<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
HAWTHORNE FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE> 2
[HAWTHORNE FINANCIAL CORPORATION LOGO]
HAWTHORNE FINANCIAL CORPORATION
2381 Rosecrans Avenue
El Segundo, CA 90245
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 17, 1998
---------------
You are cordially invited to attend the Annual Meeting of Stockholders
of Hawthorne Financial Corporation (the "Company"), which will be held at the
Manhattan Beach Marriott Hotel at 1400 Parkview Avenue, Manhattan Beach,
California, on June 17, 1998, at 10:00 a.m., local time, to consider and act on
the following matters:
1. The election of six directors to serve until the next Annual Meeting
of Stockholders and until their successors are elected and qualified;
2. The approval of proposed amendments to the 1994 Stock Option Plan
which would, among other things, fix the number of shares of Common
Stock available for issuance under the Plan at 800,000 shares; and
3. Such other business as may properly come before the Annual Meeting and
any adjournments thereof.
The Board of Directors has fixed the close of business on May 1, 1998
as the record date for determining Stockholders of Hawthorne Financial
Corporation entitled to notice of and to vote at the Annual Meeting or any
postponement or adjournment thereof.
WE HOPE YOU WILL ATTEND THE ANNUAL MEETING IN PERSON IF IT IS
CONVENIENT FOR YOU TO DO SO. IF YOU ARE UNABLE TO ATTEND, IT IS IMPORTANT THAT
YOU SIGN, DATE AND RETURN PROMPTLY THE ACCOMPANYING PROXY CARD IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE THAT A QUORUM IS PRESENT FOR THE TRANSACTION OF
BUSINESS AT THE ANNUAL MEETING.
By Order of the Board of Directors
James D. Sage
Senior Vice President
and Corporate Secretary
May 8, 1998
<PAGE> 3
HAWTHORNE FINANCIAL CORPORATION
2381 Rosecrans Avenue
El Segundo, CA 90245
---------------
PROXY STATEMENT
---------------
SOLICITATION OF PROXIES
This Proxy Statement is being sent to you in connection with the
solicitation of proxies by the Board of Directors (the "Board") of Hawthorne
Financial Corporation (the "Company") to be voted at the Annual Meeting of
Stockholders of the Company to be held on June 17, 1998, and at any postponement
or adjournment thereof (the "Annual Meeting"). The approximate date of mailing
of this Proxy Statement is May 8, 1998.
The expenses of this proxy solicitation will be paid by the Company.
The original mail solicitation may be supplemented by telephone, telegram,
facsimile transmission or personal solicitation. The Company will also request
record holders of shares beneficially owned by others to send proxy material to
the beneficial owners of such shares and will reimburse such holders for their
reasonable expenses incurred in doing so. In addition, the Company has retained
ChaseMellon Shareholder Services to assist in the solicitation of proxies for
an estimated fee of $5,500.
VOTING
The Board has selected May 1, 1998 as the record date (the "Record
Date") for the determination of Stockholders entitled to notice of and to vote
at the Annual Meeting. As of that date, there were outstanding 3,164,096
shares of common stock, par value $0.01 per share ("Common Stock"), the only
outstanding class of voting securities of the Company. Holders of shares of
Common Stock are entitled to cast one vote for each share held as of the Record
Date. In addition, each Stockholder may cumulate his or her votes in the
election of directors and give any nominee a number of votes equal to the number
of directors to be elected multiplied by the number of his or her shares, or to
distribute his or her votes among as many nominees as he or she sees fit.
All proxies which are properly completed, signed and delivered to the
Company prior to the Annual Meeting, and not revoked, will be voted in
accordance with the instructions indicated thereon by the Stockholders giving
such proxies. Each proxy received without specific directions indicated thereon
will be voted FOR the election of the nominees named in this Proxy Statement, or
as many of such nominees as may be elected as directors of the Company and FOR
the approval of the proposed amendments to the 1994 Stock Option Plan. The
proxies solicited hereby confer authority on the proxy holders named therein to
cumulate votes in the election of directors among the nominees for whom such
proxies may be voted in such manner as they deem appropriate to elect the
maximum possible number of such nominees. Each proxy delivered may be revoked by
the Stockholder who executed it at any time before it is voted by filing written
notice of revocation, which may consist of a later dated proxy, with the
Secretary of the Company prior to the vote on the matters described herein or by
attending the meeting and voting in person.
A majority of the outstanding shares of Common Stock, represented in
person or by proxy, will constitute a quorum for the transaction of business.
Abstentions and broker non-votes will be counted for purposes of determining the
presence or absence of a quorum. "Broker non-votes" are shares held by brokers
or nominees which are present in person or represented by proxy, but which are
not voted on a particular matter because instructions have not been received
from the beneficial owner. Under applicable law, the effect of broker non-votes
on a particular matter depends on whether the matter is one as to which the
broker or nominee has discretionary voting authority. The effect of broker
non-votes on the specific items to be brought before the Annual Meeting is
discussed under each item.
The Board does not know of any business to be presented for action at
the meeting other than that stated in this Proxy Statement. If any other
business is properly presented at the Annual Meeting and may properly be voted
upon, the proxies solicited hereby will be voted on such matters in accordance
with the best judgment of the proxy holders named therein.
2
<PAGE> 4
ELECTION OF DIRECTORS
A board of six directors will be elected at the Annual Meeting to
serve for the ensuing year and until their successors are duly elected and
qualified.
The following table sets forth certain information concerning the
nominees of the Board, each of whom is currently a director of the Company. Each
nominee has indicated his or her willingness to serve if elected. If any nominee
is unable to serve, an event the Board does not anticipate, the persons named in
the accompanying proxy will vote for such replacement nominees as the Board
shall select. Each of the directors of the Company is also a director of
Hawthorne Savings, F.S.B. (the "Bank"), a wholly owned subsidiary of the
Company.
NOMINEES FOR ELECTION AS DIRECTORS
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF
DIRECTOR STOCK BENEFICIALLY OUTSTANDING COMMON
NAME AGE SINCE OWNED (1) STOCK
- ------------------------------------ ---- -------- ------------------ ------------------
<S> <C> <C> <C> <C>
Marilyn Garton Amato 58 1988 11,962 *
Scott A. Braly (2) 44 1993 202,626 6.1%
Timothy R. Chrisman (3) 51 1994 16,693 *
Anthony W. Liberati (4) 65 1996 -- --
Harry F. Radcliffe (4)(5) 47 1996 70,258 2.2%
Howard E. Ritt (6) 73 1993 1,500 *
</TABLE>
- -----------------
* Less than 1%.
(1) As of May 1, 1998.
(2) Includes (i) 19,161 shares directly owned, (ii) 148,000 shares
acquirable by stock options exercisable within 60 days of May 1, 1998,
(iii) 34,411 shares held of record by the Hawthorne Savings, F.S.B.
Employee Stock Ownership Plan (the "ESOP") which have not been
allocated to participants' accounts, and with respect to which Mr.
Braly, as one of the trustees of the ESOP, shares voting power and
(iv) 1,054 shares held by the 401(k) Plan which have been allocated to
Mr. Braly. Does not include 62,485 and 34,856 shares held of record by
the ESOP and the 401(k) Plan, respectively, which have been allocated
to participants' accounts and which are voted by the trustees at the
direction of the participants or, if no direction is given, by the
trustees in their discretion. Does not include 105,600 shares
acquirable upon the exercise of Warrants or 84,000 shares acquirable
upon the exercise of stock options, neither of which are exercisable
within 60 days of May 1, 1998.
(3) Does not include 6,000 shares acquirable upon the exercise of Warrants
which are not exercisable within 60 days of May 1, 1998.
(4) In December 1995, the Company sold $27.0 million of "investment units"
in a private placement offering. Pursuant to an agreement entered into
in connection with the offering, each of the three largest purchasers
of investment units is entitled to recommend one person for nomination
by the Board of Directors for election as a director. Pursuant to
these rights, Fort Pitt Fund, L.P. recommended Harry F. Radcliffe and
Lee M. Bass recommended Anthony W. Liberati. Also pursuant to its
rights, one of the three largest purchasers of investment units, Value
Partners Ltd., previously recommended Michael Hall, who served as a
director of the Company and the Bank from April 1996 to April 1998.
Mr. Hall resigned from both Boards in April 1998 for personal reasons.
Value Partners retains its right to recommend a director. The right of
each of these purchasers to nominate a director terminates at the time
the purchaser no longer owns Warrants to purchase 220,000 shares of
Common Stock and/or shares of Common Stock acquired upon the exercise
of Warrants.
(5) Represents shares owned by the Fort Pitt Fund, L.P. Mr. Radcliffe is
the President and Chief Executive Officer of Fort Pitt Capital
Management Corp., the General Partner of Fort Pitt Fund, L.P. Does not
3
<PAGE> 5
include 387,200 shares acquirable upon the exercise of Warrants which
are not exercisable within 60 days of May 1, 1998.
(6) Represents shares owned by the Ritt Family Trust of which Mr. Ritt is
a co-trustee.
BIOGRAPHICAL INFORMATION
Marilyn Garton Amato has owned and operated for more than the past
five years an interior design firm, The Finishing Touch, that specializes in
both commercial and residential interior design. She has also been active in
many civic and charitable groups over the years and is the daughter of Dr. Cecil
O. Garton, a past director and Chairman of the Board of Directors of the Company
and a director of the Bank.
Scott A. Braly has served as President and Chief Executive Officer of
the Company and the Bank since July 1993. Mr. Braly served as a director of, and
a consultant to, Citadel Holding Corporation, a savings and loan holding
company, and its subsidiary company, Fidelity Federal Bank from April 1992 to
July 1993.
Timothy R. Chrisman has been the President and owner of Chrisman &
Company, Inc., an executive search firm specializing in the placement of senior
executives in the financial services industry for more than the past five years.
Mr. Chrisman has previously served as a director of other savings institutions.
In February 1996, Mr. Chrisman was named Chairman of the Board of the Company
and the Bank.
Anthony W. Liberati has been the Chairman of the Board of Directors of
Miami Computer Supply Corporation, a distributor of computer supplies, since May
1996. Mr. Liberati retired in 1995 from the Edward J. DeBartolo Corporation,
Youngstown, Ohio where he was the Chief Operating Officer. Prior to his
appointment as Chief Operating Officer, he was the DeBartolo Corporation's Chief
Financial Officer. Mr. Liberati is a former member of the Board of Directors of
DeBartolo Realty Corporation, Youngstown, Ohio, a real estate investment trust.
Harry F. Radcliffe has been President and Chief Executive Officer of
Fort Pitt Capital Management Corp. since April 1997. From December 1993 through
March 1997, Mr. Radcliffe was the President, Chief Executive Officer and a
Director of First Home Bancorp, Inc., Pittsburgh, Pennsylvania, and was
President and Chief Executive Officer of its subsidiary First Home Savings Bank,
F.S.B., from December 1993 and a Director from May 1993 until March 1997. He
previously served as a Director and President of FirstSouth Savings Association
from April 1989 to December 1993, and as its Chief Executive Officer from June
1989 to December 1993 and Director, President and Chief Executive Officer from
May 1990 to December 1993. He also served as Director of Home Bancorp, Inc. and
Home Savings Bank, F.S.B., Norfolk, Virginia from October 1994 to September
1995. Mr. Radcliffe is a Director of Essex Savings Bank, F.S.B., Virginia Beach,
Virginia, Miami Computer Supply Corporation, First Home Bancorp and First
Fidelity Bancorp.
Howard E. Ritt retired in 1990 as an Executive Vice President of Sanwa
Bank.
4
<PAGE> 6
BOARD MEETINGS; BOARD COMMITTEES; COMPENSATION OF DIRECTORS
The Board of Directors held 12 meetings in 1997. All directors
attended at least 75% of the number of meetings held by the Board or any
committee of the Board on which he or she served.
The Boards of Directors of the Company and the Bank have established
and delegated certain powers to various committees, including (i) a Compensation
Committee, which acts on behalf of both the Boards of Directors of the Company
and the Bank, (ii) an Audit Committee of the Bank, (iii) a Credit Committee of
the Bank and (iv) a Capital Committee of the Company.
The Compensation Committee consists solely of non-management directors
of the Company and the Bank. During 1997, the Committee included Robert Troost
(Chairman), Charles Jacobs, and Messrs. Liberati and Ritt. Messrs. Troost and
Jacobs each resigned from the Boards of the Company and the Bank in February
1998 and Mr. Liberati was appointed Chairman of the Committee. The authority of
the Compensation Committee is described under "Executive Compensation -- Report
on Executive Compensation." The Compensation Committee met 12 times in 1997.
The Audit Committee consists solely of non-management directors of the
Bank. During 1997, the Committee included Messrs. Ritt (Chairman), Chrisman and
Hall. Mr. Hall resigned from the Boards of the Company and the Bank in April
1998. The Audit Committee maintains delegated responsibility to (i) provide
oversight to the Bank's internal audit group, including approving the annual
internal audit plan and monitoring individual audits and the reporting thereon
by the internal audit group, and (ii) meet periodically with the Company's and
the Bank's independent public accountants, including reviewing the results of
the annual audit and any findings of the accountants in connection therewith.
The Audit Committee met 11 times in 1997.
During 1997, the Credit Committee consisted of Messrs. Hall
(Chairman), Braly, Liberati and Radcliffe. Mr. Hall resigned from the Boards of
the Company and the Bank in April 1998. The Credit Committee maintains delegated
responsibility to (i) provide oversight with respect to the Bank's lending
activities, including the Bank's lending organization, resourcing and scope of
activities, and (ii) evaluate loans, or groups of loans, prior to their funding.
The Credit Committee met 11 times in 1997.
The Capital Committee was formed in January 1997 and consists of
Messrs. Radcliffe (Co-Chairman), Liberati (Co-Chairman), Braly and Chrisman. The
Capital Committee is an ad hoc committee which met periodically, as necessary,
during 1997. The Capital Committee has delegated responsibility to (i)
periodically assess the Company's and the Bank's capital structure and to make
recommendations to the full Board with respect thereto, and (ii) select
professional advisors to the Company with respect to individual capital-related
transactions, including investment banking firms and securities counsel.
Each non-employee director receives an annual retainer fee of $15,000
and an additional fee of $1,000 for each Board meeting of the Company attended.
In addition to the $1,000 fee per meeting received by each director, the
Chairman of the Board receives an additional fee of $1,500 per meeting. The
Chairmen of the Audit, Credit and Compensation Committees and the Co-Chairmen of
the Capital Committee also receive $500 per meeting attended. All of the
directors of the Company are also directors of the Bank and receive only the
above described fees for their combined service.
5
<PAGE> 7
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth as of May 1, 1998 certain information
regarding the ownership of the Company's Common Stock by (i) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of the Common Stock, (ii) each executive officer named in the Summary
Compensation Table in this Proxy Statement and (iii) all of the Company's
executive officers and directors as a group. Except as may be indicated in the
footnotes to the table and subject to applicable community property laws, each
of such persons has the sole voting and investment power with respect to the
shares owned. Beneficial ownership has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under this Rule, certain shares may be deemed to be beneficially owned by
more than one person (such as where persons share voting power or investment
power). In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which information is provided; in
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual voting power at
any particular date.
<TABLE>
<CAPTION>
SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY PERCENT OF
OWNED CLASS
- ------------------------------------------------------------------ ------------ ----------
<S> <C> <C>
Scott A. Braly (1)(2) 202,626 6.1%
Dimensional Fund Advisors, Inc. (3) 178,600 5.6%
David L. Hardin, Jr. (2)(4) 71,602 2.2%
Norman A. Morales (2)(5) 59,409 1.9%
Thomas Hylton (6) 653 *
Michael Cain (7) 234 *
All directors and executive officers as a group (10 persons)(2)(8) 366,115 10.9%
</TABLE>
- -----------------
* Less than 1%.
(1) Includes (i) 19,161 shares directly owned, (ii) 148,000 shares
acquirable by stock options exercisable within 60 days of May 1, 1998
and (iii) 1,054 shares held by the 401(k) Plan which have been
allocated to Mr. Braly. Does not include 105,600 shares acquirable
upon the exercise of Warrants or 84,000 shares acquirable upon the
exercise of stock options, neither of which are exercisable within 60
days of May 1, 1998.
(2) Shares beneficially owned by Messrs. Braly, Hardin and Morales (i)
include 34,411 shares held of record by the ESOP which have not been
allocated to participants' accounts, and with respect to which Messrs.
Braly, Hardin and Morales, as trustees of the ESOP, have voting power,
and (ii) do not include 62,485 and 34,856 shares held of record by the
ESOP and the 401(k) Plan, respectively, which have been allocated to
participants' accounts and which are voted by the trustees at the
direction of the participants or, if no direction is given, by the
trustees in their discretion.
(3) This information is based on an amendment to the Schedule 13G filed
for the year ended December 31, 1997 by Dimensional Fund Advisors,
Inc., a Delaware investment advisor registered under the Investment
Advisers Act of 1940 ("Dimensional") that is deemed to have beneficial
ownership of 178,600 shares of Common Stock as of December 31, 1997.
The Schedule 13G indicates that these shares are held in portfolios of
DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans.
Dimensional serves as investment manager for each of these entities.
Dimensional disclaims beneficial ownership of all such shares, and has
a business address at 1299 Ocean Avenue, 11th Floor, Santa Monica, CA
90401.
6
<PAGE> 8
(4) Includes (i) 3,193 shares directly owned, (ii) 33,000 shares
acquirable by stock options exercisable within 60 days of May 1, 1998
and (iii) 998 shares held by the 401(k) Plan which have been allocated
to Mr. Hardin. Does not include 13,200 shares acquirable upon the
exercise of Warrants or 24,000 shares acquirable upon the exercise of
stock options, neither of which are exercisable within 60 days of May
1, 1998.
(5) Includes (i) 24,000 shares directly owned and (ii) 998 shares held by
the 401(k) Plan which have been allocated to Mr. Morales. Does not
include 16,000 shares acquirable upon the exercise of Warrants or
49,000 shares acquirable upon the exercise of stock options, neither
of which are exercisable within 60 days of May 1, 1998.
(6) Represents shares held by the 401(k) Plan which have been allocated to
Mr. Hylton.
(7) Represents shares held by the 401(k) Plan which have been allocated to
Mr. Cain. Does not include 25,000 shares acquirable upon the exercise
of stock options which are not exercisable within 60 days of
May 1, 1998.
(8) Includes (i) 181,000 shares acquirable by stock options exercisable
within 60 days of May 1, 1998, (ii) 3,937 shares held by the 401(k)
Plan which have been allocated to the executive officers and (iii)
34,411 shares held of record by the ESOP with respect to which Messrs.
Braly, Hardin and Morales, as trustees of the ESOP, have voting power.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief
Executive Officer and the four other highest paid executive officers (the "Named
Executive Officers") of the Company and the Bank during 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARDS
------------------------- -------------
SECURITIES
UNDERLYING ALL OTHER
OPTIONS/SARS COMPENSATION
NAME AND POSITION YEAR SALARY BONUS (1) (#) (5)
- ----------------------- ---- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Scott A. Braly 1997 $ 337,500 $ -- 20,000 $ 4,800
Chief Executive 1996 250,000 -- -- 4,917
Officer and President 1995 250,000 159,479 212,000 --
Norman A. Morales 1997 $ 180,000 $ -- 25,000 $ 4,800
Executive Vice 1996 175,000 -- -- 3,938
President 1995 137,500 72,000 72,000 50,000 (6)
David L. Hardin, Jr 1997 $ 175,000 $ 30,000 -- $ 4,800
Executive Vice 1996 175,000 -- -- 3,938
President 1995 160,000 74,500 72,000 --
Thomas Hylton 1997 $ 120,000 $ 151,597 (2) -- $ 4,800
Senior Vice President 1996 120,000 60,000 -- 1,800
1995 105,000 47,138 (3) 26,000(4) --
Michael Cain 1997 $ 108,333 $ 35,000 25,000 $ 52,375 (7)
Senior Vice President 1996 40,128 -- -- --
1995 -- -- -- --
</TABLE>
7
<PAGE> 9
- -------------------------
(1) Amounts were earned in the years indicated. Bonuses were paid in the
year earned or in the first quarter of the following year.
(2) Pursuant to an agreement among the Bank, on the one hand, and Mr.
Hylton and certain other parties, on the other hand, entered into in
March 1996, the Bank retained Mr. Hylton and the other parties for the
purpose of preparing for development, and developing, a 40-unit
condominium project on land previously acquired by the Bank through
foreclosure. Under the development agreement, the Bank provided the
land and all funds necessary to complete the construction and sale of
the project, and Mr. Hylton and the other parties to the agreement
maintained responsibility for all construction and marketing
activities. In exchange for onsite management of the project, Mr.
Hylton received a bonus for 1997 which included $74,847 representing
his share of the net sale proceeds from this development.
(3) Includes $5,500 representing the fair market value of 1,000 shares
issued to Mr. Hylton in October 1995.
(4) During 1995, Mr. Hylton was granted options to purchase 26,000 shares
of Common Stock which were forfeited in their entirety in 1996.
(5) Except as otherwise disclosed, All Other Compensation in 1997 and 1996
is comprised solely of 401(k) matching contributions made by the
Company.
(6) Mr. Morales was hired in February 1995. Upon his hiring, Mr. Morales
received a sign-on bonus of $50,000.
(7) Mr. Cain was hired in July 1996. In 1997, Mr. Cain received a
relocation bonus of $50,000 which was paid in 1998.
RETIREMENT PLANS
The Company has an ESOP which was amended in 1996 to include a 401(k)
Plan. Employees of the Company who were either (i) employed by the Company on
March 1, 1996, or (ii) at least 21 years of age, employed by the Company for six
months and worked at least 500 hours are eligible to participate in the
Company's ESOP. For the period from April 1, 1996 (the effective date on which
the ESOP was amended) through March 31, 1998, the Company provided a matching
contribution, in the form of shares owned by the ESOP but previously unallocated
to participants, equal to 100% of the dollar amount each participant contributes
into the ESOP, up to a maximum of 3% of the participant's compensation for each
calendar quarter. During 1997, 15,989 shares of the Company's Common Stock were
allocated to participants in the 401(k) Plan.
The Company had a retirement income plan ("Retirement Plan") that
previously covered substantially all employees over 21 years of age who met
minimum service requirements. The Company terminated the Retirement Plan and
completed liquidation of its assets during 1997.
STOCK OPTION PLANS
The Company maintains two stock option plans (the "Option Plans"), (i)
the 1994 Stock Option Plan, which was approved by the Company's stockholders in
May 1994, and (ii) the 1995 Stock Option Plan, which was adopted by the Board in
December 1995. Under the Option Plans, the Company may grant to officers and
other employees options to purchase up to an aggregate of approximately
1,050,000 shares of Common Stock.
1994 Stock Option Plan. In May 1994, the Company's stockholders
approved a stock option plan for employees (including employees who are
directors) (the "1994 Stock Option Plan"). In April 1998, the Board approved
several amendments to the 1994 Stock Option Plan which are being submitted to
the stockholders for approval. See "Proposal to Amend 1994 Stock Option Plan."
Currently, under the 1994 Stock Option Plan, a number of shares of Common Stock
equal to the greater of 455,000 or 17.5% of the outstanding Common Stock may be
issued pursuant to options granted. One of the proposed amendments is to
increase to a fixed number of 800,000
8
<PAGE> 10
the shares which could be issued under the 1994 Stock Option Plan and to
eliminate the provision which sets the number of shares to be issued at 17.5% of
the outstanding Common Stock. As of May 1, 1998, 89,700 shares had been issued
under the 1994 Stock Option Plan and options to purchase 405,300 shares were
outstanding. The exercise price of any option granted under the 1994 Stock
Option Plan may not be less than the fair market value of the Common Stock at
the grant date, and the term of any option may not exceed ten years from such
date. See "Proposal to Amend 1994 Stock Option Plan" for proposed amendments to
the 1994 Stock Option Plan.
1995 Stock Option Plan. In December 1995, the Board adopted a stock
option plan for employees other than executive officers and directors subject to
Section 16(b) of the Exchange Act (the "1995 Stock Option Plan"). In March 1998,
the Board amended the 1995 Stock Option Plan to increase from 300,000 to 500,000
the number of shares of Common Stock available for issuance under the 1995 Stock
Option Plan. As of May 1, 1998, 44,000 shares had been issued under the 1995
Stock Option Plan and options to purchase 235,000 shares were outstanding. The
exercise price of any option granted under the 1995 Stock Option Plan may not be
less than the fair market value of the Common Stock at the grant date, and the
term of any option may not exceed ten years from the grant date.
The table below sets forth certain information regarding the Company's
Option Plans.
<TABLE>
<CAPTION>
Total Option Total Option Total Option Total Options Net Option
Capacity at Capacity at Capacity Under Awarded, net of Capacity
12/31/95 05/01/98 Proposed Plan Forfeitures Available
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1994 Stock Option Plan 495,000 553,717 800,000 495,000 305,000
1995 Stock Option Plan 300,000 500,000 500,000 279,000 221,000
--------- --------- --------- --------- ---------
Total 795,000 1,053,717 1,300,000 774,000 526,000
========= ========= ========= ========= =========
</TABLE>
OPTION GRANTS LAST FISCAL YEAR
The table below sets forth certain information regarding stock options
granted during 1997 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
RATE OF STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED OPTION TERM(1)
UNDERLYING OPTION TO EMPLOYEES IN EXERCISE OR EXPIRATION --------------------------
NAME GRANTED(2) FISCAL YEAR(3) BASE PRICE(4) DATE 5% 10%
- --------------------- ----------------- --------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Scott A. Braly 20,000 16.7% $ 10.50 6/1/05 $100,266 $240,154
Norman A. Morales 25,000 20.8% $ 18.02 11/19/05 $172,075 $412,149
Michael Cain 25,000 20.8% $ 18.02 11/19/05 $172,075 $412,149
</TABLE>
- -----------------------
(1) The potential realizable value is based on the assumption that the Common
Stock appreciates at the annual rate shown (compounded annually) from the
date of grant until the expiration of the option term. These amounts are
calculated pursuant to applicable requirements of the Securities and
Exchange Commission and do not represent a forecast of the future
appreciation of the Common Stock.
(2) The option grants for Messrs. Braly and Morales set forth on this chart
vest in annual installments of one-third of the options granted, with the
first installment vesting on June 1, 1998 and November 19, 1998,
respectively. The option grant for Mr. Cain vests 100% on November 19,
2000.
9
<PAGE> 11
(3) Options covering an aggregate of 120,000 shares were granted to eligible
persons during 1997.
(4) The exercise price and the tax withholding obligations related to such
exercise may be paid by delivery of already owned shares, subject to
certain conditions.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive
Officers, certain information regarding options exercised in 1997 and options
held at December 31, 1997:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS/SARS AT FISCAL
ACQUIRED VALUE OPTIONS/SARS AT FISCAL YEAR-END ($)
ON EXERCISE REALIZED YEAR-END (#) EXERCISABLE/UNEXERCISABLE
NAME (#) ($) EXERCISABLE/UNEXERCISABLE (1)
- ----------------------- ----------- --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Scott A. Braly -- -- 141,334/90,666 $2,187,144/1,286,056
David L. Hardin, Jr 10,000 76,500 38,000/24,000 588,050/371,400
Norman A. Morales 24,000 138,150 24,000/49,000 371,400/424,025
Michael Cain -- -- 0/25,000 0/52,625
</TABLE>
- -----------------------
(1) Based on the closing sale price of $ 20.125 for the Common Stock on
December 31, 1997, less the option exercise price.
REPORT ON EXECUTIVE COMPENSATION
The Boards of Directors of the Company and the Bank, principally as
delegated to the Compensation Committee (the "Compensation Committee"), (i) have
oversight responsibility for the Company's and Bank's compensation policies,
benefits and practices, (ii) review and approve or disapprove management's
recommendations concerning the compensation of senior officers (i.e., those with
the title of Senior Vice President and above), all stock option grants and the
payment of bonuses (in the aggregate), and (iii) have oversight responsibility
for management planning and succession. The Compensation Committee has from time
to time retained an independent compensation consultant to assist it in the
exercise of its responsibilities where it has deemed such retention appropriate,
including the development of compensation plans and the propriety of the
Company's and the Bank's compensation policies and practices with those of
comparable companies.
The directors and management have structured the Bank's compensation
programs to provide the Bank's principal managers with (1) a competitive annual
salary and benefits, (2) the potential to earn cash bonuses based upon periodic,
measurable performance, and (3) the potential to receive one or more grants of
stock options under the Company's Option Plans, the annual vesting with respect
to which is generally dependent upon each option holder's performance, as
determined by the Chief Executive Officer and the directors. The directors and
management believe that this combination of programs provides reasonable
incentive to the Bank's principal managers to meet or exceed the Bank's annual
or multi-year financial and operational goals, and reasonably aligns the
interests of such managers with those of the Company's Stockholders.
Commencing with the recapitalization of the Company and the Bank in
late 1995, the Bank's principal managers have received, in addition to their
annual salaries, long-term incentive compensation in the form of stock option
grants from one of the Company's Option Plans. Including option grants made in
late 1995, a total of 852,000 stock options have been granted, of which 640,300
remained outstanding at May 1, 1998. In consideration of these option grants,
option holders received no material cash bonuses during 1996 and 1997. With
respect to all other
10
<PAGE> 12
employees, the Bank maintains a performance-based, cash bonus program, under
which individuals may earn annual cash bonuses based upon individual, group and
Bank-wide performance.
Commencing in 1998, the Bank modified its cash bonus program to
include all employees of the Company and the Bank, except for Mr. Braly, who is
not entitled to a cash bonus. See "Compensation of the Chief Executive Officer."
The inclusion of all employees (except for Mr. Braly) in the Bank's cash bonus
program reflects the Company's recent and planned emphasis on the origination of
substantial (relative to the Bank's asset size) volumes of new loan commitments
and growth in core deposit accounts, and competitive factors which have required
the Bank to provide cash bonuses, based upon performance, to newly-hired senior
managers. The Bank's cash bonus program remains grounded in individual, group
and Bank-wide performance measures.
Compensation of the Chief Executive Officer
Mr. Braly was hired by the Company and the Bank in July 1993. In
November 1995, the directors granted stock options to purchase 212,000 shares of
Common Stock to Mr. Braly at the then market price of the Company's common
stock. In June 1997, the directors granted additional stock options to purchase
20,000 shares of Common Stock to Mr. Braly at the then market price of the
Common Stock. These option grants were made in recognition of Mr. Braly's
contribution to the successful recapitalization of the Company and the Bank, and
the Bank's post-recapitalization performance. In June 1997, the Board increased
Mr. Braly's annual salary to $400,000 from $250,000, the salary which had been
in effect since the commencement of Mr. Braly's employment in July 1993. In
connection with the recapitalization of the Company and the Bank in December
1995, Mr. Braly purchased $1.2 million of investment units. Mr. Braly's
purchase, which was made from his personal funds and on the same terms as were
applicable to the other purchasers, was a condition imposed by the other
purchasers of investment units. During the period from Mr. Braly's hiring
through the year ended December 31, 1995, Mr. Braly was entitled to, and
received, cash bonuses tied to his and the Company's performance, as determined
by the Board of Directors. For the years ended December 31, 1996 and 1997, Mr.
Braly was not entitled to, and did not receive, cash bonuses.
At his request, Mr. Braly is not a party to an employment contract
with either the Company or the Bank. Further, Mr. Braly has no arrangement with
the Company or the Bank to receive additional compensation, beyond that
attributable to the accelerated vesting or exercise of stock options under the
terms applicable to all option holders under the Company's Option Plans, in the
event that the Company or the Bank is sold or in the event of a change of
control. Accordingly, Mr. Braly serves at the will of the Board of Directors.
There are currently no plans to formalize, via an employment agreement or
otherwise, Mr. Braly's continued, long-term employment with the Company and the
Bank.
COMPENSATION COMMITTEE
Anthony W. Liberati, Chairman
Howard E. Ritt
11
<PAGE> 13
PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change
in the cumulative total stockholder return on the Company's Common Stock against
the cumulative total return of the Nasdaq market index and the SNL Securities
Western Thrift index for publicly traded savings institution holding companies
for the period beginning January 1, 1993 and ended December 31, 1997.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG HAWTHORNE FINANCIAL
CORPORATION, NASDAQ MARKET INDEX AND SNL SECURITIES WESTERN THRIFT INDEX
<TABLE>
<CAPTION>
PERIOD ENDING
----------------------------------------------------------
INDEX 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Hawthorne Financial Corporation 100.00 39.71 23.36 23.36 37.96 94.03
NASDAQ - Total US 100.00 114.80 112.21 158.70 195.19 239.53
SNL Western Thrift Index 100.00 104.66 88.98 148.52 189.35 312.69
</TABLE>
12
<PAGE> 14
PROPOSAL TO AMEND 1994 STOCK OPTION PLAN
GENERAL
In April 1998, the Board unanimously approved several amendments (the
"Amendments") to the 1994 Stock Option Plan. The Amendments are being submitted
to the Stockholders for approval. A copy of the 1994 Stock Option Plan, marked
to show the Amendments, is attached as Exhibit A to this Proxy Statement.
DESCRIPTION OF THE 1994 STOCK OPTION PLAN
The following is a description of the 1994 Stock Option Plan, as
presently in effect. Under the 1994 Stock Option Plan, a number of shares of
Common Stock equal to the greater of 455,000 shares or 17.5% of the outstanding
Common Stock may be issued pursuant to options granted to employees (including
employees who are directors). The options may only be options which do not
qualify as incentive stock options, as defined in Section 422 of the Internal
Revenue Code of 1986 (the "Code") (these options are referred to as
"non-statutory options"). No option may be granted under the 1994 Stock Option
Plan more than ten years after the earlier of the date the 1994 Stock Option
Plan was adopted by the Board or the date the 1994 Stock Option Plan was
approved by the stockholders.
The 1994 Stock Option Plan is administered by a committee (the
"Committee") appointed by the Board , consisting of two or more "disinterested
persons" as such term is defined for purposes of Rule 16b-3 of the Exchange Act.
The Committee has the authority to select optionees, designate the number of
shares to be covered by each option and, subject to certain restrictions,
specify other terms of the options, including conditions to the options. All
employees, including employee directors, are eligible to participate in the 1994
Stock Option Plan. As of May 1, 1998, seven employees were participating in the
1994 Stock Option Plan.
The exercise price of shares covered by an option may not be less than
100% of the fair market value (as defined in the 1994 Stock Option Plan) of the
Common Stock on the date of grant. The exercise price may be paid in cash or
such other form of payment as may be permitted by the Committee, including,
without limitation, loans made to the participant by the Company for the purpose
of exercising the options. The term of any option may not exceed ten years, and
unless otherwise provided, will expire upon termination of employment.
The 1994 Stock Option Plan also provides that options will become
immediately exercisable upon a Terminating Event. A Terminating Event is deemed
to occur upon the effective date of a dissolution or liquidation of the Company,
or a reorganization, merger or consolidation of the Company with one or more
other companies in which the Company is not the surviving corporation, or the
transfer of substantially all of the assets or shares of the Company to another
corporation. In addition, upon a "change in control" of the Company, options
will become immediately exercisable. A "change in control" for these purposes is
defined to include (i) the acquisition by any person of 20% or more of the
voting power of the Company's outstanding securities, (ii) a change in the
composition of the Board during any one-year period so that persons who were
directors at the beginning of the period do not continue to comprise a majority
of the members of the Board, or (iii) any other event, transaction or series of
events as a result of which any person may be deemed to "acquire control" of the
Company under the regulations of the Office of Thrift Supervision.
The 1994 Stock Option Plan provides that the Board may amend, suspend
or terminate the 1994 Stock Option Plan or any award outstanding under the 1994
Stock Option Plan without Stockholder approval except for amendments (i) to
increase the number of shares reserved under the 1994 Stock Option Plan, (ii)
which require Stockholder approval by law, (iii) which alter or impair the
rights of participants with respect to awards previously made under the 1994
Stock Option Plan or (iv) which would disqualify the 1994 Stock Option Plan from
the exemption provided by Rule 16b-3 of the Exchange Act.
As of May 1, 1998, 89,700 shares had been issued under the 1994 Stock
Option Plan and options to purchase 405,300 shares were outstanding. The closing
sales price of the Common Stock on April 29, 1998 was $20-1/8.
13
<PAGE> 15
FEDERAL INCOME TAX CONSEQUENCES OF STOCK OPTIONS
The following is a general discussion of the principal tax
considerations for non-statutory stock options and is based upon the tax laws
and regulations of the United States existing as of the date hereof, all of
which are subject to modification at any time. The 1994 Stock Option Plan does
not constitute a qualified retirement plan under Section 401(a) of the Code
(which generally covers trusts forming part of a stock bonus, pension or
profit-sharing plan funded by the employer and/or employee contributions which
are designed to provide retirement benefits to participants under certain
circumstances) and is not subject to the Employee Retirement Income Security Act
of 1974 (the pension reform law which regulates most types of privately funded
pension, profit sharing and other employee benefit plans).
Consequences to Employees. No income is recognized by a grantee of a
non-statutory stock option as a result of the grant. In general, at the time
shares of Common Stock are issued to a holder pursuant to exercise of a
non-statutory stock option, the holder will recognize ordinary income equal to
the excess of the fair market value of the shares on the date of exercise over
the exercise price.
A holder will recognize gain or loss on the subsequent sale of Common
Stock acquired upon exercise of a non-statutory stock option in an amount equal
to the difference between the sales price and the tax basis of the Common Stock,
which will include the price paid plus the amount included in the holder's
income by reason of the exercise of the non-statutory stock options. Provided
the shares of Common Stock are held as a capital asset, any gain or loss
resulting from a subsequent sale will be short-term, mid-term or long-term
capital gain or loss depending upon the length of time the shares have been
held.
Consequences to the Company. Generally, the Company will be entitled
to a deduction for federal income tax purposes in the year and in the same
amount as the holder is considered to have realized ordinary income in
connection with the exercise of the non-statutory stock option.
DESCRIPTION OF PROPOSED AMENDMENTS TO THE 1994 STOCK OPTION PLAN
The following is a summary of the proposed Amendments. The summary
should be read in conjunction with, and is qualified in its entirety by
reference to, the complete text of the 1994 Stock Option Plan.
Eligibility. The Amendments would expand the list of persons eligible
to receive options to include non-employee directors. The Company presently has
no plan pursuant to which non-employee directors may receive options or Common
Stock. The Board believes that non-employee directors are an integral part of
the administration of the Company and it would be appropriate for them to
receive options to share in the growth of the Company and to more closely align
their interests with the Stockholders' interests.
Administration. The 1994 Stock Option Plan is currently administered
by the Committee. This was advantageous to the Company under pre-existing rules
of the Securities and Exchange Commission under the Exchange Act; as a result of
amendments to those rules, those advantages may be realized regardless of
whether the 1994 Stock Option Plan is administered by a committee of
"disinterested persons". In order to provide the Board with more flexibility
with respect to administration of the 1994 Stock Option Plan, the proposed
Amendments would allow the 1994 Stock Option Plan to be administered by the
Board, or, at the discretion of the Board, a committee which would not
necessarily have to include only disinterested persons.
Number of Shares. The 1994 Stock Option Plan currently provides that
the maximum aggregate number of shares of Common Stock which may be issued is
the greater of 455,000 shares or 17.5% of the number of shares of Common Stock
outstanding. At May 1, 1998, the maximum number of shares was 553,717. As of
that date, there were only 58,717 shares available for future grants under the
1994 Stock Option Plan. The Board believes that stock options are an effective
means of attracting and retaining individuals as officers, employees and
directors who can make material contributions to the Company. Accordingly, the
Board believes that an increase in the number of shares which may be issued
pursuant to the 1994 Stock Option Plan is in the best interests of the Company
and its Stockholders. Accordingly, the Amendments would increase the number of
shares which could be issued under the 1994 Stock Option Plan to 800,000 shares.
In addition, the Board has proposed to eliminate the provision which
14
<PAGE> 16
permits more shares to be issued as the number of outstanding shares increases,
in order to give the Stockholders more certainty as to the number of shares
which may be issued under the 1994 Stock Option Plan.
In considering the Amendments, Stockholders should also consider that
the Company has a 1995 Stock Option Plan, described under "Stock Option Plans"
above, pursuant to which an aggregate of 500,000 shares of Common Stock may be
issued upon exercise of options granted to employees other than executive
officers and directors subject to Section 16(b) of the Exchange Act.
Change in Control. The 1994 Stock Option Plan provides for
acceleration of vesting of options upon a "change in control." The Amendments
would modify the definition of "change in control" to include only the
acquisition by any person or group of 50% or more of the outstanding voting
securities of the Company. The Board believes that the definition of "change in
control" was too broad and is therefore proposing a narrower definition.
Furthermore, the 1994 Stock Option Plan provides for acceleration of
vesting of options automatically upon any "change in control." Under the
proposed Amendments, acceleration of vesting would not occur if the Board
approves or consents to the transaction which results in a change in control.
Duration of 1994 Stock Option Plan. The Amendments would extend the
last date upon which options may be granted under the 1994 Stock Option Plan to
December 31, 2007.
REQUIRED VOTE
The approval of the Amendments require the affirmative vote of a
majority of the shares of the Common Stock present or represented and voting on
this matter at the Annual Meeting. Broker non-votes with respect to this matter
will be treated as neither a vote "for" nor a vote "against" the matter,
although they will be counted in determining if a quorum is present. However,
abstentions will be considered in determining the number of votes required to
attain a majority of the shares present or represented at the meeting and
entitled to vote. Accordingly, an abstention from voting by a Stockholder
present in person or by proxy at the meeting has the same effect as a vote
"against" the matter because it represents a share present or represented at the
meeting and entitled to vote, thereby increasing the number of affirmative votes
required to approve the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
THE APPROVAL OF THE AMENDMENTS TO THE 1994 STOCK OPTION PLAN.
15
<PAGE> 17
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Deloitte & Touche LLP, certified public
accountants, to audit the consolidated financial statements of the Company for
the year ending December 31, 1998. A representative of Deloitte & Touche LLP is
expected to be present at the Annual Meeting and is expected to be available to
respond to appropriate questions. The representative will be given the
opportunity to make a statement if the representative wishes to do so.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of copies of reports filed by reporting
persons of the Company pursuant to Section 16(a) of the Exchange Act, or written
representations from reporting persons that no Form 5 filing was required for
such person, the Company believes that all filings required to be made by
reporting persons of the Company were timely made in accordance with
requirements of the Exchange Act, except that Messrs. Braly and Radcliffe filed
Form 5s late, and Mr. Hardin filed a Form 4 late.
STOCKHOLDERS' PROPOSALS FOR 1999 ANNUAL MEETING
All proposals of Stockholders intended to be presented for
consideration at the next annual meeting of stockholders must be received by the
Company no later than January 8, 1999 for inclusion in the Company's proxy
statement and form of proxy relating to the next annual meeting.
THE COMPANY WILL PROVIDE EACH STOCKHOLDER FREE OF CHARGE, UPON WRITTEN
REQUEST TO THE SECRETARY OF THE COMPANY AT THE COMPANY'S PRINCIPAL EXECUTIVE
OFFICES, AN ADDITIONAL COPY OF THE COMPANY'S ANNUAL REPORT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K, WITHOUT EXHIBITS. THE COMPANY
WILL FURNISH A COPY OF THE EXHIBITS TO ITS FORM 10-K TO ANY STOCKHOLDERS UPON
REQUEST AND PAYMENT OF A COPYING CHARGE OF ($.25) PER PAGE. REQUESTS SHOULD BE
ADDRESSED TO:
Hawthorne Financial Corporation
Attn: Investor Relations
2381 Rosecrans Avenue
El Segundo, CA 90245
By Order of the Board of Directors
James D. Sage
Senior Vice President
and Corporate Secretary
May 8, 1998
16
<PAGE> 18
EXHIBIT A
HAWTHORNE FINANCIAL CORPORATION
1994 STOCK OPTION PLAN
ARTICLE I
Definitions
"Administrator" shall mean the Board or, at the discretion of the
Board, the Committee.
"Affiliate" means any "subsidiary corporation" or "parent
corporation," as such terms are defined in Section 424 of the Code, of
the Company.
"Agreement" means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying
the terms and conditions of an award of an Option granted to such
Participant.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, and any amendments
thereto.
"Committee" means a committee which may from time to time be appointed
by the Board to administer the Plan, whose members shall serve at the
pleasure of the Board.
"Common Stock" means the Common Stock, par value $.01 per share, of
the Company.
"Company" means Hawthorne Financial Corporation.
"Date of Grant" means the date upon which an Option is awarded.
"Exchange Act" means the Securities Exchange Act of 1934, and any
amendments thereto.
"Fair Market Value", unless otherwise determined by the Administrator
in good faith, means with respect to a share of Common Stock as of any
given date (i) the weighted average of the closing sale prices of a
share of Common
1
<PAGE> 19
Stock as reported on the national securities exchange or transaction
reporting system on or through which actual sale prices are regularly
reported for the Common Stock as reported for the ten most recent
trading days preceding the Date of Grant; or (ii) if the Common Stock
is not traded on a national securities exchange or transaction
reporting system on or through which actual sale prices are reported,
the weighted average of the mean of the closing bid and asked prices
of a share of Common Stock, in either case as reported for the ten
most recent trading days preceding the date the determination is made.
"Option" means a stock option granted under this Plan.
"Participant" means a person who holds an outstanding Option.
"Plan" means the Hawthorne Financial Corporation 1994 Stock Option
Plan set forth herein.
"SEC" means the Securities and Exchange Commission or any successor
agency.
ARTICLE II
Purpose
The Plan is intended to assist the Company and its Affiliates in
recruiting and retaining directors and employees with ability and
initiative by enabling directors and employees to participate in the
Company's future success and to associate their interests with those
of the Company and its shareholders. The Plan is intended to permit
the grant of Options not qualifying under Section 422 of the Code
("nonqualified stock options"). The proceeds received by the Company
from the sale of Common Stock pursuant to the Plan shall be used for
general corporate purposes.
ARTICLE III
Administration
The Plan shall be administered by the Administrator. The Administrator
shall have authority to grant Options upon such terms (not
inconsistent with the provisions of the Plan) as the Administrator may
consider appropriate. Such terms may include conditions (in addition
to those contained in the Plan) on the exercisability of all or any
part of an Option. Notwithstanding any such conditions, the
Administrator may, in its
2
<PAGE> 20
discretion, accelerate the time at which any Option may be exercised.
In addition, the Administrator shall have complete authority to
interpret all provisions of the Plan; to prescribe the form of
Agreements; to adopt, amend, and rescind rules and regulations
pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of the
Plan. The express grant in the Plan of any specific power to the
Administrator shall not be construed as limiting any power or
authority of the Administrator. Any decision made, or action taken, by
the Administrator in connection with the administration of the Plan
shall be final. No member of the Administrator shall be liable for any
act done in good faith with respect to the Plan or any Agreement or
Option award. All expenses of administering the Plan shall be borne by
the Company.
The Administrator, in its discretion, may delegate to one or more
officers of the Company all or part of the Administrator's authority
and duties with respect to Participants who are not subject to the
reporting and other provisions of Section 16 of the Exchange Act, as
in effect from time to time. In the event of such delegation, and as
to matters encompassed by the delegation, references in the Plan to
the Administrator shall be interpreted as a reference to the
Administrator's delegate or delegates. The Administrator may revoke or
amend the terms of a delegation at any time but such action shall not
invalidate any prior actions of the Administrator's delegate or
delegates that were consistent with the terms of the Plan.
ARTICLE IV
Eligibility
Any director or employee of the Company or Affiliate (including any
corporation that becomes an Affiliate after the adoption of the Plan)
is eligible to participate in the Plan . A director or employee may be
granted one or more Options.
ARTICLE V
Stock Subject to Plan
5.01 Source of Shares - Upon the exercise of any Option, the Company may
deliver to the Participant (or the Participant's broker if the
Participant so directs), authorized but unissued shares of Common
Stock or issued shares of Common Stock that have been reacquired by
the Company.
3
<PAGE> 21
5.02 Maximum Number of Shares - The maximum aggregate number of shares of
Common Stock with respect to which Options may be granted under the
Plan and which may be issued pursuant to the exercise thereof shall be
800,000 shares, subject to increases and adjustments as provided in
this Article V and Article VIII.
5.03 Forfeitures, etc. - Shares related to Options that expire unexercised
or are forfeited, surrendered, terminated, canceled or settled in cash
in lieu of the issuance of shares of Common Stock shall again be
available for additional awards under the Plan, except for shares of
Common Stock withheld or surrendered to satisfy tax withholding
obligations.
ARTICLE VI
Stock Options
6.01 Grants - The Administrator will designate individuals to whom Options
are to be granted and will specify the number of shares of Common
Stock subject to each Option and the additional terms thereof. All
Options granted under the Plan shall be evidenced by Agreements which
shall be subject to the applicable provisions of the Plan and to such
other provisions as the Administrator may adopt. The Administrator may
provide that Options granted under the Plan shall become exercisable
in one or more installments or upon such other conditions as it shall
deem appropriate.
6.02 Option Price - The exercise price per share for Common Stock purchased
on the exercise of an Option shall not be less than the Fair Market
Value of a share of Common Stock on the Date of Grant.
6.03 Maximum Option Period - The maximum period in which an Option may be
exercised is ten years from the Date of Grant. The terms of any Option
my provide that it is -- exercisable for a period less than such
maximum period.
6.04 Maximum Number Shares - No Participant may receive more than 800,000
shares under the Plan.
ARTICLE VII
Exercise of Options
7.01 Exercise - An Option may be exercised, as to all or any portion of the
shares of Common Stock as to which the Option is then exercisable, by
giving written notice to the Secretary of the Company prior to the
date on which the Option expires; provided, however, that an Option
may only be exercised with respect to whole shares of Common Stock.
Such notice shall specify the number of shares of Common Stock to be
purchased and shall be accompanied by payment of the Option Price for
4
<PAGE> 22
such shares (and, if required by the Administrator, any applicable
withholding taxes) in such form and manner as the Administrator may
from time to time approve.
7.02 Installment Payment - Section 7.01 to the contrary notwithstanding, if
an Agreement so provides, the Company shall lend the Participant such
amount as shall be permitted under applicable law, up to 100% of the
exercise price of the shares to be acquired on exercise of the Option
to which the Agreement relates, for the purpose of enabling the
Participant to exercise the Option, with the principal amount of such
loan to be repayable in not more than three annual installments;
provided, that the terms of any such loan, including the amount and
maturity thereof, shall conform to any applicable requirements of the
regulations of the Board of Governors of the Federal Reserve System
relating to margin credit and to any other applicable laws and
regulations.
The Participant shall pay interest on the unpaid principal balance of
any such loan at the minimum rate necessary to avoid imputed interest
or original issue discount under the Code. All shares of Common Stock
acquired with cash borrowed from the Company shall be pledged to the
Company as security for the repayment thereof. In the discretion of
the Administrator, shares of Common Stock may be released from such
pledge proportionately as payments of the note (together with
interest) are made, provided that the release of such shares complies
with the then applicable regulations of the Federal Reserve System
relating to securities credit transactions. While shares are so
pledged, and so long as there has been no default in the installment
payments, such shares shall remain registered in the name of the
Participant, and the Participant shall have the right to vote such
shares and to receive all dividends thereon.
7.03 Termination of Employment - In the event that the terms of any Option
provide that it may be exercised only during employment or within a
specified period of time after termination of employment, the
Administrator may decide to what extent leaves of absence for
governmental or military service, illness, temporary disability, or
other reasons shall not be deemed interruptions of continuous
employment.
Unless provided otherwise by the Administrator, a Participant's
Options shall expire on the Participant's termination of employment,
subject to the following:
(a) If the Participant terminates employment with the Company
and its Affiliates on account of retirement at or after
attaining age 55, the Participant's Options may be
exercised, to the extent then vested, for a period of three
months following such termination, but not later than the
Options' expiration date.
(c) If the Participant terminates employment with the Company
and its Affiliates by reason of death, any Options which the
Participant was entitled to exercise on the date of his
death shall be exercisable by the person or persons to whom
that right passes by will or by the laws of descent and
distribution for a period of twelve months after the date of
death, but not later than the Option's expiration date.
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<PAGE> 23
7.04 Tax Withholding - The Company shall have the right to deduct or
otherwise effect a withholding of any amount required by federal or
state tax laws to be withheld with respect to the grant, exercise or
surrender of an Option, including any withholding required in order
for the Company to obtain a tax deduction as a consequence of such
grant, exercise or surrender. Such amounts may be deducted or
withheld, at the Company's discretion, from shares issuable or amounts
payable in respect of an Option or from any other payments, including
regular compensation, to be made by the Company to the Participant. If
Common Stock is used to satisfy any such tax withholding requirement,
such Common Stock shall be valued based on its Fair Market Value as of
the date it is withheld.
ARTICLE VIII
Adjustment Upon Change In Common Stock
The maximum number of shares of Common Stock which are allocated for
issuance under the Plan shall be proportionately adjusted, and the
terms of outstanding Options shall be adjusted, as the Administrator
shall determine to be equitably required to preserve the value of
benefits awarded or to be awarded to Participants under the Plan, in
the event that (a) the Company (i) effects one or more stock
dividends, stock split-ups, subdivisions or consolidations of shares
or (ii) engages in a transaction to which Section 424 of the Code
applies or (b) the Company issues shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or
property, or for labor or services, either upon direct sale or upon
exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or merger, reorganization or obligations of the
Company convertible into such shares or other securities or (c) there
occurs any other event which, in the judgment of the Administrator,
necessitates such action. Any determination made under this Article
VIII by the Administrator shall be final and conclusive.
The Administrator may grant Options, in connection with a transaction
described in the first paragraph of this Article VIII. Notwithstanding
any provision of the Plan (other than the limitation of Article V),
the terms of such substituted Option grants shall be as the
Administrator, in its discretion, determines is appropriate.
ARTICLE IX
Adjustment Upon Change in Control
Upon the effective date of the dissolution or liquidation of the
Company, or a reorganization, merger or consolidation of the Company
with one or more other entities in which the Company is not the
surviving entity, or of the transfer of substantially all of the
assets or shares of the Company (any such transaction being referred
to herein as a
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<PAGE> 24
"Terminating Event"), the Plan and any Option granted hereunder shall
terminate unless provision is made in writing in connection with such
Terminating Event for the continuance of the Plan and for the
assumption of Options theretofore granted hereunder, or the
substitution for such Options of new options issued by the successor
corporation, or the parent corporation thereof, with such appropriate
adjustments as may be determined or approved by the Administrator or
its successor, in which event the Plan and the Options theretofore
granted or substituted therefor, shall continue in the manner and
under the terms so provided. Upon the occurrence of a Terminating
Event in which provision is not made for the continuance of the Plan
and for the assumption of Options theretofore granted or the
substitution for such Options of new options issued by the successor
corporation or the parent corporation thereof: (i) each Participant to
whom an Option has been granted under the Plan shall be entitled to
exercise, in whole or in part, such Participant's rights under any
such Option without regard to any restrictions on exercise that would
otherwise apply, effective as of the effective date of the Terminating
Event, and (ii) in the event a Participant shall not, prior to the
effective date of such a Terminating Event, fully exercise an Option
granted under the Plan, such Option, to the extent not previously
exercised, shall be deemed surrendered by the Participant as of the
effective date of the Terminating Event and such Participant shall
receive in exchange therefor a cash payment equal to the difference,
if a positive amount, between the Fair Market Value as of the
effective date of the Terminating Event of the shares of stock then
subject to the Option and the aggregate exercise price therefor. To
the extent that a Participant has the right to exercise, surrender or
receive payment under any Option solely on account of a Terminating
Event, such exercise, surrender or payment shall be contingent upon
the consummation of such Terminating Event.
The determination as to which party to a merger or consolidation is
the "surviving entity" shall be made on the basis of the relative
equity interests of the shareholders in the entity existing after the
merger or consolidation, as follows: if following any merger or
consolidation the holders of outstanding voting securities of the
Company immediately prior to the merger or consolidation own equity
securities possessing more than fifty percent (50%) of the voting
power of the surviving entity, then for purposes of this Plan, the
Company shall be the surviving corporation. In all other cases, the
Company shall not be the surviving corporation. In making the
determination of ownership by the shareholders of an entity
immediately after the merger or consolidation, of equity securities
pursuant to this Article IX, equity securities which the shareholders
owned immediately before the merger or consolidation as shareholders
of another party to the transaction shall be disregarded. Further, for
purposes of this Article IX only, outstanding voting securities of an
entity shall be calculated by assuming the conversion of all equity
securities convertible (immediately or at some future time) into
shares entitled to vote.
Upon a "change in control" of the Company, a Participant shall have
the right, notwithstanding any restrictions that would
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<PAGE> 25
otherwise apply, to exercise any Option theretofore granted to such
Participant unless: (i) the Board shall have approved, authorized or
consented to the change of control and shall not have expressly
permitted acceleration of vesting of Options, or (ii) the Option
Agreement relating to the Option shall provide otherwise. To the
extent a Participant has the right to exercise an Option solely on
account of a change in control, such right to exercise shall be
contingent upon the consummation of such change in control. Unless
otherwise defined by the Administrator in Agreements relating to
particular Options, a "change in control " shall be deemed to have
occurred if any "person" (as such term as used in Sections 13(d) and
14(d) of the Exchange Act and the regulations of the SEC thereunder,
each as in effect on the effective date of this Plan, and including
any such persons that may be deemed to be acting in concert with
respect to the Company or the acquisition, ownership or voting of
Company securities) becomes, directly or indirectly, the "beneficial
owner " (as defined in Rule 13d-3 under the Exchange Act and the
regulations of the SEC thereunder, each as in effect on the effective
date of this Plan) of outstanding securities of the Company
representing more than 50% of the combined voting power of the
Company's then outstanding securities .
ARTICLE X
Compliance With Law and Approval of Regulatory Bodies
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no
payment shall be made under the Plan other than in compliance with all
applicable federal and state laws and regulations (including, without
limitation, withholding tax requirements) and the rules of all
domestic stock exchanges on which the Company's shares may be listed.
The Company shall have the right to rely on an opinion of its counsel
as to such compliance. Any share certificate issued to evidence Common
Stock for which an Option is exercised may bear such legends and
statements as the Administrator may deem advisable to assure
compliance with federal and state laws and regulations. No Option
shall be exercisable, no Common Stock shall be issued, no certificate
for shares shall be delivered, and no payment shall be made under the
Plan until the Company has obtained such consents and approvals as the
Administrator may deem advisable from regulatory bodies having
jurisdiction over such matters.
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ARTICLE XI
General Provisions
11.01 Effect on Employment - Neither the adoption of the Plan, its
operation, nor any documents describing or referring to the Plan (or
any part thereof) shall confer upon any employee any right to continue
in the employ of the Company or an Affiliate or in any way affect any
right or power of the Company or an Affiliate to terminate the
employment of any employee at any time with or without assigning a
reason therefor.
11.02 Shareholder Status - No award to a Participant under the Plan shall
create any rights in such Participant as a shareholder of the Company
until shares of Common Stock are registered in the name of the
Participant.
11.03 Rules of Construction - Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference.
The reference to any statute, regulation, or other provision of law
shall be construed to refer to any amendment to or successor of such
provision of law.
11.04 Nontransferability - Any Option granted under the Plan shall be
nontransferable except by will or by laws of descent and distribution.
During the lifetime of the Participant to whom the Option is granted,
the Option may be exercised only by such Participant. No right or
interest of a Participant in any Option shall be liable for, or
subject to, any lien, obligation, or liability of such Participant.
ARTICLE XII
Amendment
The Board may, at any time and in any manner, amend, suspend or
terminate the Plan or any award outstanding under the Plan; provided,
however, that no such amendment or discontinuance shall:
(a) increase the number of shares reserved under the Plan without
shareholder approval;
(b) be made without shareholder approval to the extent such approval
is required by law, agreement or the rules of any exchange or
automated quotation system upon which the Common Stock is listed
or quoted;
(c) alter or impair the rights of Participants with respect to awards
previously made under the Plan without the consent of the holder
thereof; or
(d) make any changes that would disqualify the Plan, which is
intended to be so qualified, from the exemption provided by Rule
166-3 adopted by the
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<PAGE> 27
SEC pursuant to the Exchange Act.
ARTICLE XIII
Duration of Plan
No Option may be granted under the Plan after December 31, 2007.
Options granted before that date shall remain valid in accordance with
their terms.
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<PAGE> 28
HAWTHORNE FINANCIAL CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
The undersigned, a stockholder of HAWTHORNE FINANCIAL CORPORATION, a
Delaware corporation, (the "Company") hereby appoints Scott A. Braly and Norman
Morales, and each of them, the proxy of the undersigned, with full power of
substitution, to attend, vote and act for the undersigned at the Company's
Annual Meeting of Stockholders (the "Annual Meeting"), to be held on June 17,
1998, and at any of its postponements or adjournments, to vote and represent all
of the shares of the Company which the undersigned would be entitled to vote, as
follows:
The Board of Directors recommends a WITH vote on Proposal 1 and a FOR
vote on Proposal 2.
1. ELECTION OF DIRECTORS, as provided in the Company's Proxy
Statement:
_____ WITH _____ WITHOUT Authority to vote for
the nominees listed
below.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY FOR A NOMINEE, LINE THROUGH
OR OTHERWISE STRIKE OUT THE NAME OF THE NOMINEE BELOW)
Marilyn Garton Amato
Scott A. Braly
Timothy R. Chrisman
Anthony W. Liberati
Harry F. Radcliffe
Howard E. Ritt
2. The approval of proposed amendments to the Hawthorne Financial
Corporation 1994 Stock Option Plan (the "Stock Plan") which
would, among other things, fix the number of shares of Common
Stock available for issuance under the Stock Plan at 800,000.
____ FOR ____ AGAINST ____ ABSTAIN
The undersigned hereby revokes any other proxy to vote at the Annual
Meeting, and hereby ratifies and confirms all that the proxy holder may lawfully
do by virtue hereof. AS TO ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE
ANNUAL MEETING AND ANY OF ITS POSTPONEMENTS OR ADJOURNMENTS, THE PROXY HOLDER IS
AUTHORIZED TO VOTE IN ACCORDANCE WITH ITS BEST JUDGMENT.
This Proxy will be voted in accordance with the instructions set forth
above. THIS PROXY WILL BE TREATED AS A GRANT OF AUTHORITY TO VOTE FOR THE
ELECTION OF THE DIRECTORS NAMED AND THE PROPOSED AMENDMENTS TO THE STOCK PLAN,
AND AS THE PROXY HOLDER SHALL DEEM ADVISABLE ON SUCH OTHER BUSINESS AS MAY COME
BEFORE THE ANNUAL MEETING, UNLESS OTHERWISE DIRECTED.
<PAGE> 29
The undersigned acknowledges receipt of a copy of the Notice of Annual
Meeting and accompanying Proxy Statement dated May 8, 1998 relating to the
Annual Meeting.
Date: ____________________________, 1998
----------------------------------------
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Signature(s) of Stockholder(s)
(See Instructions Below)
The signature(s) hereon should correspond exactly
with the name(s) of the stockholder(s) appearing
on the Stock Certificate. If stock is jointly
held, all joint owners should sign. When signing
as attorney, executor, administrator, trustee or
guardian, please give full title as such. If
signer is a corporation, please sign the full
corporation name, and give title of signing
officer.
THIS PROXY IS SOLICITED BY
THE BOARD OF DIRECTORS OF HAWTHORNE FINANCIAL CORPORATION
