<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------------------------------
HAWTHORNE FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
------------------------------
(State or other Jurisdiction of
Incorporation or organization)
6035
------------------------------
(Primary Standard Industrial
Classification Code Number)
95-2085671
------------------
(I.R.S. Employer
Identification No.)
2381 ROSECRANS AVENUE
2ND FLOOR
EL SEGUNDO, CALIFORNIA 90245
(310) 725-5000
---------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
SCOTT A. BRALY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HAWTHORNE FINANCIAL CORPORATION
2381 ROSECRANS AVENUE
2ND FLOOR
EL SEGUNDO, CALIFORNIA 90245
(310) 725-5000
-----------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area
code, of agents for service)
COPY TO:
<TABLE>
<S> <C>
GERARD L. HAWKINS, ESQ. STANLEY F. FARRAR, ESQ.
JEFFREY D. HAAS, ESQ. SULLIVAN & CROMWELL
ELIAS, MATZ, TIERNAN & HERRICK, L.L.P. 444 S. FLOWER STREET
734 15TH STREET, N.W. LOS ANGELES, CALIFORNIA 90071
WASHINGTON, D.C. 20005 (213) 955-8000
(202) 347-0300
</TABLE>
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legal facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [x]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(c) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AGGREGATE REGISTRATION
TO BE REGISTERED OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per share . . . . . . . . . . . . . . . $38,489,062.50 $11,354.27
===============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
---------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED JUNE __, 1998
PROSPECTUS
1,750,000 Shares
HAWTHORNE FINANCIAL CORPORATION
Common Stock
(par value $0.01 per share)
All of the 1,750,000 shares of common stock, par value $0.01 per share
(the "Common Stock"), offered hereby (the "Offering") are being issued and sold
by Hawthorne Financial Corporation (the "Company"), a Delaware corporation, at
a price of $______ per share.
The Common Stock is quoted on the National Market of the Nasdaq Stock
Market under the symbol "HTHR." The last reported sale price of the Common
Stock as quoted through the Nasdaq Stock Market on June 1, 1998 was $19.125 per
share.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY.
--------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER DEBT
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY GOVERNMENTAL
AGENCY OR OTHERWISE.
--------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------------------
<TABLE>
<CAPTION>
=============================================================================================================
Underwriting
Price Discounts and Proceeds to
to Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
=============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at
$700,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an additional 262,500
shares of Common Stock, on the same terms and conditions set forth
above, solely to cover over-allotments, if any. If such option is
exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $_______, $_______ and
$_______, respectively.
The shares of Common Stock are offered severally by the Underwriters,
as specified herein, subject to receipt and acceptance by them, and subject to
their right to reject any order in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about ______ __, 1998
against payment therefor in immediately available funds.
------------------------------------------
SANDLER O'NEILL & PARTNERS, L.P.
------------------------------------------
The date of this Prospectus is June __, 1998.
<PAGE> 3
[MAP]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY ENGAGE IN
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OFFERED HEREBY INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY
BID IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
AVAILABLE INFORMATION
The Company (which term shall include its subsidiaries, unless the
context otherwise requires) is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information concerning the Company can be inspected and
copied at prescribed rates at the Commission's Public Reference Room, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
following Regional Offices of the Commission: 7 World Trade Center, 13th Floor,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material may be obtained by mail
from the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. If available, such reports and
other information also may be accessed through the Commission's electronic data
gathering, analysis and retrieval system ("EDGAR") via electronic means,
including the Commission's web site on the Internet (http://www.sec.gov). The
Common Stock is quoted on the Nasdaq Stock Market's National Market and,
consequently, such reports, proxy statements and other information also may be
inspected at the offices of the NASD, 1735 K Street, N.W., Washington, D.C.
20006.
This Prospectus constitutes a part of a Registration Statement on Form
S-2 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act with respect to the Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Common Stock. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company
pursuant to Section 13 of the Exchange Act are incorporated by reference in
this Prospectus:
(a) Annual Report on Form 10-K for the year ended December
31, 1997, as amended;
(b) Quarterly Report on Form 10-Q for the three months ended
March 31, 1998; and
(c) Current Reports on Form 8-K dated January 28, 1998,
February 23, 1998 and March 26, 1998.
This Prospectus is accompanied by a copy of the most recent Annual
Report on Form 10-K, as amended, and Quarterly Report on Form 10-Q filed by the
Company with the Commission prior to the delivery of this Prospectus.
As used herein, the terms "Prospectus" and "herein" mean this
Prospectus, including the documents incorporated or deemed to be incorporated
herein by reference, as the same may be amended, supplemented or otherwise
modified from time to time. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein do not purport to
be complete, and where reference is made to the particular provisions of such
contract or other document, such provisions are qualified in all respects by
reference to all of the provisions of such contract or other document.
The Company will provide without charge to each person to whom a copy
of this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents referred to above which have been
incorporated by reference herein (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Hawthorne Financial Corporation,
2381 Rosecrans Avenue, 2nd Floor, El Segundo, California 90245, Attention:
Norman Morales. The Company's telephone number is (310) 725-5000.
3
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus or incorporated by
reference herein. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and financial statements, including
the notes thereto, contained elsewhere in this Prospectus or incorporated by
reference herein. Unless otherwise indicated, the information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
The Company is a financial services company specializing in making
real estate-secured loans in market niches which management believes generally
provide higher rates of return and greater growth potential than the
traditional mortgage products offered by competing mortgage lenders. The
Company, through Hawthorne Savings, F.S.B. (the "Bank"), its wholly-owned
subsidiary, generally seeks to originate real estate-secured loans in which it
can earn a premium yield for prompt, efficient execution and for tailoring the
terms of the loans to meet the objectives of both the Company and the borrower.
The Company focuses primarily on originating (1) loans secured by large homes
and unique estates ("estate loans") with principal balances of $1.0 million or
more, (2) loans for the construction of individual and tracts of single-family
residential homes and the acquisition and development of land for such
construction, and (3) permanent and construction loans secured by multi-family
residential and commercial real estate. The Company funds its lending
activities primarily with retail deposits obtained through the Bank's branch
system and, to a lesser extent, advances from the Federal Home Loan Bank
("FHLB") of San Francisco. At March 31, 1998, the Company had assets of $1.05
billion, liabilities of $1.00 billion, including deposits of $848.9 million,
and stockholders' equity of $44.5 million.
BACKGROUND
The Company reported net losses during 1993, 1994 and 1995 due to high
levels of nonperforming assets, which were attributable to loans originated
during the late 1980's and early 1990's by prior management of the Company.
The collectibility of such loans was adversely affected by the severe economic
recession experienced within California during the early 1990's and the
resulting decline in real estate values. In 1993, the Board of Directors
replaced senior management of the Company with a new management team which was,
among other things, more experienced with troubled asset management and
resolution. New management undertook an extensive restructuring of the Company
which included the following elements:
- Substantially reducing the Bank's sizeable portfolio of problem
assets by promptly foreclosing on the collateral securing the
Bank's nonperforming loans, making additional post-foreclosure
investments in the Bank's residential development projects and
apartment buildings, through the subsequent retail disposition of
the Bank's real estate owned and, to a much lesser extent, through
loan workouts. The foregoing actions resulted in a reduction of
nonperforming assets from $151.2 million at December 31, 1993 to
$16.8 million at March 31, 1998.
- Increasing the Bank's regulatory capital through (i) the issuance
by the Company of an aggregate of $27 million of senior notes and
cumulative preferred stock in 1995, (ii) the issuance by the
Company of an aggregate of $40 million of senior notes due 2004 in
1997, the proceeds of which were used, in part, to repay the
senior notes and preferred stock issued in 1995, and (iii)
accumulated earnings during 1996 and 1997.
- Developing and implementing revised lending strategies, including
(1) clearly defining targeted, niche lending products and markets,
(2) making a substantial investment in the Bank's lending and
operating infrastructure, and (3) enhancing the Bank's loan
underwriting policies and procedures and internal
4
<PAGE> 6
audit and credit risk management functions, which, commencing in
1995, permitted the Company to resume substantial lending
activities.
- Consolidating the Bank's branch system from 19 branch offices at
December 31, 1993, with average deposits of $43.7 million per
branch, to six branch offices at March 31, 1998, with average
deposits of $141.5 million per branch.
CURRENT BUSINESS STRATEGIES
Beginning in 1995, the Company established itself as a provider of
real estate-secured financings to narrowly targeted segments of the Southern
California real estate markets. These real estate market segments, which
include estate homes, residential construction and multi-family and commercial
real estate, have provided the Company with opportunities to achieve higher
loan yields than is typical in more traditional mortgage financings.
Generally, the Company is able to realize higher yields on its financings
because of the size and complexity of individual loans, the high level of
support services it offers to builders, developers and other borrowers, the
efficiency with which it can process individual loan requests, and its
willingness and competence in tailoring the terms of individual loans to meet
the objectives of the Company and the borrower. In recent years, the Company
has retained lending personnel with significant loan origination experience, a
full complement of loan underwriting, processing and funding personnel, and
skilled personnel responsible for the Company's appraisal, servicing, internal
audit and credit risk management functions. The Company sources its loan
originations through a combination of established relationships with mortgage
brokers and mortgage bankers, and through expanding referrals from, and repeat
business with, existing customers of the Company. Since the Company's
resumption of lending activities in 1995, new loan commitments have increased
from $197.4 million in 1995 to $332.3 million in 1996 to $495.0 million in
1997, and amounted to $193.0 million during the three months ended March 31,
1998. As a result of the foregoing and the initiatives set forth below, the
Company recognized net earnings of $7.5 million, $9.6 million and $1.8 million
during the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1998, respectively.
The Company believes that it can continue to expand its annual volume
of new loan originations, thereby increasing its market share within its
existing business lines, due to (1) the number of market segments in which it
actively competes, (2) its willingness to originate loans across the full
spectrum of potential risk and return within each of its market segments, (3)
the experience and depth of its lending personnel, (4) its strategy of
retaining virtually all new loan originations for its own portfolio, (5) its
unique complement of execution efficiency and flexibility and high level of
customer service, complemented by its flat organizational structure, and (6)
its access to relatively low-cost funding from retail deposits and, to a lesser
extent, advances from the FHLB of San Francisco which have a wide variety of
interest rates and maturities.
Management believes that the combined effects of these attributes,
coupled with the Company's strategy of pricing its loans on an adjustable-rate
basis, will enable the Company to continue to successfully compete against much
larger providers of mortgage credit, while maintaining prudent levels of
interest rate and credit risk as its loan portfolio grows.
The Company is a registered savings and loan holding company under the
Home Owners' Loan Act ("HOLA") subject to regulation by the Office of Thrift
Supervision ("OTS"). The Bank is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund, which
insures the Bank's deposits up to the maximum extent permitted by law.
The Company's principal executive offices are located at 2381
Rosecrans Avenue, 2nd Floor, El Segundo, California 90245. The Company's
telephone number is (310) 725-5000.
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered . . . . . . . . . . . . . 1,750,000 shares.
Purchase price . . . . . . . . . . . . . . . . $ per share.
----------
Common Stock outstanding prior to the Offering 3,170,296(1).
Common Stock outstanding after the Offering . . 4,920,296 (5,182,796 shares assuming the exercise of the
Underwriters' over-allotment option)(1).
Estimated net proceeds . . . . . . . . . . . . $ .
--------------------
Use of proceeds . . . . . . . . . . . . . . . . Net proceeds retained by the Company will be used for general
corporate purposes, including contributions to the Bank in
order to maintain and enhance internal loan growth and
expansion of its business. See "Use of Proceeds."
Dividend policy . . . . . . . . . . . . . . . . The Company does not currently pay cash dividends on the
Common Stock and has no current plans to do so in the future.
See "Market for Common Stock and Dividends."
Nasdaq National Market Symbol
for the Common Stock . . . . . . . . . . . . HTHR
Risk factors . . . . . . . . . . . . . . . . . Prospective investors are urged to carefully review the matters
discussed under "Risk Factors."
</TABLE>
- -----------------------------
(1) Does not reflect the exercise of outstanding (i) options to purchase an
aggregate of 634,100 shares of Common Stock pursuant to the Company's Stock
Option Plans and (ii) warrants to purchase an aggregate of 2,376,000 shares of
Common Stock which are exercisable in whole or in part on or after December 11,
1998 and which expire December 11, 2005 (the "Warrants"), in each case as of
June 1, 1998. See "Description of Capital Stock."
6
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company set forth
below should be read in conjunction with, and is qualified in its entirety by,
the Consolidated Financial Statements of the Company, including the related
notes, included in the documents incorporated herein by reference. See
"Available Information" and "Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION> December 31,
March 31, -------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $1,046,907 $928,197 $847,195 $753,583 $743,793 $881,641
Cash and cash equivalents(1) 60,636 51,620 93,978 14,015 18,063 42,901
Investment securities(2) 586 578 38,371 62,793 30,190 52,425
Mortgage-backed securities -- -- -- -- 57,395 28,891
Loans receivable, net 950,589 838,251 672,401 617,328 537,020 623,450
Deposits 848,870 799,501 717,809 698,008 649,382 829,809
Senior notes and other borrowings 145,000 80,000 62,307 12,006 47,141 --
Stockholders' equity 44,529 42,319 43,922 38,966 40,827 43,949
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
----------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- --------- --------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest revenues $21,994 $17,007 $75,616 $65,354 $50,994 $49,571 $58,798
Interest costs 12,918 10,155 43,825 39,960 34,486 30,443 36,692
------ ------ ------ ------ ------ ------ ------
Net interest income 9,076 6,852 31,791 25,394 16,508 19,128 22,106
Provision (recovery) for credit losses(3) 1,485 1,220 5,137 6,067 472 (24,449) (6,409)
------ ------ ------ ------ ------ ------ ------
Net interest income after provision
(recovery) for credit losses 7,591 5,632 26,654 19,327 16,036 43,577 28,815
Noninterest revenues, net:
Gain (loss) on sales of loans and
securities -- -- (11) 248 2,954 -- --
Operating noninterest revenues, net 709 732 3,599 1,927 1,311 1,973 3,295
Net gain (loss) from disposition of
deposits and premises -- -- -- 6,413 (117) 2,835 (4,066)
Other revenues (expenses) 4 (13) 112 (3,366)(4) 864 -- --
------ ------ ------ ------ ------ ------ ------
Total noninterest revenues, net 713 719 3,700 5,222 5,012 4,808 (771)
------ ------ ------ ------ ------ ------ ------
Operating costs 6,280 5,424 22,009 21,046 20,339 23,911 21,162
(Income) loss from real estate
operations, net(3) (333) 260 (229) 2,378 14,309 27,314 43,840
------ ------ ------ ------ ------ ------ ------
Total noninterest expense 5,947 5,684 21,780 23,424 34,648 51,225 65,002
------ ------ ------ ------ ------ ------ ------
Earnings (loss) before income tax
benefit (expense) and extraordinary
item 2,357 667 8,574 1,125 (13,600) (2,840) (37,258)
Income tax benefit (expense) (524) 692 2,577 6,382 (617) (123) 7,648
Earnings (loss) before extraordinary
item 1,833 1,359 11,151 7,507 (14,217) (2,963) (29,610)
Extraordinary item -- -- (1,534)(5) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net earnings (loss) $ 1,833 $ 1,359 $ 9,617 $ 7,507 $(14,217) $ (2,963) $(29,610)
====== ====== ====== ====== ====== ====== ======
PER SHARE DATA:
Basic earnings (loss) per share before
extraordinary item $0.58 $0.29 $3.02 $1.95 $(5.52) $(1.14) $(11.39)
Basic earnings (loss) per share after
extraordinary item 0.58 0.29 2.49 1.95 (5.52) (1.14) (11.39)
Diluted earnings (loss) per share before
extraordinary item 0.32 0.16 1.66 1.17 (5.52) (1.14) (11.39)
Diluted earnings (loss) per share after
extraordinary item 0.32 0.16 1.37 1.17 (5.52) (1.14) (11.39)
Shares of Common Stock outstanding
at end of period 3,164 2,629 3,090 2,599 2,599 2,599 2,599
Average shares of Common Stock
outstanding during the period 3,157 2,617 2,883 2,599 2,599 2,599 2,599
</TABLE>
(Continued on following page)
7
<PAGE> 9
<TABLE>
<CAPTION>
At and For the Three
Months Ended
March 31, At or For the Year Ended December 31,
----------------------- ---------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ----------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS(6):
Return on average assets 0.75% 0.65% 1.11% 0.93% (1.96)% (0.36)% (3.09)%
Return on average
stockholders' equity 16.90 12.38 19.83 17.75 (47.57) (6.99) (50.80)
Average stockholders' equity
to average assets 4.44 5.29 5.60 5.24 4.11 5.12 6.08
Interest rate spread(7) 3.56 3.16 3.56 3.14 2.61 2.72 2.32
Net interest margin(8) 3.81 3.43 3.78 3.28 2.47 2.56 2.42
Efficiency ratio(9) 64.18 71.52 62.19 77.03 114.14 113.32 83.31
CAPITAL RATIOS(10):
Tangible 7.45 6.67 7.55 6.27 5.80 5.15 4.61
Core 7.45 6.67 7.55 6.27 5.80 5.15 4.61
Risk-based 11.45 11.11 11.48 11.11 10.27 9.36 8.18
ASSET QUALITY DATA:
Nonperforming loans(11) $10,223 $20,266 $10,793 $16,643 $11,298 $18,103 $78,949
Real estate owned, net 6,551 20,977 9,859 20,140 37,905 62,613 72,234
Gross nonperforming
assets(11) 16,774 41,243 20,652 36,783 49,203 80,716 151,183
Gross classified assets(12) 59,968 95,732 61,100 93,852 116,663 165,772 243,913
Allowance for credit losses 14,092 13,657 13,274 13,515 15,192 21,461 46,629
Nonperforming assets to total
assets at end of period(11) 1.60% 4.92% 2.22% 4.34% 6.53% 10.85% 17.15%
Nonperforming loans to total
loans at end of period(11) 1.06 2.85 1.27 2.43 1.79 3.24 11.78
Allowance for credit losses to
loans at end of period 1.46 1.92 1.56 1.97 2.40 3.84 6.96
Allowance for credit losses
to nonperforming loans at
end of period(11) 137.85 67.39 122.99 81.21 134.47 118.55 59.06
</TABLE>
- ----------------------------------
(1) Cash and cash equivalents include cash, certificates of deposits in
other financial institutions and federal funds sold.
(2) Investment securities were classified as available for sale at March
31, 1998 and December 31, 1997, 1996 and 1995.
(3) For the years ended December 31, 1996, 1995, 1994 and 1993, the
Company reclassified $1.4 million, $13.9 million, $29.7 million and
$17.2 million, respectively, from the reserve for estimated credit
losses to the reserve for real estate owned.
(4) Includes a one-time charge on all deposits insured by the Savings
Association Insurance Fund ("SAIF") as of March 31, 1995 to
recapitalize the SAIF.
(5) Relates to the accelerated write-off of unamortized issue costs and
original issue discount (net of applicable taxes) associated with the
senior notes due 2000 which were issued by the Company in December
1995 and repaid in full in December 1997.
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(6) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods and are annualized where
appropriate.
(7) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(8) Net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) Represents operating expenses divided by net interest income before
provision for credit losses plus operating noninterest revenues.
(10) The tangible and core capital ratios are calculated as a percent of
adjusted total assets and the risk-based capital ratio is calculated
as a percent of total risk-weighted assets.
(11) Nonperforming loans consist of loans delinquent 90 days or more and
nonperforming assets consist of nonperforming loans and real estate
owned acquired through foreclosure or deed-in-lieu thereof, net of
writedowns and reserves. Nonperforming loans do not include loans
which are 30 to 89 days delinquent, which the Company places on
nonaccrual status as a matter of policy, and other loans which are
performing in accordance with their terms but which the Company has
placed on nonaccrual status due to one or more defined weaknesses,
which in the aggregate amounted to $9.0 million at March 31, 1998. At
March 31, 1998, the Company's nonperforming assets plus nonaccrual
loans amounted to $25.8 million or 2.47% of total assets and
nonperforming loans plus nonaccrual loans amounted to 2.00% of total
loans. Nonperforming assets do not include troubled debt
restructurings ("TDRs") which are performing in accordance with their
terms but classified as substandard for regulatory purposes, which
amounted to $6.1 million, $3.8 million, $12.9 million, $7.3 million,
$3.7 million and $5.6 million at March 31, 1998 and December 31, 1997,
1996, 1995, 1994 and 1993, respectively.
(12) Classified assets consist of assets classified as substandard for
regulatory purposes for which the Company has established specific
reserves of $4.1 million, $2.9 million, $3.8 million, $2.2 million,
$3.4 million, $8.6 million and $23.3 million as of March 31, 1998 and
1997 and December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
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RISK FACTORS
Prospective investors should carefully review the following factors,
as well as the other information contained in this Prospectus, in connection
with the Common Stock offered hereby. When used in this Prospectus, the words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," "believe" or similar expressions are
intended to identify "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. The Company
wishes to caution readers that all forward-looking statements are necessarily
speculative and not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various risks and uncertainties, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected. The risks
highlighted herein should not be assumed to be the only factors that could
affect the future performance of the Company.
LIMITED HISTORY OF PROFITABILITY
The Company reported net losses of $14.2 million, $3.0 million and
$29.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. These losses were attributable to the high levels of loans
originated during the late 1980s and early 1990s by prior management of the
Company which became nonperforming and, in many instances, resulted in
foreclosure with respect to the underlying collateral. The high levels of
nonperforming assets resulted in significant provisions for loan losses, net
loan charge-offs, loss of interest income on nonperforming loans, write-downs
of investments in real estate and increases in operating expenses during 1993,
1994 and 1995. Continued profitability in future periods will be dependent
upon, among other things, the quality of both the Company's existing assets and
the assets to be originated or acquired by the Company in the future. See
"-Asset Quality" below. Although the Company reported net earnings of $1.8
million, $9.6 million and $7.5 million during the three months ended March 31,
1998 and years ended December 31, 1997 and 1996, respectively, there can be no
assurance that the Company will maintain profitable operations or that there
will not be substantial inter-period variations in its operating results.
RISKS ASSOCIATED WITH LENDING ACTIVITIES
Credit Risk. Since 1994, the Company's lending activities have
emphasized (i) estate loans, (ii) loans to local developers to construct
individual, detached single-family homes and small (two-to-four units)
condominium projects and loans to developers for the acquisition of land, lot
development and construction of tracts of homes and (iii) permanent and
construction loans secured by existing multi-family (over four units)
residential real estate and commercial real estate, such as office buildings,
retail properties, industrial properties and various special purpose
properties. Residential construction financing is generally considered to
expose the lender to a greater risk of loss than long-term lending on improved,
occupied real estate. The risk of loss on a residential construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development, the estimated cost
(including interest) of construction, the ability of the developer or builder
to complete the project on a timely basis and within the established budget
parameters, as well as the availability of permanent take-out financing.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of value proves to be inaccurate, the Company
may be confronted, at or prior to the maturity of the loan, with a project
which, when completed, has a value which is insufficient to ensure full
repayment. The Company's estate loans also entail certain risks not typically
associated with conventional loans, including the size of many of such loans,
the unique characteristics of certain of the properties securing the estate
loans, and the absence of demonstrated financial capacity with respect to
certain of the estate loan borrowers. Similarly, multi-family residential and
commercial real estate lending generally is considered to involve a higher
degree of risk than the single-family residential lending traditionally
emphasized by savings institutions because the payment experience on
multi-family residential and commercial real estate
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loans typically is dependent on the successful operation of the project, and
thus such loans may be adversely affected to a greater extent by adverse
conditions in the real estate markets or in the economy generally, as well as
the manner in which the borrower manages the property. Moreover, the Company's
income property loans generally are made with primary reliance on the operation
and/or sale of the property and without recourse to the borrower. Finally,
construction loans secured by multi-family residential and construction real
estate combine the risks discussed above with respect to residential
construction lending as well as the risks discussed above with respect to
permanent loans secured by multi-family residential and commercial real estate.
Size of Loans. With the exception of its conventional single-family
residential loan programs, the Company seeks to originate relatively few,
high-dollar balance loans within each of its lending businesses. Except with
respect to single-family residential construction lending, the Company
generally emphasizes loans with individual commitments or multiple commitments
to affiliated borrowers of between $1.0 million and $6.0 million, although it
may make loans up to the Bank's loans-to-one borrower limitation under
applicable laws and regulations, which amounted to $13.2 million at March 31,
1998 and is expected to increase as a result of the Offering. With respect to
single-family residential construction lending, the Company provides
construction financing to builders (and, to a lesser extent, owner-occupants)
ranging from $500,000 to $2.0 million for individual home construction
projects, although the Company may finance several home construction projects
with any one builder. Larger balance loans or multiple loans with affiliated
borrowers (in each instance, relative to the regulatory capital of the Bank),
involve greater risk to the Company because a small number of such loans could
have significant effects on the amount of the Company's nonperforming assets
and the level of its interest income in the event of default.
Terms of Loans. The Company generally offers a variety of loan terms
and conditions on all loan types, including fixed interest rates and interest
rates which adjust in accordance with various indices; payments which are
interest-only or payments which include the amortization of principal, either
on a partial or fully amortizing basis; varying adjustment frequencies for
adjustable-rate loans and interest rate payment floors and caps; and varying
maturity and extension options. Certain of these terms, which generally are
offered by the competition encountered by the Company in connection with its
lending activities, may increase the risk of default. For example, loans which
are not fully amortizing over their maturity and which have a balloon payment
due at their stated maturity, as is the case with substantially all of the
Company's estate, multi-family residential and commercial real estate loans,
involve a greater risk of loss than fully amortizing loans because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to timely refinance the loan or to timely sell the security property.
The ability of a borrower to accomplish these results will be affected by a
number of factors, including the level of available mortgage rates at the time
of sale or refinancing, the financial condition and operating history of the
borrower and the property which secures the loan, tax laws, prevailing economic
conditions and the availability of financing for such loans generally.
Similarly, adjustable-rate loans, which comprised a substantial majority of all
of the loans originated by the Company during the three months ended March 31,
1998 and the years ended December 31, 1997, 1996 and 1995, may increase the
risk of default thereon during periods of rising interest rates, which could
adversely affect a borrower's ability to make required payments during the term
of the loan, as well as at maturity if, as a result of payment caps, the
difference between the interest rate on which payments are made during the term
of the loan is less than the accrual rate of interest thereon and such
difference is added to the principal amount of the loan due at maturity, or
so-called "negative amortization."
Limited Track Record of Performance for New Loan Originations. The
Company ceased loan origination activities during 1993 and 1994 in order to
focus on building a lending and operating infrastructure. The Company resumed
significant lending activities during 1995 and, as a result, $698.0 million or
71.8% of the Company loan portfolio as of March 31, 1998 was originated
subsequent to 1994. Although such loans have generally performed in accordance
with their respective terms, they have generally not been outstanding long
enough to fully assess their ability to perform under changing economic and
market conditions.
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RISKS ASSOCIATED WITH GROWTH IN LOAN ORIGINATIONS
The Company resumed significant lending activities in 1995. During
the period 1995 through 1997, the Company's annual volume of new loan
commitments increased substantially, reaching $495 million in 1997, as compared
with $332 million in 1996 and $197 million in 1995. During the three months
ended March 31, 1998, the Company recorded $193 million of new loan
commitments. An integral component of the Company's business strategy
consists of expanding its market share in each of its principal lending
businesses, including the financing of estate homes, residential construction
and multi-family residential and commercial real estate. The Company's ability
to meet this objective will be dependent on market and economic conditions,
particularly the general level of interest rates, the competition for such
lending activities, which management believes has increased significantly in
recent years, the Company's ability to attract and retain cost-efficient
sources of funds in order to fund its lending activities, and other factors
which are beyond the control of the Company. As a result of the foregoing,
there can be no assurance that the Company will be able to engage in the
desired level of lending activities in order to meet its loan growth
objectives.
ASSET QUALITY
The Company's results of operations are significantly dependent on the
quality of its assets, as measured by the level of its nonperforming assets,
nonaccruing and classified assets. Nonperforming assets consist of loans which
are 90 days or more past due ("nonperforming loans") and real estate acquired
by foreclosure or deed-in-lieu thereof, net of writedowns and reserves ("real
estate owned"). In addition to its nonperforming assets, the Company has loans
which are delinquent 30 to 89 days, which the Company places on nonaccrual
status as a matter of policy, and loans which are performing in accordance with
their terms but which the Company has classified as substandard or lower in
accordance with OTS regulations because they were troubled debt restructurings
or contained one or more defined weaknesses, a portion of which also may be
placed on nonaccrual status. Management of the Company has devoted and
continues to devote substantial time and resources to the identification,
collection and workout of the Company's problem assets, which has resulted in a
significant decrease in the Company's nonperforming assets from a high of
$151.2 million, or 17.2% of total assets at December 31, 1993 to $16.8 million,
or 1.6% of total assets at March 31, 1998. Notwithstanding the substantial
decline in nonperforming assets since 1993, at March 31, 1998, the Company's
nonperforming assets and other classified assets aggregated $60.0 million, or
5.7%, of total assets.
Although management of the Company has successfully reduced its
nonperforming assets in recent years, the real estate markets and the overall
economy in its market area are likely to be significant determinants of the
quality of the Company's assets in future periods and, thus, its financial
condition and results of operations. In addition, the Company's financial
condition and results of operations may be adversely affected to the extent the
Company's newly originated loans experience asset quality problems.
ADEQUACY OF ALLOWANCES FOR LOSSES
Management establishes general reserves against the Company's
portfolio of loans. Such general reserves are established for each segment of
the Company's loan portfolio. In establishing general reserves, management
incorporates (1) the recovery rate for similar properties previously sold by
the Company, (2) valuations of groups of similar assets, (3) the probability of
future adverse events (i.e., performing loans which are expected to become
nonperforming and loans in default which are expected to be foreclosed on) and
(4) guidelines published by the OTS.
At March 31, 1998, the Company's allowance for credit losses amounted
to 1.46% of total loans and 137.85% of nonperforming loans. Although the
Company believes that it has established adequate allowances for losses on its
loan portfolio and real estate owned, material future additions to the
allowance for loan losses may be necessary due to changes in economic
conditions, the performance of the Company's loan portfolio and increases in
loans. Future additions to the allowance for losses on real estate owned may
be necessary to reflect
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changes in the economies and markets for real estate in which the Company's
real estate owned is located and other factors which may result in adjustments
which are necessary to ensure that the Company's real estate owned is carried
at the lower of cost or fair value, less estimated costs to dispose of the
properties. In addition, the OTS, as an integral part of its examination
process, periodically reviews the Company's allowance for losses and the
carrying values of its assets. Increases in the provisions for losses on loans
and real estate owned would adversely affect the Company's results of
operations.
SOURCE OF PAYMENTS ON THE SENIOR NOTES DUE 2004
The Company is a holding company with no material business operations
of its own. The Company's only significant asset is all of the common stock of
the Bank. In connection with the 1995 recapitalization of the Bank, the
Company issued $27 million of senior notes and preferred stock. In December
1997, the Company repaid such senior notes and preferred stock with the
proceeds of a $40 million offering of senior notes due 2004. The senior notes
due 2004 have an annual debt service requirement of $5.0 million. The
principal source of cash to pay interest on and principal of the senior notes
due 2004 consists of dividends from the Bank. There can be no assurance that
the earnings from the Bank will be sufficient to pay dividends to the Company
or that such dividends will be permitted by applicable federal banking laws and
regulations. Failure to pay interest and/or principal on the senior notes due
2004 would constitute an event of default with respect to such senior notes.
For additional information concerning limitations on the Bank paying dividends
to the Company, see "No Intention to Pay Dividends; Limited Sources for
Dividends on the Common Stock and Funding of Activities."
INTEREST RATE RISK
The Company's operating results depend almost entirely on its net
interest income, which is the difference between the interest income earned on
interest-earning assets and the interest expense incurred in connection with
its interest-bearing liabilities. Changes in the general level of interest
rates can affect the Company's net interest income by affecting the spread
between the Company's interest-earning assets and interest-bearing liabilities.
This may be due to the disparate maturities or period to repricing of the
Company's interest-earning assets and interest-bearing liabilities, as well as
in the case of an increase in the general level of interest rates, periodic
caps which limit the interest rate change on many of the Company's
adjustable-rate mortgage loans. Changes in the general level of interest rates
also affect, among other things, the ability of the Company to originate loans;
the ability of borrowers to make payments on loans; the value of the Company's
interest-earning assets and its ability to realize gains from the sale of such
assets; the average life of the Company's interest-earning assets; and the
Company's ability to obtain deposits in competition with other available
investment alternatives. Interest rates are highly sensitive to many factors,
including governmental monetary policies, domestic and international economic
and political conditions and other factors beyond the control of the Company.
The Company's interest rate risk strategy emphasizes the management of
asset and liability balances within repricing categories in order to limit the
Bank's exposure to earnings variations as well as variations in the value of
assets and liabilities due to changes in interest rates over time. The Company
does not currently utilize off-balance sheet hedging instruments in order to
hedge its interest rate exposure. Instead, the Company hedges such exposure
internally through the use of core deposit accounts and FHLB advances, together
with an emphasis on investing in shorter-term or adjustable-rate assets.
ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon
general economic conditions, particularly in the areas in Southern California
in which it conducts its business activities. Adverse changes in the economic
conditions of these areas may impair the ability of the Company to collect
loans and would otherwise have an adverse effect on its business, including the
demand for new loans, the ability of customers to repay loans and the value of
both the real estate which secures its loans and its real estate owned.
Moreover,
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earthquakes and other natural disasters could have similar effects. Although
such disasters have not significantly adversely affected the Company to date,
the ability of borrowers to acquire insurance for such disasters in California
is severely limited. The Company does not generally require individual
borrowers to obtain insurance coverage with respect to any damage to the
collateral securing the Bank's loans in the event of an earthquake. Instead,
in June 1997, the Company purchased a $10 million blanket insurance policy
covering the collateral securing the Bank's estate loans in the event of an
earthquake. Pursuant to this blanket insurance policy, the Company will be
reimbursed for any losses suffered upon the disposition of the collateral
securing an estate loan (whether by foreclosure or sale), including interest
foregone with respect to the loan for the period from the 91st day of the
loan's delinquency until the ultimate disposition of the collateral.
Nevertheless, no assurance can be made that in the event of an earthquake, the
Bank will recover amounts pursuant to such insurance policy sufficient to cover
all of the losses suffered by the Bank.
COMPETITION
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for
deposits historically has come from other thrift institutions, commercial banks
and credit unions conducting business in its market areas in Southern
California. In addition, as with all banking organizations, the Company has
experienced increasing competition from nonbanking sources, such as full
service and discount broker-dealers and other investment alternatives, such as
mutual funds. The Company's competition for estate loans comes principally
from larger commercial banks, investment banks and other thrift institutions
and the Company's competition for residential construction loans comes
principally from smaller commercial banks. The Company's competition for
multi-family residential and commercial real estate loans comes principally
from other thrift institutions, commercial banks, insurance companies, mortgage
real estate investment trusts, mortgage conduits and other institutional
lenders. A number of institutions with which the Company competes for deposits
and loans (primarily with respect to estate loans and multi-family residential
and commercial real estate loans) have significantly greater assets, capital
and other resources than the Company. In addition, many of the Company's
competitors are not subject to the same extensive federal regulation that
governs savings and loan holding companies, such as the Company, and
federally-chartered and federally-insured savings institutions, such as the
Bank. As a result, many of the Company's competitors have advantages over the
Company in conducting certain businesses and providing certain services.
TECHNOLOGY
Data Processing Conversion. During 1998, the Company expects to
complete a conversion of substantially all of its computer-based systems and
applications to an in-house, client-server platform from an outsourced,
host-based platform, following over two years of planning, design,
specification, hardware and software acquisition and resource additions. The
Company believes that the new computer-based systems and applications will
provide it with the information processing, warehousing and reporting
capabilities necessary to more efficiently and reliably support its business
activities in the future. Although management believes that it has adequately
planned for, and is prudently implementing its established project plan with
respect to, the conversion, there is a risk, inherent in all conversions of
computer-based systems, that the conversion will not be implemented consistent
with management's plan. This could result in the inability of the new
computer-based systems to accurately process and report information on a timely
basis, which could lead to the allocation of unplanned resources and the
expenditure of additional funds. In addition, significant problems with the
conversion could adversely affect the Company's ability to successfully
implement portions of its strategic plan on a timely basis.
Year 2000 Compliance. The Company has adopted, and is implementing, a
plan to address Year 2000 data processing issues. The plan includes the
assessment of all internal systems, programs and data processing applications
(with respect to the Company, including the new applications which are integral
to the conversion of its computer-based systems), as well as those provided to
the Company by third-party vendors. The expense
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incurred and to be incurred by the Company to ensure Year 2000 compliance is
substantially integrated and included with the expense associated with the
planned conversion of its computer-based systems. Management continues to
evaluate the Company's third party vendors' efforts with respect to compliance
with Year 2000 issues. No assurance can be given that such third party
vendors' efforts will be successful or that the Company's costs associated
therewith will be consistent with internal projections. However, the Company
does not believe that any Year 2000 issues will materially affect the Company's
products, services or competitive conditions. In addition, the Company does
not believe that the cost of addressing Year 2000 issues is a material event or
uncertainty which would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions, and
the costs or the consequences of incomplete or untimely resolution of its Year
2000 issues does not represent a known material event or uncertainty that is
reasonably likely to affect its future financial results, or cause its reported
financial information not to be necessarily indicative of future operating
results or future financial condition.
The Company anticipates incurring approximately $3.3 million in costs
related to the foregoing data processing conversion and the implementation of
the Company's Year 2000 plan. Approximately $1.2 million of such costs are
expected to be expensed during 1998 while approximately $2.1 million of such
costs are expected to be capitalized and expensed over a three-year period.
REGULATION
Both the Company, as a savings and loan holding company, and the Bank,
as a federally-chartered savings institution, are subject to significant
governmental supervision and regulation, which is intended primarily for the
protection of depositors. Statutes and regulations affecting the Company and
the Bank may be changed at any time, and the interpretation of these statutes
and regulations by examining authorities also is subject to change. There can
be no assurance that future changes in applicable statutes and regulations or
in their interpretation will not adversely affect the business of the Company.
The Company is subject to regulation and examination by the OTS and the Bank is
subject to regulation and examination by the OTS and the FDIC. There can be no
assurance that the OTS or the FDIC will not, as a result of such regulation and
examination, impose various requirements or regulatory sanctions upon the
Company or the Bank, as applicable. In addition to governmental supervision
and regulation, each of the Company and the Bank is subject to changes in
federal and state laws, including changes in tax laws, which could materially
affect the real estate industry. For information concerning limitations on the
Bank paying dividends to the Company, see "No Intention to Pay Dividends;
Limited Sources for Dividends on the Common Stock and Funding of Activities."
DEPENDENCE ON CHIEF EXECUTIVE OFFICER
Scott A. Braly, President and Chief Executive Officer of the Company,
has had, and will continue to have, a significant role in the development and
management of the Company's business, including in particular his active
involvement in the Bank's lending operations, whereby he functions as the
Bank's Chief Lending Officer. The loss of his services could have an adverse
effect on the Company. The Company and Mr. Braly are not parties to an
employment agreement, and the Company currently does not maintain key man life
insurance relating to Mr. Braly or any of its other officers.
NO INTENTION TO PAY DIVIDENDS; LIMITED SOURCES FOR DIVIDENDS ON THE COMMON
STOCK AND FUNDING OF ACTIVITIES
The Company does not currently pay cash dividends on the Common Stock
and has no current plans to do so in the future. See "Market for Common Stock
and Dividends." As a holding company whose only significant asset is all of
the common stock of the Bank, the ability of the Company to pay dividends on
the Common Stock and to conduct business activities directly or in non-banking
subsidiaries will depend significantly on the receipt of dividends or other
distributions from the Bank. Federal banking laws and regulations, including
the regulations of the OTS, limit the Bank's ability to pay dividends to the
Company. The Bank generally may
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not declare dividends or make any other capital distribution to the Company if,
after the payment of such dividend or other distribution, it would fall within
any of the three undercapitalized categories under the prompt corrective action
standards established by the OTS and the other federal banking agencies
pursuant to Section 38 of the Federal Deposit Insurance Act. A capital
distribution regulation of the OTS also limits the Bank's ability to pay
dividends and make other capital distributions in a manner which depends upon
the extent to which the Bank meets its regulatory capital requirements. In
addition, the HOLA requires every savings association subsidiary of a savings
and loan holding company to give the OTS at least 30 days' advance notice of
any proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock or else such dividend will be invalid. Further, the OTS
may prohibit any dividend or other capital distribution that it determines
would constitute an unsafe or unsound practice. In addition to the regulation
of dividends and other capital distributions, there are various statutory and
regulatory limitations on the extent to which the Bank can finance or otherwise
transfer funds to the Company or non-banking subsidiaries of the Company,
whether in the form of loans, extensions of credit, investments or asset
purchases. The Director of the OTS may further restrict these transactions in
the interests of safety and soundness.
As of March 31, 1998, the Bank met the capital and other requirements
of a "well capitalized" institution under the OTS' prompt corrective action
standards. There can be no assurance that the Bank will remain "well
capitalized" in the future or that the OTS will not require the Bank to
maintain higher levels of capital in light of the risk profile of its lending
activities.
LIMITED MARKET FOR THE COMMON STOCK
The Common Stock is traded on the National Market of the Nasdaq Stock
Market, although it is not an actively-traded stock. No assurance can be given
that a more active and widespread trading market for the Common Stock will
develop or if one develops, that it will continue.
DILUTION
Upon completion of the Offering, there will be an immediate dilution
of the net tangible book value per share of Common Stock purchased in the
Offering from the Price to Public. This dilution primarily results from the
sale by the Company of Common Stock in the Offering at a price above the
current book value per share. Without taking into account any changes in net
tangible book value after March 31, 1998, other than those resulting from the
sale by the Company of the Common Stock offered hereby (after deduction of
underwriting discounts and commissions and estimated Offering expenses), the
pro forma net tangible book value at March 31, 1998 would have been $___ per
share, representing an immediate dilution of $___ per share to persons
purchasing the Common Stock offered hereby at the Price to Public.
SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering, including shares issuable upon exercise of the
Warrants or stock options, as discussed below, could adversely affect the
market price of the Common Stock and the ability of an investor in the Common
Stock offered hereby to sell such Common Stock for an amount which is equal to
or higher than its purchase price. The 1,750,000 shares of Common Stock
offered hereby (plus up to 262,500 shares which may be sold pursuant to the
Underwriters' overallotment option) will be freely transferable without further
restriction or further registration under the Securities Act, except that any
shares purchased by an "affiliate" of the Company, as that term is defined by
the Securities Act ("affiliate"), will be subject to certain of the resale
limitations of Rule 144 under the Securities Act. Of the 3,170,296 shares of
Common Stock outstanding at June 1, 1998, 2,739,175 shares are freely
transferable without restriction or registration under the Securities Act and
431,121 shares are "restricted securities" as that term is defined in Rule 144
and may only be sold pursuant to a registration statement under the Securities
Act or an applicable exemption from registration thereunder, including pursuant
to Rule 144.
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Pursuant to a Registration Rights Agreement entered into by the
Company and certain investors in December 1995, the Company intends to file a
Registration Statement under the Securities Act to register for resale from
time to time by the holders thereof (the "Selling Securityholders") (i) the
431,121 shares of outstanding restricted Common Stock, (ii) outstanding
Warrants to purchase an aggregate of 2,376,000 shares of Common Stock and (iii)
2,376,000 shares of Common Stock issuable upon exercise of such Warrants
(2,024,000 Warrants and 2,024,000 shares of Common Stock issuable upon exercise
of such Warrants may be deemed to be held by affiliates of the Company) (all
Warrants and shares of Common Stock covered by such Registration Statement are
collectively referred to herein as the "Securities"). The Warrants become
exercisable in accordance with their terms on December 11, 1998. See
"Description of Capital Stock - Warrants." The sale or distribution of all or
any portion of the Securities may be effected from time to time by the Selling
Securityholders directly, or indirectly through brokers or dealers or in a
distribution by one or more underwriters on a firm commitment or best efforts
basis, in the over-the-counter market, on any national securities exchange or
automated inter-dealer quotation system on which the Securities are listed or
traded, if any, in privately-negotiated transactions or otherwise, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. In addition, any of the Securities that
qualify for sale pursuant to Rule 144 may be sold in transactions complying
with such rule.
As of June 1, 1998, (i) a total of 465,102 shares of Common Stock were
reserved for issuance under the Company's Stock Option Plan for employees who
may be deemed to be affiliates of the Company, which the Board of Directors of
the Company has proposed to increase to 800,000, subject to approval of the
Company's stockholders at an annual meeting of stockholders to be held on June
17, 1998, and (ii) a total of 449,800 shares of Common Stock were reserved for
issuance under the Company's Stock Option Plan for employees who are not deemed
to be affiliates of the Company. Shares of Common Stock issued under the Stock
Option Plans, other than shares held by affiliates of the Company, which may be
sold under Rule 144, will be eligible for resale in the public market without
restriction. For additional information, see "Shares Available for Future
Sale" and "Underwriting."
USE OF PROCEEDS
Net proceeds of the Offering retained by the Company will be used for
general corporate purposes, including contributions to the Bank in order to
maintain and enhance internal loan growth and expansion of its business.
Initially, the net proceeds from the Offering will be invested primarily in
U.S. Government and agency securities.
The estimated net proceeds to be raised in the Offering depends on the
amount of the actual expenses incurred in the Offering, which may differ from
the estimates herein.
The following table shows estimated gross and net proceeds based upon
the sale of 1,750,000 shares of Common Stock in the Offering at an assumed
Price to Public of $_____ per share.
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
Gross proceeds from the Offering . . . . $---------
Less: estimated Offering
expenses and discounts . . . . . . ---------
Net proceeds from the
Offering(1) . . . . . . . . . . . $
=========
</TABLE>
- ----------------
(1) Does not include the exercise of the option for 262,500 additional
shares granted to the Underwriters to cover over-allotments. If the
option is exercised in full, total net proceeds are estimated to be
$______ (based upon an assumed Price to Public of $___ per share).
17
<PAGE> 19
MARKET PRICE FOR COMMON STOCK AND DIVIDENDS
MARKET PRICE FOR COMMON STOCK
The Common Stock is traded on the National Market of the Nasdaq Stock
Market under the symbol "HTHR." The following table sets forth the high and
low sales prices of the Common Stock as reported by the National Market of the
Nasdaq Stock Market during the periods indicated.
<TABLE>
<CAPTION>
Sales Price
----------------------------------------------
High Low
1996 ----------------------- --------------------
--------------------------------
<S> <C> <C>
First Quarter $5.625 $4.375
Second Quarter 9.00 4.875
Third Quarter 9.25 6.75
Fourth Quarter 8.125 6.625
1997
--------------------------------
First Quarter 11.75 7.75
Second Quarter 12.25 9.25
Third Quarter 18.00 12.25
Fourth Quarter 24.00 17.50
1998
--------------------------------
First Quarter 21.50 19.125
Second Quarter
(through June 1, 1998) 21.75 19.00
</TABLE>
On June __, 1998, the last trading day before the commencement of the
Offering, the closing sale price of a share of Common Stock on the Nasdaq Stock
Market was $________.
As of June 1, 1998, there were 3,170,296 shares of Common Stock
outstanding, which were held by approximately 475 holders of record. The
number of holders of record does not reflect the number of persons or entities
who or which hold their stock in nominee or "street" name through various
brokerage firms or other entities.
DIVIDENDS
The Company does not currently pay cash dividends on the Common Stock
and has no current plans to do so in the future. In the future, the timing and
amount of any dividends will be determined by the Board of Directors of the
Company and will depend, among other factors, upon the Company's earnings,
financial condition, cash requirements, the capital requirements of the Bank
and investment opportunities at the time any such payment is considered. See
"Risk Factors - No Intention to Pay Dividends; Limited Sources for Dividends on
the Common Stock and Funding of Activities."
As a holding company, the payment of any dividends by the Company will
be significantly dependent on dividends received by the Company from the Bank.
For a description of limitations on the ability of the Bank
18
<PAGE> 20
to pay dividends on its capital stock to the Company, see "Risk Factors - No
Intention to Pay Dividends; Limited Sources for Dividends on the Common Stock
and Funding of Activities."
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1998, and the pro forma consolidated capitalization of the
Company at such date after giving effect to (i) the sale of 1,750,000 shares of
Common Stock at an assumed Price to Public of $___ per share and (ii) the
Company's receipt of all of the estimated proceeds from the sale of the Common
Stock offered hereby, based on the assumptions set forth under "Use of
Proceeds" and in the notes below. The table should be read in conjunction with
the Consolidated Financial Statements of the Company, including the related
notes, included in the documents incorporated herein by reference. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------
Actual As Adjusted
---------------------- -----------------
(Dollars in Thousands, Except Share Data)
<S> <C> <C>
Deposits $848,870 $848,870
Borrowings:
FHLB advances 105,000 105,000
Notes due 2004 40,000 40,000
Accounts payable and other liabilities 8,508 8,508
---------- ----------
Total liabilities 1,002,378 1,002,378
Stockholders' equity:
Preferred Stock, $0.01 par value;
10,000,000 shares authorized; none outstanding -- --
Common Stock, $0.01 par value; 20,000,000 shares
authorized; 3,169,496 shares issued(1) 32
Capital in excess of par value(1) 10,770
Unrealized gain (loss) on available for sale securities 6 6
Retained earnings 33,853 33,853
------ ------
44,661
Less:
Treasury stock, at cost (5,400 shares of Common (48) (48)
Stock)
Loan to Employee Stock Ownership Plan (84) (84)
--------- ---------
Total stockholders' equity 44,529
--------- ---------
Total liabilities and stockholders' equity $1,046,907 $
========= =========
Shares of Common Stock outstanding:
Basic 3,157
Warrants(2) 2,376 2,376
Options 655 655
Less Treasury shares(3) (507) (507)
--------- ---------
Diluted $ 5,681 $
========= =========
Stockholders' equity:
Basic 44,529
Warrants(2) 5,346 5,346
Options 4,704 4,704
Less Treasury shares(3) (10,087) (10,087)
--------- ---------
Diluted $ 44,492 $
========= =========
Basic book value per share $ 14.10 $
Diluted book value per share $ 7.83 $
</TABLE>
(Footnotes on following page)
19
<PAGE> 21
- --------------------------
(1) Does not reflect the exercise of (i) options to purchase shares of
Common Stock which have been or may be granted pursuant to the Company's
Stock Option Plans and (ii) outstanding Warrants to purchase an
aggregate of 2,376,000 shares of Common Stock. See "Shares Available
for Future Sale."
(2) The Offering is not expected to result in a decrease in the exercise
price of the Warrants of 1% or more. Consequently, the Warrants (as
adjusted) do not reflect a possible adjustment to the exercise price or
number of Warrants as a result of the Offering. See "Description of
Capital Stock - Adjustments of Exercise Price and Number of Shares of
Common Stock."
(3) Under the diluted method, it is assumed that the Company will use
proceeds from the pro forma exercise of the Warrants and options to
acquire actual shares currently outstanding, thus increasing Treasury
shares. Treasury shares were assumed to be repurchased at the average
closing stock price for the respective period.
REGULATORY CAPITAL
Under regulations adopted by the OTS, each savings institution is
currently required to maintain tangible and core capital equal to at least 1.5%
and 3.0%, respectively, of its adjusted total assets, and total capital equal
to at least 8.0% of its risk-weighted assets.
The following table sets forth the actual regulatory capital ratios of
the Bank at March 31, 1998. Following consummation of the Offering, management
anticipates downstreaming the proceeds of the Offering to the Bank as necessary
in order to maintain the Bank's internally established minimum core and
risk-based capital ratios of 6.5% and 11.0% of its adjusted total assets and
risk-weighted assets, respectively.
<TABLE>
<CAPTION>
March 31, 1998
----------------------------------------------------
Capital Excess
Capital Requirement Capital
------------ ---------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
DOLLAR BASIS:
Tangible $77,767 $15,667 $62,100
Core(1) 77,767 31,334 46,433
Risk-based(2) 87,306 61,021 26,285
PERCENTAGE BASIS:
Tangible 7.45% 1.50% 5.95%
Core(1) 7.45 3.00 4.45
Risk-based(2) 11.45 8.00 3.45
</TABLE>
- ---------------
(1) Does not reflect the 4% and 5% requirements to be met in order for an
institution to be deemed "adequately capitalized" and "well
capitalized," respectively, under applicable laws and regulations.
(2) Does not reflect the 10% requirement to be met in order for an
institution to be deemed to be "well capitalized" under applicable laws
and regulations.
20
<PAGE> 22
BUSINESS OVERVIEW OF THE COMPANY
Set forth below is a brief overview of the Company, which should be read
in conjunction with, and is qualified in its entirety by reference to, the more
detailed information and other information contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as amended, and
Quarterly Report on Form 10-Q for the three months ended March 31, 1998.
GENERAL
The Company is a financial services company specializing in making real
estate-secured loans in market niches which management believes generally
provide higher rates of return and greater growth potential than the
traditional mortgage products offered by competing mortgage lenders. The
Company, through the Bank, generally seeks to originate real estate-secured
loans in which it can earn a premium yield for prompt, efficient execution and
for tailoring the terms of the loans to meet the objectives of both the Company
and the borrower. The Company focuses primarily on originating (1) loans
secured by estate homes with principal balances of $1.0 million or more; (2)
loans for the construction of individual and tracts of single-family
residential homes and the acquisition and development of land for such
construction; and (3) permanent and construction loans secured by multi-family
residential and commercial real estate. The Company funds its lending
activities primarily with retail deposits obtained through the Bank's branch
system and, to a lesser extent, advances from the FHLB of San Francisco. At
March 31, 1998, the Company had assets of $1.05 billion, liabilities of $1.00
billion, including deposits of $848.9 million, and stockholders' equity of
$44.5 million.
The Company reported net losses for 1993, 1994, and 1995 due to high
levels of nonperforming assets, which were attributable to loans originated
during the late 1980's and early 1990's by prior management of the Company.
The collectibility of such loans was adversely affected by the severe economic
recession experienced within California during the early 1990's and the
resulting decline in real estate values. In 1993, the Board of Directors
replaced senior management of the Company with a new management team which was,
among other things, more experienced with troubled asset management and
resolution. New management undertook an extensive restructuring of the Company
which included the following elements:
- Substantially reducing the Bank's sizeable portfolio of problem
assets by promptly foreclosing on the collateral securing the
Bank's nonperforming loans, making additional post-foreclosure
investments in the Bank's residential development projects and
apartment buildings through the subsequent retail disposition of
real estate owned and, to a much lesser extent, through loan
workouts. The foregoing actions resulted in a reduction of
nonperforming assets from $151.2 million at December 31, 1993 to
$16.8 million at March 31, 1998.
- Increasing the Bank's regulatory capital through (i) the issuance
by the Company of an aggregate of $27 million of senior notes and
cumulative preferred stock in 1995, (ii) the issuance by the
Company of an aggregate of $40 million of senior notes due 2004
in 1997, the proceeds of which were used, in part, to repay the
senior notes and preferred stock issued in 1995, and (iii)
accumulated earnings during 1996 and 1997.
- Developing and implementing revised lending strategies, including
(1) clearly defining targeted, niche lending products and
markets, (2) making a substantial investment in the Bank's
lending and operating infrastructure, and (3) enhancing the
Bank's loan underwriting policies and procedures and internal
audit and credit risk management functions, which, commencing in
1995, permitted the Company to resume substantial lending
activities.
- Consolidating the Bank's branch system from 19 branch offices at
December 31, 1993, with average deposits of $43.7 million per
branch, to six branch offices at March 31, 1998, with average
deposits of $141.5 million per branch.
21
<PAGE> 23
Beginning in 1995, the Company established itself as a provider of real
estate-secured financings to narrowly targeted segments of the Southern
California real estate markets. These real estate market segments, which
include estate homes, residential construction and multi-family and commercial
real estate, have provided the Company with opportunities to achieve higher
loan yields than is typical in more traditional mortgage financings.
Generally, the Company is able to realize higher yields on its financings
because of the size and complexity of individual loans, the high level of
support services it offers to builders, developers and other borrowers, the
efficiency with which it can process individual loan requests, and its
willingness and competence in tailoring the terms of individual loans to meet
the objectives of the Company and the borrower. In recent years, the Company
has retained lending personnel with significant loan origination experience, a
full complement of loan underwriting, processing and funding personnel, and
skilled personnel responsible for the Company's appraisal, servicing, internal
audit and credit risk management functions. The Company sources its loan
originations through a combination of established relationships with mortgage
brokers and mortgage bankers, and through expanding referrals from, and repeat
business with, existing customers of the Company. Since the Company's
resumption of lending activities in 1995, loan commitments have increased from
$197.4 million in 1995 to $332.3 million in 1996 to $495.0 million in 1997, and
amounted to $193.0 million during the three months ended March 31, 1998. As a
result of the foregoing and the initiatives set forth below, the Company
recognized net earnings of $7.5 million, $9.6 million and $1.8 million for the
years ended December 31, 1996 and 1997 and the three months ended March 31,
1998, respectively.
The Company believes that it can continue to expand its annual volume of
new loan originations, thereby increasing its market share within its existing
business lines, due to (1) the number of market segments in which it actively
competes, (2) its willingness to originate loans across the full spectrum of
potential risk and return within each of its market segments, (3) the
experience and depth of its lending personnel, (4) its strategy of retaining
virtually all new loan originations for its own portfolio, (5) its unique
complement of execution efficiency and flexibility and high level of customer
service, complemented by its flat organizational structure, and (6) its access
to relatively low-cost funding from retail deposits and, to a lesser extent,
advances from the FHLB of San Francisco which have a wide variety of interest
rates and maturities.
Management believes that the combined effects of these attributes,
coupled with the Company's strategy of pricing its loans on an adjustable-rate
basis, will enable the Company to continue to successfully compete against much
larger providers of mortgage credit, while maintaining prudent levels of
interest rate and credit risk as its loan portfolio grows.
MARKET AREA
Because the Company conducts virtually all of its business within
Southern California, the success of its various business strategies and results
of operations are dependent upon the health and vibrancy of the Southern
California economy and, in particular, the real estate markets which the
Company targets in its lending businesses.
During the early 1990s, the Southern California economy experienced a
severe downturn in employment and economic activity, principally occasioned by
a national recession and exacerbated by the financial difficulties experienced
within the region's aerospace and defense industries, each of which accounted
for significant employment in the region. During this period, California's
unemployment rate rose from less than 7% to nearly 10%, the number of persons
employed throughout the state declined, and the dollar amount of taxable sales
declined (Source: UCLA Anderson Forecast, March 1998). The resulting decline
in the region's macroeconomic indicators adversely affected virtually all of
Southern California's real property markets. During this period, (1) the
median price of new homes declined by over 20%, (2) building permits issued for
new residential units declined by approximately 60%, and (3) construction
employment declined by nearly 20% (Source: UCLA Anderson Forecast, March 1998).
This combination of adverse economic and real property market factors caused
real estate values throughout the region to decline significantly.
22
<PAGE> 24
Since mid-1995, economic conditions throughout California have improved
significantly. Since the end of the recession, (1) the state's unemployment
rate has declined to less than 6% from 10%, (2) the dollar amount of taxable
sales has increased by approximately 25%, (3) Los Angeles County median home
prices have increased, (4) the unit volume of new and existing home sales have
increased by approximately 30%, and (5) the value of nonresidential building
permits has increased by over 75% (Source: UCLA Anderson Forecast, March 1998).
These positive economic factors have contributed to the recent expansion of the
region's economy, and a significant rise in real property values since the
1993-1995 period. Management believes that the initial firming and recent rise
of real property values has created growing liquidity throughout the region's
real property markets, which has contributed to a surge in the availability of
credit from local, regional and national sources of mortgage financing.
LENDING ACTIVITIES
General. The Company's principal business activity involves the
origination of real estate-secured loans, with respect to which it can often
charge a premium price for highly efficient transaction execution and for
tailoring the terms of such loans to meet the transaction-specific objectives
of both the Company and the borrower. Unlike most real estate-secured lenders,
the Company also seeks to originate loans across the full spectrum of
identified risk and potential return. Since the beginning of 1995, the Company
has emphasized the origination of (1) loans secured by single-family
residences, primarily very large homes and unique estates, (2) loans for the
construction of individual and tracts of single-family residential homes and
the acquisition and development of land for the construction of such homes, and
(3) permanent loans secured by multi-family residential and commercial real
estate. The Board of Directors of the Company has established maximum
concentration targets with respect to its principal lending groups (because the
following percentages are maximums, they are not additive), which currently
amount to (as a percentage of total loans) (i) 30% for estate loans, (ii) 40%
for committed residential construction loans (30% for disbursed residential
construction loans) and (iii) 40% for multi-family residential real estate and
30% for commercial real estate loans. As of March 31, 1998 the Company's
estate loans, residential construction loans and multi-family residential and
commercial real estate loans did not exceed the foregoing maximum concentration
targets.
Although the types of collateral securing loans made by the Company
since 1995 are generally similar to the types of collateral which secured loans
made by the Company prior to 1995, these older loans were underwritten under
significantly different criteria, and were made in much larger concentrations
to individual or affiliated borrowers, as compared to the loans made since
1995. More specifically, the residential construction loans currently being
originated by the Company carry shorter terms (i.e., 12 months or, with respect
to tract development loans, 12 months per development phase), are underwritten
pursuant to more stringent loan underwriting criteria (including loan-to-value
ratios), and are subject to more stringent individual transaction restrictions
and loan-to-one borrower limitations. In addition, in recent years, the
Company has hired skilled personnel with experience in the areas of loan
originations, loan underwriting, processing and funding, appraisal review, loan
servicing, internal audit and credit risk management. Moreover, the Company
adheres to a voucher system in order to control disbursements to builders and
developers. Finally, since 1994, the Company has not extended any new credit
to any individuals or entities with whom the Company's prior management
conducted business.
The Company's current loan origination activities are governed by
established policies and procedures appropriate to the risks inherent to the
types of collateral and borrowers financed by the Company. The Company's
primary competitive advantages, which include (1) a willingness and competence
to tailor the terms and conditions of individual transactions to accommodate
the borrower's and the Company's objectives, (2) a strategy of holding in
portfolio virtually all new loan originations, and (3) highly effective and
efficient transaction execution, are consistent with the Company's relatively
flat organizational and decision-making structure, and its reliance upon
relatively few, highly-skilled lending professionals. This combination of
competitive, organizational and strategic distinctions contribute to the
Company's success in attracting new business and in its ability to
23
<PAGE> 25
receive a return believed by management to be commensurate with the inherent
and transaction-specific risks assumed and the value added to its customers.
The Company's principal lending groups (i.e., estate lending,
residential construction lending and multi-family residential and commercial
real estate lending) are headed by individuals with significant banking and
mortgage-related experience. Michael Cain, Senior Vice President in charge of
income property lending, has been employed by the Bank since July 1996 and has
significant experience analyzing and valuing a wide range of multi-family
residential and commercial real estate property. Mr. Cain has over 19 years of
banking and mortgage-related experience and previously served in numerous
positions with Sun State Savings Bank, Phoenix, Arizona, Universal Savings,
Scottsdale, Arizona, and Citibank N.A., Dallas, Texas. Patrick Avison, Senior
Vice President in charge of residential construction lending, has been employed
by the Bank since December 1997 and has significant experience in residential
and commercial lending. Mr. Avison has over 19 years of banking and
mortgage-related experience and previously was employed as executive vice
president and chief financial officer of Coleman Homes, Inc., a home builder
located in Bakersfield, California, and senior director and unit head of the
real estate department of the Los Angeles representative office of the Bank of
Montreal. Steven Gardner, Senior Vice President in charge of estate lending,
has been employed by the Bank since December 1997 and has significant
experience in originating and underwriting both conventional and jumbo
single-family residential loans. Mr. Gardner has over 14 years of banking and
mortgage-related experience and previously served in numerous positions with
American Savings Bank, FA, California Federal Bank and Topa Savings Bank, all
of which are located within Southern California.
The Company's lending groups extend credit pursuant to a comprehensive
lending policy tailored to the particular attributes of the Company's lending
activities. The Company's lending policy establishes requirements and defines
parameters covering loan applications, borrower financial information and legal
and corollary agreements which support the vesting of title to the Company's
collateral, title policies, fire and extended liability coverage casualty
insurance, credit reports, and other necessary documents to support each
extension of credit. The real property collateral which secures the Company's
loans is appraised by either an independent fee appraiser approved by the
Company or by one of the Company's staff appraisers. All independent fee
appraisals are reviewed by the Company's Chief Appraiser prior to each
extension of credit.
The credit risk management policies of the Company are established and
periodically reviewed by the Company's Board of Directors and management. The
Company's credit risk management group is responsible for (1) conducting annual
reviews of loans with principal balances in excess of $1.0 million subsequent
to their funding in order to assess the borrower's compliance with applicable
loan covenants, the current condition and approximate valuation of the
collateral securing the Company's loans, the borrower's recent performance and
changes, if any, to the ownership of the collateral securing the Company's
loans and (2) assessing, generally using available data from independent
sources, market trends affecting the collateral securing the Company's loans,
including transaction volumes and pricing. Management utilizes the information
acquired and accumulated by the credit risk management group in establishing
specific and general reserves and in classifying individual assets and groups
of similar assets. The Company has enhanced its credit risk management
functions in recent years through the implementation of new computer-based
systems and the hiring of experienced risk management personnel.
The Company seeks to originate relatively few, high-dollar balance loans
within each of its lending businesses, with the exception of the Company's
conventional home financing group. Accordingly, the Company's internal "house
limit," applicable to individual transactions or to multiple loans with
affiliated borrowers (as defined in applicable federal regulations), is higher
than for many other regulated financial institutions. Since April 1998, the
Company's "house limit" amounted to 70% of the Bank's legal lending limit (or
$9.2 million as of March 31, 1998), except for special purpose commercial real
estate loans which are limited to $5.0 million per loan. Loans below such
amounts are generally collectively approved by the applicable loan officer, the
head of the appropriate lending group and the President of the Bank. Loan
requests in excess of such amounts and up
24
<PAGE> 26
to the Bank's legal lending limit ($13.2 million at March 31, 1998) require
approval of the Credit Committee of the Board of Directors prior to funding.
All loan approvals are reported to the full Board of Directors.
Each of the Company's principal lending groups is discussed below. In
the discussion below, the Company's effective yield is calculated by adding to
the weighted average coupon interest rate, loan fees collected at origination
(net of loan origination costs deferred) and loan discount, in each instance
annualized over the contractual term of the loan. With respect to residential
construction loans, the effective yield is calculated assuming that an average
of 60% of the committed amount is outstanding during the term of such loans.
In all cases, the effective yield excludes revenue to which the Company is
entitled upon the maturity of certain loans (e.g. exit and release fees),
prepayment penalties, modifications and extension fees.
25
<PAGE> 27
The following table sets forth information concerning the composition of
the Company's loan portfolio, and the percentage of the loan portfolio
represented by each type of loan, as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
March 31,
1998 1997
---------------------------- -----------------------------
Balance Percent Balance Percent
----------- --------------- ------------ ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family:
Estate(1) $216,575 19.6% $173,764 17.9%
Conventional 218,721 19.8 224,006 23.1
Income property(2):
Multi-family 241,147 21.9 225,738 23.3
Commercial real estate 143,266 13.0 114,293 11.8
Land 62,999 5.7 39,475 4.1
Single-family construction:
Individual residences 143,960 13.0 112,899 11.7
Tract development 61,774 5.6 68,653 7.1
Other 15,501 1.4 9,698 1.0
--------- ------ -------- ------
Gross Loans Receivable(3) 1,103,943 100.0% 968,526 100.0%
===== =====
Less:
Participants' share (1,088) (1,141)
Undisbursed loan funds (130,371) (108,683)
Deferred loan fees and
credits, net (7,803) (7,177)
Reserves (14,092) (13,274)
------- -------
Net Loans Receivable $950,589 $838,251
======= =======
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
Balance Percent Balance Percent
----------- ------------------ ----------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family:
Estate(1) $107,891 14.6% $ 51,142 7.8%
Conventional 231,306 31.2 318,703 48.5
Income property(2):
Multi-family 220,707 29.7 219,015 33.4
Commercial real estate 60,388 8.2 31,258 4.8
Land 14,513 2.0 5,579 0.9
Single-family construction:
Individual residences 56,306 7.6 21,987 3.4
Tract development 33,791 4.6 6,800 1.0
Other 15,684 2.1 1,459 0.2
-------- ------ -------- ------
Gross Loans Receivable(3) 740,586 100.0% 655,943 100.0%
===== =====
Less:
Participants' share (1,413) (2,219)
Undisbursed loan funds (46,646) (15,208)
Deferred loan fees and
credits, net (6,611) (5,996)
Reserves (13,515) (15,192)
------- -------
Net Loans Receivable $672,401 $617,328
======= =======
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1994 1993
----------------------------- ---------------------------
Balance Percent Balance Percent
----------- ---------------- ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family:
Estate(1) $ -- --% $ -- --%
Conventional 375,320 65.7 426,610 62.5
Income property(2):
Multi-family 172,641 30.2 193,468 28.4
Commercial real estate 7,757 1.4 7,630 1.1
Land 3,797 0.7 22,179 3.3
Single-family construction:
Individual residences 3,270 0.6 6,603 1.0
Tract development 6,000 1.1 22,925 3.4
Other 1,654 0.3 2,013 0.3
-------- ------ -------- -----
Gross Loans Receivable(3) 570,439 100.0% 681,428 100.00%
===== ======
Less:
Participants' share (3,072) (3,098)
Undisbursed loan funds (2,795) (966)
Deferred loan fees and
credits, net (6,091) (7,285)
Reserves (21,461) (46,629)
------- -------
Net Loans Receivable $537,020 $623,450
======= =======
</TABLE>
- -----------------------------
(1) Applicable solely to loans, generally in excess of $1.0 million, made
subsequent to 1994. For periods prior to 1995, all loans secured by
single-family homes are included with Conventional loans, irrespective
of size.
(2) As of March 31, 1998, such amounts included $7.6 million and $11.1
million of loans for the construction of multi-family residential and
commercial real estate, respectively.
(3) Gross loans receivable includes outstanding balances plus outstanding
construction commitments.
26
<PAGE> 28
The table below summarizes the Company's loan origination activity for
the three months ended March 31, 1998 and the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
For the Three Months For the Year Ended December 31,
--------------------------------------------------------
Ended
Type of Loan March 31, 1998 1997 1996 1995
- ----------------------------- ------------------------- ------------- --------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross loans at beginning
of period $ 968,526 $740,586 $655,943 $570,439
Originations of loans
Single-family:
Estate 56,969 100,382 72,520 53,659
Conventional 4,914 25,712 27,362 11,399
Income Property:
Multi-family 15,496 51,726 70,688 66,081
Commercial real
estate 23,500 105,076 46,001 31,664
Land 21,264 35,681 12,555 2,412
Single-family
construction:
Individual residences 53,764 104,851 53,210 25,327
Tract development 10,217 61,754 32,262 6,800
Other 6,852 9,749 17,725 --
---------- -------- -------- ----------
Total loan originations 192,976 494,931 332,323 197,342
---------- ------- ------- -------
Undisbursed portion of
new lines of credit -- (50,412) (15,680) (5,250)
Repayments (62,470) (202,999) (72,897) (27,760)
Principal amortization (16,417) (30,134) (21,056) (16,494)
Total loans sold -- (1,370) (130,413) (19,282)
Advances on lines of credit
and other, net 23,098 39,284 13,852 (4,777)
Transfers to real estate
owned (1,770) (21,360) (21,486) (38,275)
---------- ------- ------- -------
Net change in gross loans 135,417 227,940 84,643 85,504
--------- ------- ------- -------
Gross loans at end of
period 1,103,943 968,526 740,586 655,943
========= ======= ======= =======
Less:
Loan participant's share (1,088) (1,141) (1,413) (2,219)
Undisbursed loan funds (130,371) (108,683) (46,646) (15,208)
Deferred loan fees and credits,
net (7,803) (7,177) (6,611) (5,996)
Reserves (14,092) (13,274) (13,515) (15,192)
---------- ------- ------- --------
Net loans receivable $ 950,589 $ 838,251 $ 672,401 $ 617,328
========= ========= ========= =========
</TABLE>
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<PAGE> 29
Estate Loans. Since 1994, the Company has provided financing to owners
of large homes and unique estates ("estate loans"). Generally, estate loans
involve financings of between $1.0 million and $5.0 million and are secured by
properties primarily located in the communities of Bel-Air, Beverly Hills,
Newport Beach, Santa Barbara, Malibu and La Jolla. During 1997, a total of
3,762 homes within California were sold for $1.0 million or more, which
represented a 41.9% increase from the 2,651 of homes sold for $1.0 million or
more during 1996. During 1997, there was an aggregate of approximately $2.66
billion of single-family residential loan originations in excess of $1.0
million which were secured by properties located within Los Angeles, Orange,
San Diego and Santa Barbara counties. Management believes that it is currently
one of the leading lenders with respect to the purchase or refinance of homes
in excess of $1.0 million within Southern California.
Generally, the Company's estate loans are originated in order to
refinance the borrower's existing mortgage debt, rather than financing the
borrower's purchase of a home. The Company generally provides estate financing
to borrowers who have substantial equity in the properties which secure the
Company's loans but who for a variety of reasons, principally related to the
purpose of the borrower's loan request, the size of the loan request, the
characteristics of the property which secure the Company's loan, and the credit
profile of the borrower (which include such issues as the legal borrowing
entity, citizenship, previous credit history, loan purpose, or current
employment income or assets), are unacceptable or inconsistent with the
guidelines of the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation or national conduits which purchase conventional loans
above the loan limits of such government-sponsored enterprises ("conventional
loans"). Because of the unique characteristics of estate loans, including the
larger principal balances, no significant, developed secondary market is known
to exist for the sale of such loans. Estate loans are generally retained in
the Bank's portfolio. Estate loans are principally originated through contact
with, and submissions by, independent mortgage brokers and generally carry
yields which are, on average, several hundred basis points in excess of the
yields typically obtained by lenders originating conventional loans. The
Company typically limits its advance to not more than 75% of the value of its
collateral, with the majority of such loans possessing loan-to-value ratios of
less than 70%.
The Company's estate loans are secured by homes with a wide range of
characteristics, from large, conventional homes located within mature areas to
very large, multiple acre, one-of-a-kind estates. The Company's estate loans
also encompass a wide range of borrower profiles, those with the demonstrated
capacity to service the loan to others with no verifiable source of recurring
cash flow. Estate loans which meet the highest standards of collateral quality
and borrower capacity and creditworthiness ("Tier 1 loans") are similar to
conventional home loans except for their size, and generally have higher
loan-to-value ratios and the most favorable pricing to the borrower. Estate
loans with respect to which the borrower's resources are limited or cannot be
reliably measured, or with respect to which the Company's collateral possesses
such unique characteristics, including size, amenity or location, so as to make
its valuation difficult to measure ("Tier 3 loans"), have the lowest
loan-to-value ratios and the highest pricing to the borrower. Loans which fall
in between these two sets of parameters ("Tier 2 loans") involve advances and
pricing which are tailored to the particular attributes of the property, the
borrower, the reason underlying the borrower's loan request and other factors.
Commencing in early 1998, the Company expanded the scope of estate loans
which it is willing to originate to include a much higher proportion of such
loans with respect to which the size of the loan request is smaller (i.e.,
loans of less than $2 million), the characteristics of the property securing
the loan are more conforming to local submarkets thereby increasing the
marketability of such properties, and the credit profile of the borrowers more
clearly support their ability to service the loan and to repay the loan upon
maturity.
At March 31, 1998, the Company had $216.2 million of estate loans in its
portfolio. As of March 31, 1998, the Company's portfolio of estate loans
consisted of 78 loans with an average principal balance of $2.8 million (the
average principal balance of the estate loans originated during the three
months ended March 31, 1998 amounted to $2.3 million). As of such date, the
Company's estate loans had an effective yield of 9.37% (which is expected to
increase as certain estate loans reprice to their fully indexed rate), an
average loan-to-value ratio
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<PAGE> 30
as of the date of origination of 62% and had been outstanding for an average of
10 months. At March 31, 1998, $111.0 million of the Company's estate loans
were classified as Tier 1 loans, $42.8 million were classified as Tier 2 loans
and $62.4 million were classified as Tier 3 loans. Loan-to-value ratios
generally range from 65% to 75% for Tier 1 loans, 60% to 75% for Tier 2 loans
and 50% to 65% for Tier 3 loans. At March 31, 1998, the effective yield
amounted to 8.58% for Tier 1 loans, 9.85% for Tier 2 loans and 10.50% for Tier
3 loans.
Because the Company's estate loans entail certain risks not typically
associated with conventional loans, including the size of many of such loans,
the unique characteristics of certain of the properties securing the Company's
estate loans, and the absence of demonstrated financial capacity with respect
to certain of the Company's estate loan borrowers, the Company believes that
the performance of its portfolio of estate loans, as measured by the level of
nonperforming, nonaccrual and classified assets, possesses a greater potential
for volatility when compared to originators of conventional loans, which may
adversely affect, even if temporarily, the Company's interest income. In
addition, because the Company's estate loans have not been outstanding long
enough to be considered mature, seasoned loans, the Company cannot predict
whether its experience to date in successfully resolving performance-related
problems with certain of its estate loan borrowers will continue into the
future.
Construction Loans. The Company originates residential construction
loans out of two groups -- the single-family residence financing group and the
tract financing group. The single-family residence financing group provides
financing, principally to local developers, to construct individual, detached
single-family homes and, to a far lesser extent, small (two-to-four units)
condominium projects. The tract financing group provides financing to
developers for the acquisition of land, lot development and construction of
tracts of homes.
The single-family residence financing group provides individual home
construction financing to local builders and homeowners operating out of the
beach cities of the South Bay and Malibu areas of Los Angeles County and the
Newport Coast area of Orange County, with occasional financing of home
construction in other affluent areas throughout Southern California. A
majority of the Company's residential construction business to date has been
generated through pre-existing relationships between the Company's loan
officers and local builders. At March 31, 1998, the Company had in the
aggregate approximately 148 commitments amounting to $143.9 million to finance
single-family residential construction, of which $74.0 million had been
disbursed. As of such date, the Company's single-family residential
construction loans had an average commitment amount of $1.0 million, an
effective yield of 13.29%, an average loan-to-value ratio as of the date of
origination of 65% and had been outstanding for an average of five months.
The tract financing group provides construction financing to
small-to-medium sized builders of single-family residential developments in
Southern California. Within this business, the Company believes its
competitive advantage is focused upon its efficient response and execution and,
more often than not, a pre-existing relationship with the borrower or
particular knowledge of the specific submarket and/or product type. In
addition, management believes that by managing the builder's or developer's
disbursements, it is able to attract a substantial amount of business with
smaller builders and developers who often do not maintain the necessary
resources to effectively manage such disbursements on a cost-effective basis.
At March 31, 1998, the Company had in the aggregate 22 commitments
amounting to $61.8 million to finance tract development, of which $24.9 million
had been disbursed. As of such date, the Company's tract loans had an average
commitment amount of $2.8 million, an effective yield of 13.48%, an average
loan-to-value ratio as of the date of origination of 72% and had been
outstanding for an average of eight months.
Virtually all of the Company's construction lending, whether involving
developers or homeowners, is conducted without either a takeout loan commitment
(in the case of construction loans made to homeowners) or a purchase commitment
for the completed home(s) (in the case of construction loans made to
developers). Construction financing is generally considered to expose the
lender to a greater risk of loss than long-term
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<PAGE> 31
lending on improved, owner-occupied real estate. The risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction, as well as the
availability of permanent take-out financing. During the construction phase, a
number of factors could result in delays and cost overruns. If the estimate of
value proves to be inaccurate, the Company may be confronted, at or prior to
the maturity of the loan, with a project which, when completed, has a value
which is insufficient to ensure full repayment.
The Company attempts to mitigate the foregoing risks by (1) utilization
of a voucher system in order to control disbursements and generally limiting
its advance to a percentage of expected development costs, and requiring the
borrower to fund the difference, (2) carefully evaluating the line item costs
to complete the development, utilizing its residential loan officers and staff
(or, where appropriate, third parties), (3) carefully evaluating the product
type to be built and the demand for the finished homes by reference to recent
sales of comparable homes, and (4) carefully evaluating the development
experience of, and the success or failure of, the Company's borrower with
similar projects.
Multi-Family Residential and Commercial Real Estate Loans. Since 1994,
the Company's lending activities have emphasized loans secured by existing
multi-family (over four units) residential real estate and commercial real
estate, such as office buildings, retail properties, industrial properties and
various special purpose properties. The Company generates a significant
majority of its new multi-family and commercial financing opportunities through
contact with, and submissions by, independent mortgage loan brokers. However,
a growing proportion of the Company's new business is derived from existing
customer relationships or through referrals from existing customers.
Management believes that the Company is often able to obtain higher returns
with respect to its multi-family and commercial financings because significant
opportunities exist in the marketplace to provide financing which requires
tailored terms and conditions, efficient response and execution, and
specialized real estate expertise.
At March 31, 1998, the Company had $383.7 million of permanent
multi-family residential and commercial real estate loans. As of such date,
$237.3 million or 62% of such portfolio consisted of loans secured by
multi-family residential properties (i.e., apartment buildings) ($130.8 million
of which were originated since 1994) and $146.4 million or 38% consisted of
loans secured by commercial real estate ($139.4 million of which were
originated since 1994). As of March 31, 1998, the Company's multi-family
residential loan portfolio consisted of 396 loans with an average principal
balance of $609,000, and such loans had an effective yield of 8.29% (8.70% with
respect to loans originated since 1994). Similarly, as of such date, the
Company's commercial real estate loan portfolio consisted of 65 loans with an
average principal balance of $2.3 million, and such loans had an effective
yield of 9.85%. As of March 31, 1998, the Company's multi-family residential
and commercial real estate loans had average loan-to-value ratios as of the
date of origination of 69% and 62%, respectively, and had been outstanding for
an average of 58 and 11 months, respectively.
The Company recently began originating construction loans secured by
multi-family residential and commercial real estate properties. As of March
31, 1998, the Company had aggregate commitments of $18.7 million to finance the
construction of multi-family residential and commercial properties, of which
$12.1 million had been disbursed, with an effective yield of 11.67%.
Multi-family residential and commercial real estate lending generally is
considered to involve a higher degree of risk than the single-family
residential lending traditionally emphasized by savings institutions because
the payment experience on multi-family residential and commercial real estate
loans typically is dependent on the successful operation of the project, and
thus such loans may be adversely affected to a greater extent by adverse
conditions in the real estate markets or in the economy generally, as well as
the manner in which the borrower manages the property. Moreover, the Company's
income property loans generally are made with primary reliance on the operation
and/or sale of the property and without recourse to the borrower. The Company
attempts to mitigate these risks by (1) requiring its borrowers to demonstrate
their commitment to the property
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<PAGE> 32
through a significant cash equity investment, (2) generally requiring minimum
debt coverage ratios of 120% and 140% with respect to multi-family residential
and commercial real estate loans, respectively, (3) evaluating the historical
and current operations of the property, (4) investigating the rental markets
within the areas surrounding its collateral in order to validate the revenue
and expense assumptions which contribute to the Company's assessment of the
properties' current and potential cash flows, and (5) evaluating the operating
experience of the borrower with similar properties.
Management underwrites the proposed collateral which will secure income
property financings by reference to the historical, current and projected
operation of the property. In evaluating multi-family and commercial
properties, management requires that borrowers provide, at a minimum, current
rent rolls, recent operating statements and pro forma operating statements. As
appropriate, the Company's lending personnel adjust reported results to
accommodate lease expirations (from non-residential properties), tenant
turnover, necessary capital improvements and other relevant factors.
Conventional Single-Family Residential Loans. Although the Company has
not emphasized single-family residential conventional lending since the change
in management, the Company continues to provide conventional, permanent
financing secured by single-family homes, located principally in Los Angeles
County. The Company conducts this business both from its local retail banking
offices and from its corporate headquarters. This business is the most
competitive and least profitable of all of the Company's financing businesses.
The Company lacks the size and scale of operations to profitably penetrate this
business, especially in view of the significant capacity already in the
marketplace in the form of very large banking and non-banking companies whose
principal business is to originate conventional single-family-secured loans,
many for resale in the secondary mortgage markets. The Company targets the
origination of a modest volume of this business each year, generally
concentrated in and around its local retail banking offices.
At March 31, 1998, the Company had $217.6 million of conventional
single-family residential loans, $57.1 million of which had been originated
since 1994. As of March 31, 1998, the Company's portfolio of conventional
single-family residential loans consisted of 1,472 loans with an average
principal balance of $149,000. As of such date, the Company's conventional
single-family residential loans had an effective yield of 7.72%, an average
loan-to-value ratio as of the date of origination of 70% and had been
outstanding for an average of 65 months.
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended (the
"Certificate"), authorizes the issuance of up to 20,000,000 shares of Common
Stock and up to 10,000,000 shares of preferred stock, par value $0.01 per share
(the "Preferred Stock"). At June 1, 1998, the Company had 3,170,296 shares of
Common Stock outstanding, Warrants to purchase an additional 2,376,000 shares
of Common Stock outstanding and no Preferred Stock outstanding. In addition,
at the same date the Company had granted options to purchase an aggregate of
634,100 shares of Common Stock pursuant to its two Stock Option Plans.
The following description of the Company's capital stock is a summary
which does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Certificate, the
Bylaws of the Company and the form of Warrant evidencing the outstanding
Warrants, copies of which are filed as exhibits to the Registration Statement
of which this Prospectus is a part, as well as the applicable provisions of the
Delaware General Corporation Law.
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<PAGE> 33
COMMON STOCK
General. Each share of Common Stock has the same relative rights and is
identical in all respects with each other share of Common Stock. The Common
Stock is not subject to call for redemption and each outstanding share of
Common Stock as of the date hereof is fully paid and non-assessable and, upon
receipt of the purchase price payable upon exercise of the Warrants, the shares
of Common Stock issuable upon such exercise will be fully paid and
non-assessable.
Voting Rights. Except as provided in any resolution or resolutions
adopted by the Board of Directors of the Company establishing any series of
Preferred Stock, the holders of Common Stock possess exclusive voting rights in
the Company. Each holder of Common Stock is entitled to one vote for each
share held on all matters voted upon by shareholders, and shareholders are
permitted to cumulate votes for the election of directors.
Dividends. Subject to the rights of the holders of any series of
Preferred Stock, the holders of Common Stock are entitled to such dividends as
may be declared from time to time by the Board of Directors of the Company out
of funds legally available therefor.
Preemptive Rights. Holders of Common Stock do not have any preemptive
rights with respect to any shares which may be issued by the Company in the
future; thus, the Company may sell shares of Common Stock without first
offering them to the then holders of Common Stock.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Company, the holders of Common Stock would be entitled to receive, after
payment of all debts and liabilities of the Company, all assets of the Company
available for distribution, subject to the rights of the holders of any
Preferred Stock which may be issued with a priority in liquidation or
dissolution over the holders of Common Stock.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue the
Preferred Stock and to fix and state voting powers, designations, preferences
or other special rights of such shares and the qualifications, limitations and
restrictions thereof. The Preferred Stock may be issued in distinctly
designated series, may be convertible into Common Stock and may rank prior to
the Common Stock as to dividend rights, liquidation preferences, or both.
The authorized but unissued shares of Preferred Stock (as well as the
authorized but unissued and unreserved shares of Common Stock) are available
for issuance in future mergers or acquisitions, in a future public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve the transaction in which the additional authorized shares
of Preferred Stock (as well as Common Stock) would be issued, shareholder
approval generally would not be required for the issuance of these shares.
Depending on the circumstances, however, shareholder approval may be required
pursuant to the requirements for continued quotation of the Common Stock on the
Nasdaq Stock Market's National Market or the requirements of any exchange on
which the Common Stock may then be listed.
WARRANTS
Exercise. The Warrants may be exercised on or after December 11, 1998
and will expire at 5:00 p.m., Pacific Time, on December 11, 2005 (the
"Expiration Date"), provided that the Warrants may be exercised in whole or in
part prior to December 11, 1998 in connection with or following a Change in
Control of the Company, as defined in the Warrants. The registered holder of a
Warrant (a "Holder" and collectively the "Holders") has the right to purchase
from the Company the number of shares of Common Stock set forth on the face
thereof (as may be adjusted pursuant to the terms of the Warrant) at the price
of $2.25 per share (as may be adjusted pursuant to the terms of the Warrant,
the "Exercise Price"). The Offering will not result in a Change in Control
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<PAGE> 34
of the Company, as defined in the Warrants, nor is the Offering expected to
result in an adjustment to the exercise price and number of Warrants.
Nevertheless, future issuances of Common Stock and other events (whether
considered on their own or in combination with the Offering) may result in an
adjustment to the exercise price and number of Warrants, under the terms and
conditions set forth below.
Adjustments of Exercise Price and Number of Shares of Common Stock. The
Exercise Price and the number and kind of shares of Common Stock issuable upon
the exercise of the Warrants will be subject to change or adjustment from time
to time as follows:
(a) Change in Common Stock. In the event the Company shall, at any
time or from time to time after the issuance of the Warrants, (i) issue any
shares of Common Stock as a stock dividend to the holders of Common Stock, (ii)
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares or (iii) issue any shares of its capital stock in a
reclassification or reorganization of the Common Stock (any such issuance,
subdivision, combination, reclassification or reorganization being herein
called a "Change of Shares"), then (A) in the case of (i) or (ii) above, the
number of shares of Common Stock that may be purchased upon the exercise of a
Warrant shall be adjusted to the number of shares of Common Stock that the
Holder would have owned or have been entitled to receive after the happening of
such event had such Warrant been exercised immediately prior to the record date
(or, if there is no record date, the effective date) for such event, and the
Exercise Price shall be adjusted to the price (calculated to the nearest
1,000th of one cent) determined by multiplying the Exercise Price immediately
prior to such event by a fraction, the numerator of which shall be the number
of shares of Common Stock purchasable with the Warrant immediately prior to
such event and the denominator of which shall be the number of shares of Common
Stock purchasable with the Warrant after the adjustment referred to above and
(B) in the case of clause (iii) above, paragraph (l) below shall apply. An
adjustment made pursuant to clause (A) of this paragraph (a) shall become
effective retroactively immediately after the record date in the case of such
dividend and shall become effective immediately after the effective date in
other cases, but any shares of Common Stock issuable solely as a result of such
adjustment shall not be issued prior to the effective date of such event.
(b) Common Stock Distribution. In the event the Company shall, at
any time or from time to time after the issuance of the Warrants, issue, sell
or otherwise distribute (including by way of deemed distributions pursuant to
paragraphs (c) and (d) below) any shares of Common Stock (other than pursuant
to (A) a Change of Shares or (B) the exercise or conversion, as the case may
be, of any Option, Convertible Security (each as defined in paragraph (c)
below) or Warrant) (any such event, including any deemed distributions
described in paragraphs (c) and (d), being herein called a "Common Stock
Distribution"), for a consideration per share less than the current market
price per share of Common Stock (as defined in paragraph (f) below), on the
date of such Common Stock Distribution, then, effective upon such Common Stock
Distribution, the Exercise Price shall be reduced to the price (calculated to
the nearest 1,000th of one cent) determined by multiplying the Exercise Price
in effect immediately prior to such Common Stock Distribution by a fraction,
the numerator of which shall be the sum of (i) the number of shares of Common
Stock outstanding (exclusive of any treasury shares) immediately prior to such
Common Stock Distribution multiplied by the current market price per share of
Common Stock on the date of such Common Stock Distribution, plus (ii) the
consideration, if any, received by the Company upon such Common Stock
Distribution, and the denominator of which shall be the product of (A) the
total number of shares of Common Stock issued and outstanding immediately after
such Common Stock Distribution multiplied by (B) the current market price per
share of Common Stock on the date of such Common Stock Distribution.
If any Common Stock Distribution shall require an adjustment to the
Exercise Price pursuant to the foregoing provisions of this paragraph (b),
including by operation of paragraph (c) or (d) below, then, effective at the
time such adjustment is made, the number of shares of Common Stock purchasable
upon the exercise of a Warrant shall be increased to a number determined by
multiplying the number of shares so purchasable immediately prior to such
Common Stock Distribution by a fraction, the numerator of which shall be the
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<PAGE> 35
Exercise Price in effect immediately prior to such adjustment and the
denominator of which shall be the Exercise Price in effect immediately after
such adjustment. In computing adjustments under this paragraph, fractional
interests in Common Stock shall be taken into account to the nearest 1,000th of
a share.
The provisions of this paragraph (b), including by operation of
paragraph (c) or (d) below, shall not operate to increase the Exercise Price or
reduce the number of shares of Common Stock purchasable upon the exercise of a
Warrant, except by operation of paragraph (j) or (k) below.
(c) Issuance of Options. In the event the Company shall, at any
time or from time to time after issuance of the Warrants, issue, sell,
distribute or otherwise grant in any manner (including by assumption) any
rights to subscribe for or to purchase, or any warrants or options for the
purchase of, Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (any such rights, warrants or options being
herein called "Options" and any such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or not such
Options or the rights to convert or exchange such Convertible Securities are
immediately exercisable, and the price per share at which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange
of such Convertible Securities (determined by dividing (i) the aggregate
amount, if any, received or receivable by the Company as consideration for the
issuance, sale, distribution or granting of such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise of all such Options, plus, in the case of Options to acquire
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the conversion or exchange of all such
Convertible Securities, by (ii) the total maximum number of shares of Common
Stock issuable upon the exercise of all such Options) shall be less than the
current market price per share of Common Stock on the date of the issuance,
sale, distribution or granting of such Options, then, for the purposes of
paragraph (b) above, the total maximum number of shares of Common Stock
issuable upon the exercise of all such Options or upon the conversion or
exchange of the total maximum amount of the Convertible Securities issuable
upon the exercise of all such Options shall be deemed to have been issued as of
the date of the issuance, sale, distribution or granting of such Options and
thereafter shall be deemed to be outstanding and the Company shall be deemed to
have received as consideration such price per share, determined as provided
above, therefor. Except as otherwise provided in paragraphs (j) and (k) below,
no additional adjustment of the Exercise Price shall be made upon the actual
exercise of such Options or upon conversion or exchange of the Convertible
Securities issuable upon the exercise of such Options. If the minimum and
maximum numbers or amounts referred to in this paragraph (c) or in paragraph
(d) below cannot be calculated with certainty as of the date of the required
adjustment, such numbers and amounts shall be determined in good faith by the
Board of Directors of the Company.
(d) Issuance of Convertible Securities. In the event the Company
shall, at any time or from time to time after issuance of the Warrants, issue,
sell or otherwise distribute (including by assumption) any Convertible
Securities (other than upon the exercise of any Option), whether or not the
rights to convert or exchange such Convertible Securities are immediately
exercisable, and the price per share at which Common Stock is issuable upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the aggregate amount, if any, received or receivable by the Company as
consideration for the issuance, sale or distribution of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange of all such
Convertible Securities, by (ii) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the current market price per share of Common
Stock on the date of such issuance, sale or distribution, then, for the
purposes of paragraph (b) above, the total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities
shall be deemed to have been issued as of the date of the issuance, sale or
distribution of such Convertible Securities and thereafter shall be deemed to
be outstanding and the Company shall be deemed to have received as
consideration such price per share, determined as provided above, therefor.
Except as otherwise provided in paragraphs (j) and (k) below, no additional
adjustment of the Exercise Price shall be made upon the actual conversion or
exchange of such Convertible Securities.
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<PAGE> 36
(e) Dividends and Distributions. In the event the Company shall, at
any time or from time to time after issuance of the Warrants, distribute to the
holders of Common Stock any dividend or other distribution of cash, evidences
of its indebtedness, other securities or other properties or assets (in each
case other than (i) dividends payable in Common Stock, Options or Convertible
Securities and (ii) any cash dividend declared and paid pursuant to a regular
quarterly dividend policy of the Company), or any options, warrants or other
rights to subscribe for or purchase any of the foregoing, then (A) the Exercise
Price shall be decreased to a price determined by multiplying the Exercise
Price then in effect by a fraction, the numerator of which shall be the current
market price per share of Common Stock on the record date for such distribution
less the sum of (X) the cash portion, if any, of such distribution per share of
Common Stock outstanding (exclusive of any treasury shares) plus (Y) the then
fair market value (as determined in good faith by the Board of Directors of the
Company) per share of Common Stock issued and outstanding on the record date
for such distribution of that portion, if any, of such distribution consisting
of evidences of indebtedness, other securities, properties, assets, options,
warrants or subscription or purchase rights, and the denominator of which shall
be such current market price per share of Common Stock and (B) the number of
shares of Common Stock purchasable upon the exercise of a Warrant shall be
increased to a number determined by multiplying the number of shares of Common
Stock so purchasable immediately prior to the record date for such distribution
by a fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to the adjustment required by clause (A) of this sentence and
the denominator of which shall be the Exercise Price in effect immediately
after such adjustment. The adjustments required by this paragraph (e) shall be
made whenever any such distribution is made and shall be retroactive to the
record date for the determination of stockholders entitled to receive such
distribution.
(f) Current Market Price. For the purpose of any computation under
paragraphs (b), (c), (d) and (e) above, the current market price per share of
Common Stock at any date shall be the average of the daily closing prices for
the shorter of (i) the 20 consecutive trading days ending on the last full
trading day on the exchange or market specified in the second succeeding
sentence, prior to the Time of Determination and (ii) the period commencing on
the date next succeeding the first public announcement of the issuance, sale,
distribution or granting in question through such last full trading day prior
to the Time of Determination. The term "Time of Determination" as used herein
shall be the time and date of the earlier to occur of (A) the date as of which
the current market price is to be computed and (B) the last full trading day on
such exchange or market before the commencement of "ex-dividend" trading in the
Common Stock relating to the event giving rise to the adjustment required by
paragraph (b), (c), (d) or (e). The closing price for any day shall be the
last reported sale price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked prices regular way
for such day, in each case (1) on the principal national securities exchange on
which the shares of Common Stock are listed or to which such shares are
admitted to trading or (2) if the Common Stock is not listed or admitted to
trading on a national securities exchange, in the over-the-counter market as
reported by the Nasdaq Stock Market's National Market or any comparable system
or (3) if the Common Stock is not listed on the Nasdaq Stock Market's National
Market or a comparable system, as furnished by two members of the National
Association of Securities Dealers, Inc. ("NASD") selected from time to time in
good faith by the Board of Directors of the Company for that purpose. In the
absence of all of the foregoing, or if for any other reason the current market
price per share cannot be determined pursuant to the foregoing provisions of
this paragraph (f), the current market price per share shall be the fair market
value thereof as determined in good faith by the Board of Directors of the
Company.
(g) Certain Distributions. If the Company shall pay a dividend or
make any other distribution payable in Options or Convertible Securities, then,
for purposes of paragraph (b) above (including dividends or distributions by
operation of paragraph (c) or (d) above, as the case may be), such Options or
Convertible Securities shall be deemed to have been issued or sold without
consideration except for such amounts of consideration as shall have been
deemed to have been received by the Company pursuant to paragraphs (c) or (d)
above, as appropriate.
35
<PAGE> 37
(h) Consideration Received. If any shares of Common Stock shall be
issued and sold in an underwritten public offering, the consideration received
by the Company for such shares of Common Stock shall be deemed to include the
underwriting discounts and commissions realized by the underwriters of such
public offering. If any shares of Common Stock, Options or Convertible
Securities shall be issued, sold or distributed for a consideration other than
cash, the amount of the consideration other than cash received by the Company
in respect thereof shall be deemed to be the then fair market value of such
consideration (as determined in good faith by the Board of Directors of the
Company). If any Options shall be issued in connection with the issuance and
sale of other securities of the Company, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued, sold or
distributed for such amount of consideration as shall be allocated to such
Options in good faith by the Board of Directors of the Company.
(i) Deferral of Certain Adjustments. No adjustments to the Exercise
Price (including the related adjustment to the number of shares of Common Stock
purchasable upon the exercise of a Warrant) shall be required hereunder unless
such adjustment, together with other adjustments carried forward as provided
below, would result in an increase or decrease of at least one percent of the
Exercise Price; provided, however, that any adjustment which by reason of this
paragraph (i) is not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(j) Changes in Options and Convertible Securities. If the exercise
price provided for in any Options referred to in paragraph (c) above, the
additional consideration, if any, payable upon the conversion or exchange of
any Convertible Securities referred to in paragraph (c) or (d) above, or the
rate at which any Convertible Securities referred to in paragraph (c) or (d)
above are convertible into or exchangeable for Common Stock shall change at any
time (other than under or by reason of provisions designed to protect against
dilution upon an event which results in a related adjustment pursuant to the
Warrants), the Exercise Price then in effect and the number of shares of Common
Stock purchasable upon the exercise of a Warrant shall forthwith be readjusted
(effective only with respect to any exercise of a Warrant after such
readjustment) to the Exercise Price and number of shares of Common Stock so
purchasable that would then be in effect had the adjustment made upon the
issuance, sale, distribution or granting of such Options or Convertible
Securities been made based upon such changed purchase price, additional
consideration or conversion rate, as the case may be, but only with respect to
such Options and Convertible Securities as then remain outstanding.
(k) Expiration of Options and Convertible Securities. If, at any
time after any adjustment to the number of shares of Common Stock purchasable
upon the exercise of a Warrant shall have been made pursuant to paragraph (c),
(d) or (j) above or this paragraph (k), any Options or Convertible Securities
shall have expired unexercised or, solely with respect to Options that are
rights ("Rights"), are redeemed, the number of such shares so purchasable
shall, upon such expiration or such redemption, be readjusted and shall
thereafter be such as they would have been had they been originally adjusted
(or had the original adjustment not been required, as the case may be) as if
(i) the only shares of Common Stock deemed to have been issued in connection
with such Options or Convertible Securities were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such Options or Convertible
Securities and (ii) such shares of Common Stock, if any, were issued or sold
for the consideration actually received by the Company upon such exercise plus
the aggregate consideration, if any, actually received by the Company for the
issuance, sale, distribution or granting of all such Options or Convertible
Securities, whether or not exercised; provided, however, that (x) no such
readjustment shall have the effect of decreasing the number of shares so
purchasable by an amount (calculated by adjusting such decrease to account for
all other adjustments made pursuant to this Section 7 following the date of the
original adjustment referred to above) in excess of the amount of the
adjustment initially made in respect of the issuance, sale, distribution or
granting of such Options or Convertible Securities and (y) in the case of the
redemption of any Rights, there shall be deemed (for the purposes of paragraph
(c) above) to have been issued as of the date of such redemption for no
consideration a number of shares of Common Stock equal to the aggregate
consideration paid to effect such redemption divided by the current market
price of the Common Stock on the date of such redemption.
36
<PAGE> 38
(l) Other Adjustments. In the event that at any time a Holder shall
become entitled to receive any securities of the Company other than shares of
Common Stock as constituted on the date of issuance of the Holder's Warrant,
the number of such other securities so receivable upon exercise of such Warrant
and the Exercise Price applicable to such exercise shall be adjusted at such
time, and shall be subject to further adjustment from time to time thereafter,
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the shares of Common Stock contained in the Warrants.
(m) Excluded Transactions. Notwithstanding any provision in the
Warrants to the contrary, no adjustment shall be made in respect of (i) any
change in the par value of the Common Stock, (ii) the granting of any Options
or the issuance of any shares of Common Stock, in either case, which would
otherwise trigger an adjustment under paragraph (b) above, that may be
registered on Form S-8 or any successor form under the Securities Act, to any
directors, officers or employees of the Company, provided that the granting of
Options or the issuance of shares of Common Stock pursuant to this clause (ii)
is in the ordinary course of business and is usual and customary, or (iii) the
issuance of Common Stock pursuant to any dividend reinvestment plan which
provides that the price of the Common Stock purchased for plan participants
from the Company will be no less than 95% of the average of the high and low
sales prices of the Common Stock on the investment date or, if no trading in
the Common Stock occurs on such date, the next preceding date on which trading
occurred (1) on the principal national securities exchange on which the shares
of Common Stock are listed or to which such shares are admitted to trading or
(2) if the Common Stock is not listed or admitted to trading on a national
securities exchange, in the over-the-counter market as reported by the Nasdaq
Stock Market's National Market or any comparable system or (3) if the Common
Stock is not listed on the Nasdaq Stock Market's National Market or a
comparable system, as furnished by two members of the NASD selected from time
to time in good faith by the Board of Directors of the Company for that
purpose. In the absence of all of the foregoing, or if for any other reason
the current market price per share cannot be determined pursuant to the
foregoing provisions of this paragraph, the current market price per share
shall be the fair market value thereof as determined in good faith by the Board
of Directors of the Company.
Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of its assets to another corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as
a condition of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby the Holder of a
Warrant shall thereafter have the right to purchase and receive, upon the basis
and upon the terms and conditions specified in the Warrant and in lieu of the
shares of Common Stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger or sale not taken
place, and in any such case appropriate provision shall be made with respect to
the rights and interests of the Holder of the Warrant to the end that the
provisions of the Warrant (including without limitation provisions for
adjustments of the Exercise Price and of the number of shares purchasable upon
the exercise of the Warrant) shall thereafter be applicable, as nearly as may
be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise thereof. The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed by first class mail, postage prepaid,
to each Holder at the last address of the Holder appearing on the register
maintained by the Company, the obligation to deliver to such Holder such shares
of stock, securities or assets as, in accordance with the provisions of the
Warrants such Holder may be entitled to purchase.
37
<PAGE> 39
RESTRICTIONS ON ACQUISITION OF THE COMPANY
FEDERAL LAWS AND REGULATIONS
Federal laws and regulations generally require any person who intends to
acquire control of a savings and loan holding company or savings institution to
give at least 60 days prior written notice to the OTS. "Control" is defined as
the power, directly or indirectly, to direct the management or policies of a
savings institution or to vote 25% or more of any class of voting securities of
the savings institution. In addition to the foregoing restrictions, a company
must secure the approval of the OTS before it can acquire control of a savings
institution. Under federal regulations, a person (including business entities)
is deemed conclusively to have acquired control if, among other things, such
person acquires: (i) 25% or more of any class of voting stock of the savings
institution; (ii) irrevocable proxies representing 25% or more of any class of
voting stock of the savings institution; (iii) any combination of voting stock
and irrevocable proxies representing 25% or more of any class of such
institution's voting stock; or (iv) control of the election of a majority of
the directors of the savings institution. In addition, a rebuttable
presumption of control arises in the event a person acquires more than 10% of
any class of voting stock (or more than 25% of any class of non-voting stock)
and is subject to one or more of eight enumerated control factors. Such
regulations also set forth rebuttable presumptions of concerted action and the
procedures to follow to rebut any such presumptions. The OTS is specifically
empowered to disapprove such an acquisition of control if it finds, among other
reasons, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the
institution or its depositors; or (iii) the competency, experience or integrity
of the acquiring person indicates that it would not be in the interest of the
depositors, the institution or the public to permit the acquisition of control
by such person.
DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law generally provides
that a Delaware corporation shall not engage in any "business combination" with
an "interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder unless (i) prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for this purpose,
shares owned by persons who are directors and also officers and shares owned by
employee stock ownership plans in which employee participants do not have the
right to determine confidentially whether the shares held subject to the plan
will be tendered in a tender offer or exchange offer; or (3) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. The three-year prohibition on
business combinations with an interested stockholder does not apply under
certain circumstances, including business combinations with a corporation which
does not have a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on an inter-dealer quotation
system of a registered national securities association, or (iii) held of record
by more than 2,000 stockholders, unless in each case this result was directly
or indirectly caused by the interested stockholder.
An "interested stockholder" generally means any person that (i) is the
owner of 15% or more of the outstanding voting stock of the corporation or (ii)
is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the affiliates
and associates of such a person. The term "business combination" is broadly
defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various
other transactions which may benefit an interested stockholder.
38
<PAGE> 40
SHARES AVAILABLE FOR FUTURE SALE
The 1,750,000 shares of Common Stock offered hereby (plus up to 262,500
shares which may be sold pursuant to the Underwriters' overallotment option)
will be freely transferable without further restriction or further registration
under the Securities Act, except that any shares purchased by an "affiliate" of
the Company, as that term is defined by the Securities Act ("affiliate"), will
be subject to certain of the resale limitations of Rule 144 under the
Securities Act. Of the 3,170,296 shares of Common Stock outstanding at June 1,
1998, 2,739,175 shares are freely transferable without restriction or
registration under the Securities Act and 431,121 shares are "restricted
securities" as that term is defined in Rule 144 and may only be sold pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder, including pursuant to Rule 144.
Pursuant to a Registration Rights Agreement entered into by the Company
and certain investors in December 1995, the Company intends to file a
Registration Statement under the Securities Act to register for resale from
time to time by the Selling Securityholders (i) the 431,121 shares of
outstanding restricted Common Stock, (ii) outstanding Warrants to purchase an
aggregate of 2,376,000 shares of Common Stock and (iii) 2,376,000 shares of
Common Stock issuable upon exercise of such Warrants (2,024,000 Warrants and
2,024,000 shares of Common Stock issuable upon exercise of such Warrants may be
deemed to be held by affiliates of the Company). The Warrants become
exercisable in accordance with their terms on December 11, 1998. See
"Description of Capital Stock - Warrants." The sale or distribution of all or
any portion of the Securities may be effected from time to time by the Selling
Securityholders directly, or indirectly through brokers or dealers or in a
distribution by one or more underwriters on a firm commitment or best efforts
basis, in the over-the-counter market, on any national securities exchange or
automated inter-dealer quotation system on which the Securities are listed or
traded, if any, in privately-negotiated transactions or otherwise, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. In addition, any of the Securities that
qualify for sale pursuant to Rule 144 may be sold in transactions complying
with such rule.
As of June 1, 1998, (i) a total of 465,102 shares of Common Stock were
reserved for issuance under the Company's Stock Option Plan for employees who
may be deemed to be affiliates of the Company, which the Board of Directors of
the Company has proposed to increase to 800,000, subject to approval of the
Company's stockholders at an annual meeting of stockholders to be held on June
17, 1998, and (ii) a total of 449,800 shares of Common Stock were reserved for
issuance under the Company's Stock Option Plan for employees who are not deemed
to be affiliates of the Company. Shares of Common Stock issued under the Stock
Option Plans, other than shares held by affiliates of the Company, which may be
sold under Rule 144, will be eligible for resale in the public market without
restriction.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year will be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then-outstanding shares of Common Stock (49,202 shares immediately
after the Offering) or (ii) the average weekly trading volume of the Common
Stock in the over-the-counter market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. Sales under
Rule 144 also are subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned shares, within the context of
Rule 144, for at least two years, is entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information or notice requirements.
39
<PAGE> 41
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting
Agreement among the Company, the Bank and Sandler O'Neill & Partners, L.P.
("Sandler O'Neill"), as Representative of the underwriters named herein (the
"Underwriters"), the Company has agreed to sell to the Underwriters, and the
Underwriters have severally agreed to purchase from the Company, the number of
shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Sandler O'Neill & Partners, L.P.
---------
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the shares of Common Stock
offered hereby, if any are taken.
The Underwriters propose initially to offer the Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and to certain securities dealers at such price less a
concession of $________ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $_______ per share to
certain brokers and dealers. After the Common Stock is released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Representative.
The Company has granted the Underwriters an option, exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
262,500 additional shares of Common Stock solely to cover over-allotments, if
any.
The Company and the Bank have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act.
Sandler O'Neill has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In connection with the Offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the shares of Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock than they are required to purchase from the
Company in the Offering. The Underwriters also may impose a penalty bid,
whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the Offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
shares of Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
Neither the Company nor the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In
40
<PAGE> 42
addition, neither the Company nor the Underwriters makes any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Underwriters may reserve for sale shares of Common Stock which may
be sold at the initial public offering price to directors, officers and
employees of the Company. The number of shares of Common Stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares of Common Stock not to be purchased
will be offered by the Underwriters on the same basis as the other shares of
Common Stock offered in the Offering.
Sandler O'Neill has provided from time to time, and expects to provide
in the future, investment banking services to the Company and its affiliates
for which Sandler O'Neill has received or will receive customary fees and
commissions.
Except for (i) Common Stock sold in the Offering and (ii) Common Stock
issued upon exercise of stock options granted pursuant to the Company's stock
option plans and the Warrants in accordance with their terms, the Company has
agreed in the Underwriting Agreement and its directors and executive officers
have otherwise agreed not to offer, sell, contract to sell or otherwise dispose
of any equity securities of the Company (or any securities exercisable for or
convertible into such equity securities) for a period of 120 days after the
consummation of the Offering without the prior written consent of Sandler
O'Neill.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for
the Company by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., and for
the Underwriters by Sullivan & Cromwell, Los Angeles, California.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
41
<PAGE> 43
=======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
A SOLICITATION OF ANY OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
-------------------------
Table of Contents
-------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.......................... 3
Incorporation of Certain Documents by
Reference.................................. 3
Summary....................................... 4
Selected Consolidated Financial Data.......... 7
Risk Factors................................. 10
Use of Proceeds.............................. 17
Market Price for Common Stock and
Dividends................................. 18
Capitalization............................... 19
Regulatory Capital........................... 20
Business Overview of the Company............. 21
Description of Capital Stock................. 31
Restrictions on Acquisition of the
Company................................... 38
Shares Available for Future Sale.............. 39
Underwriting................................. 40
Validity of Common Stock..................... 41
Experts...................................... 41
</TABLE>
=======================================================
=======================================================
1,750,000
HAWTHORNE
FINANCIAL
CORPORATION
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
June , 1998
--
SANDLER O'NEILL & PARTNERS, L.P.
=======================================================
<PAGE> 44
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the expenses to be incurred by the
Company in connection with the offering of Common Stock described herein.
<TABLE>
<S> <C>
SEC registration fee........................................................ $ 11,354
Legal fees and expenses..................................................... 450,000
Accounting fees and expenses................................................ 125,000
Miscellaneous expenses...................................................... 113,646
-------
$ 700,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Thirteenth of the Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director except for liability: (i) for any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the director derived any improper personal
benefit.
Article Fourteenth of the Company's Certificate of Incorporation
provides that each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or
officer of the Company or is or was serving at the request of the Company as a
director or officer of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Company to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may be amended and without
giving effect to any provisions of the Delaware General Corporation Law which
would make such indemnification permissive and not mandatory on the part of the
Company, but, in the case of any amendment of the Delaware General Corporation
Law, only to the extent that such amendment permits the Company to provide
broader indemnification rights than said law permitted the Company to provide
prior to such amendment, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee who has ceased to be a director or officer and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in paragraph (B) of Article Fourteenth with respect to
proceedings to enforce rights to indemnification, the Company shall indemnify
any such indemnitee in connection with a proceeding (or part thereof) initiated
by such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Company. Article Fourteenth of the Company's
Certificate of Incorporation also provides that the right to indemnification
contained therein shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Company of an undertaking, by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such indemnitee is
not entitled to be indemnified for such expenses under Article Fourteenth or
otherwise.
II-1
<PAGE> 45
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
Exhibits are listed by number corresponding to the Exhibit Table of
Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------------------------- --------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement among Sandler O'Neill, the
Company and the Bank
3.1 Certificate of Incorporation of the Company (1)
3.2 Amendment to Certificate of Incorporation of the Company (2)
3.3 Bylaws of the Company (1)
4.1 Specimen certificate of the Company's Common Stock(3)
4.2 Indenture, dated as of December 31, 1997, between the
Company and United States Trust Company of New York, as
Trustee, relating to the Company's 12 1/2% Notes due 2004 (4)
4.3 Form of the Company's 12 1/2% Notes due 2004 (included in
Section 2.02 of the Indenture included as Exhibit 4.2)
4.4 Form of Warrants to purchase an aggregate of 2,376,000 shares
of Common Stock (5)
4.5 Registration Rights Agreement among the Company and certain
investors (5)
4.6 Unit Purchase Agreement among the Company and the
investors named therein (5)
5.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding the
legality of the Securities
10.1 Stock Option Plan for all Employees (6)
10.2 Amended Stock Option Plan for all Employees (7)
10.3 Stock Option Plan for Employees who are not Executive
Officers and Directors (8)
10.4 Lease of corporate headquarters (9)
11.1 Statement on computation of per share earnings (10)
21.1 Subsidiaries of the Registrant (11)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in
Exhibit 5)
24.1 Power of Attorney (located on the signature page hereto)
</TABLE>
II-2
<PAGE> 46
- ----------------------
(1) Incorporated by reference to the Company's Registration
Statementon Form S-8 (No. 33-74800) filed on February 3, 1994.
(2) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
(3) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1985.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, as amended.
(5) Incorporated by reference to the Company's Current Report on Form
8-K filed on February 7, 1996.
(6) Incorporated by reference to the Company's Registration Statement
on Form S-8 (No. 33-74800) filed on February 3, 1994.
(7) Incorporated by reference to the Proxy Statement filed by the
Company on April 29, 1998. The effectiveness of this exhibit is subject to the
approval of the Company's stockholders at the annual meeting of stockholders of
the Company to be held on June 17, 1998.
(8) Incorporated by reference to the Company's Registration Statement
on Form S-8 (No. 33-23587) filed on March 19, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
(10) See Note A to the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended.
(11) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
B. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are
not applicable as the required information is included in the financial
statements or notes thereto incorporated by reference herein.
C. REPORTS, OPINIONS OR APPRAISALS.
Not applicable.
II-3
<PAGE> 47
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being transferred which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of each undersigned Registrant pursuant to the provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the undersigned Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by the controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 48
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Hawthorne
Financial Corporation certifies that it has reasonable grounds that it meets
all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of El Segundo, State of California as of the 3rd
day of June 1998.
HAWTHORNE FINANCIAL CORPORATION
By: /s/ Scott A. Braly
-------------------------
Scott A. Braly
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each of the directors and/or officers
of Hawthorne Financial Corporation whose signature appears below hereby
appoints Scott A. Braly as his or her attorney-in-fact to sign in his or her
name and behalf, in any and all capacities stated below and to file with the
Securities and Exchange Commission any and all amendments, including
post-effective amendments, to this Registration Statement on Form S-2, making
such changes in the Registration Statement as appropriate, and generally to do
all such things in their behalf in their capacities as directors and/or
officers to enable Hawthorne Financial Corporation to comply with the
provisions of the Securities Act of 1933, and all requirements of the
Securities and Exchange Commission.
<TABLE>
<S> <C>
/s/ Marilyn Garton Amato Date: June 3, 1998
- --------------------------------------
Marilyn Garton Amato
Director
/s/ Scott A. Braly Date: June 3, 1998
- --------------------------------------
Scott A. Braly
Director and President and Chief Executive Officer
(principal executive officer)
/s/ Timothy R. Chrisman Date: June 3, 1998
- --------------------------------------
Timothy R. Chrisman
Chairman
/s/ Anthony W. Liberati Date: June 3, 1998
- --------------------------------------
Anthony W. Liberati
Vice Chairman
</TABLE>
II-5
<PAGE> 49
<TABLE>
<S> <C>
/s/ Harry F. Radcliffe Date: June 3, 1998
- --------------------------------------
Harry F. Radcliffe
Director
/s/ Howard E. Ritt Date: June 3, 1998
- --------------------------------------
Howard E. Ritt
Director
/s/ Norman A. Morales Date: June 3, 1998
- --------------------------------------
Norman A. Morales
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
</TABLE>
II-6
<PAGE> 1
EXHIBIT 1.1
1,750,000 SHARES
HAWTHORNE FINANCIAL CORPORATION
COMMON STOCK
PAR VALUE $0.01 PER SHARE
-------------------------------
UNDERWRITING AGREEMENT
June __, 1998
Sandler O'Neill & Partners, L.P.,
As representative of the several Underwriters
named in Schedule I hereto,
Two World Trade Center, 104th Floor,
New York, New York 10048.
Ladies and Gentlemen:
Hawthorne Financial Corporation, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 1,750,000 shares (the "Firm Shares") and, at
the election of the Underwriters, up to 262,500 additional shares (the
"Optional Shares") of the common stock, par value $0.01 per share ("Stock") of
the Company (the Firm Shares and the Optional Shares that the Underwriters
elect to purchase pursuant to Section 2 hereof being collectively called the
"Shares").
1. (a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form S-2 (File No.
333-....) (the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the "Commission"); the
Initial Registration Statement and any post-effective amendment thereto, each
in the form heretofore delivered to you, and, excluding exhibits thereto but
including all documents incorporated by reference in the prospectus contained
therein, delivered to you for each of the other Underwriters, have been
declared effective by the
<PAGE> 2
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing, no other document with respect to
the Initial Registration Statement or document incorporated by reference
therein has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration Statement, if
any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act, is
hereinafter called a "Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if any,
including all exhibits thereto and including (i) the information contained in
the form of final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed by virtue of
Rule 430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective and (ii) the documents incorporated by reference
in the prospectus contained in the registration statement at the time such part
of the Initial Registration Statement became effective, each as amended at the
time such part of the Initial Registration Statement became effective or such
part of the Rule 462(b) Registration Statement, if any, became or hereinafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus"; and any reference
herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Item
12 of Form S-2 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be;
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects
to the requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Sandler O'Neill & Partners, L.P. expressly for use
therein;
(iii) The documents incorporated by reference in the
Prospectus, when they were filed with the Commission, conformed in all material
respects to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information furnished in
writing to the Company by an Underwriter through Sandler O'Neill & Partners,
L.P. expressly for use therein;
2
<PAGE> 3
(iv) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date as to
the Registration Statement and any amendment thereto, and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter through
Sandler O'Neill & Partners, L.P. expressly for use therein;
(v) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any change in
the capital stock or long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries (a "Material Adverse Effect"), otherwise than as
set forth or contemplated in the Prospectus;
(vi) The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(vii) The Company is a registered savings and loan holding
company under the Home Owners' Loan Act ("HOLA") and has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and has
been duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by reason
of the failure to be so qualified in any such jurisdiction;
(viii) Each subsidiary of the Company either has been duly
incorporated and is validly existing as a corporation or has been duly
chartered and is validly existing as a federal savings bank, in each case in
good standing under the laws of the jurisdiction of its organization,
3
<PAGE> 4
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification,
or is subject to no material liability or disability by reason of the failure
to be so qualified in any such jurisdiction; the activities of the subsidiaries
of Hawthorne Savings, F.S.B., a federally chartered and insured stock savings
bank (the "Bank"), are permitted to subsidiaries of a federally chartered
savings bank under applicable law and the rules and regulations of the Office
of Thrift Supervision (the "OTS") set forth in Chapter V of Title 12 of the
Code of Federal Regulations; all of the issued and outstanding capital stock of
each subsidiary of the Company has been duly authorized and validly issued and
is fully paid and nonassessable and is owned, directly or through other
subsidiaries of the Company, by the Company; and all of the capital stock of
each subsidiary of the Company that is owned by the Company, directly or
through other subsidiaries of the Company, is owned free and clear of any
pledge, lien, encumbrance, claim or equity;
(ix) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable and conform to the description of the Stock contained in the
Prospectus; and all of the issued shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued, are fully paid
and nonassessable and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(x) The unissued Shares to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and nonassessable and will
conform to the description of the Stock contained in the Prospectus;
(xi) Except as described in the Prospectus, there are no
outstanding rights, warrants or options to acquire, or instruments convertible
into or exchangeable for, or agreements or understandings with respect to the
sale or issuance of, any shares of capital stock of or other equity interest in
the Company;
(xii) The issue and sale of the Shares by the Company and
the compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict with
or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the
4
<PAGE> 5
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
(xiii) Neither the Company nor any of its subsidiaries is in
violation of its charter or by-laws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, note,
lease or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(xiv) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the capital stock and warrants of the Company and under
the caption "Underwriting", insofar as they purport to describe the provisions
of the laws and documents referred to therein, are accurate, complete and fair;
(xv) Except as disclosed in the Prospectus, the Company
and its subsidiaries are conducting their respective businesses in compliance
in all material respects with all laws, rules, regulations, decisions,
directives and orders (including, without limitation, all regulations and
orders of, or agreements with, the OTS and the Federal Deposit Insurance
Corporation (the "FDIC")) applicable to them; there is no action, suit,
investigation or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its
subsidiaries (A) that is required to be disclosed in the Registration Statement
and not disclosed therein, (B) that could result in any Material Adverse
Effect, (C) that could materially and adversely affect the properties, assets
or leasehold interests of the Company and its subsidiaries, or (D) that could
adversely affect the consummation of the transactions contemplated in this
Agreement; all pending legal or governmental proceedings to which the Company
or any of its subsidiaries is a party or of which any of their property is the
subject, which are not described in the Registration Statement, including
ordinary routine litigation incidental to their respective businesses, would
not have a Material Adverse Effect; and there are no contracts or documents of
the Company or any of its subsidiaries which would be required to be described
in the Registration Statement or to be filed as exhibits thereto by the Act or
by the rules and regulations of the Commission thereunder which have not been
so described and filed;
(xvi) The Company and its subsidiaries possess such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to conduct the business now
operated by the Company or its subsidiaries; the Company and its subsidiaries
are in compliance with the terms and conditions of all such Governmental
Licenses, except where the failures so to comply would not, singly or in the
aggregate, have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such
5
<PAGE> 6
Governmental Licenses which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect;
(xvii) Each of the Company and its subsidiaries is in
compliance in all material respects with all applicable federal, state and
local environmental laws and regulations, including, without limitation, those
applicable to emissions to the environment, waste management, and waste
disposal (collectively, the "Environmental Laws"), except where such
noncompliance could not be reasonably likely to have a Material Adverse Effect,
or except as disclosed in the Prospectus, and to the knowledge of the Company,
there are no circumstances that would prevent, interfere with or materially
increase the cost of such compliance in the future;
(xviii) Except as disclosed in the Prospectus, there is no
claim under any Environmental Law, including common law, pending or, to the
best knowledge of the Company, threatened against the Company (an
"Environmental Claim"), which would be reasonably likely to have a Material
Adverse Effect, and, to the knowledge of the Company, under applicable law,
there are no past or present actions, activities, circumstances, events or
incidents, including, without limitation, releases of any material into the
environment, that are reasonably likely to form the basis of any Environmental
Claim against the Company or its subsidiaries which would be reasonably likely
to have a Material Adverse Effect;
(xix) Other than as set forth in the Prospectus, there are
no legal or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a Material
Adverse Effect; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(xx) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or an
entity "controlled" by an "investment company", as such terms are defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act");
(xxi) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes; and
(xxii) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and its subsidiaries, are independent
public accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) The Bank represents and warrants to, and agrees with,
each of the Underwriters that:
(i) The Bank has been duly chartered and is validly existing
as a federal savings bank in good standing under the laws of the United States,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been
6
<PAGE> 7
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification,
or is subject to no material liability or disability by reason of the failure
to be so qualified in any such jurisdiction;
(ii) Neither the Bank nor any of its subsidiaries is in
violation of its federal stock charter, by-laws or other charter documents or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan agreement, note, lease or other agreement or
instrument to which the Bank or any of its subsidiaries is a party or by which
it or any of them may be bound, or to which any of the property of the Bank or
any of its subsidiaries is subject; and
(iii) The execution, delivery and performance of this
Agreement by the Bank and the compliance by the Bank with all of the provisions
of this Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the Bank or
any of its subsidiaries is a party or by which the Bank or any of its
subsidiaries is bound or to which any of the property or assets of the Bank or
any of its subsidiaries is subject, nor will such action result in any
violation of the provisions of the charter of the Bank or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Bank or any of its subsidiaries or any of their
properties.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $................, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, the Company agrees to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 262,500 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
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defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
It is understood that each Underwriter has authorized Sandler
O'Neill & Partners, L.P., for such Underwriter's account, to accept delivery
of, receipt for, and make payment of the purchase price for, the Firm Shares
and the Optional Shares, if any, which such Underwriter has agreed to purchase.
Sandler O'Neill & Partners, L.P., individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Firm Shares or the Optional Shares, if any, to be purchased by
any Underwriter whose funds have not been received by the relevant Time of
Delivery but such payment shall not relieve such Underwriter from its
obligations hereunder.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Sandler O'Neill & Partners, L.P. may request upon at least
forty-eight hours' prior notice to the Company shall be delivered by or on
behalf of the Company to Sandler O'Neill & Partners, L.P., through the
facilities of the Depository Trust Company ("DTC"), for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by certified or official bank check or checks, payable
to the order of the Company in New York Clearing House (next day) funds. The
Company will cause the certificates representing the Shares to be made
available for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office of DTC
or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
Eastern Time, on June __, 1998 or such other time and date as Sandler O'Neill &
Partners, L.P. and the Company may agree upon in writing, and, with respect to
the Optional Shares, 9:30 a.m., New York time, on the date specified by Sandler
O'Neill & Partners, L.P. in the written notice given by Sandler O'Neill &
Partners, L.P. of the Underwriters' election to purchase such Optional Shares,
or such other time and date as Sandler O'Neill & Partners, L.P. and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery", such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "Second Time of Delivery", and each such time and date for delivery
is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Sullivan & Cromwell, 444 South Flower Street, Los Angeles, California 90071
(the "Closing Location"), and the Shares will be delivered at the Designated
Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at .......p.m., Eastern Time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New
York Business Day" shall
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<PAGE> 9
mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on
which banking institutions in New York are generally authorized or obligated by
law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 am, Eastern Time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may from time to time reasonably request, and, if the
delivery of a prospectus is required at any time prior to the expiration of
nine months after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any event shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be necessary
during such period to amend or supplement the Prospectus in order to comply
with the Act, to notify you and upon your request to prepare and furnish
without charge to each Underwriter and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended Prospectus
or a supplement to the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
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<PAGE> 10
months or more after the time of issue of the Prospectus, upon your request but
at the expense of such Underwriter, to prepare and deliver to such Underwriter
as many copies as you may request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company and its subsidiaries (which need
not be audited) complying with Section 11(a) of the Act and the rules and
regulations thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 120 days after the date of the Prospectus,
not to, and not to allow its directors, [certain affiliates] and executive
officers to, offer, sell, contract to sell or otherwise dispose of, except as
provided hereunder any securities of the Company that are substantially similar
to the Shares, including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to receive, Stock or any
such substantially similar securities (other than pursuant to employee stock
option plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent;
(f) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public accountants) and,
as soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), consolidated summary financial information
of the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver
to you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) If the Company elects to rely on Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time on the date of
this Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act;
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<PAGE> 11
(j) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ"); and
(k) During the period beginning on the date hereof and ending on the
later of the third anniversary of the First Time of Delivery or the date on
which the Underwriters receive full payment in satisfaction of any claim for
indemnification or contribution to which they may be entitled pursuant to
Section 8 of this Agreement, neither the Company nor the Bank shall, without
the prior written consent of the Representative, take or permit to be taken any
action that could result in the Bank's common stock becoming subject to any
security interest, mortgage, pledge, lien or encumbrance; provided, however,
that this covenant shall be null and void if the OTS, or any other federal
agency having jurisdiction over the Bank, by regulation, policy statement or
interpretive release or by written order or written advice addressed to the
Bank and specifically addressing the provisions of Section 8 hereof, permits
indemnification of the Underwriters by the Bank as contemplated by such
provisions.
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the reasonable
out-of-pocket expenses incurred by the Underwriters in connection with the
transactions contemplated hereby (regardless of whether the sale of the Shares
is consummated), including, without limitation, disbursements, fees and
expenses of the Underwriters' counsel and marketing, syndication and travel
expenses, up to a maximum of $200,000; (ii) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements
thereto and the mailing and delivering of copies thereof to the Underwriters
and dealers; (iii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iv) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey (v) all fees and
expenses in connection with listing the Shares on NASDAQ; (vi) the filing fees
incident to, and the fees and disbursements of counsel for the Underwriters in
connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (vii) the cost
of preparing stock certificates; (viii) the cost and charges of any transfer
agent or registrar; and (ix) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and
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<PAGE> 12
regulations under the Act and in accordance with Section 5(a) hereof; if the
Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., Eastern Time, on the date
of this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters,
shall have furnished to you such opinion or opinions, dated such Time
of Delivery, with respect to the incorporation of the Company, the
validity of the Shares, the Registration Statement, the Prospectus as
amended or supplemented and other related matters as you may reasonably
request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(c) Elias, Matz, Tiernan & Herrick, L.L.P., counsel for
the Company, shall have furnished to you their written opinion (a draft
of such opinion is attached as Annex II hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) The Company is a registered savings and loan
holding company under the Home Owners' Loan Act ("HOLA") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with power and authority
(corporate and other) to own its properties and conduct its business
as described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and nonassessable; and the Shares conform to the
description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions and certificates);
(iv) Each subsidiary of the Company either has been duly
incorporated and is validly existing as a corporation or has been duly
chartered and is validly existing as a federal savings bank, in each
case in good standing under the laws of the jurisdiction of its
organization, with power and authority (corporate and other) to own
its properties and conduct its business as described in the
Prospectus, and
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<PAGE> 13
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; the activities of the subsidiaries
of the Bank are permitted to subsidiaries of a federally chartered
savings bank under applicable law and the rules and regulations of the
OTS set forth in Chapter V of Title 12 of the Code of Federal
Regulations; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued
and is fully paid and nonassessable and is owned, directly or through
other subsidiaries of the Company, by the Company; and all of the
capital stock of each subsidiary of the Company that is owned by the
Company, directly or through other subsidiaries of the Company, is
owned free and clear of any pledge, lien, encumbrance, claim or
equity;
(v) The Company and its subsidiaries have good and
marketable title in fee simple to all real property owned by them, in
each case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its
subsidiaries;
(vi) To the best of such counsel's knowledge, except as
disclosed in the Prospectus, the Company and its subsidiaries are
conducting their respective businesses in compliance in all material
respects with all laws, rules, regulations, decisions, directives and
orders (including, without limitation, all regulations and orders of,
or agreements with, the OTS and the FDIC applicable to them); there is
no action, suit, investigation or proceeding before or by any
government, governmental instrumentality or court, domestic or
foreign, now pending or, to the knowledge of such counsel, threatened
against or affecting the Company or any of its subsidiaries (A) that
is required to be disclosed in the Registration Statement and not
disclosed therein, (B) that could result in any Material Adverse
Effect, (C) that could materially and adversely affect the properties,
assets or leasehold interests of the Company and its subsidiaries,
considered as one enterprise, or (D) that could adversely affect the
consummation of the transactions contemplated in this Agreement; all
pending legal or governmental proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is
the subject, which are not described in the Registration Statement,
including ordinary routine litigation incidental to their respective
businesses, would not have a Material Adverse Effect;
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<PAGE> 14
(vii) This Agreement has been duly authorized, executed and
delivered by the Company and the Bank;
(viii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties;
(ix) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act
of the Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation, By-laws or charter or
in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any
of its properties may be bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) The Company is not, and after giving effect to the
offering and sale of the Shares, will not be, an "investment company"
or an entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act;
(xiii) The documents incorporated by reference in the
Prospectus (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), when they
were filed with the Commission, complied as to form in all material
respects with the requirements of the Exchange
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<PAGE> 15
Act and the rules and regulations of the Commission
thereunder; and they have no reason to believe that any of
such documents, when such documents were so filed, contained
an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made when such documents were so filed, not misleading;
and
(xiv) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to
which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Act and
the rules and regulations thereunder; although they do not
assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus, except for those referred to in
the opinion in subsection (xi) of this section 7(c), they have
no reason to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to
which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules
therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading or that, as of such Time of
Delivery, either the Registration Statement or the Prospectus
or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to
which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
they do not know of any amendment to the Registration
Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to
the Registration Statement or required to be incorporated by
reference into the Prospectus or required to be described in
the Registration Statement or the Prospectus which are not
filed or incorporated by reference or described as required;
(d) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., Eastern Time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Deloitte & Touche LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as
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<PAGE> 16
Annex I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration Statement
and as of each Time of Delivery is attached as Annex I(b) hereto);
(e)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case described
in Clause (i) or (ii), is in the judgment of the Representatives so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
(ii) no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of any
of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities declared by
either Federal or New York or California State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the effect
of any such event specified in this Clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from the stockholders listed on Schedule II
hereto, substantially to the effect set forth in Subsection 5(e) hereof in form
and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
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(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and warranties of
the Company herein at and as of such Time of Delivery, as to the performance by
the Company of all of its obligations hereunder to be performed at or prior to
such Time of Delivery, as to the matters set forth in subsections (a) and (e)
of this Section and as to such other matters as you may reasonably request.
8. (a) The Company and the Bank, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company and the Bank shall not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Sandler O'Neill & Partners, L.P. expressly for use therein.
Notwithstanding the foregoing, the indemnification provided for in this
paragraph (a) shall not apply to the Bank to the extent that such
indemnification by the Bank is found in a final judgment by a court of
competent jurisdiction to constitute a covered transaction under Section 23A of
the Federal Reserve Act.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Sandler O'Neill & Partners, L.P. expressly for use therein;
and will reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending any such
action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect
17
<PAGE> 18
thereof is to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and, after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under such subsection for any legal expenses of other counsel or any
other expenses, in each case subsequently incurred by such indemnified party,
in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation
18
<PAGE> 19
which does not take account of the equitable considerations referred to above
in this subsection (d). The amount paid or payable by an indemnified party as
a result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act or who is an affiliate
or partner of any Underwriter; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each other
person, if any, who controls the Company within the meaning of the Act or who
is an affiliate of the Company.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or
the Company shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-tenth of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery
19
<PAGE> 20
and, in addition, to require each non-defaulting Underwriter to purchase its
pro rata share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-tenth of the aggregate number of
all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company, except for the expenses
to be borne by the Company as provided in Section 6 hereof and the indemnity
and contribution agreements in Section 8 hereof; but nothing herein shall
relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representative at Two World Trade
Center, 104th Floor, New York, NY 10048, Attention: Catherine A. Lawton,
Principal; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Chief Financial Officer; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be
20
<PAGE> 21
delivered or sent by mail, telex or facsimile transmission to such Underwriter
at its address set forth in its Underwriters' Questionnaire, or telex
constituting such Questionnaire, which address will be supplied to the Company
by you upon request. Any such statements, requests, notices or agreements
shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's office
in Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
21
<PAGE> 22
If the foregoing is in accordance with your understanding, please sign
and return to us four counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement between each of the Underwriters
and the Company.
Very truly yours,
HAWTHORNE FINANCIAL CORPORATION
By:...................................
Name:
Title:
HAWTHORNE SAVINGS, F.S.B.
By:...................................
Name:
Title:
By:...................................
Name:
Title:
Accepted as of the date hereof:
SANDLER O'NEILL & PARTNERS, L.P.
As representative of the Underwriters
By: Sandler O'Neill & Partners Corp.
the sole general partner
By:.....................................
Name:
Title: Vice President
22
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ------------------
<S> <C> <C>
Sandler, O'Neill & Partners, L.P.
[NAMES OF OTHER UNDERWRITERS] . . . . . . . .
--------------- ------------------
Total . . . . . . . . . . . . . . .
=============== ==================
</TABLE>
23
<PAGE> 24
SCHEDULE II
CERTAIN STOCKHOLDERS
24
<PAGE> 25
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included or incorporated by reference in the Registration
Statement or the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Act or the Exchange
Act, as applicable, and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified
Public Accountants of the consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have
been separately furnished to the representatives of the Underwriters
(the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included in the Company's quarterly
report on Form 10-Q incorporated by reference into the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives; and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether
the unaudited condensed consolidated financial statements referred to
in paragraph (vi)(A)(i) below comply as to form in the related in all
material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published rules and
regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus and included or incorporated by reference in Item 6 of the
Company's Annual Report on Form 10-K for the most recent fiscal year
agrees with the corresponding amounts (after restatement where
applicable) in the audited consolidated
1
<PAGE> 26
financial statements for such five fiscal years which were included or
incorporated by reference in the Company's Annual Reports on Form 10-K for such
fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302,
402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus, inquiries of officials of
the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused
them to believe that:
(A) (i) the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus and/or included or incorporated by reference in
the Company's Quarterly Reports on Form 10-Q incorporated
by reference in the Prospectus do not comply as to form in
all material respects with the applicable accounting
requirements of the Exchange Act and the related published
rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus or included in the Company's Quarterly Reports
on Form 10-Q incorporated by reference in the Prospectus,
for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not
agree with the corresponding items in the unaudited
consolidated financial statements from which such data and
items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent
with the basis for the corresponding amounts in the
audited consolidated financial statements included or
incorporated by reference in the Company's Annual Report
on Form 10-K for the most recent fiscal year;
(C) the unaudited financial statements which were
not included in the Prospectus but from which were derived
the unaudited condensed financial statements referred to
in Clause (A) and any unaudited income statement data and
balance sheet items included in the Prospectus and
referred to in Clause
2
<PAGE> 27
(B) were not determined on a basis substantially
consistent with the basis for the audited financial
statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent
fiscal year;
(D) any unaudited pro forma consolidated
condensed financial statements included or incorporated by
reference in the Prospectus do not comply as to form in
all material respects with the applicable accounting
requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have
not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five
days prior to the date of such letter, there have been any
changes in the consolidated capital stock (other than
issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the latest
balance sheet included or incorporated by reference in the
Prospectus) or any increase in the consolidated long-term
debt of the Company and its subsidiaries, or any decreases
in consolidated net current assets or stockholders' equity
or other items specified by the Representatives, or any
increases in any items specified by the Representatives,
in each case as compared with amounts shown in the latest
balance sheet included or incorporated by reference in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(F) for the period from the date of the latest
financial statements included or incorporated by reference
in the Prospectus to the specified date referred to in
Clause (E) there were any decreases in consolidated net
revenues or operating profit or the total or per share
amounts of consolidated net income or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with the comparable period of the preceding year
and with any other period of corresponding length
specified by the Representatives, except in each case for
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such
letter; and
(vii) In addition to the examination referred to in their
report(s) included or incorporated by reference in the Prospectus and
the limited procedures, inspection of minute books, inquiries and other
procedures referred to in paragraphs (iii) and (vi) above, they have
carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information
specified by the Representatives which are derived from the general
accounting records of the Company and its subsidiaries, which appear in
the Prospectus (excluding documents incorporated by reference) or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives or
3
<PAGE> 28
in documents incorporated by reference in the Prospectus specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
4
<PAGE> 1
EXHIBIT 5.1
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
June 4, 1998
Board of Directors
Hawthorne Financial Corporation
2381 Rosecrans Avenue
2nd Floor
El Segundo, California 90245
Ladies and Gentlemen:
We have acted as counsel to Hawthorne Financial Corporation (the
"Company") in connection with a Registration Statement on Form S-2 (the
"Registration Statement") filed by the Company under the Securities Act of
1933, as amended, with the Securities and Exchange Commission. The
Registration Statement relates to the offer and sale by the Company of up to
2,012,500 shares of common stock, par value $0.01 per share (the "Common
Stock"), of the Company. We have been requested by the Company to furnish an
opinion to be included as an exhibit to the Registration Statement.
We have examined such corporate records, certificates and other
documents, and such questions of law, as we have considered necessary or
appropriate for the purposes of this opinion.
Based on the foregoing, we are of the opinion that the 2,012,500
shares of Common Stock covered by the Registration Statement will be legally
issued and fully paid and non-assessable when issued and sold by the Company in
the manner set forth in the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Validity of Common Stock" in the Prospectus included therein. In giving such
consent, we do not hereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Gerard L. Hawkins
----------------------------------
Gerard L. Hawkins, a Partner
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration
Statement of Hawthorne Financial Corporation on Form S-2 of our report dated
January 30, 1998 appearing in the Annual Report on Form 10-K of Hawthorne
Financial Corporation for the year ended December 31, 1997 and to the reference
to us under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
DELOITTE & TOUCHE LLP
June 4, 1998
Los Angeles, California
