committee, in which amounts which may be payable to an Alternate Payee shall be held. A Determination Period Account shall be held in an interest-bearing account and credited with earnings of that account. Qualified Domestic Relations Order - Any domestic relations order or judgment that meets the requirements set forth in Code Section 414(p). -26- 31 SECTION IX DUTIES AND POWERS OF THE TRUSTEE 9.1 GENERAL: Subject to Section 9.5, the Trustee shall receive, hold, manage, convert, sell, exchange, invest, disburse and otherwise deal with such contributions as may from time to time be made to the Trust Fund and the income and profits therefrom, in the manner and for the uses and purposes of the Plan as provided in the Plan and in the trust agreement described in Section 9.2. 9.2 TRUST AGREEMENT: The Employer has entered into a trust agreement with the Trustee under which the Trustee will receive, invest and administer the Trust Fund in accordance with the terms thereof. The trust agreement is incorporated by reference as a part of the Plan, and the rights of all persons under the Plan are subject to the terms of the trust agreement. The trust agreement provides for the investment and reinvestment of the Trust Fund, the management of the Trust Fund, the responsibilities and immunities of the Trustee, the removal of the Trustee and appointment of a successor, the accounting by the Trustee and the disbursement of the Trust Fund. 9.3 LIMITATION OF LIABILITY: The Trustee shall hold in trust and administer the Trust Fund subject to all the terms and conditions of this Plan and of the trust agreement described in Section 9.2. The Trustee shall not be responsible for the administration of the Plan unless employed by the Employer to serve in such capacity. The Trustee's responsibility shall be limited to holding, investing and reinvesting the assets of the Trust Fund from time to time in its possession or under its control as Trustee, as directed by the Plan Committee, and to disbursing funds as directed by the Plan Committee. The Trustee shall not be responsible for the correctness of any payment or disbursement or action if made in accordance with the instructions of the Plan Committee. 9.4 POWER OF TRUSTEE TO CARRY OUT THE PLAN: If, at any time, the Employer or the Plan Committee shall be incapable, for any reason, of giving directions, instructions or authorizations to the Trustee, as herein provided, the Trustee may act, without such directions, instructions or authorizations, as it, in its discretion, shall deem appropriate and advisable under the circumstances for carrying out the provisions of the Plan; provided, however, that the Trustee shall not vote Employer Stock without written instructions from the Plan Committee. 9.5 PLAN COMMITTEE: (a) The Plan Committee shall be responsible for directing the Trustee regarding the management, disposition and investment of Trust assets (including the power to direct the Trustee with respect to the voting and valuation of Employer Stock), as described in the trust agreement. The Plan Committee shall have the power to consult with and employ competent advisors, agents and other persons to assist the Plan Committee in discharging its responsibilities with respect to the voting, valuation, management, disposition and investment of Employer Stock. (b) Except as otherwise required by the Trust Agreement, The Plan Committee may, but is not required to, poll the Participants to determine how Employer Stock should be voted or whether Employer Stock should be sold. If the Plan Committee requests and receives instructions by the Participants regarding the voting or sale of Employer Stock, the Plan Committee shall follow the Participants' instructions in directing the Trustee regarding the voting or sale of Employer Stock. -27- 32 SECTION X AMENDMENT AND TERMINATION 10.1 AMENDMENT: This Plan shall be irrevocable and binding as to all contributions made by an Employer to the Trust, but this Plan may be amended from time to time by the Employer. No amendment shall be made to the Plan that (a) would have the effect of diverting any of the Trust from Participants or their Beneficiaries as provided in the Plan, (b) would prevent the allowance as a deduction for federal income tax purposes, and particularly under Code Section 404, of any contribution made by an Employer to the Trust, (c) would take the Plan and Trust out of the scope of Code Sections 401, 402 and 501(a), (d) would increase the duties of the Trustee without its consent, or (e) would decrease a Participant's vested interest in his or her Account in the Trust Fund. Subject to the foregoing to the contrary, the Employer reserves the right to amend the vesting schedule at any time; provided, however, the Employer shall not amend the vesting schedule (and no amendment shall be effective) to reduce a Participant's vested Account derived from Employee Contributions (determined as of the later of the date the amendment is adopted or the date the amendment becomes effective). If the Employer makes a permissible amendment to the vesting schedule, each Participant having at least three 3 Years of Service may elect to have the percentage of his or her vested Account computed under the Plan without regard to the amendment. The Participant must file an election with the Plan Committee within sixty (60) days of the latest of (a) adoption of the amendment; (b) the effective date of the amendment; or (c) the Participant's receipt of a copy of the amendment. The Plan Committee, as soon as practicable, shall forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. For purposes of this Section, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the vested percentage of an Employee's rights to his or her Employer derived Account. 10.2 TERMINATION: This Plan may be terminated at any time by the Employer. If the Plan is terminated, or if a partial termination occurs (through a complete discontinuance of contributions or otherwise), each affected Participant shall have a 100% vested interest in his or her Account, and his or her Account shall be paid to the Participant (or to the Participant's Beneficiary, in the event of the Participant's death) in a lump sum as soon as is practicable after the termination. An Affiliated Company that has adopted the Plan may terminate its participation in the Plan at any time. In the event of such termination, the Affiliated Company may adopt a successor plan providing substantially similar benefits and the interests of each Participant who is an Employee of the Affiliated Company shall be transferred to the trustee or other funding agent for such successor plan. If the Affiliated Company does not establish a successor plan within six months of its notice of termination of participation in the Plan (or gives sooner notice that no successor plan will be established) then the Plan will be deemed to be terminated with respect to the Affiliated Company. Notwithstanding anything in this instrument to the contrary, if this Plan ceases to be an ESOP, qualifying employer securities acquired with the proceeds of an exempt loan will continue, after the loan is paid, to be subject to Regulation 54.4975-7(b)(4), (10), (11), and (12) relating to put, call or other options and to buy - sell or similar arrangements. 10.3 MERGER: In the event of merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant shall be entitled to a benefit under such other plan immediately after the merger, consolidation, or transfer that is equal to or greater than the Participant's Account balance determined under this Plan immediately before the merger, consolidation or transfer. -28- 33 SECTION XI CLAIMS PROCEDURE 11.1 RIGHT TO FILE CLAIM: Every Participant, former Participant, retired Participant, or Beneficiary of a Participant or former Participant shall be entitled to file with the Plan Committee a claim for benefits under the Plan. The claim must be in writing. 11.2 DENIAL OF CLAIM: If the claim is denied by the Plan Committee, in whole or in part, the claimant shall be furnished within 90 days after the Plan Committee's receipt of the claim (or within 180 days after such receipt if special circumstances require an extension of time) a written notice of denial of the claim containing the following: (a) Specific reason or reasons for denial, (b) Specific reference to pertinent Plan provisions on which the denial is based, (c) A description of any additional material or information necessary for the claimant to perfect the claim, and an explanation of why the material or information is necessary, and (d) An explanation of the claims review procedure. 11.3 CLAIMS REVIEW PROCEDURE: (a) Review may be requested at any time within 90 days following the date the claimant received written notice of the denial of his or her claim. For purposes of this Section, any action required or authorized to be taken by the claimant may be taken by a representative authorized in writing by the claimant to represent him or her. The Plan Committee shall afford the claimant a full and fair review of the decision denying the claim and, if so requested, shall: (i) permit the claimant to review any documents that are pertinent to the claim; (ii) permit the claimant to submit to the Plan Committee issues and comments in writing; and (iii) afford the claimant an opportunity to meet with a quorum of the Plan Committee as a part of the review procedure. (b) The decision on review by the Plan Committee shall be in writing and shall be issued within 60 days following receipt of the request for review. The period for decision may be extended to a date not later than 120 days after such receipt if the Plan Committee determines that special circumstances require extension. The decision on review shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision of the Plan Committee is based. -29- 34 SECTION XII ADOPTION OF PLAN BY AFFILIATED COMPANIES 12.1 ADOPTION OF THE PLAN: An Affiliated Company may become a Participating Employer with the approval of the Employer by adopting the Plan for its Employees. An Affiliated Company that becomes a Participating Employer shall promptly deliver to the Trustee a certified copy of the resolutions or other documents evidencing its adoption of the Plan. Notwithstanding anything in the Plan to the contrary, an Affiliated Company adopting the Plan may determine whether and to what extent periods of employment with the Affiliated Company before the Affiliated Company adopted the Plan shall be included as Service under the Plan. 12.2 WITHDRAWAL: An Affiliated Company may cease to be a Participating Employer at any time by giving advance notice in writing of its intention to the Employer and to the Plan Committee. Upon the receipt of notice of any such withdrawal, the Plan Committee shall certify to the Trustee the equitable share of the withdrawing Affiliated Company in the Trust Fund, and the Trustee shall thereupon set aside from the Trust Fund such securities and other property as it shall, in its sole discretion, deem to be equal in value to the Affiliated Company's equitable share. If the Plan is to be terminated with respect to the Affiliated Company, the amount set aside shall be administered according to Section 9.2. If the Plan is not to be terminated with respect to the Affiliated Company, the Trustee shall turn over the Affiliated Company's equitable share to a trustee designated by the Affiliated Company, and the securities and other property shall thereafter be held and invested as a separate trust of the Affiliated Company and shall be used and applied according to the terms of a new trust agreement between the Affiliated Company and the trustee so designated. Neither the segregation of the Trust Fund assets upon the withdrawal of an Affiliated Company, nor the execution of a new trust agreement shall operate to permit any part of the corpus or income of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants, former Participants and Beneficiaries. -30- 35 SECTION XIII TOP HEAVY 13.1 PURPOSE: This Article is intended to insure that the Plan complies with Section 416 of the Code. If the Plan is or becomes Top-Heavy in any Plan Year beginning after December 31, 1983, the provisions of this Section will supersede any conflicting provision in the Plan. 13.2 DEFINITIONS: For purposes of this Article, the following definitions shall apply: (a) Determination Date: For any Plan year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that Year. (b) Key Employee: Any Employee or former Employee (and the beneficiaries of such Employee) who at any time during the determination period was (i) an officer of the Employer if such individual's annual compensation exceeds 50% of the dollar limitation in effect under Section 415(b)(1)(A) of the Code, (ii) an owner (or considered an owner under Section 318 of the Code) of one of the ten largest interests in the Employer if such individual's compensation exceeds 100% of the dollar limitation in effect under Section 415(c)(1)(A) of the Code, (iii) a 5% owner of the Employer, or (iv) a 1% owner of the Employer who has an annual compensation of more than $150,000. Annual compensation means compensation as defined in Section 415(c)(3) of the Code, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludible from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. Determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the regulations thereunder. (c) Non-Key Employee: Any Employee who is not a Key Employee, including Employees who are former Key Employees. (d) Permissive Aggregation Group: The Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (e) Required Aggregation Group: (1) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of Sections 401(a)(4) or 410 of the Code. (f) Top-Heavy Plan: This Plan is Top-Heavy if for any Plan Year any of the following conditions exists: (i) If the Top-Heavy Ratio for this Plan exceeds 60% and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (ii) If this Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. (iii) If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. (g) Top-Heavy Ratio: -31- 36 (i) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the Account balances of all Key Employees as of the Determination Date(s) (including any part of any Account balance distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of Account balances (including any part of any Account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with Section 416 of the Code and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Section 416 of the Code and the regulations thereunder. (ii) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of Account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of Account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all participants as of the Determination Date(s), all determined in accordance with Section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. (iii) For purposes of (i) and (ii) above the value of Account balances and the present value of accrued benefits will 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 Section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan. The Account balances and accrued benefits of a participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any Employer maintaining the Plan at any time during the five-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of Account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (2) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C) of the Code. (h) Valuation Date: The Plan Year-End as of which Account balances or accrued benefits are valued for purposes of calculating the Top-Heavy Ratio. 13.3 MINIMUM ALLOCATION: (a) Except as otherwise provided in paragraphs (c) and (d) below, in any Plan Year in which this Plan is Top-Heavy, Employer contributions allocated to the Account of each Participant who is a Non-Key Employee, shall be not less than the lesser of (i) 3% of the Non-Key Employee's Compensation, or (ii) in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer contributions (if applicable), as a percentage of the first $200,000 of Compensation, allocated on behalf of any Key Employee for that Plan Year. The minimum allocation shall be determined without regard to any Social Security contribution. This minimum contribution shall be made even though, under other provisions of this Plan, the Participant would not otherwise be entitled to receive an allocation -32- 37 or would have received a lesser allocation for the Plan Year because of (i) the Participant's failure to complete 1,000 Hours of Service, (ii) the Participant's failure to make mandatory Employee contributions to the Plan, or (iii) Compensation less than a stated amount. (b) For purposes of computing the minimum allocation, Compensation shall mean Compensation as defined in Section 1.8 of the Plan. (c) The provisions in paragraph (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (d) The minimum allocation required (to the extent required to be nonforfeitable under Section 416(b)) may not be forfeited under Section 411(a)(3)(B) or 411(a)(3)(D) of the Code. (e) Any minimum Top Heavy allocations will be made from this Plan. 13.4 VESTING SCHEDULE: (a) For any Plan Year in which the Plan is Top-Heavy, the following vesting schedule shall apply to any Employer contributions made for that Plan Year:
Years of Service Vested Percentage ---------------- ----------------- 1 year 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years or more 100%
The Top-Heavy vesting schedule shall also apply to any subsequent Plan Years unless the Employer amends the Plan to provide for a vesting schedule which is more rapid than the one in this Section. (b) The minimum vesting schedule applies to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to Employee contributions, including benefits accrued before the effective date of Section 416 of the Code and benefits before the Plan became Top-Heavy. Further, no decrease in a Participant's nonforfeitable percentage may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this Section does not apply to the Account balances of any Employee who does not have an Hour of Service after the Plan has initially become Top-Heavy and such Employee's Account balance attributable to Employer Contributions and forfeitures will be determined without regard to this Section. -33- 38 SECTION XIV MISCELLANEOUS 14.1 RECEIPT OF ROLLOVERS AND TRUSTEE TO TRUSTEE TRANSFERS: (a) The Trustee may (but shall not be required to) receive, with the consent of the Plan Committee, the transfer of assets previously held under another qualified plan for the benefit of a person who is a Participant in this Plan, provided that the assets have not at any time been held in any defined benefit plan or a defined contribution plan that is subject to the funding standards of Code Section 412 (unless the transfer is of an "eligible rollover distribution" within the meaning of Section 6.13). The assets may be received directly from the trustee of a qualified plan or as a rollover contribution from a qualified plan or from an individual retirement account. Any plan from which assets are received must be a plan qualified under Code Section 401 at the time of the transfer, any rollover individual retirement account must be an individual retirement account within the meaning of Code Section 408 at the time of the rollover, and the assets of any individual retirement account must be derived from distributions qualifying for the treatment described in this Section. (b) Notwithstanding the foregoing, effective January 1, 1993, the Trustee may receive, with the consent of the Administrator, a transfer of assets previously held under a qualified plan for the benefit of an Employee in the form of a Direct Rollover (as defined in Section 6.11). (c) An eligible Employee may, with the consent of the Plan Committee and prior to satisfying the Plan's eligibility condition(s), make a rollover contribution to the Trust to the same extent and in the same manner as a Participant. If an Employee makes a rollover contribution to the Trust prior to satisfying the Plan's eligibility condition(s), the Plan Committee and Trustee shall treat the Employee as a Participant for all purposes of the Plan except the Employee may not share in Employer contributions under Section III until the Employee actually becomes a Participant in the Plan. If the Employee terminates employment prior to becoming a Participant, the Trustee shall distribute the Participant's rollover contribution Account to the Participant as if it were an Employer contribution account. (d) The Trustee shall invest the transferred assets as a part of the Trust Fund. The transferred assets, and the earnings and losses attributable to them, shall be held in a separate account on the books of the Trust for the benefit of the Participant. The account shall share in allocations and adjustments pursuant to Section 4.3. The interest of a Participant in his or her account attributable to transferred assets shall be fully vested at all times. Payment of the account shall be made on the same basis as payment of the Participant's Employer contributions Account. (e) The Plan Committee and the Trustee shall be fully protected in relying on data, representations, or other information provided by the trustee or custodian of a qualified plan or individual retirement account for the purpose of determining that the requirements of Section 14.1(a) have been satisfied. 14.2 INDEMNIFICATION: The Employer shall indemnify each Plan Committee member and each other Employee who is involved in the administration of the Plan against all costs, expenses and liabilities, including attorney's fees, incurred in connection with any action, suit or proceeding instituted against any of them alleging any act of omission or commission performed while acting in good faith in discharging their duties with respect to the Plan. Promptly after receipt by an indemnified party of notice of the commencement of any action, the indemnified party shall notify the Employer of the action. The Employer shall be entitled to participate at its own expense in the defense or to assume the defense of any action brought against any indemnified party. If the Employer elects to assume the defense of any such suit, the defense shall be conducted by counsel chosen by the Employer, and the indemnified party shall bear the fees and expenses of any additional counsel retained by him or her. -34- 39 14.3 EXCLUSIVE BENEFIT RULE: This Plan shall be administered for the exclusive benefit of the Employees of the Employer and for the payment to Participants out of the income and principal of the Trust Fund of the benefits provided under the Plan. No part of the income or principal of the Trust Fund shall be used for or diverted to purposes other than the exclusive benefit of the Participants or their Beneficiaries, as provided in the Plan. 14.4 NO RIGHT TO THE FUND: No person shall have any interest in, or right to, any part of the assets of the Trust Fund or any rights under the Plan, except as to the extent expressly provided in the Plan. 14.5 RIGHTS OF EMPLOYER: The establishment of this Plan shall not be construed as conferring any legal or other rights upon any Employee or any other person for continuation of employment, nor shall it interfere with the right of the Employer to discharge any Employee or to deal with him or her without regard to the effect thereof under the Plan. 14.6 NON-ALIENATION OF BENEFITS: No amount payable to or held under the Plan for the account of any Participant, former Participant, retired Participant, or Beneficiary of a Participant or former Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void. No amount payable to or held under the Plan for the account of any Participant, former Participant, retired Participant, or Beneficiary may be in any manner liable for his or her debts, contracts, liabilities, engagements or torts, or be subject to any legal process, levy or attachment. The provisions of this Section shall not preclude distributions made by the Trustee in accordance with a Qualified Domestic Relations Order. 14.7 CONSTRUCTION AND SEVERABILITY: Except as otherwise provided by federal law, the provisions of this Plan shall be construed and enforced according to California laws, and all of the provisions of the Plan shall be administered in accordance with the laws of the State of California. For simplicity of expression, pronouns and other terms are sometimes expressed in a particular number and gender; however, where appropriate to the context, such terms shall be deemed to include each of the other numbers and the other gender. Each provision of this Plan shall be considered to be severable from all other provisions so that if any provision or any part of a provision shall be declared void, then the remaining provisions of the Plan that are not declared void shall continue to be effective. 14.8 DELEGATION OF AUTHORITY: Whenever the Employer, under the terms of this Plan, is permitted or required to do or perform any act, the act may be done or performed by any officer of the Employer, and such officer shall be presumed to be duly authorized by the Board of Directors of the Employer. 14.9 REQUEST FOR TAX RULING: This Plan is based upon the condition precedent that it shall meet the requirements of the Code with respect to qualified employees' trusts so as to permit the Employer to deduct for federal income tax purposes the amounts of its contributions and so that its contributions will not be taxable to the Participants as income in the year in which the contributions are made. The Employer shall apply for a determination by the Internal Revenue Service that this Plan is so qualified. If the Internal Revenue Service rules that this Plan is not so qualified, then the then current value of all contributions made by the Employer before the initial determination as to qualification shall be returned to the Employer, and this Plan shall be of no further force or effect. -35- 40 * * * * * IN WITNESS WHEREOF, the Employer has caused this Plan to be executed on November 21, 1994. FREMONT GENERAL CORPORATION By: /s/ Raymond G. Meyers ----------------------------------- Raymond G. Meyers Senior Vice President -36- 41 EXHIBIT A 1. Fremont General Corporation 2. Fremont Financial Corporation 3. Fremont Indemnity Company a. Physicians and Surgeons Underwriters Corporation b. Comstock Insurance Company 4. Fremont Premium Finance Corporation 5. Fremont Life Insurance Company 6. Fremont Investment and Loan 7. Fremont Compensation Insurance Company a. Fremont Health Company EX-10.2 9 ESOP TRUST AGT 1 EXHIBIT 10.2 FREMONT EMPLOYEE STOCK OWNERSHIP PLAN TRUST AGREEMENT RESTATED EFFECTIVE AUGUST 1, 1994 Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 - ESTABLISHMENT OF TRUST............................ 2 ARTICLE 2 - ACCEPTANCE OF TRUST............................... 3 ARTICLE 3 - CONTRIBUTIONS TO THE TURST FUND................... 4 ARTICLE 4 - PAYMENTS FROM THE TRUST FUND...................... 5 ARTICLE 5 - INVESTMENT OF THE TRUST FUND...................... 6 ARTICLE 6 - POWERS AND DUTIES OF THE TRUSTEE WITH RESPECT TO THE TRUST FUND............................... 8 ARTICLE 7 - LOANS............................................. 11 ARTICLE 8 - ACCOUNTS OF THE TRUSTEE AND VALUATION OF THE TRUST FUND.................................. 12 ARTICLE 9 - ADMINISTRATIVE PROVISIONS......................... 13 ARTICLE 10 - RESIGNATION OR REMOVAL OF TRUSTEE................. 16 ARTICLE 11 - AMENDMENT AND TERMINATION OF THE TRUST............ 17 ARTICLE 12 - MISCELLANEOUS..................................... 18
-i- 3 FREMONT GENERAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN TRUST AGREEMENT This Trust Agreement, effective as of August 1, 1994, between Fremont General Corporation (the "Employer"), and Merrill Lynch Trust Company of California, as trustee (the "Trustee"). The Employer maintains the Fremont General Corporation Employee Stock Ownership Plan (the "Plan") for the benefit of its eligible employees. Merrill Lynch Trust Company of California has assumed the duties of Trustee of the Plan, and the Employer now desires to restate the trust agreement implementing the Plan to, among other things, incorporate the change of trustee. NOW, THEREFORE, the Employer and the Trustee, on behalf of themselves and their respective successors and assigns, hereby agree as follows: 4 ARTICLE 1 ESTABLISHMENT OF TRUST SECTION 1.1: (a) This Trust shall be known as the Fremont General Corporation Employee Stock Ownership Plan Trust Agreement (the "Trust") and shall be a funding medium for the Fremont General Corporation Employee Stock Ownership Plan (the "Plan"). The Plan and the Trust implementing the Plan are intended to be an employee stock ownership plan and trust qualified under Sections 401(a) and 4975(e)(7) of the Internal Revenue Code (the "Code"). The Plan and Trust are designed to be invested primarily in Employer Stock. The terms used in this agreement that are defined in the Plan shall have the same meanings as in the Plan, unless the context indicates otherwise. A copy of the Plan and of each amendment shall be furnished to the Trustee for convenience of reference. (b) This is a directed Trust. Except as otherwise provided in the Plan or in this Trust, and subject to any contrary provision or requirement of the Employee Retirement Income Security Act of 1974, as amended (ERISA), the Plan Committee under the Plan shall be responsible for directing the Trustee regarding the management, disposition and investment of the Trust Fund (including the power to direct the Trustee with respect to the voting and valuation of Employer Stock). SECTION 1.2: All contributions received by the Trustee and all proceeds, investments, reinvestments and income in the Trustee's possession, may be commingled and shall be held, invested and accounted for by the Trustee as provided in the Plan and in this trust agreement. The assets held by the Trustee shall be referred to as the "Trust Fund". SECTION 1.3: The Employer may adopt or establish one or more other trusts for the purpose of implementing the Plan. Upon doing so, the Employer shall notify the Trustee in writing of the establishment of such other trusts and shall certify to the Trustee in writing that such other trusts are qualified under Code Section 401(a), whereupon the Trustee: (a) Shall transfer and pay over to the trustee of the other trust such cash, Employer Stock and other property as the Employer shall from time to time direct in writing; (b) Shall receive and hold as a part of the Trust Fund such cash, Employer Stock and other property as may from time to time be delivered to it by the trustee of the other trust; and (c) May, in determining its investments, take into consideration the nature and value of the assets held by the other trust to the extent reported to it by the trustee or by the Employer. For purposes of this Section, an insurance or annuity contract issued to the Employer for the purpose of funding benefits under the Plan shall be considered to be a trust established for the purpose of implementing the Plan. 5 ARTICLE 2 ACCEPTANCE OF TRUST The Trustee hereby accepts the Trust subject to the terms and conditions of this agreement, and agrees to hold and administer the assets of the Trust and to execute the Trust in accordance with its provisions. 6 ARTICLE 3 CONTRIBUTIONS TO THE TRUST FUND SECTION 3.1: The Trustee shall receive from time to time the contributions of the Employer in cash, Employer Stock or other property acceptable to the Trustee. The Trustee shall be under no obligation to collect any contributions required under the Plan. The determination of the amount, timing and types of payments made to the Trustee and the establishment of a funding policy consistent with the objectives of the Plan shall be the responsibility of the Plan Committee established under the Plan for the administration of the Plan. SECTION 3.2: It shall be impossible, at any time before satisfaction of all liabilities with respect to Participants and their Beneficiaries, for any part of the Trust Fund to be used for, or diverted to, purposes other than the exclusive benefit of the Participants and their Beneficiaries. However, if a contribution is made by the Employer through a mistake of fact, this Section shall not prohibit the return of the contribution to the Employer within one year after payment of the contribution to the Trustee. If a contribution is conditioned upon the deductibility of the contribution under Code Section 404, then, to the extent the deduction is disallowed, this Section shall not prohibit the return of the contribution (to the extent disallowed) to the Employer within one year after disallowance of the deduction. If a contribution is conditioned upon the initial qualification of the Plan under Code Section 401, this condition is not satisfied, the Plan was submitted to the internal Revenue Service for qualification by the time prescribed by law for filing the Employer's return for the taxable year in which the plan was adopted, or for such later date as the Secretary of the Treasury may prescribe, this Section shall not prohibit the return of the contribution to the Employer within one year after the date of denial of qualification. Payments made by the Trustee in accordance with Article 4 of this agreement shall, in every instance, be deemed to comply with the provisions of this Section. 7 ARTICLE 4 PAYMENTS FROM THE TRUST FUND SECTION 4.1: Payments shall be made from the Trust Fund by the Trustee to or for the account of such persons, in such manner, at such times, and in such amounts as the Plan Committee may from time to time direct in writing. The Trustee shall be fully protected in making payments from the Trust Fund in accordance with such directions and shall have no responsibility to see to the application of such payments or to ascertain whether such directions comply with the terms of the Plan. The Trustee shall not be liable for its acts with respect to payments from the Trust Fund when following such directions, or for its failure to act in the absence of such directions. The Trustee shall not be liable or responsible for any payment made by it in good faith and in the exercise of reasonable care without knowledge of the changed conditions or status of the payee. SECTION 4.2: Except to the extent that such amounts are promptly paid by the Employer, the Trustee shall also pay out of the Trust Fund: (a) all brokerage fees, transfer tax expenses and other expenses incurred in connection with the sale or purchase of investments, (b) all real and personal property taxes, income taxes and other taxes at any time levied or assessed upon, or with respect to, the Trust Fund or any property included in the Trust Fund, (c) all applicable federal or state income taxes required to be withheld on distributions to a Participant or Beneficiary of a Participant, and (d) the Trustee's compensation and all other expenses of administering the Trust. SECTION 4.3: The Trustee may withhold all or part of any payment required to be made hereunder as it may deem necessary and proper to protect the Trustee or the Trust Fund against any liability or claim on account of any estate, inheritance, income or other tax, and the Trustee may discharge any such liability with part or all of the payment so withheld, provided that at least ten days before discharging a liability with any amount so withheld, the Trustee shall notify the Plan Committee in writing of its intent to do so. SECTION 4.4: If any check for a payment made from the Trust Fund that has been mailed by regular United States mail to the last address of the payee is returned to the Trustee unclaimed, the Trustee shall notify the Plan Committee and shall not make any further payments to the payee until it receives further instructions from the Plan Committee. 8 ARTICLE 5 INVESTMENT OF THE TRUST FUND SECTION 5.1: The Plan Committee shall have all power over and responsibility for the management, disposition and investment of the trust assets, and the Trustee shall comply with proper written directions of the Plan Committee respecting such assets. The Plan Committee shall not issue directions in violation of the terms of the Plan and Trust or prohibited by the fiduciary responsibility rules of ERISA. Except to the extent otherwise required by ERISA, the Trustee shall have no duty or responsibility to review, initiate action, or make recommendations regarding trust assets and shall retain such assets until directed in writing by the Plan Committee to dispose of them. Notwithstanding the foregoing, the Plan Committee may appoint one or more Investment Managers (as defined in Section 3(38) of ERISA) to direct, control or manage the investment of all or part of the Trust assets other than Employer Stock. The Plan Committee shall notify the Trustee in writing of the appointment of an Investment Manager and cause such Investment Manager to acknowledge to the Trustee in writing that such Investment Manager is a fiduciary with respect to the Plan. If the foregoing conditions are met, such Investment Manager shall have the power to manage, acquire or dispose of any Trust assets, and the Trustee shall not be liable for acts or omissions of such Investment Manager, or be under an obligation to invest or otherwise manage any asset of the Trust which is subject to the management of such Investment Manager. No Investment Manager shall issue directions in violation of the Plan and Trust or prohibited by the fiduciary responsibility rules of ERISA. SECTION 5.2: As directed in writing by the Plan Committee, and subject to Section 5.1 above, (a) The Trustee shall invest the Trust Fund primarily in Employer Stock. Up to 100% of the Trust Fund may be invested in Employer Stock. The Trustee shall invest all Employer contributions and earnings that it receives in Employer Stock; provided that the Trustee may retain in cash or in other investments such amounts as the Trustee or the Plan Committee anticipates will be needed in the reasonably foreseeable future to pay Plan expenses and distributions, and such other amounts as the Plan Committee or the Trustee deems appropriate for any reason. The Plan Committee shall have the responsibility for establishing and carrying out a funding policy and method as defined in Section 402(a)(1) of ERISA consistent with the objectives of the Plan and the requirements of ERISA, taking into consideration the Plan's short-term and long-term financial needs. It is further understood that the Plan Committee, rather than the Trustee, shall be responsible for said funding policy and for overall compliance of the Trust Fund with statutory limitations on the amount of investment in Employer Stock or other property of the Employer or its affiliated companies. The Plan Committee shall not direct the investment of assets of the Trust Fund unless it is satisfied that the securities are exempt from registration under the Federal Securities Act of 1933 and are exempt from qualification under the California Corporate Securities Law of 1968 and of any other applicable blue sky law, or in the alternative, that the securities have been so registered and/or qualified. The Plan Committee shall also specify to the Trustee what restrictive legend on transfer, if any, is required to be set forth on the certificates for the securities and the procedure to be followed by the Trustee to effectuate a resale of such securities. (b) If directed by the Plan Committee, to the extent that the Trustee deems it appropriate and consistent with the foregoing investment policy, the Trustee may invest, reinvest and hold the assets of the Trust Fund in cash or in any other forms of investment that the Trustee deems appropriate. In making or holding such investments, the Trustee shall not be restricted to those investments that are authorized by the laws of any state for the investment of trust funds. The Trustee may hold any part of the Trust Fund uninvested or in cash without liability for interest for a reasonable period of time pending the investment of assets or the payment of costs, expenses or benefits payable under the Plan. The Trustee may invest the Trust Fund in participations in a common trust fund maintained by the Trustee for plans qualified under Code Section 401(a) or in time or demand deposits of the Trustee as long as any such time deposits shall bear a reasonable rate of interest. The Trustee may invest cash of the Trust Fund in short-term interest-bearing obligations, either directly or by investment collectively in any common trust fund maintained by the Trustee. During any period of time that an investment through the medium of a common trust fund shall 9 exist, the trust agreement of the common trust fund shall, to the extent of the participation of the Trust Fund, constitute a part of this agreement. It is understood that the Trustee may, from time to time, have on hand funds which are received as contributions or transfers to the Trust which are awaiting investment or funds from the sale of Trust assets which are awaiting reinvestment. Absent receipt by the Trustee of a direction from the proper person for the investment or reinvestment of such funds or otherwise prior to the application of funds in implementation of such a direction, the Trustee shall in accordance with the Trustee's normal procedures in this regard cause such funds to be invested in shares of the money market fund acceptable to the Trustee as the Employer or Investment Manager may in writing to the Trustee specify for this purpose from time to time. Any such fund may be sponsored, managed or distributed by an affiliate of the Trustee. The Employer or the Investment Manager, as the case may be, hereby acknowledges that prior to any such specification it has read or will have read the then current prospectus for the specified fund. SECTION 5.3: In the exercise and performance of its powers and duties, the Trustee shall act at all times with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. 10 ARTICLE 6 POWERS AND DUTIES OF THE TRUSTEE WITH RESPECT TO THE TRUST FUND SECTION 6.1: In addition to the powers and discretion conferred upon the Trustee by any other provision of this agreement, but subject to the requirements of applicable law and Articles 4, 5 and 7, the Trustee shall have all the usual powers conferred by law on trustees and shall also have the following express powers with respect to the Trust Fund: (a) To retain, to exchange for any other property, to sell in any manner and at any time; provided that the Trustee shall only sell Employer Stock upon the direction of the Plan Committee. (b) To vote Employer Stock as described in Section 6.2. (c) As directed by the Plan Committee, to vote stock other than Employer Stock held in the Trust Fund personally or by proxy and to delegate the Trustee's powers and discretions with respect to stock to a proxy. (d) To exercise subscription, conversion and other rights and options and to make payments from the Trust Fund in connection therewith. (e) To take any action and to abstain from taking any action with respect to any reorganization, consolidation, merger, dissolution, recapitalization, refinancing and any other change affecting any property held as part of the Trust Fund, and in connection therewith to delegate its discretionary powers and to pay assessments, subscriptions and other charges from the Trust Fund. (f) In any manner, and to any extent, to waive, modify, reduce, compromise, release, settle and extend the time of payment of any claim of any nature in favor of or against the Trustee or all or any part of the Trust Fund. (g) To make executory contracts, and to make such contracts binding on the Trust Fund and enforceable against any property of the Trust Fund. (h) To employ agents, experts and counsel, to delegate discretionary powers to, and reasonably rely upon information and advice furnished by, agents, experts and counsel, and to compensate such agents, experts and counsel out of the Trust Fund. (i) From time to time to register any property in the name of its nominee or in its own name or to hold it unregistered or in such form that title shall pass by delivery, provided that the records of the Trustee shall at all times indicate the true ownership of such securities. (j) To purchase insurance contracts from any insurance company qualified to do business in any state. (k) To borrow funds to acquire Employer Stock, as described in Article 7. SECTION 6.2: The Trustee shall vote Employer Stock according to the following instructions: (a) With respect to Employer Stock allocated to each Participant's Account which are a part of a registration type class of securities (as defined in Section 409(e)(4) of the Code), each Participant shall have the right to instruct the Trustee how to vote such shares of Employer Stock. (b) With respect to Employer Stock allocated to each Participant's Account which are not a part of a registration type class of securities (as defined in Section 409(e)(4) of the Code), each Participant shall have the right to instruct the Trustee how to vote such shares of Employer Stock concerning any corporate matter which involves the voting of such shares 11 regarding the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as may be prescribed by the Code or the regulations thereunder. (c) The Participant must give the Trustee written instructions for the voting of Employer Stock in time for the Trustee to act with respect to the instructions. The Employer shall ensure that all notices, forms, and other information that are distributed to shareholders regarding the exercise of voting rights are furnished to the Trustee, Participants, and the Plan Committee within a reasonable time before voting rights are to be exercised. The Employer and others may solicit and exercise voting rights pursuant to this Section under proxy rules that apply to all holders of Employer Stock. Subject to ERISA, the Trustee shall not vote shares of Employer Stock that have been allocated to Participants' Accounts and for which no instructions from Participants are received with respect to corporate matters that involve the voting of shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as may be prescribed by the Code or regulations thereunder. (d) The Plan Committee shall instruct the Trustee, in writing, how to vote all Employer Stock that has been allocated to Participants' Accounts with respect to corporate matters with respect to which Participants do not have a right to instruct the Trustee under subparagraph (b) immediately above. The Trustee may rely on the Plan Committee's advice regarding what corporate matters are subject to said subparagraph (b). (e) The Plan Committee shall instruct the Trustee, in writing, how to vote Employer Stock that has not been allocated to Participants' Accounts (such as Employer Stock held in a suspense account) with respect to all corporate matters. SECTION 6.3: In the event of a tender offer for shares of Employer Stock, the Trustee shall sell, convey or transfer Employer Stock only in accordance with the written instructions of the Participant. The Plan Committee shall, to the extent possible, allocate all unallocated shares of Employer Stock (including shares of Employer Stock held in a suspense account) to the Accounts of Participants as if the Plan Year had ended on the date the tender offer was filed with the Securities and Exchange Commission and on the basis of Compensation paid through the last pay period ending before such date; provided, however, that the sole purpose of such interim allocation shall be to allocate all unallocated shares of Employer Stock for purposes of acting in response to the tender offer. The Trustee shall deliver to each Participant (a) a copy of the description of the terms and conditions of the tender offer filed with the Securities and Exchange Commission on Schedule 14D-1, (b) if requested by the Employer, a copy of the statement from Employer management setting forth its position with respect to the tender offer filed with the Securities and Exchange Commission on Schedule 14D-9, (c) an instruction form to be used by any Participant who wishes to instruct the Trustee to tender Employer Stock in response to the tender offer which states that Employer Stock allocated to the Participant will not be tendered if no instruction form is returned to the Trustee by the indicated deadline, and (d) such other materials or information as the Trustee may deem necessary or appropriate. The Trustee shall sell, convey, or transfer shares of Employer Stock pursuant to the terms of the tender offer as directed by the Participants on the instruction forms. Subject to ERISA, the Trustee or designee shall sell, convey or transfer unallocated shares of Employer Stock in the same proportion as shares of Employer Stock allocated to Participants' Accounts are so sold, conveyed, or transferred. The Trustee shall not express any opinion or recommendation to any Participant concerning the tender offer. SECTION 6.4: The Trustee shall have no duties whatsoever except as are specifically set forth as such in this agreement, and no implied covenant or obligation will be read into this agreement against the Trustee. 12 ARTICLE 7 LOANS The Trustee is authorized to borrow funds to acquire Employer Stock upon the following terms: (a) The loan must meet the requirements of Code Section 4975 and the regulations thereunder. The loan may be made by a "disqualified person" (as defined in Code Section 4975(e)(2)) to the Plan, or it may be guaranteed by a disqualified person. A loan includes a direct loan of cash, a purchase-money obligation, or an assumption of the Plan's obligation. A guarantee includes an unsecured guarantee or the use of assets of a disqualified person as collateral for a loan. (b) The terms of the loan must, at the time the loan is made, be at least as favorable to the Plan as the terms of a comparable loan resulting from arm's length negotiations between independent parties. The interest rate under the loan must not exceed a reasonable rate of interest and the loan must be for a specific term. The proceeds of the loan must be used to purchase Employer Stock, to repay the loan, or to repay a prior loan. (c) Any collateral pledged to the lender by the Trustee shall consist only of the Employer Stock purchased with the borrowed funds or Employer Stock that was used as collateral with respect to a prior loan that is repaid with the proceeds of the current loan. The Employer Stock so pledged shall be placed in a Suspense Account and shall be released as the loan is repaid, as described in the Plan. As additional collateral, the Employer or another party may guarantee repayment of the loan. (d) No person entitled to payment under a loan shall have recourse against Trust assets other than the collateral, Employer contributions that are available under the Plan to meet obligations under the loan, and earnings attributable to such collateral and the investment of such Employer contributions. All Employer contributions that are available under the Plan to meet obligations under the loan and that are paid during the Plan Year in which a loan is made (whether before or after the proceeds of the loan are received), all such Employer contributions paid thereafter until the loan has been repaid in full, and all earnings from investment of such Employer contributions, without regard to whether the Employer contributions and earnings have been allocated to Participants' Other Investments Accounts, shall be available to meet obligations under the loan, unless otherwise provided by the Employer at the time the Employer contribution is made. (e) Payments of principal and interest on a loan during a Plan Year shall be made by the Trustee (as directed by the Plan Committee) only from (i) Employer contributions, and earnings on such Employer contributions, that are available under the Plan to meet the Plan's obligation under a loan, (ii) earnings attributable to Employer Stock given as collateral for a loan, (iii) the proceeds of a subsequent loan made to repay a prior loan, and (iv) the proceeds of the sale of any Employer Stock held as collateral for a loan. (f) The loan must provide that, in the event of default, the value of Plan assets transferred in satisfaction of the loan shall not exceed the amount of default. If the lender is a disqualified person, the loan must provide that a transfer of Plan assets upon default will be made only upon, and to the extent of, the failure of the Plan to meet the payment schedule of the loan. 13 ARTICLE 8 ACCOUNTS OF THE TRUSTEE AND VALUATION OF THE TRUST FUND SECTION 8.1: The Trustee shall keep accurate and detailed accounts of all investments, receipts, disbursements, distributions and other transactions. The Trustee's accounts shall be open to inspection and audit by the Employer, the Plan Committee or any authorized representative of them at all reasonable times during business hours. SECTION 8.2: Within 90 days after the last day of each Plan Year, the Trustee shall deliver an account to the Employer listing the investments of the Trust Fund and any uninvested cash balance and setting forth all receipts, disbursements, distributions and other transactions respecting the Trust Fund not included in a previous account. When approved by the Employer, the Trustee's account shall be binding on the Employer, and the Trustee will be released and discharged from any liability or accountability to the Employer with respect to all matters set forth therein. Failure by the Employer to object in writing to any specific items in an account within 180 days after its delivery to the Employer will constitute approval of the account by the Employer. The Trustee shall not be required to file, and no Participant or his or her Beneficiary shall have any right to compel, any accounting, judicial or otherwise, by the Trustee. SECTION 8.3: As of each Valuation Date, and at such other times as the Plan Committee may reasonably require, the Trustee shall determine the fair market value of the Trust Fund and shall notify the Plan Committee in writing of the fair market value as so determined within 90 days of the date of valuation. The fair market value of the Trust Fund shall be the fair market value of all securities and other assets then held in the Trust Fund, including all income received since the last Valuation Date and income accrued and unpaid at the close of the Valuation Date. In determining fair market value, the Trustee shall be entitled to rely conclusively upon information that it believes to be reliable, and the Trustee's determination with respect to fair market value shall be final and conclusive upon all persons. Notwithstanding anything to the contrary herein, the Trustee shall have no responsibility for valuing Employer Stock. Employer Stock shall be valued by such appraiser or appraisers as the Plan Committee shall appoint for that purpose. Such values shall be provided the Trustee as soon as approved by the Plan Committee and in sufficient time to enable the Trustee to perform its duties hereunder. 14 ARTICLE 9 ADMINISTRATIVE PROVISIONS SECTION 9.1: Except as otherwise specifically provided in the Plan or this agreement, any action required or permitted to be taken by the Employer may be taken by the Plan Committee. SECTION 9.2: The Employer shall provide the Trustee with a written certification stating the names of the members of the Plan Committee. The Trustee shall be entitled to rely upon such a certification as to the identity of the duly appointed and currently acting members of the Plan Committee, until the Trustee is notified by the Employer otherwise. The Trustee shall be fully protected in acting upon: (a) Any notice, direction, certification, approval or other writing of the Employer, if evidenced by an instrument signed in the name of the Employer by any duly authorized person. (b) Any notice, direction, certification or approval or other writing of the Plan Committee if evidenced by an instrument signed in the name of the Plan Committee by one or more of its members. SECTION 9.3: The Trustee shall be entitled to such reasonable compensation for its services as may be agreed upon from time to time by the Employer and the Trustee, if the Trustee is not an Employee of the Employer. The Trustee shall be entitled to reimbursement for all expenses reasonably incurred by the Trustee in the administration of the Trust Fund. The Trustee's compensation and expenses shall be paid by the Employer or from the Trust Fund. Any such payments from the Trust Fund shall be deemed to be for the exclusive benefit of Participants. SECTION 9.4: No person dealing with the Trustee shall be obliged to see to the application of any property paid or delivered to the Trustee or to inquire into the expediency or propriety of any transaction or the Trustee's authority to consummate the same. SECTION 9.5: Ownership of the assets comprising the Trust Fund shall be in the Trustee. The rights or interests of any Participant or the Participant's Beneficiaries to any benefits under the Plan or this agreement shall not be subject to attachment or garnishment or other legal process by any creditor of the Participant or Beneficiary, nor shall any Participant or Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits that he or she may expect to receive, contingently or otherwise, under the Plan or this agreement. The provisions of this Section shall not preclude distributions made by the Trustee in accordance with a Qualified Domestic Relations Order. SECTION 9.6: Communications to the Trustee shall be deemed sufficiently made if sent by mail addressed to the Trustee at its principal place of business. Communications to the Employer and the Plan Committee shall be deemed sufficiently made if sent by mail to the Employer's principal place of business. SECTION 9.7: In case of any court proceedings involving the Trustee or the Trust Fund, only the Trustee and the Employer shall be necessary parties, and no one participating in the Plan shall be entitled to any notice or process, except as may be required by applicable law. SECTION 9.8: The Trustee shall have no duty to inquire whether directions by the Employer, the Plan Committee, or any other person conform to the Plan, and the Trustee shall be fully protected in relying on any such direction communicated in accordance with procedures acceptable to the Trustee from any person who the Trustee reasonably believes is a proper person to give the direction. The Trustee shall have no liability to any Participant, any Beneficiary, or any other person for payments made, any failure to make payments, or any discontinuance of payments, on direction of the Plan Committee or any designee, or for any failure to make payments in the absence of directions from the Plan Committee or any person responsible for or purporting to be responsible for directing the investment of Trust assets. The Trustee shall have no obligation to request proper directions from any person. The Trustee may request instructions from the Plan Committee and shall have no duty to act or liability for failure to act if such instructions are not forthcoming. The Trustee shall have no responsibility to determine whether the Trust 15 Fund is sufficient to meet the liabilities under the Plan, and shall not be liable for payments or Plan liabilities in excess of the Trust Fund. SECTION 9.9: The Employer hereby indemnifies the Trustee against, and shall hold the Trustee harmless from, any and all loss, claims, liability, and expense, including reasonable attorneys fees, imposed upon the Trustee or incurred by the Trustee as a result of any acts taken, or any failure to act, in accordance with the directions from the Plan Committee, Investment Manager, or any other person specified herein, or any designee of any such person, or by reason of the Trustee's good faith execution of its duties with respect to the Trust, including, but not limited to, its holding of assets of the Trust as provided for in Article 2, the Employer's obligations in the foregoing regard to be satisfied promptly on request by the Trustee, provided that in the event that the loss, claim, liability or expense involved is determined by a no longer appealable final judgment entered in a lawsuit or proceeding to have resulted from the gross negligence or willful misconduct of the trustee, the Trustee shall promptly thereafter return to the Employer any amount previously received by the Trustee under this Section with respect to such loss, claim, liability or expense. SECTION 9.10: o Arbitration is final and binding on the parties. o The parties waive their right to seek remedies in court, including the right to jury trial. o Pre-arbitration discovery is generally more limited than and different from court proceedings. o The arbitrator's award is not required to include factual findings or level reasoning and any party's right to appeal or seek modification of rulings by the arbitrators is strictly limited. o The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry. The Employer agrees that all controversies which may arise between the Employer and either or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in connection with the Trust, including, but not limited to, those involving any transactions, or the construction, performance, or breach of this or any other agreement between the Employer and either or both the Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement shall be conducted only before the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or arbitration facility provided by any other exchange of which MLPF&S is a member, the National Association of Securities Dealers, Inc., or the Municipal Securities Rulemaking Board, and in accordance with its arbitration rules then in force. The Employer may elect in the first instance whether arbitration shall be conducted before the New York Stock Exchange, Inc., the American Stock Exchange, Inc., other exchange of which MLPF&S is a member, the National Association of Securities Dealers, Inc., or The Municipal Securities Rulemaking Board, but if the Employer fails to make such election, by registered letter or telegram addressed to Merrill Lynch Trust Companies, Employee Benefit Trust Operations, P.O. Box 30532, New Brunswick, New Jersey 08989-0532, before the expiration of five days after receipt of a written request from MLPF&S and/or the Trustee to make such election, then MLPF&S and/or the Trustee may make such election. Judgment upon the award of arbitrators may be entered in any court, state or federal, having jurisdiction. No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; who is a member of putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein. 16 SECTION 9.11: Except as required by ERISA, the Trustee shall follow all directions of the Plan committee, a Participant or Beneficiary, as provided in this instrument, and shall have no duty to exercise voting or other rights relating to any such security or other asset. 17 ARTICLE 10 RESIGNATION OR REMOVAL OF TRUSTEE SECTION 10.1: Any Trustee, and any successor Trustee, may be removed by the Employer at any time by giving written notice to the Trustee then acting. The removal shall be effective on the date specified in the written notice. SECTION 10.2: Any Trustee, and any successor Trustee, may resign as Trustee by filing with the Employer a written resignation, which shall take effect 30 days after the date of the filing, unless before that time a successor Trustee shall have been appointed by the Employer. SECTION 10.3: The Employer may appoint a successor Trustee by delivering to the removed or resigning Trustee and to the successor Trustee an instrument in writing, executed by the Employer, appointing the successor Trustee. SECTION 10.4: All of the provisions of this agreement with respect to the Trustee shall apply to each successor Trustee with the same force and effect as if the successor Trustee were the original Trustee. SECTION 10.5: Upon the appointment of a successor Trustee, the removed or resigning Trustee shall transfer and deliver those assets of the Trust Fund in its possession or under its control to the successor Trustee, together with all such instruments of transfer, conveyance, assignment and further assurance as the successor Trustee may reasonably require. The removed or resigning Trustee shall file with the Employer a final account of its actions as Trustee, to which the provisions of Article 8 regarding accounts shall apply. The receipt of the successor Trustee and the approval by the Employer of the final account of the removed or resigning Trustee shall be a full and complete acquittal and discharge of the removed or resigning Trustee, and the successor Trustee shall have no liability whatsoever for the acts or omissions of any prior Trustee in which it did not participate. If the Employer shall fail to express in writing its objections to an account delivered by a removed or resigning Trustee within 180 days from the date of receipt by the Employer of the account, the account shall be considered as approved by the Employer. 18 ARTICLE 11 AMENDMENT AND TERMINATION OF THE TRUST SECTION 11.1: This agreement may be amended at any time and from time to time by the Employer, provided that no amendment shall increase the duties or obligations of the Trustee without the Trustee's consent. SECTION 11.2: This Trust may be terminated at any time by the Employer by written instrument delivered to the Trustee. Upon such a termination, the Trust Fund shall be paid out by the Trustee as directed by the Plan Committee in writing and in accordance with the terms of the Plan and applicable law. The Trustee shall be fully protected in making payments from the Trust Fund in accordance with written directions of the Plan Committee. 19 ARTICLE 12 MISCELLANEOUS SECTION 12.1: Nothing contained in this agreement shall be deemed to constitute a contract between the Employer and any Employee. SECTION 12.2: This agreement shall be interpreted according to the law promulgated by or under ERISA, and, to the extent not inconsistent with such law, according to the law of the State of California. SECTION 12.3: This agreement may be executed in any number of counterparts, each of which shall be deemed to be the original, and all of such counterparts shall together constitute one document. SECTION 12.4: Except when otherwise indicated by the context, any masculine terminology shall also include the feminine and the definition of any term in the singular may also include the plural. The headings of Articles of this agreement are for convenience of reference only and shall have no substantive effect on the provisions of this agreement. SECTION 12.5: Any notice required hereunder may be waived by the person entitled to receive notice. SECTION 12.6: This agreement shall be effective as of August 1, 1994. * * * * * * * IN WITNESS WHEREOF, the Employer and the Trustee have caused this agreement to be executed August 1, 1994. FREMONT GENERAL CORPORATION By: /s/ James A. McIntyre --------------------------------------- TRUSTEE MERRILL LYNCH TRUST COMPANY OF CALIFORNIA By: /s/ Chris Rosin --------------------------------------- 20 AMENDMENT TO THE FREMONT GENERAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN TRUST Effective as of February 1, 1994, Section 6.2 of the Trust Agreement between Fremont General Corporation and Merrill Lynch Trust Company of California, Trustee, is amended in its entirety, to read as follows: "SECTION 6.2: The Trustee shall vote Employer Stock according to the following instructions: (a) With respect to Employer Stock allocated to each Participant's Account, each Participant shall have the right to instruct the Trustee how to vote such shares of Employer Stock. (b) The Participant must give the Trustee written instructions for the voting of Employer Stock in time for the Trustee to act with respect to the instructions. The Employer shall ensure that all notices, forms, and other information distributed to shareholders regarding the exercise of voting rights are furnished to the Trustee, Participants, and the Plan Committee within a reasonable time before voting rights are to be exercised. The Employer and others may solicit and exercise voting rights pursuant to this Section under proxy rules that apply to all holders of Employer Stock. (c) The Plan Committee may instruct the Trustee, in writing, how to vote Employer Stock that has not been allocated to Participants' Accounts (such as Employer Stock held in a suspense account). (d) The Trustee shall vote all shares of Employer Stock, allocated or unallocated, and for which no instructions have been received from either a Participant or the Plan Committee, in direct proportion to the instructions to vote received from Participants pursuant to subparagraph (a) above. Except as required by ERISA, the Trustee shall follow all directions above-referred to in this Section, and shall have no duty to exercise voting or other rights relating to any such security or other asset." Dated: November 28, 1994 FREMONT GENERAL CORPORATION By: /s/ Raymond G. Meyers --------------------------------------- Raymond G. Meyers, Vice President Dated: November 30, 1994 MERRILL LYNCH TRUST COMPANY By: /s/ Chris Rosin --------------------------------------- Chris Rosin, Trust Officer EX-10.3 10 INVESTMENT INCENTIVE PROGRAM 1 EXHIBIT 10.3 FREMONT GENERAL CORPORATION AND AFFILIATED COMPANIES INVESTMENT INCENTIVE PLAN RESTATED EFFECTIVE JANUARY 1, 1994 Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 (415) 493-9300 2 TABLE OF CONTENTS
Page ---- I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Account or Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Adjustment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Administrator or Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Affiliated Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 Beaver Plan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.7 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.8 Break in Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.9 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.10 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.11 Contribution Percentage Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.12 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.13 Controlled Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.14 Disability or Permanent and Total Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.15 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.16 Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.17 Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.18 Employer Discretionary Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.19 Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.20 Employer Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.21 Employment Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.22 Entry Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.23 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.24 Family Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.25 Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.26 Hour of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.27 Non-Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.28 Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.29 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.30 Participating Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.31 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.32 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.33 Qualified Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.34 Qualified Nonelective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.35 Reemployment Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.36 Rollover Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.37 Salary Reduction Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.38 Section 415 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.39 Severance from Service or Severance from Service Date . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.40 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.41 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.42 Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.43 Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.44 Year of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.45 Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 III ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-i- 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 3.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 Change in Employment Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 IV CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Salary Reduction Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Employer Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3 Discretionary and Qualified Nonelective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.4 Limitations on Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.5 Time and Manner of Payment of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.6 Receipt of Assets from Plan of Former Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 V ACCOUNTS AND ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.1 Participant's Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.2 Allocation of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.3 Allocation of Earnings or Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.4 Section 415 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.5 Discrimination Testing of Salary Reduction Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.6 Distribution of Excess Salary Deferral Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.7 Discrimination Testing of Employer Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . 23 5.8 Corrective Procedure when Discriminatory Matching Contributions are Made . . . . . . . . . . . . . . . . . 25 VI VESTING AND DISTRIBUTION OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.1 Vested Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6.2 Employer Matching Contributions and Employer Discretionary Contributions Forfeitures . . . . . . . . . . . 29 6.3 Normal Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.4 Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.5 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.6 Commencement of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.7 Direct Rollovers and Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.8 Form of Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.9 Transitional Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 6.10 Distribution Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.11 Distribution or Transfer of Accounts On Plan Termination and Other Events . . . . . . . . . . . . . . . . 40 6.12 Distribution to Minor or Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.13 Location of Participant or Beneficiary Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.14 Hardship Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6.15 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.16 Withdrawals at Age 59 1/2: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.17 Withdrawals From Rollover Account: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 VII ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.1 Powers of the Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.2 Domestic Relations Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 VIII LEAVES OF ABSENCE AND TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.1 Military Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.2 Other Leaves of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.3 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
-ii- 4 TABLE OF CONTENTS (CONTINUED)
PAGE ---- IX TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 X FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 XI NECESSITY OF QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 XII AMENDMENT, TERMINATION OR MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 12.1 Amendment or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 12.2 Termination of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 12.3 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 XIII CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 13.1 Right to File Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 13.2 Denial of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 13.3 Claims Review Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 XIV TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 14.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 14.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 14.3 Minimum Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 14.4 Vesting Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 XV MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.1 Legal or Equitable Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.3 No Enlargement of Plan Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.4 No Enlargement of Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.5 Written Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.6 No Release from Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.7 Discretionary Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.8 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.9 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.10 Non-Alienation of Benefits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 15.11 No Reversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 15.12 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 15.13 Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
-iii- 5 I INTRODUCTION Fremont General Corporation has established this Plan, consisting of the following provisions, for the exclusive benefit of its Employees and their Beneficiaries. The Plan is intended to be a profit sharing plan qualified under Section 401(a) of the Internal Revenue Code and is intended to include a qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code. -1- 6 II DEFINITIONS For purposes of this Plan, the following definitions shall apply: 2.1 ACCOUNT OR ACCOUNTS: A Participant's interest in the Trust Fund, consisting of the Participant's Salary Reduction Contributions Account, Employer Matching Contributions Account, Qualified Matching Contributions Account, Employer Discretionary Contributions Account, Qualified Nonelective Contributions Account, Rollover Contributions Account, and such other Account(s) as the Administrator shall determine. 2.2 ACT: The Employee Retirement Income Security Act of 1974, as amended. 2.3 ADJUSTMENT FACTOR: The cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code as applied to such items and in such manner as the Secretary shall provide. 2.4 ADMINISTRATOR OR PLAN ADMINISTRATOR: The Employer. 2.5 AFFILIATED COMPANY: Any corporation which is a member of a controlled group of corporations (as defined under Section 414(b) of the Code as modified by Section 415(h) of the Code) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined under Section 414(c) of the Code as modified by Section 415(h) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined under Section 414(m) of the Code) which includes the Employer; and any other organization or entity which is required to be aggregated with the Employer pursuant to Section 414(o) of the Code. 2.6 BEAVER PLAN ACCOUNT: The Account maintained for a Participant to record his or her share of the contributions of the Employer to the Beaver Insurance Company 401(k) Employees' Savings Plan and Trust. 2.7 BENEFICIARY: The person or entity who is to receive any benefits payable from the Plan on account of a Participant's death. If the Participant is married, the Beneficiary is the Participant's surviving spouse and no written designation is required. A Participant may designate a Beneficiary other than the Participant's spouse provided (i) the Participant's spouse consents in writing (on a form provided by the Administrator) to such designation and to the form thereof; (ii) such Beneficiary designation may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse); and (iii) the spouse's consent acknowledges the effect of such Beneficiary designation and is witnessed by a Plan representative or a notary public. Such spousal consent shall not be required if it is established to the satisfaction of the Administrator that the consent required under the preceding sentence cannot be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as the Secretary of the Treasury or the Secretary's delegate may by regulations prescribe. If at the time of his or her death, the Participant has no surviving spouse or designated Beneficiary, the Beneficiary is the personal representative of the Participant's estate. A Participant's Beneficiary is bound by the terms of the Plan. 2.8 BREAK IN SERVICE: (a) A Plan Year during which an Employee does not complete more than 500 Hours of Service. Solely for purposes of determining whether a Break in Service for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. (b) For purposes of paragraph (a) above, maternity or paternity leave means a period during which an Employee is absent because of (i) the pregnancy of the Employee, (ii) the birth of a child of the Employee, (iii) the placement of a child with the Employee in connection with the Employee's adoption of the child, or (iv) the Employee's caring for a child immediately after the birth or placement of the child. 2.9 CODE: The Internal Revenue Code of 1986, as amended. -2- 7 2.10 COMPENSATION: (a) Compensation means all of an Employee's Code Section 3401(a) [W-2] wages. Wages as defined in Section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules 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 Section 3401(a)(2) of the Code). (b) Compensation shall include only that compensation which is actually paid to the Employee during the Plan Year. Notwithstanding the foregoing, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includable in the gross income of the Employee under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code. (c) For Plan Years beginning after December 31, 1988, the annual Compensation of each Employee taken into account for determining all benefits provided under the Plan for any determination period shall not exceed $200,000 (as adjusted by the Adjustment Factor). If Compensation is to be determined on a period of time that contains fewer than 12 calendar months, the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins, multiplied by the ratio obtained by dividing the number of full months in the period by 12. In determining the Compensation of a Participant for purposes of the foregoing $200,000 limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 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 individuals in proportion to each such individual's Compensation as determined under this section prior to the application of this limitation. If Compensation for any prior determination period is taken into account in determining a Participant's allocations or benefits for the current determination period, the Compensation for such prior year is subject to the applicable annual Compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual Compensation limit is $200,000. (d) For limitation years beginning after December 31, 1991, for purposes of applying the limitations of this Section, Compensation for a limitation year is the Compensation actually paid or made available during such limitation year. (e) 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 annual compensation limit under the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"). The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. 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 in the number of months in the determination period, and the denominator of which 12. For plan years beginning on or after January 1, 1994, any reference in this plan to the limitation under section 401(a)(17) of the Code 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. 2.11 CONTRIBUTION PERCENTAGE AMOUNTS: The sum of Employer Matching Contributions and Qualified Matching Contributions (to the extent not taken into account for purposes of the test in Section 5.5(a) of the Plan) made under the Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Employer Matching Contributions that are forfeited either to correct Excess Matching Contributions or because the Contributions to which they relate are Excess Salary Reduction Contributions, Excess 401(k) Contributions or Excess Matching Contributions. The Employer may include Qualified Nonelective Contributions in the Contribution Percentage Amounts. The Employer may also elect to use Salary Reduction Contributions in the Contribution Percentage Amounts so long as the test in Section 5.5(a) of the Plan is met before the Salary Reduction Contributions are used in the test in Section 5.7(a) of the Plan and continues to be met following the exclusion of those Salary Reduction Contributions that are used to meet the test in Section 5.7(a) of the Plan. -3- 8 2.12 CONTRIBUTIONS: Salary Reduction Contributions, Employer Matching Contributions and Qualified Matching Contributions, Employer Discretionary Contributions, and Qualified Nonelective Contributions. 2.13 CONTROLLED GROUP: The Employer and any entity required to be aggregated with the Employer under Sections 414(b), (c) or (m) of the Code. 2.14 DISABILITY OR PERMANENT AND TOTAL DISABILITY: The inability to engage in any substantial, gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, or such other standard as expressed in Section 22(e)(3) of the Code or any successor provision. The permanence and degree of such impairment shall be supported by medical evidence. 2.15 EFFECTIVE DATE: The Effective Date of the Plan was February 1, 1986. The effective date of this restatement shall be January 1, 1994; provided, however, that any provision of this Plan required as a result of the Tax Reform Act of 1986 or any subsequent legislation shall be effective as of the earliest date required by such legislation. 2.16 EMPLOYEE: Any person employed by the Employer other than as an independent contractor. The term Employee shall include any person (other than an Employee of the Employer) who, pursuant to an agreement between the Employer and any other person ("Leasing Organization"), has performed services for the Employer (or for the Employer and related persons determined in accordance with Section 414(n)(6) of the Code) 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 Employer ("Leased Employee"). A Leased Employee shall not be considered an Employee of the Employer if both of the following conditions are met: (a) such employee is covered by a money purchase pension plan providing: (i) a non-integrated employer contribution rate of at least 10% of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code; (ii) immediate participation; and (iii) full and immediate vesting. (b) Leased Employees do not constitute more than 20% of the Employer's non-highly-compensated work force. 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. 2.17 EMPLOYER: Fremont General Corporation and any Affiliated Company. 2.18 EMPLOYER DISCRETIONARY CONTRIBUTIONS: Employer contributions to the Trust other than Employer Matching Contributions and other than Employer contributions made pursuant to Participants' salary reduction elections. 2.19 EMPLOYER STOCK: The voting common stock of Fremont General Corporation and any other security, debenture or other property convertible into Employer Stock. The term Employer Stock shall also include warrants or rights to purchase Employer Stock which are received by the Trustee as a result of its holding Employer Stock. 2.20 EMPLOYER MATCHING CONTRIBUTIONS: Employer contributions to the Trust made on account of Salary Reduction Contributions, but not including any contribution and/or allocation made to satisfy the minimum allocation requirements of Section 14.3. -4- 9 2.21 EMPLOYMENT COMMENCEMENT DATE: The date on which an Employee first performs an Hour of Service for the Employer, within the meaning of 29 CFR Section 2530.200b-2(a). 2.22 ENTRY DATES: The first day of each quarter of each Plan Year: January 1, April 1, July 1 and October 1. Effective April 1, 1994, Entry Dates shall be the first day of the first full pay period in each month. 2.23 ERISA: The Employee Retirement Income Security Act of 1974, as amended. 2.24 FAMILY MEMBER: With respect to an Employee, any individual who is a spouse, lineal ascendent or descendant, or a spouse of a lineal ascendant or descendant of the Employee. 2.25 HIGHLY COMPENSATED EMPLOYEE: (a) Any Employee who at any time in the look-back year or the determination year was a 5% owner of the Employer (as defined in Section 416(i)(1)(B)(i) of the Code); (b) Any Employee who, in the look-back year: (i) Received Compensation of more than $75,000 (as adjusted by the Adjustment Factor); (ii) Was an officer and received Compensation of more than 50% of the dollar limit in effect for that Plan Year under Section 415(b)(1)(A) of the Code; or (iii) Received Compensation of more than $50,000 (as adjusted by the Adjustment Factor) and was in the top-paid group; (c) Any Employee not described in paragraph (b) above but who, in the determination year, (i) is described in clause (i), (ii) or (iii) of paragraph (b), and (ii) is among the 100 Employees who received the most Compensation from the Employer during the determination year; and (d) Any former Employee who has separated from Service but who was a Highly Compensated Employee as described in paragraph (a), (b) or (c) above when he or she separated from Service or at any time after he or she attained age 55. (e) For purposes of this Section: (i) the determination year is the Plan Year for which the determination of Highly Compensated Employees is being made; (ii) the look-back year is the twelve month period preceding the determination year. (iii) the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers and the Compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder. (iv) employers aggregated under Sections 414(b), (c), (m) or (o) of the Code are treated as a single employer. (v) if an employee is, during a determination year or look-back year, a Family Member of either a 5% owner who is an active or former Employee or a Highly Compensated Employee who is one of the ten most highly compensated Employees ranked on the basis of Compensation paid by the Employer during such year, then the Family Member and the 5% owner or top-ten Highly Compensated Employee shall be aggregated. In such case, the Family Member and 5% owner or top-ten Highly Compensated Employee shall be treated as a single Employee receiving Compensation and -5- 10 Plan Contributions or benefits equal to the sum of such Compensation and Contributions or benefits of the Family Member and 5% owner or top-ten Highly Compensated Employee. 2.26 HOUR OF SERVICE: (a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer for the performance of duties and for reasons other than the performance of duties; provided that (i) no more than 501 Hours of Service shall be credited on account of a single continuous period during which no duties are performed, and (ii) no Hours of Service shall be credited if payment was made or due (1) under a plan maintained solely for the purpose of complying with applicable workmen's compensation, unemployment compensation or disability insurance laws; or (2) solely as reimbursement for medical or medically related expenses incurred by the Employee. Hours of Service shall be calculated in accordance with Department of Labor Regulation Section 2530.200b-2(b) and (c); (b) For an Employee on a leave of absence pursuant to Section 8.1 or 8.2, credit for such leave shall be given for the number of regularly scheduled working hours included in the period of such leave; (c) An Employee's Hours of Service include each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer. Such Hours of Service shall be credited for the periods to which the award or agreement pertains rather than the periods in which the award, agreement, or payment is made, and no Hours of Service shall be credited under this paragraph which would duplicate any hours credited above. (d) Hours of Service will be credited for employment with other members of an affiliated service group (under Section 414(m) of the Code), a controlled group of corporations (under Section 414(b) of the Code), or a group of trades or business under common control (under Section 414(c) of the Code) of which the Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Section 414(o) of the Code. Hours of Service will also be credited for any individual considered an Employee for purposes of this Plan under Sections 414(n) or 414(o) of the Code. 2.27 NON-HIGHLY COMPENSATED EMPLOYEE: An Employee who is neither a Highly Compensated Employee nor a Family Member with respect to a Highly Compensated Employee. 2.28 NORMAL RETIREMENT DATE: The date an Employee attains age 65. 2.29 PARTICIPANT: An Employee or former Employee for whom an Account is maintained under the Plan. 2.30 PARTICIPATING EMPLOYERS: The Affiliated Companies which have, from time to time, adopted the Plan, as set forth on Exhibit A attached hereto. 2.31 PLAN: The Fremont General Corporation and Affiliated Companies Investment Incentive Plan, as amended (formerly known as the Fremont General Corporation and Affiliated Companies Investment Incentive Program). 2.32 PLAN YEAR: The twelve consecutive month period beginning each January 1 and ending each December 31. 2.33 QUALIFIED MATCHING CONTRIBUTIONS: Employer Matching Contributions under this Plan or any other plan of the Employer, as provided by regulations under the Code, treated as Salary Reduction Contributions for purposes of the tests of Section 5.5(a) of the Plan. The amount of Qualified Matching Contributions made under this Plan and taken into account as Salary Reduction Contributions for purposes of calculating the tests of Section 5.5(a) of the Plan, subject to -6- 11 such other requirements as may be prescribed by the Secretary of the Treasury, shall be such Qualified Matching Contributions as are needed to meet the Actual Deferral Percentage test of Section 5.5(a) of the Plan. 2.34 QUALIFIED NONELECTIVE CONTRIBUTIONS: Employer Discretionary Contributions under this Plan or any other plan of the Employer, as provided by regulations under the Code, treated as Salary Reduction Contributions for purposes of the test of Section 5.5(a) of the Plan, or as Matching Contributions for purposes of the test of Section 5.7(a) of the Plan. (a) The amount of Qualified Nonelective Contributions made under this Plan and taken into account as Salary Reduction Contributions for purposes of calculating the tests of Section 5.5(a) of the Plan, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be such Qualified Nonelective Contributions as are needed to meet the Actual Deferral Percentage test of Section 5.5(a) of the Plan. (b) The amount of Qualified Nonelective Contributions made under this Plan and taken into account as Contribution Percentage Amounts for purposes of calculating the tests of Section 5.7(a), subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be such Qualified Nonelective Contributions as are needed to meet the Average Actual Contribution Percentage test of Section 5.7(a) of the Plan. Notwithstanding the foregoing, Qualified Nonelective Contributions used in calculating the Actual Deferral Percentage test of Section 5.5(a) of the Plan may not be used in calculating the Average Actual Contribution Percentage test of Section 5.7(a) of the Plan. 2.35 REEMPLOYMENT COMMENCEMENT DATE: The first date, following a Severance from Service, on which an Employee again performs an Hour of Service for the Employer. 2.36 ROLLOVER CONTRIBUTION: A qualified Rollover Contribution as described in Section 4.6 hereof. 2.37 SALARY REDUCTION CONTRIBUTIONS: Employer contributions to the Trust on behalf of Participants who have elected to make such contributions as described in Section 4.1 hereof. For purposes of the test under Section 5.7(a) of the Plan, the Employer may take into account and include as Contribution Percentage Amounts, Salary Reduction Contributions under this Plan or any other plan of the Employer, as provided by regulations. The amount of Salary Reduction Contributions made under the Plan and taken into account as Contribution Percentage Amounts for purposes of calculating the Average Actual Contribution Percentage, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be such Salary Reduction Contributions as are needed to meet the Average Actual Contribution Percentage test of Section 5.7(a) of the Plan; provided, however, that Salary Reduction Contributions used in calculating the Actual Deferral Percentage test of Section 5.5(a) of the Plan may not be used in calculating the Average Actual Contribution Percentage test of Section 5.7(a) of the Plan. 2.38 SECTION 415 COMPENSATION: Wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips bonuses, fringe benefits, reimbursements, and reimbursements or other expense allowances under a nonaccountable plan (as described in Regulations Section 1.62-2(c)), and excluding the following: (A) Employer contributions to a plan of deferred compensation which are not includable in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (B) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (C) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and -7- 12 (D) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). 2.39 SEVERANCE FROM SERVICE OR SEVERANCE FROM SERVICE DATE: The first to occur of the date on which an Employee terminates employment with the Employer because he or she quits, is discharged, incurs a Permanent and Total Disability, dies or retires. 2.40 TRUST: The Trust established under Article IX of the Plan. 2.41 TRUSTEE: Merrill Lynch Trust Company of California, and any successor or successors thereto, designated to act as Trustee of the Trust and to hold the Trust assets in accordance with Article IX hereof. 2.42 TRUST FUND: The assets held by the Trustee under the Trust. The Trustee is specifically authorized to hold Employer common stock as an asset of the Trust, in any amount, up to 100% of Trust assets. 2.43 VALUATION DATE: The last day of each Plan Year and such other date(s) as the Administrator may designate. 2.44 YEAR OF SERVICE: (a) A Plan Year during which an Employee is credited with 1,000 Hours of Service. (b) The Administrator will credit each Employee with Hours of Service on the basis of months of employment. Each Employee will be credited with 190 Hours of Service for each month in which he or she performs at least one Hour of Service. (c) Each Year of Service completed by a Participant in this Plan while he or she was an employee of Beaver Insurance Company, Pacific Compensation Insurance Company, or Investors Bancor shall be deemed a Year of Service under this Plan. 2.45 OTHER DEFINITIONS: In addition to the definitions contained in this Section, the following terms are defined in the Section listed:
Section Term ------- ---- 3.1 Part-Time Employees Temporary Employees Union Employees 5.4 Annual Additions Defined Benefit Fraction Defined Contribution Dollar Limitation Defined Contribution Fraction Excess Amount Highest Average Compensation Limitation Year Maximum Permissible Amount Projected Annual Benefit 5.5 Actual Deferral Percentage Average Actual Deferral Percentage Eligible Employee
-8- 13 Excess 401(k) Contributions Maximum Deferral Percentage 5.6 Salary Deferrals Excess Salary Deferrals 5.7 Aggregate Limit Average Actual Contribution Percentage Contribution Percentage Contribution Percentage Amounts Eligible Participant Employee Contribution Excess Matching Contributions Maximum Matching Contribution Percentage 6.8 Annuity Starting Date Election Period Qualified Election Qualified Joint and Survivor Annuity Qualified Preretirement Survivor Annuity Spouse or Surviving Spouse Straight Life Annuity 6.11 Applicable Life Expectancy Designated Beneficiary Distribution Calendar Year Life Expectancy Participant's Benefit Required Beginning Date 6.15 Hardship 7.2 Alternate Payee Determination Period Determination Period Account Qualified Domestic Relations Order 14.2 Determination Date Key Employee Non-Key Employee Permissive Aggregation Group Required Aggregation Group Top-Heavy Plan Top-Heavy Ratio Valuation Date
-9- 14 III ELIGIBILITY 3.1 PARTICIPATION: (a) Each Employee, except Employees employed by an Affiliated Company which is not a Participating Employer, Leased Employees, Part-Time Employees, Temporary Employees, and Union Employees may commence participation in the Plan on the Entry Date following his or her date of hire. (b) For purposes of this Section, the following definitions shall apply: (i) Part-time Employees - Employees scheduled to work less than 25 hours per week. (ii) Temporary Employees - Employees hired on a temporary or seasonal basis who is classified as such in the records of the Employer. (iii) Union Employees - Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees who are covered pursuant to that agreement are professionals as defined in Treasury Regulations Section 1.410(b)-9. For this purpose, the term "Employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers or executives of the Employer. 3.2 REEMPLOYMENT: If an eligible Employee terminates employment with the Employer and is thereafter reemployed by the Employer, the Employee will be eligible to participate in the Plan as of his or her Reemployment Commencement Date. 3.3 CHANGE IN EMPLOYMENT STATUS: In the event a Participant becomes an Employee excluded from participation in the Plan under Section 3.1 above and therefore becomes ineligible to participate, such Employee will participate immediately upon returning to an eligible class of Employees. In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately. -10- 15 IV CONTRIBUTIONS 4.1 SALARY REDUCTION CONTRIBUTIONS: (a) An eligible Employee may elect, in writing on a form prescribed by the Administrator, to have between 2% and 15% of Compensation from each payroll period contributed to his or her Salary Reduction Contributions Account; provided, however, in no event shall the dollar amount for any taxable year exceed $7,000, as adjusted annually by the Adjustment Factor. A Participant may elect to increase, discontinue or decrease Salary Reduction Contributions by making a new election with the Administrator in such a manner as the Administrator shall specify during such reasonable period of time as the Administrator shall specify, but in no event less frequently than once each calendar year. (b) For purposes of the Plan, and with respect to Salary Reduction Contributions on behalf of any Participant, such Salary Reduction Contributions must be allocated to the Participant's Salary Reduction Contributions Account as of a date within the Plan Year and must relate to Compensation that either (i) would have been received by the Participant in the Plan Year but for the Participant's election to defer it, or (ii) is attributable to services performed by the Participant in the Plan Year and, but for the Participant's election to defer, would have been received by the Participant within 2 1/2 months after the close of the Plan Year. 4.2 EMPLOYER MATCHING CONTRIBUTIONS: (a) The Employer may, in its discretion, make Employer Matching Contributions. Employer Matching Contributions which would otherwise be made on behalf of a Participant may be reduced to the extent necessary to comply with the limitations of Sections 5.4, 5.5 and 5.7 of the Plan. Any amount that cannot be contributed to the Trust because of these limitations shall be retained by the Employer, and the Employer shall have no obligation to contribute such amount to the Trust. (b) In the Employer's discretion, Employer Matching Contributions may be in the form of cash or Employer Stock. (c) The Administrator may, in its discretion, elect to treat all or a portion of Employer Matching Contributions for a Plan Year as Qualified Matching Contributions for purposes of the tests of Section 5.5(a) of the Plan. (d) For all purposes of the Plan, Employer Matching or Qualified Matching Contributions shall be subject to the distribution limitations of Article VI. Amounts allocated to a Participant's Employer Matching or Qualified Matching Contributions Account shall not be eligible for hardship distribution under Section 6.15 of the Plan. 4.3 DISCRETIONARY AND QUALIFIED NONELECTIVE CONTRIBUTIONS: (a) The Employer may, in its discretion, make Employer Discretionary Contributions in such amount and at such times as it shall determine. (b) In the Employer's discretion, Employer Discretionary Contributions may be in the form of cash or Employer Stock. (c) The Administrator may, in its discretion, elect to treat all or a portion of Employer Discretionary Contributions for a Plan Year as Qualified Nonelective Contributions for purposes of the tests of Section 5.5(a) and 5.7(a) of the Plan. (d) Neither the Trustee nor any Participant shall have any right or duty to inquire into the amount of the Employer's Discretionary or Qualified Nonelective Contributions or the method used in determining the amount of the Employer's Discretionary or Qualified Nonelective Contributions. The Trustee shall be accountable only for funds actually received by the Trustee. -11- 16 (e) For all purposes of the Plan, Employer Discretionary or Qualified Nonelective Contributions shall be subject to the distribution limitations of Article VI. Amounts allocated to a Participant's Discretionary or Qualified Nonelective Contributions Account shall not be eligible for hardship distribution under Section 6.15 of the Plan. 4.4 LIMITATIONS ON CONTRIBUTIONS: During a Plan Year, Contributions may not, in the aggregate, exceed 15% of the total Section 415 Compensation paid to, or accrued by the Employer for, Participants for that Plan Year. 4.5 TIME AND MANNER OF PAYMENT OF CONTRIBUTIONS: Contributions shall be paid to the Trustee on a regular basis determined by the Administrator; provided that, unless Treasury Regulations otherwise permit, all Salary Reduction Contributions, Qualified Nonelective Contributions and Qualified Matching Contributions for a Plan Year must be paid to the Trustee no later than the end of the 12-month period immediately following the Plan Year to which such contributions relate. 4.6 RECEIPT OF ASSETS FROM PLAN OF FORMER EMPLOYER: (a) The Trustee may receive, with the consent of the Administrator, a transfer of assets previously held under a qualified plan for the benefit of an Employee; provided, however, that the Trustee may not receive a direct transfer of assets from a plan to which Section 401(a)(11) of the Code applies. Subject to the preceding sentence, the assets may be received directly from the trustee of a plan qualified under Section 401(a) of the Code, or they may be received from the Employee in accordance with Sections 402(a)(5) or 408(d)(3) of the Code. Notwithstanding the foregoing, effective January 1, 1993, the Trustee may receive, with the consent of the Administrator, a transfer of assets previously held under a qualified plan for the benefit of an Employee in the form of a Direct Rollover (as defined in Section 6.7 below). (b) The Administrator and the Trustee shall be fully protected in relying on data, representations, or other information provided by the Employee or by the trustee or custodian of a qualified plan or individual retirement account that transfers assets to it for the purpose of determining that the requirements of subsection (a) above have been satisfied. (c) Amounts attributable to elective contributions (as defined in Treasury Regulations Section 1.401(k)-1(g)(4), 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 Treasury Regulations Section 1.401(k)-1(d). -12- 17 V ACCOUNTS AND ALLOCATIONS 5.1 PARTICIPANT'S ACCOUNTS: For each Participant, a separate Account shall be maintained for each of the following, and for the income, expenses, gains and losses attributable thereto: (a) Salary Reduction Contributions. A Participant's Salary Reduction Contributions Account shall be credited with amounts attributable to Salary Reduction Contributions pursuant to Section 4.1. (b) Employer Matching Contributions. A Participant's Employer Matching Contributions Account shall be credited with all amounts, if any, attributable to Employer Matching Contributions pursuant to Section 4.2. (c) Qualified Matching Contributions. A Participant's Qualified Matching Contributions Account shall be credited with all amounts, if any, attributable to Qualified Matching Contributions. (d) Employer Discretionary Contributions. A Participant's Employer Discretionary Contributions Account shall be credited with all amounts, if any, attributable to Employer Discretionary Contributions pursuant to Section 4.3. Employer Discretionary Contributions shall be allocated among the Employer Discretionary Contributions Accounts of all Participants and former Participants who were employed by the Employer during the Plan Year. Employer Discretionary Contributions (and any forfeitures allocated to the Accounts of Participants) shall be allocated to Participants entitled to share in the allocation of Employer Discretionary Contributions for a Plan Year in proportion to their Compensation for such Plan Year. (e) Qualified Nonelective Contributions. A Participant's Qualified Nonelective Contributions Account shall be credited with all amounts, if any, attributable to Qualified Nonelective Contributions. The Employer may, with respect to a Plan Year, allocate Qualified Nonelective Contributions to such Participants and in such a manner as it deems necessary or appropriate to satisfy the tests of Section 5.5(a) and 5.7(a). (f) Rollover Contributions. A Participant's Rollover Contributions Account shall be credited with all amounts transferred to the Plan pursuant to Section 4.6. (g) Such other Account or Accounts as the Administrator shall deem necessary or appropriate. 5.2 ALLOCATION OF CONTRIBUTIONS: As of each Valuation Date, the Administrator shall allocate to the Accounts of each Participant the contributions made for his or her benefit since the preceding Valuation Date. 5.3 ALLOCATION OF EARNINGS OR LOSSES: As of each Valuation Date, the Accounts of each Participant shall be adjusted to reflect income, gains, losses or expenses. Adjustments shall be made in such manner as the Administrator determines is fair and reasonable, provided that each Account shall generally share in the income, gains, losses or expenses associated with an asset of that Account in the proportion which the Account's investment in the asset bears to the total amount of the Trust Fund invested in such asset; provided, however, unless the Administrator elects otherwise, as of each Valuation Date, the net earnings or losses of the Trust Fund, including capital gains and losses whether or not realized, since the preceding Valuation Date shall be allocated to the Accounts of all Participants in accordance with the ratio which each Account of each Participant bears to the aggregate of all such Accounts. For purposes of this allocation, the Account balances of each Participant shall consist of the balances of all the investments of each of the Participant's Accounts as of the preceding Valuation Date adjusted by adding thereto one-half of the Contributions made to each such Account since such date and excluding therefrom all withdrawals since such date. Notwithstanding any of the foregoing, the allocation of earnings and losses, as herein provided, need not be made if the method used to account for the respective interest of each Participant is such that, in an equitable manner, it includes a revaluation at current market values of each such interest as of each Valuation Date, including, but not limited to, the Unit Method of accounting. -13- 18 5.4 SECTION 415 LIMITATIONS: (a) (i) If the Participant does not participate in, and has never participated in another qualified plan maintained by the Employer, or a welfare benefit fund, as defined in Section 419(e) of the Code maintained by the Employer, or an individual medical account, as defined in Section 415(l)(2) of the Code, maintained by the Employer, which provides an Annual Addition as defined below, the amount of Annual Additions which may be credited to the Participant's Account for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Contributions that would otherwise be contributed or allocated to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. (ii) Prior to determining the Participant's actual Section 415 Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant's Section 415 Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (iii) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Section 415 Compensation for the Limitation Year. (iv) If, pursuant to paragraph (iii) above, or as a result of (1) a reasonable error in determining the amount of Salary Reduction Contributions that may be made with respect to any Participant under the limits of this Section, (2) an allocation of forfeitures, or (3) other facts and circumstances to which Regulations Section 1.415-6(b)(6) shall be applicable, there is an Excess Amount, such portion of the Excess Amount which consists of Salary Reduction Contributions and the earnings thereon will be distributed to the affected Participant. If, after such distribution of Salary Reduction Contributions and the earnings thereon to the Participant, an Excess Amount remains, the Excess Amount will be disposed of as follows: (A) If the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's Account will be used to reduce Employer contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary. (B) If the Participant is not covered by the Plan at the end of a Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce Employer contributions for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary. (C) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, it will not participate in the allocation of the Trust's investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participant's Accounts before any Contributions may be made to the Plan for that Limitation Year. Excess Amounts (other than Excess Amounts which consist of Salary Reduction Contributions and the earnings thereon) may not be distributed to Participants or former Participants. In the event of termination of the Plan, the suspense account shall revert to the Employer to the extent it may not then be allocated to any Participant's Account. (b) (i) This Section applies if, in addition to this Plan, the Participant is covered under another defined contribution plan maintained by the Employer, a welfare benefit fund, as defined in Section 419(e) of the Code maintained by the Employer, or an individual medical account, as defined in Section 415(l)(2) of the Code, maintained by the Employer, which provides an Annual Addition, during any Limitation Year. The Annual Additions which may be credited to a Participant's Account under this Plan for any such Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a participant's account under the other plans and welfare benefit funds for the same Limitation Year. If the Annual Additions with respect to the participant under other defined contribution plans and welfare benefit funds maintained by the Employer are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's Account under this Plan would cause the -14- 19 Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's Account under this Plan for the Limitation Year. (ii) Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant in the manner described in paragraph (a) of this Section. (iii) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. (iv) If, pursuant to paragraph (iii) above or as a result of the allocation of forfeitures, a Participant's Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a welfare benefit fund or individual medical account will be deemed to have been allocated first regardless of the actual allocation date. (v) If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of, (A) the total Excess Amount allocated as of such date, times (B) the ratio of (i) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (ii) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all other defined contribution plans. (vi) Any Excess Amount attributed to this Plan will be disposed in the manner described in paragraph (a) (iv) above. (c) If the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's defined benefit plan fraction and defined contribution plan fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to the Participant's Account under this Plan for any Limitation Year will be limited in accordance with the provisions of paragraph (b) of this Section. (d) Definitions. (i) Annual Additions: The sum of the following amounts credited to a Participant's Account for the Limitation Year are treated as Annual Additions: (A) Employer contributions; (B) Employee contributions; (C) forfeitures; (D) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer; (E) 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 Section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in Section 419(e) of the Code, maintained by the Employer; -15- 20 (F) any Excess Amount applied under Sections (a)(iv) or (b)(vi) in the Limitation Year to reduce Employer contributions. (ii) Defined Benefit Fraction: 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 Sections 415(b) and (d) of the Code or 140 percent of the Highest Average Compensation, including any adjustments under Section 415(b) of the Code. 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 Section 415 for all Limitation Years beginning before January 1, 1987. (iii) Defined Contribution Dollar Limitation: $30,000 or if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for the Limitation Year. (iv) Defined Contribution Fraction: 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 Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(1)(2) of the Code, 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 Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code or 35 percent of the Participant's Section 415 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 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 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. (v) Excess Amount: The amount of Annual Additions which, if credited to a Participant's Account for a Limitation Year, would exceed the Maximum Permissible Amount. (vi) Highest Average Compensation: The average Section 415 Compensation for the three consecutive Years of Service with the Employer that produces the highest average. (vii) Limitation Year: The Plan Year. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. -16- 21 (viii) Maximum Permissible Amount: The maximum Annual Addition that may be contributed or allocated to a Participant's Account under the Plan for any Limitation Year shall not exceed the lesser of: (A) the Defined Contribution Dollar Limitation, or (B) 25 percent of the Participant's Section 415 Compensation for the Limitation Year. The Section 415 Compensation limitation shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition under Section 415(1)(1) or 419A(d)(2) of the Code. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction: Number of months in the short Limitation Year --------------------------------------------- 12 (ix) Projected Annual Benefit: The annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) to which the Participant would be entitled under the terms of a plan assuming: (A) the Participant will continue employment until normal retirement age under the plan (or current age, if later), and (B) the Participant's Section 415 Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the plan will remain constant for all future Limitation Years. 5.5 DISCRIMINATION TESTING OF SALARY REDUCTION CONTRIBUTIONS: (a) Actual Deferral Percentage. The anti-discrimination requirements of Section 401(k)(3) of the Code provide that in each Plan Year one of the following tests must be met: (i) The Average Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Eligible Employees who are Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or (ii) The Average Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Eligible Employees who are Non-Highly Compensated Employees for the Plan Year multiplied by two (2), provided that the Average Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for Eligible Employees who are Non-Highly Compensated Employees by more than two (2) percentage points or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employee. (b) Corrective Procedure. (i) Correction of Excess 401(k) Contributions. The Administrator shall have the responsibility for monitoring the Plan's compliance with the limitations of Section (a) above throughout the Plan Year. The Administrator shall maintain such records as are necessary to demonstrate compliance with this Section. The Administrator shall have the discretionary power to take any and all steps it deems necessary or appropriate to ensure compliance with those limitations, including, without limitation: (A) Restricting the amount of Salary Reduction Contributions by Highly Compensated Employees and their Family Members; -17- 22 (B) Pursuant to subsection (iv) below, distributing Excess 401(k) Contributions to the Highly Compensated Employees and Family Members who made such contributions; and (C) Treating Employer Matching or Discretionary Contributions, as the case may be, as Qualified Matching or Qualified Nonelective Contributions, respectively. (ii) Leveling Method. The amount of Excess 401(k) Contributions for a Highly Compensated Employee for a Plan Year is to be determined by the following leveling method, under which the Actual Deferral Percentage of the Highly Compensated Employee with the highest Actual Deferral Percentage is reduced to the extent required to enable the Plan to satisfy the anti-discrimination test of Section 5.5(a) or to cause such Highly Compensated Employee's Actual Deferral Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee with the next highest Actual Deferral Percentage. The procedure requires that contributions be reduced exclusively with respect to those Highly Compensated Employees who, together with their Family Members, received allocations of Employer Matching, Qualified Matching, Discretionary or Qualified Nonelective Contributions, or who made Salary Reduction Contributions, all of which when expressed as a percentage of their respective Compensation for the Plan Year, were in excess of the Maximum Deferral Percentage. (A) The Excess 401(k) Contributions of the Highly Compensated Employee (and Family Members(s)) with the highest Actual Deferral Percentage shall be reduced; such reduction shall continue, as necessary, until such Employee's (Employees') Actual Deferral Percentage equal(s) those of the Highly Compensated Employee(s) with the second highest Actual Deferral Percentage(s). (B) Following the application of the preceding paragraph (A), if it is still necessary to reduce Highly Compensated Employees' (and their Family Members') Excess 401(k) Contributions, the contributions of (or allocations on behalf of, if applicable) Highly Compensated Employees (and Family Member(s)) with the highest and second highest Actual Deferral Percentages shall be reduced and the amounts shall be distributed, as necessary, until such Employees' Actual Deferral Percentage equal those of the Highly Compensated Employee(s) with the third highest Actual Deferral Percentage. (C) Following the application of paragraph (B), if it is still necessary to reduce Highly Compensated Employees' (and their Family Members') Excess 401(k) Contributions, the procedure, the beginning of which is described in paragraphs (A) and (B), shall continue until no further reductions are necessary. (D) The determination and correction of Excess 401(k) Contributions of a Highly Compensated Employee whose Actual Deferral Percentage is determined by aggregating contributions with Family Members in accordance with subsection (c)(i) shall be made under subsection (c)(ii) below. (iii) Character of Excess 401(k) Contributions. The Excess 401(k) Contributions of a Highly Compensated Employee or Family Member shall be deemed to consist of contributions and allocations as determined according to the following order of primacy: (A) First, the Employee's Excess 401(k) Contributions shall be deemed to consist of any Salary Reduction Contributions which exceed the highest rate or amount at which Salary Reduction Contributions are matched; provided, such contributions shall be offset by any Excess Salary Deferrals distributable to the Employee pursuant to Section 5.6 below. (B) Second, the Employee's Excess 401(k) Contributions shall be deemed to consist of (1) any Salary Reduction Contributions and (2) any Employer Matching and Qualified Matching Contributions, each in proportion to the Employee's total Salary Reduction Contributions and total Employer Matching and Qualified Matching Contributions for the Plan Year; provided, any Salary Reduction Contributions characterized as Excess 401(k) Contributions by this paragraph (B) shall be offset by any Excess Salary Deferrals distributable to the Employee pursuant to Section 5.6 below and not taken into account under paragraph (b)(iii)(A) above. (C) Third, the Employee's Excess 401(k) Contributions shall be deemed to consist of any allocations of Employer Discretionary and Qualified Nonelective Contributions. -18- 23 (iv) Distribution of Excess 401(k) Contributions. If, pursuant to paragraph (b)(i)(B) above, the Administrator elects to distribute Excess 401(k) Contributions (increased by attributable income and decreased by attributable losses) to Highly Compensated Employees (and their Family Members), the Administrator shall make such distributions: (A) On or before the date which falls 2-1/2 months after the last day of the Plan Year for which such Excess 401(k) Contributions were made, to avoid liability for the federal excise tax (equal to 10% of the undistributed Excess 401(k) Contributions), which will be imposed on Excess 401(k) Contributions distributed after such date; (B) In the event of a complete termination of the Plan during the Plan Year in which there are Excess 401(k) Contributions, such distributions shall be made after the date of termination of the Plan and as soon as administratively feasible, but in no event later than the close of the twelve-month period immediately following such termination; and (C) In any case, before the last day of the Plan Year next following the Plan Year for which such Excess 401(k) Contributions were made. (D) Excess 401(k) Contributions (including amounts recharacterized) shall be treated as Annual Additions under the Plan. (v) Adjustment for Income/Loss. After the Administrator has determined the aggregate amount and character of Excess 401(k) Contributions to be distributed to a given Highly Compensated Employee (and his or her Family Member(s)), the amount to be distributed shall be increased to reflect any attributable income, or decreased to reflect any attributable losses. Excess 401(k) Contributions shall be adjusted for any income or loss up to the end of the Plan Year for which such Excess 401(k) Contributions were made. The income or loss allocable to Excess 401(k) Contributions shall be calculated by the Plan Administrator using any reasonable method for computing the income or loss allocable to Excess 401(k) Contributions, provided that the method does not violate Section 401(a)(4) of the Code, is used consistently for all Participants and for all corrective distributions under the plan for the Plan Year, and is used by the Plan Administrator for allocating income to Participants' Accounts. (vi) Uniform Procedures. All actions taken by the Administrator under this Section shall be pursuant to consistently applied procedures that do not arbitrarily discriminate in favor of those Highly Compensated Employees (and their Family Members) whose Actual Deferral Percentages are nearest to the Maximum Deferral Percentage. (c) Special Rules. (i) Aggregation of Family Members. For purposes of determining the Actual Deferral Percentage of a Participant who is five-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Actual Deferral Percentage and Section 415 Compensation of such Participant shall include the Salary Deferral Contributions and Section 415 Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Actual Deferral Percentage both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (ii) Corrective Procedure and Family Aggregation. The determination and correction of Excess 401(k) Contributions of a Highly Compensated Employee whose Actual Deferral Percentage is determined by aggregating contributions with Family Members shall be made as follows: the Actual Deferral Percentage shall be reduced as required under subsection (b)(ii) above, and the Excess 401(k) Contributions for the aggregated group of Family Members shall be allocated among the Family Members in proportion to the Salary Deferral Contributions and Qualified Matching Contributions used pursuant to paragraph (b)(i)(C) above of each Family Member that are combined to determine the Actual Deferral Percentage. -19- 24 (iii) Computation of Compensation. For purposes of this Section, a Participant's Compensation for the entire Plan Year shall be included, whether or not he or she made Salary Reduction Contributions for the entire Plan Year. (iv) Coordination with Distribution of Excess Deferrals. After calculation of an amount to be distributed to a Participant pursuant to the procedures discussed in subsection (b)(iii) and (iv), if the Participant in question has also made Excess Salary Deferrals during the calendar year ended within or coincident with the Plan Year, the amount actually distributed to the Participant shall be adjusted to take into account such Excess Salary Deferrals pursuant to Section 5.6 below and any relevant regulations issued by the Secretary of the Treasury. (v) Aggregation of Plans. For purposes of determining whether a plan satisfies the Actual Deferral Percentage test in paragraph (a) of this Section 5.5, all elective contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) or 410(b) of the Code (other than Section 410(b)(2)(A)(ii) of the Code) are to be treated as made under a single plan. If two or more plans are permissively aggregated for purposes of Section 401(k) of the Code, the aggregate plans must also satisfy Sections 401(a)(4) and 410(b) of the Code as though they were a single plan. For Plan Years beginning after December 31, 1989 two or more plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. (d) The Employer shall maintain records sufficient to demonstrate satisfaction of the test in Section 5.5(a) above and the amount, if any, of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. (e) Definitions. For purposes of this Article, the following definitions shall apply: (i) Actual Deferral Percentage: (A) With respect to each Eligible Employee, a percentage, calculated as the sum of the amount of (A) Salary Reduction Contributions, (B) Qualified Matching Contributions, and (C) Qualified Nonelective Contributions, made on behalf of such Eligible Employee for the Plan Year, divided by such Employee's Section 415 Compensation for the Plan Year. (B) The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Salary Reduction Contributions (and Qualified Nonelective or Qualified Matching Contributions, or both, if treated as Salary Reduction Contributions for purposes of the test under this Section 5.5, allocated to his or her Accounts under two or more arrangements described in Section 401(k) of the Code, that are maintained by the Employer, shall be determined as if such Salary Reduction Contributions (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(k) of the Code. (C) For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Salary Reduction Contributions shall be treated as a Participant on whose behalf no Salary Reduction Contributions are made. (ii) Average Actual Deferral Percentage. The average (expressed as a percentage) of the Actual Deferral Percentages for all Eligible Employees in the relevant group. (iii) Eligible Employee: Any Employee of the Employer who is otherwise authorized under the terms of the Plan to have Contributions allocated to the Employee's Account for the Plan Year. (iv) Excess 401(k) Contributions: With respect to any Plan Year, the excess of: -20- 25 (A) The aggregate amount of Employer Contributions actually taken into account in computing the Actual Deferral Percentage of Highly Compensated Employees for such Plan Year, over (B) The maximum amount of such Contributions permitted by the test in Section 5.5(a) of the Plan (determined by reducing Contributions made on behalf of Highly Compensated Employees in order of the Actual Deferral Percentages, beginning with the highest of such percentages). (v) Maximum Deferral Percentage: The highest permissible Actual Deferral Percentage for the Highly Compensated Employees who wish to ensure that they will make the highest possible amount of Salary Reduction Contributions. The Maximum Deferral Percentage shall be a percentage which shall not cause the Average Actual Deferral Percentage for Highly Compensated Employees to exceed the limitations described in Section 5.5(a) above. (To the extent required under Section 5.5(b), the Maximum Deferral Percentage shall be determined by reducing allocations made on behalf of and contributions made by Highly Compensated Employees in accordance with subsection (b)(ii) above. 5.6 DISTRIBUTION OF EXCESS SALARY DEFERRAL CONTRIBUTIONS: (a) A Participant may assign to this Plan any Excess Salary Deferrals made during a taxable year of the Participant by notifying the Plan Administrator in writing of the amount of the Excess Salary Deferrals to be assigned to the Plan on or before March 15 of the year following the Participant's taxable year in which the Excess Salary Deferrals were made. "Salary Deferrals" shall mean any Employer contributions made to the Plan at the election of the Participant, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Salary Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Section 401(k) of the Code, any simplified employee pension cash or deferred arrangement as described in Section 402(h)(1)(B) of the Code, any eligible deferred compensation plan under Section 457 of the Code, any plan as described under Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Section 403(b) of the Code pursuant to a salary reduction agreement. Elective deferrals shall not include any deferrals properly distributed as excess annual additions. "Excess Salary Deferrals" shall mean those Salary Deferrals that are includable in a Participant's gross income under Section 402(g) of the Code to the extent such Participant's Salary Deferrals for a taxable year exceed the dollar limitation under such Section of the Code. For purposes of Section 5.4, Excess Salary Deferrals shall be treated as Annual Additions under the Plan. A Participant is deemed to notify the Plan Administrator of any Excess Salary Deferral Contributions that arise by taking into account only those Salary Deferral Contributions made to this Plan and any other plans of the Employer. Notwithstanding any other provision of the Plan, Excess Salary Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any Participant to whose account Excess Salary Deferrals were assigned for the preceding taxable year and who claims Excess Salary Deferrals for such taxable year. (b) Determination of income or loss: Excess Salary Deferrals shall be adjusted for any income or loss up to the end of the Plan Year for which such Excess Salary Deferrals were made. The income or loss allocable to Excess Salary Deferrals shall be calculated by the Plan Administrator using any reasonable method for computing the income or loss allocable to Excess Salary Deferrals, provided that the method does not violate Section 401(a)(4) of the Code, is used consistently for all Participants and for all corrective distributions under the plan for the Plan Year, and is used by the Plan Administrator for allocating income to Participants' Accounts. 5.7 DISCRIMINATION TESTING OF EMPLOYER MATCHING CONTRIBUTIONS: (a) Except as provided in subsection (b) below, for each Plan Year, Participant's allocations of Employer Matching Contributions for each Plan Year must satisfy one of the following tests: -21- 26 (i) The Average Actual Contribution Percentage for Eligible Employees who are Highly Compensated Employees shall not exceed the Average Actual Contribution Percentage for Eligible Employees who are Non-Highly Compensated Employees multiplied by 1.25; or (ii) The Average Actual Contribution Percentage for Eligible Employees who are Highly Compensated Employees shall not be more than the lesser of (A) twice the Average Actual Contribution Percentage for Eligible Employees who are Non-Highly Compensated Employees or (B) the Average Actual Contribution Percentage for Eligible Employees who are Non-Highly Compensated Employees plus 2 percentage points. (b) Special Rules. (i) Multiple Use: If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the Actual Contribution Percentage test maintained by the Employer and the sum of the Actual Deferral Percentage and Actual Contribution Percentage of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the Actual Contribution Percentage of those Highly Compensated Employees who also participate in a cash or deferred arrangement will be reduced (beginning with such Highly Compensated Employee whose Actual Contribution Percentage is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Matching Contribution. The Actual Deferral Percentage and Actual Contribution Percentage of the Highly Compensated Employees are determined after any corrections required to meet the Actual Deferral Percentage and Actual Contribution Percentage tests. Multiple use does not occur if either the Actual Deferral Percentage or Actual Contribution Percentage of the Highly Compensated Employees does not exceed 1.25 multiplied by the Actual Deferral Percentage and Actual Contribution Percentage of the Non-Highly Compensated Employees. (ii) For purposes of this Section, the Contribution Percentage for any Participant who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in Section 401(a) of the Code, or arrangements described in Section 401(k) of the Code that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(m) of the Code. (iii) In the event that this Plan satisfies the requirements of Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. (iv) For purposes of determining the Contribution percentage of a Participant who is five-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Section 415 Compensation of such Participant shall include the Contribution Percentage Amounts and Section 415 Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Contribution Percentage both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (v) For purposes of determining the Contribution Percentage test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the trust. Employer Matching Contributions and Qualified Non-elective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (vi) The Employer shall maintain records sufficient to demonstrate satisfaction of the Actual Contribution Percentage test and the amount of Qualified Non-elective Contributions or Qualified Matching Contributions, or both, used in such test. -22- 27 (vii) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (c) Definitions. For purposes of this Article, the following definitions shall apply: (i) Aggregate Limit: The sum of (A) 125 percent of the greater of the Actual Deferral Percentage of the Non-Highly Compensated Employees for the Plan Year or the Actual Contribution Percentage of Non-Highly Compensated Employees under the Plan subject to Section 401(m) of the Code for the Plan Year of the cash or deferred arrangement and (B) the lesser of 200% or two plus the lesser of such Actual Deferral Percentage or Actual Contribution Percentage. "Lesser" is substituted for "greater" in "(A)", above, and "greater" is substituted for "lesser" after "two plus the" in "(B)" if it would result in a larger Aggregate Limit. (ii) Average Actual Contribution Percentage: The average of the Contribution Percentages of the Eligible Participants in a group. (iii) Contribution Percentage: The ratio (expressed as a percentage) of the Participant's Contribution Percentage Amounts to the Participant's Section 415 Compensation for the Plan Year. (iv) Contribution Percentage Amounts: The sum of the Employee Contributions, Employer Matching Contributions, and Qualified Matching Contributions (to the extent not taken into account for purposes of the Actual Deferral Percentage test) made under the Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Employer Matching Contributions that are forfeited either to correct Excess Matching Contributions or because the contributions to which they relate are Excess Salary Reduction Contributions, Excess 401(k) Contributions, or Excess Matching Contributions. The Employer may include Qualified Non-elective Contributions in the Contribution Percentage amounts. The Employer also may elect to use Salary Reduction Contributions in the Contribution Percentage Amounts so long as the Actual Deferral Percentage test is met before the Salary Reduction Contributions are used in the Actual Contribution Percentage test and continues to be met following the exclusion of those Salary Reduction Contributions that are used to meet the Actual Contribution Percentage test. (v) Eligible Participant: Any Employee who is eligible to make an Employee Contribution, or any Elective Deferral (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive Employer Matching Contributions (including forfeitures) or Qualified Matching Contributions. If an Employee Contribution is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an eligible Participant on behalf of whom no Employee Contributions are made. (vi) Employee Contribution: Any contribution made to the Plan by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated. (vii) Excess Matching Contributions: The portion of a Highly Compensated Employee's allocations of Employer Matching Contributions which causes the Employee's Actual Contribution Percentage to exceed the Maximum Matching Contribution Percentage. (viii) Maximum Matching Contribution Percentage: The highest permissible Actual Contribution Percentage for the Highly Compensated Employees who wish to ensure that the highest possible aggregate allocation of Employer Matching Contributions are made to their respective Accounts. The Maximum Matching Contribution Percentage shall be a percentage which will not cause the Average Actual Contribution Percentage for Highly Compensated Employees to exceed the applicable limitations discussed in Section 5.7(a) above. To the extent required pursuant to the provisions of Section 5.8 below, the Maximum Matching Contribution Percentage shall be determined by reducing allocations made on behalf of and contributions made by, Highly Compensated Employees in order of their respective Actual Contribution Percentages beginning with the highest such percentage. 5.8 CORRECTIVE PROCEDURE WHEN DISCRIMINATORY MATCHING CONTRIBUTIONS ARE MADE: -23- 28 (a) The Administrator shall have responsibility of monitoring the Plan's compliance with the limitations of the preceding Section throughout the Plan Year. The Administrator shall have the discretionary power to take any and all steps it deems necessary or appropriate to ensure compliance with those limitations, including, without limitation: (i) pursuant to subsection (c) below, distributing vested Excess Matching Contributions to the Eligible Employees who are Highly Compensated Employees and Family Members who received such allocations; (ii) treating as amounts to be reallocated pursuant to subsection (d) below, the portion of Excess Matching Contributions which consists of unvested allocations of Employer Matching Contributions to the Employer Matching Contribution Accounts of Eligible Employees who are Highly Compensated Employees and their Family Members; and (iii) limiting the amount of Employer Matching Contributions allocated to the Employer Matching Contribution Accounts of Eligible Employees who are Highly Compensated Employees and their Family Members. (b) Notwithstanding any other provisions in this Plan, if, pursuant to subsection (a)(i) or (ii) above, the Administrator elects to distribute or reallocate Excess Matching Contributions (increased by attributable income and decreased by attributable losses), the Administrator shall take such action(s) (i) on or before the date which falls 2-1/2 months after the last day of the Plan Year for which such Excess Matching Contributions were made, if the Employer wishes to avoid liability for the federal excise tax (equal to 10% of undistributed and unreallocated Excess Matching Contributions), which will be imposed on Excess Matching Contributions distributed or reallocated after such date, and (ii) in any case, before the last day of the Plan Year next following the Plan Year for which such contributions were made. (c) Distributions and/or reallocations of Excess Matching Contributions shall be made according to the procedure discussed below. The procedure requires that allocations and contributions be reduced (and amounts be distributed or reallocated) exclusively with respect to those Employees who are Highly Compensated Employees who, together with their Family Members, received allocations of Employer Matching Contributions which, when expressed as a percentage of their respective Section 415 Compensations for the Plan Year, were in excess of the Maximum Matching Contribution Percentage. (i) The allocations of Employer Matching Contributions of the Highly Compensated Employee(s) (and Family Member(s)) with the highest percentage contribution(s) shall be reduced first; such reduction shall continue, as necessary, until such individual's (individuals') contribution percentage(s) equal(s) those of the individual(s) with the second highest percentage contribution percentage(s). (ii) Following the application of paragraph (i), if it is still necessary to reduce Highly Compensated Employees' (and their Family Members') allocations of Employer Matching Contributions, the contributions of Highly Compensated Employees with the highest and second highest contribution percentages shall be reduced, as necessary, until such individuals' contribution percentages equal those of the individual(s) with the third highest contribution percentage. (iii) Following the application of paragraph (ii), if it is still necessary to reduce Highly Compensated Employees' (and their Family Members') allocations of Employer Matching Contributions, the procedure, the beginning of which is outlined in paragraphs (i) and (ii), shall continue until such time as no further reductions are necessary. (iv) The determination and correction of Excess Matching Contributions of a Highly Compensated Employee whose Actual Contribution Percentage is determined by aggregating contributions with Family Members shall be made as follows: the Actual Contribution Percentage shall be reduced as required under subsections (i)-(iii) above, and the Excess Matching Contributions for the aggregated group of Family Members shall be allocated among the Family Members in proportion to the Employer Matching Contributions and Qualified Nonelective Contributions used pursuant to Section 5.7(b) of each Family Member that are combined to determine the Actual Contribution Percentage. (v) The Excess Matching Contributions of a Highly Compensated Employee or Family Member shall be deemed to consist of allocations and contributions as determined according to the following order: -24- 29 (A) First, the Employee's Excess Matching Contributions shall be deemed to consist of any Excess Salary Deferrals which both are distributable to the Employee pursuant to Section 5.6 above and were used to satisfy the Section 5.7(a) nondiscrimination tests pursuant to Section 5.7(b) above. (B) Second, the Employee's Excess Matching Contributions shall be deemed to consist of any Employer Matching Contributions used to satisfy the Section 5.7(a) tests in proportion to the Employee's Employer Matching Contributions used to satisfy the Section 5.7(a) test for the Plan Year. (C) Third, the Employee's Excess Matching Contributions shall be deemed to consist of any allocations of Employer Discretionary Contributions which were characterized as Qualified Nonelective Contributions and used to satisfy the Section 5.7(a) nondiscrimination tests pursuant to Section 5.7(d) above. (vi) After the Administrator has determined the aggregate amount, and character, of Excess Matching Contributions to be distributed to, or in the case of nonvested Employer Matching Contributions, reallocated from, the Account of a given Highly Compensated Employee or Family Member, the amount to be distributed or reallocated shall be increased to reflect any attributable income, or decreased to reflect any attributable losses. The attributable income or loss to be distributed or reallocated shall be calculated by the Plan Administrator using any reasonable method for computing the income or loss allocable to Excess Matching Contributions, provided that the method does not violate Section 401(a)(4) of the Code, is used consistently for all Participants and for all corrective distributions under the plan for the Plan Year, and is used by the Plan Administrator for allocating income to Participants' Accounts. (vii) After calculation of an amount to be distributed and/or reallocated to an Employee pursuant to the procedure discussed in paragraphs (i) through (vi), if the Employee in question has also made Excess Salary Deferrals during the calendar year ended within or coincident with the Plan Year, any Salary Reduction Contributions scheduled to be distributed to the Employee shall be adjusted to take into account any Excess Salary Deferrals deemed to be Excess Matching Contributions pursuant to paragraph (v) above and any relevant regulations issued by the Secretary of the Treasury. (d) After the procedure outlined in subsection (c) is completed, all amounts of Excess Matching Contributions other than unvested allocations of Employer Matching Contributions shall be distributed to the respective Highly Compensated Employees and Family Members to whose Accounts the Excess Matching Contributions were made. Unvested allocations of Employer Matching Contributions which comprise Excess Matching Contributions shall be applied to reduce the Employer's obligation to make Employer Matching Contributions for the Plan Year next following the Plan Year to which the Excess Matching Contributions relate. (e) All actions taken by the Administrator under this Section shall be pursuant to consistently applied procedures which do not arbitrarily discriminate in favor of those Highly Compensated Employees whose contribution percentages are nearest to the Maximum Matching Contribution Percentage. (f) Any amount distributed to a Highly Compensated Employee or Family Member pursuant to this Section shall not be subject to any of the consent rules for Participants and spouses contained in Article VI below. Similarly, any such distribution will not make the Employee liable for the federal taxes applicable to early withdrawals (Section 72(t) of the Code) and excess distributions (Section 4981A of the Code). -25- 30 VI VESTING AND DISTRIBUTION OF ACCOUNTS 6.1 VESTED INTEREST: (a) A Participant's interest in his or her Salary Reduction Contributions Account, Qualified Matching Contributions Account, Qualified Nonelective Contributions Account and Rollover Contributions Account under this Plan shall be at all times fully vested and nonforfeitable. A Participant's interest in his or her Employer Matching Contributions Account and Employer Discretionary Contributions Account shall be fully vested and nonforfeitable at the Participant's Normal Retirement Date, on the Participant's death or Permanent and Total Disability, upon termination of the Plan, and otherwise only to the following extent: (i) If a Participant's hire date with a Participating Employer (including Beaver Insurance Company) is prior to February 1, 1986, the Participant is 100% vested at all times. (ii) If a Participant's hire date with a Participating Employer (including Beaver Insurance Company) is after January 31, 1986 and before December 1, 1988, the Participant is vested in accordance with the following schedule:
Years of Service Percent Vested ---------------- -------------- Less than 1 year 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 years or more 100%
(iii) If a Participant's hire date with a Participating Employer (including Beaver Insurance Company) is after November 30, 1988, the Participant is vested in accordance with the following schedule:
Years of Service Percent Vested ---------------- -------------- Less than 1 year 0% 1 but less than 2 10% 2 but less than 3 20% 3 but less than 4 30% 4 but less than 5 40% 5 but less than 6 60% 6 but less than 7 80% 7 years or more 100%
(iv) Notwithstanding the foregoing, a Participant who was hired before January 1, 1990 by Investors Bancor shall be vested in accordance with the following schedule:
Years of Service Percent Vested ---------------- -------------- Less than 2 years 0% 2 but less than 3 25% 3 but less than 4 50% 4 but less than 5 75% 5 years or more 100%
-26- 31 (b) In the case of an Employee who has five consecutive one-year Breaks in Service, all Years of Service after such Breaks in Service will be disregarded for the purpose of the vesting schedules in paragraph (a) above with respect to the Participant's Employer- derived Account balance that accrued before such Breaks in Service, but both pre-break and post-break service will count for the purposes of vesting the Employer-derived Account balance accruing after such Breaks in Service. In the case of an Employee who does not have five consecutive one-year Breaks in Service, both the pre-break and post-break service will count in vesting both the pre-break and post-break Employer derived Account balance. (c) If any vesting schedule in paragraph (a) above is amended to provide less rapid vesting than that shown in paragraph (a) above, if the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to a Top-Heavy vesting schedule, each Participant (i) who has completed three Years of Service with the Employer and (ii) whose Account(s) would have vested more rapidly prior to the amendment, may irrevocably elect during the election period to have the nonforfeitable percentage of his or her Accounts calculated without regard to such amendment. For purposes of this Section, the election period shall begin the date the amendment is adopted, and shall end on the date 60 days after the later of (i) the date the amendment is adopted, (ii) the date the amendment becomes effective, or (iii) the date the Participant is issued written notice of the amendment by the Employer or the Administrator. 6.2 EMPLOYER MATCHING CONTRIBUTIONS AND EMPLOYER DISCRETIONARY CONTRIBUTIONS FORFEITURES: (a) If an Employee incurs a Severance from Service, and the value of the Employee's vested Account balance derived from Employer and Employee contributions is not greater than $3,500, the Employee will receive a distribution of the value of the entire vested portion of such Account balance and the nonvested portion will be treated as a forfeiture. For purposes of this Section, if the value of an Employee's vested Account balance is zero, the Employee shall be deemed to have received a distribution of such vested Account balance. A Participant's vested Account balance shall not include accumulated deductible Employee contributions within the meaning of Section 72(o)(5)(B) of the Code for Plan Years beginning prior to January 1, 1989. (b) If an Employee incurs a Severance from Service, and elects, in accordance with the requirements of Sections 6.6 - 6.8, to receive the value of the Employee's vested Account balance, the nonvested portion will be treated as a forfeiture. (c) If an Employee receives a distribution pursuant to this Section and the Employee resumes employment covered under this Plan, the Employee's Employer-derived Account balance will be restored to the amount on the date of distribution if the Employee repays to the Plan the full amount of the distribution attributable to Employer contributions before the earlier of 5 years after the Participant's Reemployment Commencement Date, or the date the Participant incurs 5 consecutive Breaks in Service following the date of the distribution. If an Employee is deemed to receive a distribution pursuant to this Section, and the Employee resumes employment covered under this Plan before the date the Participant incurs 5 consecutive Breaks in Service, upon the Employee's Reemployment Commencement Date, the Employer-derived Account balance of the Employee will be restored to the amount on the date of such deemed distribution. (d) If an Employee incurs a Severance from Service, the value of the Employee's vested Account Balance derived from Employer and Employee contributions is greater than $3,500, and the Employee does not elect, in accordance with the requirements of Sections 6.7 and 6.8, to receive the value of the Employee's vested Account balance, the nonvested portion of the Employee's Account will be treated as a forfeiture as of the last day of the Plan Year in which the Employee incurs five consecutive Breaks in Service. (e) Any amounts forfeited pursuant to this Section, or pursuant to Section 5.8 shall be used to reduce the Employer's obligation to make Employer Matching Contributions for the Plan Year in which the forfeiture occurs. 6.3 NORMAL RETIREMENT: A Participant may retire as of the first day of any month coinciding with or following his or her Normal Retirement Date. The Participant's Accounts shall be distributed in accordance with Sections 6.7 and 6.8 below. -27- 32 6.4 DEATH BENEFITS: If a Participant or former Participant dies before the entire vested balance of his or her Accounts has been distributed, the vested balance in his or her Accounts will be paid to the Participant's Beneficiary in accordance with Sections 6.7 and 6.8 below. 6.5 TERMINATION OF EMPLOYMENT: Following a Participant's Severance from Service, the Participant's Accounts shall be valued as soon as practicable in accordance with the Administrator's customary procedures, and distributed in accordance with Sections 6.7 and 6.8 of the Plan. 6.6 COMMENCEMENT OF DISTRIBUTION: (a) Subject to Sections (b) and (c) and Section 6.7 below, the Accounts of a Participant who incurs a Severance from Service shall be distributed at a date designated by the Administrator, which designation (except as provided below) shall be made in a uniform and nondiscriminatory manner and shall be as soon as practicable following the next Valuation Date after the Participant's Severance from Service Date. If, at the date of distribution, the Participant's Accounts exceed (or at the time of any prior distribution exceeded) $3,500, the Participant (or, where the Participant is deceased, the Participant's Spouse) and the Participant's Spouse (if the Account being distributed is a Beaver Plan Account) must consent in writing within the 90 day period ending on the annuity starting date to the distribution before it may be made. If the Participant, or his or her Spouse where applicable, consents to the distribution, such distribution shall include all of the Participant's vested Account balances. If the Participant or, where applicable, the Participant's Spouse does not consent in writing to the distribution, the Participant's Accounts will be held in the Trust Fund until the earlier of (i) the Participant's death, or (ii) the Participant's Normal Retirement Date. If a Participant's consent to a distribution is required hereunder, then at least 30 days and not more than 90 days prior to the Annuity Starting Date the Administrator shall provide the Participant (or, if applicable, the Participant's Spouse) with a notice of the right to elect immediate distribution or the right to defer distribution until the Participant's Normal Retirement Date. A retired, disabled, deceased or terminated Participant's Accounts shall be increased by any Contributions that are allocated to the Participant's Accounts after the Valuation Date. (b) Unless the Participant elects otherwise, distributions to a Participant must commence no later than 60 days following the close of the Plan Year in which occurs the latest of: (i) The date the Participant attains the earlier of (A) the Participant's Normal Retirement Date, or (B) age 65; (ii) The 10th anniversary of the date on which the Participant first commences participation in the Plan; or (iii) The date on which the Participant incurs a Severance from Service. Notwithstanding the foregoing, the failure of a Participant (and, where applicable, the Participant's Spouse) to consent to a distribution while a benefit is immediately distributable within the meaning of this Section, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section. (c) Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution of a Beaver Plan Account in the form of a Qualified Joint and Survivor Annuity while the Beaver Plan Account balance is immediately distributable. (Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to Section 6.8 of the Plan, only the Participant need consent to the distribution of an Account balance that is immediately distributable.) Neither the consent of the Participant nor the Participant's Spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of this Plan, if the Plan does not offer an annuity option (purchased from a commercial provider) and if the Employer or any entity within the same controlled group as the Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the Participant's Account balance will, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) then the Participant's Account balance will be transferred, without the Participant's consent, to the other plan if the Participant does not consent to an immediate distribution. -28- 33 (d) Notwithstanding anything to the contrary herein, the balance in each Participant's Accounts must begin to be distributed not later than the April 1 following the calendar year in which the Participant reaches age 70 1/2. 6.7 DIRECT ROLLOVERS AND WITHHOLDING: (a) Effective Date: The provisions of this Section shall apply to all distributions from the Plan made on or after January 1, 1993. (b) General Rule: If the Distributee of any Eligible Rollover Distribution elects to have the Eligible Rollover Distribution paid directly to an Eligible Retirement Plan, and specifies the Eligible Retirement Plan to which the Eligible Rollover Distribution is to be paid, then the Eligible Rollover Distribution will be paid to that Eligible Retirement Plan in a Direct Rollover. (c) Waiver of 30 Day Notice Requirement: If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations 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. (d) Definitions: For purposes of this Section, the following definitions shall apply: (i) Direct Rollover: An Eligible Rollover Distribution paid directly to an Eligible Retirement Plan for the benefit of a Distributee. (ii) Distributee: An Employee, surviving spouse of a deceased employee, or a spouse entitled to payment under a Qualified Domestic Relations Order. (iii) Eligible Retirement Plan: (A) With respect to any Distributee, an individual retirement account described in Section 408(a) of the Code. (B) With respect to a Distributee who is an Employee or a spouse or former spouse of an Employee who is an Alternate Payee under a Qualified Domestic Relations Order as defined in Section 7.2 below, an Eligible Retirement Plan shall also mean an individual retirement annuity (other than an endowment contract) described in Section 408(b) of the Code, a qualified trust described in Section 401(a) of the Code or an annuity plan described in Section 403(a) of the Code. (iv) Eligible Rollover Distribution: 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 section 401(a)(9) of the Code; 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). (e) If a Participant does not elect to have an Eligible Rollover Distribution transferred directly to an Eligible Retirement Plan, or in the case of any distribution which is not an Eligible Rollover Distribution, the Plan Committee shall direct the Trustee as to any required withholding. 6.8 FORM OF BENEFIT: (a) Distribution of all Accounts, other than Beaver Plan Accounts, shall be in the form of a lump sum. -29- 34 (b) Distribution of all Beaver Plan Accounts shall be as follows: (i) Unless an optional form of benefit is selected by the Participant or his or her Beneficiary pursuant to a Qualified Election within the 90-day period ending on the Annuity Starting Date, an unmarried Participant's vested Account balances will be paid in the form of a Straight Life Annuity, and a married Participant's vested Account balances will be paid in the form of a Qualified Joint and Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, if a married Participant dies before his or her Annuity Starting Date, the Participant's vested Account balances shall be applied toward the purchase of a Qualified Preretirement Survivor Annuity for the life of the Participant's Surviving Spouse. A Participant will be deemed to be a "married" Participant if the Participant is married on his or her Severance from Service Date. (A) In the case of a Qualified Joint and Survivor Annuity as described in this Section, the Administrator shall provide each Participant no less than 30 days and no more than 90 days prior to the Annuity Starting Date a written explanation of: (I) the terms and conditions of a Qualified Joint and Survivor Annuity; (II) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (III) the rights of a Participant's Spouse; and (IV) the right to make, and the effect of a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. (B) In the case of a Qualified Preretirement Survivor Annuity as described in this Section, the Administrator shall provide each Participant within the applicable period, a written explanation of the Qualified Preretirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of paragraph (A) of this Section 6.8(b)(i) applicable to a Qualified Joint and Survivor Annuity. (1) The applicable period for a Participant is whichever of the following periods ends last: (aa) the period beginning on the first day of the Plan Year in which the Participant attains age thirty-two (32) and ending with the close of the Plan Year in which the Participant attains age thirty-five (35); (bb) a reasonable period ending after the individual becomes a Participant; (cc) a reasonable period ending after this Section first applies to the Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after the Participant's Severance from Service in the case of a Participant whose Severance from Service occurs before the Participant attains age 35. (2) For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (bb) and (cc) is the end of the two-year period beginning one year prior to the date the applicable event occurs, and ending one year after that date. In the case of a Participant whose Severance from Service occurs prior to the Plan Year in which the Participant attains age 35, notice shall be provided within the two-year period beginning one year prior to the Participant's Severance from Service and ending one year after the Participant's Severance from Service. If such Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. (ii) The Participant, or if applicable, his or her Spouse, may select by means of a Qualified Election, one of the following distribution alternatives in lieu of the Qualified Joint and Survivor Annuity described in (i) above: (A) A life annuity, payable no less frequently than annually, with a term certain guaranteed. The term certain cannot exceed the Participant's life expectancy, or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary. If a Participant dies before the Trustee has made the guaranteed number of payments, the Trustee shall continue the balance of the payments to the Participant's designated Beneficiary; (B) A lump sum payment; or (C) Equal, or nearly equal, at least annual installments over a term certain extending not beyond the normal life expectancies of the Participant and his or her Beneficiary. -30- 35 (iii) If the Participant or his or her Beneficiary chooses the installment method of distribution, the following shall apply: (A) If the Participant dies before the completion of installment payments, any balance in the Participant's Accounts shall be paid to his or her Beneficiary as provided in Section 6.4. If a Beneficiary who is receiving payments dies, any remaining balance of the Account shall be paid to the personal representative of the Beneficiary's estate. When establishing the terms of installment payments, at the time payments begin, the present value of the payments projected to be paid to the Participant, based on his or her life expectancy, must be more than 50% of the present value of the payments projected to be paid to the Participant and his or her Beneficiary, based on their life expectancies. (B) As of any subsequent Valuation Date, the Administrator, with the consent of the Participant, may cause the amount then credited to the Accounts of the Participant to be paid in a lump sum. (C) The following rules apply to payments after a Participant's death: (1) Distribution Beginning Before Death. If a Participant dies after payments have begun, then his or her remaining vested Account balances, if any, must be distributed to his or her Beneficiary at least as rapidly as under the method of distribution elected by the Participant; (2) Distribution Beginning After Death. (I) If the Participant dies before distribution of his or her interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with a) or b) below: a) if any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of the designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died; b) if the designated Beneficiary is the Participant's Surviving Spouse, the date distributions are required to begin in accordance with a) above shall not be earlier than the later of (1) December 31 of the calendar year immediately following the calendar year in which the Participant died and (2) December 31 of the calendar year in which the Participant would have attained age 70 1/2. If the Participant has not made an election pursuant to this paragraph (I) by the time of his or her death, the Participant's designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Section, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated Beneficiary, or if the designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (II) For purposes of paragraph (I) above, if the Surviving Spouse dies after the Participant, but before payments to such Spouse begin, the provisions of paragraph (I), with the exception of paragraph (bb) therein, shall be applied as if the Surviving Spouse were the Participant. (III) For the purposes of this Section, distribution of a Participant's interest is considered to begin on the Participant's required beginning date (or, if paragraph (II) above is applicable, the date distribution is required to begin to the Surviving Spouse pursuant to paragraph (I) above). If distribution in the form of an annuity irrevocably commences to the Participant before the required beginning date, the date distribution is considered to begin is the date distribution actually commences. (c) For purposes of this Article VI the following definitions shall apply: -31- 36 (i) Annuity Starting Date: The first day of the first period for which an amount is paid in an annuity or any other form. (ii) Election Period: The period which begins on the first day of the Plan Year in which the Participant attains age thirty-five (35) and ends on the date of the Participant's death. If a Participant incurs a Severance from Service prior to the first day of the Plan Year in which age thirty-five (35) is attained, with respect to the Participant's Account balances as of the Severance from Service Date, the election period shall begin on the Severance from Service Date. Pre-age 35 Waiver: A Participant who will not yet attain age thirty-five (35) as of the end of any current Plan Year may make a special qualified election to waive the Qualified Preretirement Survivor Annuity for the period beginning on the date of such Election and ending on the first day of the Plan Year in which the Participant will attain age thirty-five (35). Such Election shall not be valid unless the Participant receives a written explanation of the Qualified Preretirement Survivor Annuity in such terms as are comparable to the explanation required under paragraph (b) (i) above. Qualified Preretirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age thirty-five (35). Any new waiver on or after such date shall be subject to the full requirements of this Article VI. (iii) Qualified Election: A waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity. The waiver must be in writing and must be consented to by the Participant's Spouse. The Spouse's consent to a waiver must be witnessed by a Plan representative or notary public. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of a Plan representative that such written consent may not be obtained because there is no Spouse or the Spouse cannot be located, a waiver will be deemed a Qualified Election. Any consent necessary under this provision will be valid only with respect to the Spouse who signs the consent, or in the event of a deemed Qualified Election, the designated Spouse. Additionally, a revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. (iv) Qualified Joint and Survivor Annuity: An annuity for the life of the Participant with a survivor annuity for the life of the Spouse which is not less than 50 percent and not more than 100 percent of the amount of the annuity which is payable during the joint lives of the Participant and the Spouse, and which is the amount of benefit which can be purchased with the Participant's Account balances. The Participant may elect to have such annuity distributed upon attainment of the earliest retirement age under the Plan. (v) Qualified Preretirement Survivor Annuity: An annuity for the life of the Surviving Spouse of a Participant who dies prior to the commencement of benefits without selecting an optional form of benefit. This annuity shall be the amount of benefit which can be purchased with the deceased Participant's Account balances. The Surviving Spouse may elect to have such annuity distributed within a reasonable period after the Participant's death. (vi) Spouse or Surviving Spouse: The spouse or surviving spouse of the Participant, provided that a former spouse will be treated as the Spouse or Surviving Spouse to the extent provided under a Qualified Domestic Relations Order as described in Section 414(p) of the Code. (vii) Straight Life Annuity: An annuity for the life of an unmarried Participant which shall be the amount of benefit which can be purchased with the Participant's Account balances. 6.9 TRANSITIONAL RULES: (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous Sections of this Article must be given the opportunity to elect to have the prior Sections of this Article apply if such Participant is credited with at least one Hour of Service under this Plan or a predecessor Plan in a Plan Year beginning on or after January 1, 1976, and such Participant had at least 10 Years of Service on his or her Severance from Service Date. (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974, and who is not otherwise credited -32- 37 with any service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in accordance with paragraph (d) of this Section. (c) The respective opportunities to elect (as described in paragraphs (a) and (b) above) must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Participants. (d) Any Participant who has elected pursuant to paragraph (b) of this Section and any Participant who does not elect under paragraph (a) of this Section or who meets the requirements of paragraph (a) of this Section except that such Participant does not have at least 10 Years of Service on his or her Severance from Service Date, shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity: (i) Automatic Joint and Survivor Annuity. If benefits in the form of a life annuity become payable to a married Participant who: (A) begins to receive payments under the Plan on or after his or her Normal Retirement Date; or (B) dies on or after his or her Normal Retirement Date while still working for the Employer; or (C) begins to receive payments on or after the qualified early retirement age; or (D) separates from service on or after his or her Normal Retirement Date (or the qualified early retirement age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the Election Period. The Election Period must begin at least 6 months before the Participant attains qualified early retirement age and end not more than 90 days before the commencement of benefits. Any election hereunder will be in writing and may be changed by the Participant at any time. (ii) Election of early survivor annuity. A Participant who is employed after attaining the qualified early retirement age will be given the opportunity to elect, during the Election Period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant at any time. The election period begins on the later of (1) the 90th day before the Participant attains the qualified early retirement age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment. (iii) For purposes of this Section 6.10: (A) Qualified early retirement age is the latest of: (I) the earliest date, under the Plan, on which the Participant may elect to receive retirement benefits, (II) the first day of the 120th month beginning before the Participant reaches normal retirement age, or (III) the date the Participant begins participation. -33- 38 (B) Qualified Joint and Survivor Annuity is an annuity for the life of the Participant with a survivor annuity for the life of the Spouse as described in Section 6.8. 6.10 DISTRIBUTION REQUIREMENTS: (a) General Rules. (i) Subject to Section 6.8, the requirements of this Section shall apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of this Plan. Unless otherwise specified, the provisions of this article apply to calendar years beginning after December 31, 1984. (ii) All distributions required under this Section shall be determined and made in accordance with the proposed regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed regulations. (b) Required Beginning Date. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's required beginning date. (c) Limits on Distribution Periods. As of the first distribution calendar year, distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (i) the life of the Participant, (ii) the life of the Participant and a designated Beneficiary, (iii) a period certain not extending beyond the life expectancy of the Participant, or (iv) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. (d) Determination of Amount to be Distributed Each Year. If the Participant's interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the required beginning date: (i) Individual Account. (A) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary or (2) a period not extending beyond the life expectancy of the designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (B) For calendar years beginning before January 1, 1989, if the Participant's Spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (C) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the applicable life expectancy or (2) if the Participant's Spouse is not the designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the Proposed Regulations. Distributions after the death of the Participant shall be distributed using the applicable life expectancy in paragraph (A) above as the relevant divisor without regard to proposed regulations Section 1.401(a)(9)-2. -34- 39 (D) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the Employee's required beginning date occurs, must be made on or before December 31 of that distribution calendar year. (ii) Other Forms. If the Participant's benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Section 401(a)(9) of the Code and the proposed regulations thereunder. Any annuity contract distributed from this Plan must be nontransferable. (e) Definitions: For purposes of this Section, the following definitions shall apply: (i) Applicable Life Expectancy. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated such succeeding calendar year. (ii) Designated Beneficiary. The individual who is designated as the Beneficiary under the Plan in accordance with Section 401(a)(9) of the Code and the proposed regulations thereunder. (iii) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to Section 401(a)(9) of the Code. (iv) Life Expectancy. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the income tax regulations. Unless otherwise elected by the Participant (or Spouse in the case of distributions which begin following the Participant's death and in which the Spouse is named as the designated Beneficiary) by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant (or Spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. (v) Participant's Benefit. (A) The Account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. (B) Exception for second distribution calendar year. For purposes of paragraph (A) above, if any portion of the minimum distribution for the first distribution calendar year is made in the second distribution calendar year on or before the required beginning date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. (vi) Required Beginning Date. (A) General Rule. The required beginning date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2. (B) Transitional Rules. The required beginning date of a Participant who attains age 70 1/2 before January 1, 1988, shall be determined in accordance with (I) or (II) below: -35- 40 (1) Non-5-percent Owners. The required beginning date of a Participant who is not a 5-percent owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70 1/2 occurs. (2) 5-percent Owners. The required beginning date of a Participant who is a 5-percent owner during any year beginning after December 31, 1979, is the first day of April following the later of: (I) the calendar year in which the Participant attains age 70 1/2, or (II) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a 5-percent owner, or the calendar year in which the Participant retires. The required beginning date of a Participant who is not a 5-percent owner who attains age 70 1/2 during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. (C) 5-percent Owner. A Participant is treated as a 5-percent owner for purposes of this Section if such Participant is a 5-percent owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 of the Code but without regard to whether the Plan is Top-Heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66 1/2 or any subsequent Plan Year. (D) Once distributions have begun to a 5-percent owner under this Section, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year. (f) Transitional Rule (i) Notwithstanding the other requirements of this article and subject to the requirements of Sections 6.7 and 6.8, distribution on behalf of any Employee, including a 5-percent owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences): (A) The distribution by the Trust is one which would not have disqualified such Trust under Section 401(a)(9) of the Code as in effect prior to amendment by the Deficit Reduction Act of 1984. (B) The distribution is in accordance with a method of distribution designated by the Employee whose interest in the Trust is being distributed or, if the Employee is deceased, by a Beneficiary of such Employee. (C) Such designation was in writing, was signed by the Employee or the Beneficiary, and was made before January 1, 1984. (D) The Employee had accrued a benefit under the Plan as of December 31, 1983. (E) The method of distribution designated by the Employee or the Beneficiary specifies the time at which distribution will commence, the period over which distribution will be made, and in the case of any distribution upon the Employee's death, the Beneficiaries of the Employee listed in order of priority. (ii) A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee. -36- 41 (iii) For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Employee, or the Beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfied the requirements in paragraphs (f) (i) (A) and (E) of this Section. (iv) If a designation is revoked any subsequent distribution must satisfy the requirements of Section 401(a)(9) of the Code and the proposed regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the trust must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Section 401(a)(9) of the Code and the proposed regulations thereunder, but for the Section 242(b)(2) election. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the proposed regulations. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another Beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from one Plan to another Plan, the rules in Q&A J-2 and Q&A J-3 shall apply. 6.11 DISTRIBUTION OR TRANSFER OF ACCOUNTS ON PLAN TERMINATION AND OTHER EVENTS: (a) Subject to Section 6.7 for any distributions or transfers on or after January 1, 1993, Participant's Accounts shall be distributed to the Participant, the Participant's Beneficiary, or as described in paragraph (d) below, to the Trustee or Custodian of an eligible retirement plan (as defined in Section 402(a)(5)(E)(iv) of the Code, as soon as administratively feasible following: (i) The termination of the Plan without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Section 4975(e) or Section 409 of the Code) or a simplified employee pension plan (as defined in Section 408(k) of the Code.) (ii) The disposition by the Employer to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in the trade or business of the Employer if the Employer continues to maintain this Plan after the disposition, but only with respect to employees who continue employment with the corporation acquiring such assets. (iii) The disposition by the Employer to an unrelated entity of the Employer's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code), if the Employer continues to maintain this Plan, but only with respect to employees who continue employment with such subsidiary. (iv) Receipt of written instructions to transfer Accounts from the Participant, the Participant's Beneficiary or the Employer, as the case may be. (b) All distributions that may be made pursuant to one or more of the distributable events in (i) through (iii) in paragraph (a) above, or the provisions of Sections 6.15 or 6.17 of this Plan, are subject to the Spousal and Participant consent requirements (if applicable) contained in Sections 411(a)(11) and 417 of the Code. In addition, distributions after March 31, 1988 that are triggered by items (i) through (iii) in paragraph (a) above must be made in a lump sum. 6.12 DISTRIBUTION TO MINOR OR INCOMPETENT: (a) In the event a distribution is to be made to a minor, 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 resides, or to a custodian for such Beneficiary under the Uniform Transfer to Minors Act, if permitted by the laws of the state in which the Beneficiary resides. Payment to the legal guardian, parent or custodian of a minor Beneficiary shall fully discharge the Trustee, Administrator and Plan from further liability on account thereof. -37- 42 (b) If a person who is entitled to receive payment under the Plan is physically or mentally incapable of personally receiving and giving a valid receipt for any payment due (unless a previous claim has been made by a duly qualified conservator or other legal representative), the payment may be made to the person's Spouse, son, daughter, parent, brother, sister or other person determined by the Administrator to have incurred expense for the person otherwise entitled to payment. Distribution under this Section shall be in the discretion of the Administrator, and the Administrator shall not be compelled to make any distribution under this Section. 6.13 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN: If a Participant who is entitled to a distribution cannot be located and the Administrator has made reasonable efforts to locate the Participant, the Participant's interest shall be forfeited and treated as Employer Matching Contributions or Employer Discretionary Contributions for the Plan Year during which the forfeiture occurs. The Administrator will be deemed to have made reasonable efforts to locate the Participant if the Administrator is unable to locate the Participant (or, in the case of a deceased Participant, his or her Beneficiary) after having made two successive certified or similar mailings to the last address on file with the Administrator. The Participant's Account(s) shall be forfeited as of the last day of the Plan Year in which occurs the close of the 12 consecutive calendar month period following the last of the two successive mailings. If the Participant or Beneficiary makes a written claim for the Account(s) subsequent to the forfeiture, the Employer shall cause the Account(s) to be reinstated. 6.14 HARDSHIP DISTRIBUTION: (a) Subject to the limitations of subsection (d) below, the Trustee shall, upon the direction of the Administrator, make a distribution from a Participant's Salary Reduction Contributions Account upon hardship of the Participant. A Participant shall be entitled to a hardship distribution only if the distribution is both (i) made on account of an immediate and heavy financial need of the Participant, and (ii) is necessary to satisfy such financial need, determined in accordance with objective, nondiscretionary standards established by the Administrator. (b) An immediate and heavy financial need shall be deemed to include, the following: (i) Expenses incurred or necessary for medical care described in Section 213(d) of the Code for the Participant, his or her Spouse, or any dependents of the Participant (as defined in Section 152 of the Code); (ii) Cost (excluding mortgage payments) relating to the purchase of a principal residence for the Participant; (iii) Payment of tuition and related educational fees for the next twelve months of post-secondary education for the Participant, his or her Spouse, children, or dependents; or (iv) The need to prevent the eviction of the Participant from his or her principal residence or foreclosure on the mortgage of the Participant's principal residence. (c) A distribution will be considered as necessary to satisfy an immediate and heavy financial need if the Administrator relies on the Participant's representation that the need cannot be relieved: (i) Through reimbursement or compensation by insurance or otherwise; (ii) By reasonable liquidation of the Participant's assets, to the extent such liquidation would not itself increase the amount of the need; (iii) By cessation of Salary Reduction Contributions under the Plan; or (iv) By other distributions or loans from the Plan or any other qualified retirement plan, or by borrowing from commercial sources on reasonable commercial terms, to the extent such amounts would not themselves increase the amount of the need. (d) Aggregate hardship distributions to a Participant pursuant to this Section shall not exceed aggregate Salary Reduction Contributions allocated to the Participant's Salary Reduction Contributions Account; however, -38- 43 in the discretion of the Administrator, on a non-discriminatory basis, aggregate hardship distributions may include earnings accrued prior to the end of the last Plan Year ending before July 1, 1989 in the Participant's Salary Reduction Contributions Account. (e) A participant must obtain the consent of his or her Spouse, if any, to the hardship withdrawal. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the hardship withdrawal is to be made. The consent must be in writing and must acknowledge the effect of the withdrawal, and must be witnessed by a Plan representative or notary public. 6.15 LOANS: (a) The Administrator may authorize a loan or loans to currently employed Participants, or parties in interest (as defined in ERISA) of the Plan who are Participants or Beneficiaries, provided that such loans: (i) are available to all such Participants and Beneficiaries on a reasonably equivalent basis; (ii) are not made available to Highly Compensated Employees, officers or shareholders in an amount greater than the amount made available to other Employees; (iii) bear a reasonable rate of interest; (iv) are adequately secured; and (v) no loan shall exceed the present value of the Participant's or Beneficiary's vested accrued benefit. (b) In the event of default, foreclosure on the note and attachment of security will not occur until a distributable event occurs in the Plan. (c) All such loans shall be available to Participants and Beneficiaries without regard to any individual's race, color, religion, sex, age or national origin. All such loans shall further be subject to ERISA, the Code, the regulations and rulings thereunder, and to such terms and conditions not inconsistent therewith (and subject to this Section) as the Administrator shall determine pursuant to uniform policies and guidelines adopted by the Administrator. Such policies and guidelines shall be in writing and (i) may be amended by the Administrator from time to time (ii) shall be communicated to all affected Participants and Beneficiaries, and (iii) shall be deemed a part of this Plan. 6.16 WITHDRAWALS AT AGE 59 1/2: A Participant may withdraw all or a part of the Participant's Salary Reduction Contributions Account, Qualified Matching Contributions Account, Qualified Nonelective Contributions Account, Rollover Account, and the vested portion of his or her Employer Matching Contributions Account and Employer Discretionary Contributions Account, at any time subsequent to attainment of age 59 1/2. 6.17 WITHDRAWALS FROM ROLLOVER ACCOUNT: A Participant may withdraw all or a part of the Participant's Rollover Account; provided, however, that except as permitted by Regulations (including Section 1.411(d)-4 of the Regulations), amounts attributable to elective contributions (as defined in Section 1.401(k)-1(g)(3) of the Regulations), 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 Section 1.401(k)-1(d) of the Regulations. -39- 44 VII ADMINISTRATION 7.1 POWERS OF THE ADMINISTRATOR: (a) The Administrator shall file all reports and distribute to Participants and Beneficiaries reports and other information required under ERISA. (b) The Administrator shall be responsible for the general administration and interpretation of the Plan and for carrying out its provisions and shall have such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers and duties: (i) Discretionary authority to construe and interpret the terms of the Plan, and to determine eligibility and the amount, manner and time of payment of any benefits hereunder; (ii) To prescribe procedures to be followed by Employees in filing applications for benefits; (iii) To make a determination as to the right of any person to a benefit and to afford any person dissatisfied with such determination the right to a hearing; (iv) To request and receive from Employees such information as necessary for the proper administration of the Plan, including but not limited to, such information as the Administrator may reasonably require to determine each Participant's eligibility to participate in the Plan and the benefits payable to each Participant upon his or her death, retirement or termination of employment; (v) To prepare and distribute, in such manner as it determines to be appropriate, information explaining the Plan; (vi) To direct the Trustee as to the method in which and persons to whom Plan assets will be distributed. (c) The Administrator may adopt such rules, regulations and bylaws and may make such decisions as it deems necessary or desirable for the proper administration of the Plan, and all rules and decisions of the Administrator shall be uniformly and consistently applied to all Participants in similar circumstances. Any rule or decision that is not inconsistent with the provisions of the Plan shall be conclusive and binding upon all persons affected by it, and there shall be no appeal from any ruling by the Administrator that is within its authority, except as otherwise provided herein. When making a determination or calculation, the Administrator shall be entitled to rely upon information furnished by the Employer or anyone acting on behalf of the Employer. (d) The Administrator shall have the power to (i) establish a funding policy; (ii) select alternative investment funds; (iv) receive and review reports on the financial condition of the Trust Fund and statements of the receipts and disbursements of the Trust Fund from the Trustee; and (v) appoint or employ one or more Investment Managers (as defined in Section 3(38) of the Act) to manage any part or all of the assets of the Plan for which the Administrator has investment discretion. (e) The Administrator may appoint one or more persons to act as a Plan committee to discharge the duties of the Administrator under the Plan. A person shall not be ineligible to be a member of the committee because he or she is or may be a Participant in the Plan. The Employer from time to time may increase or decrease the number of members of the committee. The committee and each of its members shall be named fiduciaries with respect to the Plan, and shall be indemnified by the Employer against any and all liabilities incurred by reason of any action taken in good faith pursuant to the provisions of the Plan. -40- 45 7.2 DOMESTIC RELATIONS ORDERS: (a) If the Trustee or the Administrator receives a domestic relations order that purports to require the payment of a Participant's benefits to a person other than the Participant, the Administrator shall take the following steps: (i) If benefits are in pay status, the Administrator shall direct the Trustee to segregate and hold in a Determination Period Account the amounts that will be payable to the Alternate Payees with respect to the Determination Period if the order is a Qualified Domestic Relations Order. (ii) The Administrator shall promptly notify the named Participant and any Alternate Payees of the receipt of the domestic relations order and of the Administrator's procedures for determining if the order is a Qualified Domestic Relations Order. (iii) The Administrator shall determine whether the order is a Qualified Domestic Relations Order under the provisions of Section 414(p) of the Code. (iv) The Administrator shall notify the named Participant and any Alternate Payees of its determination as to whether the order meets the requirements of a Qualified Domestic Relations Order. (b) If, within 18 months of receipt of the domestic relations order, the order is determined to be a Qualified Domestic Relations Order, the Administrator shall direct the Trustee to pay the Determination Period Account to the persons entitled to receive the Account pursuant to the order. (c) If, within 18 months of receipt of the domestic relations order, (i) the order is determined not to be a Qualified Domestic Relations Order or (ii) the issue as to whether the order is a Qualified Domestic Relations Order has not been resolved, the Administrator shall direct the Trustee to pay the amounts held in the Determination Period Account to the Participant or other person who would have been entitled to such amounts if there had been no order. (d) If an order is determined to be a Qualified Domestic Relations Order after the end of the 18-month period, the determination shall be applied prospectively only. (e) For purposes of this Section, the following definitions shall apply: (i) Alternate Payee: Any spouse, former spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to all or a portion of the benefits payable under the Plan to the Participant. (ii) Determination Period: The period of up to 18 months during which the Administrator shall determine the qualified status of a domestic relations order. (iii) Determination Period Account: A segregated account established by the Trustee at the direction of the Administrator, in which amounts which may be payable to an Alternate Payee shall be held. A Determination Period Account shall be held in an interest-bearing account and credited with earnings of that account. (iv) Qualified Domestic Relations Order: Any domestic relations order or judgment that meets the requirements set forth in Section 414(p) of the Code. -41- 46 VIII LEAVES OF ABSENCE AND TRANSFERS 8.1 MILITARY LEAVE OF ABSENCE: So long as the Uniformed Services Employment and Reemployment Rights Act of 1994, or any similar law, shall remain in force, providing for re-employment rights for all persons in military service, as therein defined, an Employee who leaves the employment of the Employer for military service in the Armed Forces of the United States, as defined in such Act from time to time in force, shall, for all purposes of this Plan, be considered as having been in the employment of the Employer, with the time of the Participant's service in the military credited to his or her service under the Plan; provided that upon such Employee being discharged from the military service of the United States the Employee applies for reemployment with the Employer and takes all other necessary action to be entitled to, and to be otherwise eligible for, re-employment rights, as provided by the Uniformed Services Employment and Reemployment Rights Act of 1994, or any similar law from time to time in force. 8.2 OTHER LEAVES OF ABSENCE: For all purposes of this Plan, an Employee on an Employer-approved leave of absence not described in Section 8.1 above shall be considered as having continued in the employment of the Employer for the period of such leave, provided that the Employee returns to the active employment of the Employer before or at the expiration of such leave. Such approved leaves of absence shall be given on a uniform, non-discriminatory basis in similar fact situations. 8.3 TRANSFERS: (a) In the event that: (i) a Participant is transferred to employment with a member of the Controlled Group which has not adopted the Plan or to employment with the Employer in a status other than as an Employee; or (ii) a person is transferred from employment with a member of the Controlled Group which has not adopted the Plan or from other employment with the Employer in a status other than Employee to employment with the Employer under circumstances making such person an Employee; or (iii) a person was employed by a member of the Controlled Group which has not adopted the Plan, terminated his or her employment and was subsequently employed by the Employer as an Employee; (b) then the following provisions shall apply: (i) transfer to employment (A) with a member of the Controlled Group which has not adopted the Plan or (B) with the Employer not as an Employee, shall not be considered termination of employment with the Employer, and such transferred person shall continue to be entitled to the benefits provided in the Plan, as modified by this Section; (ii) any employment with a member of the Controlled Group which has not adopted the Plan or with the Employer not as an Employee will be deemed to be employment by the Employer; (iii) no amounts earned from a member of the Controlled Group at a time when it has not adopted the Plan or from the Employer not as an Employee shall constitute Compensation hereunder; (iv) termination of employment with a member of the Controlled Group which has not adopted the Plan by a person entitled to benefits under this Plan (other than to transfer to employment with the Company or another member of the Controlled Group) shall be considered as termination of employment with the Employer; (v) all other terms and provisions of this Plan shall fully apply to such person and to any benefits to which he or she may be entitled hereunder. -42- 47 IX TRUST Contributions made to the Plan and all other Plan assets shall be held in trust under a Trust Agreement entered into between the Employer and the Trustee. Such Trust Agreement shall be incorporated herein by reference and shall be considered a part of the Plan. -43- 48 X FEES AND EXPENSES All reasonable fees and expenses of the Administrator or the Trustee incurred in the performance of their duties hereunder or under the Trust may be paid by the Employer; provided, however, that to the extent not so paid by the Employer, such fees and expenses shall be deemed to be an expense of the Trust, and the Trustee is authorized to charge the same to the Accounts of the Participants, and unless allocable to the Accounts of specific Participants, they shall be charged against the respective accounts of all or a reasonable group of Participants in such reasonable manner as the Trustee shall determine. -44- 49 XI NECESSITY OF QUALIFICATION This Plan is established with the intent that it shall qualify under Section 401(a) of the Code as that Section exists at the time the Plan is established. If the Plan as adopted by the Employer fails to attain or retain such qualification, the Employer shall promptly either amend the Plan under Section 401(b) of the Code so that it does qualify, or direct the Trustee to terminate the Trust, and distribute all the assets of the Trust, and the Plan and Trust shall be considered to be rescinded and of no force and effect. -45- 50 XII AMENDMENT, TERMINATION OR MERGER 12.1 AMENDMENT OR TERMINATION: The Employer may at any time, and from time to time amend this Plan or suspend or terminate this Plan by giving written notice to the Trustee, but the Trust may not thereby be diverted from the exclusive benefit of the Participants, their Beneficiaries, survivors or estates, or the administrative expenses of the Plan, nor revert to the Employer, nor may an allocation or contribution theretofore made be changed thereby, nor may any amendment directly or indirectly deprive a Participant of such Participant's rights to benefits. No amendment to the Plan shall be effective to the extent that it would have the effect of decreasing any Participant's Accounts or would otherwise violate Section 411(d)(6) of the Code. 12.2 TERMINATION OF PLAN: Upon termination or partial termination of the Plan or complete discontinuance of Employer Contributions under it, the Accounts of each affected Participant will be nonforfeitable. The Administrator shall distribute each Participant's Accounts to the Participant pursuant to Sections 6.7 and 6.8 as soon as is practicable after the termination. 12.3 MERGER: Nothing contained herein shall prevent the merger or consolidation of the Plan with, or transfer of assets or liabilities of the Plan to, another plan meeting the requirements of Section 401(a) of the Code or the transfer to the Plan of assets or liabilities of another such plan so qualified under the Code. Any such merger, consolidation or transfer shall be accompanied by the transfer of such existing records and information as may be necessary to properly allocate such assets among Participants, including any tax or other information necessary for the Participants or persons administering the plan which is receiving the assets. The terms of such merger, consolidation or transfer must be such that (if this Plan had then terminated), the requirements of Section 12.1 hereof would be satisfied and each Participant would receive a benefit immediately after the merger, consolidation or transfer equal to or greater than the benefit he or she would have received if the Plan had terminated immediately before the merger, consolidation or transfer. -46- 51 XIII CLAIMS PROCEDURE 13.1 RIGHT TO FILE CLAIM: Every Participant or Beneficiary of a Participant shall be entitled to file with the Administrator a claim for benefits under the Plan. The claim must be in writing. 13.2 DENIAL OF CLAIM: If the claim is denied by the Administrator, in whole or in part, the claimant shall be furnished within 90 days after the Administrator's receipt of the claim (or within 180 days after such receipt if special circumstances require an extension of time) a written notice of denial of claim containing the following: (a) Specific reason or reasons for denial; (b) Specific reference to pertinent Plan provisions on which the denial is based; (c) A description of any additional material or information necessary for the claimant to perfect the claim, and an explanation of why the material or information is necessary; and (d) An explanation of the claims review procedure. 13.3 CLAIMS REVIEW PROCEDURE: (a) Review may be requested at any time within 90 days following the date the claimant received written notice of the denial of his or her claim. For purposes of this Section, any action required or authorized to be taken by the claimant may be taken by a representative authorized in writing by the claimant to represent him or her. The Administrator shall afford the claimant a full and fair review of the decision denying the claim and, if so requested, shall: (i) Permit the claimant to review any documents that are pertinent to the claim; (ii) Permit the claimant to submit to the Administrator issues and comments in writing; and (iii) Afford the claimant an opportunity to meet with a representative of the Administrator as a part of the review procedure. (b) The decision on review by the Administrator shall be in writing and shall be issued within 60 days following receipt of the request for review. The period for decision may be extended to a date not later than 120 days after such receipt if the Administrator determines that special circumstances require extension. The decision on review shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision of the Administrator is based. -47- 52 XIV TOP-HEAVY PROVISIONS 14.1 PURPOSE: This Article is intended to insure that the Plan complies with Section 416 of the Code. If the Plan is or becomes Top-Heavy in any Plan Year beginning after December 31, 1983, the provisions of this Section will supersede any conflicting provision in the Plan. 14.2 DEFINITIONS: For purposes of this Article, the following definitions shall apply: (a) Determination Date: For any Plan year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that Year. (b) Key Employee: Any Employee or former Employee (and the beneficiaries of such Employee) who at any time during the determination period was (i) an officer of the Employer if such individual's annual Section 415 Compensation exceeds 50% of the dollar limitation in effect under Section 415(b)(1)(A) of the Code, (ii) an owner (or considered an owner under Section 318 of the Code) of one of the ten largest interests in the Employer if such individual's Section 415 Compensation exceeds 100% of the dollar limitation in effect under Section 415(c)(1)(A) of the Code, (iii) a 5% owner of the Employer, or (iv) a 1% owner of the Employer who has an annual Section 415 Compensation of more than $150,000. For purposes of this Section, the determination of Section 415 Compensation shall be based only on Section 415 Compensation which is actually paid and shall be made by including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. Determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the regulations thereunder. (c) Non-Key Employee: Any Employee who is not a Key Employee, including Employees who are former Key Employees. (d) Permissive Aggregation Group: The Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (e) Required Aggregation Group: (1) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of Sections 401(a)(4) or 410 of the Code. (f) Top-Heavy Plan: This Plan is Top-Heavy if for any Plan Year any of the following conditions exists: (i) If the Top-Heavy Ratio for this Plan exceeds 60% and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (ii) If this Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. (iii) If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. (g) Top-Heavy Ratio: (i) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the Account -48- 53 balances of all Key Employees as of the Determination Date(s) (including any part of any Account balance distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of Account balances (including any part of any Account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with Section 416 of the Code and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Section 416 of the Code and the regulations thereunder. (ii) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of Account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of Account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all participants as of the Determination Date(s), all determined in accordance with Section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. (iii) For purposes of (i) and (ii) above the value of Account balances and the present value of accrued benefits will 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 Section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan. The Account balances and accrued benefits of a participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of Account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (2) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C) of the Code. (h) Valuation Date: The Plan Year-end as of which Account balances or accrued benefits are valued for purposes of calculating the Top-Heavy Ratio. 14.3 MINIMUM ALLOCATION: (a) Except as otherwise provided in paragraphs (b) and (c) below, in any Plan Year in which this Plan is Top-Heavy, Employer Discretionary Contributions allocated to the Accounts of each Participant who is a Non-Key Employee, shall be not less than the lesser of (i) 3% of the Non-Key Employee's Section 415 Compensation, or (ii) in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer Discretionary Contributions and forfeitures (if applicable), as a percentage of the first $200,000 of Section 415 Compensation, allocated on behalf of any Key Employee for that Plan Year. The minimum allocation shall be determined without regard to any Social Security contribution. This minimum contribution shall be made even though, under other provisions of this Plan, the Participant would not otherwise be entitled to receive an allocation or would have received a lesser allocation for the Plan Year because of (i) the Participant's failure to complete 1,000 Hours of Service (or any equivalent provided in the Plan), (ii) the Participant's failure to make mandatory Employee contributions to the Plan, or (iii) Compensation less than a stated amount. -49- 54 (b) The provisions in paragraph (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (c) The provisions in paragraph (a) above shall not apply to any Participant to the extent the Participant is covered under any other plan or plans of the Employer. (d) The minimum allocation required (to the extent required to be nonforfeitable under Section 416(b)) may not be forfeited under Section 411(a)(3)(B) or 411(a)(3)(D) of the Code. (e) Any minimum Top Heavy allocation will be made from the Fremont General Corporation Employee Stock Ownership Plan. 14.4 VESTING SCHEDULE: (a) If the vesting schedule for Matching and Discretionary Contributions in Section 6.1 results in vesting which is slower, in any respect, than the vesting schedule set forth below, then for any Plan Year in which the Plan is Top-Heavy, the following vesting schedule shall apply to any such Matching and/or Discretionary Contributions made for that Plan Year:
Years of Service Vested Percentage ---------------- ----------------- Less than 2 years 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years or more 100%
The Top-Heavy vesting schedule shall also apply to any subsequent Plan Years unless the Employer amends the Plan to provide for a vesting schedule which is more rapid than the one in this Section. (b) The minimum vesting schedule applies to all benefits accrued within the meaning of Section 411(a)(7) of the Code except those attributable to Employee contributions, including benefits accrued before the effective date of Section 416 of the Code and benefits before the Plan became Top-Heavy. Further, no decrease in a Participant's nonforfeitable percentage may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this Section does not apply to the Account balances of any Employee who does not have an Hour of Service after the Plan has initially become Top-Heavy and such Employee's Account balance attributable to Employer Contributions and forfeitures will be determined without regard to this Section. -50- 55 XV MISCELLANEOUS 15.1 LEGAL OR EQUITABLE ACTION: If any legal or equitable action with respect to the Plan is brought by or maintained against any person, and the results of such action are adverse to that person, attorney's fees and all other costs to the Employer, the Administrator or the Trust of defending or bringing such action shall be charged against the interest, if any, of such person under the Plan. 15.2 INDEMNIFICATION: The Employer indemnifies and holds harmless the Plan Administrator, all members of the Plan committee, if any, and the Trustee from and against any and all liabilities, demands, claims, losses, taxes, expenses, including reasonable attorney's fees, both direct and indirect, arising by reason of any act or omission to act (except willful misconduct or negligence) in their official capacities in the administration of this Plan or Trust or both, including all expenses reasonably incurred in their defense, if the Employer fails to provide such defense. The indemnification provisions of this Section 15.2 shall not relieve the Plan Administrator, any member of the Plan committee or any Trustee from any liability such person may have under the Act for breach of a fiduciary duty. 15.3 NO ENLARGEMENT OF PLAN RIGHTS: It is a condition of the Plan, and each Participant by participating herein expressly agrees, that he or she shall look solely to the assets of the Trust for the payment of any benefit under the Plan. 15.4 NO ENLARGEMENT OF EMPLOYMENT RIGHTS: Nothing appearing in or done pursuant to the Plan shall be construed (a) to give any person a legal or equitable right or interest in the assets of the Trust or distribution therefrom, nor against the Employer, except as expressly provided herein or (b) to create or modify any contract of employment between the Employer and any Employee or to obligate the Employer to continue the services of any Employee. 15.5 WRITTEN ORDERS: In taking or omitting to take any action under this Plan, the Trustee may conclusively rely upon and shall be protected in acting upon any written orders from or determinations by the Employer or the Administrator as appropriate, or upon any other notices, requests, consents, certificates or other instruments or papers believed by it to be genuine and to have been properly executed, and so long as it acts in good faith, in taking or omitting to take any other action. 15.6 NO RELEASE FROM LIABILITY: Nothing in the Plan shall relieve any person from liability for any responsibility under Part 4 of Title I of the Act. Subject thereto, neither the Trustee or the Administrator nor any other person shall have any liability under the Plan, except as a result of negligence or wilful misconduct, and in any event the Employer shall fully indemnify and save harmless all persons from any liability except that resulting from their negligence or wilful misconduct. 15.7 DISCRETIONARY ACTIONS: Any discretionary action, including the granting of a loan pursuant to Section 6.16 hereof, to be taken by the Administrator under this Plan shall be non-discriminatory in nature and all Employees similarly situated shall be treated in a uniform manner. 15.8 HEADINGS: Headings herein are primarily for convenience of reference, and if they conflict with the text, the text shall control. 15.9 APPLICABLE LAW: This Plan shall, to the extent state law is applicable, be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the state of California. 15.10 NON-ALIENATION OF BENEFITS: No amount payable to or held under the Plan for the account of any Participant or Beneficiary of a Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void. No amount payable to or held under the Plan for the account of any Participant or Beneficiary may be in any manner liable for the Participant's or Beneficiary's debts, contracts, liabilities, engagements or torts, or be subject to any legal process, levy or attachment. The provisions of this Section shall not preclude distributions made by the Trustee in accordance with a Qualified Domestic Relations Order. -51- 56 15.11 NO REVERSION: Notwithstanding any other contrary provision of the Plan, no part of the assets in the Trust shall revert to the Employer, and no part of such assets, other than that amount required to pay taxes or administrative expenses, shall be used for any purpose other than exclusive benefit of Employees or their Beneficiaries. However, the Employer may request a return, and this Section shall not prohibit return, of an amount to the Employer under any of the following circumstances: (a) If the amount was all or part of an Employer Contribution which was made as a result of a mistake of fact and the amount contributed is returned to the Employer within one year after the date on which the mistaken payment of the contribution was made; or (b) If the amount was all or part of an Employer Contribution which was conditioned on deductibility under Section 404 of the Code and this condition is not satisfied, and the amount is returned to the Employer within one year after the date on which the deduction is disallowed; or (c) If the amount was all or part of an Employer Contribution which was conditioned on the initial qualification of the Plan under Section 401(a) of the Code, this condition is not satisfied, the Plan was submitted to the Internal Revenue Service for qualification 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, and the amount is returned to the Employer within one year after the date on which initial qualification is denied. For purposes of this Section, all Employer Contributions are conditioned on initial qualification of the Plan under Section 401(a) of the Code and deductibility under Section 404 of the Code. 15.12 NOTICES: The Employer will provide the notice to other interested parties contemplated under Section 7476 of the Code before requesting a determination by the Secretary of the Treasury or his or her delegate with respect to the qualification of the Plan. 15.13 CONFLICT: In the event of any conflict between the provisions of this Plan and the terms of any contract or agreement issued thereunder or with respect thereto, the provisions of the Plan shall control. Dated: November 21, 1994 FREMONT GENERAL CORPORATION By: /s/ Raymond G. Meyers -------------------------------------- Raymond G. Meyers Senior Vice President -52- 57 EXHIBIT A PARTICIPATING EMPLOYERS 1. Fremont General Corporation 2. Fremont Financial Corporation 3. Fremont Indemnity Company a. Physicians and Surgeons Underwriters Corporation b. Comstock Insurance Company c. Fremont Reinsurance Company 4. Fremont Premium Finance Corporation 5. Fremont Life Insurance Company 6. Fremont Investment and Loan 7. Fremont Compensation Insurance Company a. Fremont Health Company EX-10.4.(B) 11 AMENDMENT TO INVESTMENT INCENTIVE 1 EXHIBIT 10.4(b) AMENDMENT TO THE FREMONT GENERAL CORPORATION INVESTMENT INCENTIVE PROGRAM TRUST Effective as of February 1, 1994, Section 5.03 of the Trust Agreement between Fremont General Corporation and Merrill Lynch Trust Company of California, Trustee, is amended in its entirety, to read as follows: "5.03 DIRECTION OF VOTING AND OTHER RIGHTS. The Trustee shall vote any employer security with respect to the Plan within the meaning of Section 407(d)(1) of ERISA ("Employer Securities") as follows: (a) With respect to Employer Securities allocated to each Participant's Account, each Participant shall have the right to instruct the Trustee how to vote such shares of Employer Securities. (b) The Participant must give the Trustee written instructions for the voting of Employer Securities in time for the Trustee to act with respect to the instructions. The Employer shall ensure that all notices, forms, and other information distributed to shareholders regarding the exercise of voting rights are furnished to the Trustee, Participants, and the Plan Committee within a reasonable time before voting rights are to be exercised. The Employer and others may solicit and exercise voting rights pursuant to this Section under proxy rules that apply to all holders of Employer Securities. (c) The Plan Committee may instruct the Trustee, in writing, how to vote Employer Securities that has not been allocated to Participants' Accounts (such as Employer Securities held in a suspense account). (d) The Trustee shall vote all shares of Employer Securities, allocated or unallocated, and for which no instructions have been received from either a Participant or the Plan Committee, in direct proportion to the instructions to vote received from Participants pursuant to subparagraph (a) above. Except as required by ERISA, the Trustee shall follow all directions above-referred to in this Section, and shall have no duty to exercise voting or other rights relating to any such security or other asset." Dated: November 28, 1994 FREMONT GENERAL CORPORATION By: /s/ Raymond G. Meyers ----------------------------------- Raymond G. Meyers, Vice President Dated: November 30, 1994 MERRILL LYNCH TRUST COMPANY By: /s/ Chris Rosin ----------------------------------- Chris Rosin, Trust Officer EX-10.5.(B) 12 AMENDMENT TO SUPPLEMENTAL RETIREMENT PLAN 1 EXHIBIT 10.5(b) Amendment to Fremont General Corporation Supplemental Retirement Plan Fremont General Corporation, a Nevada corporation, adds the following paragraph to the Fremont General Corporation Supplemental Retirement Plan (the "Plan"), effective May 1, 1994, as follows: 4.6 Voting of Employer Stock. A Participant may direct the Trustee as to the manner in which Employer Stock allocated to his Account shall be voted. Before each meeting of the Employer's shareholders, the Trustee shall deliver to each Participant a copy of any proxy solicitation materials together with a form by which the Participant may instruct the Trustee how to vote the Employer Stock allocated to the Participant's Account. The Trustee shall vote Employer Stock through proxy in accordance with instructions received from the Participants. The Trustee shall vote Employer Stock which has not been allocated to a Participant or which is held in a suspense account in accordance with the direction of the Committee, or, in the absence of a direction of the Committee, in direct proportion to the instructions to vote received from the Participants. The Trustee shall vote allocated Employer Stock for which instructions are not received from the Participants in direct proportion to the instructions to vote received from Participants. Dated: May 11, 1994 Fremont General Corporation, a Nevada corporation By: /s/ Raymond G. Meyers ---------------------------------- Raymond G. Meyers Senior Vice President EX-10.6 13 TRUST AGREEMENT FOR SUPPLEMENTAL RETIREMENT PLAN 1 EXHIBIT 10.6 THE MERRILL LYNCH NON-QUALIFIED DEFERRED COMPENSATION PLAN TRUST AGREEMENT TRUST UNDER: _________________________ DEFERRED COMPENSATION PLAN(1) This Agreement made this first day of February, 1994, by and between Fremont General Corporation (Company) and Merrill Lynch Trust Company, a _________ corporation ("Trustee"); WHEREAS, Company has adopted the Non-Qualified Deferred Compensation Plan identified above and such other Plan(s) as are listed in Appendix A; WHEREAS, Company has incurred or expects to incur liability under the terms of such Plan(s) with respect to the individuals participating in such Plan(s); WHEREAS, Company wishes to establish a trust (the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of the Company's insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan(s); WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan(s) as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purpose of Title 1 of the Employee Retirement Income Security Act of 1974; WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan(s); NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1. ESTABLISHMENT OF TRUST. (a) Company hereby deposits with Trustee in trust and such cash and/or marketable securities, if any, listed in Appendix B, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. ____________________ 1 This trust is intended to comply with the model grantor trust requirement of Revenue Procedure 92-64 While Merrill Lynch believes that this Trust Agreement complies with the Revenue Procedure, it provides no assurance that modifications to the additional terms contained herein would not be required by the Internal Revenue Service during the review process in the event the Company were to apply for a ruling as to the tax consequences of its plan and this trust. If the Company desires to obtain such a ruling from the Internal Revenue Service, a copy of this Trust Agreement with all substituted or additional language underlined as required by the Revenue Procedure is available through your Merrill Lynch Financial Consultant. 2 (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part 1, subchapter 1, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan(s) and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of insolvency, as defined in Section 3(a) herein. (e) Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to the held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. (f) Trustee shall not be obligated to receive such cash and/or property unless prior thereto Trustee has agreed that such cash and/or property is acceptable to Trustee and Trustee has received such reconciliation, allocation, investment or other information concerning, or representation with respect to, the cash and/or property as Trustee may require. Trustee shall have no duty or authority to (a) require any deposits to be made under the Plan or to Trustee; (b) compute any amount to be deposited under the Plan to Trustee; or (c) determine whether amounts received by Trustee comply with the Plan. Assets of the Trust may, in Trustee's discretion, be held in an account with an affiliate of Trustee. SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. (a) With respect to each Plan participant, Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of the participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan(s), and the time of commencement for payment of such amounts. The Payment Schedule shall be delivered to Trustee not more than thirty (30) business days, nor fewer than fifteen (15) business days prior to the first date on which a payment is to be made to the Plan participant. Any changes to a Payment Schedule shall be delivered to Trustee not more than thirty (30) days nor fewer than fifteen (15) days prior to the date on which the first payment is to be made in accordance with the changed Payment Schedule. Except as otherwise provided herein, Trustee shall make payments to Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provisions for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company, it being understood among the parties hereto that (1) Company shall on a timely basis provide Trustee specific information as to the amount of taxes to be withheld and (2) Company shall be obligated to receive such withheld taxes from Trustee and properly pay and report such amounts to the appropriate taxing authorities. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan(s) shall be determined by Company or such party as it shall designate under the Plan(s), and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan(s). 2 3 (c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan(s). Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan(s), Company shall make the balance of each payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. (d) Trustee shall have no responsibility to determine whether the Trust is sufficient to meet the liabilities under the Plan(s), and shall not be liable for payments or Plan(s) liabilities in excess of the value of the Trust's assets. SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT. (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is insolvent. Company shall be considered "insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Company (or, if there is no Chief Executive Officer, the highest ranking officer) shall have the duty to inform Trustee in writing of Company's insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become insolvent, Trustee shall determine whether Company is insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Company's insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is insolvent, Trustee shall have no duty to inquire whether Company is insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. (3) If at any time Trustee has determined that Company is insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan(s) or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not insolvent (ir is no longer insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan(s) for the period of such discontinuance, less the aggregate amount of any payments made to 3 4 Plan participants provided for hereunder during any such period of discontinuance; provided that Company has given Trustee the information with respect to such payments made during the period of discontinuance prior to resumption of payments by Trustee. SECTION 4. PAYMENTS TO COMPANY. Except as provided in Section 3 hereof, since the Trust is irrevocable in accordance with Section 1(b) hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payments of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan(s). SECTION 5. INVESTMENT AUTHORITY. (a) Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercised by or rest with Plan participants, except that voting rights with respect to Trust assets will be exercised by Company unless an investment adviser has been appointed pursuant to Section 5(c) and voting authority has been delegated to such investment adviser. (b) Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercised by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. (c) Trustee may appoint one or more investment advisers who are registered as investment advisers under the Investment Advisers Act of 1940, who may be affiliates of Trustee, to provide investment advice on a discretionary or nondiscretionary basis with respect to all or a specified portion of the assets of the Trust. (d) Trustee, or Trustee's designee, is authorized and empowered: (1) To invest and reinvest Trust assets, together with the income therefrom, in common stock, preferred stock, convertible preferred stock, bonds, debentures, convertible debentures and bonds, mortgages, notes, commercial paper and other evidences of indebtedness (including those issued by Trustee), shares of mutual funds (which funds may be sponsored, managed or offered by an affiliate of Trustee), guaranteed investment contracts, bank investment contracts, other securities, policies of life insurance, annuity contracts, options, options to buy or sell securities or other assets, and all other property of any type (personal, real or mixed, and tangible or intangible); (2) To deposit or invest all or any part of the assets of the Trust in savings accounts or certificates of deposit or other deposits in a bank or savings and loan association or other depository institution, including Trustee or any of its affiliates, provided with respect to such deposits with Trustee or an affiliate the deposits bear a reasonable interest rate; (3) To hold, manage, improve, repair and control all property, real or personal, forming part of the Trust; to sell, convey, transfer, exchange, partition, lease for any term, even extending beyond the duration of this Trust, and otherwise dispose of the same from time to time; (4) To hold in cash, without liability for interest, such portion of the Trust as is pending investments, or payment of expenses, or the distribution of benefits; (5) To take such actions as may be necessary or desirable to protect the Trust from loss due to the default on mortgages held in the Trust, including the appointment of agents or trustees in such other jurisdictions 4 5 as may seem desirable, to transfer property to such agents or trustees, to grant to such agents such powers as are necessary or desirable to protect the Trust, to direct such agent or trustee, or to delegate such power to direct, and to remove such agent or trustee; (6) To settle, compromise or abandon all claims and demands in favor of or against the Trust; (7) To exercise all of the further rights, powers, options and privileges granted, provided for, or vested in trustees generally under the laws of the state in which Trustee is incorporated as set forth above, so that the powers conferred upon Trustee herein shall not be in limitation of any authority conferred by law, but shall be in addition thereto; (8) To borrow money from any source and to execute promissory notes, mortgages or other obligations and to pledge or mortgage any trust assets as security; and (9) To maintain accounts at, execute transactions through, and lend on an adequately secured basis stocks, bonds or other securities to, any brokerage or other firm, including any firm which is an affiliate of Trustee. SECTION 6. ADDITIONAL POWERS OF TRUSTEE. To the extent necessary or which it deems appropriate to implement its powers under Section 5 or otherwise to fulfill any of its duties and responsibilities as Trustee of the Trust, Trustee shall have the following additional powers and authority: (a) To register securities, or any other property, in its name or in the name of any nominee, including the name of any affiliate or the nominee name designated by any affiliate, with or without indication of the capacity in which property shall be held, or to hold securities in bearer form and to deposit any securities or other property in a depository or clearing corporation; (b) To designate and engage the services of, and to delegate powers and responsibilities to, such agents, representatives, advisers, counsel and accountants as Trustee considers necessary or appropriate, any of whom may be an affiliate of Trustee or a person who renders services to such an affiliate, and, as a part of its expenses under this Trust Agreement, to pay their reasonable expenses and compensation; (c) To make, execute and deliver, as Trustee, any and all deeds, leases, mortgages, conveyances, waivers, releases or other instruments in writing necessary or appropriate for the accomplishment of any of the powers listed in this Trust Agreement; and (d) Generally to do all other acts which Trustee deems necessary or appropriate for the protection of the Trust. SECTION 7. DISPOSITION OF INCOME. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. SECTION 8. ACCOUNTING BY TRUSTEE. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within ninety (90) days following the close of each calendar year and within ninety (90) days after removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding 5 6 year to the date of such removal or resignation, setting forth all investments, receipts, disbursements, and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Trustee may satisfy its obligation under this Section 8 by rendering to Company monthly statements setting forth the information required by this Section separately for the month covered by the statement. SECTION 9. RESPONSIBILITY AND INDEMNITY OF TRUSTEE. (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan(s) and this Trust and is given in writing by Company. Trustee shall also incur no liability to any person for any failure to act in the absence of direction, request or approval from Company which is contemplated by, and in conformity with, the terms of this Trust. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) Company hereby indemnifies Trustee and each of its affiliates (collectively, the "Indemnified Parties") against, and shall hold them harmless from, any and all loss, claims, liability, and expense, including reasonable attorneys' fees, imposed upon or incurred by any Indemnified Party as a result of any acts taken, or any failure to act, in accordance with the directions from Company or any designee of Company, or by reason of the Indemnified Party's good faith execution of its duties with respect to the Trust, including, but not limited to, its holding of assets of the Trust. Company's obligations in the foregoing regard to be satisfied promptly by Company, provided that in the event the loss, claim, liability or expense involved is determined by a no longer appealable final judgment entered in a lawsuit or proceedings to have resulted from the gross negligence or willful misconduct of Trustee. Trustee shall promptly on request thereafter return to Company any amount previously received by Trustee under this Section with respect to such loss, claim, liability or expense. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust without direction from Company. (c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisers, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) Trustee shall have, without exclusion, all powers conferred on Trustee by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) However, notwithstanding the provisions of Section 9(e) above, Trustee may loan to Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust. 6 7 (g) Notwithstanding any powers to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. SECTION 10. COMPENSATION AND EXPENSES OF TRUSTEE. Trustee is authorized, unless otherwise agreed by Trustee, to withdraw from the Trust without direction from Company the amount of its fees in accordance with the fee schedule agreed to by Company and Trustee. Company shall pay all administrative expenses, but if not so paid, the expenses shall be paid from the Trust. SECTION 11. RESIGNATION AND REMOVAL OF TRUSTEE. (a) Trustee may resign at any time by written notice to Company, which shall be effective thirty (30) days after receipt of such notice unless Company and Trustee agree otherwise. (b) Trustee may be removed by Company on thirty (30) days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit, provided that Trustee is provided assurance by Company satisfactory to Trustee that all fees and expenses reasonably anticipated will be paid. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. (e) Upon settlement of the account and transfer of the Trust assets to the successor Trustee, all rights and privileges under this Trust Agreement shall vest in the successor Trustee and all responsibility and liability of Trustee with respect to the Trust and assets thereof shall terminate subject only to the requirement that Trustee execute all necessary documents to transfer the Trust assets to the successor Trustee. SECTION 12. APPOINTMENT OF SUCCESSOR. (a) If Trustee resigns or is removed in accordance with Section 11(a) or (b) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The Successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any 7 8 action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. SECTION 13. AMENDMENT OR TERMINATION. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan(s) or shall make the Trust revocable since the Trust is irrevocable in accordance with Section 1(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan(s). Upon termination of the Trust, any assets remaining in the Trust shall be returned to Company. (c) Upon written approval of participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan(s), Company may terminate this Trust prior to the time all benefit payments under the Plan(s) have been made. All assets in the Trust at termination shall be returned to Company. SECTION 14. MISCELLANEOUS. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the state in which Trustee is incorporated as set forth above. (d) The provisions of Sections 2(d), 3(b)(3), 9(b) and 15 of this Agreement shall survive termination of this Agreement. (e) The rights, duties, responsibilities, obligations and liabilities of Trustee are as set forth in this Trust Agreement, and no provision of the Plan(s) or any other documents shall affect such rights, responsibilities, obligations and liabilities. If there is a conflict between provisions of the Plan(s) and this Trust Agreement with respect to any subject involving Trustee, including, but not limited to, the responsibility, authority or powers of Trustee, the provisions of this Trust Agreement shall be controlling. (f) For purposes of this Trust, "Change of Control" shall mean: The purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of Company of a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of Company immediately prior to such reorganization, merger or consolidation do not immediately thereafter own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or of the sale of all or substantially all of Company's assets. 8 9 SECTION 15. ARBITRATION. o Arbitration is final and binding on the parties. o The parties waive their right to seek remedies in court, including the right to jury trial. o Pre-arbitration discovery is generally more limited than and different from court proceedings. o The arbitrators' award is not required to include factual findings or level reasoning and any party's right to appeal or seek modification of rulings by the arbitrators is strictly limited. o The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry. Company agrees that all controversies which may arise between Company and either or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in connection with the Trust, including, but not limited to, those involving any transactions, or the construction, performance, or breach of this or any other agreement between Company and either or both the Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement shall be conducted only before the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or arbitration facility provided by any other exchange of which MLPF&S is a member, the National Association of Securities Dealers, Inc., or the Municipal Securities Rulemaking Board, and in accordance with its arbitration rules then in force. Company may elect in the first instance whether arbitration shall be conducted before the New York Stock Exchange, Inc., the American Stock Exchange, Inc., other exchange of which MLPF&S is a member, the National Association of Securities Dealers, Inc., or the Municipal Securities Rulemaking Board, but if Company fails to make such election, by registered letter or telegram addressed to Merrill Lynch Trust Companies, Employee Benefit Trust Operations, P.O. Box 30532, New Brunswick, New Jersey 08989-0532, before the expiration of five (5) days after receipt of a written request from MLPF&S and/or the Trustee to make such election, then MLPF&S and/or the Trustee may make such election. Judgment upon the award of arbitrators may be entered in any court, state or federal, having juris diction. No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; who is a member of putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement, except to the extent stated herein. SECTION 16. EFFECTIVE DATE. The effective date of this Trust Agreement shall be ___________ , 19__. IN WITNESS WHEREOF, Company and Trustee have executed this Trust Agreement each by action of a duly authorized person. 9 10 By signing this Agreement, the undersigned Company acknowledges (1) that, in accordance with Section 15 of this Agreement, Company is agreeing in advance to arbitrate any controversies which may arise with either or both the Trustee or MLPF&S and (2) receipt of a copy of this Agreement. FREMONT GENERAL CORPORATION By: /s/ Raymond G. Meyers --------------------------------- Raymond G. Meyers Senior Vice President TRUSTEE By: /s/ Chris Rosin --------------------------------- Chris Rosin 10 11 APPENDIX A NAME OF NON-QUALIFIED DEFERRED COMPENSATION PLAN(S): Fremont General Corporation Supplemental Retirement Plan and Fremont General Corporation Senior Supplemental Retirement Plan. APPENDIX B DEPOSIT OF CASH AND/OR MARKETABLE SECURITIES TO THE TRUST: CASH: $2,735,883.17 MARKETABLE SECURITIES: Fremont General Corporation Common Stock - 113,333 shares 11 12 Amendment for Fremont's SRP and SSRP AMENDMENT TO THE MERRILL LYNCH NON-QUALIFIED DEFERRED COMPENSATION PLAN TRUST AGREEMENT between MERRILL LYNCH TRUST COMPANY OF CALIFORNIA and FREMONT GENERAL CORPORATION AMENDMENT to the Merrill Lynch Non-Qualified Deferred Compensation Plan Trust Agreement entered into as of February 1, 1994 by and between Merrill Lynch Trust Company of California (the "Trustees") and Fremont General Corporation (the "Employer") in respect of a trust forming part of the Fremont General Supplemental Retirement Plan and Senior Supplemental Retirement Plan. WHEREAS, the Trustee and the Employer wish to amend the Agreement as hereinafter set forth; NOW, THEREFORE, the Trustee and the Employer agree that said Agreement shall be amended as follows: 1. Section 5(a) is hereby amended so as to delete the second sentence thereof and insert in lieu thereof the following: "All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercised by or rest with Plan participants, except that voting rights shall be exercised as set forth below. Notwithstanding the foregoing sentence, the voting and other rights in securities or other assets held in the Trust shall be exercised by Trustee as directed by Company, provided that such voting and other rights in any "employer security" within the meaning of Section 407(d)(1) of the Employee Retirement Income Security Act of 1974, as amended from time to time ("Employer Securities") which is held by the Trust shall be exercised by Trustee taking into account, to the extent it deems advisable, instructions from participants or beneficiaries having interests in such shares of Employer Securities. In the event Company or participant or beneficiary, as applicable, does not communicate any decision or instruction on the matter to Trustee or Trustee's designee by the time prescribed by Trustee for that purpose, Trustee may, at the cost of Company, obtain advice from a bank, insurance company, investment adviser or other investment professional (including an affiliate of Trustee) or retain an investment adviser pursuant to Section 5(c) with full discretion to make the decision." 13 2. Section 14(f) is hereby amended so as to delete Section 14(f) and insert a new Section 14(f) as follows: (f) For purposes of this Trust, a "Change in Control" shall mean: (i) With respect to Company, a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act") or any successor thereto; provided that, without limitation, such a change in control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of Voting Securities of Company representing 50% or more of the combined voting owner of Company's then outstanding Voting Securities; or (B) the stockholders of Company approve a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of Company approve a plan of complete liquidation of Company or an agreement for the sale or disposition by Company (in one transaction or a series of transactions) of all or substantially all of Company's assets. (ii) With respect to Company, a Change in Control shall mean: (A) any acquisition or more than 50% of the outstanding capital stock of Company, but excludes a public stock offering of Company's stock; or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Company, together with any new directors whose election or nomination for election was approved by a vote of at least two-thirds of the directors then still in office who were either directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors of Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur as a result of any event described in Sections 14(f)(i)(A), 14(f)(i)(C), or 14(f)(ii)(A), if directors who were a majority of the members of the Board prior to such event determine that the event shall not constitute a Change in Control within one year after the transaction and furnish written notice to Trustee of such determination. 14 (2) For purposes of this Trust Agreement, a Change in Control shall be deemed to have occurred when Trustee makes a determination to that effect on its own initiative or upon receipt by Trustee of written notice to that effect from Company. The Chief Executive Officer of Company or the Board shall furnish written notice to the Trustee when a Change in Control occurs under Section 14(f). (3) "Voting Securities" shall mean any securities of Company which vote generally in the election of directors." 3. This Amendment shall be effective as of August 1, 1994. 4. Except as provided herein, the Agreement shall remain in full force and effect as specifically amended hereby. IN WITNESS WHEREOF, the Trustee and the Employer have caused this Amendment to be executed on the date set forth below. MERRILL LYNCH TRUST COMPANY FREMONT GENERAL OF CALIFORNIA CORPORATION By: /s/ Chris Rosin By: /s/ Raymond G. Meyers -------------------------------- ----------------------- Name/Title: Chris Rosin Trust Officer Name/Title: Vice President Date: February 9, 1994 Date: January 27, 1994
EX-10.7 14 SENIOR SUPPLEMENTAL RETIREMENT PLAN 1 EXHIBIT 10.7 EXHIBIT A FREMONT GENERAL CORPORATION SENIOR SUPPLEMENTAL RETIREMENT PLAN 2 FREMONT GENERAL CORPORATION SENIOR SUPPLEMENTAL RETIREMENT PLAN TABLE OF CONTENTS ARTICLE 1. ESTABLISHMENT AND PURPOSE .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Establishment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purpose of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Application of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (a) Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (b) Administrative Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (C) Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (d) Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (e) Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (f) Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (9) Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (h) Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (i) Investment Incentive Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (i) Management Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (k) Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (l) Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (M) Retire and Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Gender And Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 3. ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2 Salary Deferral Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 4. BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.1 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.2 Maintenance Of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.3 Vesting And Forfeiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.4 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.5 Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE 5. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.1 Administrative Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.2 Uniform Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.3 Notice Of Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.4 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(i) 3 ARTICLE 6. AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.1 Amendment And Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.2 Reorganization Of Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.3 Protected Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 7. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.1 Nonassignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.2 Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.3 Illegality Of Particular Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.4 Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(ii) 4 FREMONT GENERAL CORPORATION SENIOR SUPPLEMENTAL RETIREMENT PLAN ARTICLE 1. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT OF PLAN. FREMONT GENERAL CORPORATION (the "Company") hereby adopts the FREMONT GENERAL CORPORATION SENIOR SUPPLEMENTAL RETIREMENT PLAN (the "Plan"), effective September 30, 1990, for eligible employees of the Company and selected subsidiaries. The Plan is intended to be exempt from the participation, vesting, funding, and fiduciary requirements of Title 1 of the Employee Retirement Income Security Act of 1974, as amended, and is intended to be maintained "primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees". 1.2 PURPOSE OF PLAN. It is the purpose of this Plan to permit eligible employees to receive benefits that will compensate them for the maximums imposed by Sections 401(a)(17), 401(k)(3), 401(m)(2) and 402(g) of the Code upon salary deferral contributions and matching contributions to qualified plans. 1.3 APPLICATION OF PLAN. The terms of this Plan are applicable to eligible employees employed by the Company on or after September 30, 1990, with respect to their Compensation and service on and after that date. 5 ARTICLE 2. DEFINITIONS 2.1 DEFINITIONS. whenever used in the Plan, the following terms shall have the respective meanings set forth below, unless a different meaning is required by the context in which the word is used, and when the defined meaning is intended, the term is capitalized: (a) "ACCOUNT" shall mean the Account or Accounts that the Committee shall maintain for a Participant under this Plan. (b) "ADMINISTRATIVE COMMITTEE" shall mean the committee with authority to administer the Plan as provided under Paragraph 5.1. (C) "AFFILIATE" shall mean any corporation which is controlled by or under common control with the Company. (d) "BENEFICIARY" shall mean the beneficiary designated under the Investment Incentive Program by the Participant to receive benefits in the event of the Participant's death. (e) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company. (f) "CODE" shall mean the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. (g) "COMPENSATION" shall mean a Participant's earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Employer (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses), plus salary deferral contributions made under the Investment Incentive Program, this Plan, or a plan maintained by the Employer under Section 125 of the Code. (h) "EMPLOYER" shall mean the Company and any Affiliate which is designated by the Board of Directors and which approves adoption of this Plan by appropriate corporate action. (i) "INVESTMENT INCENTIVE PROGRAM" shall mean the FREMONT GENERAL CORPORATION INVESTMENT INCENTIVE PROGRAM, a profit sharing plan qualified under Sections 401(a) and 401(k) of the Code. -2- 6 (j) "MANAGEMENT EMPLOYEE" shall mean employee of an Employer who is classified in pay grade 17 or higher and who is either (i) an officer of the Employer, or (ii) a designated senior management employee of an Employer. (k) "PARTICIPANT" shall mean any Management Employee who meets the requirements set forth in Article 3 to participate in the Plan. (1) "PLAN YEAR" shall mean the calendar year; provided, however, that the first Plan Year shall be the period commencing October 1, 1990 and ending December 31, 1990. (m) "RETIRE" and "RETIREMENT" shall mean a Participant's termination of employment after becoming eligible for "Retirement" as defined in the Investment Incentive Program. 2.2 GENDER AND NAME. Except when otherwise indicated by the context, any masculine terminology used herein shall also include the feminine, and the use of any term herein in the singular may also include the plural. -3- 7 ARTICLE 3. ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY. Any Management Employee who is eligible to participate in the Investment Incentive Program and who, for a given plan year of the Investment Incentive Program, (a) is a highly compensated employee (within the meaning of Section 414(q) of the Code) of the Employer for such plan year; and (b) would be ineligible (i) to make the maximum salary deferral contribution to the Investment Incentive Program due (A) to the dollar limitations under Sections 401(a)(17) and 402(g) of the Code, or (B) to the limitation on average deferral percentages under section 401(k)(3) of the Code; or (ii) to receive the maximum matching contribution to the Investment Incentive Program due to the limitation on average contribution percentages under Section 401(m)(2) of the Code; shall become a Participant in this Plan effective on the first day of such Plan Year. 3.2 SALARY DEFERRAL ELECTION. Each Management Employee who satisfies the eligibility requirements of Paragraph 3.1 shall elect prior to the first day of each Plan Year on a form provided by the Administrative Committee the level of salary deferral contributions which he desires to make to this Plan. Such election shall be in whole percentages not to exceed 15% and shall be irrevocable for such Plan Year once made; provided, however, that such election shall cease to be in effect upon (a) termination of his employment with the Employer, (b) his death, or (c) a determination by the Administrative Committee (in its absolute discretion) that he has suffered a significant hardship to justify permitting the revocation of his election for that Plan Year. -4- 8 ARTICLE 4. BENEFITS 4.1 CONTRIBUTIONS. The Committee of the Investment Incentive Program shall determine, as of the first day of each plan year of the Investment Incentive Program, the maximum interim salary deferral contribution percentage (the "Interim Contribution") that each highly-compensated employee (within the meaning of section 414(q) of the Code) participating in the Investment Incentive Program will be permitted to make to the Investment Incentive Program for that plan year. The excess of each Participant's salary deferral contributions under Paragraph 3.2 over the lesser of (a) the Interim Contribution, or (b) the dollar limitation for that plan year under Section 402(g) of the Code, together with the Matching Contribution directly attributable to such excess salary deferral contributions, shall be contributed by the Employer on a periodic basis in accordance with the Employer's payroll practices to a grantor trust or similar arrangement to fund benefits hereunder. As of the end of each plan year of the Investment Incentive Program, the Committee of the Investment Incentive Program shall determine the maximum salary deferral contributions and matching contribution available for each Participant under the Investment Incentive Program and shall notify the Administrative Committee of such additional salary deferral contributions, if any, and such additional matching contribution, if any, which can be made to the Investment Incentive Program for each Participant in this Plan. Within 10 days of such notification, the Administrative Committee shall direct the trustee of the grantor trust or the custodian of any similar arrangement funding benefits hereunder to transfer such contribution amounts (but not the earnings attributable to such amounts) to the trustee of the Investment Incentive Program. 4.2 MAINTENANCE AND INVESTMENT OF ACCOUNTS. (a) The Employer shall establish and maintain, in the name of each Participant, an individual Account which shall consist of all amounts contributed to the Plan on behalf of each Participant. Such contributed amounts shall be invested by the Trustee in such investment funds as the Administrative Committee shall determine are available from time to time under this Plan and in such percentages as elected by the Participant. (b) The individual Account of each Participant shall represent a liability, payable when due under this Plan, out of the general assets of the Employer, or from the assets of any trust, custodial account or escrow arrangement which the Employer may establish for the purpose of assuring availability of funds sufficient to pay benefits under this Plan. The money and other assets in any such trust or Account shall at all times remain the property of the Employer, -5- 9 and neither this Plan or any Participant shall have any beneficial ownership interest in the assets thereof. No property or assets of the Employer shall be pledged, encumbered, or otherwise subjected to a lien or security interest for payment of benefits hereunder. Accounting for this Plan shall be based on generally accepted accounting principles. 4.3 VESTING AND FORFEITURE. All benefits under this Plan shall be contingent and forfeitable, and each Participant shall have a vested interest in any benefit under this Plan in accordance with the vesting provisions set forth in Paragraphs 6.1 and 6.2 of the Investment Incentive Program. A person who terminates employment with the Employer for any reason prior to becoming vested hereunder shall not receive a benefit. 4.4 PAYMENT. Every Participant who Retires or terminates employment shall, if vested, have his Account distributed to him within the calendar quarter following the calendar quarter in which he terminates his employment in a single-sum payment, and the benefit distribution amount shall not accrue earnings or losses during the calendar quarter in which distribution is to occur. 4.5 DEATH. The Account of a Participant who dies while employed by an Employer shall be paid in a single-sum to the Participant's Beneficiary within the calendar quarter following the calendar quarter in which his death occurs. If a Participant dies after Retirement or termination of employment, then his surviving Beneficiary shall be paid the amount in the Participant's Account in a single-sum within the calendar quarter following the calendar quarter in which his death occurs, and the benefit distribution amount shall not accrue earnings or losses during the calendar quarter in which distribution is to occur. -6- 10 ARTICLE 5. ADMINISTRATION 5.1 ADMINISTRATIVE COMMITTEE. This Plan shall be administered by the Administrative Committee, whose members shall be the same persons who are the Plan Committee of the Investment Incentive Program from time-to-time. The interpretation and construction by the Administrative Committee of any provisions of this Plan shall be final unless otherwise determined by the Board Of Directors. Subject to the Board of Directors, the Administrative Committee is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to it, and to make all other determinations necessary for its administration. Without limiting the generality of the foregoing, the Administrative Committee shall have the authority to calculate amounts allocable to Participants, and to maintain and adjust accounts. The Administrative Committee shall have authority to delegate responsibility for performance of ministerial functions necessary for administration of the Plan to such officers of the Employer, including Participants, as the Administrative Committee shall in its discretion deem appropriate. 5.2 UNIFORM RULES. In administering the Plan, the Administrative Committee will apply uniform rules to all Participants similarly situated. 5.3 NOTICE OF ADDRESS. Any payment to a Participant or Beneficiary, at the last known post office address submitted to the Employer, shall constitute a complete acquittance and discharge of the Employer and any director or officer with respect thereto. Neither the Employer nor any director or officer shall have any duty or obligation to search for or ascertain the whereabouts of any Participant or his Beneficiary. 5.4 RECORDS. The records of the Administrative Committee with respect to the Plan shall be conclusive on all Participants, all Beneficiaries, and all other persons whomsoever. -7- 11 ARTICLE 6. AMENDMENT AND TERMINATION 6.1 AMENDMENT AND TERMINATION. The Company expects the Plan to be permanent, but since future conditions affecting the Company cannot be anticipated or foreseen, the Company must necessarily and does hereby reserve the right to amend, modify, or terminate the Plan at any time by action of its Board Of Directors, except that no amendment shall reduce the dollar amount credited to a Participant's Account and any such termination or amendment shall apply uniformly to all Participants. The Administrative Committee in its discretion may amend the Plan if it finds that such amendment does not significantly increase or decrease benefits or costs. 6.2 REORGANIZATION OF EMPLOYER. In the event of a merger or consolidation of the Employer, or the transfer of substantially all of the assets of the Employer to another corporation, such continuing, resulting or transferee corporation shall have the right to continue and carry on the Plan and to assume all liabilities of the Employer hereunder without obtaining the consent of any Participant or Beneficiary. If such successor shall assume the liabilities of the Employer hereunder, then the Employer shall be relieved of all such liability, and no Participant or Beneficiary shall have the right to assert any claim against the Employer for benefits under or in connection with this Plan. 6.3 PROTECTED BENEFITS. If the Plan is terminated or amended so as to prevent further earnings adjustments, or if liabilities accrued hereunder up to the date of an event specified in Paragraph 6.2 are not assumed by the successor to the Employer, then the dollar amount credited to the Account of each Participant, or Beneficiary (whether or not vested) shall be paid in cash to such Participant or Beneficiary in a single-sum on the last day of the second month following the month in which the amendment or termination occurs. -8- 12 ARTICLE 7. GENERAL PROVISIONS 7.1 NONASSIGNABILITY. Benefits under the Plan are not in any way subject to the debts or other obligations of the persons entitled thereto and may not voluntarily or involuntarily be sold, transferred, or assigned. Any voluntary attempt to sell, anticipate, assign, or encumber benefits under this Plan shall operate to cancel the benefit or the balance of a Participant's account as of the date of such attempt and to relieve the Employer from any future liability to pay or distribute any benefit with respect to such canceled amount. 7.2 EMPLOYMENT RIGHTS. The establishment of the Plan shall not be construed as conferring any legal rights upon any Participant or any other person for a continuation of employment, nor shall it interfere with the rights of the Employer to discharge any person or treat him without regard to the effect which such treatment might have upon him under this Plan. 7.3 ILLEGALITY OF PARTICULAR PROVISION. If any particular provision of this Plan shall be found to be illegal or unenforceable, such provision shall not affect any other provision, but the Plan shall be construed in all respects as if such invalid provision were omitted. 7.4 APPLICABLE LAWS. The Plan shall be governed by and construed according to the laws of the State of California. IN WITNESS WHEREOF, Fremont General Corporation has caused this instrument to be executed by its duly authorized officers on September 5, 1990, but effective as of September 30, 1990. FREMONT GENERAL CORPORATION, a Nevada corporation By: JAMES MCINTYRE ----------------------- JAMES MCINTYRE APPROVED AS TO FORM STEVEN L.GUISE - --------------------- STEVE L.GUISE Attorney for Employer -9- 13 AMENDMENT TO FREMONT GENERAL CORPORATION SENIOR SUPPLEMENTAL RETIREMENT PLAN Fremont General Corporation, a Nevada corporation, amends the Fremont General Corporation Senior Supplemental Retirement Plan (the "Plan"), effective January 1, 1993, in the following respects: Paragraph 3.2 of the Plan is amended to read as follows: 3.2 SALARY DEFERRAL ELECTION. Each Management Employee who satisfies the eligibility requirements of Paragraph 3.1 shall elect prior to the first day of each Plan Year on a form provided by the Administrative Committee the level of salary deferral contributions which he desires to make to this Plan. For calendar years commencing prior to January 1, 1993, such election shall be in whole percentages not to exceed 15%, and for calendar years commencing after December 31, 1992, such election may be made in an unlimited amount. An election made with respect to a calendar year shall be irrevocable for such Plan Year once made; provided, however, that such election shall cease to be in effect upon (a) termination of his employment with the Employer, (b) his death, or (c) a determination by the Administrative Committee (in its absolute discretion) that he has suffered a significant hardship to justify permitting the revocation of his election for that Plan Year. Dated: December 9, 1992 FREMONT GENERAL CORPORATION, a Nevada corporation By: RAYMOND G. MEYERS ----------------- RAYMOND G. MEYERS Vice President 14 Amendment to Fremont General Corporation Senior Supplemental Retirement Plan Fremont General Corporation, a Nevada corporation, adds the following paragraph to the Fremont General Corporation Senior Supplemental Retirement Plan (the "Plan"), effective May 1, 1994, as follows: 4.6 VOTING OF EMPLOYER STOCK. A Participant may direct the Trustee as to the manner in which Employer Stock allocated to his Account shall be voted. Before each meeting of the Employer's shareholders, the Trustee shall deliver to each Participant a copy of any proxy solicitation materials together with a form by which the Participant may instruct the Trustee how to vote the Employer Stock allocated to the Participant's Account. The Trustee shall vote Employer Stock through proxy in accordance with instructions received from the Participants. The Trustee shall vote Employer Stock which has not been allocated to a Participant or which is held in a suspense account in accordance with the direction of the Committee, or, in the absence of a direction of the Committee, in direct proportion to the instructions to vote received from the Participants. The Trustee shall vote allocated Employer Stock for which instructions are not received from the Participants in direct proportion to the instructions to vote received from Participants. Dated: May 11, 1994 Fremont General Corporation, a Nevada corporation By: RAYMOND G. MEYERS --------------------------- Raymond G. Meyers Senior Vice President EX-10.8.(B) 15 AMENDMENT TO EXCESS BENEFIT PLAN 1 EXHIBIT 10.8(b) Amendment to Fremont General Corporation Excess Benefit Plan Fremont General Corporation, a Nevada corporation, adds the following paragraph to the Fremont General Corporation Excess Benefit Plan (the "Plan"), effective May 1, 1994, as follows: 4.7 Voting of Employer Stock. A Participant may direct the Trustee as to the manner in which Employer Stock allocated to his Account shall be voted. Before each meeting of the Employer's shareholders, the Trustee shall deliver to each Participant a copy of any proxy solicitation materials together with a form by which the Participant may instruct the Trustee how to vote the Employer Stock allocated to the Participant's Account. The Trustee shall vote Employer Stock through proxy in accordance with instructions received from the Participants. The Trustee shall vote Employer Stock which has not been allocated to a Participant or which is held in a suspense account in accordance with the direction of the Committee, or, in the absence of a direction of the Committee, in direct proportion to the instructions to vote received from the Participants. The Trustee shall vote allocated Employer Stock for which instructions are not received from the Participants in direct proportion to the instructions to vote received from Participants. Dated: May 11, 1994 Fremont General Corporation, a Nevada corporation By: /s/ Raymond G. Meyers ---------------------------------- Raymond G. Meyers Senior Vice President EX-10.8.(C) 16 TRUST AGT FOR EXCESS BENEFIT PLAN 1 EXHIBIT 10.8(c) TRUST UNDER: DEFERRED COMPENSATION PLAN(1) This Agreement made this day of August 1, 1994, by and between Fremont General Corporation (Company) and Merrill Lynch Trust Company corporation (Trustee): WHEREAS, Company has adopted the Non-Qualified Deferred Compensation Plan identified above and such other Plan(s) as are listed in Appendix A. WHEREAS, Company has incurred or expects to incur liability under the terms of such Plan(s) with respect to the individuals participating in such Plan(s). WHEREAS, Company wishes to establish a trust (the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of the Company's insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan(s); WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan(s) as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purpose of Title I of the Employee Retirement Income Security Act of 1974. WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan(s); NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1. ESTABLISHMENT OF TRUST. (a) Company hereby deposits with Trustee in trust such cash and/or marketable securities, if any, listed in Appendix B, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. ____________________ (1) This trust is intended to comply with the model grantor trust requirement of Revenue Procedure 9264. While Merrill Lynch believes that this Trust Agreement complies with the Revenue Procedure, it provides no assurance that modifications to the additional terms contained herein would not be required by the Internal Revenue Service during the review process in the event the Company were to apply for a ruling as to the tax consequences of its plan and this trust. If the Company desires to obtain such a ruling from the Internal Revenue Service, a copy of this Trust Agreement with all substituted or additional language underlined as required by the Revenue Procedure is available through your Merrill Lynch Financial Consultant. 2 (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan(s) and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their bene ficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of insolvency, as defined in Section 3(a) herein. (e) Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shad have any right to compel such additional deposits. (f) Trustee shall not be obligated to receive such cash and/or property unless prior thereto Trustee has agreed that such cash and/or property is acceptable to Trustee and Trustee has received such reconciliation, allocation, investment or other information concerning, or representation with respect to, the cash and/or property as Trustee may require. Trustee shall have no duty or authority to (a) require any deposits to be made under the Plan or to Trustee, (b) compute any amount to be deposited under the Plan to Trustee: or (c) determine whether amounts received by Trustee comply with the Plan. Assets of the Trust may, in Trustee's discretion, be held in an account with an affiliate of Trustee. SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. (a) With respect to each Plan participant, Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of the participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan(s)), and the time of commencement for payment of such amounts. The Payment Schedule shall be delivered to Trustee not more than [30] business days nor fewer than [15] business days prior to the first date on which a payment is to be made to the Plan participant. Any change to a Payment Schedule shall be delivered to Trustee not more than [30] days nor fewer than [15] days prior to the date on which the first payment is to be made in accordance with the changed Payment Schedule. Except as otherwise provided herein. Trustee shall make payments to Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provisions for the reporting and withholding of any federal state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company, it being understood among the parties hereto that (1) Company shall on a timely basis provide Trustee specific information -2- 3 as to the amount of taxes to be withheld and (2) Company shall be obligated to receive such withheld taxes from Trustee and property pay and report such amounts to the appropriate taxing authorities. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan(s) shall be determined by Company or such party as it shall designate under the Plan(s), and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan(s). (c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan(s). Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan(s), Company shall make the balance of each payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. (d) Trustee shall have no responsibility to determine whether the Trust is sufficient to meet the liabilities under the Plan(s), and shall not be liable for payments or Plan(s) liabilities in excess of the value of the Trust's. SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT. (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is insolvent, Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject to claim of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Company (or, if there is no Chief Executive Officer, the highest ranking officer) shall have the duty to inform Trustee in writing of Company's insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become insolvent, Trustee shall determine whether Company is insolvent and, pending such determination. Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Company's insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is insolvent. Trustee shall have no duty to inquire whether Company is insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. -3- 4 (3) If at any time Trustee has determined that Company is insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan(s) or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not insolvent (or is no longer insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan(s) for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants provided for hereunder during any such period of discontinuance; provided that Company has given Trustee the information with respect to such payments made during the period of discontinuance prior to resumption of payments by Trustee. SECTION 4. PAYMENTS TO COMPANY. Except as provided in Section 3 hereof, since the Trust is irrevocable in accordance with Section l(b) hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan(s). SECTION 5. INVESTMENT AUTHORITY. (a) Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercised by or rest with Plan participants, except that voting rights with respect to Trust assets will be exercised by Company unless an investment adviser has been appointed pursuant to Section 5(c) and voting authority has been delegated to such investment adviser. (b) Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercised by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. (c) Trustee may appoint one or more investment advisers who are registered as investment advisers under the investment Advisers Act of 1940, who may be affiliates of Trustee, to provide investment advice on a discretionary or nondiscretionary basis with respect to all or a specified portion of the assets of the Trust. -4- 5 (d) Trustee, or Trustee's designee, is authorized and empowered: (1) To invest and reinvest Trust assets, together with the income therefrom, in common stock, preferred stock, convertible preferred stock, bonds, debentures, convertible debentures and bonds, mortgages, notes, commercial paper and other evidences of indebtedness (including those issued by Trustee), shares of mutual funds (which funds may be sponsored, managed or offered by an affiliate of Trustee), guaranteed investment contracts, bank investment contracts, other securities, policies of life insurance, annuity contracts, options, options to buy or sell securities or other assets, and all other property of any type (personal, real or mixed, and tangible or intangible); (2) To deposit or invest all or any part of the assets of the Trust in savings accounts or certificates of deposit or other deposits in a bank or savings and loan association or other depository institution, including Trustee or any of its affiliates, provided with respect to such deposits with Trustee or an affiliate the deposits bear a reasonable interest rate: (3) To hold, manage, improve, repair and control all property, real or personal, forming part of the Trust; to sell, convey, transfer, exchange, partition, lease for any term, even extending beyond the duration of this Trust, and otherwise dispose of the same from time to time; (4) To hold in cash, without liability for interest, such portion of the Trust as is pending investments, or payment of expenses, or the distribution of benefits: (5) To take such actions as may be necessary or desirable to protect the Trust from loss due to the default on mortgages held in the Trust including the appointment of agents or trustees in such other jurisdictions as may seem desirable, to transfer property to such agents or trustees, to grant to such agents such powers as are necessary or desirable to protect the Trust, to direct such agent or trustee, or to delegate such power to direct, and to remove such agent or trustee; (6) To settle, compromise or abandon all claims and demands in favor of or against the Trust; (7) To exercise all of the further rights, powers, options and privileges granted, provided for, or vested in trustees generally under the laws of the state in which Trustee is incorporated as set forth above, so that the powers conferred upon Trustee herein shall not be in limitation of any authority conferred by law, but shall be in addition thereto; (8) To borrow money from any source and to execute promissory notes, mortgages or other obligations and to pledge or mortgage any trust assets as security; and (9) To maintain accounts at, execute transactions through, and lend on an adequately secured basis stocks, bonds or other securities to any brokerage or other firm, including any firm which is an affiliate of Trustee. -5- 6 SECTION 6. ADDITIONAL POWERS OF TRUSTEE. To the extent necessary or which it deems appropriate to implement its powers under Section 5 or otherwise to fulfill any of its duties and responsibilities as Trustee of the Trust, Trustee shall have the following additional powers and authority: (a) To register securities, or any other property, in its name or in the name of any nominee, including the name of any affiliate or the nominee name designated by any affiliate, with or without indication of the capacity in which property shall be held, or to hold securities in bearer form and to deposit any securities or other property in a depository or clearing corporation; (b) To designate and engage the services of, and to delegate powers and responsibilities to, such agents, representatives, advisers, counsel and accountants as Trustee considers necessary or appropriate, any of whom may be an affiliate of Trustee or a person who renders services to such an affiliate, and, as a part of its expenses under this Trust Agreement, to pay their reasonable expenses and compensation; (c) To make, execute and deliver, as Trustee, any and all deeds, leases, mortgages, conveyances, waivers, releases or other instruments in writing necessary or appropriate for the accomplishment of any of the powers listed in this Trust Agreement; and (d) Generally to do all other acts which Trustee deems necessary or appropriate for the protection of the Trust. SECTION 7. DISPOSITION OF INCOME. (a) During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. SECTION 8. ACCOUNTING BY TRUSTEE. (a) Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within 90 days following the close of each calendar year and within 90 days after removal or resignation of Trustee. Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Trustee may satisfy its obligation under this Section 8 by rendering to Company monthly statements setting forth the information required by this Section separately for the month covered by the statement. -6- 7 SECTION 9. RESPONSIBILITY AND INDEMNITY OF TRUSTEE. (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan(s) and this Trust and is given in writing by Company. Trustee shall also incur no liability to any person for any failure to act in the absence of direction, request or approval from Company which is contemplated by, and in conformity with, the terms of this Trust. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) Company hereby indemnifies Trustee and each of its affiliates (collectively, the "Indemnified Parties") against, and shall hold them harmless from, any and all loss, claims, liability, and expense, including reasonable attorneys' fees, imposed upon or incurred by any Indemnified Party as a result of any acts taken, or any failure to act, in accordance with the directions from Company or any designee of Company, or by reason of the Indemnified Party's good faith execution of its duties with respect to the Trust, including, but not limited to, its holding of assets of the Trust. Company's obligations in the foregoing regard to be satisfied promptly by Company, provided that in the event the loss, claim, liability or expense involved is determined by a no longer appealable final judgment entered in a lawsuit or proceeding to have resulted from the gross negligence or willful misconduct of Trustee, Trustee shall promptly on request thereafter return to Company any amount previously received by Trustee under this Section with respect to such loss, claim, liability or expense. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust without direction from Company. (c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisers, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) Trustee shall have, without exclusion, all powers conferred on Trustee by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust. Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) However, notwithstanding the provisions of Section 9(e) above, Trustee may loan to Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust. -7- 8 (g) Notwithstanding any powers to Trustee pursuant to this Trust Agreement or to applicable law. Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section.301-7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. SECTION 10. COMPENSATION AND EXPENSES OF TRUSTEE. Trustee is authorized, unless otherwise agreed by Trustee, to withdraw from the Trust without direction from Company the amount of its fees in accordance with the fee schedule agreed to by Company and Trustee. Company shall pay all administrative expenses, but if not so paid, the expenses shall be paid from the Trust. SECTION 11. RESIGNATION AND REMOVAL OF TRUSTEE. (a) Trustee may resign at any time by written notice to Company, which shall be effective 30 days after receipt of such notice unless Company and Trustee agree otherwise. (b) Trustee may be removed by Company on 30 days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 60 days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit, provided that Trustee is provided assurance by Company satisfactory to Trustee that all fees and reasonably anticipated will be paid. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made. Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. (e) Upon settlement of the account and transfer of the Trust assets to the successor Trustee, all rights and privileges under this Trust Agreement shall vest in the successor Trustee and all responsibility and liability of Trustee with respect to the Trust and assets thereof shall terminate subject only to the requirement that Trustee execute all necessary documents to transfer the Trust assets to the successor Trustee. SECTION 12. APPOINTMENT OF SUCCESSOR. (a) If Trustee resigns or is removed in accordance with Section 11(a) or (b) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The -8- 9 appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. SECTION 13. AMENDMENT OR TERMINATION. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan(s) or shall make the Trust revocable since the Trust is irrevocable in accordance with Section 1(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan(s). Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. (c) Upon written approval of participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan(s), Company may terminate this Trust prior to the time all benefit payments under the Plan(s) have been made. All assets in the Trust at termination shall be returned to Company. SECTION 14. MISCELLANEOUS. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the state in which Trustee is incorporated as set forth above. (d) The provisions of Sections 2(d), 3(b)(3), 9(b) and 15 of this Agreement shall survive termination of this Agreement. -9- 10 (e) The rights, duties, responsibilities, obligations and liabilities of Trustee are as set forth in this Trust Agreement, and no provision of the Plan(s) or any other documents shall affect such rights, responsibilities, obligations and liabilities. If there is a conflict between provisions of the Plan(s) and this Trust Agreement with respect to any subject involving Trustee, including but not limited to the responsibility, authority or powers of Trustee, the provisions of this Trust Agreement shall be controlling. (f) For purposes of this Trust, Change of Control shall mean: The purchase or other acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or of the sale of all or substantially all of Company's assets. SECTION 15. ARBITRATION. Arbitration Is final and binding on the parties. o The parties waive their right to seek remedies in court, including the right to jury trial. o Pre-arbitration discovery if generally more limited than and different from court proceedings. o The arbitrators award is not required to include factual findings or level reasoning and any party's right to appeal or seek modification of rulings by the arbitrators is strictly limited. o The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry. Company agrees that all controversies which may arise between Company and either or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in connection with the Trust, including but not limited to, those involving any transactions, or the construction, performance, or breach of this or any other agreement between Company and either or both the Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement may be conducted only before the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or arbitration facility provided by any other of which MLPF&S is a member, the National Association of Securities Dealers, Inc., or the Municipal Securities Rulemaking Board, and in accordance with its arbitration rules then in force. Company may elect in the -10- 11 first instance whether arbitration shall be conducted before the New York Stock Exchange Inc., the American Stock Exchange, Inc., other exchange of which MLPF&S is a member, the National of Securities Dealers, Inc., or the Municipal Securities Rulemaking Board, but if Company fails to make such election, by registered letter or telegram addressed to Merrill Lynch Trust Companies & Employee Benefit Trust Operations, P.O. Box 30532, New Brunswick, New Jersey 08989-0532, before the expiration of five (5) days after receipt of a written request from MLPF&S and/or the Trustee to make such election, then MLPF&S and/or the Trustee may make such election. Judgment upon the award of arbitrators may be entered in any court, state or federal having jurisdiction. No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; who is a member of putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein. SECTION 16. EFFECTIVE DATE. The effective date of this Trust Agreement shall be August 1, 1994. -11- 12 IN WITNESS WHEREOF, Company and the Trustee have executed this Trust Agreement each by action of a duly authorized person. By signing this Agreement the undersigned Company acknowledges (1) that, in accordance with Section 15 of this Agreement, Company is agreeing in advance to arbitrate any controversies which may arise with either or both the Trustee or MLPF&S and (2) receipt of a copy of this Agreement. Fremont General Corporation By: /s/ James A. McIntyre ---------------------------------- Name/Title: James A. McIntyre, President, FGC and Chairman of the Board Trustee By: /s/ Chris Rosin ---------------------------------- Name/Title: Trust Officer -12- 13 APPENDIX A Name of Non-Qualified Deferred Compensation Plan(s): Fremont General Corporation Excess Benefit Plan 14 APPENDIX B Deposit of cash and/or marketable securities to the Trust: As of 3/31/94 (approx.): Cash: $15,479.09 Marketable Securities: Fremont General Corporate Common Stock - 61,121 Shares 15 Amendment for Fremont's Excess Benefit Plan AMENDMENT TO THE MERRILL LYNCH NON-QUALIFIED DEFERRED COMPENSATION PLAN TRUST AGREEMENT between MERRILL LYNCH TRUST COMPANY OF CALIFORNIA and FREMONT GENERAL CORPORATION AMENDMENT to the Merrill Lynch Non-Qualified Deferred Compensation Plan Trust Agreement entered into as of August 1, 1994 by and between Merrill Lynch Trust Company of California (the "Trustees") and Fremont General Corporation (the "Employer") in respect of a trust forming part of the Fremont General Excess Benefit Plan. WHEREAS, the Trustee and the Employer wish to amend the Agreement as hereinafter set forth; NOW, THEREFORE, the Trustee and the Employer agree that said Agreement shall be amended as follows: 1. Section 5(a) is hereby amended so as to delete the second sentence thereof and insert in lieu thereof the following: "All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee or the person designated by Trustee, and shall in no event be exercised by or rest with Plan participants, except that voting rights shall be exercised as set forth below. Notwithstanding the foregoing sentence, the voting and other rights in securities or other assets held in the Trust shall be exercised by Trustee as directed by Company, provided that such voting and other rights in any "employer security" within the meaning of Section 407(d)(1) of the Employee Retirement Income Security Act of 1974, as amended from time to time ("Employer Securities") which is held by the Trust shall be exercised by Trustee taking into account, to the extent it deems advisable, instructions from participants or beneficiaries having interests in such shares of Employer Securities. In the event Company or participant or beneficiary, as applicable, does not communicate any decision or instruction on the matter to Trustee or Trustee's designee by the time prescribed by Trustee for that purpose, Trustee may, at the cost of Company, obtain advice from a bank, insurance company, investment adviser or other investment professional (including an affiliate of Trustee) or retain an investment adviser pursuant to Section 5(c) with full discretion to make the decision." 16 2. Section 14(f) is hereby amended so as to delete Section 14(f) and insert a new Section 14(f) as follows: (f) For purposes of this Trust, a "Change in Control" shall mean: (i) With respect to Company, a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act") or any successor thereto; provided that, without limitation, such a change in control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of Voting Securities of Company representing 50% or more of the combined voting owner of Company's then outstanding Voting Securities; or (B) the stockholders of Company approve a merger or consolidation of Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of Company approve a plan of complete liquidation of Company or an agreement for the sale or disposition by Company (in one transaction or a series of transactions) of all or substantially all of Company's assets. (ii) With respect to Company, a Change in Control shall mean: (A) any acquisition or more than 50% of the outstanding capital stock of Company, but excludes a public stock offering of Company's stock; or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Company, together with any new directors whose election or nomination for election was approved by a vote of at least two-thirds of the directors then still in office who were either directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors of Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur as a result of any event described in Sections 14(f)(i)(A), 14(f)(i)(C), or 14(f)(ii)(A), if directors who were a majority of the members of the Board prior to such event determine that the event shall not constitute a Change in Control within one year after the transaction and furnish written notice to Trustee of such determination. 17 (2) For purposes of this Trust Agreement, a Change in Control shall be deemed to have occurred when Trustee makes a determination to that effect on its own initiative or upon receipt by Trustee of written notice to that effect from Company. The Chief Executive Officer of Company or the Board shall furnish written notice to the Trustee when a Change in Control occurs under Section 14(f). (3) "Voting Securities" shall mean any securities of Company which vote generally in the election of directors." 3. This Amendment shall be effective as of August 1, 1994. 4. Except as provided herein, the Agreement shall remain in full force and effect as specifically amended hereby. IN WITNESS WHEREOF, the Trustee and the Employer have caused this Amendment to be executed on the date set forth below. MERRILL LYNCH TRUST COMPANY FREMONT GENERAL OF CALIFORNIA CORPORATION By: /s/ Chris Rosin By: /s/ James A. McIntyre -------------------------------- ----------------------------- Name/Title: Chris Rosin Trust Officer Name/Title: Chairman of the Board and President, FGC Date: August 3, 1994 Date: August 1, 1994
EX-10.9 17 NON QUALIFIED STOCK OPTION PLAN 1 EXHIBIT 10.9 AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989 AS OF JANUARY 8, 1996 FREMONT GENERAL CORPORATION (the "Company"), a corporation organized under the laws of the State of Nevada, hereby adopts this AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989 (the "Plan") which amends the Non-Qualified Stock Option Plan of 1989 to reserve an additional 893,750 (reflecting a share adjustment pursuant to Section 2.3 of the Plan as a result of the 3-for-2 stock split distributed on February 7, 1996) shares for future grants. The purposes of this Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to certain of the key employees of the Company and its Subsidiaries who have been or will be given responsibility for the management or administration of the Company's business affairs, by assisting them to become owners of Common Stock of the Company and thus to benefit directly from its growth, development and financial success; (2) To enable the Company to obtain and retain the services of the type of professional, technical and managerial persons considered essential to the long-range success of the Company by providing and offering them an opportunity to become owners of Common Stock of the Company; and (3) To attract, motivate and retain experienced and knowledgeable outside directors through the benefits provided in Article III. ARTICLE I DEFINITIONS SECTION 1.1 - General Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. SECTION 1.2 - Board "Board" shall mean the Board of Directors of the Company. SECTION 1.3 - Code "Code" shall mean the Internal Revenue Code of 1986, as amended. 2 SECTION 1.4 - Committee "Committee" shall mean the Stock Option Committee of the Board, appointed as provided in Section 5.1. SECTION 1.5 - Company "Company" shall mean Fremont General Corporation. SECTION 1.6 - Director "Director" shall mean a member of the Board of Directors of Fremont General Corporation. SECTION 1.7 - Employee "Employee" shall mean any employee (including any officer) of the Company, or of any corporation which is then a subsidiary, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. SECTION 1.8 - Employee Participant "Employee Participant" shall mean any Employee who has been granted an Option under the provisions of Article IV. SECTION 1.9 - Fair Market Value "Fair Market Value" shall mean: (i) the closing price of a share of the Company's stock on the principal exchange on which shares of the Company's stock are then trading (or the last sale price if the shares are traded on the National Market System), if any, on such date, or, if shares were not traded on such date, then on the next preceding day during which a sale occurred; or (ii) if such stock is not traded on an exchange but quoted on NASDAQ or a successor quotation system, the mean between the closing representative bid and asked prices for the stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the stock on such date; or (iv) if the Company's stock is not publicly traded, the fair market value as established by the Committee acting in good faith at such time for the purposes of this Plan. SECTION 1.10 - Non-Employee Director "Non-Employee Director" shall mean a member of the Board who is not an officer or employee of the Company or any Subsidiary. -2- 3 SECTION 1.11 - Non-Employee Director Participant "Non-Employee Director Participant" shall mean a Non-Employee Director who has been granted an Option under the provisions of Article III. SECTION 1.12 - Option "Option" shall mean an option to purchase Common Stock of the Company granted under the Plan. SECTION 1.13 - Plan The "Plan" shall mean this AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989. SECTION 1.14 - Pronouns The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, where the context so indicates. SECTION 1.15 - Secretary "Secretary" shall mean the Secretary of the Company. SECTION 1.16 - Subsidiary "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns the stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 1.17 - Termination of Employment "Termination of Employment" shall mean the time when the employee-employer relationship between the Employee Participant and the Company or a Subsidiary is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding terminations where there is a simultaneous reemployment by the Company or a Subsidiary. For purposes of this Section 1.17, an Employee Participant who is employed by a Subsidiary will be deemed to have terminated employment at such time as the Employee Participant's employer ceases to be a Subsidiary. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Termination of Employment. -3- 4 ARTICLE II SHARES SUBJECT TO PLAN SECTION 2.1 - Shares Subject to Plan The shares of stock subject to Options shall be shares of the Company's Common Stock. The aggregate number of such shares which may be delivered upon exercise of Options shall not exceed 2,681,250, (adjusted to reflect (i) the 3-for-2 stock split distributed on June 17, 1993; (ii) the ten percent (10%) stock dividend paid on June 15, 1995 and (iii) the 3-for-2 stock split distributed on February 7, 1996) subject to adjustments required by this Plan and as may be required by Rule 16b-3. Shares subject to outstanding options shall be reserved for issuance under the Plan. SECTION 2.2 - Unexercised Options If any Option expires, terminates, is surrendered or cancelled without having been fully exercised, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation will not be charged against the maximum number of shares set forth in Section 2.1 above and may again be optioned hereunder. SECTION 2.3 - Changes in Company's Shares In the event that the outstanding shares of Common Stock of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, the Committee shall make an appropriate proportionate and equitable adjustment in the number and kind of securities for the purchase of which Options may be granted, including adjustments of the limitations in Sections 2.1, 3.2 and 4.9 on the maximum and specific number and kind of securities which may be issued on exercise of Options. ARTICLE III NON-EMPLOYEE DIRECTOR OPTIONS SECTION 3.1 - Participation Grants of Options under this Article III shall be made only to Non-Employee Directors. Each such Option shall provide that the Option shall not be treated as an incentive stock option within the meaning of Section 422 of the Code. -4- 5 SECTION 3.2 - Annual Option Grants (a) Time of Initial Award. Upon approval of this First Restatement of the Plan by the shareholders of the Company, there shall be granted automatically (without any action by the Board or Committee) to each director who is not then an officer or employee of the Company an Option (the date of grant of which shall be the date of such approval) to purchase 2,500 shares of Common Stock. (b) Subsequent Annual Awards. On the date of the annual shareholders' meeting of the Company in 1993, 1994, and 1995, there shall be granted automatically (without any action by the Committee or the Board) an Option (the date of grant of which shall be such shareholders' meeting date) to each Non-Employee Director then in office to purchase 2,500 in 1993 and 3,750 in 1994 and 1995 (adjusted as applicable, to reflect the 3-for-2 stock split distributed on June 17, 1993) shares of Common Stock. SECTION 3.3 - Option Price The exercise price per share of the Common Stock covered by each Option granted pursuant to Section 3.2 hereof shall be one hundred percent (100%) of the Fair Market Value of the Common Stock on the date such Option is granted. Upon the fifth (5th) anniversary of the date of such grant, however, and on each successive anniversary thereafter until the Option is either exercised or expires, the exercise price of each unexercised Option shall be automatically reduced by one-sixth (1/6th) of the original option exercise price. Upon exercise of an Option, the Optionee shall pay to the Company the then applicable option exercise price. SECTION 3.4 - Option Period Each Option granted under this Article III and all rights or obligations thereunder shall expire ten (10) years after the date such Option is granted and shall be subject to earlier termination as provided below. SECTION 3.5 - Exercise of Options Each Option granted under this Article III shall become exercisable in four equal installments at the rate of twenty-five percent (25%) per year beginning on the first anniversary of the grant date. The exercise price of each Option granted under this Article III shall be paid in full at the time of exercise in cash or by check or in shares of Common Stock valued at their Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, provided that any such shares used in payment of such exercise price shall have been owned by the Non-Employee Director Participant at least six (6) months prior to the date of exercise. An exercisable Option may be exercised solely by delivery to the Secretary or his or her office of a notice in writing signed by the -5- 6 Non-Employee Director Participant (or other person then entitled to exercise the Option or portion thereof pursuant to Section 6.3, subject to Section 6.8). SECTION 3.6 - Termination of Directorship If a Non-Employee Director Participant's services as a member of the Board of Directors terminate, an Option granted pursuant to this Article held by such Non-Employee Director Participant shall remain exercisable to the extent it was then exercisable until the first to occur of the following events: (i) The expiration of ten (10) years after the date the Option was granted: or (ii) Except in the case of any Non-Employee Director Participant who is disabled (within the meaning of Section 105(d)(4) of the Code), or dies, the expiration of three (3) months after the date of the Non-Employee Director Participant's termination from service; or (iii) In the case of any Non-Employee Director Participant who is disabled (within the meaning of Section 105(d)(4) of the Code), or dies, the expiration of twelve (12) months after the date of the Non-Employee Director Participant's termination from service. SECTION 3.7 - Acceleration Upon a Change in Control Event (a) Upon the occurrence of a Change in Control Event (as defined below), each Option granted under Section 3.2 shall become immediately exercisable in full; provided, however, that none of such Options shall be accelerated to a date less than six (6) months after the initial date of grant of such Option. (b) For purposes of this Section 3.7, a "Change in Control Event" shall mean (i) Approval by the shareholders of the Company of the dissolution or liquidation of the Company; (ii) Approval by the shareholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries, as a result of which less than fifty percent (50%) of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned by shareholders of the Company immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Company's securities from the record date of such shareholder action until such reorganization and that such record owners hold no securities of the other parties to such reorganization); (iii) Approval by the shareholders of the Company of the sale of substantially all of the Company's business and/or assets to a person or entity which is not a Subsidiary; -6- 7 (iv) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing more than eighty percent (80%) of the combined voting power of the Company's then outstanding securities entitled to then vote generally in the election of directors of the Company; or (v) During any period not longer than two (2) consecutive years, individuals who at the beginning of such period constituted the Board cease to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of at least a majority of the new Board members during such period was approved by a vote of at least two-thirds (2/3rds) of the Board members then still in office who were Board members at the beginning of such period. SECTION 3.8 - Adjustments and Termination Options granted under this Article III shall be subject to adjustment as provided in Sections 2.3 and 6.2, but only to the extent that (a) such adjustment and the Committee's action in respect thereof satisfy applicable criteria for disinterested administration under Rule 16b-3, (b) such adjustment in the case of a Change in Control Event is effected pursuant to the terms of a reorganization agreement approved by shareholders of the Company, and (c) such adjustment is consistent with the adjustments to Options held by persons other than executive officers or directors of the Company. To the extent that any Option granted under this Article III is not exercised prior to (x) a dissolution of the Company, or a merger or other corporate reorganization that the Company does not survive, and (y) no provision is (or consistent with the provisions of the preceding sentence can be) made for the assumption, conversion, substitution or exchange of the Option, the Option shall terminate upon the occurrence of such event. SECTION 3.9 - Limitation on Amendments The provisions of this Article III shall not be amended more than once every six (6) months (other than as may be necessary to conform to any applicable changes in the Code or the rules thereunder), unless such amendment would be consistent with the provisions of Rule 16b-3(c) (2) (ii) (or any successor provision). -7- 8 ARTICLE IV EMPLOYEE OPTIONS SECTION 4.1 - Eligibility Any key Employee of the Company or a Subsidiary who is selected by the Committee shall be eligible to be granted Options under this Article. SECTION 4.2 (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are key Employees and select from among the key Employees (including those to whom Options have been previously granted under the Plan) such of them as in its opinion should be granted Options; and (ii) Determine the number of shares to be subject to such Options granted to such selected key Employees; and (iii) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary to issue such Option and may impose such conditions on the grant of such Option as deemed appropriate. Each such Option shall provide that the Option shall not be treated as an incentive stock option within the meaning of Section 422A of the Code. SECTION 4.3 - Option Price The exercise price per share of the Common Stock covered by each Option granted pursuant to Section 3.2 hereof shall be one hundred percent (100%) of the Fair Market Value of the Common Stock on the date such Option is granted. Upon the fifth (5th) anniversary of the date of such grant, however, and on each successive anniversary thereafter until the Option is either exercised or expires, the exercise price of each unexercised Option shall be automatically reduced by one-sixth (1/6th) of the original option exercise price. Upon exercise of an Option, the Optionee shall pay to the Company the then applicable option exercise price. SECTION 4.4 - Commencement of Exercisability (a) No Option granted under this Article IV may be exercised in whole or in part during the first year after such option is granted or, if the exercise price of an option is reduced by amendment other than as described above in Section 4.3, during the first year after such amendment. -8- 9 (b) Subject to the provisions of Section 4.4(a), 4.4(c) and 6.3, such Options are, subject to the discretion of the Committee to otherwise provide, exercisable at a rate of twenty-five percent (25%) per year beginning on the first anniversary of the grant date; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Sections 4.4(a), 4.4(c), 4.5 and 6.3, accelerate or extend the time at which such Option or any portion thereof may be exercised. (c) Unless the Committee otherwise provides, no portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable. SECTION 4.5 - Expiration of Options (a) No Option may be exercised to any extent by anyone after the first to occur of the following events (unless, as to clauses (ii) through (iv) below, the Committee otherwise provides): (i) The expiration of ten (10) years after the date the Option was granted; or (ii) Except in the case of any Employee Participant who is disabled (within the meaning of Section 105(d) (4) of the Code), the expiration of three (3) months after the date of the Employee Participant's Termination of Employment for any reason other than such Employee Participant's death unless the Employee Participant dies within said three (3) months period; or (iii) In the case of an Employee Participant who is disabled (within the meaning of Section 105(d)(4) of the Code), the expiration of twelve (12) months from the date of the Employee Participant's Termination of Employment for any reason other than such Employee Participant's death unless the Employee Participant dies within said twelve (12) month period; or (iv) The expiration of one (1) year after the date of the Employee Participant's death. (b) Subject to the provisions of Section 4.5(a), the Committee shall provide, in the terms of each individual Option granted to an Employee Participant, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any one or more reasons. SECTION 4.6 - Consideration In consideration of the granting of the Option, the Employee Participant shall agree, in the written Stock Option Agreement, to remain in the employ of the Company or a Subsidiary for a period of at least one (1) year after the Option is granted. Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon an Employee Participant any right to continue in the employ of the Company or any Subsidiary. The granting of the Option shall not interfere with or restrict in any way the rights of -9- 10 the Company and Subsidiaries, which are hereby expressly reserved, to discharge any Employee Participant at any time for any reason whatsoever, with or without good cause. SECTION 4.7 - Merger, Consolidation, Exchange, Acquisition, Liquidation or Dissolution In its absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide by the terms of any Option granted to an Employee Participant that such Option cannot be exercised after the merger or consolidation of the Company into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation of eighty percent (80%) or more of the Company's then outstanding voting stock or the liquidation or dissolution of the Company; and if the Committee so provides, it may, in its absolute discretion and on such terms and conditions as it deems appropriate, also provide either by the terms of such Option or by a resolution adopted prior to the occurrence of such merger, consolidation, exchange, acquisition, liquidation or dissolution, that, for some period of time prior to such event, such Options or some of them shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in Section 4.4(a), Section 4.4(b) and/or in any installment provisions of such Option. SECTION 4.8 - Manner of Exercise An exercisable Option granted to an Employee Participant, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or his or her office of all of the following prior to the time when such Option or such portion becomes unexercisable under Section 4.5 or Section 4.7: (a) Notice in writing signed by the Employee Participant or other person then entitled to exercise such Option or portion, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; and (b) (i) Full payment (in cash or by check payable to the Company) for the shares with respect to which such Option or portion is thereby exercised; or (ii) Subject to such conditions and rules as the Committee may establish, shares of any class of the Company's stock owned by the Employee Participant duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate Option price of the shares with respect to which such Option or portion in thereby exercised; or (iii) At the option and in the sole discretion of the Committee, promissory note or notes of the Employee Participant, to be secured by a security interest in the shares issued upon exercise and such other security, if any, as the Committee may require. Any such promissory notes shall bear a rate of interest not less than a rate, if any, as it may change from time to time required under federal tax law to prevent any imputation of interest, unless such rate exceeds the maximum rate permissible under Nevada law, in which case the rate shall not exceed the maximum permitted under Nevada law. All other terms of such note shall be determined, subject to compliance with applicable laws (including federal -10- 11 margin requirements if applicable), solely by the Committee. All terms and conditions, including whether the note shall become due upon Termination of Employment, shall be expressly set forth in the promissory note or notes executed by the Employee Participant. The Committee shall furnish the Employee Participant with a Truth-in-Lending statement if required showing the terms of the loan, including the amount financed, total payments of interest, total payments of principal and annual percentage rate; or (iv) Any combination of the consideration permitted by the foregoing subsections. (c) Such representation and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to agents and registrars. (d) In the event the Option or portion shall be exercised pursuant to Section 6.3 by any person or persons other than the Employee Participant, appropriate proof of the right of such person or persons to exercise the Option or portion. SECTION 4.9 - Performance-Based Compensation Limitation The following limitations shall apply to grants of Options under the Plan: (i) No Employee shall be granted, in any fiscal year of the Company, Options under the Plan to purchase more than 165,000 (adjusted to reflect the ten percent (10%) stock dividend paid on June 15, 1995 and the 3-for-2 stock split distributed on February 7, 1996) shares of Common Stock, provided that the Company may make an additional one-time grant of up to 33,000 (adjusted to reflect the ten percent (10%) stock dividend paid on June 15, 1995 and the 3-for-2 stock split distributed on February 7, 1996) shares of Common Stock to newly-hired Employees. (ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 6.2. (iii) If an Option is canceled (other than in connection with a transaction described in Section 4.7 or Section 6.2), the canceled Option will be counted against the limit set forth in Section 4.9(i). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. -11- 12 ARTICLE V ADMINISTRATION SECTION 5.1 - Stock Option Committee (a) The Stock Option Committee shall be composed of no fewer than three (3) members (or, as of September 1, 1992, two (2) members) of the Board, designated by and holding office at the pleasure of the Board. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. (b) No options shall be granted to any member of the Committee during the term of his or her membership on the Committee except as provided in Article III. No person shall be eligible to serve or continue to serve on the Committee unless he or she is the "disinterested" person for purposes of Rule 16b-3, as amended from time to time. SECTION 5.2 - Duties and Powers of Committee It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the Options and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such interpretations and rules shall be consistent with the basic purposes of the Plan. Notwithstanding the foregoing, the provisions of Article III relating to Non-Employee Director Options shall be non-discretionary, automatic and, to the maximum extent possible, self-effectuating. SECTION 5.3 - Action by the Committee The Committee shall act by a majority of its members in office by vote at a meeting or by unanimous written consent of all members of the Committee. SECTION 5.4 - Compensation; Professional Assistance; Good Faith Actions Members of the Committee shall not receive compensation for their service as members but all expenses and liabilities they incur in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its officers and Directors shall be entitled to rely upon the advice, opinions or valuations and determinations made by the Committee in good faith and the same shall be final and binding upon all Employee Participants and Non-Employee Director Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith -12- 13 with respect to the Plan or the Options and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. ARTICLE VI OTHER PROVISIONS SECTION 6.1 - Option Agreement Each Option granted under Article IV shall be evidenced by a written Stock Option Agreement, which shall be executed by the Employee Participant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Each Option granted under Article III shall be evidenced by a written Stock Option Agreement in the form heretofore approved by the Board and shall be signed by the President or a Senior Vice President of the Company. The terms upon which, the times at which and the exercise price of all Options granted under the Plan shall be established by resolution of the Committee providing for the grant of Option and shall be set forth in or incorporated by reference in the Stock Option Agreement. SECTION 6.2 - Adjustments in Outstanding Options In the event that the outstanding shares of stock subject to Options are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options, or portions then unexercised, shall be exercisable, to the end that after such event the Employee Participant or Non-Employee Director Participant's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding Option shall be made without change in the total price applicable to the Option or the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in the option price per share. SECTION 6.3 - Person Eligible to Exercise Except as permitted by Section 6.8, during the lifetime of the Employee Participant or Non-Employee Director Participant, his or her Option, or any portion, shall be exercisable only by him or her or by his or her guardian or legal representative. After the death of the Employee Participant or Non-Employee Director Participant, any exercisable portion of an Option may, prior to the time when such portion becomes unexercisable under Section 3.6, 4.5 or 4.7, be exercised by his or her personal representative or by any person empowered to do so under the deceased Employee Participant or Non-Employee Director Participant's will or under the then applicable laws of the descent and distribution. -13- 14 SECTION 6.4 - Partial Exercise At any time and from time to time prior to the time when any exercisable Option or exercisable portion becomes unexercisable under Section 3.6, 4.5 or 4.7, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the Committee may, by the terms of an Option granted under Article IV, require any partial exercise to be with respect to a specified minimum number of shares. SECTION 6.5 - Conditions to Issuance of Stock Certificates The shares of stock issuable and deliverable upon the exercise of an Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges, if any, on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience; and (e) The satisfaction of all other applicable legal requirements incident to such action. SECTION 6.6 - Rights as Shareholders The holders of Options shall not be, nor have any of the rights or privileges of, shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. SECTION 6.7 - Transfer Restrictions After Exercise The Committee, in its absolute discretion, may impose such restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate and any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates -14- 15 evidencing such shares, but in respect of any option granted under Article III, such restrictions shall be limited to those required by applicable law. Section 6.8 Options Not Transferable No Option or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Employee Participant or Non-Employee Director Participant or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition is voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 6.8 shall prevent transfers by will or by the applicable laws of descent and distribution or, effective September 1, 1992 pursuant to a "qualified domestic relations order" as defined by the Code or Title 1 of the Employee Retirement Income Security Act of 1974. The designation by an Employee Participant or Non-Employee Director Participant of persons or trust entitled upon such participant's death, by will or the laws of descent and distribution, to receive the Employee Participant or Non-Employee Director Participant Options in the event of the death of such option holder shall not constitute a transfer. Section 6.9 Amendment, Suspension or Termination of the Plan; Amendment of Options Subject to Section 3.8, the Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, without approval of the Company's shareholders given within twelve (12) months before or after the action by the Board or the Committee, no action of the Committee or Board may, except as contemplated by Section 2.3 and 6.2, materially increase the number of shares which may be issued on exercise of Options, or materially increase the benefit accruing to Employee Participants or Non-Employee Director Participants under the Plan or materially modify the requirements as to eligibility for participation in the Plan. Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of the Option, alter or impair any rights or obligations of the holder, and neither the suspension nor termination of the Plan shall impair the authority of the Committee in respect of outstanding options during any period of suspension. In no event may any Option be granted under this Plan after February 1, 1999. The Committee by resolution may waive conditions of or limitations on rights under Options granted to any or all Employee Participants that the Committee in the prior exercise of its discretion has imposed, or make other changes to the terms of such Options consistent with the express provisions hereof that do not adversely affect such Participants. No change of or affecting an outstanding Option shall, however, without the written consent of the Participant, adversely affect the Participant's rights or benefits under any Option then outstanding. Changes contemplated by Sections 2.3, 3.8, 4.6 or 6.2 shall not be deemed to constitute changes for purposes of this Section. -15- 16 SECTION 6.10 - Approval of Plan by Stockholders This Plan was originally adopted by the Stockholders in May, 1989. Subsequent amendments were adopted by the Shareholders in 1992, 1994 and 1995. SECTION 6.11 - Effect of Plan Upon Other Options and Compensation Plans The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company or any Subsidiary (a) to terminate employees of the Company or any Subsidiary or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. SECTION 6.12 - Tax Withholding Upon the exercise of an option by an Employee Participant or other person, the Company shall have the right to require such person to pay, by cash or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such exercise. Notwithstanding the foregoing, in any case where a tax is required to be withheld in connection with the issuance or transfer of Company stock under this Plan, an Employee Participant or other person entitled to exercise an Option (other than an Option granted under Article III), may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided the Committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy any applicable regulatory requirements. SECTION 6.13 - Governing Law (a) The Plan and the Option Agreements and all other related documents shall be governed by the laws of the State of California, except to the extent such laws may be supplanted by the supreme laws of the United States of America, or by Nevada law as the law of the State of incorporation of the Company. If any provision shall be held invalid and unenforceable by a court of competent jurisdiction, the remaining provisions shall continue to be fully effective. (b) It is the intent of the Company that this Plan and Options granted hereunder satisfy and be interpreted in a manner that in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Securities Exchange Act of 1934 and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Option would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any -16- 17 remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be deemed void. SECTION 6.14 - Titles Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. -17- EX-10.10 18 LONG-TERM INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.10 LONG-TERM INCENTIVE COMPENSATION PLAN OF 1993 FREMONT GENERAL CORPORATION AND AFFILIATED COMPANIES FREMONT GENERAL OFFICER PARTICIPATION ___________________________ PURPOSE The purpose of the Fremont General Corporation Long-Term Incentive Compensation Plan of 1993 (the "LTICP" or Plan") is to attract, retain and motivate high caliber executive talent and to reward their success in achieving the financial goals of materially enhancing stockholder value. To this end, the Plan is intended to link the compensation of covered employees to the long-range growth and increased value of the Company. To accomplish this, the LTICP pays cash or stock awards upon the successful achievement, over the three (3) year period ending December 31, 1995 (the "Performance Period"), of a pretax earnings Target of $191,000,000. The Plan is a non-funded bonus compensation plan which is contingent upon specific performance as set forth above and is neither subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), nor qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended. ADMINISTRATION The Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Committee"). The Committee retains full and final discretion and authority to interpret and administer the Plan, to determine and approve the participants, assign award opportunities, and determine the conditions as to the grant of awards subject to the terms set forth herein. PARTICIPATION Officers and other key management employees ("Participants") of the Company or any participating Fremont company listed in Exhibit A attached hereto, as designated by the Committee, shall participate in the LTICP. No person is automatically entitled to participate in the Plan. Personnel will maintain the roster of designated Participants and will issue notices of participation to those designated at the beginning of the Performance Period. New Participants may be added by the Committee from time to time during the Performance Period pursuant to the following schedule: o Participants designated at the inception of the LTICP are eligible for full participation. 2 o New Participants entering the LTICP after inception but prior to 12/31/93 are eligible for full participation. o New Participants entering the LTICP on or after 1/1/94 but prior to 12/31/94 are eligible for prorated participation as follows: o entrants between 1/1/94 and 6/30/94 are eligible for a maximum of two-thirds of any appropriate bonus award; o entrants between 7/1/94 and 12/31/94 are eligible for a maximum of one-half of any appropriate bonus award. o No new Participant may enter the LTICP after 12/31/94. PERFORMANCE OBJECTIVE The Company's three-year goal is the achievement of a cumulative pre-tax earnings target of $191,000,000 (the "Target"). Minimum performance is 80% of the Target. Participants are not entitled to any award for the Performance Period if minimum performance is not achieved. INDIVIDUAL BONUS AWARDS Certain bonus features of this Plan for the designated officers of the Company vary from those provided for all other Participants. Each designated officer may elect to receive any bonus earned in the form of shares of the Company's common stock. This election is made at the inception of the Plan and, as of December 31, 1993, is irrevocable. TARGET AWARD OPPORTUNITY Cash Bonus. For each Participant, other than Participants who elect to receive any bonus earned in the form of the Company's common stock, the Committee determines the dollar amount of the bonus between 50% and 100% of eligible compensation (defined below). The actual bonus will depend on the pre-tax earnings result pursuant to the following schedule:
Pre-Tax Result Bonus -- % of Eligible Compensation -------------- ----------------------------------- 80% but less than 85% 50% 85% but less than 90% 60% 90% but less than 95% 70% 95% but less than 100% 85% 100% plus 100%
-2- 3 "ELIGIBLE COMPENSATION" means, for the purpose of the Cash Bonus, the average of the salary grade midpoint values of the Participant's job in each of the three (3) years during the Performance Period, or of the Participant's actual annualized base salary in each of the three (3) years during the Performance Period, whichever is greater. Stock Bonus. If the designated officer elects to take any bonus earned in the Company's common stock, the Committee determines the number of shares to be paid between 50% and 100% of those allocated (defined below) on the designated officer's behalf at the inception of the Plan. The actual award will depend on the pretax earnings result pursuant to the following schedule:
Pre-Tax Result Bonus -- % of Allocated Shares -------------- ------------------------------- 80% but less than 85% 50% 85% but less than 90% 60% 90% but less than 95% 70% 95% but less than 100% 85% 100% plus 100%
"ALLOCATED SHARES " means the maximum number of shares of the Company's common the officer may earn under the Plan. To estimate the total number of Allocated Shares, the Company calculated the average salary grade midpoint value for the designated officer's job for each of the three (3) years during the Performance Period, estimating 4.5% compounded increases in midpoints for 1994 and 1995 values. At the same time, the Company calculated the average annualized base salary of the designated officer over the three (3) years during the Performance Period, estimating 5% compounded increases in base salary for 1994 and 1995. The greater of the average estimated midpoint or base salary value was then divided by the closing price of the stock on January 1, 1993, at the inception of the Plan ($22.50). As of the Plan Maturity Date (defined below), final calculations of actual annual midpoint and base salary rates will be used to adjust the actual number of Allocated Shares at $22.50 per share for each designated officer. Any adjustment award will be in shares or cash. QUALIFICATIONS In addition to the achievement of the Target of the Plan, the following qualifications shall apply: 1. Participants must be admitted to the Plan as described above under "Participation" and must be actively employed in a participating Fremont company on the Plan Maturity Date. If such qualifications are not met, all rights to any awards under the Plan shall be forfeited, unless the Committee determines, in its discretion, that all or a portion of the award shall be paid; provided, however, that a Participant who becomes totally disabled during the Performance Period, or who, on or after age 65 elects to retire, may receive an award based on the time of -3- 4 employment as a percentage of the Performance Period. There is no "vesting" accrual during the Performance Period. 2. Participants must maintain no less than a "satisfactory" individual performance appraisal rating in each of the three (3) years during the Performance Period, as determined by the Committee in its discretion. Appraisals of less than "satisfactory" in this period will result in partial or full disqualification of the individual from bonus eligibility notwithstanding the actual Company results. PLAN FUNDING AND LIMITATION OF BENEFITS The aggregate amount of the awards payable under the Plan will equal the sum of the required payments. Under the Plan, no Participant may receive an award in excess of $1,000,000, in the case of a cash award, or 50,000 shares of the Company's common stock, in the case of a stock award. In addition, the total number of shares of the Company's common stock that may be issued under the Plan is 150,000. CHANGE IN CONTROL Upon the occurrence of a Change in Control Event (as defined below), Participants shall become entitled to an award which is the greater of (i) actual performance to the date of the change in control; or (ii) their target award opportunity. In such event, awards shall be paid in cash promptly following the change in control. A "Change in Control Event" shall mean (1) Approval by the stockholders of the Company of the dissolution or liquidation of the Company; (2) Approval by the stockholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries, as a result of which less than 50 percent of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned by stockholders of the Company immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Company's securities from the record date of such stockholder action until such reorganization and that such record owners hold no securities of the other parties to such reorganization); (3) Approval by the stockholders of the Company of the sale of substantially all of the Company's business and/or assets to a person or entity which is not a subsidiary of the Company; -4- 5 (4) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing more than 80 percent of the combined voting power of the Company's then outstanding securities entitled to then vote generally in the election of directors of the Company; or (5) During any period not longer than two consecutive years, individuals who at the beginning of such period constituted the Board cease to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of at least a majority of the new Board members during such period was approved by a vote of at least two-thirds of the Board members then still in office who were Board members at the beginning of such period. OTHER TERMS The rights of a Participant under the Plan are non-assignable and are not subject in any manner to the debts or other obligations of any Participant or any other person. Until shares of the Company's common stock are received pursuant to the Plan a Participant does not have any right to vote or receive dividends or exercise any rights of a stockholder with respect to such shares. AMENDMENT AND TERMINATION OF THE PLAN The Committee may terminate, suspend or amend the Plan, in whole or in part, from time to time, including to adopt amendments deemed necessary or desirable to correct any defect, supply any omission, or reconcile any inconsistency in the Plan or in any award granted under the Plan. No amendment, termination, or modification may adversely affect outstanding awards under the Plan, in any manner, without the consent of the affected Participants. The Plan shall remain in effect until December 31, 1995 (the "Plan Maturity Date"), unless sooner terminated by the Committee as described above. INCEPTION DATE The LTICP is effective as of January 1, 1993. PAYMENT Unless deferred into a deferred compensation trust pursuant to the terms thereof and in compliance with applicable tax law, the stock or cash earned under this Plan will be distributed to Participants after the Plan Maturity Date subject to all tax withholding and reporting requirements then in effect. -5- 6 DISCLAIMER The LTICP is a non-funded bonus compensation plan which is contingent upon specific performance as set forth above and is not subject to ERISA requirements. There is no provision for accrual of any non-forfeitable vesting rights. NOTICE The Board of Directors has approved this Plan subject to stockholder approval, as required or advisable, with respect to the issuance of stock in payment of compensation. In the event stockholder approval is not granted for the use of stock in this manner, any bonus earned pursuant to the terms of the stock award provisions of this Plan will be paid in cash equal to the market value of the stock (i.e. - closing trading price, NYSE) on the Plan Maturity Date for the number of shares that would have been granted with stockholder approval. -6- 7 LONG-TERM INCENTIVE COMPENSATION PLAN OF 1993 FREMONT GENERAL CORPORATION AND AFFILIATED COMPANIES List of Participating Companies Exhibit A -7- EX-10.11 19 RESTRICTED STOCK AWARD PLAN 1 EXHIBIT 10.11 FREMONT GENERAL CORPORATION 1995 RESTRICTED STOCK AWARD PLAN 1. PURPOSE OF THE PLAN. The purpose of the Plan is to provide for the award by the Company of Common Stock to Participant's to increase shareholder value and to promote the success of the Company's business by (a) motivating Participants to perform to the best of their abilities, and (b) increasing the desire of such Participants to continue their employment with the Company. The Plan's goals are to be achieved by providing such Participants with awards of Restricted Stock. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "Administrator" shall mean the Board or its Committee, as provided in Section 4 of the Plan. (b) "Applicable Laws" shall mean all applicable laws, including without limitation Nevada corporate law, the Internal Revenue Code of 1986, as amended, and applicable federal and state securities laws. (c) "Board" shall mean the Board of Directors of the Company. (d) "Committee" shall mean a Committee appointed by the Board as specified in Section 4(a) of the Plan. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Common Stock" shall mean the Common Stock of the Company. (g) "Company" shall mean Fremont General Corporation, a Nevada corporation, or any successor to the Company. (h) "Employee" shall mean any person, including officers, employed by the Company or any Parent or Subsidiary. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (j) "Parent" shall mean a "parent corporation," whether now or hereafter existing. (k) "Participant" shall mean an employee who is awarded Shares under the Plan. 2 (l) "Plan" shall mean this 1995 Restricted Stock Award Plan. (m) "Share" shall mean a share of Common Stock, as adjusted in accordance with Section 9 of the Plan. (n) "Stock Award Agreement" shall mean an agreement in the form approved by the Board pursuant to which a Participant may acquire Common Stock of the Company under the Plan. (o) "Stock Award" shall mean an award of Shares pursuant to the Plan. (p) "Subsidiary" shall mean a "subsidiary corporation," whether now or hereafter existing. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 9 of the Plan, the maximum aggregate number of Shares which may be sold under the Plan is 800,000 Shares. The Shares shall be reacquired Common Stock. If Shares are forfeited to the Company pursuant to a Stock Award Agreement, such Shares, unless the Plan shall have been terminated, shall become available for reissuance under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) Procedure. The Plan shall be administered by the Board or by a committee designated by the Board. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to select Employees to whom Stock Awards may be granted hereunder; (ii) to determine whether and to what extent Stock Awards are granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Stock Award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to construe and interpret the terms of the Plan; -2- 3 (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to modify or amend each Stock Award Agreement (subject to Section 10 of the Plan); (viii) to authorize any person to execute on behalf of the Company any instrument required to effect the award of a Stock Award previously granted by the Administrator; (ix) to determine the terms, conditions and restrictions, not inconsistent with the terms of the Plan, applicable to Stock Awards and the Shares relating thereto; and (x) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on Participants. 5. ELIGIBILITY Stock Awards may be made to Employees, as designated by the Administrator, who hold executive and key management positions with the Company. Neither the Plan nor any Stock Award shall confer upon a Participant any right upon any Participant with respect to continuing such Participant's employment with the Company, nor shall the Plan or any Stock Award hereunder interfere in any way with Participant's right or the Company's right to terminate such employment at any time, with or without cause. In addition, the Administrator may, in its sole discretion, authorize the issuance of Shares under the Plan to a trust, or trusts, maintained by the Company in connection with its compensation and benefit plans. 6. AWARD OF STOCK Stock Awards shall be made under the Plan at the discretion of the Administrator. The Shares underlying Stock Awards shall be evidenced by a Notice of Grant that together with the Stock Award, attached to the Notice of Grant as Exhibit A-1, shall specify the applicable vesting restrictions, the amount of Restricted Stock awarded, and such other conditions as the Administrator, in its sole discretion, shall determine. The awarded Shares shall be held in escrow pursuant to the Joint Escrow Instructions, attached to the Notice of Grant as Exhibit A-3, until such time as they are released from the Company's reacquisition option. -3- 4 7. TERM OF PLAN The Plan shall become effective upon adoption by the Board. The Plan shall continue in effect for a term of 10 years from such date of Board adoption unless sooner terminated under Section 10 of the Plan. 8. COMPANY'S RIGHT OF REACQUISITION The Company shall have such right of reacquisition as shall be set forth in the Stock Award Agreement. 9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION The number of shares of Common Stock which have been authorized for issuance under the Plan shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Plan. 10. AMENDMENT AND TERMINATION OF THE PLAN (a) Amendment and Termination. The Board may amend, suspend, or terminate the Plan from time to time in such respects as the Board may deem advisable. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Shares already subject to Stock Award Agreements, except as provided in said Stock Award Agreements. 11. COMPLIANCE WITH LAWS AND REGULATIONS Shares shall not be issued under this Plan unless the issuance and delivery of such Shares shall comply with Applicable Laws, as well as the requirements of any stock exchange or market system upon which Shares may then be listed or designated. -4- 5 12. RESERVATION OF SHARES The Company, during the term of the Plan, shall at all times reserve and keep available, such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 13. GOVERNING LAW. The Plan shall be governed by the laws of the State of California. -5- 6 1995 RESTRICTED STOCK AWARD PLAN NOTICE OF GRANT OF STOCK AWARD Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice of Grant. [Participant Name and Address] [Social Security Number] You have been granted this Stock Award of Common Stock of the Company, subject to the Company's Reacquisition Option, and your continuing status as an Employee (as described in the Plan and the attached Stock Award Agreement), as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date (if different from the Date of Grant) _________________________ Total Number of Shares Subject to This Stock Award _________________________ By your signature and the signature of the Company's representative below, you and the Company agree that this Stock Award is granted under and governed by the terms and conditions of the Restricted Stock Award Plan and the Stock Award Agreement, attached hereto as Exhibit A-1, both of which are made a part of this document. You further agree to execute the attached Stock Award Agreement, Assignment Separate From Certificate, Joint Escrow Instructions and Consent of Spouse, as a condition to receiving any shares under this Stock Award. PARTICIPANT: FREMONT GENERAL CORPORATION By: - -------------------------------- ---------------------------------- Signature Title: - -------------------------------- ------------------------------- Print Name 7 EXHIBIT A-1 1995 RESTRICTED STOCK AWARD PLAN STOCK AWARD AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Award Agreement. WHEREAS the Participant named in the Notice of Grant is an Employee of the Company, and the Participant's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in order to give the Participant an opportunity to acquire an equity interest in the Company and as an incentive for the Participant to participate in the affairs of the Company, the Admin istrator has granted to the Participant a Stock Award subject to the terms and conditions of the Plan and the Notice of Grant, which are incorporated herein by reference, and this Stock Award Agreement (the "Agreement"). NOW THEREFORE, the parties agree as follows: 1. Transfer of Stock. The Company hereby agrees to award to the Participant and the Participant hereby agrees to accept shares of the Company's Common Stock (the "Shares"). 2. Reacquisition Option. (a) In the event the Participant's status as an Employee terminates for any or no reason (including death or disability) before all of the Shares are released from the Company's Reacquisition Option (see Section 3), the Company shall, upon the date of such termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option (the "Reacquisition Option") for a period of sixty (60) days from such date to reacquire, without the payment or further consideration, up to that number of shares which constitute the Unreleased Shares (as defined in Section 3). The Reacquisition Option shall be exercised by the Company by delivering written notice to the Participant or the Participant's executor (with a copy to the Escrow Holder). Upon delivery of such notice, the Company shall become the legal and beneficial owner of the Shares /being reacquired and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being reacquired by the Company. (b) Whenever the Company shall have the right to reacquire Shares hereunder, the Company may designate and assign one or more employees, officers, directors or stockholders of the Company or other persons or organizations (including, without limitation, any trust or trusts maintained by the Company in connection with its non-qualified deferred compensation plans) to exercise all or a portion of the Company's acquisition rights under this Agreement and acquire all or a portion of such Shares. -1- 8 3. Release of Shares From Reacquisition Option. (a) Ten percent (10%) of the Shares shall be released from the Company's Reacquisition Option on each of the first ten (10) anniversaries of the vesting commencement date, provided that the Participant's status as an Employee has not terminated prior to the date of any such release. (b) Any of the Shares that have not yet been released from the Reacquisition Option are referred to herein as "Unreleased Shares." (c) The Shares that have been released from the Reacquisition Option shall be delivered to the Participant at the Participant's request (see Section 5). 4. Restriction on Transfer. Except for the escrow described in Section 5 or the transfer of the Shares to the Company or its assignees contemplated by this Agreement upon exercise of the Reacquisition Option, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until such Shares are released from the Company's Reacquisition Option in accordance with the provisions of this Agreement, other than by will or the laws of descent and distribution. 5. Escrow of Shares. (a) To ensure the availability for delivery of the Participant's Unreleased Shares upon reacquisition by the Company or its assignees pursuant to the Reacquisition Option, the Participant shall, upon execution of this Agreement, deliver and deposit with an escrow holder designated by the Company (the "Escrow Holder") the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company and Participant attached hereto as Exhibit A-3, until such time as the Company's Reacquisition Option expires. As a further condition to the Company's obligations under this Agreement, the Company may require the spouse of Participant, if any, to execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4. (b) The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Unreleased Shares in escrow while acting in good faith and in the exercise of its judgment. (c) If the Company or any assignee exercises the Reacquisition Option hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the Reacquisition Option has been exercised or expires unexercised or a portion of the Shares has been released from the Reacquisition Option, upon request the Escrow Holder -2- 9 shall promptly cause a new certificate to be issued for the released Shares and shall deliver the certificate to the Company or the Participant, as the case may be. (e) Subject to the terms hereof, the Participant shall have all the rights of a stockholder with respect to the Shares while they are held in escrow, including without limitation, the right to vote the Shares and to receive any cash or stock dividends declared thereon. In the event the Company declares and pays a stock dividend, the Shares acquired by Participant upon payment of such dividend shall not be subject to the terms of the Plan, the Notice of Grant, this Stock Award Agreement or the Joint Escrow Instructions. If, from time to time during the term of the Reacquisition Option, there is any stock split or other change in the Shares, any and all new or additional securities to which the Participant is entitled by reason of the Participant's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Reacquisition Option. 6. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REACQUISITION AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 7. Adjustment for Stock Split. All references to the number of Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend (subject to Section 5(e)) or other change in the Shares which may be made by the Company after the date of this Agreement. 8. Changes of Control. (1) Definition of "Change in Control". For purposes of this Section 8, a "Change in Control" means the happening of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Parent, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (ii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such -3- 10 surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; or (iii) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company). (2) Effect of a Change of Control. In the event of a Change of Control of the Company, then, upon the occurrence of such Change of Control, 100% of the Shares shall be released from the Company's Reacquisition Option. 9. Tax Consequences. The Participant has reviewed with the Participant's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Participant understands that the Participant (and not the Company) shall be responsible for the Participant's own tax liability that may arise as a result of the transactions contemplated by this Agreement. The Participant understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the purchase price, if any, of the Shares at the date of grant and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to reacquire the Shares pursuant to the Reacquisition Option. The Participant understands that the Participant may elect to be taxed at the time the Shares are acquired rather than when and as the Reacquisition Option expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of acquisition. The form for making this election is attached as Exhibit A-5 hereto. THE PARTICIPANT ACKNOWLEDGES THAT IT IS THE PARTICIPANT'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PARTICIPANT'S BEHALF. 10. General Provisions. (a) This Agreement shall be governed by the laws of the State of California. This Agreement, subject to the terms and conditions of the Plan and the Notice of Grant, represents the entire agreement between the parties with respect to the award of the Shares to the Participant. Subject to Section 10 of the Plan, in the event of a conflict between the terms and conditions of the Plan and the -4- 11 terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. (b) Any notice, demand or request required or permitted to be given by either the Company or the Participant pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the address of the party set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party hereto. (c) The rights of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Participant under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, nor prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted both parties hereunder are cumulative and shall not constitute a waiver of either party's right to assert any other legal remedy available to it. (e) The Participant agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR ACQUIRING SHARES HEREUNDER). PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PARTICIPANT'S RIGHT OR THE COMPANY'S RIGHT TO TERMI NATE PARTICIPANT'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. By Participant's signature below, Participant represents that he or she is familiar with the terms and provisions of the Plan, and hereby accepts this Agreement subject to all of the terms and provisions thereof. Participant has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Participant agrees to accept as binding, conclusive and final all decisions or -5- 12 interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Participant further agrees to notify the Company upon any change in the residence indicated in the Notice of Grant. DATED: -------------------------- PARTICIPANT: FREMONT GENERAL CORPORATION By: - -------------------------------- ---------------------------------- Signature Title: - -------------------------------- ------------------------------- Print Name - -------------------------------- - -------------------------------- Address - -------------------------------- Social Security Number -6- 13 EXHIBIT A-2 1995 RESTRICTED STOCK AWARD PLAN ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, __________________________, hereby sell, assign and transfer unto ____________________________________________________________ _______________________________________________ (__________) shares of the Common Stock of Fremont General Corporation standing in my name on the books of said corporation represented by Certificate No. _______________ herewith and do hereby irrevocably constitute and appoint _____________________________________ ___________________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Stock Award Agreement (the "Agreement") between ____________________________ and the undersigned dated ______________, 19__. Dated: _______________, 19______ Signature:_______________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise the Reacquisition Option, as set forth in the Agreement, without requiring additional signatures on the part of the Participant. 14 EXHIBIT A-3 1995 RESTRICTED STOCK AWARD PLAN JOINT ESCROW INSTRUCTIONS _________________________, 19_____ Corporate Secretary Fremont General Corporation 2020 Santa Monica Blvd. Santa Monica, CA 90404 Dear ______________: As Escrow Agent for both Fremont General Corporation, a Nevada corporation (the "Company"), and the undersigned Participant (the "Participant"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Stock Award Agreement (the "Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively as the "Company") exercises the Company's Reacquisition Option set forth in the Agreement, the Company shall give to Participant and you a written notice specifying the number of shares of stock to be reacquired, and the time for a closing hereunder at the principal office of the Company. Participant and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, for the number of shares of stock being acquired pursuant to the exercise of the Company's Reacquisition Option. 3. Participant irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Participant does hereby irrevocably constitute and appoint you as Participant's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the terms hereof, the Participant shall have all the rights of a stockholder with respect to the Shares while they are held in escrow, including without limitation, the right to vote the Shares and to receive any cash or stock dividends declared thereon. In the event the Company declares and pays a stock dividend, the Shares acquired by Participant upon payment of such dividend shall not be subject to the terms of these Joint Escrow Instructions. If, from time to time during the term of the 15 Reacquisition Option, there is any stock split or other change in the Shares, any and all new or additional securities to which the Participant is entitled by reason of the Participant's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Reacquisition Option. 4. Upon written request of the Participant, unless the Company's Reacquisition Option has been exercised, you shall deliver to Participant a certificate or certificates representing so many shares of stock as are not then subject to the Company's Reacquisition Option. Within 90 days after cessation of Participant's employment by the Company, or any parent or subsidiary of the Company, you shall deliver to Participant a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not reacquired by the Company or its assignees pursuant to exercise of the Company's Reacquisition Option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Participant, you shall deliver all of the same to Participant and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Participant while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. -2- 16 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Corporate Secretary Fremont General Corporation 2020 Santa Monica Blvd. Santa Monica, California 90404 PARTICIPANT: ---------------------------------- ---------------------------------- ---------------------------------- ESCROW AGENT: Corporate Secretary Fremont General Corporation 2020 Santa Monica Blvd. Santa Monica, California 90404 -3- 17 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of California. Very truly yours, FREMONT GENERAL CORPORATION By: ---------------------------------- Title: ------------------------------- PARTICIPANT: ------------------------------------- (Signature) ------------------------------------- (Typed or Printed Name) ESCROW AGENT: - ---------------------------- Corporate Secretary -4- 18 EXHIBIT A-4 1995 RESTRICTED STOCK AWARD PLAN CONSENT OF SPOUSE I, ______________________________________________________, spouse of _____________________________, have read and approve the foregoing Stock Award Agreement (the "Agreement"). In consideration of the Company's grant to my spouse of shares of the Common Stock of Fremont General Corporation, as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: ____________________, 19______ - -------------------------------------- Signature of Spouse - -------------------------------------- Print Full Name 19 EXHIBIT A-5 1995 RESTRICTED STOCK AWARD PLAN ELECTION UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with his or her receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER: SPOUSE: ADDRESS: IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: ______________________ shares (the "Shares") of the Common Stock of Fremont General Corporation (the "Company"). 3. The date on which the property was transferred is: ______________, 19__. 4. The property is subject to the following restrictions: The Shares may be reacquired by the Company, or its assignee, upon certain events. This right lapses with regard to a portion of the Shares based on the continued performance of services by the taxpayer over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $_______________. 6. The amount (if any) paid for such property is: $ 0.00 The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: ___________________, 19____ ________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ___________________, 19____ ________________________________ Spouse of Taxpayer EX-10.12 20 EMPLOYEE BENEFIT TRUST AGT 1 EXHIBIT 10.12 FREMONT GENERAL CORPORATION EMPLOYEE BENEFITS TRUST AGREEMENT TRUST AGREEMENT, dated September 7, 1995, by and between FREMONT GENERAL CORPORATION, a Nevada corporation (the "Company"), and MERRILL LYNCH TRUST COMPANY OF CALIFORNIA, as directed trustee of the Trust created hereby (the "Trustee"). The Company is or may become obligated to make periodic contributions to existing and future compensation and benefit plans, agreements, programs and arrangements to make payments to or for the benefit of past, present or future employees or their beneficiaries. For the purpose of providing for the satisfaction, in whole or in part, of such obligations, as the Board of Directors of the Company may, in its discretion, from time to time determine, the Company desires to establish a trust (the "Trust"), which shall be a grantor trust within the meaning of Section 671 of the Internal Revenue Code of 1986, as amended, the assets of which shall be subject to the claims of the Company's existing or future general creditors. The Company shall not be relieved of any obligation to such benefit plans, agreements, programs and arrangements by reason of establishing the Trust; provided, however, that to the extent that payments are made from the Trust in discharge of such obligations, the Company shall be relieved of such obligations. NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the parties hereto agree as follows: ARTICLE I Establishment Section 1.1 Trust Fund. The assets held at any time and from time to time under the Trust collectively are herein referred to as the "Trust Fund" and shall consist of contributions received by the Trustee, proceeds of any loans, investments and reinvestments thereof, the earnings, dividends and 2 income thereon, less disbursements from the Trust. Except as herein otherwise provided, title to the assets of the Trust Fund shall at all times be vested in the Trustee and securities that are part of the Trust Fund shall be held in such manner that the Trustee's name and the capacity in which the securities are held are fully disclosed, subject to the right of the Trustee to hold title in the name of a nominee, and the interests of others in the Trust Fund shall be only the right to have such assets received, held, invested, administered and distributed in accordance with the provisions of this Agreement. This Trust shall be known as the Fremont General Corporation Employee Benefits Trust. It is intended that the Trust be an independent legal entity. Section 1.2 Trustee Acceptance. The Trustee hereby accepts this Trust and all the Company's right, title and interest in the property transferred to the Trust and all other property coming into the possession of the Trustee pursuant to the terms of this Agreement, and the Trustee agrees to hold, administer and distribute the Trust property and the income therefrom according to the terms and conditions of this Agreement. Section 1.3 Grantor Trust. The Trust is intended to be a grantor trust within the meaning of Section 671 of the Code and shall be construed accordingly. The Trust is intended not to be subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and shall be construed accordingly. The Trust Fund shall at all times remain subject to the claims of the Company's general creditors. Section 1.4 Separate Entity. The principal of the Trust Fund, any earnings thereon and the proceeds of any dispositions thereof shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes set forth in the Plans and this Agreement. No employee benefit plan of the Company or any of its subsidiaries (including the Plans), or any participant -2- 3 in any such plan, is intended to have any claim on, or any beneficial interest in, any assets of the Trust prior to the time such assets are distributed as provided in Article IV. Section 1.5 Irrevocability. The Trust shall not be revocable by the Company. This Agreement may be amended as provided in Section 12.1. Section 1.6 Representation The Company hereby represents that the Trust is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, that the Trust qualifies as a grantor trust within the meaning of Section 671 of the Code, that the Trust or interests therein are not required to be registered under federal or state securities laws and that the execution of this Trust Agreement and the effectuation of any of the transactions contemplated hereunder will not constitute a violation of federal or state securities laws. ARTICLE II Definitions The following definitions shall apply to the Trust: Section 2.1 "Administrative Committee" means the Company's Administrative Committee, which shall be appointed by the Board to direct the Trustee as required under this Agreement and to coordinate the administration of this Trust with the Company's compensation, incentive and benefits plans, agreements, programs and arrangements. Section 2.2 "Board" means the Board of Directors of the Company. Section 2.3 "Code" means the Internal Revenue Code of 1986, as amended. Section 2.4 "Company Stock" means shares of Common Stock of the Company. -3- 4 Section 2.5 "Extraordinary Dividend" means any dividend or other distribution of cash or other property (other than Company Stock) made with respect to Company Stock, which the Board of Directors declares to be other than an ordinary dividend. Section 2.6 "Note" means any Promissory Note of the Trust to the Company representing indebtedness of the Trust incurred to purchase Company Stock. Section 2.7 "Plan" or "Plans" means any employee benefit plan, agreement, program or arrangement listed on Exhibit A annexed hereto. The Administrative Committee may add to or delete from Exhibit A such employee benefit plans, agreements, programs and arrangements of the Company or its subsidiaries as the Administrative Committee, in its sole discretion, shall determine; provided that at all times during which the trust is in existence, Exhibit A shall contain at a minimum one Plan that is subject to ERISA, and one Plan that is not so subject. Section 2.8 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Section 2.9 "ESOP" means the Fremont General Corporation Employee Stock Ownership Plan. Section 2.10 "ESOP Trustee" means the bank, trust company or other financial institution at the time serving as trustee under the ESOP. Section 2.11 "Trust Year" means the calendar year. ARTICLE III Funding the Trust Section 3.1 Initial Delivery. Concurrently with the execution of this Agreement, the Company is conveying to the Trust cash which, notwithstanding Section 4.3 hereof, shall be used to acquire shares -4- 5 of Company Stock which shares shall be administered and disposed of by the Trustee as provided in Article IV hereof. Section 3.2 Contributions. (a) Cash. In each Trust Year the Company may, in its sole discretion, contribute cash to the Trust in such amounts and at such times as the Company shall determine. Such cash, when added to the earnings of the Trust shall be applied by the Trustee for the following purposes, as directed by the Company: (i) Notwithstanding Section 4.3 hereof, and if directed by the Company acting through the Administrative Committee, to acquire shares of Company Stock which shall be administered and disposed of by the Trustee as provided in Article IV hereof; (ii) any cash remaining after purchasing shares of Company Stock pursuant to (i) immediately above, to make interest and principal payments on any Note. In the event contributions to, and earnings of, the Trust are insufficient to satisfy any installment of principal and interest on the due date thereof, the Company (acting through the Administrative Committee) may, in its discretion, forgive such installment to the extent of the insufficiency. (b) Company Stock. In each Trust Year the Company may, acting through the Administrative Committee and in its sole discretion, contribute Company Stock to the Trust to be administered and disposed of by the Trustee as provided in Article IV hereof. (c) Concurrently with any contribution of cash or Company Stock, if the Company so requires, the Trustee shall deliver to the Company, on behalf of the Trust, a Note as consideration for all or part of such cash loan, or in payment of the purchase price for the Company Stock so conveyed, as the case may be. In the event the Note is in payment of the purchase price for Company Stock, the principal amount shall be equal to the number of shares of Company Stock so contributed multiplied by -5- 6 the last sale price as reported on the New York Stock Exchange Composite Tape on the day of such transfer. Such Note (if required) shall be in substantially the form set forth as Exhibit B annexed hereto. (d) The Trust shall have no remedy for any failure by the Company to make any contribution of cash or Company Stock to the Trust. The Trustees shall be under no duty or obligation to require the Company to make any cash or other contributions to the Trust. Section 3.3 Prepayments. The Company may, from time to time, contribute cash to the Trust in amounts sufficient to enable the Trust to prepay, in whole or in part, principal (and accrued interest thereon to the date of prepayment) of any Note at any time without premium or penalty or, in lieu of such prepayment, the Administrative Committee may, from time to time, direct that all or any part of such principal (and interest accrued thereon) shall be forgiven and the amount so directed shall be forgiven. Each such prepayment or forgiven amount of principal shall be applied to reduce installments of principal thereafter due on such Note in the order of their scheduled maturities. Section 3.4 Dividends. Dividends (other than an Extraordinary Dividend) paid in cash on Company Stock held by the Trust shall be used to pay interest on any Note as it becomes due, and any excess remaining after such payment shall be applied to the payment of principal thereon. Non-cash dividends (other than an Extraordinary Dividend) paid on Company Stock shall be reduced to cash as soon as practicable, in accordance with the directions of the Administrative Committee, and shall be used to pay interest and principal on any Note. Section 3.5 Investment of Cash. In all cases, unless otherwise instructed by the Administrative Committee the Trustee shall temporarily invest any cash it holds under this Agreement in accordance with Article VI to the extent it is not, at the time, required or used to acquire Company Stock or to pay interest and principal on any Note. -6- 7 ARTICLE IV Release of Company Stock and Allocations Section 4.1 Release of Company Stock. As soon as practicable after each payment, forgiveness or prepayment, if any, of principal (and accrued interest thereon) with respect to a Note, a number of shares of Company Stock shall be made available for transfer from the Trust ("Released Shares") in the manner set forth in Section 4.2. The total number of such shares shall equal the number of shares of Company Stock held in the Trust that are attributable to that Note (either purchased from the Company in consideration of the Note or acquired with the proceeds of a loan represented by such Note) and which are not Released Shares immediately prior to the payment, forgiveness or prepayment multiplied by a fraction, the numerator of which shall be the amount of principal paid or prepaid by the Trust on the Note or forgiven upon such payment or prepayment date or date of forgiveness and the denominator of which shall be the sum of the numerator plus the remaining principal amount of the Note. No fractional shares shall be released, and if the preceding computation results in fractional shares, the number of Released Shares shall be computed by rounding down to the next whole number. The number of Released Shares, as so determined, shall be certified to the Trustee by the Administrative Committee. Section 4.2 Transfer of Company Stock. All shares of Company Stock, including Released Shares, shares of Company Stock purchased by the Trust with cash of the Trust and shares of Company Stock contributed to the Trust by the Company, shall be transferred by the Trustee to or for the benefit of such Plans (or their participants and beneficiaries) as the Administrative Committee, in its sole discretion, shall determine. Such transfers shall be made at such times and in such amounts (not to exceed the amounts necessary to fund the benefits provided to participants under the selected Plans) as the Administrative Committee shall direct. -7- 8 Section 4.3 Transfer of Other Assets. Any assets other than Company Stock held in the Trust pursuant to Section 6.1 or Section 6.3 shall be transferred by the Trustee in such amounts and at such times to or for the benefit of such Plans (or their participants and beneficiaries) as the Administrative Committee shall, in its sole discretion, determine. Section 4.4 Rights Regarding Common Stock. (a) Voting Rights. The Trustee shall follow the directions of the ESOP participants with respect to the manner of voting of Company Stock held by the Trust on each matter pending before an annual or special meeting of shareholders of the Company or any action by written consent of such shareholders in lieu of such meeting. In connection with any such meeting of the shareholders or Action by written consent in lieu of such meeting, the Trustee shall obtain from the ESOP Trustee or its designee certification of the directions received from the ESOP participants (in the aggregate and not identifying any individual direction) directing the ESOP Trustee whether and how to vote, abstain or act by written consent with respect to, the Company Stock held by the ESOP Trustee. Upon receipt by the Trustee of such certification, the Trustee shall, on each such matter, vote, abstain or act by written consent with respect to the shares of Company Stock held by the Trust in the same proportion and manner as the ESOP Trustee. If the ESOP has been amended, terminated or merged with another Plan of the Company, such that participant direction of the voting of Company Stock is no longer required, the Trustee shall vote such shares as the Administrative Committee shall direct. (b) Tender or Exchange Offer. If a tender or exchange offer is commenced for Company Stock, the Trustee shall obtain from the ESOP Trustee or its designee certification of the directions received from the ESOP participants directing the Company Stock held by the ESOP and upon receipt by the Trustee of such certification, the Company Stock held by the Trust shall be tendered or -8- 9 exchanged, or not tendered or exchanged, by the Trustee in the same proportion and manner as the ESOP Trustee. If the ESOP has been amended, terminated or merged with another Plan of the Company, such that Participant direction of such tender or exchange is no longer required, the Trustee shall tender or exchange, or not tender or exchange such Company Stock as the Administrative Committee shall direct. (c) Notwithstanding any of the foregoing to the contrary, in the event the ESOP has been terminated and distributed, or merged with another plan, or the voting, tender or exchange of its shares of Company stock are for any reason no longer voted, tendered or exchanged according to participant direction, and if the Administrative Committee so directs, the Trustee shall vote, tender or exchange such shares in accordance with the direction of the Participants of one or more other plans eligible for funding from this Trust in such manner as the Administrative Committee shall determine. (d) Confidentiality. All voting and other actions taken pursuant to this Section 4.4 (a), (b) and (c) shall be held confidential by the Trustee and shall not be divulged or released to any person (other than agents of the Trustee), including officers and employees of the Company and its affiliates, except as may be necessary to effectuate such voting or action or in response to a court order. (e) Trustee Action. The Trustee shall not make any recommendations regarding the manner of Participant exercise of any rights under this Section 4.4, including whether or not any rights should be exercised. Section 4.5 Withholding. The Trustee, at the direction of the Administrative Committee, shall withhold any taxes from any payment to the extent, if any, required by applicable law and in such amounts, if any, as shall be specified by the Administrative Committee. ARTICLE V Bankruptcy or Insolvency -9- 10 Section 5.1 Deliveries to Creditors of the Company. It is intended that the Trust Fund is and shall remain at all times subject to the claims of the general creditors of the Company. Accordingly, neither the Trustee nor the Company shall create any security interest in the Trust Fund in favor of any Plan or any creditor. If the Trustee receives the notice provided for in Section 5.2, or if the Trustee otherwise receives actual notice that the Company is insolvent or bankrupt as defined in Section 5.2, the Trustee shall make no further distributions from the Trust Fund, and shall deliver the entire amount of the Trust Fund as a court of competent jurisdiction, or duly appointed receiver or other person authorized to act by such a court, may direct. The Trustee shall resume distribution of the Trust Fund as directed by the Company under the terms hereof, upon not less than 30 days' advance notice to the Company, if it determines that the Company was not, or is no longer, bankrupt or insolvent. Such determination shall be made in a timely fashion, and shall be based upon a decision of a court of competent jurisdiction or a certification by the Chief Executive Officer of the Company of such a determination of its Board of Directors. The Trustee shall have no duty to inquire as to whether the Company is bankrupt or insolvent. Section 5.2 Notification of Bankruptcy or Insolvency. The Company shall advise the Trustee promptly in writing of the Company's bankruptcy or insolvency. The Company shall be deemed to be bankrupt or insolvent upon the occurrence of any of the following: (a) the Company shall make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver, liquidator, sequestrator or trustee for it or a substantial part of its assets, or shall commence any case under any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar law or statute of any jurisdiction (Federal or state), whether now or hereafter in effect; or there shall have been filed any such petition or application, or any such case shall have been -10- 11 commenced against it, in which an order for relief is entered or which remains undismissed for a period of 120 days; or the Company by any act or omission shall indicate its consent to, approval of or acquiescence in (i) any such petition, application or case or order for relief or (ii) the appointment of any custodian, receiver or trustee for it or any substantial part of its property, or shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of 120 days; or (b) the Company shall generally not pay its debts as such debts become due or shall cease to pay its debts generally in the ordinary course of business. ARTICLE VI Investments Section 6.1 Investments. Except where the Company has exercised its power of substitution under Section 6.3, the Trustee shall invest and reinvest the Trust Fund primarily in Company Stock; provided, however, that the Trustee may invest any portion of the Trust Fund temporarily in (i) United States Government obligations with maturities of less than one year, (ii) interest-bearing accounts including, but not limited to, certificates of deposit, time deposits, savings accounts and money market accounts, with maturities of less than one year, or (iii) a common, collective or pooled trust fund maintained by the Trustee whose investments are limited to those described in clauses (i) and (ii) of this Section 6.1, in which event such part of the Trust Fund so invested shall be subject to all the terms and provisions of the common, collective or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. Notwithstanding the foregoing, the proceeds of a tender or exchange transaction to which Section 4.4(b) applies or any non-cash -11- 12 Extraordinary Dividend shall be reduced to cash and reinvested in Company Stock, if available, or, to the extent not available, shall be held or invested as instructed by the Administrative Committee. Section 6.2 Trustee's Duties. The Trustee shall have no duty to determine or review the merit or suitability of investing the Trust Fund in Company Stock for the objectives of the Trust, and the Trustee shall have no liability for actions taken by it in conformity with Section 6.1. Section 6.3 Substitution of Assets. The Company shall have the right, at any time and from time to time, in its sole discretion, to substitute assets determined by the Company to have a value equal to that of any Common Stock or any other asset held by the Trust. This right shall be exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. The Trustee shall retain such substitute assets in the Trust or shall dispose of such assets and reinvest the proceeds thereof in such investments (other than Company Stock) as the Administrative Committee shall direct. ARTICLE VII Accounting by Trustee The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements and other transactions. All such records shall be open to inspection and audit at all reasonable times by the Company. Within sixty days following the close of each Trust Year and within sixty days after the removal or resignation of a Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding Trust Year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost and net proceeds of such purchases or sales, and showing -12- 13 all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. All tax returns and other regulatory filings, if any, required by the Trust shall be prepared by the Company. The Trustee shall make such filings as shall be directed by the Company and shall be entitled to rely on the accuracy of all returns and filings so prepared by the Company. ARTICLE VIII Responsibility and Powers of Trustee Section 8.1 Duty of Trustee. The Trustee shall incur no liability for any action taken by the Trustee pursuant to a direction, request, or approval given by the Company, the Board, or the Administrative Committee in accordance with the terms of this Agreement; provided, that the Trustee shall invest the Trust Fund only as provided in Article VI and the Trustee shall incur no liability by reason of lack of diversification of the Trust Fund. Section 8.2 Indemnification of Trustee. The Company shall indemnify and hold the Trustee harmless from any liabilities, claims or expenses which it may incur in the exercise and performance of its powers and duties hereunder and which are not due to its negligence or bad faith, including any liability alleged to have resulted from a violation of law, including, without limitation, the Securities Act of 1933, or the rules and regulations of any authority having jurisdiction over the Company or any of its affairs. Notwithstanding any other provision of this Agreement, in the event the Trust is determined to be subject to the provisions of ERISA, the Company shall indemnify and hold the Trustee harmless from any liabilities, claims or expenses which it may incur in the exercise and performance of its powers and duties hereunder and which are not due to its gross negligence or bad faith. -13- 14 Section 8.3 Management and Control of Trust Fund. Subject to the terms of this Agreement, the Trustee shall manage and control the assets of the Trust Fund as directed by the Company or the Administrative Committee. Section 8.4 Powers of the Trustee. Without in any way limiting the powers and discretion conferred upon it by the other provisions of this Agreement or by law, but subject to Article VI and any other provisions of this Agreement, the Trustee is expressly authorized and empowered: (i) to sell, exchange, convey, transfer or otherwise dispose of any property held by it by private contract or at public auction, and 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; (ii) to enter into contracts or to make commitments either alone or in concert with others to sell at any future date any property held in the Trust Fund or to purchase any property which it may be authorized to acquire hereunder; (iii) subject to Section 4.4, to vote 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 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 held in the Trust Fund; -14- 15 (iv) 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; (v) to register any investment held in the Trust Fund in its own name or in the name of a nominee and to hold any investment in bearer form, or to combine //certificates representing such investments with certificates of the same issue held by the Trustee in other fiduciary capacities, or to deposit or to arrange for the deposit of such securities in a qualified central depository even though, when so deposited, such securities may be merged and held in bulk in the name of the nominee of such depository with other securities deposited therein by any other person, or to deposit or to arrange for the deposit of any securities issued by the United States Government, or any agency or instrumentality thereof, with a Federal Reserve Bank, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (vi) to employ suitable agents, depositaries and counsel, domestic or foreign, and to pay their reasonable expenses and compensation out of the Trust Fund; (vii) to borrow money from any source as may be necessary or advisable to effectuate the purposes of the Trust on such terms and conditions as the Administrative Committee may direct; (viii) to deposit all or any part of the Trust Fund in interest-bearing accounts maintained or savings certificates issued by the Trustee, in its separate corporate capacity, or in any other banking institution affiliated with the Trustee; (ix) to compromise or otherwise adjust all claims in favor of or against the Trust; -15- 16 (x) to maintain cash balances to meet anticipated distributions from, or administrative expenses of, the Trust Fund without incurring any obligation to pay interest thereon; and (xi) to do all things that the Trustee reasonably deems necessary to carry out the purposes of this Trust. Section 8.5 Valuation of Trust Fund. The Trustee shall value the assets of the Trust Fund as of the last business day of each Trust Year. Shares of Company Stock shall be valued at the Daily Value (as defined below) as of such date. "Daily Value" shall mean, with respect to a share of Company Stock, the closing reported sales price per share of Company Stock on the New York Stock Exchange Composite Tape, or if Company Stock is not traded on such stock exchange, the principal national securities exchange on which Company Stock is traded, or if not so traded, the mean between the highest bid and lowest asked quotation on the over-the-counter market as reported by the National Quotations Bureau, or any similar organization, on any relevant date, or if not so reported, as determined by the Administrative Committee in a manner consistently applied. ARTICLE IX Compensation of Trustee The Trustee shall be entitled to receive such reasonable compensation for its services as shall be agreed upon in writing by the Company and the Trustee. To the extent the compensation and expenses of the Trustee are not paid directly by the Company, they shall be paid by the Trust, but in all events shall remain an obligation of the Company. -16- 17 ARTICLE X Action by the Administrative Committee Any action with respect to the Trust by the Administrative Committee shall be taken by vote or consent of at least a majority of its members or by any member authorized by the Administrative Committee, as the case may be, to take action with respect thereto and shall be communicated to the Trustee by the chairman or any other member designated by the Administrative Committee. ARTICLE XI Replacement of Trustee The Trustee may, with 30 days' advance written notice, be removed at any time by the Company or may resign, in which case a new trustee shall be appointed by the Company. Any successor trustee appointed by the Company shall be an independent, institutional trustee. ARTICLE XII Amendment or Termination; Notices Section 12.1 Amendment. This Agreement may be amended at any time and to any extent by a written instrument executed by the Trustee and the Company, except to make the Trust revocable. Section 12.2 Termination. The Trust shall terminate upon the earliest of (i) January 1, 2010, (ii) the date on which the Trust no longer holds any assets, (iii) the date specified in a written notice of termination given by the Company to the Trustee, (iv) the date the Department of Labor or a court of competent jurisdiction determines (or, in the Administrative Committee's sole discretion, would be likely to determine) that the assets of the Trust are subject to Part 4 of Subtitle B of Title I of ERISA, or (v) the date the Internal Revenue Service or a court of competent jurisdiction determines (or, in the -17- 18 Administrative Committee's sole discretion, would be likely to determine) that any portion of the Trust Fund is presently taxable to any participant or beneficiary under any of the Plans. Section 12.3 Effect of Termination. Upon termination of the Trust, the Trustee shall sell sufficient remaining assets of the Trust so that the proceeds of such sale, together with any other available cash, can be applied to pay in full the remaining principal of all Notes and any accrued but unpaid interest thereon. The Administrative Committee may direct the Trustee as to the timing and manner of such sale in order to comply with applicable law and to avoid, if possible, adverse effects on the publicly traded market price of Company Stock. The proceeds of sale shall first be paid to the Company, or other holder of any Note, up to the amount of any unpaid principal and interest on such Note. In the event the proceeds of the sale shall be insufficient to discharge all Notes in their entirety, the Company shall be deemed to have forgiven all amounts that shall remain due and owing thereon. Any assets or Company Stock remaining in the Trust after such payment of any Notes shall be distributed to or for the benefit of any employee benefit plan (including one or more of the Plans) and in which a broad cross-section of non-collectively bargained employees of the Company or its subsidiaries participate, as the Administrative Committee shall, in its sole discretion, determine. Notwithstanding any other provision of this Agreement, in the event the Trust is terminated under clause (iv) or (v) of Section 12.2, the Trustee shall distribute all assets then constituting the Trust Fund to fund such Plans or benefits thereunder as is determined by the Administrative Committee. Section 12.4 Notices. Any notice, report, demand or waiver required or permitted hereunder shall be in writing and shall be given personally, delivered by overnight delivery service or sent by telecopier, addressed as follows: If to the Company: -18- 19 Fremont General Corporation 2020 Santa Monica Boulevard 6th Floor Santa Monica, California 90404 Telephone No.: (310) 315-5530 Telecopier No.: (310) 315-5598 Attention: Raymond G. Meyers If to the Trustee: Merrill Lynch Trust Company of California Employee Benefit Trust Administration 300 Davidson Avenue - 2nd Floor, West Somerset, New Jersey 08873 Telephone No.: (908) 627-7810 Telecopier No.: (908) 627-7699 Attention: Christopher C. Rosin Notices shall be effective only upon receipt. The Company and the Trustee may change the address to which notices, requests and other communications are to be sent to it by giving written notice of such address change to the other parties in conformity with this Section 12.4. ARTICLE XIII Severability Any provision of this Agreement prohibited by law shall be ineffective to the extent of any such prohibition without invalidating the remaining provisions hereof. ARTICLE XIV Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. -19- 20 IN WITNESS WHEREOF, the Company and the Trustee have executed this Agreement, in duplicate, as of the date set forth above. FREMONT GENERAL CORPORATION By: /s/ Raymond G. Meyers -------------------------- Name: Raymond G. Meyers ------------------------ Title: Senior Vice President ------------------------ MERRILL LYNCH TRUST COMPANY OF CALIFORNIA As Directed Trustee By: /s/ Chris Rosin --------------------------- Name: Chris Rosin ------------------------ Title: Trust Officer ------------------------ -20- 21 EXHIBIT A THE FREMONT GENERAL CORPORATION EMPLOYEE BENEFITS TRUST APPLICABLE PLANS Plan Name - --------- Fremont General Corporation Employee Stock Ownership Plan Fremont General Corporation Investment Incentive Program Fremont General Corporation Excess Benefit Plan Fremont General Corporation Supplemental Retirement Plan Fremont General Corporation Senior Supplemental Retirement Plan Fremont General Corporation Long-Term Incentive Compensation Plan of 1993 Fremont General Corporation Nonqualified Stock Option Plan of 1989 22 EXHIBIT B NOTE $_______________ [City, State] ______________, 19___ FOR VALUE RECEIVED, Merrill Lynch Trust Company of California, as directed trustee of the Fremont General Corporation Employee Benefits Trust (the "Trust"), promises to pay to Fremont General Corporation, a Nevada corporation (the "Company"), or order, the principal sum of _______________________ ($_____________), together with interest on the unpaid principal hereof from the date hereof at the rate of _______________ percent (____%) per annum, compounded semiannually. Principal and interest shall be due and payable in equal annual installments, with the final such payment to be made on January 1, 2010. Should the undersigned fail to make full payment of principal or interest for a period of 10 days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned, at the direction of the Company's Administrative Committee, may at any time prepay all or any portion of the principal or interest owing hereunder. The holder of this Note shall have full recourse against the Trust. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the Trust. MERRILL LYNCH TRUST COMPANY OF CALIFORNIA As Directed Trustee By: ____________________________ EX-10.14.(A) 21 EMPLOYMENT AGT - RAMPINO 1 EXHIBIT 10.14(a) EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into effective as of February 8, 1996 (the "Effective Date"), by and between Louis J. Rampino (the "Executive") and Fremont General Corporation (the "Company"). R E C I T A L S A. The Company and the Executive desire to enter into this Agreement in order to provide additional financial security and benefits to the Executive in recognition of past services and to encourage Executive to continue employment with the Company. B. To accomplish the foregoing objectives, the Board of Directors of the Company (the "Board") has directed the Company, upon execution of this Agreement by the Executive, to agree to the terms provided herein. C. Certain capitalized terms used in the Agreement are defined in Section 8 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Executive by the Company, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Company shall employ the Executive in the position of President and Chief Operating Officer, with such duties, responsibilities and compensation as in effect as of the Effective Date; provided, however, that the Board shall have the right to revise such responsibilities and compen sation from time to time as the Board may deem necessary or appropriate. If any such revision constitutes "Involuntary Termination" (as defined in Section 8(e)), the Executive shall be entitled to benefits upon such Involuntary Termination as provided under this Agreement. (b) Obligations. The Executive shall devote his full business efforts and time to the Company and its subsidiaries. The foregoing, however, shall not preclude the Executive from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company. 2. At-Will Employment. The Company and the Executive acknowledge that the Executive's employment is and shall continue to be at-will, as defined under applicable law. If the Executive's employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or other agreements with the Company at the time of termination. 3. Term of Agreement. The terms of this Agreement shall terminate upon the earliest of (i) the date that all obligations of the parties hereunder have been satisfied, (ii) in the absence of a Company Event (as defined in Section 8(b)) prior to the sixth anniversary of the Effective Date, the sixth anniversary of the Effective Date, or (iii) in the event of a Company Event on or prior to the sixth anniversary of the Effective Date, the third anniversary of such Company Event. Notwithstanding the foregoing, this Agreement may 2 be extended for an additional period or periods by mutual written agreement of the Company and the Executive. A termination of the terms of this Agreement pursuant to this Section 3 shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 4. Compensation and Benefits. (a) Base Compensation. The Company shall pay the Executive as compensation for services a base salary at the annualized rate of $550,000. Such salary shall be reviewed at least annually and may be increased from time to time. Such salary may be decreased, subject to the provisions of subsection 8(e)(ii) of this Agreement. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation specified in this Section 4(a), as adjusted from time to time, is referred to in this Agreement as "Base Compensation." (b) Bonus. Beginning with the Company's current fiscal year and for each fiscal year thereafter during the term of this Agreement, the Executive shall be eligible to participate in any bonus plan or arrangement maintained by the Company of general applicability to other key executives of the Company. (c) Executive Benefits. The Executive shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company of general applicability to other key executives of the Company, including (without limitation) retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, restricted stock programs, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of the Board or any committee administering such plan or program. 5. Benefits Upon a Company Event. In the event of a Company Event that occurs while the Executive is employed by the Company, the unvested portion of any stock option or restricted stock held by the Executive shall automatically be accelerated in full so as to become completely vested. 6. Severance Benefits. (a) Severance Benefits. If the Executive's employment with the Company terminates, either (i) within the thirty-six (36) month period following a Company Event, or (ii) during the "Employment Term" (as defined in Section 8(d)) below, then the Executive shall be entitled to receive severance benefits as follows: (i) Involuntary Termination; Death; Disability. If the Executive's employment terminates as a result of Involuntary Termination other than for Cause, or if the Executive's employment terminates as the result of the Executive's death or Disability, then the Company shall pay the Executive (or the Executive's beneficiary or representative, as applicable) within ten (10) business days after the Termination Date a lump sum amount equal to thirty-six (36) months Base Compensation of the Executive -2- 3 at the time of such termination (without giving effect to any reduction in Base Compensation that resulted in such Involuntary Termination). In addition, the Executive shall be entitled to a payment of a pro-rata portion of the target bonus amount (as such term is defined and applied by the Company) for the then current bonus period(s) under any bonus plan maintained by the Company in which the Executive is participating on the Termination Date. The pro-rata portion of any such bonus opportunity shall be determined by multiplying the target bonus by a fraction, the numerator of which shall be the number of days in which the Executive was employed by the Company in the bonus period in which such termination occurs, and the denominator of which shall be the number of days in such bonus period. Such payment shall be paid in a lump sum within ten (10) business days after the Termination Date. (ii) Voluntary Resignation; Termination for Cause. If the Executive's employment terminates by reason of the Executive's voluntary resignation (and is not an Involuntary Termination), or if the Executive is terminated for Cause, then the Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established (and applicable) under the Company's then-existing severance and benefits plans and policies at the time of such termination. (b) Benefits; Miscellaneous. In the event the Executive is entitled to severance benefits pursuant to subsection 6(a)(i) (other than as a result of the Executive's death), then in addition to such severance benefits, the Company shall continue to provide the Executive, for thirty-six (36) months after the Termination Date, welfare benefits or such comparable alternative welfare benefits as the Company may, in its discretion, determine to be sufficient to satisfy its obligations to the Executive under this Agreement (including, without limitation, medical, prescription, dental, disability, individual life, group life, accidental death and travel accident plans and programs) which are at least as favorable as the most favorable plans of the Company applicable to other peer executives and their families as of the Termination Date. Notwithstanding the foregoing, if the Executive is covered under any medical, life, or disability insurance plan(s) provided by a subsequent employer, then the amount of coverage required to be provided by the Company hereunder shall be reduced by the amount of coverage provided by the subsequent employer's medical, life or disability insurance plan(s). The Executive's rights under this Section 6(b) shall be in addition to, and not in lieu of, any post-termination continuation coverage or conversion rights the Executive may have pursuant to applicable law, including without limitation, continuation coverage required by Section 4980B of the Internal Revenue Code. In addition, (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to termination. These payments shall be made promptly upon termination and within the period of time mandated by law. (c) Option and Restricted Stock Accelerated Vesting. In the event the Executive is entitled to severance benefits pursuant to subsection 6(a)(i), the unvested portion of any stock option or restricted stock held by the Executive shall automatically be accelerated in full so as to become completely vested. -3- 4 (d) Option Bonus. In the event of a termination described in subsection 6(a)(i) that occurs within the thirty-six (36) month period following a Company Event, then, in addition to the severance and other benefits provided above, the Company shall also pay the Executive a cash bonus in an amount equal to the aggregate option exercise price attributable to the Executive's then outstanding Company stock options. Such bonus shall be paid in a lump sum within ten (10) business days after the Termination Date. 7. Limitation on Payments. Notwithstanding anything to the contrary contained herein, in the event it shall be determined that any payment by the Company to or for the benefit of the Executive, whether paid or payable but determined without regard to any additional payments required under this Section 7 (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable federal, state, or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the payment and on the Gross-Up Payment, the Executive shall retain an amount equal to the Payment minus all applicable taxes on the Payment. The intent of the parties is that the Company shall be solely responsible for, and shall pay, any Excise Tax on the Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as any loss of tax deduction caused by the Gross-Up Payment. All determinations required to be made under this Section, including without limitation, whether and when a Gross-Up Payment is required in the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is the Company's outside auditor at the time of such determinations, which firm must be reasonably acceptable to the Executive (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. 8. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Cause. "Cause" shall mean (i) a willful act of personal dishonesty knowingly taken by the Executive in connection with his responsibilities as an employee and intended to result in his substantial personal enrichment, (ii) a willful and knowing act by the Executive which constitutes gross misconduct, or any refusal by the Executive to comply with a reasonable directive of the Board, (iii) a willful breach by the Executive of a material provision of this Agreement, or (iv) a material and willful violation of a federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. Termination for Cause shall not be deemed to have occurred unless, by the affirmative vote of all of the members of the Board (excluding the Executive, if applicable), at a meeting called and held for that purpose (after reasonable notice to the Executive and his counsel after allowing the Executive and his counsel to be heard before the Board, a resolution is adopted finding that in the good faith opinion of such Board members the Executive was guilty of conduct set forth in (i), (ii), (iii), or (iv) and specifying the particulars thereof. -4- 5 (b) Company Event. "Company Event" shall mean the occurrence of any of the following events: (i) Any "person" or "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (other than to a subsidiary or subsidiaries); or (iv) James A. McIntyre, while serving as Chairman of the Board, has a conservator of his person appointed or dies. (c) Disability. "Disability" shall mean that the Executive has been or will be unable to perform his duties under this Agreement for a period of six or more months due to illness, accident or other physical or mental incapacity. (d) Employment Term. "Employment Term" shall mean the period beginning on the Effective Date and ending (i) on the third anniversary of the Effective Date in the event the Company or the Executive, before the second anniversary of the Effective Date, gives advance written notice of termination of the Employment Term to the other in accordance with Section 10(a), or (ii) in the absence of such notice of termination, on the sixth anniversary of the Effective Date. (e) Involuntary Termination. "Involuntary Termination" shall mean: (i) the continued assignment to Executive of any duties or the continued significant change in the Executive's duties, either of which is substantially inconsistent with the Executive's duties immediately prior to such assignment or change for a period of 30 days after notice -5- 6 thereof from Executive to the Chief Executive Officer of the Company or the Board setting forth in reasonable detail the respects in which Executive believes such assignments or duties are significantly inconsistent with the Executive's prior duties; (ii) a reduction in Executive's Base Compensation, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries, except that in no event shall the Executive's Base Compensation be reduced below the rate set forth in Section 4(a) above as of the Effective Date; (iii) a material reduction by the Company in the kind or level of employee benefits (other than salary and bonus) to which Executive is entitled immediately prior to such reduction with the result that Executive's overall benefits package (other than salary and bonus) is substantially reduced (other than any such reduction applicable to officers of the Company generally); (iv) the relocation of Executive's principal place for the rendering of the services to be provided by him hereunder to a location more than fifty (50) miles from the present location of the principal executive office of the Company; (v) any purported termination of the Executive's employment by the Company other than for Cause; (vi) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 9 below; or (vii) any material breach by the Company of any material provision of this Agreement which continues uncured for 30 days following notice thereof; provided that none of the foregoing shall constitute Involuntary Termination to the extent Executive has agreed thereto. (f) Termination Date. "Termination Date" shall mean (i) if the Executive's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such thirty (30) day period), (ii) if the Executive's employment is terminated by the Company for any other reason, the date on which a notice of termination is given, or (iii) if the Agreement is terminated by the Executive, the date on which the Executive delivers the notice of termination to the Company. 9. Successors. (a) Company's Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business -6- 7 and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representa tives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Notice of Termination. Any termination by the Company for Cause or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 10 of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. 11. Arbitration. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. The arbitrator shall be selected as follows: In the event the Company and the Executive agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and the Executive do not so agree, the Company and the Executive shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Los Angeles, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or the Executive and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such -7- 8 information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs, provided that punitive damages shall not be awarded. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. 12. Miscellaneous Provisions. (a) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void. (g) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company -8- 9 or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY FREMONT GENERAL CORPORATION /s/ James A. McIntyre --------------------------------------- By: James A. McIntyre Title: Chairman of the Board and Chief Executive Officer EXECUTIVE LOUIS J. RAMPINO /s/ Louis J. Rampino --------------------------------------- -9- EX-10.14.(B) 22 EMPLOYMENT AGT - BAILEY 1 EXHIBIT 10.14(b) EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into effective as of February 8, 1996 (the "Effective Date"), by and between Wayne R. Bailey (the "Executive") and Fremont General Corporation (the "Company"). R E C I T A L S A. The Company and the Executive desire to enter into this Agreement in order to provide additional financial security and benefits to the Executive in recognition of past services and to encourage Executive to continue employment with the Company. B. To accomplish the foregoing objectives, the Board of Directors of the Company (the "Board") has directed the Company, upon execution of this Agreement by the Executive, to agree to the terms provided herein. C. Certain capitalized terms used in the Agreement are defined in Section 8 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Executive by the Company, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Company shall employ the Executive in the position of Executive Vice President and Chief Financial Officer, with such duties, responsibilities and compensation as in effect as of the Effective Date; provided, however, that the Board shall have the right to revise such responsibilities and compensation from time to time as the Board may deem necessary or appropriate. If any such revision constitutes "Involuntary Termination"( as defined in Section 8(e)), the Executive shall be entitled to benefits upon such Involuntary Termination as provided under this Agreement. (b) Obligations. The Executive shall devote his full business efforts and time to the Company and its subsidiaries. The foregoing, however, shall not preclude the Executive from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company. 2. At-Will Employment. The Company and the Executive acknowledge that the Executive's employment is and shall continue to be at-will, as defined under applicable law. If the Executive's employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or other agreements with the Company at the time of termination. 3. Term of Agreement. The terms of this Agreement shall terminate upon the earliest of (i) the date that all obligations of the parties hereunder have been satisfied, (ii) in the absence of a Company Event (as defined in Section 8(b)) prior to the sixth anniversary of the Effective Date, the sixth anniversary of the Effective Date, or (iii) in the event of a Company Event on or prior to the sixth anniversary of the Effective Date, the third anniversary of such Company Event. Notwithstanding the foregoing, this Agreement may -1- 2 be extended for an additional period or periods by mutual written agreement of the Company and the Executive. A termination of the terms of this Agreement pursuant to this Section 3 shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 4. Compensation and Benefits. (a) Base Compensation. The Company shall pay the Executive as compensation for services a base salary at the annualized rate of $450,000. Such salary shall be reviewed at least annually and may be increased from time to time. Such salary may be decreased, subject to the provisions of subsection 8(e)(ii) of this Agreement. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation specified in this Section 4(a), as adjusted from time to time, is referred to in this Agreement as "Base Compensation." (b) Bonus. Beginning with the Company's current fiscal year and for each fiscal year thereafter during the term of this Agreement, the Executive shall be eligible to participate in any bonus plan or arrangement maintained by the Company of general applicability to other key executives of the Company. (c) Executive Benefits. The Executive shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company of general applicability to other key executives of the Company, including (without limitation) retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, restricted stock programs, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of the Board or any committee administering such plan or program. 5. Benefits Upon a Company Event. In the event of a Company Event that occurs while the Executive is employed by the Company, the unvested portion of any stock option or restricted stock held by the Executive shall automatically be accelerated in full so as to become completely vested. 6. Severance Benefits. (a) Severance Benefits. If the Executive's employment with the Company terminates, either (i) within the thirty-six (36) month period following a Company Event, or (ii) during the "Employment Term" (as defined in Section 8(d)) below, then the Executive shall be entitled to receive severance benefits as follows: (i) Involuntary Termination; Death; Disability. If the Executive's employment terminates as a result of Involuntary Termination other than for Cause, or if the Executive's employment terminates as the result of the Executive's death or Disability, then the Company shall pay the Executive (or the Executive's beneficiary or representative, as applicable) within ten (10) business days after the Termination Date a lump sum amount equal to thirty-six (36) months Base Compensation of the Executive -2- 3 at the time of such termination (without giving effect to any reduction in Base Compensation that resulted in such Involuntary Termination). In addition, the Executive shall be entitled to a payment of a pro-rata portion of the target bonus amount (as such term is defined and applied by the Company) for the then current bonus period(s) under any bonus plan maintained by the Company in which the Executive is participating on the Termination Date. The pro-rata portion of any such bonus opportunity shall be determined by multiplying the target bonus by a fraction, the numerator of which shall be the number of days in which the Executive was employed by the Company in the bonus period in which such termination occurs, and the denominator of which shall be the number of days in such bonus period. Such payment shall be paid in a lump sum within ten (10) business days after the Termination Date. (ii) Voluntary Resignation; Termination for Cause. If the Executive's employment terminates by reason of the Executive's voluntary resignation (and is not an Involuntary Termination), or if the Executive is terminated for Cause, then the Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established (and applicable) under the Company's then-existing severance and benefits plans and policies at the time of such termination. (b) Benefits; Miscellaneous. In the event the Executive is entitled to severance benefits pursuant to subsection 6(a)(i) (other than as a result of the Executive's death), then in addition to such severance benefits, the Company shall continue to provide the Executive, for thirty-six (36) months after the Termination Date, welfare benefits or such comparable alternative welfare benefits as the Company may, in its discretion, determine to be sufficient to satisfy its obligations to the Executive under this Agreement (including, without limitation, medical, prescription, dental, disability, individual life, group life, accidental death and travel accident plans and programs) which are at least as favorable as the most favorable plans of the Company applicable to other peer executives and their families as of the Termination Date. Notwithstanding the foregoing, if the Executive is covered under any medical, life, or disability insurance plan(s) provided by a subsequent employer, then the amount of coverage required to be provided by the Company hereunder shall be reduced by the amount of coverage provided by the subsequent employer's medical, life or disability insurance plan(s). The Executive's rights under this Section 6(b) shall be in addition to, and not in lieu of, any post-termination continuation coverage or conversion rights the Executive may have pursuant to applicable law, including without limitation, continuation coverage required by Section 4980B of the Internal Revenue Code. In addition, (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to termination. These payments shall be made promptly upon termination and within the period of time mandated by law. (c) Option and Restricted Stock Accelerated Vesting. In the event the Executive is entitled to severance benefits pursuant to subsection 6(a)(i), the unvested portion of any stock option or restricted stock held by the Executive shall automatically be accelerated in full so as to become completely vested. -3- 4 (d) Option Bonus. In the event of a termination described in subsection 6(a)(i) that occurs within the thirty-six (36) month period following a Company Event, then, in addition to the severance and other benefits provided above, the Company shall also pay the Executive a cash bonus in an amount equal to the aggregate option exercise price attributable to the Executive's then outstanding Company stock options. Such bonus shall be paid in a lump sum within ten (10) business days after the Termination Date. 7. Limitation on Payments. Notwithstanding anything to the contrary contained herein, in the event it shall be determined that any payment by the Company to or for the benefit of the Executive, whether paid or payable but determined without regard to any additional payments required under this Section 7 (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable federal, state, or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the payment and on the Gross-Up Payment, the Executive shall retain an amount equal to the Payment minus all applicable taxes on the Payment. The intent of the parties is that the Company shall be solely responsible for, and shall pay, any Excise Tax on the Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as any loss of tax deduction caused by the Gross-Up Payment. All determinations required to be made under this Section, including without limitation, whether and when a Gross-Up Payment is required in the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is the Company's outside auditor at the time of such determinations, which firm must be reasonably acceptable to the Executive (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. 8. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Cause. "Cause" shall mean (i) a willful act of personal dishonesty knowingly taken by the Executive in connection with his responsibilities as an employee and intended to result in his substantial personal enrichment, (ii) a willful and knowing act by the Executive which constitutes gross misconduct, or any refusal by the Executive to comply with a reasonable directive of the Board, (iii) a willful breach by the Executive of a material provision of this Agreement, or (iv) a material and willful violation of a federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. Termination for Cause shall not be deemed to have occurred unless, by the affirmative vote of all of the members of the Board (excluding the Executive, if applicable), at a meeting called and held for that purpose (after reasonable notice to the Executive and his counsel after allowing the Executive and his counsel to be heard before the Board, a resolution is adopted finding that in the good faith opinion of such Board members the Executive was guilty of conduct set forth in (i), (ii), (iii), or (iv) and specifying the particulars thereof. -4- 5 (b) Company Event. "Company Event" shall mean the occurrence of any of the following events: (i) Any "person" or "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (other than to a subsidiary or subsidiaries); or (iv) James A. McIntyre, while serving as Chairman of the Board, has a conservator of his person appointed or dies. (c) Disability. "Disability" shall mean that the Executive has been or will be unable to perform his duties under this Agreement for a period of six or more months due to illness, accident or other physical or mental incapacity. (d) Employment Term. "Employment Term" shall mean the period beginning on the Effective Date and ending (i) on the third anniversary of the Effective Date in the event the Company or the Executive, before the second anniversary of the Effective Date, gives advance written notice of termination of the Employment Term to the other in accordance with Section 10(a), or (ii) in the absence of such notice of termination, on the sixth anniversary of the Effective Date. (e) Involuntary Termination. "Involuntary Termination" shall mean: (i) the continued assignment to Executive of any duties or the continued significant change in the Executive's duties, either of which is substantially inconsistent with the Executive's duties immediately prior to such assignment or change for a period of 30 days after notice -5- 6 thereof from Executive to the Chief Executive Officer of the Company or the Board setting forth in reasonable detail the respects in which Executive believes such assignments or duties are significantly inconsistent with the Executive's prior duties; (ii) a reduction in Executive's Base Compensation, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries, except that in no event shall the Executive's Base Compensation be reduced below the rate set forth in Section 4(a) above as of the Effective Date; (iii) a material reduction by the Company in the kind or level of employee benefits (other than salary and bonus) to which Executive is entitled immediately prior to such reduction with the result that Executive's overall benefits package (other than salary and bonus) is substantially reduced (other than any such reduction applicable to officers of the Company generally); (iv) the relocation of Executive's principal place for the rendering of the services to be provided by him hereunder to a location more than fifty (50) miles from the present location of the principal executive office of the Company; (v) any purported termination of the Executive's employment by the Company other than for Cause; (vi) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 9 below; or (vii) any material breach by the Company of any material provision of this Agreement which continues uncured for 30 days following notice thereof; provided that none of the foregoing shall constitute Involuntary Termination to the extent Executive has agreed thereto. (f) Termination Date. "Termination Date" shall mean (i) if the Executive's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such thirty (30) day period), (ii) if the Executive's employment is terminated by the Company for any other reason, the date on which a notice of termination is given, or (iii) if the Agreement is terminated by the Executive, the date on which the Executive delivers the notice of termination to the Company. 9. Successors. (a) Company's Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business -6- 7 and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representa tives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Notice of Termination. Any termination by the Company for Cause or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 10 of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. 11. Arbitration. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. The arbitrator shall be selected as follows: In the event the Company and the Executive agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and the Executive do not so agree, the Company and the Executive shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Los Angeles, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or the Executive and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such -7- 8 information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs, provided that punitive damages shall not be awarded. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. 12. Miscellaneous Provisions. (a) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void. (g) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company -8- 9 or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY FREMONT GENERAL CORPORATION /s/ James A. McIntyre --------------------------------------- By: James A. McIntyre Title: Chairman of the Board and Chief Executive Officer EXECUTIVE WAYNE R. BAILEY /s/ Wayne R. Bailey --------------------------------------- -9- EX-10.15 23 MANAGEMENT CONTINUITY AGREEMENT/RAYMOND MEYERS 1 EXHIBIT 10.15 MANAGEMENT CONTINUITY AGREEMENT This Management Continuity Agreement (the "Agreement") is made and entered into effective as of February 8, 1996 (the "Effective Date"), by and between Raymond G. Meyers (the "Executive") and Fremont General Corporation (the "Company"). R E C I T A L S A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other significant Company event. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities. The Board is determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Executive, notwithstanding the possibility, threat or occurrence of a Company Event (as defined below). B. The Board believes that it is the best interests of the Company and its stockholders to provide the Executive with an incentive to continue his employment and to motivate the Executive to maximize the value of the Company upon a Company Event for the benefit of its stockholders. C. The Board believes that it is imperative to provide the Executive with certain benefits upon a Company Event and, under certain circumstances, upon termination of the Executive's employment in connection with a Company Event, which benefits are intended to provide the Executive with financial security and provide sufficient incentive and encouragement to the Executive to remain with the Company notwithstanding the possibility of a Company Event. D. To accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Agreement by the Executive, to agree to the terms provided herein. E. Certain capitalized terms used in the Agreement are defined in Section 8 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Executive by the Company, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Company shall employ the Executive in the position of Senior Vice President, with such duties, responsibilities and compensation as in effect as of the Effective Date; provided, however, that the Board shall have the right, at any time prior to the occurrence of a Company Event, to revise such responsibilities and compensation from time to time as the Board, in its discretion, may deem necessary or appropriate. (b) Obligations. The Executive shall continue to devote his full business efforts and time to the Company and its subsidiaries. The Executive shall comply with and be bound by the Company's operating policies, procedures and practices from time to time in effect during his employment. During the term of the Executive's employment with the Company, the Executive shall devote his full time, skill and -1- 2 attention to his duties and responsibilities, and shall perform them faithfully, diligently and competently, and the Executive shall use his best efforts to further the business of the Company and its affiliated entities. The foregoing, however, shall not preclude the Executive from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company. 2. At-Will Employment. The Company and the Executive acknowledge that the Executive's employment is and shall continue to be at-will, as defined under applicable law. If the Executive's employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or other agreements with the Company at the time of termination. 3. Term of Agreement. The terms of this Agreement shall terminate upon the earliest of (i) the date that all obligations of the parties hereunder have been satisfied, (ii) in the absence of a Company Event (as defined in Section 8(b)) prior to the sixth anniversary of the Effective Date, the sixth anniversary of the Effective Date, or (iii) in the event of a Company Event on or prior to the sixth anniversary of the Effective Date, the third anniversary of such Company Event. Notwithstanding the foregoing, this Agreement may be extended for an additional period or periods by mutual written agreement of the Company and the Executive. A termination of the terms of this Agreement pursuant to this Section 3 shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 4. Compensation and Benefits. (a) Base Compensation. The Company shall pay the Executive as compensation for services a base salary at the annualized rate of $290,000. Such salary shall be reviewed at least annually and may be increased from time to time. At any time prior to a Company Event, such salary may be decreased, subject to the provisions of subsection 8(d)(ii) of this Agreement. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation specified in this Section 4(a), as adjusted from time to time, is referred to in this Agreement as "Base Compensation." (b) Bonus. Beginning with the Company's current fiscal year and for each fiscal year thereafter during the term of this Agreement, the Executive shall be eligible to participate in any bonus plan or arrangement maintained by the Company of general applicability to other key executives of the Company. (c) Executive Benefits. The Executive shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company of general applicability to other key executives of the Company, including (without limitation) retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, restricted stock programs, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of the Board or any committee administering such plan or program. -2- 3 5. Benefits Upon a Company Event. In the event of a Company Event that occurs while the Executive is employed by the Company, the unvested portion of any stock option or restricted stock held by the Executive shall automatically be accelerated in full so as to become completely vested. 6. Severance Benefits. (a) Severance Benefits. If the Executive's employment with the Company terminates within the thirty-six (36) month period following a Company Event, then the Executive shall be entitled to receive severance benefits as follows: (i) Involuntary Termination; Death; Disability. If the Executive's employment terminates as a result of Involuntary Termination other than for Cause, or if the Executive's employment terminates as the result of the Executive's death or Disability, then the Company shall pay the Executive (or the Executive's beneficiary or representative, as applicable) within ten (10) business days after the Termination Date a lump sum amount equal to thirty-six (36) months Base Compensation of the Executive at the time of such termination (without giving effect to any reduction in Base Compensation that resulted in such Involuntary Termination). In addition, the Executive shall be entitled to a payment of a pro-rata portion of the target bonus amount (as such term is defined and applied by the Company) for the then current bonus period(s) under any bonus plan maintained by the Company in which the Executive is participating on the Termination Date. The pro-rata portion of any such bonus opportunity shall be determined by multiplying the target bonus by a fraction, the numerator of which shall be the number of days in which the Executive was employed by the Company in the bonus period in which such termination occurs, and the denominator of which shall be the number of days in such bonus period. Such payment shall be paid in a lump sum within ten (10) business days after the Termination Date. (ii) Voluntary Resignation; Termination for Cause. If the Executive's employment terminates by reason of the Executive's voluntary resignation (and is not an Involuntary Termination), or if the Executive is terminated for Cause, then the Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established (and applicable) under the Company's then-existing severance and benefits plans and policies at the time of such termination. (b) Benefits; Miscellaneous. In the event the Executive is entitled to severance benefits pursuant to subsection 6(a)(i) (other than as a result of the Executive's death), then in addition to such severance benefits, the Company shall continue to provide the Executive, for thirty-six (36) months after the Termination Date, welfare benefits or such comparable alternative welfare benefits as the Company may, in its discretion, determine to be sufficient to satisfy its obligations to the Executive under this Agreement (including, without limitation, medical, prescription, dental, disability, individual life, group life, accidental death and travel accident plans and programs) which are at least as favorable as the most favorable plans of the Company applicable to other peer executives and their families as of the Termination Date. Notwithstanding the foregoing, if the Executive is covered under any medical, life, or disability insurance plan(s) provided by a subsequent employer, then the amount of coverage required to be provided by the Company hereunder shall be reduced by the amount of coverage provided by the subsequent employer's medical, life or disability insurance plan(s). The Executive's rights under this Section 6(b) shall be in addition to, and not in lieu of, any post-termination continuation coverage or conversion rights the -3- 4 Executive may have pursuant to applicable law, including without limitation, continuation coverage required by Section 4980B of the Internal Revenue Code. In addition, (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to termination. These payments shall be made promptly upon termination and within the period of time mandated by law. (c) Option Bonus. In the event the Executive is entitled to severance benefits pursuant to subsection 6(a)(i), then, in addition to the severance and other benefits provided above, the Company shall also pay the Executive a cash bonus in an amount equal to the aggregate option exercise price attributable to the Executive's then outstanding Company stock options. Such bonus shall be paid in a lump sum within ten (10) business days after the Termination Date. 7. Limitation on Payments. Notwithstanding anything to the contrary contained herein, in the event it shall be determined that any payment by the Company to or for the benefit of the Executive, whether paid or payable but determined without regard to any additional payments required under this Section 7 (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable federal, state, or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the payment and on the Gross-Up Payment, the Executive shall retain an amount equal to the Payment minus all applicable taxes on the Payment. The intent of the parties is that the Company shall be solely responsible for, and shall pay, any Excise Tax on the Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as any loss of tax deduction caused by the Gross-Up Payment. All determinations required to be made under this Section, including without limitation, whether and when a Gross-Up Payment is required in the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is the Company's outside auditor at the time of such determinations, which firm must be reasonably acceptable to the Executive (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. 8. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Cause. "Cause" shall mean (i) a willful act of personal dishonesty knowingly taken by the Executive in connection with his responsibilities as an employee and intended to result in his substantial personal enrichment, (ii) a willful and knowing act by the Executive which constitutes gross misconduct, or any refusal by the Executive to comply with a reasonable directive of the Board, (iii) a willful breach by the Executive of a material provision of this Agreement, or (iv) a material and willful -4- 5 violation of a federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. Termination for Cause shall not be deemed to have occurred unless, by the affirmative vote of all of the members of the Board (excluding the Executive, if applicable), at a meeting called and held for that purpose (after reasonable notice to the Executive and his counsel after allowing the Executive and his counsel to be heard before the Board, a resolution is adopted finding that in the good faith opinion of such Board members the Executive was guilty of conduct set forth in (i), (ii), (iii), or (iv) and specifying the particulars thereof. (b) Company Event. "Company Event" shall mean the occurrence of any of the following events: (i) Any "person" or "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (other than to a subsidiary or subsidiaries); or (iv) James A. McIntyre, while serving as Chairman of the Board, has a conservator of his person appointed or dies. (c) Disability. "Disability" shall mean that the Executive has been or will be unable to perform his duties under this Agreement for a period of six or more months due to illness, accident or other physical or mental incapacity. -5- 6 (d) Involuntary Termination. "Involuntary Termination" shall mean: (i) the continued assignment to Executive of any duties or the continued significant change in the Executive's duties, either of which is substantially inconsistent with the Executive's duties immediately prior to such assignment or change for a period of 30 days after notice thereof from Executive to the Chief Executive Officer of the Company or the Board setting forth in reasonable detail the respects in which Executive believes such assignments or duties are significantly inconsistent with the Executive's prior duties; (ii) a reduction in Executive's Base Compensation, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries, except that in no event shall the Executive's Base Compensation be reduced below the rate set forth in Section 4(a) above as of the Effective Date; (iii) a material reduction by the Company in the kind or level of employee benefits (other than salary and bonus) to which Executive is entitled immediately prior to such reduction with the result that Executive's overall benefits package (other than salary and bonus) is substantially reduced (other than any such reduction applicable to officers of the Company generally); (iv) the relocation of Executive's principal place for the rendering of the services to be provided by him hereunder to a location more than fifty (50) miles from the present location of the principal executive office of the Company; (v) any purported termination of the Executive's employment by the Company other than for Cause; (vi) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 9 below; or (vii) any material breach by the Company of any material provision of this Agreement which continues uncured for 30 days following notice thereof; provided that none of the foregoing shall constitute Involuntary Termination to the extent Executive has agreed thereto. (e) Termination Date. "Termination Date" shall mean (i) if the Executive's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such thirty (30) day period), (ii) if the Executive's employment is terminated by the Company for any other reason, the date on which a notice of termination is given, or (iii) if the Agreement is terminated by the Executive, the date on which the Executive delivers the notice of termination to the Company. -6- 7 9. Successors. (a) Company's Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representa tives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Notice of Termination. Any termination by the Company for Cause or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 10 of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. 11. Arbitration. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. The arbitrator shall be selected as follows: In the event the Company and the Executive agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and the Executive do not so agree, the Company and the Executive shall each select one independent, qualified -7- 8 arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Los Angeles, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or the Executive and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs, provided that punitive damages shall not be awarded. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. 12. Miscellaneous Provisions. (a) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. -8- 9 (f) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void. (g) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY FREMONT GENERAL CORPORATION By: /s/ James A. McIntyre -------------------------------------- James A. McIntyre Chairman of the Board and Chief Executive Officer EXECUTIVE /s/ Raymond G. Meyers ----------------------------------------- Raymond G. Meyers -9- EX-10.17 24 CONTINUING COMPENSATION PLAN /RETIRE DIRECTORS 1 EXHIBIT 10.17 RESOLUTION OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF FREMONT GENERAL CORPORATION The undersigneds, being all the Committee do hereby consent to the adoption of the following resolution: Whereas, the Company wishes to provide a modest retirement benefit for non-employee Directors of our Company who have served at least five (5) years and who are, at the time of retirement, at least 65 years of age; and Whereas, the Company wishes to continue to draw on the experience and counsel of its retired Directors for a period following retirement; and Whereas, the Company wishes to provide such benefit in the form of continuing regular monthly fees at the rate in effect, as adopted by the Board, at the time of the Director's retirement, for a period of three (3) years thereafter; and Whereas, the Company wishes to extend such benefits as remain owing under these provisions to the surviving spouse (if any) of Directors who die prior to retirement or during the three (3) year period thereafter; and Whereas, the Company intends to continue these provisions indefinitely but nonetheless wishes to reserve the absolute right to amend, alter, modify or discontinue these provisions at its sole discretion; Now, therefore, be it resolved that the Committee hereby authorizes and instructs the officers of the Company forthwith to implement a Continuing Compensation Plan for retired Directors, in a form accept able to the General Counsel of the Company, which Plan shall provide continuation of the payment of monthly fees for a period of three (3) years following retirement or to the Directors' surviving spouses. /s/ Dickinson C. Ross --------------------------------------- Dickinson C. Ross Chairman /s/ Kenneth L. Trefftzs --------------------------------------- Kenneth L. Trefftzs /s/ Houston I. Flournoy --------------------------------------- Houston I. Flournoy 2 FREMONT GENERAL CORPORATION CONTINUING COMPENSATION PLAN FOR RETIRED DIRECTORS In recognition of their service and contributions as Directors of the Company, and upon attainment of the age and length of service requirements herein defined, FREMONT GENERAL CORPORATION provides the benefit of continuing compensation to those non-employee Directors who elect to retire from active participation on the Board. ELIGIBILITY Directors who are not, nor have been, employees of the Company, or of any of its principal subsidiaries, who have served at least five (5) consecutive years on the Board are eligible for continuing compensation under this Plan. QUALIFICATION Upon retirement from active service on the Board after completing at least five (5) years of service and the attainment of age 65 (but not later than the attainment of age 75), eligible Directors shall continue to receive monthly payments equal to the monthly fees then in effect as approved by the Board for a period of three (3) years following retirement. CONTINGENCY PLANS DEATH In the event of an eligible Director's death PRIOR to retirement, the Company will pay to the Director's surviving spouse (if any) the benefit which the Company would have paid had the Director retired at the time of death. Should a Director die AFTER retirement, the Company' will continue to pay the monthly fees then in effect to the surviving spouse (if any) for the remainder of the three (3) year period. At the Company's sole discretion, such a survivor benefit may be paid in monthly installments or in a lump sum. 3 DISABILITY In the event an eligible Director becomes totally and permanently disabled prior to retirement, the Company will pay such benefit as the Director would have been paid had he or she retired at the time of disability. Payments to a Director who becomes disabled after retiring will continue for the duration of the three (3) year period. The Company will regard the certification of the attending physician as to the qualification date for this benefit. In the event of death following a period of total disability, but within the three (3) year period, the Company will continue the scheduled benefits as described under "DEATH" above to the surviving spouse (if any). EXCLUSIVITY No one, other than eligible Directors or their surviving spouses, shall have any claim to the benefits provided under this Plan. Thus, upon the death of a surviving spouse, all further payments cease; no payments are owed to any estate or other claimant thereafter. -2- 4 ADMINISTRATION Notwithstanding the Company's desire and intent to implement and maintain this Plan for the benefit of its Directors, the Plan is an informal, voluntary, non-contributory, unfunded and non-qualified Plan within the meanings of all ERISA, IRC or other codes and regulations. Maintenance, funding, and payments under the terms of this Plan are purely discretionary with the Company which can alter, suspend, or discontinue this Plan at will. The commitment to pay under the terms of this Plan is merely an unsecured promise-to-pay obligation of the Company. The Plan shall be administered by the Company's Personnel Officer under the supervision of the Compensation Committee of the Board and the Chief Executive Officer. Claims against the Plan are administered by the Personnel Officer. Disputed claims or payments will be reviewed by the Compensation Committee of the Board which may enforce, in its sole discretion, the action(s) taken by the Personnel Officer or make whatever adjustments it deems necessary. The decisions of the Compensation Committee are final. IMPLEMENTATION This Plan is effective immediately upon affirmative vote of the majority of all Directors. -3- EX-10.18 25 NON-EMPLOYMENT DIRECTORS DEFERRED COMP/PLAN 1 EXHIBIT 10.18 FREMONT GENERAL CORPORATION NON-EMPLOYEE DIRECTORS DEFERRED COMPENSATION PLAN PURPOSE: To permit non-employee Directors to defer all or a portion of any fees earned in performance of their duties until retirement or other termination of service. ELIGIBILITY: Any duly-elected non-employee Director of the Board is eligible to participate immediately upon election or at the beginning of any PlanYear thereafter. QUALIFICATION: This Deferred Compensation Plan is a "non-qualified" plan under the Internal Revenue Code. This means that the participants who elect to defer current income to the Plan do so at the risk of having the Plan subject to forfeiture upon the claims of creditors in the event of bankruptcy or other change in control of the Company. To minimize this risk, the Plan has adopted a grantor ("rabbi") trust which provides protection of Plan assets on behalf of participants except in bankruptcy. DEFERRALS: Participants may elect to participate at the time of election or prior to January 1 of any subsequent Plan Year. Such elections are irrevocable once made, and the Participant may not thereafter modify or cease deferrals until the next annual election. Participants may elect to defer any portion of their regular annual Board retainer fees and/or meeting fees up to 100% in increments of whole percentages. INVESTMENTS: The Plan permits Participants who defer income to direct the investment thereof into one or any combination of investment funds provided through Merrill Lynch & Company under this Plan. Participants who elect to buy Fremont common stock must be aware of SEC Rule 16 restrictions. DISBURSEMENTS: Plan benefits are payable to the Participants upon their retirement or other termination from Board service. All deferred amounts, plus any accrued interest or appreciation thereon, are paid out in cash, in lump sum, subject to all Federal, state and local income tax withholding at ordinary income rates. (Participants who have invested in Company
2 stock may request payment in shares or cash subject to tax withholding). TRUSTEE: Merrill Lynch & Company ADMINISTRATOR: The Non-Employee Director Deferred Compensation Plan Administration Committee is composed of three (3) senior officers of the Company. OPERATION AND SERVICES: Fremont will deposit monthly into the Merrill Lynch account of each participant an amount equal to his pre-tax elected deferral of retainer income, and quarterly an amount equal to any elected deferral of meeting fees. The participant shall be permitted, through access to his account on the Merrill Lynch Voice Response System, to instruct Merrill Lynch on the investment of existing account balances and current deferral additions. The Participant shall be permitted to change any investment election through Merrill Lynch at any time (usually limited to one transaction per investment fund per day). Merrill Lynch will provide a quarterly account statement to each Participant detailing current account balance, investment allocations, and performance data.
EX-10.19.(B) 26 AMENDED TO CREDIT AGT 1 EXHIBIT 10.19(b) FIRST AMENDMENT This FIRST AMENDMENT (this "Amendment") to the AMENDED AND RESTATED CREDIT AGREEMENT, dated as of August 24, 1995 (the "Agreement"), among FREMONT GENERAL CORPORATION, a Nevada corporation (the "Borrower"), the lending institutions listed from time to time on Annex I thereto (each a "Bank" and, collectively, the "Banks"), and THE CHASE MANHATTAN BANK, N.A., as Agent (the "Agent"), is entered into as of December 11, 1995. W I T N E S S E T H : WHEREAS, the Borrower desires to amend the Agreement upon the terms set forth below; NOW, THEREFORE, IT IS AGREED: Section 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given thereto in the Agreement. Section 2. Amendments to the Agreement. (a) Section 7.05 of the Agreement shall be amended, as of the Effective Date (as defined below), by deleting subsection (g) therefrom and substituting the following therefor: "(g) The Borrower will not, and will not permit any of its Subsidiaries to, lend money or credit or make advances to any Financial Services Subsidiary, or purchase or acquire any capital stock, obligations (including loans) or securities of, or any other interest in, or make any capital contribution to, any Financial Services Subsidiary, except (i) the Borrower may purchase, acquire or otherwise participate in mortgage loans purchased or originated by FIL to the extent permitted by Section 7.05(c), (ii) prior to December 31, 1996, the Borrower may contribute an aggregate of up to $25,000,000 to the capital of one or more of the Thrift Subsidiaries, so long as the Borrower shall have received, prior to such date of contribution, gross proceeds of at least $100,000,000 from an incurrence of Permitted Subordinated Debt in connection with the issuance and sale of the TOPrS and (iii) to the extent the aggregate amount of such purchases, acquisitions and contributions (excluding from such aggregate 2 amount those purchases, acquisitions and contributions described in clauses (i) and (ii) above) made pursuant to this Section 7.05(g), contributions made pursuant to Section 5.05(c) and acquisitions made pursuant to Section 7.02(d), in each case after the Amendment Effective Date, does not exceed the Permitted Basket Amount. Notwithstanding the foregoing sentence, in no event shall the Borrower permit any of its Subsidiaries (other than Thrift Subsidiaries) to, lend money or credit or make advances to any Thrift Subsidiary, or purchase or acquire any capital stock, obligations (including loans) or securities of, or any other interest in, or make any capital contribution to, any Thrift Subsidiary." (b) Section 7 of the Agreement shall be amended, as of the Effective Date, by adding the following new Section after Section 7.17 of the Agreement: "7.18 Trust Originated Preferred Securities. Notwithstanding any covenant or agreement to the contrary contained in this Agreement: (a) The Borrower may establish, form or otherwise create a Subsidiary (the "TOPrS Subsidiary"), provided that: (i) the Borrower maintains at all times a 100% common equity interest in the TOPrS Subsidiary following its establishment, formation or creation; (ii) the Borrower's contribution to the capital of the TOPrS Subsidiary shall not exceed an amount greater than the difference between the face amount of the TOPrS Debt and the proceeds received by the Borrower as a result of the incurrence of the TOPrS Debt; (iii) the purposes of the TOPrS Subsidiary are restricted to, and the TOPrS Subsidiary shall conduct no business other than: (A) the issuance and sale of up to $125,000,000 of trust originated preferred securities ("TOPrS"), (B) the loaning of the proceeds of the TOPrS to the Borrower upon terms and conditions so that such loan constitutes Permitted Subordinated Debt (the "TOPrS Debt") and (C) the making of distributions to the holders of the TOPrS solely from payments received from the Borrower pursuant to the TOPrS Debt; 2 3 (iv) the TOPrS Subsidiary shall not wind up, liquidate or dissolve its affairs, unless such action is taken, (A) upon the advice of nationally recognized tax counsel, to avoid adverse tax consequences to the Borrower, the TOPrS Subsidiary or any holder of TOPrS and (B) upon the advice of nationally recognized counsel experienced in investment company matters, to avoid the TOPrS Subsidiary becoming an "investment company" under the Investment Company Act of 1940, as amended; (v) the TOPrS Subsidiary shall not enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of (in one transaction or a series of related transactions) all or any part of its property or assets, or purchase, lease or otherwise acquire (in one transaction or a series of related transactions) all or any part of the property or assets of any Person, except the TOPrS Subsidiary shall be permitted to distribute its property and assets to the holders of the TOPrS in connection with a permitted winding up, liquidation or dissolution of its affairs; (vi) the TOPrS Subsidiary shall not create, incur, assume or suffer to exist any Lien upon or with respect to any of its property or assets of any kind (real or personal, tangible or intangible) whether now owned or hereafter acquired, or assign any right to receive income, or file or permit the filing of any financing statement under the UCC or any other similar notice of Lien under any similar recording or notice statute, except (A) for Liens for taxes not yet due or Liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP and (B) a Lien in favor of the trustee for the holders of the TOPrS to secure its fees and expenses; (vii) the TOPrS Subsidiary shall not contract, create, incur, assume or suffer to exist any Indebtedness; and (viii) except for the TOPrS Debt, the TOPrS Subsidiary shall not lend money or credit or make advances to any Person, or purchase or acquire any capital stock, obligations (including loans) or securities of, or any other interest in, or make any capital contribution to, any Person. 3 4 (b) The Borrower may incur and suffer to exist Indebtedness of the Borrower constituting a guaranty of the TOPrS, provided that (i) such guaranty is subordinated to the same extent as the TOPrS Debt and (ii) the Borrower's liability under such guaranty is no greater than its liability under the TOPrS Debt. (c) Section 9 of the Agreement shall be amended, as of the Effective Date, by adding thereto in appropriate alphabetical order the following new definitions: "TOPrS" shall have the meaning provided in Section 7.18(a)(iii). "TOPrS Debt" shall have the meaning provided in Section 7.18(a)(iii). "TOPrS Subsidiary" shall have the meaning provided in Section 7.18(a). Section 3. TOPrS Debt and Guaranty. The Banks listed on the signature pages hereto, which comprise the Required Banks, hereby acknowledge that the documentation previously provided to the Banks by the Borrower, by distribution on or about December 4, 1995, related to the incurrence by the Borrower of the TOPrS Debt and the guaranty described in Section 2(b) above (the "TOPrS Guaranty") is in form and substance satisfactory to the Required Banks. The parties hereto hereby acknowledge and agree that the TOPrS Debt constitutes Permitted Subordinated Debt. The Borrower shall not amend or modify any of the terms or provisions of the TOPrS Guaranty, except in accordance with its terms and only for those amendments and modifications specifically, as opposed to generally, identified in the form of the TOPrS Guaranty that has, by this First Amendment, been approved by the Required Banks. Section 4. Conditions Precedent to the Effectiveness of this Amendment. This Amendment shall become effective and the Agreement shall be amended as provided herein on the date on which each of the following documents shall have been executed and delivered and the following conditions have been satisfied (such date, the "Effective Date"): (a) Execution of Amendment. The Agent shall have received a counterpart of this Amendment duly executed and delivered by the Borrower and Banks comprising the Required Banks. 4 5 (b) No Default. No Default or Event of Default shall have occurred or be continuing or shall result due to the effectiveness of this Amendment. Section 5. Representations and Warranties. The Borrower represents and warrants to each Bank that: (a) The Borrower has the corporate power to execute, deliver and perform the terms and provisions of this Amendment, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. The Borrower has duly executed and delivered this Amendment and this Amendment constitutes its legal, valid and binding obligation of the Borrower enforceable in accordance with its terms. (b) Neither the execution, delivery or performance by the Borrower of this Amendment, nor the consummation of the transactions contemplated herein, (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Pledge Agreement) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement or any other material instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject, or (iii) will violate any provision of the charter or bylaws of the Borrower or any of its Subsidiaries. (c) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of this Amendment or (ii) the legality, validity, binding effect or enforceability of this Amendment. (d) The representations and warranties of the Borrower set forth in the Agreement and the other Credit Documents are true and correct on the date 5 6 hereof as if such representations and warranties were made as of the date hereof. Section 6. Covenant of the Borrower. The Borrower hereby agrees to pay upon demand the reasonable fees and disbursements of White & Case, counsel for the Agent, incurred in connection with the preparation, negotiation, execution and delivery of this Amendment. Section 7. Miscellaneous. (a) Except as expressly modified by this Amendment, the Agreement shall continue to be and remain in full force and effect in accordance with its terms. Any future reference to the Agreement shall be deemed to be a reference to the Agreement as amended by this Amendment. (b) This Amendment may be executed in any number of counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. (c) This Amendment shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FREMONT GENERAL CORPORATION By WAYNE R. BAILEY -------------------------------- Name: Wayne R. Bailey Title: Executive Vice President, Treasurer and Chief Financial Officer THE CHASE MANHATTAN BANK, N.A., Individually and as Agent By ISOLDE G. O'HANLON -------------------------------- Name: Isolde G. O'Hanlon Title: Managing Director 6 7 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By GAYMA SHIVNARAIN ------------------------------ Name: Gayma Shivnarain Title: Vice President By _________________________ Name:_____________________ Title:____________________ FIRST BANK NATIONAL ASSOCIATION By JOSE A. PERIS ------------------------------- Name: Jose A. Peris Title: Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA By BILL A. SHIRLEY ------------------------------- Name: Bill A. Shirley Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY By MASATAKE YASHIRO ------------------------------- Name: Mr. Masatake Yashiro Title: General Manager THE SAKURA BANK, LIMITED, LOS ANGELES AGENCY By OFUSA SATO ------------------------------- Name: Ofusa Sato Title: Senior Vice President and Assistant General Manager 7 8 SANWA BANK CALIFORNIA By JOHN HYCHE -------------------------------- Name: John Hyche Title: Vice President SHAWMUT BANK CONNECTICUT, N.A. By TIMOTHY B. BROWN -------------------------------- Name: Timothy B. Brown Title: Assistant Vice President UNION BANK By ROBERT C. DAWSON -------------------------------- Name: Robert C. Dawson Title: Vice President WELLS FARGO BANK, N.A. By RICHARD H. PALMER --------------------------------- Name: Richard H. Palmer Title: Vice President THE YASUDA TRUST AND BANKING CO., LTD., LOS ANGELES AGENCY By NOBUO NISHIRO --------------------------------- Name: Nobuo Nishiro Title: Joint General Manager 8 EX-10.20 27 KEEP WELL AGREEMENT 1 EXHIBIT 10.20 KEEP WELL AGREEMENT KEEP WELL AGREEMENT (as same may be amended, supplemented or modified from time to time in accordance with the terms hereof, this "Agreement"), dated as of August 24, 1995, made by Fremont General Corporation ("Fremont General"), Fremont Financial Corporation ("Fremont Financial") and The Chase Manhattan Bank, N.A. (the "Agent") for the benefit of the Agent and the various lending institutions (the "Banks") party to the Credit Agreement referred to below. Except as otherwise defined herein, terms defined in the Credit Agreement shall be used herein as so defined. W I T N E S S E T H: WHEREAS, Fremont Financial, the Banks, and The Chase Manhattan Bank, N.A., as Agent have entered into a Credit Agreement, dated as of August __, 1995 (as modified, supplemented or amended from time to time, the "Credit Agreement"); WHEREAS, Fremont General owns 100% of the outstanding capital stock of Fremont Financial; WHEREAS, it is a condition precedent to the making of Loans under the Credit Agreement that Fremont General and Fremont Financial shall have executed and delivered this Agreement; and WHEREAS, Fremont General will obtain direct and indirect benefits as a result of the Loans made under the Credit Agreement and, accordingly, desires to execute and deliver this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, it is agreed: 1. At all times during the term of this Agreement, Fremont General agrees that it shall cause Fremont Financial to have a Consolidated Tangible Net Worth of not less than the sum of (a) US$80,000,000 and (b) an amount (if positive) equal to 50% of the Consolidated Net Income of Fremont Financial for the period from July 1, 1995 to the end of the then most recently ended fiscal quarter of Fremont Financial (determined on a cumulative basis). 2 Page 2 2. At all times during the term of this Agreement, Fremont General shall hold, directly or through one or more Wholly-Owned Subsidiaries, the entire legal title to and beneficial interest in all the outstanding shares of stock of Fremont Financial, and shall not pledge directly or indirectly or in any way encumber or otherwise dispose of any such shares of stock of Fremont Financial or permit its Subsidiaries to do so. 3. Fremont General hereby waives notice of acceptance of this Agreement and notice of any liability to which it may apply, and waives presentment, demand of payment, protest, notice of dishonor, or nonpayment of any such liability, suit or taking of other action by Fremont Financial, the Agent or any Bank against, and any other notice to, any party liable thereon. 4. No invalidity, irregularity or unenforceability of all or any of the Loans and/or any of the other Obligations or of any security therefor shall affect, impair or be a defense to this Agreement, and Fremont General's obligations hereunder shall be absolute and unconditional notwithstanding the occurrence of any event or the existence of any circumstance, including without limitation any bankruptcy or insolvency proceeding with respect to Fremont General, Fremont Financial or FPFC or any event or circumstance which would constitute a legal or equitable discharge, except payment in full of such obligations or partial payment, to the extent of such partial payment. 5. In order to induce the Banks to enter into the Credit Agreement and make Loans pursuant thereto, Fremont General makes the following representations and warranties to, and agreements with, the Agent and the Banks, all of which shall survive the execution and delivery of this Agreement and the making of the Loans pursuant to the Credit Agreement: (a) Each of Fremont General and its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which 3 Page 3 failure to be so qualified and in good standing could reasonably be expected to have a material adverse effect on the business, management, assets or other properties, liabilities or condition (financial or otherwise), results of operations or prospects of Fremont General and its Subsidiaries taken as a whole, and (iii) has the corporate power and authority to own, operate and encumber its property and assets and to transact the business in which it is engaged. (b) Fremont General has the corporate power to execute, deliver and perform the terms and provisions of this Agreement and has taken all necessary corporate action to authorize the execution, delivery and performance by it of this Agreement. Fremont General has duly executed and delivered this Agreement, and this Agreement constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms. (c) Neither the execution, delivery or performance by Fremont General of this Agreement, nor compliance by it with the terms and provisions hereof, (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality having applicability to Fremont General, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Fremont General pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other material agreement, contract or instrument to which Fremont General is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the Articles of Incorporation or By-Laws of Fremont General. (d) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, or 4 Page 4 any other Person, is required to be made or obtained by Fremont General in order to authorize, or is required to be made or obtained by Fremont General in connection with, (i) the due execution, delivery and performance of this Agreement by Fremont General or (ii) the legality, validity, binding effect or enforceability of this Agreement by Fremont General. (e) There are no actions, suits or proceedings pending or, to the best knowledge of Fremont General, threatened, against Fremont General or its Subsidiaries (i) which purport to affect the legality, validity, binding effect or enforceability of this Agreement or (ii) that could reasonably be expected to have a material adverse effect on (A) the business, management, assets or other properties, liabilities or condition (financial or otherwise), results of operations or prospects of Fremont General and its Subsidiaries taken as a whole or (B) the rights and remedies of the Agent under, or on the ability of Fremont General to perform under, this Agreement. (f) Each of Fremont General and its Subsidiaries is in compliance in all material respects with all Requirements of Law applicable to it and its business (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) and has obtained all Permits necessary for the conduct of its business as presently conducted. (g) All tax returns and reports of Fremont General and each of its Subsidiaries required to be filed have been timely filed, and all taxes, assessments, fees and other charges of Governmental Authorities upon Fremont General and its properties, assets, income and franchises which are shown on such returns as being due and payable, have been paid. Fremont General has no knowledge of any proposed tax assessment against it. (h) The annual report on Form 10-K of Fremont General for the fiscal year ending December 31, 1994, and the quarterly report on Form 10-Q of Fremont General for the fiscal quarter ending June 30, 1995, copies of which have been furnished to each Bank, fairly present (subject, in the case of the quarterly report on Form 5 Page 5 10-Q, to year-end audit adjustments) the financial condition of Fremont General and its Subsidiaries as at such date and the results of the operations of Fremont General and its Subsidiaries for the period ended on such date. (i) Since December 31, 1994, there has occurred no event which has had or could reasonably be expected to have a material adverse effect on (i) the business, management, assets or other properties, liabilities or condition (financial or otherwise), results of operations or prospects of Fremont General or of Fremont General and its Subsidiaries taken as a whole or (ii) the rights and remedies of the Agent under, or on the ability of Fremont General to perform under, this Agreement. (j) Fremont General shall deliver to the Agent (i) for each fiscal year of Fremont General ending during the term of this Agreement, its annual report on Form 10-K and (ii) for each fiscal quarter of Fremont General ending during the term of this Agreement, its quarterly report on Form 10-Q, in each case promptly after the sending or filing thereof with the SEC. (k) Fremont General shall from time to time deliver to the Agent, with sufficient copies for each Bank, such other information or documents respecting the condition or operations, financial or otherwise, of Fremont General or any of its Subsidiaries as the Agent may from time to time reasonably request. (l) The certificates, written statements, materials and other information furnished by or on behalf of Fremont General to the Agent and the Banks do not contain any material misstatement of fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading in all material respects. 6. No failure or delay on the part of the Agent, Fremont Financial or any Bank in exercising any right, power or privilege hereunder or under the Credit Agreement and no course of dealing between Fremont General, Fremont Financial, 6 Page 6 the Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under the Credit Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights, powers and remedies herein expressly provided are cumulative and not exclusive of any rights, powers or remedies which Fremont Financial, the Agent or any Bank would otherwise have. No notice to or demand on Fremont General or Fremont Financial in any case shall entitle Fremont General to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent or any Bank to any other or further action in any circumstances without notice or demand. 7. This Agreement shall be binding upon Fremont General, Fremont Financial and their successors and assigns (including, without limitation, any executors or administrators) and shall inure to the benefit of each of them. Neither Fremont General nor Fremont Financial may assign any of its obligations hereunder without the consent of the Banks. 8. Neither this Agreement nor any provision hereof may be changed, nor may this Agreement be terminated, except with the written consent of Fremont Financial, Fremont General and the Agent (acting with the consent of the Banks). 9. All notices and other communication hereunder shall be made at the addresses, in the manner and with the effect provided in Section 11.03 of the Credit Agreement, provided that, for this purpose, the address of Fremont General shall be the address specified opposite its signature below. 10. This Agreement shall terminate and be of no further force and effect upon the earlier of (i) the date on which the Agent (with the consent of the Banks) gives written notice to Fremont General that its obligations under this Agreement have been fulfilled or terminated (except to the extent any party's obligations, if any, arising prior to such time hereunder have not theretofore been fulfilled) and (ii) the date on which all Commitments have been terminated and all Obligations repaid in full. 7 Page 7 11. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF FREMONT FINANCIAL, FREMONT GENERAL, THE AGENT AND THE BANKS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement may be brought in the courts of the State of New York or of the United States for the Southern District of New York and, by execution and delivery of this Agreement, Fremont General hereby irrevocably accepts for itself and in respect of its property, unconditionally, the jurisdiction of the aforesaid courts with respect to any such action or proceeding. Fremont General hereby irrevocably designates, appoints and empowers CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019 as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding. The Agent agrees to use reasonable good faith after its receipt thereof to mail, by registered or certified mail, to Fremont General, at its address set forth opposite its signature below, copies of any and all legal process, summons, notices and documents mailed or delivered to CT Corporation System in connection with the immediately preceding sentence; provided that the failure of Fremont General to receive, for any reason, copies of such correspondence shall not in any way affect the effectiveness of the delivery of any legal process, summons, notice or documents delivered to CT Corporation System. If for any reason such designee, appointee and agent shall cease to be available to act as such, Fremont General agrees to designate a new designee, appointee and agent in New York City on the terms and for the purposes of this provision satisfactory to the Agent. Fremont General further irrevocably consents to the service of process out of any of aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to Fremont General at its address set forth opposite its signature below, such service to become effective thirty days after such mailing. Nothing herein shall affect the right of the Agent or any Bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against Fremont General in any other jurisdiction. 8 Page 8 (b) Fremont General hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. FREMONT GENERAL FURTHER WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN ANY COURT OR JURISDICTION, INCLUDING WITHOUT LIMITATION THOSE REFERRED TO IN CLAUSE (A) ABOVE, IN RESPECT OF ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT. 12. The parties hereto acknowledge and agree that the Agent and the Banks are intended to be third-party beneficiaries of this Agreement and, as such, are entitled to the benefits hereof and may enforce the obligations of Fremont General directly against it. Fremont General acknowledges and agrees that in the event of any breach of Section 1 or 2 of this Agreement, the Banks will be irreparably and immediately harmed and cannot be made whole by monetary damages. It is accordingly agreed that, upon a breach by Fremont General of Section 1 and/or 2 of this Agreement, the Agent, on behalf of the Banks, in addition to any other remedy to which it may be entitled in law and/or equity, shall be entitled to compel specific performance of such Section or Sections. [THIS SPACE INTENTIONALLY LEFT BLANK] 9 Page 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. Address: FREMONT GENERAL CORPORATION 2020 Santa Monica Blvd. Santa Monica, CA 90404 By LOUIS J. RAMPINO ------------------------- Name: Louis J. Rampino Title: President 2020 Santa Monica Blvd. FREMONT FINANCIAL CORPORATION Santa Monica, CA 90404 By PATRICK E. LAMB -------------------------- Name: Patrick E. Lamb Title: Senior Vice President Accepted and Agreed to: THE CHASE MANHATTAN BANK, N.A., as Agent for the Banks By BRYAN J. ROLFE ------------------------------- Name: Bryan J. Rolfe Title: Vice President
EX-11 28 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS FREMONT GENERAL CORPORATION
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 ------- ------- ------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) PRIMARY:* Weighted average shares outstanding 25,391 25,305 22,273 Net effect of dilutive stock options--based on the treasury stock method using average market price 688 518 766 ------- ------- ------- Total 26,079 25,823 23,039 ======= ======= ======= Net income $68,022 $55,812 $42,710 ======= ======= ======= Per share amount $ 2.61 $ 2.16 $ 1.85 ======= ======= ======= FULLY DILUTED:* Weighted average shares outstanding 25,391 25,305 22,273 Net effect of dilutive stock options#based on the treasury stock method using the year-end market price, if higher than average market price 743 520 766 Assumed conversion of: LYONs 7,209 7,209 1,802 7 1/4% Convertible Debentures due 2011 - 3,402 ------- ------- ------- Total 33,343 33,034 28,243 ======= ======= ======= Net income $68,022 $55,812 $42,710 Income adjustments for fully diluted computation: Add interest expense, amortization of prepaid expense and redemption premium, net of federal income tax effect re: LYONs 4,488 4,364 976 7 1/4% Convertible Debentures due 2011 - - 3,110 ------- ------- ------- Total $72,510 $60,176 $46,796 ======= ======= ======= Per share amount $ 2.17 $ 1.82 $ 1.65 ======= ======= =======
* Adjusted retroactively for all stock splits and dividends.. EX-21 29 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF FREMONT GENERAL CORPORATION Each of the subsidiary companies does business under its incorporated name. 1. Domestic Subsidiaries
NAME STATE OF INCORPORATION - ---- ---------------------- Beaver Insurance Company California Beaver Pacific Corporation Delaware Casualty Insurance Company Illinois CB Financial Services, Inc. California Comstock Insurance Company California FGC Commercial Mortgage Finance Co. California Fremont Compensation Insurance Company California Fremont Indemnity Company California Fremont Insurance Group, Inc. Delaware Fremont Financial Corporation California Fremont Funding, Inc. Delaware Fremont Health Corporation California Fremont Life Insurance Company Arizona Fremont Pacific Insurance Group Incorporated California Fremont Reinsurance Company California Fremont Syndicate, Inc. New York Investors Bancor California Fremont Investment & Loan California Pacific Compensation Insurance Corporation California Menlo Life Insurance Company California Fremont Premium Finance Corporation California Workers Compensation and Indemnity Company California
2. Foreign Subsidiaries
NAME STATE OF INCORPORATION - ---- ----------------------- Fremont Reinsurance Co., Ltd. Bermuda
EX-23 30 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the Fremont General Corporation and affiliated companies Investment Incentive Program and in the Registration Statement on Form S-8 pertaining to the Fremont General Corporation Supplemental Retirement Plan and Fremont General Corporation Senior Supplemental Retirement Plan and in the Registration Statement on Form S-8 pertaining to the Fremont General Corporation non-qualified Stock Option Plan of 1989 and in the Registration Statement on Form S-4 pertaining to the Fremont General Financing I, 9% Trust Originated Preferred Securities of our report dated March 14, 1996, with respect to the consolidated financial statements and schedules of Fremont General Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1995. ERNST & YOUNG LLP Los Angeles, California March 28, 1996 EX-27 31 ARTICLE 7 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from SEC Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1,296,550 0 0 277,451 0 0 3,436,933 39,559 9,422 76,638 4,477,399 1,830,416 100,481 0 40,822 765,467 0 0 25,393 472,697 4,477,399 621,386 119,523 1 182,904 481,261 126,099 34,433 100,327 32,305 68,022 0 0 0 68,022 2.61 2.17 610,510 459,951 1,382 132,358 358,423 1,185,706 1,382 Includes loans receivable, short-term and other investments Sum of Additional paid-in-capital, Retained earnings, Unearned Employee Stock Ownership Plan shares and Net unrealized gain on investments. Includes loan interest and other revenue Reserve for losses and LAE, net of reinsurance recoverble. On Febrruary 22, 1995 the Company acquired Casualty Insurance Company with reserves of 604,444. Reserve for Losses and LAE, net of reinsurance recoverable
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