Document:

exv10w9

 

Exhibit 10.9

ASSET PURCHASE AGREEMENT

     This Asset Purchase Agreement (the “Agreement”) is made and entered into as of the
27th day of January, 2005 (the “Effective Date”) by and among Celtic Merger Corp., a
California corporation (“Buyer”), Discovery Bancorp a California corporation (“Bancorp”), Celtic
Capital Corporation, a California corporation (the “Seller”), Bron Hafner, Mark Hafner, and Alex
Falo (individually by name and collectively “Principals”) with reference to the following:

R E C I T A L S

     WHEREAS, Seller is a corporation with its main office located at 2951 28th Street, Suite 2030
Santa Monica, California 90405 which operates a commercial finance business (the “CF Business”);
and

     WHEREAS, Buyer is a newly formed California corporation which is wholly owned by Bancorp; and

     WHEREAS, Seller wishes to sell to Buyer and Buyer wishes to purchase from Seller certain
assets and to assume certain liabilities of Seller relating to its CF Business under the terms and
conditions set forth herein;

     NOW, THEREFORE, in consideration of the mutual benefits to be derived from this Agreement and
the representations, warranties, conditions and covenants set forth herein, the parties hereto
hereby agree as follows:

A G R E E M E N T

     1. Purchase and Sale of Assets and Assumption of Liabilities.

          1.01 On the terms and subject to the conditions set forth in this Agreement, Seller hereby
agrees to sell, transfer, convey, assign and deliver to Buyer, and Buyer hereby agrees to purchase
from Seller at the closing, as that term is defined in Section 3 hereof (the “Closing”), all the
property of Seller as set forth below, free and clear of all liens, encumbrances and restrictions,
except as specifically agreed to herein, all of which are collectively referred to hereinafter as
the “Assets”:

          (a) The specific commercial loans, lines of credit, installment loans and other loans and loan
commitments carried on the books of the Seller, at par, plus accrued interest thereon to the
Closing Date, and listed on Exhibit “A” hereto, provided however, that Buyer may
elect to designate specific commercial loans, lines of credit, installment loans and/or other loans
and loan commitments carried on the books of the Seller as “Reserve Loans” provided that Buyer
provides written notice to Seller not less than ten (10) business days prior to the Closing Date
and such Reserve Loans shall then be subject to the provisions of Section 2.03 hereof; and

          (b) The specific furniture, fixtures, and equipment, at net book value and in an as-is,
where-is condition, listed on Exhibit “B” hereto; and

 

 

          (c) All claims and causes of action the Seller has or might have against any third party
arising out of, in connection with or with respect to, the Assets or the Liabilities; and

          (d) All of Seller’s interest in the computer software, computer programs and software licenses
used by Seller in connection with the CF Business, and all copyrights, servicemarks, trademarks,
trade names, trade secrets, licenses, royalty rights and proprietary rights of Seller as used in
the CF Business (the “Software and Intangible Property”);

          (e) All telephone numbers used in Seller’s CF Business (the “Telephone Numbers”);

          (f) All customer lists of every kind and nature whatsoever of the Seller, whether held by
Seller, Seller’s officers, directors and/or employees;

          (g) All of Seller’s right, title and interest in and to that certain lease by and between
Seller and CA-Santa Monica Business Park-American Golf Limited Partnership, a Delaware limited
partnership and Spieker-Partners Livermore, LTD., a California limited Partnership (collectively
the “Santa Monica Landlord”) dated June 29, 1994, as amended (the “Santa Monica Lease”), a copy of
which is attached hereto as Exhibit “C-1” regarding that certain real property commonly known as
2951 28th Street, Suite 2030, Santa Monica, California 90405 (the “Santa Monica Premises”) together
with the security deposit paid to the Santa Monica Landlord and any and all deposits to providers
of utilities of Seller in the Santa Monica Premises as set forth on Exhibit “C-2” hereto
(the “Security Deposits”);

          (h) All of Seller’s right, title and interest in and to that certain service agreement by and
between Seller and Vision Offices(the “Arizona Landlord”) dated January 1, 2003, as amended (the
“Arizona Lease”), a copy of which is attached hereto as Exhibit “C-3” regarding that
certain real property commonly known as 15849 N. 71st Street, Suite 100, Scottsdale, Arizona 85254
(the “Arizona Premises”) together with the security deposit paid to the Arizona Landlord and any
and all deposits to providers of utilities of Seller in the Arizona Premises as set forth on
Exhibit “C-2” hereto;

          (i) All of the goodwill of Seller and Seller’s CF Business (the “Goodwill”); and

          (j) Except as set forth on Exhibit “D”, all books, records, manuals, documents, files,
reports, studies, instruments and other materials of Seller relating to the Software and Intangible
Property, the Telephone Numbers, Customer List, Santa Monica Lease, Arizona Lease, Personal
Property, Security Deposits, Goodwill and all other Assets set forth above.

          (k) All cash and monies held in the Wells Fargo Foothill (“WFF”) cash collateral accounts in
the name of Seller.

          1.02 The parties hereto hereby acknowledge and agree that Buyer is not purchasing any other
asset of Seller except as set forth in Section 1.01 hereof, including but not limited to those
assets of Seller set forth on Exhibit “D” hereof (“Retained Assets”).

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          1.03 On the terms and subject to the conditions set forth in this Agreement from and after the
Closing, Buyer shall assume and be liable to pay, discharge and perform when due (i) all
obligations of Seller under the Santa Monica Lease and the Arizona Lease and all obligations which
arise in connection with other Assets provided that such obligations arise or accrue after the
Closing, (ii) all obligations of Seller under the vendor contracts as set forth on Exhibit
“E” hereto (the “Vendor Contracts”) arising from and after the Closing and (iii) all amounts of
principal and interest outstanding on Seller’s lines of credit # CCR000 and CCR001 with WFF as of
the Closing (“Wells Debt”), all of which are collectively referred to as the “Liabilities.”

          1.04 Seller hereby represents and warrants to and agrees with Buyer that Buyer shall not
assume or become responsible, as a result of this Agreement, for any liabilities of Seller, whether
known or unknown, disclosed or undisclosed, contingent or otherwise, which have arisen or may arise
or be established in connection with Seller’s conduct of the CF Business, other than those
specifically assumed in Section 1.03 hereof. Particularly, but without limitation, Buyer shall not
assume:

          (a) Any liability arising out of any claims of employees employed by Seller or any independent
contractors or agents or other parties making claims for bonuses, salaries, or other payments or
benefits from Seller arising out of, relating to, or resulting from their respective employment or
other relationship with Seller;

          (b) Any liability of Seller, or any of its officers, directors, or employees in connection
with any income or franchise taxes, sales tax, depreciation recapture and investment recapture
obligations and any expenses including expenses for professional fees incurred by Seller in
connection with the negotiations, preparation, execution, delivery and performance of this
Agreement; or

          (c) Any other duty, obligation or liability of Seller arising out of, resulting from, or
relating to the operation of Seller or its CF Business up to and including the Closing.

          1.05 In order to effectuate the foregoing, Seller and Buyer shall execute and deliver at the
Closing, the Bill of Sale and Assumption of Liabilities Agreement in a form mutually acceptable to
the parties.

     2. Purchase Price.

          2.01 In addition to the assumption of the Liabilities provided for in Section 1.03 hereof,
Buyer shall deliver, or cause Bancorp to deliver, to Seller, either outright or subject to the
provisions of Section 2.03 hereof as applicable, at the Closing the following consideration (the
“Purchase Price”):

          (a) An amount equal to the sum of (W) the aggregate of the principal balance of all
outstanding loans and the outstanding balance of all lines of credit and other monetary
obligations due to Seller (excluding loan participations sold by Seller to third parties)
together with accrued but unpaid interest due thereon as of the Closing (but excluding any loans
and customer contracts that are Retained Assets) plus (X) the balance of the WFF cash
collateral

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account referenced in Section 1.01(k) as of the Closing plus (Y) the net book
value as of the Closing of the furniture, fixtures and equipment of Seller listed on Exhibit
“B”, minus (Z) the sum of the Wells Debt plus or minus the unamortized portion of loan
fees as listed on, and relating to the loans listed on, Exhibit “A” and the net aggregate
amount of funds advanced to Seller by Seller’s clients or prospective clients for expenses but not
yet expended by Seller for the purposes intended; plus

          (b) Nine Hundred Thousand Dollars ($900,000.00); plus

          (c) That number of shares of Bancorp’s common stock equal to Eight Hundred Thousand Dollars
($800,000.00) divided by the per share offering price for Bancorp’s common stock as established in
the public offering of Bancorp’s common stock (“Public Offering Price”) which is to be conducted in
accordance with Section 7.03 (“Seller’s Shares”). Seller’s Shares shall be registered, at
Bancorp’s or Buyer’s sole expense, as part of the public offering and shall be issued pursuant
thereto in accordance with Section 7.03.

          2.02 The Purchase Price shall be allocated as determined by the mutual agreement of the
parties at the time of the Closing. Buyer and Seller each acknowledge that the portions of the
Purchase Price allocated pursuant to this Section 2.02 will represent the fair market value of the
Assets, determined pursuant to arm’s-length negotiations. They further acknowledge that a tax
attorney or other qualified advisor will have explained the tax consequences of those allocations
to them. Buyer and Seller agree to report the sale of the business for income tax purposes
according to the allocation agreed upon pursuant to this Section 2.02.

          2.03 (a) With respect to each Reserve Loan, Buyer and Seller shall use their best efforts to
establish a mutually acceptable amount for the estimate loss exposure (“ELE”) for such Reserve
Loan. The aggregate amount of ELE shall be divided by the per share Public Offering Price and that
number of shares shall be withheld from the number of Seller’s Shares to be delivered pursuant to
Section 2.01(c) hereof (“Reserve Shares”). Should the aggregate ELE exceed Eight Hundred Thousand
Dollars ($800,000) then Seller may deposit cash to an account (“Reserve Account”) to be held
pursuant to Section 2.03(c) hereof or if the aggregate ELE exceeds Eight Hundred Thousand Dollars
($800,000), then Seller may decline to deposit cash to the Reserve Account, which refusal shall be
deemed a mutual termination of this Agreement pursuant to Section 14.01 hereof. Both the Reserve
Shares and the Reserve Account shall be held by or for the benefit of Buyer as a secured party.

          (b) If the parties can not agree on the aggregate ELE, then the ELE shall be determined by a
third party mutually acceptable to Buyer and Seller whose decision as to the ELE shall be binding
on the parties and whose fee for analyzing the ELE shall be borne equally by the parties. If the
parties cannot agree on a third party to determine the ELE, then the ELE shall be determined by a
majority vote of a panel of three experts, one selected by Seller, one selected by Buyer and one
selected by mutual agreement of the experts selected by Seller and Buyer and whose determination
shall be final and binding on the parties.

          (c) Actual losses incurred after the Closing and prior to the 366th day thereafter (“Cut-Off
Date”) with respect to Reserve Loans shall reduce on a dollar-for-dollar

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basis the number of
Reserve Shares until the Reserve Shares are exhausted and then shall reduce the cash balance in the
Reserve Account. On the Cut-Off Date, the balance of the Reserve Shares and the Reserve Account
shall be calculated and within five (5) days shall be delivered to Seller free and clear of the
provision of this Section 2.03. Reserve Shares not delivered to Seller shall be cancelled.
Cancellation of Reserve Shares and deductions from the Reserve Account shall serve to reduce the
Purchase Price. If, prior to the Cut-Off Date, the Buyer determines that a Reserve Loan should no
longer be classified as such, or if a Reserve Loan is paid in full, then Buyer shall be obligated
to release that number of Reserve Shares that would relate to the ELE for such reclassified or
repaid Reserve Loan.

     3. The Closing. The Closing shall take place at the offices of Buyer on such day as the
parties shall agree following the receipt of the Approvals (as that term is defined in Section 8.01
hereof) and the occurrence of all of the conditions set forth in Sections 9 and 10 hereof; provided
however, that if the parties are unable to so agree, then the Closing shall take place on the last
day of the month in which the Approvals are received and the occurrence of all the conditions set
forth in Sections 9 and 10 hereof have occurred.

     4. Representations and Warranties of Seller. Seller and each of the Principals hereby
represent and warrant to Buyer as follows:

          4.01 Seller is a California corporation, duly organized, validly existing and in good standing
under the laws of the State of California and Seller has all requisite corporate power and
authority to own, lease and operate its properties and assets and holds all licenses necessary to
carry on its business as presently conducted.

          4.02 The execution, delivery and performance by Seller of this Agreement have been duly and
validly authorized by all necessary corporate action on the part of the Seller and Seller’s
shareholders and this Agreement is a valid, binding and enforceable obligation of Seller in
accordance with its terms, except as limited by bankruptcy, insolvency, and similar laws relating
to the enforcement of creditors rights generally. This Agreement does not and will not violate any
provision of Seller’s Articles of Incorporation (as amended) or Bylaws (as amended) and does not
and will not constitute or result in a breach of, or be in violation of any of terms or provisions
of, or constitute a default under, or result in the creation or imposition of any lien, charge or
encumbrance upon, any Asset of the Seller under any agreement, franchise, license, indenture,
lease, mortgage, deed of trust or other instrument to which Seller is a party or by which Seller or
its Assets may be bound or effected or any law, order, judgment, decree, rule or regulation
applicable to Seller.

          4.03 Except as set forth on Schedule 4.03 hereto, Seller is the owner of and has good
and marketable title to all of the Assets free and clear of all liens and encumbrances, except for
current taxes not yet due, and Seller has not entered into any other contract or agreement, either
oral or written, to otherwise sell or encumber the Assets and there are no judgments, liens,
actions or proceedings pending against Seller or of which Seller has knowledge in any court or
before any regulatory agency which would affect any of the Assets.

          4.04 To the knowledge of Seller and the Principals, except as set forth on Schedule
4.04 hereto, each loan, line of credit and other obligations due to Seller as set forth on

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Exhibit “A” is a legally valid and binding obligation of the obligor, enforceable in
accordance with its terms, except as limited by bankruptcy, insolvency, and similar laws relating
to the enforcement of creditors rights generally. All such loans and extensions of credit have
been made in material compliance with all applicable federal and state laws and regulations,
including but not limited to the Equal Credit Opportunity Act (Regulation B), the Truth in Lending
Act (Regulation Z), state usury laws and state laws regarding installment sales contracts.

          4.05 The Security Deposits set forth on Exhibit “C-2” hereto is a true, accurate, and
complete list of all deposits held by third parties on account of the Santa Monica Premises and the
Arizona Premises.

          4.06 The Personal Property set forth on Exhibit “B” hereto is a true, accurate, and
complete list of all of the furniture, fixtures, and equipment used by Seller in the CF Business.

          4.07 Except as set forth on Schedule 4.07 hereto, Seller owns and possesses sufficient right,
title and interest in and to or has duly licensed from third parties the right to use the Software
and Intangible Property which are being sold, transferred, conveyed and assigned by Seller to Buyer
hereunder and Seller has no knowledge of any claim, any infringement, misappropriation or conflict
from any third party of such Software and Intangible Property which has not been resolved or
disposed of and Seller has not infringed, misappropriated or otherwise conflicted with such
Software and/or Intangible Property.

          4.08 The Santa Monica Lease attached hereto as Exhibit “C-1” is a true, complete and
accurate copy of the Santa Monica Lease regarding the Santa Monica Premises and the Arizona Lease
attached hereto as Exhibit “C-3” is a true, complete and accurate copy of the of the
Arizona Lease regarding the Arizona Premises and Seller is in material compliance with all terms,
conditions and provisions of both the Santa Monica Lease and the Arizona Lease and has not
otherwise assigned, subleased, transferred or conveyed any of Seller’s interest in either the Santa
Monica Lease or the Arizona Lease to any other person.

          4.09 Seller’s audited Financial Statements for the year-ending December 31, 2003 as well as
the unaudited Financial Statements for the month’s ended from June to November 2004 (the
“Seller Financial Statements”) are true and correct in all material respects, and
accurately and fairly present in all material respects the Assets and Liabilities and the financial
condition of Seller as of their respective dates.

          4.10 The list of Vendor Contracts on Exhibit “E” hereto is a true, accurate, and
complete list of all material contracts and agreements between the Seller and third party vendors
regarding providing services for the maintenance and operation of the CF Business. All amounts due
and owing by Seller prior to the date hereof under the Vendor Contracts have been timely paid, and
all amounts due and owing by Seller after the date hereof and prior to Closing under the Vendor
Contracts shall be timely paid by Seller.

          4.11 Except as set forth on Schedule 4.11 hereto, Seller has no liabilities or
obligations, either accrued or contingent, which are material to Seller’s business, which have not
been reflected in the Vendor Contracts, on the Seller Financial Statements or on the other

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schedules hereto, and to the best of Seller’s knowledge, there is no basis for the assertion
against Seller of any liability, obligation or claim that might result in or cause any material
adverse change from the date hereof, in the business or financial condition of the CF Business of
the Seller which has not otherwise been disclosed in any of the foregoing.

          4.12 Columbia Capital Corporation is controlled by some or all of the Principals, is currently
inactive and holds no material assets and has no material liabilities other than as set forth in
Schedule 4.12 hereof.

          4.13 None of the information contained in the representations and warranties of Seller set
forth in this Agreement or in any of the exhibits or schedules attached hereto or delivered by
Seller as contemplated by any of the provisions of this Agreement contains any untrue statement of
the material fact, or omits to state a material fact required to be stated herein or therein, or
necessary to make the statements contained herein or therein, in light of the circumstances in
which they are made, not misleading.

          4.14 Neither Seller nor any of its agents, including the Principals, has paid or agreed to
pay, or has done any act which will give rise to the payment of, any fee, commission or
consideration to any agent, broker, finder or any other person on account of services rendered as a
broker or finder in connection with this Agreement or any of the transactions contemplated hereby,
or which has resulted in or may give rise to any obligation on the part of Seller or Buyer.

          4.15 There has been no material adverse change from August 31, 2004 to the Effective Date with
respect to any of the Seller’s Assets, or the operation of the CF Business, except as set forth in
Schedule 4.15 hereof.

          4.16 Seller is not a party to any litigation or legal proceeding, nor is it aware of any
threatened or pending legal action, other than as set forth on Schedule 4.16 hereof.

          4.17 Each representation, warranty, covenant, and agreement of Seller and/or any one or more
of the Principals set forth in this Agreement shall be deemed to be made on and as of the Effective
Date and as of the Closing and shall survive the Closing for a period of twelve (12) months.

     5. Representations and Warranties of Buyer. Buyer and Bancorp hereby represent and warrant
to Seller and the Principals as follows:

          5.01 Buyer is a California corporation, duly organized, validly existing and in good standing
under the laws of the State of California and Buyer has all requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business as presently
conducted. Bancorp is a California corporation, duly organized, validly existing and in good
standing under the laws of the State of California and Bancorp has all requisite corporate power
and authority to own, lease and operate its properties and assets and to carry on its business as
presently conducted.

          5.02 As of the Effective Date, Buyer has only minimal capital and the transactions to be
completed at the Closing will depend on Bancorp’s successfully completing its capitalization and
public offering of common stock.

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          5.03 The execution, delivery and performance by Buyer of this Agreement have been duly and
validly authorized by all necessary corporate action on the part of the Buyer and this Agreement is
a valid, binding and enforceable obligation of Buyer in accordance with its terms, except as
limited by bankruptcy, insolvency, and similar laws relating to the enforcement of creditors rights
generally. This Agreement does not and will not violate any provision of Buyer’s Articles of
Incorporation or Bylaws and does not and will not constitute or result in a breach of, or be in
violation of any of terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or asset of the Buyer
under, any agreement, franchise, license, indenture, lease, mortgage, deed of trust or other
instrument to which Buyer is a party or by which Buyer or its property may be bound or effected or
any law, order, judgment, decree, rule or regulation applicable to Buyer.

          5.04 The execution, delivery and performance by Bancorp of this Agreement have been duly and
validly authorized by all necessary corporate action on the part of the Bancorp and this Agreement
is a valid, binding and enforceable obligation of Bancorp in accordance with its terms, except as
limited by bankruptcy, insolvency, and similar laws relating to the enforcement of creditors rights
generally. This Agreement does not and will not violate any provision of Bancorp’s Articles of
Incorporation or Bylaws and does not and will not constitute or result in a breach of, or be in
violation of any of terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or asset of the Bancorp
under, any agreement, franchise, license, indenture, lease, mortgage, deed of trust or other
instrument to which Bancorp is a party or by which Bancorp or its property may be bound or effected
or any law, order, judgment, decree, rule or regulation applicable to Bancorp.

          5.05 Neither Buyer nor Bancorp nor any of their agents has paid or agreed to pay, or has done
any act which will give rise to the payment of, any fee, commission or consideration to any agent,
broker, finder or any other person on account of services rendered as a broker or finder in
connection with this Agreement or any of the transactions contemplated hereby, or which has
resulted in or may give rise to any obligation on the part of Seller or Buyer or Bancorp.

          5.06 Buyer is, and at the time of the Closing Discovery Bank will be, wholly owned
subsidiaries of Bancorp. Except for Buyer, Bancorp has no subsidiaries and does not otherwise own
or control, directly or indirectly, any equity interest in any corporation, association or business
entity and is not a participant in any joint venture, partnership or similar arrangement.

          5.07 The capitalization of Discovery Bank and the pro-forma capitalization of Bancorp,
including shares exercisable pursuant to options, rights and warrants, and a description of
pre-emptive rights, if any, the obligations to repurchase shares issuable upon the conversion of
existing securities, if any, are as set forth in Bancorp’s Registration Statement on Form S-4 as
filed with the Securities and Exchange Commission on January 18, 2005 (the “S-4”).

          5.08 Audited financial statements of Discovery Bank, a California corporation, (“Discovery
Bank”) for the year-ending December 31, 2003 as well as the unaudited Financial Statements for the
quarters ended March 31, June 30, September 30 and December 31, 2004 (the

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“Buyer Financial
Statements”) are attached as Schedule 5.08 hereto and are true and correct in all
material respects, and accurately and fairly present in all material respects the assets and
liabilities and the financial condition of Discovery Bank as of their respective dates. There has
been no material adverse change in the operations or assets of the business of Discovery Bank since
December 31, 2003.

          5.09 Each representation, warranty, covenant, and agreement of Buyer and Bancorp set forth in
this Agreement shall be deemed to be made on and as of the Effective Date hereof and as of the
Closing and shall survive the Closing.

     6. Covenants of Seller Pending the Closing. Seller covenants and agrees with Buyer as
follows:

          6.01 Conduct of Business. Unless Buyer shall give its prior written consent, which
consent shall not be unreasonably withheld, from the Effective Date up to and including the
Closing, Seller will:

          (a) conduct its affairs and business only in the usual and ordinary course, consistent with
safe and sound business practices and prior customary practice of Seller;

          (b) refrain from creating or incurring any new mortgage, lien, pledge, security interest,
charge, encumbrance or restriction of any kind against or in respect of any Assets of Seller;

          (c) refrain from making or becoming a party to any new contract or commitment, except for
loans or commitments to lend, which alone, or in the aggregate with other new contracts or
commitments, exceeds Five Thousand Dollars ($5,000.00), or renewing, extending, amending or
modifying any such contract or commitment, except in the usual and ordinary course of business,
consistent with safe and sound business practices and prior customary practice of Seller;

          (d) refrain from making any capital expenditures, except for ordinary repairs and replacements
in an aggregate amount not to exceed Five Thousand Dollars ($5,000.00) other than for the computer
upgrades set forth on Schedule 6.01(d) hereof;

          (e) maintain its Assets in good condition and repair (ordinary wear and tear excepted);

          (f) refrain from selling or otherwise disposing of any of its Assets, except in the usual and
ordinary course of business, consistent with prior customary practice of Seller;

          (g) use its commercially reasonable efforts to preserve its business organization intact and
to retain its present officers and employees;

          (h) use its commercially reasonable efforts to encourage Monique Tyler and Scott Blaeser, its
Client Development Officers, to enter into employment arrangements acceptable to Buyer to become
effective as of the Closing.

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          (i) use its commercially reasonable efforts to preserve the goodwill of its customers and
those having business relations with Seller;

          (j) use its commercially reasonable efforts to renew the Arizona Lease on terms acceptable to
Buyer;

          (k) use its commercially reasonable efforts to assist Buyer with Wells Fargo Bank in Buyer’s
attempt to assume the Wells Debt;

          (l) arrange for Buyer’s representatives to join with Seller in visitations to selected
customers of Seller to be conducted in a manner reasonably acceptable to Seller;

          (m) maintain insurance coverage at least equal to that in effect as of the Effective Date
hereof on the Seller’s Premises and on Assets for which it is responsible, and carry the same
coverage for public liability, personal injury, fidelity, errors and omissions, and property damage
that is in effect as of the Effective Date;

          (n) meet its contractual obligations and not become in default on any thereof including, but
not limited to, performing all of its obligations as and when required under the Santa Monica Lease
and the Arizona Lease, and the Vendor Contracts and on all loan commitments;

          (o) duly observe and conform to lawful requirements applicable to the CF Business in all
material respects;

          (p) maintain its books of account and records in the regular manner of Seller in accordance
with all applicable statutory and regulatory requirements applied on a consistent basis;

          (q) refrain, directly or indirectly, from entering into or continuing negotiations, agreements
or understandings, the purpose or effect of which could encompass the selling of any of the Assets
(except in the ordinary course of business);

          (r) refrain from granting, or committing to, any increases in salary, compensation or benefits
for any of its directors, officers or employees;

          (s) refrain from granting or renewing any loan or line of credit (other than loans or lines of
credit containing automatic renewal provisions) except in compliance with Section 6.05; and

          (t) refrain from entering into any agreement, contract, or understanding which would or could
result in the taking of any action or the occurrence of any event prohibited by clauses (a) through
(s) above.

     For the purposes of this Section 6.01, Buyer shall be deemed to have given its consent to any
action which is contrary to any specific covenant set forth in this Section 6.01 if, and only if,
Buyer shall have given written notice (in accordance with Section 15.01 hereof) of its consent

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after receipt of notice from Seller of Seller’s intention to act contrary to any of the specified
covenants set forth in this Section 6.01.

          6.02 Access to Information. Seller has and will continue to afford Buyer, its
representatives, counsel, accountants, agents and employees, reasonable access during normal
business hours to all of its business, operations, properties, books, files and records and will do
everything reasonably necessary to enable Buyer and its representatives, counsel, accountants,
agents and employees to make a reasonable examination of the financial statements, business, assets
and properties of Seller and to update such examination at such intervals as Buyer shall deem
appropriate. Such examination shall be conducted in cooperation with the officers of Seller and in
such a manner as to minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of, or interference with, the normal business operations
of Seller. Subject to Section 13.05, no such examination, however, shall constitute a waiver or
relinquishment on the part of Buyer of its right to rely upon the representations and warranties
made by Seller and/or its officers and directors herein or pursuant hereto. Buyer will hold in
strict confidence all documents and information concerning Seller so obtained (except to the extent
that such documents or information are a matter of public record or require disclosure in any
application necessary to obtain regulatory approval of the transactions contemplated by this
Agreement) and, if the transactions contemplated herein are not consummated, such confidence shall
be maintained and all such documents and any documents provided pursuant to this Agreement shall be
returned to Seller.

          6.03 Financial Report. From and after the Effective Date, within 30 days after the
end of each fiscal quarter, Seller shall provide to Buyer a balance sheet and income statement as
of the end of the quarter and for that portion of the fiscal year ending with such quarter,
certified as correct in all material respects by the Seller’s Chief Financial Officer.

          6.04 Approvals. Seller will use commercially reasonable efforts to promptly obtain,
at or before the Closing, all consents, approvals and authorizations as are necessary to carry out
and consummate the transactions contemplated herein including, but not limited to, the approval of
the Santa Monica Landlord under the Santa Monica Lease of Buyer’s assumption of the Santa Monica
Lease upon the Closing and the approval of the Arizona Landlord under the Arizona Lease of Buyer’s
assumption of the Arizona Lease upon the Closing, as well as other consents that may be necessary
to transfer good and marketable title to Buyer, or for Buyer’s assumption and lawful use of, the
Assets.

          6.05 Lending. At least three (3) business days prior to entering into any loan or
other extension of credit, or renewing or extending an existing loan or extension of credit, Seller
shall present the proposed loan or extension of credit, together with the write-up and any
supporting documentation, including but not limited to financial statements and tax returns of the
borrower and/or any applicable guarantor, for review by Buyer’s designated officer(s). Buyer may
reject the proposed loan/extension of credit within three (3) business days after receipt of the
loan request. If the Seller chooses to fund the loan or credit facility after Buyer’s rejection,
then that loan/extension of credit shall be a Retained Asset hereunder. With respect to any loan
or line of credit subject to automatic renewal, if either Seller or its customer gives notice
of the intent not to renew, a copy of that notice shall be provided to Buyer on a same day basis.

11

 

          6.06 Notification. Seller shall notify Buyer by telephone, confirmed promptly in
writing, of any breach or violation on its part of any covenant contained herein, or of the
occurrence of an event which would cause any warranties or representations made by it herein to be
or become false or misleading, or if it becomes a party to or is threatened with becoming a party
to any legal or equitable proceeding or governmental investigation, or upon the occurrence of any
event which would result in a change in the circumstances of Seller described in the
representations and warranties contained herein.

     7. Covenants of Bancorp and/or Buyer Pending the Closing.

     Bancorp and Buyer covenant and agree with Seller as follows:

          7.01 Federal Approvals. Bancorp will use its best efforts to promptly obtain, at or
before the Closing, all regulatory consents, approvals and authorizations from the Board of
Governors of the Federal Reserve System as are necessary for it to become a bank holding company,
to retain Buyer as a wholly owned subsidiary of a bank holding company and to carry out and
consummate the transactions contemplated herein and as set forth in Bancorp’s S-4.

          7.02 State Approvals. Buyer will use its best efforts to promptly obtain, at or
before the Closing, all regulatory consents, approvals and licenses from the State of California,
and such other states, as are necessary for Buyer to operate the CF Business from and after the
Closing, in a manner substantially similar to the CF Business as currently operated by Seller.

          7.03 Public Offering. Bancorp will use its best efforts, at its sole expense, to
commence and complete a public offering of its common stock pursuant to a registration on Form SB-2
in compliance with all applicable federal and state securities laws, in which Bancorp shall receive
aggregate gross proceeds of not less than Six Million Dollars ($6,000,000), the proceeds of which
will be used, at least in part, to capitalize Buyer and consummate the transactions contemplated
herein (the “Public Offering”). Bancorp shall include Seller’s Shares in the registration
statement filed in connection with the Public Offering, at the sole expense of Buyer or Bancorp.

          7.04 Financial Report. From and after the Effective Date, within 30 days after the
end of each fiscal quarter, Bancorp shall provide to Seller a balance sheet and income statement
for Discovery Bank and Bancorp as of the end of the quarter and for that portion of the fiscal year
ending with such quarter, certified as correct in all material respects by Discovery Bank’s Chief
Financial Officer.

          7.05 Funding. Bancorp and Buyer will use their collective commercially reasonable
efforts to obtain the approval from WFF for the transfer of the Wells Debt to Buyer, on terms no
less favorable than those existing prior to the transfer, or in the alternative to arrange for debt
financing in an amount not less than Twenty-Five Million Dollars ($25,000,000), plus, in either
case, an additional long-term debt financing of not less than Two Million Three
Hundred Thousand Dollars ($2,300,000) from third party sources other than WFF (collectively
“Debt Funding”).

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          7.06 Notification. Buyer shall notify Seller by telephone, confirmed promptly in
writing, of any breach or violation on its part of any covenant contained herein, or of the
occurrence of an event which would cause any warranties or representations made by it herein to be
or become false or misleading, or if it becomes a party or is threatened with becoming a party to
any legal or equitable proceeding or governmental investigation, or upon the occurrence of any
event which would result in a change in the circumstances of Buyer described in the representations
and warranties contained herein.

          7.07 Alternative Transaction. Buyer shall not, directly or indirectly, enter into or
continue any negotiations, agreements or understandings, the purpose or effect of which would be
the acquisition by Buyer of a commercial finance business other than that of Seller.

     8. Approvals.

          8.01 Required Approvals. The obligations of the parties to proceed with the sale of
the Assets and assumption of the Liabilities of Seller at the Closing, as provided for herein, are
subject to the receipt of all of the following permits, consents and approvals (hereinafter
collectively referred to as the “Approvals”): (a) the approval by the Board of Governors of the
Federal Reserve System for Bancorp to be become a bank holding company pursuant to the Bank Holding
Company Act of 1956, (b) the approval of the Board of Governors of the Federal Reserve System for
Bancorp to hold Buyer as a subsidiary and to operate a business substantially similar to the CF
Business as conducted by Seller, (c) the licenses from the State of California, and any other
state, for Buyer to operate the CF Business substantially similar to that conducted by the Seller
immediately prior to the Closing, (d) all consents and approvals necessary to effect transfer of
the assets and the assumption of the Santa Monica Lease and the Arizona Lease by Buyer. The
parties agree that they will cooperate with each other in obtaining these Approvals and will
furnish promptly such documentation and information about each other as shall be reasonably
necessary in order to obtain these approvals.

          8.02 Compliance with Laws. In obtaining the Approvals for which it is responsible,
each of Buyer and Seller covenants and warrants to the other that it will comply with all material
provisions of applicable state and federal law and that no document filed by it with state or
federal regulatory authorities will contain any untrue statement of a material fact or will omit to
state a material fact required to be stated therein or which is necessary to make the facts stated
therein not misleading; provided that neither party covenants and warrants as to information
provided by the other party for inclusion in such document.

     9. Conditions Precedent to the Obligations of Buyer.

     The fulfillment or performance prior to the Closing of each of the following is a condition to
the performance by Buyer of its obligations hereunder:

          9.01 Approvals. Receipt of the Approvals.

          9.02 Capital. Bancorp’s completion of the Public Offering and Buyer’s obtaining the
Debt Funding.

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          9.03 Fairness Opinion. Bancorp has received a written opinion from Hoeffer & Arnett,
Incorporated substantially in the form of Exhibit “G” hereto dated as of the Closing.

          9.04 Certificate of No Default. The fulfillment or performance in a timely manner of
all of the covenants, terms and conditions of Seller contained in this Agreement. The
representations and warranties of Seller contained in this Agreement shall be true and correct in
all material respects on and as of the Closing, except for changes contemplated by this Agreement,
with the same effect as though such representations and warranties had been made on and as of such
date. Seller shall have delivered to Buyer a certificate, dated as of the Closing, signed by the
President and by the Chief Financial Officer of Seller, certifying the fulfillment of the
conditions set forth in Sections 9.04, 9.05 and 9.06.

          9.05 Absence of Litigation. No action or proceeding shall have been instituted or, to
the knowledge of any of the parties hereto, threatened before a court or other governmental agency
or body or by any public authority to restrain or prohibit the consummation of the transactions
contemplated herein, unless Buyer shall have received an opinion satisfactory to it of counsel
handling such matter stating that such action or proceeding will not, in all likelihood, result in
such a restraint or prohibition, and there shall not be in effect any order, writ, injunction or
decree of any court or governmental authority prohibiting the consummation of any of the
transactions contemplated hereby.

          9.06 No Adverse Change. There shall not have occurred between the date hereof and the
Closing any event, and Buyer shall not have discovered any fact or circumstance, which, in the
reasonable judgment of Buyer, would be materially adverse to the business or properties of, or
prospects of, the Seller and its CF Business.

          9.07 Regulatory Conditions. Regulatory authorities shall not have imposed any
requirements as a condition to granting the Approvals for the transactions contemplated by this
Agreement, which conditions or requirements are burdensome to Buyer or its shareholder, in the sole
judgment of Buyer.

          9.08 Employment Contracts. Buyer has received an Employment Contract executed by Mark
Hafner substantially in the form of Exhibit “H-1” (the “Mark Hafner Employment Agreement”),
an Employment Contract executed by Alex Falo substantially in the form of Exhibit “H-2”
(the “Alex Falo Employment Agreement”) and a Consulting Agreement executed by Bron Hafner
substantially in the form of Exhibit “H-3” hereof (the “Bron Hafner Consulting Agreement”),
all to be effective from and after the Closing in accordance with their respective terms and
conditions, including the “Non-Compete” provisions thereof.

          9.09 Name Change. Buyer has received evidence, satisfactory to it, of Seller’s having
taken the necessary action prior to the Closing to change its name and granting to Buyer permission
to change Buyer’s name to that used by Seller, such name changes to be effective immediately
following the Closing.

          9.10 Audit. Buyer has received a copy of Seller’s Financial Statements for the year
ended December 31, 2004 prepared by Seller’s independent certified public accountants in

14

 

accordance
with Generally Accepted Accounting Principles and containing their unqualified opinion.

     Buyer may waive one or more of the foregoing conditions by a notice in writing to that effect
delivered to Seller.

     10. Conditions Precedent to the Obligations of Seller.

     The fulfillment or performance prior to the Closing of each of the following is a condition to
the performance by Seller of its obligations hereunder:

          10.01 Approvals; Public Offering. Receipt of the Approvals and completion of the
Public Offering, including the registration of Seller’s Shares pursuant thereto.

          10.02 Funding of Buyer. Cash or other good funds representing at least the cash
portion of the Purchase Price shall have been contributed as capital into Buyer at least three (3)
business days prior to the Closing and an amount equal to the cash portion of the Purchase Price
shall be delivered by cashier’s check or wire transfer to Seller contemporaneous with the Closing,
and the sum set forth in Section 2.01(a) shall be a positive number.

          10.03 Certificate of No Default. The fulfillment or performance in a timely manner of
all of the covenants, terms and conditions of Buyer and Bancorp contained in this Agreement. The
representations and warranties of Buyer and Bancorp contained in this Agreement shall be true and
correct in all material respects on and as of the Closing, except for changes contemplated by this
Agreement, with the same effect as though such representations and warranties had been made on and
as of such date. Buyer and Bancorp shall have each delivered to Seller a certificate, dated as of
the Closing, signed by the President and by the Chief Financial Officer of Buyer and Bancorp,
certifying the fulfillment of the conditions set forth in Sections 10.03 and 10.04.

          10.04 Absence of Litigation. No action or proceeding shall have been instituted or,
to the knowledge of any of the parties hereto, threatened before a court or other governmental
agency or body or by any public authority to restrain or prohibit the consummation of the
transactions contemplated herein, unless Seller shall have received an opinion satisfactory to it
of counsel handling such matter stating that such action or proceeding will not, in all likelihood,
result in such a restraint or prohibition, and there shall not be in effect any order, writ,
injunction or decree of any court or governmental authority prohibiting the consummation of any of
the transactions contemplated hereby.

          10.05
Employment Contracts. Buyer shall have executed and delivered to the
Principal that is a party thereto the Mark Hafner Employment Agreement, the Alex Falo Employment
Agreement and the Bron Hafner Consulting Agreement.

     Seller may waive one or more of the foregoing conditions by a notice in writing to that effect
delivered to Buyer and Bancorp.

     11. Operations Post Closing. 

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          11.01 The parties acknowledge and agree that they have had extensive discussions regarding the
operation of the CF Business from and after the Closing and Buyer, Bancorp and Seller agree to the
terms and conditions regarding employment matters and other post-closing operations of the CF
Business set forth in Exhibit I hereto.

     12. Covenant Not to Compete.

          12.01 During the period commencing with the Closing and continuing up to and including three
(3) years thereafter (the “Noncompete Period”) Seller agrees not to be employed by, or
consult with, or directly or indirectly own, manage, participate in, operate or control any
interest in, any business, whether operated as a partnership, corporation, limited liability
company, sole proprietorship, joint venture, association, individually or by any action in concert
with others (the “Competitor(s)”), which Competitor offers, sells, provides or conducts any lending
activities then being offered, sold, provided or conducted by Buyer (the “Business”) within any
county or counties, city or cities, or a part thereof, within the State of California (the
“Territory”).

          12.02 The Principals acknowledge and agree that as a condition to the Closing they are to be
parties to Employment Contracts and/or a Consulting Agreement with Buyer which contain
“Non-Compete” provisions which are part of the consideration being paid by Buyer in the
transactions contemplated herein.

          12.03 During the Noncompete Period, Seller shall not, directly or indirectly, on behalf of a
Competitor or Seller, induce or influence or seek to induce or influence any employee, agent or
independent contractor or other business affiliate of Buyer to terminate, leave or reduce his, her
or its relationship with Buyer. During the Noncompete Period, Seller shall not, directly or
indirectly, on behalf of a Competitor or Seller divert, take away or solicit or attempt to divert,
take away or solicit, any loan customers of Buyer.

          12.04 During the Noncompete Period, Seller shall not directly or indirectly, on behalf of a
Competitor or Seller, use, divulge, disclose or communicate to any person, firm, partnership,
corporation or entity, in any manner whatsoever any confidential, secret or proprietary information
(but excluding such information if it is in the public domain through no act of Seller) concerning
any matters affecting or relating to the Business of Buyer including, but not limited to, records,
data, specifications, formulas, technology, inventions, devices, products, methods, know-how,
processes, financial data, customer and vendor information, employee information or any other
confidential information of, about or concerning the Business of Buyer, the respective matters of
operation, or other confidential data of any kind, nature or description. The parties hereby
stipulate, that as between them, the foregoing matters are important, material and confidential
trade secrets and affect the successful conduct of the Business and Goodwill being purchased by
Buyer.

          12.05 Seller hereby acknowledges and agrees that should it violate any of the provisions of
this Section 12, it would be difficult to determine the amount of damages resulting
to Buyer and, in addition to any other remedies which Buyer may have, Buyer shall be entitled
to temporary and permanent injunctive relief without the necessity of proving damages.

16

 

          12.06 Each of the foregoing covenants contained in this Section 12 shall be construed as a
separate and independent covenant covering the respective subject matter of the covenant in each of
the separate counties in the state of California. To the extent that any covenant shall be
determined to be judicially unenforceable in any one or more county that covenant shall continue to
be effective to the extent legally permissible in such county, and said covenant shall continue to
be effective with respect to every other county and each covenant being construed is severable and
independent with respect to each county.

     13. Indemnity of Parties.

          13.01 Seller and the Principals, jointly and severally, hereby agree to indemnify, defend and
hold harmless Buyer and its respective successors, assigns, employees, representatives, officers,
directors and agents (hereinafter collectively referred to as “Buyer’s Parties”) from and against
any and all costs, losses, liabilities, damages, lawsuits, claims, demands, expenses, obligations,
recoveries and deficiencies, including, without limitation, interest and penalties (“Claims”), in
connection with or arising out of or resulting from or incident to:

          (i) any breach of any covenant, indemnity, obligation, agreement, representation, warranty or
the misrepresentation or inaccuracy of any representation or warranty made by Seller in this
Agreement, its exhibits, schedules, or in any written statement or certificate furnished by Seller,
pursuant to this Agreement or in connection with the transactions contemplated by this Agreement,

          (ii) the Retained Assets or the Retained Liabilities, or any other obligations that do not
constitute Liabilities assumed by Buyer from the operation of the CF Business by Seller prior to
the Closing; and

          (iii) including also in each instance, and without limitation, all reasonable costs and
expenses of investigating and defending any Claim at any time arising (and any lawsuit instituted
asserting such Claim and appeal therefrom) and costs incurred in connection therewith, whether or
not such Claim is ultimately defeated, and including also any amounts paid incident to any
compromise or settlement of any such Claim.

          13.02 Buyer and Bancorp, jointly and severally, hereby agree to indemnify, defend and hold
harmless Seller and its respective successors, assigns, employees, representatives, officers,
directors and agents and the Principals and their respective heirs, executors and assigns
(hereinafter collectively referred to as “Seller’s Parties”) from and against any and all Claims in
connection with or arising out of or resulting from or incident to:

          (i) any breach of any covenant, indemnity, obligation, agreement, representation, warranty or
the misrepresentation or inaccuracy of any representation or warranty made by Buyer in of this
Agreement its exhibits, schedules or in any written statement or
certificate furnished by Buyer pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement;

17

 

          (ii) the Assets or the Liabilities or conduct of Buyer of the CF Business from and after the
Closing; and

          (iii) including also in each instance, and without limitation, all reasonable costs and
expenses of investigating and defending any Claim at any time arising (and any law suit instituted
asserting such Claim and appeal therefrom) and costs incurred in connection therewith, whether or
not such Claim is ultimately defeated, and including also any amounts paid incident to any
compromise or settlement of any such Claim.

          13.03 (a) Any of the Buyer’s Parties or Seller’s Parties entitled to indemnity under this
Section 13 shall promptly notify the indemnifying party in writing of the existence of any Claim,
or other matter to which the indemnification obligations would apply, and shall give the
indemnifying party a reasonable opportunity to defend the same at its own expense and with counsel
of its own selection.

                    (b) With respect to any Claim, asserted, threatened, instituted, incurred or discovered by or
against an indemnified party, the obligation to indemnify shall continue through the final
disposition or settlement of any such matter and the full satisfaction of the indemnification
obligation, provided that notice hereof has been given to the indemnifying party.

                    (c) The indemnifying party shall have the right to undertake the defense, compromise or
settlement of the same at the indemnifying party’s own expense and with counsel of the indemnifying
party’s own selection; provided that in the event the indemnifying party shall elect to undertake
the defense of such matter, the indemnifying party agrees that during the course of such proceeding
the indemnifying party shall keep the indemnified party fully informed and shall use all reasonable
efforts at the indemnifying party’s expense to defend such claim or litigation, to present any
defense reasonably appropriate in the circumstances, and to consult with the indemnified party
concerning such defense during the course thereof, and provided that no compromise or settlement
shall be made, executed or delivered without the indemnified party’s prior written consent, which
shall not be unreasonably withheld. In the event that any such claim is of a nature that it cannot
be defended solely by the indemnifying party, the indemnified party shall make available to the
indemnifying party, at the expense of the indemnifying party, information and assistance that they
may reasonably request.

                    (d) In the event that the indemnifying party, within fifteen (15) days after notice of any
indemnifiable claim, fails to assume the defense, the indemnified party will have the right to
undertake the defense, compromise or settlement of such indemnifiable claim on behalf of, for the
account of, at the risk and expense of the indemnifying party, with all costs and expenses incurred
in connection therewith being reimbursed by the indemnifying party upon demand by the indemnified
party.

                    (e) To the extent that an indemnified party obtains proceeds from its insurance carrier in
redress of damages incurred or suffered as a result of the occurrence of an event giving rise to
the indemnification rights and obligations hereunder, the amount of such
insurance proceeds realized shall be offset against any sums owing under this Section 13
unless the insurance carrier asserts its rights of subrogation to the indemnified party under said
insurance policy. If the indemnifying party has paid the indemnified party pursuant to the

18

 

provisions of this Section with respect to a Claim for which: (i) insurance proceeds are
subsequently received by the indemnified party; or (ii) other amounts are received by the
indemnified party from independent third parties with respect to which the indemnified party has
been indemnified by the indemnifying party, the indemnified party shall pay such proceeds or
amounts, or such part thereof, to the indemnifying party in an amount not to exceed the sums paid
by the indemnifying party to the indemnified party in connection with the occurrence giving rise to
the Claim.

          13.04 Limitations on Indemnification. Seller and the Principals shall not have any
liability under this Section 13 until the aggregate amount of Claims against Seller or the
Principals exceeds Ten Thousand Dollars ($10,000) and, in such event, the Buyer’s Parties shall be
entitled to claim indemnity for the entire aggregate amount of such Claims, provided that the
maximum aggregate amount of liability of Seller under Section 13 shall be the aggregate cash
portion of the Purchase Price paid by Buyer to Seller pursuant to Sections 2.01(a) and 2.01(b).

          13.05 Reduction of Indemnities. Any Claims which a Buyer’s Party shall be entitled to
receive payment under Section 13 shall be reduced dollar for dollar to the extent that the Buyer’s
Party obtains a monetary benefit or value directly related to such Claim. A Buyer’s Party shall not
have any remedy hereunder for a breach of representation or warranty to the extent that Buyer’s
Party had actual knowledge of such breach prior to the Closing Date. The indemnities provided by
this Section 13 shall apply only to Claims for which the Indemnified Party may not be reimbursed
through third party insurance. Notwithstanding the above, if indemnification of any damages,
losses, liabilities or expenses would result in a deduction, credit or other tax benefit to the
Indemnified Party under U.S. federal tax law, the amount indemnifiable under this Section 13 shall
be reduced to reflect such tax benefit.

          13.06 Mitigation. Each Indemnified Party will use reasonable efforts to mitigate any
Claim for which it may claim indemnification under this Section 13. To the extent that the
operations of the CF Business after the date of Closing contribute to or aggravate any Claims as to
which indemnification is available under Section 13.01, Seller’s indemnification obligation shall
be reduced to the extent of such contribution or aggravation.

          13.07 Remedies; Fraud. Except as expressly provided in this Agreement, or for Claims
based on fraud committed by the indemnifying party, the indemnities set forth in this Section 13
shall be the exclusive remedies of the parties for any Claims to which they are entitled to
indemnification pursuant to this Section 13, and the parties hereto shall not be entitled to any
further indemnification rights or Claims of any nature whatsoever in respect thereof. Without
limiting the foregoing, no provision of this Agreement shall in any way limit the ability of a
Buyer’s Party to seek the aggregate amount of Claims in connection with or arising out of the fraud
of Seller or any Principal.

     14. Termination.

     Anything herein to the contrary notwithstanding, this Agreement may be terminated at any time
before the Closing, as follows:

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          14.01 Mutual Agreement. By mutual action of the Board of Directors of Seller and the
Board of Directors of Buyer.

          14.02 Failure to be Consummated by a Date Certain. By notice to one party from the
other, if the Closing has not occurred on or before June 30, 2005 (the “Termination Date”);
provided, however, that by mutual agreement of the parties, the Termination Date may be extended to
such date as the parties mutually agree.

          14.03 Legal Action or Proceeding. By either party, by written notice given to the
other, if any action or proceeding shall have been instituted before any court or governmental
body or authority to restrain or prohibit the consummation of the transactions contemplated by this
Agreement, and the party giving such notice has been advised in writing by its counsel that in the
opinion of such counsel such action or proceeding could reasonably be expected at the time such
notice is given to result in such restraint or prohibition.

          14.04 By Buyer for Default or Failure of Condition. Immediately upon the expiration
of ten (10) business days after delivery of written notice by Buyer to Seller of Seller’s material
breach or material misrepresentation or material failure to satisfy any condition, warranty,
representation, covenant or agreement of Seller contained herein, or the occurrence of an event
that has or is likely to have a material adverse effect upon the CF Business (provided that such
breach, misrepresentation or default has not been waived in writing by Buyer or cured by Seller
within such ten (10) business day period).

          14.05 By Seller for Default or Failure of Condition. Immediately upon the expiration
of ten (10) business days after delivery of written notice by Seller to Buyer of Buyer’s material
breach or material misrepresentation or material failure to satisfy any condition, warranty,
representation, covenant or agreement of Buyer contained herein (provided that such breach,
misrepresentation or default has not been waived in writing by Seller or cured by Buyer within such
ten (10) business day period).

          14.06 Failure of Regulatory Approval. Upon the expiration of thirty (30) days after
any other regulatory authority whose approval is required denies or refuses in writing to grant the
Approval(s) contemplated herein, unless Buyer and/or Bancorp resubmits its (or their) application
for approval within such thirty (30) day period; provided, however, this Section 14.06 shall not be
deemed to extend the time periods set forth in Section 14.02.

          14.07 Effect of Termination. If this Agreement shall be terminated as provided
herein, each party shall redeliver all documents, work papers and other material of the other party
relating to the transactions contemplated herein to the party furnishing the same, except that the
foregoing shall not apply to any documents, work papers, material or information which is a matter
of public knowledge. Notwithstanding anything herein to the contrary, no party hereto shall have
the right to terminate this Agreement on account of its own breach of any representation, warranty,
agreement or covenant made hereunder or due to any immaterial breach by the other party hereto. If
the Agreement is terminated based upon a breach of any representation, warranty, agreement or
covenant made herein, then the breaching party shall be responsible for all out-of-pocket costs and
expenses incurred by the non-breaching party, and such other damages as may be determined by a
court of competent jurisdiction.

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          14.08 Expenses. Except as provided in Section 14.07 hereof, each party hereto shall
bear its own fees and out-of-pocket costs incurred in connection with the negotiation, preparation
and performance of this Agreement, including legal and accounting fees, filing fees and other
necessary out-of-pocket expenses (“Expenses”).

          14.09 Seller’s Alternative Transaction. Anything herein to the contrary
notwithstanding, in the event this Agreement is terminated by Buyer based upon Seller’s breach of
the provisions of Section 6.01(q) hereof, and Seller enters into an agreement for a merger,
reorganization share exchange, consolidation or similar transaction, or any agreement for the
purchase of all or substantially all of the assets of the Seller, Seller shall pay to Buyer an
alternative transaction fee in the amount of Five Hundred Thousand Dollars ($500,000) which the
parties agree shall be the sole and exclusive remedy of Buyer for a breach of Section 6.01(q)
hereof by Seller and which amount represents liquidated damages and does not constitute a penalty
but rather a negotiated measure of the damages sustained by Buyer from Seller’s entering into an
alternative transaction.

          14.10 Buyer’s Alternative Transaction. Anything herein to the contrary
notwithstanding, in the event this Agreement is terminated by Seller based upon Buyer’s breach of
the provisions of Section 7.07 hereof, and Buyer or Bancorp enters into an agreement for a merger,
reorganization, share exchange, consolidation or similar transaction, or any agreement for the
purchase of all or substantially all, of the assets of another commercial finance business, Buyer
shall pay to Seller an alternative transaction fee in the amount of Five Hundred Thousand Dollars
($500,000) which the parties agree will be the sole and exclusive remedy of Seller for a breach of
Section 7.07 hereof by Buyer and which amount represents liquidated damages and does not constitute
a penalty but rather a negotiated measure of the damages sustained by Seller from Buyer’s entering
into an alternative transaction.

     15. MISCELLANEOUS.

          15.01 Notice. Any notice or other communication required or permitted hereunder shall
be in writing and shall be sufficiently given if sent by Federal Express, overnight delivery, or
U.S. Mail, next day delivery, postage prepaid, or sent by facsimile transmission to be delivered
the day of transmission, addressed as follows:

	 	 	 	 	 
	

	 	If to Seller:
	 	Celtic Capital Corporation
	

	 	 	 	2951 28th Street, #2030
	

	 	 	 	Santa Monica, California 90405
	

	 	 	 	Attention: Mark Hafner
	

	 	 	 	FAX: (310) 664-4760
	 
	 	 	 	 
	

	 	With a copy to:
	 	Pillsbury Winthrop
	

	 	 	 	725 S. Figueroa St., # 2800
	

	 	 	 	Los Angeles, CA 90017
	

	 	 	 	Attention: Edward A. Perron, Esq.
	

	 	 	 	FAX: (213) 629-1033

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	 	If to Buyer or Bancorp:
	 	Discovery Bancorp
	

	 	 	 	1145 San Marino Drive, Suite 346
	

	 	 	 	San Marcos, CA 92069
	

	 	 	 	Attention: Joseph Carona
	

	 	 	 	FAX: (760) 736-8906
	 
	 	 	 	 
	

	 	with a copy to
	 	Horgan, Rosen, Beckham & Coren L.L.P.
	

	 	 	 	23975 Park Sorrento, Suite 200
	

	 	 	 	Calabasas, CA 91302
	

	 	 	 	Attention: S. Alan Rosen, Esq.
	

	 	 	 	FAX: (818) 591-3838

          15.02 Entire Agreement. This Agreement and the Exhibits hereto contain the entire
Agreement between the parties with respect to the subject matter hereof, incorporates and
supersedes all prior agreements and understandings between the parties with respect to such subject
matter, whether written or oral, and may be amended solely by an instrument in writing executed by
both parties.

          15.03 Severability. Any provision of this Agreement which is void or is determined to
be unenforceable by a court of competent jurisdiction shall not affect the remainder of this
Agreement, which shall continue in full force and effect notwithstanding such voidness or
unenforceability.

          15.04 Waiver. The waiver by any party of the performance of any covenant, condition
or promise contained herein shall not invalidate this Agreement, nor shall it be considered a
waiver of any other covenant, condition or promise. The waiver by any party of the time for
performing any act shall not be deemed a waiver of the time for performing any other act or an
identical act required to be performed at a later time. The exercise of any remedy provided by
law, or otherwise, and the provisions in this Agreement for any remedy shall not exclude any other
remedy unless it is expressly excluded.

          15.05 Governing Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of California.

          15.06 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original but all of which when taken together shall constitute one
and the same Agreement.

          15.07 Third Parties. Each party hereto intends that this Agreement shall not benefit
or create any right or cause of action to any person other than parties hereto.

          15.08 Successors and Assigns. All terms and conditions of this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their respective transferees,
successors and assigns; provided, however, that this Agreement and all rights, privileges, duties
and obligations of the parties hereto may not be assigned or delegated by either party hereto
without the prior written consent of the other party hereto.

22

 

          15.09 Attorneys’ Fees. If legal action or other proceeding is brought for enforcement
of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Agreement, the successful or prevailing party or
parties shall be entitled to reasonable attorneys’ fees and other costs incurred in that action or
proceeding in addition to any other relief to which it or they may be entitled.

          15.10 Publicity. The parties hereto agree that they will coordinate on any publicity
concerning this Agreement and the transactions contemplated herein. No party shall issue any press
release, publicity statement or other public notice relating in any way to this Agreement or any of
the transactions contemplated hereby without obtaining the prior consent of the others which
consent shall not be unreasonably withheld, unless the party is advised by its legal counsel that
issuance of such publicity is required for compliance with federal or state securities laws.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.

	 	 	 
	 

	 	CELTIC MERGER CORP.
	

	 	a California corporation
	 
	 	 
	

	 	By:/s/ John R. Plavan
	

	 	Its: Chairman
	 
	 	 
	

	 	DISCOVERY BANCORP

a California corporation
	 
	 	 
	

	 	

	 
	 

	 	CELTIC CAPITAL CORPORATION

a California corporation
	 
	 	 
	

	 	By:/s/ Mark Hafner

Its: President
	 
	 	 
	

	 	/s/ Bron Hafner

Bron Hafner
	 
	 	 
	

	 	/s/ Mark Hafner

Mark Hafner
	 
	 	 
	

	 	/s/ Alex Falo

Alex Falo

23

 

	 	 	 
	 

	 	DISCOVERY BANCORP
	

	 	A California corporation
	 
	 	 
	

	 	By:   /s/ John R. Plavan
	

	 	

	

	 	Its:   Chairman
	

	 	

23A

 

EXHIBIT A

SELLER’S LOAN PORTFOLIO

 

 

EXHIBIT B

FURNITURE, FIXTURES AND EQUIPMENT

 

 

EXHIBIT C-1

SANTA MONICA LEASE

 

 

EXHIBIT C-2

LEASE DEPOSITS

 

 

EXHIBIT C-3

ARIZONA LEASE

 

 

EXHIBIT D

RETAINED ASSETS

 

 

EXHIBIT E

VENDOR CONTRACTS

 

 

EXHIBIT F-1

BILL OF SALE

 

 

EXHIBIT F-2

ASSUMPTION OF LIABILITIES

 

 

EXHIBIT G

FAIRNESS OPINION

 

 

EXHIBIT H-1

MARK HAFNER EMPLOYMENT CONTRACT

 

 

EXHIBIT H-2

ALEX FALO EMPLOYMENT CONTRACT

 

 

EXHIBIT H-3

BRON HAFNER CONSULTING AGREEMENT

 

 

EXHIBIT I

MEMORANDUM RE: OPERATIONS (POST-CLOSING)

     Celtic Merger Corp. (“Buyer”) and its parent, Discovery Bancorp, (“Bancorp”) have reached
general agreement with Celtic Capital Corporation (“Seller”) and its primary operating officer,
Mark Hafner, who will be President of Celtic Merger Corp. after the Closing Date, concerning
operating matters deemed important to Buyer and Seller, as follows:

     1. Buyer will continue to locate company operations at Santa Monica, California, unless
another location is mutually agreed upon. Buyer’s executives will travel to the Bancorp head office
in San Diego as necessary, but it is agreed efforts will be made to minimize travel. Bancorp
executives will travel as needed to Santa Monica, and will be accorded temporary office space,
suitable to their purpose, while they are there.

     2. The Board of Directors of Buyer will designate one of its elected directors as Chairman of
the Board. The director so designated shall also, unless the Board decides otherwise, act as the
Chief Executive Officer of Buyer.

     3. Buyer will, at closing date, hire and assume responsibility for all Celtic at-will
employees, under Seller’s existing compensation arrangements. Tenure of all employees so hired
will be counted from the date of employment by Seller. At-will employees will be included in fringe
benefit programs or plans for such employees utilized by Bancorp, provided that such programs or
plans, at Bancorp’s sole discretion, may replace similar plans of Seller already in place. Seller’s
401 (k) plan will be merged into the existing 401 (k) plan of Bancorp.

     Following closing, Buyer’s employment policy, including compensation plans, will be
established by its Board of Directors, upon recommendation by management. It is understood such
employment policy will, where appropriate, utilize plans and programs common to Bancorp and its
subsidiaries where efficiency permits, but will not necessarily mirror the policies or plans of
other subsidiaries. Buyer will give no assurance that employment or existing employment
arrangements for at-will employees will continue.

     4. Oversight of Buyer’s business and operations, including loan approval, will be conducted by
its Board of Directors which may, at its sole discretion, delegate authority to committees formed
for specific purposes, or to individuals. With due consideration for the requirements of the
management, the board will determine the form, nature and timing of all reporting. Buyer is aware
of the need for prompt decision-making on loan matters, and will give its best efforts to do so.

     5. The following matters relate to specific aspects of Information Technology (“IT”)
operations of Seller that are deemed important enough to warrant special agreement.

     It is understood by Seller that Bancorp and Buyer intend to integrate the IT systems of its
various operations, over time, for control and efficiency purposes. In doing so, high priority will
be given to meeting the operating and service requirements of subsidiary businesses, as well as
conforming to regulatory standards.

 

 

          (a) It is agreed that, following the closing, Buyer’s accounting will be conducted on an
integrated general ledger software system selected by Buyer for that purpose.

          (b) Seller utilizes a Stucky software system for loan accounting and loan management
information purposes, said system having been modified and customized substantially. This modified
system is stated by Seller to be critical to its operations. Seller utilizes an on-line customer
collateral reporting system internally developed utilizing its own resources, which is integrated
with the aforementioned Stucky system, and which Seller also states is critical to its operations.

          (c) The right to utilize these systems without future payment to any third party has been duly
acquired by Seller and is included in the purchase price and will be transferred to Buyer in the
Asset Purchase. Buyer believes that the aforementioned modified and customized systems are
acceptable for Buyer, as a Bancorp regulated subsidiary. They, accordingly, will be utilized by the
Buyer unless they are, in the future, in Buyer’s sole judgment, found to be unacceptable.

          (d) Seller utilizes a local area network for its computers, which network will continue to be
utilized by the Buyer if, or until, Buyer determines to integrate it into its own operations or
finds it to be unacceptable, in its sole judgment.

          (e) Seller maintains in-house management expertise for certain of its IT operations, and
employs certain consultants for its remaining technical expertise requirements.

          Buyer has conducted initial due diligence of Seller’s IT operations and staffing, including
in-house management and outside consultants and has agreed to leave as is. Buyer has determined,
and Seller has agreed, that in the six-month period following the Closing, Buyer will evaluate
certain cost and staffing issues, to determine the best methods of deployment and integration.
Seller acknowledges that the evaluation may result in changes in management, staffing, and
deployment of operating systems. If such changes are made, any person adversely impacted shall be
provided with at least ninety (90) days prior written notice or three months severance
compensation.

     6. It has been agreed that Mark Hafner will, following Effective Date, bring the Seller’s
credit file information into conformance with Buyer’s standards. Also, the parties will, during the
period between the Effective Date and Closing, jointly work out solutions to Buyer’s requirements
relative to “Payment In Kind” collateral control, as to both overall policy and as to specific
borrowers.exv4w1

 

OMNIBUS INSTRUMENT

      WHEREAS, the parties named herein desire to enter into certain Program Documents contained
herein, each such document dated as of this 1st day of April, 2005, relating to the
issuance by Principal Life Income Fundings Trust 2005-30 (the “Trust”) of Notes to investors under
Principal Life’s secured notes program;

      WHEREAS, the Trust is a trust and will be organized under and its activities will be governed
by the provisions of the Trust Agreement (set forth in Section A of this Omnibus Instrument), dated
as of the date of the Pricing Supplement (attached to this Omnibus Instrument as Exhibit D)
(the “Pricing Supplement”), by and between the parties thereto indicated in Section F herein;

      WHEREAS, certain expense and indemnification arrangements between Principal Life and the
Trustee, on behalf of itself and on behalf of the Trust, are governed pursuant to the provisions of
the Expense and Indemnity Agreement dated as of March 5, 2004, by and between Principal Life and
the Trustee;

      WHEREAS, certain licensing arrangements between the Trust and Principal Financial Services,
Inc. will be governed pursuant to the provisions of the License Agreement (set forth in Section B
of this Omnibus Instrument), dated as of the date of the Pricing Supplement, by and between the
parties thereto indicated in Section F herein;

      WHEREAS, certain custodial arrangements of the Funding Agreement and the Guarantee will be
governed pursuant to the provisions of the Custodial Agreement (the “Custodial Agreement”) dated as
of March 5, 2004 by and among Bankers Trust Company, N.A., acting as custodian (the “Custodian”),
the Indenture Trustee and the Trustee, on behalf of the Trust;

      WHEREAS, the Notes will be issued pursuant to the Indenture (set forth in Section C of this
Omnibus Instrument), dated as of the Original Issue Date, by and between the parties thereto
indicated in Section F herein;

      WHEREAS, the sale of the Notes will be governed by the Terms Agreement (set forth in Section D
of this Omnibus Instrument), dated the date of the Pricing Supplement, by and among the parties
thereto indicated in Section F herein; and

      WHEREAS, certain agreements relating to the Notes, the Funding Agreement and the Guarantee are
set forth in the Coordination Agreement (set forth in Section E of this Omnibus Instrument), dated
as of the date of the Pricing Supplement, by and among the parties thereto indicated in Section F
herein.

      All capitalized terms used herein and not otherwise defined will have the meanings set forth
in the Indenture.

[Remainder of Page Intentionally Left Blank.]

 

 

SECTION A

TRUST AGREEMENT

     This TRUST AGREEMENT (this “Trust Agreement”), dated as of the date of the
Pricing Supplement, is entered into by and between GSS Holdings II, Inc., a
Delaware corporation, as trust beneficial owner (the “Trust Beneficial Owner”),
and U.S. Bank Trust National Association, a national banking association, as
Trustee (the “Trustee”).

W I T N E S S E T H:

     WHEREAS, the Trust Beneficial Owner and the Trustee desire to authorize
the issuance of a Trust Beneficial Interest and a series of Notes in connection
with the entry into this Trust Agreement;

     WHEREAS, all things necessary to make this Trust Agreement a valid and
legally binding agreement of the Trustee and the Trust Beneficial Owner,
enforceable in accordance with its terms, have been done;

     WHEREAS, the parties intend to provide for, among other things, (i) the
issuance and sale of the Notes (pursuant to the Indenture, the Distribution
Agreement and the related Terms Agreement) and the Trust Beneficial Interest,
(ii) the use of the proceeds of the sale of the Notes and Trust Beneficial
Interest to acquire the Funding Agreement, the payment obligations of which
will be fully and unconditionally guaranteed by the Guarantee, and (iii) all
other actions deemed necessary or desirable in connection with the transactions
contemplated by this Trust Agreement; and

     WHEREAS, the parties hereto desire to incorporate by reference those
certain Standard Trust Terms, dated as of March 5, 2004, and attached to the
Omnibus Instrument as Exhibit A (the “Standard Trust Terms”) and all
capitalized terms not otherwise defined herein (including the recitals hereof)
shall have the meanings set forth in the Standard Trust Terms (the Standard
Trust Terms and this Trust Agreement, collectively, the “Trust Agreement”).

     NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the sufficiency of
which are hereby acknowledged, each party hereby agrees as follows:

ARTICLE 1

     Section 1.01 Incorporation by Reference. All terms, provisions and
agreements set forth in the Standard Trust Terms (except to the extent
expressly modified herein) are hereby incorporated herein by reference with the
same force and effect as though fully set forth herein. To the extent that the
terms set forth in Article 2 of this Trust Agreement are inconsistent with the
terms of the Standard Trust Terms, the terms set forth in Article 2 herein
shall apply.

A-1

 

ARTICLE 2

     Section 2.01 Name. The Trust created and governed by the Trust Agreement
shall be the trust specified in the Omnibus Instrument. The name of the Trust
shall be the name specified in the first paragraph of the Omnibus Instrument,
as such name may be modified from time to time by the Trustee following written
notice to the Trust Beneficial Owner.

     Section 2.02 Jurisdiction. The Trust is hereby organized in, and formed
under and pursuant to, the laws of the State of New York.

     Section 2.03 Initial Capital Contribution and Ownership. The Trust
Beneficial Owner has paid or has caused to be paid to, or to an account at the
direction of, the Trustee, on the date hereof, the sum of $15 (or, in the case
of Notes issued with original issue discount, such amount multiplied by the
issue price of the Notes). The Trustee hereby acknowledges receipt in trust
from the Trust Beneficial Owner, as of the date hereof, of the foregoing
contribution, which shall be used along with the proceeds from the sale of the
series of Notes to purchase the Funding Agreement. Upon the creation of the
Trust and the registration of the Trust Beneficial Interest in the Securities
Register (as defined in the Trust Agreement) by the Registrar in the name of
the Trust Beneficial Owner, the Trust Beneficial Owner shall be the sole
beneficial owner of the Trust.

     Section 2.04 Acknowledgment. The Trustee, on behalf of the Trust,
expressly acknowledges its duties and obligations set forth in the Standard
Trust Terms incorporated herein.

     Section 2.05 Additional Terms.

     None

     Section 2.06 Omnibus Instrument; Execution and Incorporation of Terms.

     The parties to the Trust Agreement will enter into the Trust Agreement by
executing the Omnibus Instrument.

     By executing the Omnibus Instrument, the Trustee and the Trust Beneficial
Owner hereby agree that the Trust Agreement will constitute a legal, valid and
binding agreement between the Trustee and the Trust Beneficial Owner.

     All terms relating to the Trust or the series of Notes not otherwise
included in the Trust Agreement will be as specified in the Omnibus Instrument
or Pricing Supplement, as indicated herein.

A-2

 

     Section 2.07 Governing Law. The Trust Agreement will be governed by, and
construed in accordance with, the laws of the State of New York.

     Section 2.08 Counterparts. The Trust Agreement, through the Omnibus
Instrument, may be executed in any number of counterparts, each of which
counterparts shall be deemed to be an original, and all of which counterparts
shall constitute but one and the same instrument.

[Remainder of Page Intentionally Left Blank.]

A-3

 

SECTION B

LICENSE AGREEMENT

     This LICENSE AGREEMENT (this “License Agreement”), dated as of the date of
the Pricing Supplement, is entered into by and between Principal Financial
Services, Inc., an Iowa corporation with its principal place of business at 711
High Street, Des Moines, Iowa 50392 (the “Licensor”), and the Principal Life
Income Fundings Trust specified in the Omnibus Instrument (the “Licensee”).

W I T N E S S E T H:

     WHEREAS, the Licensor is the owner of certain trademarks and service marks
and registrations and pending applications therefor, and may acquire additional
trademarks and service marks in the future, all as described more fully below;

     WHEREAS, the Licensee desires to use certain of the Licensor’s trademarks
and service marks in connection with the Licensee’s activities, as described
more fully below;

     WHEREAS, the Licensor and the Licensee wish to formalize the agreement
between them regarding the Licensee’s use of the Licensor’s marks; and

     WHEREAS, the parties hereto desire to incorporate by reference those
certain Standard License Agreement Terms, dated March 5, 2004, and attached to
the Omnibus Instrument as Exhibit B (the “Standard License Agreement Terms”)
and all capitalized terms not otherwise defined herein (including the recitals
hereof) shall have the meanings set forth in the Standard License Agreement
Terms (the Standard License Agreement Terms and this License Agreement,
collectively, the “License Agreement”).

     NOW, THEREFORE, in consideration of the mutual promises set forth herein
and for other good and valuable consideration, the sufficiency and receipt of
which are hereby acknowledged, each party hereby agrees as follows:

ARTICLE 1

     Section 1.01 Incorporation by Reference. All terms, provisions and
agreements set forth in the Standard License Agreement Terms (except to the
extent expressly modified herein) are hereby incorporated herein by reference
with the same force and effect as though fully set forth herein. To the extent
that the terms set forth in Article 2 of this License Agreement are
inconsistent with the terms of the Standard License Agreement Terms, the terms
set forth in Article 2 herein shall apply.

ARTICLE 2

     Section 2.01 Additional Terms.

     None

B-1

 

     Section 2.02 Omnibus Instrument; Execution and Incorporation of Terms.

     The parties to the License Agreement will enter into the License Agreement
by executing the Omnibus Instrument.

     By executing the Omnibus Instrument, the Licensor and the Licensee hereby
agree that the License Agreement will constitute a legal, valid and binding
agreement between the Licensor and the Licensee.

     All terms relating to the Trust or the Notes not otherwise included in the
License Agreement will be as specified in the Omnibus Instrument or Pricing
Supplement, as indicated herein.

     Section 2.03 Counterparts. The License Agreement, through the Omnibus
Instrument, may be executed in any number of counterparts, each of which
counterparts shall be deemed to be an original, and all of which counterparts
shall constitute but one and the same instrument.

[Remainder of Page Intentionally Left Blank.]

B-2

 

SECTION C

INDENTURE

     This INDENTURE (this “Indenture”) is entered into as of the Original Issue
Date by and between the Principal Life Income Fundings Trust specified in the
Omnibus Instrument (the “Trust”) and Citibank, N.A., as indenture trustee (the
“Indenture Trustee”).

     Citibank, N.A., in its capacity as indenture trustee, hereby accepts its
role as Registrar, Paying Agent, Transfer Agent and Calculation Agent
hereunder.

     References herein to “Indenture Trustee,” “Registrar,” “Transfer Agent,”
“Paying Agent” or “Calculation Agent” shall include the permitted successors
and assigns of any such entity from time to time.

W I T N E S S E T H:

     WHEREAS, the Trust has duly authorized the execution and delivery of this
Indenture to provide for the issuance of Notes;

     WHEREAS, all things necessary to make this Indenture a valid and legally
binding agreement of the Trust and the other parties to this Indenture,
enforceable in accordance with its terms, have been done, and the Trust
proposes to do all things necessary to make the Notes, when executed by the
Trust and authenticated and delivered pursuant hereto, valid and legally
binding obligations of the Trust as hereinafter provided; and

     WHEREAS, the parties hereto desire to incorporate by reference those
certain Standard Indenture Terms, dated as of March 5, 2004, and attached to
the Omnibus Instrument as Exhibit C (the “Standard Indenture Terms”) and all
capitalized terms not otherwise defined herein (including the recitals hereof)
shall have the meanings set forth in the Standard Indenture Terms (the Standard
Indenture Terms and this Indenture, collectively, the “Indenture”).

     NOW, THEREFORE, for and in consideration of the premises and the purchase
of the Notes by the Holders thereof, it is mutually covenanted and agreed by
each of the parties hereto as follows:

ARTICLE 1

     Section 1.01 Incorporation by Reference. All terms, provisions and
agreements set forth in the Standard Indenture Terms (except to the extent
expressly modified herein) are hereby incorporated herein by reference (with
the same force and effect as though fully set forth herein). To the extent
that the terms set forth in Article 2 of this Indenture are inconsistent with
the terms of the Standard Indenture Terms, the terms set forth in Article 2
herein shall apply.

C-1

 

ARTICLE 2

     Section 2.01 Agreement to be Bound. Each of the Trust, the Indenture
Trustee, the Registrar, the Transfer Agent, the Paying Agent and the
Calculation Agent hereby agrees to be bound by all of the terms, provisions and
agreements set forth in the Indenture, with respect to all matters contemplated
in the Indenture, including, without limitation, those relating to the issuance
of the below-referenced Notes.

     Section 2.02 Designation of the Trust, the Notes, the Funding Agreement
and the Guarantee. The Trust created by the Trust Agreement and referred to in
the Indenture is the Principal Life Income Fundings Trust specified in the
Omnibus Instrument. The Notes issued by the Trust and governed by the
Indenture shall be the Notes specified in the Pricing Supplement. The Funding
Agreement designated hereby is the Funding Agreement designated in the Pricing
Supplement dated as of the Original Issue Date between the Trust and Principal
Life. The Guarantee designated hereby is the Guarantee dated as of the Original
Issue Date of PFG.

     Section 2.03 Additional Terms.

     None

     Section 2.04 Omnibus Instrument; Execution and Incorporation of Terms.

     The parties to the Indenture will enter into the Indenture by executing
the Omnibus Instrument.

     By executing the Omnibus Instrument, the Indenture Trustee, the Registrar,
the Transfer Agent, the Paying Agent, the Calculation Agent and the Trust
hereby agree that the Indenture will constitute a legal, valid and binding
agreement between the Indenture Trustee, the Registrar, the Transfer Agent, the
Paying Agent, the Calculation Agent and the Trust.

     All terms relating to the Trust or the Notes not otherwise included in the
Indenture will be as specified in the Omnibus Instrument or Pricing Supplement,
as indicated herein.

     Section 2.05 Counterparts. The Indenture, through the Omnibus Instrument,
may be executed in any number of counterparts, each of which counterparts shall
be deemed to be an original, and all of which counterparts shall constitute one
and the same instrument.

[Remainder of Page Intentionally Left Blank.]

C-2

 

SECTION D

TERMS AGREEMENT

     This TERMS AGREEMENT (this “Terms Agreement”) is entered into as of the
Original Issue Date by and among Principal Life Insurance Company (“Principal
Life”), Principal Financial Group, Inc. (“PFG”), the Principal Life Income
Fundings Trust specified in the Omnibus Instrument (the “Trust”) and the
Purchasing Agent specified in the Pricing Supplement (the “Purchasing Agent”).

W I T N E S S E T H:

     WHEREAS, Principal Life, PFG and the agents named therein, including the
Purchasing Agent have entered into that certain Distribution Agreement dated
March 5, 2004 (the “Distribution Agreement”).

     NOW, THEREFORE, in consideration of the mutual promises set forth herein
and other good and valuable consideration, the sufficiency and receipt of which
are hereby acknowledged, each of the parties hereby agrees as follows:

ARTICLE 1

     Section 1.01 Incorporation by Reference. The provisions of the
Distribution Agreement and the related definitions (unless otherwise specified
herein) are incorporated by reference herein and shall be deemed to have the
same force and effect as if set forth in full herein.

ARTICLE 2

     Section 2.01 Addition of Trust as Party to Distribution Agreement.

     Pursuant to Section 1 of the Distribution Agreement, each of the
undersigned parties hereby acknowledges and agrees that the Trust, upon
execution hereof by the Trust and the other parties to the Distribution
Agreement (other than any other trusts organized in connection with the
Registration Statement that are party thereto as of the date hereof), shall
become a Trust for purposes of the Distribution Agreement in accordance with
the terms thereof, in respect of the Notes, with all the authority, rights,
powers, duties and obligations of a Trust under the Distribution Agreement.
The Trust confirms that any agreement, covenant, acknowledgment, representation
or warranty under the Distribution Agreement applicable to the Trust is made by
the Trust at the date hereof, unless another time or times are specified in the
Distribution Agreement, in which case such agreement, covenant, acknowledgment,
representation or warranty shall be deemed to be confirmed by the Trust at such
specified time or times.

     Section 2.02 Purchase of Notes as Principal.

     (a) Subject in all respects to the terms and conditions of the
Distribution Agreement, the Trust hereby agrees to sell to the Purchasing Agent
and the Purchasing Agent hereby agrees to purchase the Notes having the terms
specified in the Pricing Supplement relating to such Notes.

D-1

 

     (b) In connection with any purchase of Notes from the Trust by the
Purchasing Agent as principal, the parties agrees that the items specified on
Schedule I of the Omnibus Instrument will be delivered as of the Settlement
Date.

     Section 2.03 Termination. Upon the termination of this Terms Agreement
pursuant to Section 13(b) of the Distribution Agreement the undersigned parties
hereby agree to that the expenses reasonably incurred prior to or in connection
with such termination will be borne by Principal Life and PFG.

     Section 2.04 Governing Law. This Terms Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard
to the principles of conflicts of laws thereof.

     Section 2.05 Notices. For purposes of Section 14 of the Distribution
Agreement, the Trust’s communications details are as set forth in Section E of
the Omnibus Instrument.

     Section 2.06 Omnibus Instrument; Execution and Incorporation of Terms.

     The parties to this Terms Agreement will enter into this Terms Agreement
by executing the Omnibus Instrument.

     By executing the Omnibus Instrument, each party hereto agrees that this
Terms Agreement will constitute a legal, valid and binding agreement by and
among such parties.

     All terms relating to the Trust or the Notes not otherwise included in
this Terms Agreement will be as specified in the Omnibus Instrument or Pricing
Supplement, as indicated herein.

     Section 2.07 Counterparts. This Terms Agreement, through the Omnibus
Instrument, may be executed in any number of counterparts, each of which
counterparts shall be deemed to be an original, and all of which counterparts
shall constitute but one and the same instrument.

[Remainder of Page Intentionally Left Blank.]

D-2

 

SECTION E

COORDINATION AGREEMENT

     This COORDINATION AGREEMENT (this “Coordination Agreement”), dated as of
the date of the Pricing Supplement, is entered into by and among Principal Life
Insurance Company (“Principal Life”), Principal Financial Group, Inc. (“PFG”),
the Principal Life Income Fundings Trust specified in the Omnibus Instrument
(the “Trust”), Principal Financial Services, Inc. (“PFSI”), Bankers Trust
Company, N.A. and Citibank, N.A., as indenture trustee (the “Indenture
Trustee”).

W I T N E S S E T H

     WHEREAS, the Trust will enter into the Funding Agreement with Principal
Life dated as of the Original Issue Date specified in the Pricing Supplement;

     WHEREAS, PFG will issue a Guarantee to the Trust as of the Original Issue
Date specified in the Pricing Supplement, which will fully and unconditionally
guarantee the payment obligations of Principal Life under the Funding
Agreement;

     WHEREAS, the Purchasing Agent (as defined in the Distribution Agreement)
have agreed to sell the Notes in accordance with the Registration Statement;

     WHEREAS, the Trust intends to issue the Notes in accordance with the
Indenture, to collaterally assign to, and grant a security interest in, the
Funding Agreement and the Guarantee to and in favor of the Indenture Trustee in
accordance with the Indenture to secure payment of the Notes;

     WHEREAS, the Custodian will hold the Funding Agreement and the Guarantee
on behalf of the Indenture Trustee pursuant to the terms of the Custodial
Agreement; and

     WHEREAS, certain licensing arrangements between the Trust and PFSI will be
governed pursuant to the provisions of the License Agreement.

     NOW, THEREFORE, to give effect to the agreements and arrangements
established under the Terms Agreement included in the Omnibus Instrument, as
applicable, the Trust Agreement, the Indenture and the Notes, and in
consideration of the agreements and obligations set forth herein and for other
good and valuable consideration, the sufficiency of which are hereby
acknowledged, each party hereby agrees as follows:

ARTICLE 1

     Section 1.01 Delivery of the Funding Agreement and the Guarantee. The
Trust hereby authorizes the Custodian, on behalf of the Indenture Trustee, to
receive the Funding Agreement from Principal Life and the Guarantee from PFG
pursuant to the assignment of the Funding Agreement and Guarantee (the
“Assignment”), to be entered into on the Original Issue Date, included in the
closing instrument dated as of the Original Issue Date (the “Closing
Instrument”).

E-1

 

     Section 1.02 Issuance and Purchase of the Notes.

     (a) Delivery of the Funding Agreement and the Guarantee to the Custodian,
on behalf of the Indenture Trustee, pursuant to the Assignment or execution of
the cross receipt contained in the Closing Instrument shall be confirmation of
payment by the Trust for the Funding Agreement.

     (b) The Trust hereby directs the Indenture Trustee, upon receipt by the
Custodian, on behalf of the Indenture Trustee, of the Funding Agreement
pursuant to the Assignment and upon receipt by the Custodian, on behalf of the
Indenture Trustee, of the Guarantee, (i) to authenticate the certificates
representing the Notes (the “Notes Certificates”) in accordance with the
Indenture and (ii) to (A) deliver each relevant Notes Certificate to the
clearing system or systems identified in each such Notes Certificate, or to the
nominee of such clearing system, or the custodian thereof, for credit to such
accounts as the Purchasing Agent may direct, or (B) deliver each relevant Notes
Certificate to the purchasers thereof as identified by the Purchasing Agent.

ARTICLE 2

     Section 2.01 Directions Regarding Periodic Payments. As registered owner
of the Funding Agreement and the Guarantee as collateral securing payments on
the Notes, the Indenture Trustee will receive payments on the Funding Agreement
and the Guarantee on behalf of the Trust. The Trust hereby directs the
Indenture Trustee to use such funds to make payments on behalf of the Trust
pursuant to the Trust Agreement and the Indenture.

     Section 2.02 Maturity of the Funding Agreement. Upon the maturity of the
Funding Agreement and the return of funds thereunder, the Trust hereby directs
the Indenture Trustee to set aside from such funds an amount sufficient for the
repayment of the outstanding principal on the Notes and Trust Beneficial
Interest when due.

ARTICLE 3

     Section 3.01 Certificates. Principal Life hereby agrees to deliver an
Officer’s Certificate, a copy of which is attached hereto as Exhibit E, on a
quarterly basis to any rating agency currently rating the Program. The Trust
hereby agrees to deliver an Officer’s Certificate, a copy of which is attached
hereto as Exhibit F, on a quarterly basis to any rating agency currently rating
the Program.

     Section 3.02 Filings. Principal Life hereby covenants to file, or cause
to be filed, in a timely manner on behalf of the Trust all reports,
certifications or similar filings required under the Securities Exchange Act of
1934, as amended.

ARTICLE 4

     Section 4.01 No Additional Liability. Nothing in this Coordination
Agreement shall impose any liability or obligation on the part of any party to
this Coordination Agreement to make any payment or disbursement in addition to
any liability or obligation such party has under the Program Documents, except
to the extent that a party has actually received funds which it is obligated to
disburse pursuant to this Coordination Agreement.

E-2

 

     Section 4.02 No Conflict. This Coordination Agreement is intended to be
in furtherance of the agreements reflected in the documents related to the
Program Documents, and not in conflict. To the extent that a provision of this
Coordination Agreement conflicts with the provisions of one or more Program
Documents, the provisions of such Program Documents shall govern.

     Section 4.03 Governing Law. This Coordination Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
regard to the principles of conflicts of laws thereof.

     Section 4.04 Severability. If any provision in this Coordination
Agreement shall be invalid, illegal or unenforceable, such provision shall be
deemed severable from the remaining provisions of this Coordination Agreement
and shall in no way affect the validity or enforceability of such other
provisions of this Coordination Agreement.

     Section 4.05 Severability. If any provision in this Coordination
Agreement shall be invalid, illegal or unenforceable, such provision shall be
deemed severable from the remaining provisions of this Coordination Agreement
and shall in no way affect the validity or enforceability of such other
provisions of this Coordination Agreement.

     Section 4.06 Notices. All demands, notices and communications under this
Coordination Agreement shall be in writing and shall be deemed to have been
duly given upon receipt at the addresses set forth below:

	 	 	 
	To the Trust:
	 	 
	 
	

	 	Principal Life Income Fundings
Trust (followed by the number set forth in the Omnibus Instrument)
	

	 	c/o U.S. Bank Trust National Association
	

	 	100 Wall Street, 16th Floor
	

	 	New York, New York 10005
	

	 	Attention: Corporate Trust Administration
	

	 	Telephone: (212) 361-2458
	

	 	Facsimile: (212) 809-5459 and (212) 509-3384
	 
	To the Indenture Trustee:
	 	 
	 
	

	 	Citibank, N.A.
	

	 	Citibank Agency & Trust
	

	 	388 Greenwich Street, 14th Floor
	

	 	New York, New York 10013
	

	 	Attention: Nancy Forte
	

	 	Telephone: (212) 816-5685
	

	 	Facsimile: (212) 816-5527

E-3

 

	 	 	 
	To Principal Life:

	 
	

	 	Principal Life Insurance Company
	

	 	711 High Street
	

	 	Des Moines, Iowa 50392
	

	 	Attention: General Counsel
	

	 	Telephone: (515) 247-5111
	

	 	Facsimile: (515) 248-3011
	 
	 	 	With a copy to:

	 
	

	 	Principal Life Insurance Company
	

	 	711 High Street
	

	 	Des Moines, Iowa 50392
	

	 	Attention: Jim Fifield
	

	 	Telephone: (515) 248-9196
	

	 	Facsimile: (515) 235-9353
	 
	To PFG:

	 
	

	 	Principal Financial Group, Inc.
	

	 	711 High Street
	

	 	Des Moines, Iowa 50392
	

	 	Attention: General Counsel
	

	 	Telephone: (515) 247-5111
	

	 	Facsimile: (515) 248-3011
	 
	 	 	With a copy to:
	 	 
	 
	

	 	Principal Life Insurance Company
	

	 	711 High Street
	

	 	Des Moines, Iowa 50392
	

	 	Attention: Jim Fifield
	

	 	Telephone: (515) 248-9196
	

	 	Facsimile: (515) 235-9353
	 
	To Principal Financial
Services, Inc.:
	 	 
	 
	

	 	Principal Financial Services, Inc.
	

	 	711 High Street
	

	 	Des Moines, Iowa 50392
	

	 	Attention: General Counsel
	

	 	Telephone: (515) 247-5111
	

	 	Facsimile: (515) 248-3011

E-4

 

	 	 	 
	 	 	With a copy to:
	 	 
	 
	

	 	Principal Life Insurance Company
	

	 	711 High Street
	

	 	Des Moines, Iowa 50392
	

	 	Attention: Jim Fifield
	

	 	Telephone: (515) 248-9196
	

	 	Facsimile: (515) 235-9353
	 
	To Bankers Trust Company, N.A:
	 	 
	 
	

	 	Bankers Trust Company, N.A.
	

	 	665 Locust Street
	

	 	Des Moines, Iowa 50309-3702
	

	 	Attention: Angela C. Brick
	

	 	Telephone: (515) 245-2820
	

	 	Facsimile: (515) 247-2101

or at such other address as shall be designated by any such party in a written
notice to the other parties.

ARTICLE 5

     Section 5.01 Omnibus Instrument; Execution and Incorporation of Terms.

     The parties to this Coordination Agreement will enter into this
Coordination Agreement by executing the Omnibus Instrument.

     By executing the Omnibus Instrument, each party hereto agrees that this
Coordination Agreement will constitute a legal, valid and binding agreement by
and among the Trust, Principal Life, PFG, PFSI, the Custodian and the Indenture
Trustee.

     All terms relating to the Trust or the Notes not otherwise included in
this Coordination Agreement will be as specified in the Omnibus Instrument or
Pricing Supplement, as indicated herein.

     Section 5.02 Acknowledgment. Principal Life hereby acknowledges Section
2.10 of the Indenture and Section 6.1 of the Custodial Agreement. The Trust
hereby acknowledges and agrees to the terms of the Custodial Agreement.

     Section 5.03 Counterparts. This Coordination Agreement, through the
Omnibus Instrument, may be executed in any number of counterparts, each of
which counterparts shall be deemed to be an original, and all of which
counterparts shall constitute but one and the same instrument.

     Section 5.04 Capitalized Terms. All capitalized terms used herein and not
otherwise defined in this Coordination Agreement will have the meanings set
forth in the Indenture.

[Remainder of Page Intentionally Left Blank.]

E-5

 

SECTION F

MISCELLANEOUS AND EXECUTION PAGES

      This Omnibus Instrument may be executed by each of the parties hereto in any number of
counterparts, and by each of the parties hereto on separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.

      Each signatory, by its execution hereof, does hereby become a party to each of the agreements
or indenture identified for such party as of the date specified in such agreements or indenture.

      IN WITNESS WHEREOF, the undersigned have executed this Omnibus Instrument with respect to the
Notes as of the date first written above.

	 	 	 	 	 
	 	PRINCIPAL LIFE INSURANCE COMPANY (in executing below
agrees and becomes a party to (i) the Terms Agreement
set forth in Section D herein and (ii) the Coordination
Agreement set forth in Section E herein)

 	 
	 	By:  	/s/ Christopher P. Freese
 	 
	 	 	Name:  	Christopher P. Freese 	 
	 	 	Title:  	Officer 	 
	 
	 	PRINCIPAL FINANCIAL GROUP, INC. (in executing below
agrees and becomes a party to (i) the Terms Agreement
set forth in Section D herein and (ii) the Coordination
Agreement set forth in Section E herein)

 	 
	 	By:  	/s/ Elizabeth D. Swanson
 	 
	 	 	Name:  	Elizabeth D. Swanson 	 
	 	 	Title:  	Counsel 	 
	 
	 	PRINCIPAL FINANCIAL SERVICES, INC. (in executing below
agrees and becomes a party to (i) the License Agreement
set forth in Section B herein and (ii) the Coordination
Agreement set forth in Section E herein)

 	 
	 	By:  	/s/ Elizabeth D. Swanson
 	 
	 	 	Name:  	Elizabeth D. Swanson 	 
	 	 	Title:  	 	 
	 

[Execution Page 1 of 3]

 

 

	 	 	 	 	 
	 	THE PRINCIPAL LIFE INCOME FUNDINGS TRUST DESIGNATED IN
THIS OMNIBUS INSTRUMENT (in executing below agrees and
becomes a party to (i) the License Agreement set forth
in Section B herein, (ii) the Indenture set forth in
Section C herein, (iii) the Terms Agreement set forth
in Section D herein and (iv) the Coordination Agreement
set forth in Section E herein)

By: U.S. Bank Trust National Association, not in its
individual capacity but solely in its capacity as
trustee of the Trust

 	 
	 	By:  	/s/ Thomas E. Tabor
 	 
	 	 	Name:  	Thomas E. Tabor 	 
	 	 	Title:  	Vice President 	 
	 
	 	U.S. BANK TRUST NATIONAL ASSOCIATION (in executing
below agrees and becomes a party to the Trust Agreement
set forth in Section A herein), as Trustee

 	 
	 	By:  	/s/ Thomas E. Tabor
 	 
	 	 	Name:  	Thomas E. Tabor 	 
	 	 	Title:  	Vice President 	 
	 
	 	GSS HOLDINGS II, INC. (in executing below agrees and
becomes a party to the Trust Agreement set forth in
Section A herein), as Trust Beneficial Owner

 	 
	 	By:  	/s/ Andrew L. Stidd
 	 
	 	 	Name:  	Andrew L. Stidd 	 
	 	 	Title:  	President 	 
	 
	 	CITIBANK, N.A. (in executing below agrees and becomes a
party to (i) the Indenture set forth in Section C
herein, as Indenture Trustee, Registrar, Transfer
Agent, Paying Agent and Calculation Agent and (ii) the
Coordination Agreement set forth in Section E herein),
as Indenture Trustee, Registrar, Transfer Agent, Paying
Agent and Calculation Agent

 	 
	 	By:  	/s/ Nancy Forte
 	 
	 	 	Name:  	Nancy Forte 	 
	 	 	Title:  	Assistant Vice President 	 
	 

[Execution Page 2 of 3]

 

 

	 	 	 	 	 
	 	BANKERS TRUST COMPANY, N.A. (in executing below agrees
and becomes a party to the Coordination Agreement set
forth in Section E herein)

 	 
	 	By:  	/s/ Patty Ashbaugh
 	 
	 	 	Name:  	Patty Ashbaugh 	 
	 	 	Title:  	Vice President 	 
	 
	 	MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (in
executing below agrees and becomes a party to the Terms
Agreement set forth in Section D herein)

 	 
	 	By:  	/s/ Diane Kenna
 	 
	 	 	Name:  	Diane Kenna 	 
	 	 	Title:  	Authorized Signatory 	 
	 

[Execution Page 3 of 3]

 

 

INDEX OF EXHIBITS AND SCHEDULES TO THE OMNIBUS INSTRUMENT

	 	 	 
	Exhibit A

	 	Standard Trust Terms – Incorporated herein by reference to Exhibit
4.6 to Principal Life Insurance Company’s and Principal Financial
Group, Inc.’s Registration Statement on Form S-3 (Registration
Nos. 333-110499 and 333-110499-01).
	 
	 	 
	Exhibit B

	 	Standard License Agreement Terms – Incorporated herein by
reference to Exhibit 99.1 to Principal Life Insurance Company’s
Current Report on Form 8-K, filed on March 29, 2004.
	 
	 	 
	Exhibit C

	 	Standard Indenture Terms – Incorporated herein by reference to
Exhibit 4.1 to Principal Life Insurance Company’s and Principal
Financial Group, Inc.’s Registration Statement on Form S-3
(Registration Nos. 333-110499 and 333-110499-01).
	 
	 	 
	Exhibit D

	 	Pricing Supplement – Incorporated herein by reference to the
Pricing Supplement with respect to Principal Life Income Fundings
Trust 2005-30, filed on April 4, 2005, with the Securities and
Exchange Commission pursuant to Rule 424(b)(5) under the
Securities Act of 1933, as amended.
	 
	 	 
	Exhibit E

	 	Principal Life Insurance Company Officer’s Certificate
	 
	 	 
	Exhibit F

	 	Principal Life Income Fundings Trusts Trustee Officer’s Certificate
	 
	 	 
	Schedule I

	 	Terms Agreement Specifications

 

 

EXHIBIT E

Principal Life Insurance Company

Officer’s Certificate

     The undersigned, an officer of Principal Life Insurance Company, an Iowa
stock life insurance company (“Principal Life”), does hereby certify to
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies,
Inc., in such capacity and on behalf of Principal Life, to the knowledge of the
undersigned and after reasonable inquiry, that:

	 	 	 
	1.

	 	each of the representations and warranties of Principal Life
contained in each Expense and Indemnity Agreement entered into in
connection with the Registration Statement (defined below), and each
Funding Agreement issued in connection with the Program (the
“Specified Agreements”) (other than any representation or warranty
expressly made as of a date prior to the date hereof) are true and
correct on and as of the date hereof, with the same effect as though
such representation or warranty had been made on and as of the date
hereof;
	 
	2.

	 	no default under any of the Specified Agreements and no event
or any condition which, with notice or lapse of time or both, would
become a default, has occurred and is continuing as of the date
hereof;
	 
	3.

	 	Principal Life has performed and complied with, respectively,
in all material respects, all of the agreements, covenants,
obligations and conditions applicable to Principal Life required by
the Specified Agreements to be performed or complied with by
Principal Life on or before the date hereof;
	 
	4.

	 	the Registration Statement filed on Form S-3 (File Nos.
333-110499 and 333-110499-01) (the “Registration Statement”) by
Principal Life and Principal Financial Group, Inc. has been declared
effective by the Securities and Exchange Commission (the
“Commission”) under the Securities Act of 1933, as amended (the
“Act”) and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been commenced by or are pending before or contemplated
by the Commission;
	 
	5.

	 	all filings, if any, required by Rule 424 and Rule 430A under
the Act have been made in a timely manner;
	 
	6.

	 	since
     , the Trusts organized in connection with the
program contemplated by the Registration Statement have issued the
following series of Notes:
	 
	

	 	[List each series of Notes.] [(collectively, the “Designated Notes”)]; and
	 
	7.

	 	the Funding Agreements issued in connection with the Designated
Notes have been executed and delivered by Principal Life in accordance
with the terms and conditions of the Program Documents.

E-1

 

          Capitalized terms used herein and not otherwise defined herein shall have the meanings set
forth in the Standard Indenture Terms attached as Exhibit 4.1 to the
Registration Statement.

     IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
the • day of •, 200•.

	 	 	 
	

	[Name], [in his/her] capacity as an
authorized officer of Principal Life
	 
	 	By:
	 
	 	 	

	

	 	Name:
	

	 	Title:

	 	 	 	 	 

E-2

 

EXHIBIT F

Principal Life Income Fundings Trusts

Trustee Officer’s Certificate

     U.S. Bank Trust National Association, not in its individual capacity but
solely in its capacity as trustee acting on behalf of each common law trust
organized under the laws of the State of New York (in such capacity, the
“Trustee,” and each such common law trust being referred to herein as, a
“Trust”) in connection with the program contemplated by Registration Statement
Nos. 333-110499 and 333-110499-01 filed on Form S-3 (the “Registration
Statement”) by Principal Life Insurance Company and Principal Financial Group,
Inc. with the Securities and Exchange Commission, does hereby certify to
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies,
Inc., in such capacity and on behalf of each Trust, to the knowledge of the
Trustee, that:

	 	 	 
	1.

	 	each of the representations and warranties of each Trust
contained in the Notes issued in connection with the Program, each
Indenture entered into in connection with the Registration Statement
and the Expense and Indemnity Agreement concerning the Trusts (the
“Specified Agreements”) (other than any representation or warranty
expressly made as of a date prior to the date hereof) are true and
correct on and as of the date hereof, with the same effect as though
such representation or warranty had been made on and as of the date
hereof;
	 
	2.

	 	no default under any of the Specified Agreements and no event
or any condition which, with notice or lapse of time or both, would
become a default, has occurred and is continuing as of the date
hereof;
	 
	3.

	 	each Trust has performed and complied with, respectively, in
all material respects, all of the agreements, covenants, obligations
and conditions applicable to such Trust required by the Specified
Agreements to be performed or complied with by such Trust on or
before the date hereof;
	 
	4.

	 	the Notes issued in connection with the Program, have been
issued, in all material respects, in accordance with the terms and
conditions of the Program Documents; and
	 
	5.

	 	each Funding Agreement has been executed and delivered by the
related Trust in accordance with the terms and conditions of the
Program Documents.

     Capitalized terms used herein and not otherwise defined herein shall have
the meanings set forth in the Standard Indenture Terms attached as Exhibit 4.1
to the Registration Statement. In no event shall U.S. Bank Trust National
Association in its personal corporate capacity have any liability for any of
the certifications or statements contained in this Trustee Officer’s
Certificate, such liability being solely that of each Trust.

F-1

 

     IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
the • day of •, 200•.

	 	 	 
	

	 	U.S. Bank Trust National Association, not
in its capacity but solely in its capacity
as Trustee acting on behalf of each Trust
	 
	 	By:
	 
	 	 	

	

	 	Name:
	

	 	Title:

F-2

 

SCHEDULE I

Terms Agreement Specifications

     In connection with Section 3(a)(iv) of the Distribution Agreement, the
Program under which the Notes are issued is rated Aa2 by Moody’s Investors
Service, Inc. (“Moody’s”) and AA by Standard & Poor’s Rating Services, a
division of The McGraw-Hill Companies, Inc. (“S&P”). Principal Life and PFG
expect that the Notes will be rated Aa2 by Moody’s. The Company’s financial
strength rating is Aa2 by Moody’s and AA by S&P.

     In accordance with Section 2.02(b) of the Terms Agreement and in
connection with the purchase of Notes from the Trust by the Purchasing Agent as
principal, the following items will be delivered on the Settlement Date:

	 	•	 	Opinion of Sidley Austin Brown & Wood LLP regarding the
enforceability of the Guarantee and the Notes.

     All capitalized terms used herein and not otherwise defined herein will
have the meanings set forth in the Distribution Agreement.

I-1

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