<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1995
Commission File # 2-76555
SDN BANCORP
- - --------------------------------------------------------------------------------
(Exact name of small business issuer in its charter)
California 95-3683748
- - ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
135 Saxony Road, Encinitas, California 92024-0905
- - -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 619-436-6888
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value 564,145
- - -------------------------- ----------------------------
Class Outstanding on June 30, 1995
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SDN BANCORP AND SUBSIDIARY
SECURITIES AND EXCHANGE COMMISSION FORM 10-QSB
INDEX
Page
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition -
June 30, 1995 and December 31, 1994
Condensed Consolidated Statements of Operations
For the six months ended June 30, 1995 and 1994 and
Three months ended June 30, 1995 and 1994
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 1995 and 1994
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
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SDN BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
JUNE 30, 1995 AND DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
(UNAUDITED)
----------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,155 $ 2,842
Interest bearing deposits with
financial institutions 889 1,078
Investment securities: at cost, approximate
market value 1995 - $4,445,000;
1994 - $4,450,000 4,427 4,535
Federal funds sold -- --
Loans 42,272 46,313
Less allowance for loan loss 789 821
--------- ---------
Loans, net 41,483 45,492
Premises and equipment, net 685 779
Real estate acquired through foreclosure 1,005 1,288
Accrued interest receivable
and other assets 1,617 1,672
--------- ---------
$ 54,261 $ 57,686
========= =========
Liabilities and Shareholders' Equity
Deposits:
Demand:
Non-interest bearing $ 10,185 $ 12,570
Interest bearing 9,808 10,206
Savings:
Regular 4,956 6,110
Money market 8,517 10,234
Time:
Under $100,000 15,639 12,212
$100,000 or more 3,898 4,544
--------- ---------
Total deposits 53,003 55,876
Accrued expenses and other liabilities 762 864
Notes payable 675 675
Mandatory Convertible Debentures 1,219 1,219
--------- ---------
Total liabilities 55,659 58,634
Shareholders' equity (deficit):
Contributed capital 2,951 2,951
Accumulated deficit (4,349) (3,899)
--------- ---------
Total shareholders' equity (deficit) (1,398) (948)
--------- ---------
$ 54,261 $ 57,686
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SDN BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,037 $ 984 $2,107 $1,963
Interest on Federal funds sold 19 14 47 16
Interest on deposits with
financial institutions 15 9 30 19
Interest and dividends on
investment securities 73 59 138 127
------ ------ ------ ------
Total interest income 1,144 1,066 2,322 2,125
Interest Expense:
Deposits 421 331 826 648
Other borrowed funds 57 44 110 85
------ ------ ------ ------
Total interest expense 478 375 936 733
------ ------ ------ ------
Net interest income 666 691 1,386 1,392
Provision for loan losses 40 258 100 308
------ ------ ------ ------
Net interest income after
provision for loan losses 626 433 1,286 1,084
------ ------ ------ ------
Non-interest income 130 142 264 297
Non-interest expense 1,076 959 2,000 2,027
------ ------ ------ ------
Net loss $ (320) $ (384) $ (450) $ (646)
====== ====== ====== ======
Loss per share $(0.57) $(0.68) $(0.80) $(1.14)
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SDN BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Operating Activities:
Net loss $ (450) $ (646)
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses 100 308
Depreciation and amortization 98 104
Decrease in accrued interest receivable 45 38
Increase in accrued interest payable 115 44
Other - net (137) 91
------- -------
Net cash used by operating activities (229) (61)
------- -------
Investing Activities:
Net decrease in interest bearing deposits
other financial institutions 189 390
Purchases of investment securities (1,500) (1,860)
Proceeds from sales and maturities of investment
securities 1,608 1,815
Net decrease in loans 3,909 3,580
Purchases of premises and equipment (4) (34)
Proceeds from sale of real estate acquired
through foreclosures 213 60
------- -------
Net cash provided by investing activities 4,415 3,951
------- -------
Financing Activities:
Net decrease in deposits (2,873) (146)
Net proceeds from issuance of notes payable -- 14
------- -------
Net cash used by financing activities (2,873) (132)
------- -------
Net increase in cash and cash equivalents 1,313 3,758
Cash and cash equivalents at January 1, 1995
and 1994 2,842 4,183
------- -------
Cash and cash equivalents at June 30, 1995
and 1994 $ 4,155 $ 7,941
======= =======
Supplemental disclosure of cash flow activities:
Cash paid for income taxes 2 2
======= =======
Cash paid for interest 821 689
======= =======
Supplemental disclosure of non-cash flow activities:
Other real estate sold and financed by Bank $ 115 --
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SDN BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
NOTE 1:
The condensed consolidated financial statements include the accounts of SDN
Bancorp ("Bancorp"), a Bank holding company, and its wholly-owned subsidiary,
San Dieguito National Bank ("Bank").
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements contain all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the financial
position as of June 30, 1995 and the results of operations and statements of
cash flows for the six months ended June 30, 1995 and 1994.
While management believes that the disclosures presented are adequate to
make the information not misleading, it is recommended that these financial
statements be read in conjunction with the financial statements and the notes
included in Bancorp's 1994 annual report.
NOTE 2:
On September 21, 1992, the Bank entered into an agreement (the "OCC
Agreement") with the Office of the Comptroller of the Currency ("OCC") which,
among other matters, requires the Bank to achieve and maintain certain capital
ratios. On October 23, 1992, Bancorp signed a Memorandum of Understanding
("MOU") with the Federal Reserve Bank to confirm a plan to correct certain
concerns. See "Capital Resources" and "Administrative Proceedings" in Item 2
hereto for information on these matters.
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The Bank is considered "significantly undercapitalized" under the Prompt
Corrective Action provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and would be considered "critically
undercapitalized" if its ratio of tangible equity to total assets should equal
or be less than 2%. At June 30, 1995, the Bank's such ratio was 2.1%. Subject to
certain exceptions, in the case of critically undercapitalized depository
institutions, the appropriate Federal banking agency is required to appoint a
conservator or receiver, generally within 90 days.
If the Bank is unable to comply with the terms of the OCC Agreement or the
MOU, one or more regulatory sanctions may result, including the possible
termination of the Bank's Federal Deposit Insurance Corporation's insured
status. Bancorp has total notes payable of $975,000 at June 30, 1995 (including
$300,000 due to the Bank) all with maturities on or before March 31, 1996 and
Mandatory Convertible Debentures of $1,219,000. See Note 5. Bancorp has not been
able to make full and timely interest payments on the notes or the Debentures
during 1994 and does not have current liquidity to repay the notes as scheduled
during 1995. These uncertainties and the net losses incurred during 1994, 1993
and 1992, among others, may indicate that the Bancorp and the Bank will be
unable to continue as a going concern. The financial statement impact, if any,
from the outcome of these uncertainties cannot presently be determined.
Accordingly, no adjustment that may result from the resolution of these matters
has been made in the accompanying financial statements.
Management and the directors are taking a number of steps to increase the
capital of both the Bancorp and the Bank or otherwise satisfy the requirements
of the OCC Agreement and the MOU and to provide funds required to service future
debt payments on the Debentures and other Bancorp debt. This included many
discussions and negotiations with potential investors or
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purchasers. The Bancorp has also used industry professionals for advice and
assistance in locating investors or purchasers. As a result of these activities,
Bancorp and Bank entered into a Stock Purchase Agreement as further described in
Note 4. No assurance can be given that this transaction will be completed or
that adequate capital resources will eventually be obtained.
NOTE 3:
At June 30, 1995, Bancorp has two promissory notes totaling $300,000 payable
to the Bank, both of which bear interest at Wall Street Journal prime plus 2.0%.
Both of these notes are due December 31, 1995. The notes are collateralized by
certain real property owned by two of Bancorp's directors. In the accompanying
consolidated statements of condition, these Bancorp notes payable and the Bank
loans receivable have been eliminated.
Bancorp has a $250,000 line of credit from a director. At June 30, 1995, the
balance outstanding on this line of credit was $250,000. This note bears
interest at Wall Street Journal prime plus 2.5%. and is due December 30, 1995.
Bancorp has promissory notes payable to directors aggregating $300,000 and
promissory notes payable to three shareholders totaling $125,000. These notes
bear interest at Wall Street Journal prime plus 2.0%. Principal and interest on
these notes are due March 31, 1996.
The Bancorp's $1,219,500 aggregate principal amount Mandatory Convertible
Debentures bear interest at Wall street Journal prime plus 3.0%, payable
quarterly. The Debentures are not subject to any sinking fund requirements and
are subordinated in right of payment to the obligations of the Bancorp under any
other indebtedness. The Indenture does not provide for a
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right of acceleration of Debentures upon a default in payment of interest or
principal or in the performance of any covenant in the Debentures or the
indenture, and no trustee is appointed under the indenture to enforce the rights
of Debentureholders. Prior to conversion of the Debentures, a Debentureholder
has none of the rights or privileges of a shareholder of the Bancorp.
In January 1994, certain directors began making cash advances to Bancorp to
provide the funds necessary to pay debt service on $700,500 in principal of
Debentures owned by non-directors and on three notes totaling $550,000, of which
$300,000 is payable to the Bank under two notes due December 31, 1995 and
$250,000 is a line of credit payable to a director due December 30, 1995.
Effective April 1, 1994, the directors continued to advance additional funds
sufficient to service only the debt requirements of these three notes totaling
$550,000. The total of all advances was $94,000 as of June 30, 1995. The
aggregate accrued unpaid interest on all notes and Debentures was $312,000 as of
June 30, 1995. The Directors agreed to defer payment of all interest and
principal due on advances and Debentures payable to them through March 31, 1996.
In July 1994, the non-director Debentureholders were notified that Bancorp
no longer had the funds to continue paying interest on the Debentures; and
therefore, the quarterly interest payments due for the second, third, and fourth
quarters of 1994 and the first and second quarters of 1995 were not made. This
constituted a payment default under Section 8.02 of the Indenture.
Debentureholders were asked to waive the quarterly payment defaults. According
to the Indenture, such a default in the payment of interest can be waived by a
majority of the principal amount of the Debentures outstanding, not including
the amount owned by Bancorp directors and
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officers. Signed waivers have been received from a sufficient number of
debenture holders thus waiving Bancorp's default in the above mentioned
quarterly payments under the Debentures.
As of August 10, 1995, Bancorp did not have the funds available to meet
future debt service requirements of the notes and Debentures. No assurance can
be given that Bancorp ultimately will be successful in obtaining a source of
funds to meet Bancorp's debt service requirements or that advances from
directors will continue. Failure to meet the debt service requirements could
force Bancorp to seek bankruptcy protection which could result in a significant
adverse impact to Bancorp noteholders, debentureholders and shareholders.
NOTE 4:
On July 21, 1995, Bancorp and Bank entered into a Stock Purchase Agreement
with Dartmouth Capital Group, L.P., where Dartmouth Capital Group would invest
approximately $5 million in SDN Bancorp. See "Capital Resources" for additional
information.
NOTE 5:
Per share data is computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents outstanding. Stock
options, which are common stock equivalents, have not been included in the
calculation of loss per share. The assumed conversion of the Mandatory
Convertible Debentures ("Debentures"), which are not common stock equivalents,
were antidilutive for the six months ended June 30, 1995 and 1994.
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NOTE 6:
Real estate acquired through foreclosure or deed-in-lieu of (Other Real
Estate Owned or OREO) are recorded at the lessor of the outstanding loan amount
or market value less estimated cost to sell, at the time of foreclosure.
NOTE 7:
Bancorp adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" effective January 1, 1993. On
January 1, 1994 Bancorp adopted the provision of Statement of Financial
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". There were no material effects of adoption of either statements.
Effective January 1, 1995 the Bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS No. 114) "Accounting by Creditors for
Impairment of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures".
The balance of impaired loans as defined by SFAS No. 114 was $1,094,000 at
June 30, 1995. At June 30, 1995 $1,094,000 of impaired loans had related
allowance for loan losses of $129,000. The Bank's average investment in impaired
loans was $1,140,000 during the six month period ending June 30, 1995. Cash
receipts for impaired loans placed an non-accrual status are first applied to
reduce principal.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, 1995
SUMMARY:
SDN Bancorp ("Bancorp") owns 100% of San Dieguito National Bank ("Bank").
Bancorp has had no significant business activities independent from the Bank.
Accordingly, the following discussion relates primarily to the operating results
and financial condition of the Bank.
Average earning assets of the Bank for the first six months of 1995 were
approximately $51.1 million, a decrease of $3.2 million or 5.9% from the average
for the comparable six month period in 1994. Average earning assets have
generally decreased since the second quarter of 1992. Total assets at June 30,
1995 were $54.3 million compared to total assets of $57.7 million at December
31, 1994 and $61.3 million at June 30, 1994.
Average loans for the first six months of 1995 were approximately $43.9
million, a decrease of $3.9 million or 8.2% from the average for the comparable
six month period in 1994. Total loans at June 30, 1995 were $42.3 million
compared to $46.3 million at December 31, 1994. This $4.0 million decrease was a
result of a $1.4 million decrease in construction and real estate loans, a $1.8
million decrease in commercial loans, and a $0.8 million decrease in consumer
and equity loans.
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Average deposits for the six months of 1995 were approximately $44.9
million, a decrease of $3.4 million or 7.0% from the average for the comparable
six month period in 1994. Total deposits decreased to $53.0 million at June 30,
1995 compared to $55.9 million at December 31, 1994. This $2.9 million decrease
is primarily due to a $2.8 million decrease in demand deposits plus a $2.9
million decrease in savings deposits (including money market) offset by a $2.8
increase in time certificates of deposit.
For the six months ended June 30, 1995, Bancorp had a net loss of $450,000
compared to a net loss of $646,000 for the same period in 1994. The 1995 net
loss is less than the comparable 1994 six-month loss primarily due to a $200,000
reduction in the provision for loan losses.
NET INTEREST INCOME AND NET INTEREST MARGIN
In the first six months of 1995, Bancorp's net interest income (including
loan fees) decreased $6,000 as the result of a decrease in average earning
assets offset by an increase in interest rates. The prime lending rate was 7.25%
at June 30, 1994 and increased several times in 1994 and once in the first
quarter of 1995. The prime lending rate was 9.0% at June 30, 1995. See "Economic
Considerations".
Comparing the first six months of 1995 to those of 1994, the yield on
average earning assets increased to 9.2% from 7.9%, while the average cost of
interest bearing liabilities increased to 4.0% from 2.9%. The net interest
margin was 5.5% for the first six months of 1995 compared to 5.2% for the first
six months of 1994. This higher net interest margin reflects the increase in the
prime lending rate.
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Loan fee income decreased $14,000 for the first six months of 1995 compared
to 1994. This decrease reflects the continued decline in local construction
lending as well as difficulties in competing for construction loans with a
reduced lending limit.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses represents the amounts which have been set
aside for the specific purpose of absorbing losses which may occur in the Bank's
loan portfolio. The provision for loan losses is an expense charged against
operating income and added to the allowance for loan losses. Management of the
Bank continues to carefully monitor the allowance for loan losses in relation to
the size of the Bank's loan portfolio and known risks or problem loans.
The allowance for loan losses was $789,000 at June 30, 1995 compared to
$821,000 at December 31, 1994. The allowance for loan losses was 1.9% of gross
loans at June 30, 1995 and 1.8% at December 31, 1994. During the first six
months of 1995, the provision for loan losses was $100,000, loan charge-offs
were $183,000 and recoveries were $51,000. This compares favorably to a
provision for loan losses of $308,000, loan charge-offs of $302,000 and
recoveries of $76,000 during the first six months of 1994.
At June 30, 1995, $31.4 million or 74% of total loans were secured by deeds
of trust on real estate. This includes loans to companies or individuals for
business purposes which are also secured by real estate. The Bank, like other
banks, also makes a number of loans to companies and individuals which are
secured by other collateral or based solely upon the cash flow, income,
character and/or net worth of the borrower. At June 30, 1995, the Bank had $10.9
million or 26% of total loans in this category. The majority of these loans are
collateralized by business property, personal property and/or governmental
agency guarantees. The collection of these loans is more
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dependent upon the borrower's financial capability at maturity than loans that
are secured by real estate.
Non-performing loans and other real estate owned ("OREO") are summarized
as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Non-performing loans:
Loans past due 90 days or more
and still accruing $ 62 $ 826
Loans on non-accrual 2,330 1,666
------ ------
Non-performing loans $2,392 $2,492
====== ======
As a percent of total loans 5.7% 5.4%
====== ======
OREO $1,005 $1,288
------ ------
Non-performing assets $3,397 $3,780
====== ======
As a percent of total assets 6.3% 6.5%
====== ======
</TABLE>
The $2,330,000 in loans on non-accrual at June 30, 1995 consists of nineteen
loans of which thirteen loans totaling 95% of the total amount are secured by
realestate. The weighted average loan to appraised value ratio of these
thirteen loans, excluding four 90% FHA guaranteed loans, is approximately 64%.
Accordingly, the Bank does not anticipate significant losses on these loans.
Foreclosure proceedings on two of these non-accrual loans totaling $777,000 has
resulted in OREO as of August 10, 1995. At December 31, 1994, the $1,666,000 in
loans on non-accrual consisted of sixteen loans, of which seven loans totaling
88%of the total dollar amount were secured by real estate.
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Using the peer group of all banks headquartered in San Diego County with
total assets less than $500 million as of March 31, 1995, the most recent peer
groupdata available, the ratio of the allowance for loan losses to
non-performing loanswas 59% for such regional peer group compared to the Bank's
ratio of 29%. At June 30, 1995, the same ratio for the Bank was 32% as a result
of a $13,000 decreasein the allowance for loan losses and a $391,000 decrease in
non-performing loans atJune 30, 1995 compared to March 31, 1995. This decrease
in non-performing loanswas largely a result of a $299,000 loan paid in full by
the borrower in April, 1995 and charge-offs for five loans totaling $91,000. As
of March 31, 1995, non-performing loans as a percentage of total loans was 4%
for the regional peer group compared to the Bank's percentage of 6%.
The OREO balance of $1,005,000 at June 30, 1995 is composed of three
properties. The decrease compared to December 31, 1994 resulted from one
property with a carrying value of $213,000 which was sold in March 1995
resulting in an additional loss of $13,000. Another OREO property was written
down by $70,000 as a result of the most recent OCC examination. As of August 10,
1995, the OREO balance was approximately $2,080,000 as a result of recent
foreclosure proceedings on two non-accrual loans totaling $777,000 plus the
Bank's payment of the senior debt on one of these loans. All of the OREO
properties are recorded at amounts which are equal to or less than the market
value based on current independent appraisals reduced by estimated selling
costs. The Bank is in compliance with SOP 92-3.
A portion of the non-performing loans represents the Bank's willingness to
allow loans to go into default in order to pursue collection efforts rather than
to grant liberal loan renewals. As
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discussed above, most of the non-performing loans and OREO are secured by
residential real estate.
Given the current local economic conditions and the importance of real
estate values to the Bank's loan portfolio, it is possible the level of
non-performing loans may increase until the local economy improves
significantly. Current collection and foreclosure activities are likely to
result in additional non-accrual and OREO amounts. See "Economic
Considerations".
The calculation of the adequacy of the allowance for loans losses requires
the use of management estimates. These estimates are inherently uncertain and
depend on the outcome of future events. Management's estimates are based upon
previous loan loss experience, current economic conditions as well as the
volume, growth and composition of the loan portfolio, the estimated value of
collateral and other relevant factors. The Bank's lending is concentrated in
Southern California, which has experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
borrowers' ability to repay loans. Although management believes the level of the
allowance as of June 30, 1995 is adequate to absorb losses inherent in the loan
portfolio, additional decline in the local economy may result in increasing
losses that cannot reasonably be predicted at this date. The possibility of
increased costs of collection, non-accrual of interest on those which are or
may be placed on non-accrual, and further charge-offs could have an adverse
impact on Bank's and Bancorp's financial condition in the future.
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NON-INTEREST INCOME
Non-interest income decreased by $33,000 for the first six months of 1995
compared to the same period in 1994. This was largely the result of deposit
service charges which decreased $26,000 in the first six months of 1995 compared
to the same six-month period in 1994.
NON-INTEREST EXPENSES
Non-interest expenses for the first six months of 1995 decreased $27,000
compared to the first six months of 1994. This is a result of decreases in
salaries, occupancy, and OREO expenses of approximately $35,000 each. These
decreases were offset by an increase in other expenses totaling $86,000 recorded
in June 1995 as a result of the most recent OCC examination.
During 1993, the Bank took a number of actions to reduce non-interest
expenses and increase non-interest income. Management continues to evaluate ways
to realize even greater efficiency and ways to reduce overhead costs. Since many
of the Bank's costs are fixed, their impact on the overhead ratio cannot be
substantially improved without a significant increase in the Bank's size.
However, the Bank cannot grow to the size necessary to be profitable without
additional capital. The directors are considering a number of alternatives to
address these matters. See "Capital Resources".
PROVISION FOR INCOME TAXES
As a result of a net operating loss for the first six months of 1995, there
is no provision for Federal or California income tax. Bancorp and Bank have a
substantial Federal income tax loss carryforward available for use in future
years.
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CAPITAL RESOURCES
Current risk-based regulatory capital standards generally require banks and
holding companies (except for non-diversified holding companies, such as
Bancorp, with less than $150 million in assets) to maintain a ratio of "core" or
"Tier 1" capital (consisting principally of common equity) to risk-weighted
assets of at least 4%, the ratio of Tier 1 capital to adjusted total assets
(leverage ratio) of at least 3% and a ratio of total capital (which includes
Tier 1 capital plus certain forms of subordinated debt, a portion of the
allowance for loan losses, and preferred stock) to risk-weighted assets of at
least 8%. Risk-weighted assets are calculated by multiplying the balance in each
category of assets according to a risk factor which ranges from zero for cash
assets and certain government obligations to 100% for some types of loans, and
adding the products together. The Bank is required by the Office of the
Comptroller of the Currency ("OCC") to increase its capital ratios as further
described under "Administrative Proceedings."
The following is a summary of the Bank's risk weighted capital and leverage
ratios at June 30, 1995:
<TABLE>
<CAPTION>
OCC
Regulatory Agreement
Actual Required Required
------ -------- --------
<S> <C> <C> <C>
Bank Only:
Total capital vs. risk adjusted assets 4.1% 8.0% 9.5%
Tier 1 capital vs. risk adjusted assets 2.8 4.0 9.5
Tier 1 capital vs. adjusted total assets
(Leverage) 2.1 3.0 6.0
</TABLE>
The Bank is considered "significantly undercapitalized" under the Prompt
Corrective Action Provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and would be considered "critically
undercapitalized" if its ratio of tangible equity to total assets should equal
or be less than 2%. As a result of becoming significantly undercapitalized, the
Bank
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was required to submit a capital plan to the OCC outlining how the Bank
plans to meet its required capital levels. Bancorp was required to guaranty the
plan. Because of the possible material effect of the uncertainty of the Bank
obtaining additional capital in a timely manner, Bancorp's independent auditors
were not able to express and did not express an opinion on the Consolidated
Financial Statements for 1994. See "Administrative Proceedings".
As of June 30, 1995, approximately $2.5 million in additional capital would
be necessary to meet the OCC capital ratio requirements. Bancorp also needs
additional capital or debt funds to pay past due and future debt service on its
mandatory convertible debentures, as well as the debt service and refinancing of
short term notes payable. Such capital, debentures, notes payable and repayment
plans are further described in Notes 2, 11 and 12 to the Consolidated Financial
Statements included in Bancorp's 1994 Annual Report, and Notes 2 and 3 hereto.
In the event the Bancorp is unable to raise funds to increase the Bancorp's
and the Bank's capital levels and the liquidity of the Bancorp, Bancorp and the
Bank could be subject to further regulatory intervention including the
appointment of a conservator or receiver or the termination of deposit
insurance. In addition, the OCC would be permitted to enforce the provisions of
the guaranty provided by Bancorp. If any of these events were to occur, Bancorp
shareholders and debentureholders could suffer the elimination of the value of
their investments in Bancorp. Failure to obtain adequate capital in Bancorp and
in the Bank could result in a significant adverse impact to both companies.
20
<PAGE> 21
On July 21, 1995 Bancorp and Bank entered into a definitive Stock Purchase
Agreement with Dartmouth Capital Group, L.P., a limited partnership. Under the
terms of the Agreement, Dartmouth Capital Group would invest approximately $5
million in Bancorp and, as part of a broader recapitalization, holders of
approximately 56% of Bancorp's outstanding subordinated convertible debentures
have agreed to cancel their debentures. The Agreement requires Dartmouth
Capital Group to invest an amount sufficient to restore Bancorp's capital to
approximately 6% of its assets. Bancorp, in turn, will contribute a sufficient
amount of the new capital to the Bank to meet the OCC capital ratio
requirements. After the recapitalization, it is expected that Dartmouth Capital
Group investors would own, directly or indirectly, approximately 94% of Bancorp
common stock outstanding as of the recapitalization. Dartmouth Capital Group's
ownership interest may increase to up to 97% depending upon the outcome of
possible post-closing adjustments. Completion of the transaction is subject to
a number of conditions, including the approval of shareholders and the
Federal Reserve Bank.
LIQUIDITY
The Bank relies on deposits as its principal source of funds and, therefore,
must be in a position to service depositors' needs as they arise. Management of
the Bank attempts to maintain a loan-to-deposit ratio of not greater than 85%
and a liquidity ratio (liquid investments to deposits and other short term
liabilities) of approximately 20%. The average loan-to-deposit ratio was 79%
for the six-month period ending June 30, 1995 and 80% for the same period in
1994. The average liquidity ratio was 20% during the first six months of 1995
and 19% during the same period in 1994. While fluctuations in the balances of
a few large depositors cause temporary
21
<PAGE> 22
increases and decreases in liquidity from time to time, the Bank has not
experienced difficulty in dealing with such fluctuations from existing liquidity
sources.
Should the level of liquid assets (primary liquidity) not meet the liquidity
needs of the Bank, other available sources of liquid assets (secondary
liquidity), including the purchase of federal funds, sale of repurchase
agreements, sale of loans, and the discount window borrowing from the Federal
Reserve Bank, could be employed. The Bank has rarely used these sources in the
past since its liquidity levels have been maintained primarily through funds
provided by deposits. The Bank has identified loans which could be sold if
necessary.
Bancorp's liquidity needs are primarily limited to debt service. In order
for Bancorp to meet its debt service requirements and pay prior loans, Bancorp
obtained additional loans as described in Note 11 to the Consolidated Financial
Statement in Bancorp's 1994 Annual Report, and Note 3 hereto.
The Directors agreed to defer payment of all interest and principal due on
all outstanding indebtedness payable to them through March 31, 1996, except for
the $250,000 line of credit. Three non-director shareholders agreed to defer
payment of interest and principal on notes payable to them aggregating $125,000.
In January, 1994, certain Directors began making cash advances to Bancorp to
provide the funds necessary to pay debt service on $700,500 in principal of
Debentures owned by non-directors and on three notes totaling $550,000, of which
$300,000 is payable to the Bank under two notes due December 31, 1995 and
$250,000 is a line of credit payable to a Director due December 30, 1995.
Effective April 1, 1994, the Directors continued to
22
<PAGE> 23
advance additional funds sufficient to service only the debt requirements of
these three notes totaling $550,000.
In July 1994, the non-director debentureholders were notified that Bancorp
no longer had the funds to continue paying interest on the Debentures; and,
therefore, the quarterly interest payments due for the second, third, and fourth
quarters of 1994 and first and second quarters of 1995 were not made. This
constituted a payment default under Section 8.02 of the Indenture.
Debentureholders were asked to waive the quarterly payment defaults. According
to the Indenture, such a default in the payment of interest can be waived by a
majority of the principal amount of the Debentures outstanding, not including
the amount owed by Bancorp Directors and officers. Signed waivers have been
received from a sufficient number of debentureholders thus waiving Bancorp's
default in the above mentioned quarterly payments under the Debentures. The
total of all advances was $94,000 as of June 30, 1995. The aggregate accrued
unpaid interest on all notes and Debentures is $312,000 as of June 30, 1995.
As of August 10, 1995 Bancorp did not have the funds available to meet
future debt service requirements of the notes and Debentures or to perform on
the guaranty to the OCC. See "Administrative Proceedings". No assurance can be
given that Bancorp ultimately will be successful in obtaining a source of funds
to meet Bancorp's debt service requirements through the consummation of the
Stock Purchase Agreement or otherwise. There is also no assurance the advances
from the Directors will continue. Failure to meet the debt service requirements
could force Bancorp to seek bankruptcy protection which would result in a
significant adverse impact to Bancorp noteholders, debentureholders and
shareholders.
23
<PAGE> 24
There are legal limitations restricting the extent to which the Bank can
make loans or pay dividends to Bancorp. The Bank cannot currently declare
dividends without the approval of the Comptroller of the Currency. Bank policy
precludes the payment of cash dividends. Pursuant to a Memorandum of
Understanding with the Federal Reserve Bank ("FRB"), Bancorp has agreed not to
pay dividends or incur additional debt without the prior approval of the FRB.
See "Administrative Proceedings."
ECONOMIC CONSIDERATIONS
Approximately 74% of the Bank's loan portfolio at June 30, 1995 consisted of
short-term loans tied to a floating interest rate which changes annually or more
frequently (32% is tied to a daily floating prime rate). This loan portfolio mix
enables the Bank to adjust its yields quickly in a changing interest rate
environment. The Bank's assets are more sensitive to interest rate changes than
its liabilities. This is partly because it has more non-interest bearing
liabilities (demand deposits and capital) than non-interest earning assets.
Given these circumstances and absent other factors, declining market rates of
interest will generally have a negative impact on the Bank's net interest
income, while rising interest rates will have a positive effect.
The majority of Bancorp's assets and liabilities are monetary items held by
the Bank, the dollar value of which is not affected by inflation. Only a small
portion of total assets are in premises and equipment. The lower inflation rate
of recent years did not have the positive impact on the Bank that was felt in
many other industries. The small fixed asset investment of Bancorp minimizes any
material misstatement of asset values and depreciation expenses which may result
from fluctuating market values due to inflation. A higher inflation rate,
however, may increase
24
<PAGE> 25
operating expenses or have other adverse effects on borrowers of the Bank,
making collection more difficult for the Bank. Rates of interest paid or charged
generally rise if the marketplace believes inflation rates will increase.
The Bank concentrates on serving the needs of small and medium-size
businesses, professionals and individuals located in the San Diego County area
of California. The general economy in this market area, and particularly the
real estate market, is suffering from the effects of a slow recovery from the
prolonged recession that has negatively impacted the ability of certain
borrowers of the Bank to perform their obligations to the Bank. In addition,
problems with the Mexican peso continue to adversely affect cross-border
traffic.
Although the assessment of recent economic reports and the current economic
environment in Bancorp's market areas are encouraging, management believes that
the negative impact of a slow recovery from the prolonged California recession
will continue in 1995.
The financial condition of the Bank has been, and is expected to continue to
be, affected by overall general economic conditions and the real estate market
in California. The future success of the Bank is dependent, in large part, upon
the quality of its assets. Although management of the Bank has devoted
substantial time and resources to the identification, collection and workout of
nonperforming assets, the real estate markets and the overall economy in
California are likely to have a significant effect on the Bank's assets in
future periods and, accordingly, the Bancorp's financial condition and results
of operations.
25
<PAGE> 26
ADMINISTRATIVE PROCEEDINGS
On September 21, 1992, the Bank entered into an agreement with the OCC (the
"OCC Agreement") to address certain matters arising from an examination of the
Bank's condition conducted by the OCC as of January 31, 1992.
Under the terms of the OCC Agreement, the Bank is required, among other
things, to: (1) infuse not less than $500,000 of Tier 1 capital to achieve and
maintain Tier 1 capital at least equal to 6.7% of risk-weighted assets and Tier
1 capital at least equal to 5.1% of actual adjusted total assets (leverage
ratio) by December 31, 1992, (2) achieve and maintain Tier 1 capital at least
equal to 9.5% of risk-weighted assets and a leverage ratio of at least equal to
6% by March 31, 1993 (revised to March 31, 1994), (3) pay no dividends without
the prior written approval of the OCC, (4) adopt and implement a strategic plan
which includes a three-year capital program and objectives for growth, earnings
and reduction in nonperforming assets, (5) revise the Bank's liquidity and funds
management policy, (6) formulate written policies and procedures governing the
use of funds obtained through a deposit broker, (7) adopt and implement a
written program to collect or strengthen criticized assets, (8) develop and
implement a written loan administration program, (9) modify the Bank's loan
review program to assure timely identification and categorization of problem
loans; and (10) modify the Bank's program to review the adequacy of the
allowance for loan losses to be in accordance with recent regulatory
pronouncements.
The OCC conducted another examination of the Bank as of March 31, 1993. The
OCC concluded that the Bank had satisfied the requirements of above items 1 and
3 through 10 under the OCC Agreement and the Bank was in non-compliance only
with item 2, minimum capital
26
<PAGE> 27
levels. As a result, certain reporting requirements were eliminated. In January
1994, the OCC advised the Bank its growth in average assets will be restricted.
The 1994 OCC examination commenced April 18, 1994. The OCC concluded that
the Bank continues to be in non-compliance with above item 2, minimum capital
levels, and in partial compliance with above items 7 and 8.
On May 22, 1995 the OCC commenced it's 1995 annual examination. The OCC
concluded that the Bank continues to be in non-compliance with above item 2,
minimum capital levels and in partial compliance with items 4, 9, and 10. At
June 30, 1995, the Bank's capital ratios did not meet those required by the OCC
Agreement as of such date.
As of December 31, 1993, the OCC notified the Bank that it was deemed to be
significantly undercapitalized under the prompt corrective action provisions of
FDICIA. As a result of becoming significantly undercapitalized, the Bank is not
only subject to asset growth restrictions, and prohibitions on payment of
dividends and management fees, but is also subject to other additional
restrictions and sanctions being imposed by the OCC which could include, among
other things, a forced sale of the Bank to another institution, further
restrictions on growth or required shrinkage, and limitations on interest rates
paid on deposits to prevailing rates in the Bank's market area for deposits of
comparable size and maturity.
In accordance with the prompt corrective action provisions of FDICIA, in
February 1994, the Bank submitted to the OCC a capital restoration plan and
Bancorp submitted to the OCC a
27
<PAGE> 28
guaranty of the capital restoration plan. The amount of such guaranty is limited
to the lesser of (i) 5% of the Bank's total assets at December 31, 1993, the
date the OCC deemed the Bank to have notice that it was significantly
undercapitalized or (ii) the amount which is necessary to bring the Bank into
compliance with all applicable capital standards at the time the Bank fails to
comply with the capital restoration plan. The capital restoration plan provided
that the anticipated primary source of additional capital for the Bank would be
provided through funds received from an investor or purchaser during the fourth
quarter of 1994. That plan was approved by the OCC in March 1994. Revised plans
have since been filed by the Bank. The revised plans also provide that the
anticipated primary source of additional capital will be provided through funds
received from an investor or purchaser. The OCC has not approved the revised
plans. The OCC has indicated the OCC Agreement will be lifted upon consummation
of the Stock Purchase Agreement.
On October 23, 1992, the Bancorp signed a Memorandum of Understanding
("MOU") with the FRB to confirm a plan to correct concerns arising from their
inspection of the condition of the Bancorp as of March 31, 1992. Bancorp agreed
to not pay dividends, add or replace a director or executive officer, or incur
additional debt without the prior approval of the FRB. In accordance with the
MOU, Bancorp submitted a plan to the FRB by December 30, 1992 which set forth
its plan to increase the capital of Bancorp and address other procedural
matters. Revised plans to increase capital are submitted to the FRB as such
plans are approved by the OCC. In addition, Bancorp reports quarterly on its
progress to correct matters contained in the MOU. As of June 30, 1995 management
of Bancorp believed it was in compliance with the MOU, except for those items
related to increased capital. The FRB has indicated the MOU will be lifted upon
consummation of the Stock Purchase Agreement.
28
<PAGE> 29
PART II
<TABLE>
ITEM 6.Exhibits and Reports on Form 8-K Page
<S> <C>
(a) Exhibits: 30
2.1 Stock Purchase Agreement By and Among SDN Bancorp, San Dieguito
National Bank and Dartmouth Capital Group, L.P. (Copies of exhibits
and schedules to the Stock Purchase Agreement will be submitted
upon request.)
(b) Reports on Form 8-K: None
</TABLE>
29
<PAGE> 30
SDN BANCORP AND SUBSIDIARY
SECURITIES AND EXCHANGE COMMISSION FORM 10-QSB
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SDN BANCORP
DATE: 8-11 , 1995 Paul E. Schedler /s/
----------- -------------------------------------
Paul E. Schedler
President and Chief Executive Officer
DATE: 8-11 , 1995 Cathy J. Wingenbach /s/
----------- -------------------------------------
Cathy J. Wingenbach
Principal Accounting Officer
30
<PAGE> 1
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of July 21, 1995, is by and
among SDN Bancorp, a California corporation ("Bancorp"), San Dieguito National
Bank, a national banking association organized under the laws of the United
States of America and a wholly-owned subsidiary of Bancorp (the "Bank"), and
Dartmouth Capital Group, L.P., a Delaware limited partnership (the
"Partnership"). Bancorp and the Bank are sometimes collectively referred to as
the "Company". The Bank joins in this Agreement solely for the purpose of making
certain representations and warranties set forth in Article V and elsewhere in
this Agreement and binding itself to perform or abide by certain covenants
contained in Articles VII and XI and elsewhere in this Agreement, it being
understood and agreed that this Agreement and the Expenses incurred herewith are
necessary to the recapitalization of the Bank.
WHEREAS, the Partnership, on behalf of itself and its permitted
designees hereunder (collectively, the "Purchasers"), desires to purchase
certain shares (the "Shares") of Bancorp's common stock for the consideration
provided herein;
WHEREAS, the Partnership has conditioned its willingness and obligation
to purchase the Shares on Bancorp and the Bank taking certain actions, and
refraining from certain other actions, prior to the closing of the purchase of
the Shares, each as provided herein; and
WHEREAS, the Board of Directors of Bancorp deems it desirable and in
the best interests of Bancorp's shareholders for Bancorp to issue and sell the
Shares to the Purchasers for the consideration and on the other terms provided
herein, including by taking the actions required hereunder and by refraining
from the other actions prohibited hereunder;
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and other agreements set forth herein,
and intending to be legally bound hereby, Bancorp, the Bank and the Partnership
agree as follows:
1
<PAGE> 2
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.1 DEFINITIONS. Capitalized terms contained in this Agreement and not
defined in the preamble or the recitals above shall have the meanings set forth
in this Section 1.1:
"AGREEMENT" means this Stock Purchase Agreement including all Schedules
and Exhibits hereto, as the same may be hereafter amended.
"BANCORP" means either or both of Bancorp-CA and Bancorp-DE, as the
context requires.
"BANCORP-CA" means SDN Bancorp, a California corporation, and excludes
Bancorp-DE.
"BANCORP-DE" means SDN Bancorp, a Delaware corporation, and excludes
Bancorp-CA.
"BANCORP FINANCIAL STATEMENTS" means (a) the audited consolidated
financial statements of Bancorp, including the notes thereto and the related
opinions thereon, included in the Bancorp SEC Documents, and (b) the unaudited
consolidated interim financial statements of Bancorp, including the notes
thereto, included in the Bancorp SEC Documents.
"BANCORP INVESTORS' AGREEMENT" shall have the meaning given that term
in Section 5.5.
"BANCORP SEC DOCUMENTS" mean all reports, schedules, registration
statements and definitive proxy statements filed by Bancorp with the SEC since
January 1, 1992, as such documents have been amended since the time of their
filing.
"BANK REGULATORS" means Federal or state Governmental Entities charged
with the supervision or regulation of banks or bank holding companies or engaged
in the insurance of bank deposits.
"BHC ACT" means the Bank Holding Company Act of 1956, as amended.
"BOARD OF DIRECTORS" means, except where another entity is expressly
referenced, the Board of Directors of Bancorp, as elected and qualified from
time to time.
2
<PAGE> 3
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday or
Friday that banks in San Diego, California are not required or permitted by Law
to be closed.
"CLASSIFIED ASSET" means (a) any loan or lease asset that is classified
on the books and records of the Company as "Substandard", "Doubtful" or "Loss",
and (b) any property classified on the books and records of the Company as OREO.
"CLOSING" means the closing of the Transactions, to be held on the
Closing Date at a location fixed pursuant to Section 9.1.
"CLOSING DATE" shall mean the date as of which the Closing of the
Transactions occurs, as may be fixed pursuant to Section 9.1.
"COMMON STOCK" means the common stock of Bancorp, as of the date hereof
having no par value but to have par value of $.01 per share following the
Merger.
"COMPANY BENEFIT PLAN" means any employee benefit plan (including any
"employee benefit plan" as defined in Section 3(3) of ERISA) maintained or
contributed to by the Company.
"COMPANY CLOSING DOCUMENTS" shall have the meaning given that term in
Section 9.3.
"COMPANY GOVERNMENTAL APPROVALS" shall have the meaning given that term
in Section 5.7.
"COMPANY PERMITS" shall have the meaning given that term in Section
5.14.
"CONFIDENTIAL INFORMATION" means information that is confidential,
proprietary or otherwise not available to the public; provided, however, that
Confidential Information shall not include (i) information that is or becomes
generally available to the public other than as a result of a breach of Section
7.3 hereof, (ii) information that the receiving party demonstrates was known to
it on a non-confidential basis prior to receiving such information from the
other party hereto, (iii) information that the receiving party develops
independently without relying on Confidential Information, and (iv) information
that becomes available to the receiving party on a non-confidential basis from
another source if the source was not known to or not reasonably believed by the
receiving party to be subject to any prohibition against disclosing such
information.
3
<PAGE> 4
"CRITICIZED ASSET" means any Classified Asset and any other loan or
lease asset of the Bank classified as "Other Loans Especially Mentioned",
"Special Mention", "Classified", "Criticized", "Credit Risk Assets", "Concerned
Loans" or by words of similar import.
"DEBENTURES" means the subordinated convertible debentures issued and
sold by Bancorp under that certain Indenture dated as of May 30, 1986 and
remaining outstanding and unconverted as of the date hereof, except where
otherwise indicated including all interest thereon accrued and unpaid as of the
Closing Date.
"DEBENTURE OPTION AGREEMENT" shall have the meaning given that term in
Section 5.5.
"DISCLOSURE MATERIALS" means this Agreement (including the Schedules,
Exhibits and any other attachments hereto), Bancorp's Form 10-KSB filed with the
SEC for the period ended December 31, 1994, and Bancorp's Form 10-QSB filed with
the SEC for the period ended March 31, 1995, including in each of the latter two
cases the Bancorp Financial Statements included therein.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AGENT" means the transfer agent retained by Bancorp from time
to time with regard to the Common Stock, or such other Person as Bancorp and the
Partnership may hereafter name by mutual written agreement.
"ESCROWED SHARES" means the shares of Common Stock placed in Escrow
with the Escrow Agent for possible future distribution to holders of the Series
A Stock Rights, as more particularly described in Section 4.3.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXPENSES" means all legal, accounting and other fees and expenses
incurred by the applicable party in connection with the Transactions, including
expenses incurred in connection with the preparation of this Agreement and all
negotiations, due diligence and other activities conducted prior hereto, and
including all broker's, finder's and similar fees and expenses.
"FEDERAL RESERVE" means the Board of Governors of the Federal Reserve
the Federal Reserve System and/or the Federal Reserve Bank of San Francisco, as
applicable.
4
<PAGE> 5
"FDIC" means the Federal Deposit Insurance Corporation.
"GAAP" means Generally Accepted Accounting Principles as in effect in
the United States, consistently applied by the Company.
"GOVERNMENTAL APPROVALS" means all of the Company Governmental
Approvals, all of the Partnership Governmental Approvals, and any other consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity required in connection with the execution and
delivery of this Agreement or the consummation of the Transactions.
"GOVERNMENTAL ENTITY" means any administrative agency, commission,
court or other governmental authority or instrumentality, domestic or foreign,
including any government-sponsored corporation having regulatory authority under
law.
"HAZARDOUS MATERIAL" means any pollutant, contaminant, waste or
hazardous or toxic substance regulated by Law as such, and petroleum or
petroleum products.
"INDENTURE" means the Indenture, dated as of May 30, 1986 and executed
by Bancorp, pursuant to which the Debentures were issued.
"I.R.C." means the Internal Revenue Code of 1986, as amended
"IRS" means the United States Internal Revenue Service.
"LAW" means any statute, law, ordinance, rule or regulation of any
Governmental Entity that is applicable to the referenced Person.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, a material
adverse effect on the business, properties, assets, liabilities, prospects,
results of operations or financial condition of such Person (including such an
effect caused indirectly through any of its Subsidiaries), or the ability of
such Person to consummate the Transactions on the terms hereof; provided,
however, that a Material Adverse Effect does not include a change with respect
to, or effect on, such Person resulting from a change in Law, GAAP, RAP, or a
change with respect to, or effect on, such Person resulting from any other
matter affecting financial institutions or their holding companies generally.
5
<PAGE> 6
"MERGER" means the merger of Bancorp-CA into a Bancorp-DE as more
particularly described in Section 3.1.
"MOST RECENT FINANCIAL STATEMENTS" means Bancorp's unaudited
consolidated balance sheet at March 31, 1995 and the related statements of
income, stockholders' equity and cash flow for the three months ended March 31,
1995, each as included in Bancorp's Form 10-QSB filed with the SEC for the
period ended March 31, 1995.
"OCC" means the Office of the Comptroller of the Currency.
"OREO" means real property (i) acquired by the Bank, in the ordinary
course of the Bank's banking business, through purchase at a foreclosure sale
conducted on a lien in favor of the Bank (or a comparable sale by a trustee
under a deed of trust) or by acceptance of a deed in lieu of foreclosure or (ii)
any asset of the Bank classified as "in-substance foreclosure" on the books and
records of the Bank.
"PARTNERSHIP CLOSING CERTIFICATE" shall have the meaning given that
term in Section 9.4.
"PARTNERSHIP GOVERNMENTAL APPROVALS" shall have the meaning given that
term in Section 6.4.
"PER-SHARE PURCHASE PRICE" means the quotient of the Purchase Price
divided by the number of Shares purchased pursuant to Section 2.1.
"PERSON" means any natural person, corporation, limited liability
company, general or limited partnership, limited liability partnership, joint
venture, joint stock company, trust, unincorporated organization, association,
sole proprietorship, governmental body, or agency or political subdivision of
any government.
"PREFERRED STOCK" means the preferred stock of Bancorp, no par value,
the terms of which may be (but have not been) fixed by the Board of Directors
pursuant to Bancorp's Articles of Incorporation.
"PRIMARY STOCK RIGHT" shall have the meaning given that term in Section
4.3.
6
<PAGE> 7
"PROCEEDS" means the gross proceeds received by Bancorp from the sale
of the Shares to the Purchasers.
"PROXY STATEMENT" means the proxy statement by which Bancorp will
solicit proxies from its stockholders for the approval of the Transactions,
including any amendment or supplement thereto.
"PURCHASE PRICE" means the aggregate purchase price for the Shares,
calculated in accordance with Section 2.2.
"QUALIFYING STRATEGIC TRANSACTION PROPOSAL" shall have the meaning
given that term in Section 7.1.2.
"RAP" means Regulatory Accounting Principles, as interpreted by the
OCC.
"RECOMMENDATION OF APPROVAL" means an unqualified recommendation by the
Board of Directors to the shareholders of Bancorp that such shareholders approve
each facet of, or matter prerequisite to or otherwise relating to, the
Transactions that, pursuant to Law or Bancorp's corporate charter or By-laws,
must be approved by Bancorp's shareholders.
"REGULATORY AGREEMENT" means any formal or informal regulatory
agreement, memorandum of understanding or similar agreement with, any cease and
desist or similar order or directive entered or issued by, commitment letter or
similar undertaking to, any extraordinary supervisory letter from, or any board
of directors resolutions adopted at the request of, any Bank Regulator,
excepting only board of directors' resolutions adopted pursuant to and as a
condition of any Regulatory Agreement Termination.
"REGULATORY AGREEMENT TERMINATION" shall have the meaning given that
term in Section 5.9.2.
"REPRESENTATIVES" means each of the applicable Person's directors,
officers, employees, agents, representatives and advisors.
"RESIDUAL STOCK RIGHT" shall have the meaning given that term in
Section 4.3.
"SEC" means the Securities and Exchange Commission.
7
<PAGE> 8
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR DEBT" shall mean the existing obligations of Bancorp identified
on Exhibit E, without giving effect to the reductions to such obligations
imposed by such Exhibit E or by the Senior Debt Adjustment.
"SENIOR DEBT ADJUSTMENT" shall have the meaning given that term in
Section 4.1.
"SEVERANCE AGREEMENT" means the agreement described in Section 5.19.1.
"STOCK OPTION PLAN" means the SDN Bancorp 1982 Stock Option Plan.
"STRATEGIC TRANSACTION" means any acquisition or purchase of all or a
significant (i.e., more than 5%) portion of the assets of, or a significant
equity interest in, Bancorp or the Bank or any merger or other business
combination involving Bancorp or the Bank or any recapitalization involving
Bancorp or the Bank resulting in an extraordinary dividend or distribution to
the Company's shareholders or a self-tender for or the redemption of some or all
of the Common Stock.
"STRATEGIC TRANSACTION PROPOSAL" means any proposal regarding a
Strategic Transaction.
"TAX" (including, with correlative meaning, the terms "taxes" and
"taxable") means, except where the context otherwise requires, all Federal,
state, local and foreign income, profits, franchise, gross receipts, payroll,
sales, employment, use, property, withholding, excise, occupancy and other
taxes, duties or assessments of any nature whatsoever, together with all
interest, penalties and additions imposed with respect to such amounts.
"TRANSACTIONS" means all of the transactions contemplated by this
Agreement, including the issuance and sale of the Shares, the distribution of
the Series A Stock Rights and the Merger.
"UNMODIFIED DEBENTURES" means all Debentures that remain outstanding as
of the Closing.
"VIOLATION" means a conflict with, violation of, default under,
creation of a right of termination under, cancellation of, acceleration of any
obligation under, loss of a material benefit
8
<PAGE> 9
under, or creation of any lien, pledge, security interest, charge or other
encumbrance on assets under, the referenced Law, organic document, agreement or
other instrument, in each case with or without notice or lapse of time, or both.
1.2 RULES OF CONSTRUCTION. The following rules of construction shall
apply to the interpretation of this Agreement:
1.2.1 Any reference to any event, change or effect being
"material" with respect to any Person means an event, change or effect which is
material in relation to the condition (financial or otherwise), properties,
assets, liabilities, businesses or operations of such entity and its
Subsidiaries taken as a whole.
1.2.2 Whenever used in this Agreement, the word "including"
shall be non-exclusive and shall mean "including without limitation."
1.2.3 All references to Sections and Articles shall, unless
another agreement is expressly referenced, mean the applicable sections or
articles of this Agreement.
1.2.4 The section titles and other headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of any provisions of this agreement.
1.2.5 The terms "herein", "hereunder", and terms of similar
import refer to this Agreement as a whole and not to the specific Section or
Article in which they are used.
ARTICLE II
PURCHASE OF SHARES
2.1 PURCHASE AND SALE; NUMBER OF SHARES. At the Closing, Bancorp shall
sell, transfer, convey and deliver, and the Partnership shall purchase and
accept delivery of, all of the Shares for the Purchase Price specified in
Section 2.2 hereof; provided, however, that if the Partnership shall designate
(consistent with Section 12.4) other Purchasers in whose names a portion of the
Shares are to be issued, Bancorp shall issue such Shares in the names of such
other Purchasers. The Shares will consist of that number of shares of Common
Stock which, on a pro forma basis, after giving effect to the issuance of the
shares of Common Stock to fund the Stock
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Right Escrow and the issuance of the Shares, will constitute ninety-four percent
(94%) of all shares of Common Stock outstanding immediately following the
Closing.
2.2 PURCHASE PRICE. The Purchase Price shall be that amount which,
following (a) the payment of all Expenses (excluding the Expenses of the
Partnership) and (b) the payment of all amounts required to be paid pursuant to
Section 4.1, will result in Bancorp having a pro forma ratio of tier 1 capital
to actual adjusted total assets (as such terms are defined in 12 C.F.R. Section
3.2) of 6.0%, or such greater amount as the Partnership may in its discretion
determine.
2.3 RESTRICTIONS ON TRANSFER. The certificates evidencing the Shares
shall bear a legend in the following form:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be offered,
sold or otherwise transferred or pledged unless and until such shares
are registered under such Act or evidence reasonably satisfactory to
the Company is provided to the Company establishing that such
registration is not required, including, if requested by the Company,
an opinion of counsel reasonably satisfactory to the Company to that
effect.
The foregoing legend shall be removed from the certificates representing the
Shares, at the request of a holder thereof who is not an affiliate of the
Company (as defined in the Securities Act), at such time as they become eligible
for resale pursuant to Rule 144(k) under the Securities Act.
ARTICLE III
ADDITIONAL ACTIONS OF THE COMPANY PRIOR TO CLOSING
3.1 CHANGE OF JURISDICTION OF ORGANIZATION; REDUCTION IN NUMBER OF
SHARES OUTSTANDING. Prior to the Closing, Bancorp shall take all corporate
actions necessary to reincorporate the Company as a Delaware corporation by
merging Bancorp-CA with and into a Bancorp-DE, which shall be a newly-formed
subsidiary of Bancorp-CA formed exclusively for the purposed of such merger and
which shall have conducted no other business activity of any kind. The Agreement
and Plan of Merger shall be in the form of Exhibit A hereto and the Certificate
of Merger shall be in the form of Exhibit B hereto. Immediately following such
merger, Bancorp shall have a Certificate of Incorporation in the form of Exhibit
C hereto and By-
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laws in the form attached as Exhibit D hereto. The exchange ratio utilized in
such merger shall reduce the number of shares of Common Stock outstanding
immediately prior to the Closing by a ratio of 1:21 (or such other ratio upon
which the parties may hereafter agree in writing) relative to the number of
shares that would be outstanding in the absence of such a reduction. If such
exchange ratio would result in a fractional share being issued to any
shareholder, (a) if such fraction is equal to or greater than one-half, then the
number of shares to be issued to such shareholder shall be rounded up to the
next whole number of shares without payment by such shareholder, and (b) if such
fraction is less than one-half, then the number of shares to be issued to such
shareholder either shall be rounded up to the next whole number of shares
without payment by such shareholder or shall be rounded down to the next whole
number of shares with payment to such shareholder of an amount equal to the
Per-Share Purchase Price multiplied by such fraction, as the Partnership may
hereafter direct.
3.2 CANCELLATION OF CERTAIN DEBENTURES. Not later than the last
Business Day prior to the Closing, Bancorp shall take all actions necessary or
appropriate to effectuate the transfer of all Debentures agreed to be
transferred to the Partnership pursuant to the Debenture Option Agreement and
the cancellation of all Debentures agreed to be cancelled pursuant to the
Bancorp Investors' Agreement and the Debt Cancellation Agreements, including
giving appropriate instructions to the escrow agent thereunder to cancel such
Debentures and by making appropriate notation of such cancellation on the books
and records of Bancorp.
ARTICLE IV
ADDITIONAL ACTIONS OF THE COMPANY AT CLOSING
4.1 REPAYMENT OF SENIOR DEBT. At the Closing, Bancorp shall pay to each
of its creditors identified on Exhibit E hereto, except as indicated on such
Exhibit E, from the Proceeds, the amount set forth beside such creditor's name
on such Exhibit E, as adjusted pursuant to this Section 4.1. Such payments shall
be made by certified check or wire transfer, at Bancorp's election, in exchange
for which each such creditor shall deliver to Bancorp, at the Closing, the
promissory note or other instrument (if any) evidencing such Senior Debt, marked
"Paid", and a written acknowledgment of full satisfaction of such Senior Debt.
Each of the amounts set forth on Exhibit E other than claims of the Bank and the
amounts specified thereon as "not subject to adjustment" shall be reduced
according to the priorities therein specified, unless there shall be delivered
to the Partnership and Bancorp, prior to the Closing, written instructions
signed by all Persons named on Exhibit E (other than the Bank) specifying a
different allocation of the Senior
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Debt Adjustment among their several claims. The Senior Debt Adjustment shall be
an amount equal to the sum of (a) the aggregate amount of interest on the
Unmodified Debentures that is accrued and unpaid through the Closing Date, plus
(b) the product of the principal amount of the Unmodified Debentures, multiplied
by 0.25%, multiplied by the number of months (rounded to the nearest whole
month) between the Closing and May 30, 1998, plus (c) the product of (i) the
difference (not less than zero) between the face amount of the Unmodified
Debentures and $304,875, multiplied by (ii) the Prime Rate (as defined in the
Indenture) in effect as of the Closing Date divided by 12, multiplied by (iii)
the number of months (rounded to the nearest whole month) between the Closing
and May 30, 1998.
4.2 RELEASE OF CERTAIN LIENS. As soon as practicable following the
Closing Date, the Bank shall release of record the liens identified on Exhibit
F, which secure the loans of the Bank to Bancorp.
4.3 DISTRIBUTION OF STOCK RIGHTS. At the Closing, Bancorp shall deliver
to the Escrow Agent one or more certificates for shares of Common Stock which,
on a pro forma basis after giving effect to the issuance of such shares and the
issuance of the Shares, will constitute three percent of all shares of Common
Stock outstanding immediately following the Closing (the "Escrowed Shares"). The
Escrowed Shares shall represent the maximum number of shares of Common Stock
(subject to certain adjustments for rounding) distributable pursuant to the
Series A (Primary) Stock Right in the form attached as Exhibit G hereto (a
"Primary Stock Right"). As promptly as practicable following the Closing, the
Escrow Agent shall deliver (a) to each Person holding shares of Common Stock as
of a record date prior to the Closing (to be fixed by Bancorp), a Series A
(Primary) Stock Right certificate representing such shareholder's beneficial
interest, subject to the terms and conditions of the Primary Stock Right, in a
pro rata portion of the Escrowed Shares, and (b) to the Partnership, a Series A
(Residual) Stock Right in the form attached as Exhibit H hereto (the "Residual
Stock Right"), representing the Partnership's right to receive any Escrowed
Shares not distributed to the holders of the Primary Stock Rights in accordance
with the terms thereof. Unless Bancorp shall elect to the contrary at any time
after the Closing and give notice to the holders of the Primary Stock Rights of
such election, the Primary Stock Rights shall be non-detachable and not
separately tradeable from the underlying shares of Common Stock. The Escrow
Agent shall thereafter hold and distribute the Escrowed Shares pursuant to an
Escrow Agreement in the form of Exhibit I hereto.
4.4 RECAPITALIZATION OF THE BANK. At the Closing, Bancorp shall
contribute to the capital of the Bank such portion of the Purchase Price as will
cause the Bank to have a pro forma
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ratio of tier 1 capital to actual adjusted total assets (as such terms are
defined in 12 C.F.R. Section 3.2) of not less than 5.0%.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Unless a different date or dates is (are) expressly specified, Bancorp
and the Bank jointly and severally make the representations and warranties set
forth below as of the date of this Agreement and again as of the Closing:
5.1 ORGANIZATION, STANDING AND POWER. As of the date hereof, Bancorp is
a business corporation duly organized, validly existing and in good standing
under the laws of the State of California. As of the Closing, Bancorp will be a
business corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. Bancorp is a bank holding company registered
under the BHC Act. The Bank is a wholly owned subsidiary of Bancorp and a
national banking association duly organized, validly existing and in good
standing under the laws of the United States of America. The deposit accounts of
the Bank are insured by the FDIC through the Bank Insurance Fund to the fullest
extent permitted by law, and all premiums and assessments required in connection
therewith have been paid by the Bank as the same have become due. Each of
Bancorp and the Bank has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted, and
is duly qualified and in good standing to do business in each jurisdiction in
which, because of the nature of its business or the ownership or leasing of its
properties, a failure to be so qualified could reasonably be expected to have a
Material Adverse Effect on the Company. Copies of the Articles of Incorporation
and By-Laws of Bancorp and the Articles of Association and By-Laws of Bank,
including all amendments thereto as of the date of this Agreement, have been
delivered to the Partnership and are complete and correct. The minute books of
Bancorp and the Bank accurately reflect in all material respects all corporate
actions held or taken by their respective stockholders and Boards of Directors
(including committees of their respective Boards of Directors).
5.2 CAPITAL STRUCTURE.
5.2.1 CAPITAL STOCK OF BANCORP. As of the date hereof, the
authorized capital stock of Bancorp-CA consists of 10,000,000 shares of Common
Stock, no par value, and 10,000,000 shares of Preferred Stock, no par value. As
of the date hereof, 564,145 shares of
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Common Stock are issued and outstanding, no shares of Common Stock are held by
Bancorp-CA in its treasury or by the Bank, and no shares of Preferred Stock are
issued and outstanding or held by Bancorp-CA in its treasury or by the Bank. As
of the date hereof, 43,000 shares of Common Stock are reserved for issuance upon
the exercise of outstanding stock options previously issued pursuant to the
Stock Option Plan (all of which stock options will have been cancelled prior to
the Closing), and adequate shares of Common Stock are reserved for issuance upon
the conversion of the Debentures. Except as enumerated above, no shares of
Common Stock or Preferred Stock are reserved for future issuance. All
outstanding shares of Common Stock have been validly issued and are fully paid
and nonassessable and not subject to preemptive rights, and the Shares will be
validly issued, fully paid and nonassessable when and as issued. All of the
issued and outstanding shares of Common Stock (including the Shares, when and as
issued) and all of the Debentures have been offered, issued and sold by Bancorp
in compliance with applicable federal and state securities laws and regulations
and in compliance with any preemptive right held by any Person. There are no
dividends which have accrued or been declared but are unpaid on the Common Stock
excepting only, as of the Closing Date, the stock dividend of the Escrowed
Shares to the Escrow Agent. Bancorp has no contractual obligation to register
any shares of Common Stock under the Securities Act except as contemplated by
this Agreement. The Common Stock of Bancorp is not required to be registered
under Section 12 of the Exchange Act. Bancorp has delivered to the Partnership a
true and correct list of all holders of Common Stock as of March 31, 1995.
5.2.2 CAPITAL STOCK OF THE BANK. The authorized capital stock of the
Bank consists of 725,000 shares of common stock, $2.50 par value, of which
632,500 shares are issued and outstanding. All issued and outstanding shares of
the Bank's common stock are held, of record and beneficially, by Bancorp. No
shares of the Bank's common stock are held in treasury by the Bank, and no
shares are reserved for future issuance. All outstanding shares of the Bank's
common stock have been validly issued and are fully paid, and are held by
Bancorp free and clear of any liens, claims or other encumbrances.
5.2.3 OTHER SECURITIES. Excepting (i) options issued under the Stock
Option Plan enabling the holders thereof to purchase an aggregate of 43,000
shares of Common Stock (all of which will have been cancelled prior to or as of
the Closing), and (ii) Debentures in the aggregate face amount not more than
$1,219,500, the terms of which are governed solely by the Debenture instruments
and by the Indenture, there are no options, warrants, calls, rights, commitments
or agreements of any character to which Bancorp or the Bank is a party or by
which either is bound obligating Bancorp or the Bank to issue, deliver or sell,
or cause to be issued, delivered or sold,
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additional shares of capital stock or other securities of Bancorp or of the Bank
or obligating Bancorp or the Bank to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement. There are no outstanding
contractual obligations of Bancorp or the Bank to repurchase, redeem or
otherwise acquire any shares of capital stock of Bancorp or the Bank. There are
no bonds, debentures, notes or other instruments evidencing indebtedness of
Bancorp or the Bank issued or outstanding that entitle the holders thereof to
vote on any matters on which stockholders may vote.
5.3 INTERESTS IN OTHER ENTITIES. Bancorp does not hold more than 1% of
the outstanding equity securities of any corporation or other entity other than
the Bank. The Bank does not hold (except as pledgee in the ordinary course of
business) more than 1% of the outstanding equity securities of any corporation
or other entity. Neither the Company nor the Bank is a member of any
partnership, joint venture or similar entity or collectivity, or is party to any
partnership agreement or joint venture agreement, however named. The Bank does
not hold any "Acquisition, Development and Construction" ("ADC") loans, as that
term is defined or used under GAAP.
5.4 AUTHORITY AND RELATED MATTERS. Subject only to the approvals of the
holders of Bancorp-CA's outstanding securities specified in the immediately
following sentence, Bancorp-CA and the Bank (a) have all requisite corporate
power and authority to enter into this Agreement and to consummate the
Transactions, and (b) have duly authorized the execution and delivery of this
Agreement and the consummation of the Transactions by all necessary corporate
action on the part of Bancorp and the Bank (including without limitation the
unanimous approval by their respective Boards of Directors). The only vote of
the holders of any class or series of Bancorp-CA's or the Bank's securities
necessary to approve this Agreement or the consummation of the Transactions is
the affirmative vote of the holders of a majority of the outstanding shares of
the Common Stock entitled to vote thereon approving the Merger, and the Board of
Directors has directed the officers of Bancorp-CA to submit to Bancorp's
shareholders a proposal to approve the Merger at a meeting of such shareholders.
Prior to the Closing, Bancorp-CA, as sole shareholder of Bancorp-DE, shall have
approved the Merger by written consent in lieu of meeting, and as of the Closing
Bancorp-DE shall have all requisite corporate power and authority to consummate
the Transactions. No other corporate proceedings on the part of Bancorp-CA or
the Bank not heretofore taken, and no other corporate proceedings on the part of
Bancorp-DE not taken prior to the Closing, are necessary to approve this
Agreement or to consummate the Transactions. This Agreement has been duly
executed and delivered by Bancorp-CA and the Bank and (assuming due
authorization, execution and delivery by the Partnership) constitutes the valid
and binding
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obligations of Bancorp-CA and the Bank, and as of the Closing shall constitute
the valid and binding obligation of Bancorp-DE, enforceable in accordance with
its terms subject only to laws regarding bankruptcy, insolvency, reorganization,
moratorium or otherwise affecting creditors' rights generally, the provisions of
12 U.S.C. Section 1818(b)(6)(D), and to the application of general principles of
equity (whether considered in a proceeding in law or at equity).
5.5 AGREEMENTS WITH CERTAIN PERSONS REGARDING TRANSACTION. As of the
date hereof, each of the Persons (excepting the Partnership and Bancorp) listed
as a signatory on Exhibit J has executed and delivered to Bancorp, and Bancorp
has executed and delivered to the Partnership, a valid and binding agreement in
the form of Exhibit J (the "Bancorp Investors' Agreement"), whereby each such
Person has irrevocably agreed, (a) to vote all of his or her shares of Common
Stock listed thereon (if any) in favor of the Merger and in favor of any other
facet of the Transactions requiring the approval of Bancorp's shareholders, (b)
to cancel and forgive each of his or her Debentures listed thereon (including
unpaid interest on such Debentures and including Debentures to be acquired in
the future as referenced therein) without payment, and (c) to the extent he or
she is the payee of any of the Senior Debt, to accept the payment provided under
Section 4.1 in full satisfaction of such Senior Debt, all as more specifically
set forth in the Bancorp Investors' Agreement. As of the date hereof, Persons
who hold Debentures with an aggregate face amount of not less than $127,085
(none of which Debentures is a "Covered Debenture" under the Bancorp Investors'
Agreement) have executed and delivered to Bancorp (which has subsequently
delivered to the Partnership) valid and binding agreements in the form of
Exhibit K (each a "Debenture Option Agreement") whereby each such Person has
granted to the Partnership an option to purchase his or her Debentures
referenced therein (including unpaid interest on such Debentures) at the price
stated therein. The Debentures agreed to be cancelled pursuant to the Bancorp
Investors' Agreement and the Debentures with regard to which options have been
granted to the Partnership pursuant to the Debenture Option Agreements
constitute in the aggregate not less than 55% (by face amount) of all
outstanding Debentures.
5.6 CONFLICTS. The execution and delivery of this Agreement , and the
consummation of the Transactions will not, result in any Violation of any
provision of the corporate charter or By-laws of either Bancorp-CA or the Bank.
The consummation of the Transactions will not result in any Violation of any
provision of the corporate charter or By-laws of Bancorp-DE. Subject to
obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings included among the Governmental
Approvals or disclosed on Schedule 5.6, the execution and delivery of this
Agreement and the consummation of the Transactions will not result in any
Violation of any Law, any loan or credit agreement, note, mortgage, indenture,
lease, employee benefit plan or other agreement, obligation, instrument, permit,
concession, franchise or license,
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or any judgment, order or decree, applicable to the Company or its properties or
assets which Violation could reasonably be expected to have a Material Adverse
Effect on the Company. As of the Closing, (a) Bancorp-DE shall have taken
appropriate action such that the provisions of Section 203 of the Delaware
General Corporation Law will not apply to this Agreement or any of the
Transactions (assuming that (i) no Purchaser is an "affiliate" or "associate" of
Bancorp-DE, as those terms are defined in such Law, and (ii) no Purchaser and no
affiliate or associate of any Purchaser beneficially owns, directly or
indirectly, or is a party to any agreement, arrangement or understanding (other
than this Agreement) for the purpose of acquiring, holding, voting or disposing
of, any shares of capital stock of Bancorp-DE), and (b) there shall exist no
other so-called "take-over" law applicable to this Agreement or the
Transactions.
5.7 CONSENTS. Except as disclosed on Schedule 5.7 (the "Company
Governmental Approvals"), no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required in
connection with the Company's execution and delivery of this Agreement or the
Company's consummation of the Transactions, as to which the failure to obtain
the same could reasonably be expected to have a Material Adverse Effect on the
Company or materially interfere with the Company's ability to consummate the
Transactions.
5.8 SEC DOCUMENTS AND FINANCIAL STATEMENTS.
5.8.1 Bancorp has provided to the Partnership a true and
complete copy of each Bancorp SEC Document (excluding filings on Forms 10-Q,
10-QSB, 8-K or 8-KSB, as applicable, prior to January 1, 1994), which (together
with such excluded Forms 10-Q, 10-QSB, 8-K and 8-KSB) are all the documents,
other than preliminary material, that Bancorp was required to file with the SEC
since December 31, 1991. As of their respective dates, the Bancorp SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such the Bancorp SEC Documents, and none of the Bancorp
SEC Documents contained any 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, in light of the circumstances under which they were made,
not misleading.
5.8.2 The Bancorp Financial Statements comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Form 10-Q
or 10-
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QSB of the SEC) and fairly present the consolidated financial position of
Bancorp and the Bank as of the dates thereof and the consolidated results of
their operations and cash flows for the periods then ended. All material
agreements, contracts and other documents required to be filed as exhibits to
any of the Bancorp SEC Documents have been so filed.
5.8.3 Bancorp has delivered to the Partnership a copy of the
Company's Most Recent Financial Statements. The Most Recent Financial Statements
are complete and correct in all material respects and have been prepared from
the books and records of the Company. The Most Recent Financial Statements
present fairly the financial condition of the Company and its results of
operations as at and for the respective periods then ended. The Most Recent
Financial Statements have been prepared in accordance with GAAP, excepting only
by the absence of footnotes and other presentation items and subject to normal
year-end adjustments. The books and records of the Company have been, and are
being, maintained in all material respects in accordance with GAAP.
5.9 REGULATORY FILINGS AND AGREEMENTS.
5.9.1 Except as disclosed on Schedule 5.9, each of Bancorp and
the Bank has timely filed all reports, registrations and statements, together
with any amendments required to be made with respect thereto, that it was
required to file since December 31, 1992 with any Bank Regulator, and all other
material reports and statements required to be filed by it since December 31,
1992, including, without limitation, any report or statement required to be
filed pursuant to the laws, rules or regulations of the United States, the
Federal Reserve, the OCC or the FDIC, and have paid all fees and assessments due
and payable in connection therewith the nonpayment of which could reasonably be
expected to have a Material Adverse Effect on the Company. Except as disclosed
on Schedule 5.9, no Bank Regulator has initiated any proceeding or investigation
or, to the best knowledge of the Company, has threatened to initiate any
proceeding or investigation, into the business or operations of the Company
since December 31, 1992. Except as disclosed on Schedule 5.9, neither Bancorp
nor the Bank is a party to or subject to any Regulatory Agreement with or from
any Bank Regulator that restricts the conduct of Bancorp's or the Bank's
business, or in any manner relates to either of their capital adequacy, credit
policies, loan origination practices or management, nor to the best knowledge of
Bancorp or the Bank, is any Bank Regulator contemplating issuing or requesting
(or considering the appropriateness of issuing or requesting) any such
Regulatory Agreement. Except as disclosed on Schedule 5.9, there is no material
unresolved violation, criticism, or exception by any Bank Regulator with respect
to any report or statement relating to any examinations of the Company.
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5.9.2 TERMINATION OF REGULATORY AGREEMENTS. As of the date
hereof, each Bank Regulator that has entered into or issued any Regulatory
Agreement with regard to Bancorp or the Bank (including the Regulatory Agreement
with the OCC and the Memorandum of Understanding with the Federal Reserve) has
agreed in writing, or given other indications regarding its agreement that the
Partnership has indicated in writing to Bancorp are reasonably satisfactory to
the Partnership, to terminate such Regulatory Agreement effective immediately
upon the Closing (such latter agreements being called "Regulatory Agreement
Terminations"). As of the date hereof, a copy of each written Regulatory
Agreement Termination and a true and correct written summary of each oral
Regulatory Agreement Termination have been delivered to the Partnership. As of
the date hereof, each Regulatory Agreement Termination remains unmodified and is
in full force and effect, and to the Company's best knowledge, no Bank Regulator
that has issued or is a party to any such Regulatory Agreement Termination is
contemplating any modification or recision of such Regulatory Agreement
Termination.
5.10 UNDISCLOSED LIABILITIES. Except as and to the extent reflected in
the Most Recent Financial Statements or on Schedule 5.10, the Company does not
have any liabilities, commitments or obligations of any nature, whether
absolute, accrued, contingent or otherwise, and whether due or to become due,
including, without limitation, liabilities that may become known or arise after
the date hereof and which relate to the transactions entered into or any state
of facts existing on or before the date of the Most Recent Financial Statements
and which would be required under GAAP to be shown in such balance sheet or
referenced in notes thereto if such notes existed, other than (a) obligations
(including guarantees and letters of credit) not required by GAAP to be
reflected, reserved against or disclosed in the Most Recent Financial
Statements, all of which are set forth on Schedule 5.10 and none of which,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on the Company and (b) those incurred in the ordinary
course of business consistent with past practice since the date of the Most
Recent Financial Statements.
5.11 CRITICIZED ASSETS, RESERVES AND CERTAIN OTHER ASSETS. As of the
date hereof, the only assets of the Company that are (a) Criticized Assets on
the Company's books and records, or (b) over 90 days delinquent in payment of
principal or interest whether or not the same are Criticized Assets, are those
listed on Schedule 5.11-a hereto (which schedule sets forth the identity of the
borrower, the original principal amount, the current book balance, the amount of
any reserve (or portion of the general reserve) allocated thereto, and the loan
classification). The only assets of the Company that will be (a) Criticized
Assets on the Company's books and records or (b) over 90 days delinquent in
payment of principal or interest as of the Closing will be those
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listed on Updated Schedule 5.11-a hereto, which updated schedule will have been
delivered to the Partnership not less than three business days prior to the
Closing Date. The loan and other asset classification procedures utilized by the
Bank are in accordance with RAP and prudent banking practice, and are
consistently applied. As of March 31, 1995, the Bank's specific allowance for
loan losses with regard to Classified Assets (carried within the Bank's general
allowance) was $261,000. Schedule 5.11-b hereto sets forth all loans of the
Company to any director, executive officer or ten percent stockholder of
Bancorp, or to the best knowledge of the Company, any person, corporation or
enterprise controlling, controlled by or under common control with any of the
foregoing.
5.12 INVESTMENT SECURITIES; DERIVATIVES. Schedule 5.12 describes all of
the investment securities, mortgage backed securities and securities held for
sale of the Company as of the date hereof, including descriptions of such
securities, the book and market values, CUSIP numbers, pool face values, coupon
rates, market values, book yields, durations, weighted average life and weighted
average coupons, in each case as of May 31, 1995 (or as of the date of
acquisition, if later acquired). Since December 31, 1993, the Company has not
engaged in any transaction in or involving forwards, futures, options on
futures, swaps or other derivative instruments except as agent on the order and
for the account of others.
5.13 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on
Schedule 5.13, since December 31, 1994, there has been no material adverse
change in the business, property, assets (including loan portfolios),
liabilities (whether absolute, contingent or otherwise) prospects, operations,
liquidity, income or condition (financial or otherwise) of Bancorp or the Bank
(other than as a result of changes in banking laws or regulations of general
applicability or interpretation thereof). Except as disclosed on Schedule 5.13,
since December 31, 1994, the Company (a) has carried on its business in the
ordinary and usual course consistent with its past practices, and (b) has not
increased the wages, salaries, compensation, pension, or other fringe benefits
or perquisites payable to any executive officer, employee, or director, granted
any severance or termination pay, entered into any contract to make or grant any
severance or termination pay, or paid any bonus, in each case except for normal
increases in the ordinary course of business consistent with past practice or
except as required by applicable law.
5.14 COMPLIANCE WITH APPLICABLE LAWS. The business of the Company is
not being conducted in violation of any Law, and either Bancorp or the Bank
holds all required permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities as to which the failure to hold the same
could reasonably be expected to have a Material Adverse Effect on the
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Company (the "Company Permits"). Bancorp and the Bank are in compliance with the
terms of each of the Company Permits, except where the failure so to comply
could not reasonably be expected to have a Material Adverse Effect on the
Company. Except as disclosed on Schedule 5.9, no investigation by any
Governmental Entity with respect to the Company is pending or, to the Company's
best knowledge, contemplated.
5.15 LITIGATION AND OTHER DISPUTES. Except as disclosed on Schedule
5.15, there is no suit, action, or proceeding pending or, to the best knowledge
of Bancorp or the Bank, threatened, against or affecting the Company or any of
its assets, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Bancorp or the Bank the
obligations under which have not heretofore been fully performed. Except as
disclosed on Schedule 5.15, since December 31, 1992, the Company has not been a
defendant, either directly or as defendant-in-counter-claim or cross-claim, in
any litigation in which any "lender liability" cause of action was asserted
against the Company.
5.16 ADMINISTRATION OF FIDUCIARY ACCOUNTS. The Company has properly
administered in all material respects all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable state and federal law and regulation and common law. Neither the
Company nor any of its directors, officers or employees has committed any breach
of trust with respect to any such fiduciary account which has had or could
reasonably be expected to have a Material Adverse Effect on the Company, and the
accountings for each such fiduciary account are true and correct in all material
respects and accurately reflect the assets of such fiduciary account.
5.17 TAXES. Bancorp and the Bank have filed, either individually or on
a consolidated basis, as appropriate, all tax returns required to be filed by
Bancorp and the Bank, and the Company has paid or has set up an adequate reserve
for the payment of all Taxes required to be paid as shown on such returns, and
the Most Recent Financial Statements reflect an adequate reserve for all Taxes
payable by Bancorp and the Bank accrued through the date of such financial
statements. No deficiencies for any Taxes have been proposed, asserted or
assessed against Bancorp or the Bank that are not adequately reserved for. The
Federal income tax returns of Bancorp (consolidated with the Bank) have been
examined by and settled with the IRS, or the statute of limitations with respect
to each such year has expired (and no waiver extending the statute of
limitations has been requested or granted), for all years through 1991. The
Federal income tax returns of Bancorp (consolidated with the Bank) for the years
1992 through 1994 are
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currently open to IRS examination, but no audit is pending for any of such years
and, to the Company's best knowledge, no challenge or deficiency is contemplated
by the IRS with regard to any of such years. The Company has not (a) filed any
consent to the application of Section 341(f) of the I.R.C., (b) filed any
election under Section 338(g) or 338(h)(10) of the I.R.C. or caused or permitted
any deemed election under Section 338(e) of the I.R.C., (c) applied for any
revenue ruling, private letter ruling or other ruling relating to Taxes, (d)
entered into any closing agreement with any Governmental Entity relating to
Taxes, or (e) been, at any time, a member of any affiliated group filing any
consolidated tax return other than the affiliated group consisting of Bancorp
and the Bank.
5.18 CERTAIN AGREEMENTS. Except as disclosed on Schedule 5.18, neither
Bancorp nor the Bank is party to (nor are any of their respective assets bound
by) any oral or written contract, lease or other agreement of any name or nature
in effect as of the date hereof or as of the Closing (a) that would be required
to be filed as an exhibit to an annual report on Form 10-K filed with the SEC
(assuming that Bancorp or the Bank, as applicable, were a reporting company
under the Exchange Act, whether or not it is so registered), (b) the benefits of
which (to either party) will accrue or be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of the Transactions
(either alone or upon the occurrence of any additional acts or events), or the
value of any of the benefits of which will be calculated on the basis of the
Transactions or any portion or aspect thereof, (c) relating to employment,
salary continuation, severance, consulting (including data processing, software
programming and licensing contracts), collective bargaining or otherwise
relating to the provision of personal services or payment therefor, (d) which,
upon the consummation of the transactions contemplated by this Agreement will
result in any payment (whether of severance pay or otherwise) becoming due from
the Purchasers, Bancorp or the Bank to any officer or employee thereof, (e)
relating to non-competition or secrecy, (f) which materially restricts the
conduct of any line of business by Bancorp or the Bank, or (g) entered into in
connection with the consummation of a federally assisted acquisition of a
depository institution pursuant to which the Company is entitled to receive
financial assistance or indemnification from any Governmental Entity. The
Company has previously delivered to the Partnership true and correct copies of
all employment, consulting and deferred compensation agreements which are in
writing and to which the Company is a party. The Company in not in Violation of
any contract, lease or other agreement described by any of the foregoing clauses
(a) through (f), and to its best knowledge, no other party to any such contract,
lease or other agreement has committed any Violation of the same.
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5.19 EMPLOYEES AND EMPLOYEE BENEFIT PLANS.
5.19.1 Bancorp, the Bank and Paul E. Schedler each have
executed and delivered an agreement in the form of Exhibit L (the "Severance
Agreement"), which Severance Agreement is valid and binding on each of the
foregoing parties. As of the Closing, the Bank shall have reversed all accruals
on its books made pursuant to or otherwise relating to prior employment-related
and severance-related agreements with Mr. Schedler in excess of the amounts to
which Mr. Schedler may become entitled pursuant to the Severance Agreement.
Except as provided in the Severance Agreement, no employee of the Company or
consultant retained by the Company shall have the right to receive from the
Company or the Purchasers any severance payment or other payment in the nature
thereof in the event his or her employment is terminated by the Company after
the Closing Date, whether such right arises as a matter of contract, past policy
or understanding, by operation of law, or otherwise.
5.19.2 With respect to each Company Benefit Plan, Bancorp has
made available to the Partnership a true and correct copy of (i) such Company
Benefit Plan, (ii) the most recent annual report (Form 5500) filed with IRS,
(iii) each trust agreement relating to such Company Benefit Plan, (iv) the most
recent summary plan description for each Company Benefit Plan for which a
summary plan description is required, (v) the most recent actuarial report or
valuation in the case of Company Benefit Plans subject to Title IV of ERISA, and
(vi) the most recent determination letter issued by the IRS in the case of
Company Benefit Plans qualified under Section 401(a) of the Code.
5.19.3 With respect to the Company Benefit Plans, individually
and in the aggregate, no event has occurred and, to the best knowledge of
Bancorp or the Bank, there exists no condition or set of circumstances, in
connection with which the Company could be subject to any liability that could
reasonably be expected to have a Material Adverse Effect on the Company (except
liability for benefits claims and funding obligations payable in the ordinary
course) under ERISA, the Code or any other applicable Law.
5.19.4 There are no material disputes, employee grievances,
pending or, to the best knowledge of the Company, threatened by or between any
of the Company's employees and the Company. The Company has complied in all
respects with all Laws relating to the employment of labor and has no liability
for any arrears of wages or employment-related taxes, or penalties for failure
to comply with any such Law, or for any severance or termination payments of any
type. No election or proceedings relating to the Company's labor relations is
pending or, to the Company's best knowledge, contemplated. The Company has had
no union activity or any material labor trouble (including any strike, work
stoppage, slow-down, or similar disturbance)
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of any kind, nature or description at any time. True and correct copies of all
personnel policies and manuals of the Company have been provided to the
Partnership.
5.20 PROPERTIES. The Company does not hold title to or a beneficial
interest in any real property other than OREO. The only real properties leased
or otherwise occupied by or in the possession of the Company (excluding OREO and
property occupied only as lender in possession, in each case provided that the
Company is conducting no business in such property), are those properties
identified on Schedule 5.20. Except for assets disposed of in the ordinary
course of business consistent with past practice since the date of the Most
Recent Financial Statements, the Company has good and valid title to all of the
tangible personal property and assets which are used in the operation of its
business and which it owns or purports to own, including all assets reflected as
owned by the Company in the Most Recent Financial Statements, and has good and
valid title to all of the leasehold interests in all leases of real or personal
property which it leases or purports to lease, including all assets reflected as
leased by the Company in the Most Recent Financial Statements free and clear of
any liens, encumbrances or other imperfections of title other than such liens,
encumbrances or imperfections as (a) are reflected, reserved against or
otherwise disclosed in the Most Recent Financial Statements, (b) arise out of
property taxes not yet due or payable, or (c) relate to immaterial properties or
assets or otherwise could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Company. The Company enjoys
peaceful and undisturbed possession of the applicable leased asset under all
leases of real or personal property under which it is operating or to which it
is a party. All of such leases are valid, subsisting and in full force and
effect and there are no existing defaults or events which, with the passage of
time or the giving of notice, or both, would constitute defaults by the Company
or, to the best knowledge of the Company, by any other party thereto, except for
such defaults, if any, which could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Company. All
items of real or personal property owned or used by the Company and material to
its business have been properly maintained and, to the Company's best knowledge,
are in good operating order and repair.
5.21 ENVIRONMENTAL. The Company and all real property (including OREO)
in the possession of the Company are, and at all times while in the possession
of the Company such property has been, in compliance with all applicable Laws
relating to pollution or protection of human health or the environment
(including Laws relating to emissions, discharges, releases or threatened
releases of Hazardous Material or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Material), except for Violations that, either individually
or in the aggregate, have not had and cannot
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reasonably be expected to have a Material Adverse Effect on the Company. There
has not occurred any release of Hazardous Material on, under or affecting any
real property during the period of the Company's ownership, possession or
operation of such property (including its participation in the management of any
business located on such property) or, to the Company's best knowledge, during
any prior period. Neither the Company nor any property now or heretofore in its
possession is or has ever been a defendant in or the subject of any suit, claim,
action, proceeding, investigation or notice before any Governmental Entity or
other forum relating to alleged Violation (including by any predecessor) of any
environmental Law, rule or regulation or relating to the release or threatened
release into the environment of any Hazardous Material, whether or not occurring
at or on a site owned, leased or operated by the Company.
5.22 INTELLECTUAL PROPERTY. Except where there could not reasonably be
expected to be a Material Adverse Effect on the Company, the Company owns, or
possesses valid and binding licenses and other rights to use without payment,
all material trademarks, trade names, servicemarks, copyrights, trade secrets
and patents used in its businesses, and the Company has not received any
challenge of the same by any Person or any notice of alleged conflict between
the same and the rights of any other Person. The Company has, in all material
respects, performed all of its obligations under, and is not in material
Violation of, any contract, agreement, arrangement or commitment relating to any
of the foregoing.
5.23 BROKERS. Neither Bancorp not the Bank has employed any broker,
finder or similar Person in connection with the Transactions other than
Carpenter & Company or has incurred or will incur any broker's, finder's or
similar fees, commissions or expenses payable by the Company in connection with
the Transactions except for the fees payable to Carpenter & Company as set forth
on Schedule 5.23. The Company acknowledges that the Partnership has retained and
may in the future retain Carpenter & Company from time to time in connection
with other transactions.
5.24 FAIRNESS OPINION. Bancorp has received an opinion, dated on or
about the date of this Agreement, from Danielson Associates Inc. to the effect
that, subject to the terms, conditions and qualifications set forth therein, as
of the date hereof the consideration to be received by the Company and the
effect of the Transactions on the existing stockholders of Bancorp is fair to
such stockholders from a financial point of view. Such firm is not affiliated
with any director or officer of the Company or any Shareholder of Bancorp
holding 1% or more of the Common Stock, and has not heretofore participated in
the offering of any currently outstanding security of Bancorp.
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5.25 DISCLOSURE OF ALL MATERIAL MATTERS. No statement of fact set forth
in the Disclosure Materials, taken as a whole, is false or misleading in any
material respect, nor do the Disclosure Materials, taken as a whole, omit to
state any material fact necessary in order to make the statements made or
information disclosed, in the light of the circumstances under which they are
made or disclosed, not misleading.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
On behalf of itself and, in the case of representations and warranties
made by the Purchasers, on behalf of all of the Purchasers, the Partnership
makes the following representations and warranties as of the date hereof and
again as of the Closing:
6.1 ORGANIZATION, STANDING AND POWER. The Partnership is a limited
partnership duly organized, validly existing and in good standing under the laws
of the State of Delaware. Dartmouth Capital Group, Inc. is a business
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and is the sole general partner of the Partnership.
The Partnership has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted, and is duly
qualified and in good standing to do business in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties make such
qualification necessary.
6.2 AUTHORITY AND RELATED MATTERS. The Partnership has all requisite
power and authority to enter into this Agreement and to consummate the
Transactions. The execution and delivery of this Agreement and the consummation
of the Transactions have been duly authorized by all necessary action on the
part of the Partnership (including without limitation approval by the Board of
Directors of its general partner). This Agreement has been duly executed and
delivered by the Partnership and (assuming due authorization, execution and
delivery by Bancorp and the Bank) constitutes the valid and binding obligation
of the Partnership, enforceable in accordance with its terms subject only to
laws regarding bankruptcy, insolvency, reorganization moratorium or otherwise
affecting creditors' rights generally, and to the application of general
principles of equity (whether considered in a proceeding in law or at equity).
6.3 NO CONFLICTS. The execution and delivery of this Agreement does
not, and the consummation of the Transactions will not, result in any Violation
of, under or pursuant to any
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provision of the Agreement of Limited Partnership of the Partnership or, subject
to obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in Section 6.4, result in
any Violation of any Law, any loan or credit agreement, note, mortgage,
indenture, lease, Benefit Plan or other agreement, obligation, instrument,
permit, concession, franchise or license, or any judgment, order or decree,
applicable to the Partnership or its properties or assets which Violation could
reasonably be expected to interfere materially with the Partnership's ability to
consummate the Transactions.
6.4 CONSENTS. Except as disclosed on Schedule 6.4 (the "Partnership
Governmental Approvals"), no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required in
connection with the Partnership's execution and delivery of this Agreement or
the Partnership's consummation of the Transactions, as to which the failure to
obtain the same could reasonably be expected to have a Material Adverse Effect
on the Company or materially interfere with the Partnership's ability to
consummate the Transactions.
6.5 SECURITIES LAW MATTERS. The Partnership acknowledges that (a) the
Shares are not being registered under the Securities Act, (b) a limited market,
if any, is likely to exist for the Shares, and (c) whether or not such a market
may hereafter exist, the Shares cannot be offered, sold, pledged or otherwise
transferred within the meaning of the Securities Act without an exemption from
the registration requirements of the Securities Act. The Partnership further
represents and warrants that (i) each Purchaser is an "accredited investor"
within the meaning of Regulation D promulgated under the Securities Act, (ii)
each Purchaser has sufficient knowledge and experience in business and financial
matters to be capable of evaluating the merits and risks of an investment in the
Shares, (iii) each Purchaser is able to bear the economic risks of an investment
in the Shares and that, at the present time, is able to afford a complete loss
of such investment, and (iv) each Purchaser is acquiring the Shares for
investment for his or her own account with no present intention of dividing his
or her interest with others or of reselling or otherwise distributing the same
in any transaction that would require registration under, or would be in
violation of, the Securities Act or any other securities law of the United
States or of any State, without prejudice, however, to a Purchaser's right to
sell or otherwise dispose of Shares under an effective registration statement or
pursuant to an exemption from registration under the Securities Act. The
Partnership further represents and warrants that it has conducted (or, prior to
the designation of any Purchaser, shall have conducted) a reasonable
investigation to determine the accuracy of each of the representations contained
in the immediately preceding sentence.
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6.6 ACCESS TO INFORMATION. Bancorp or its representatives have afforded
the Partnership, as a Purchaser in its own right and as agent for the other
Purchasers, and the Partnership's advisors, the opportunity to conduct due
diligence regarding the Company, to discuss an investment in the Shares and to
ask questions concerning the Shares and the Company, which questions have been
answered to the satisfaction of the Partnership.
6.7 BROKERS. Neither the Partnership nor the other Purchasers has
employed any broker, finder or similar Person in connection with the
Transactions or has incurred or will incur any broker's, finder's or similar
fees, commissions or expenses in connection with the Transaction.
6.8 FINANCIAL CAPACITY. The Partnership has received valid and binding
subscription agreements for investments in the Partnership, payable on or before
the Closing Date, that, in the aggregate, will provide the Partnership
sufficient funds to pay the Purchase Price at the Closing and otherwise perform
its obligations hereunder. Each such subscription agreement has been executed by
a Person that, to the Partnership's best knowledge after reasonable
investigation, has the financial capacity to perform thereunder. The obligations
of the Partnership hereunder are not conditioned upon its obtaining financing.
ARTICLE VII
COVENANTS PENDING CLOSING
7.1 DISCUSSIONS WITH THIRD PARTIES.
7.1.1 The Company (a) shall not, and shall instruct and cause
each of its Representatives not to, solicit or encourage, directly or
indirectly, inquiries or proposals with respect to any Strategic Transaction
Proposal, and, (b) except as expressly permitted by Section 7.1.2, shall not,
and shall instruct and cause each of its Representatives not to, furnish any
Confidential Information relating to or participate in any negotiations,
discussions or other activities concerning, any Strategic Transaction with any
party other than the Partnership. The Company shall notify the Partnership
promptly after any Strategic Transaction Proposal is received by, or any
negotiations or discussions regarding a Strategic Transaction Proposal are
sought to be initiated with, directly or indirectly, the Company or any of their
Representatives, and shall disclose to the Partnership the identity of the third
party making or seeking to make such Strategic Transaction Proposal, the terms
and conditions thereof and such other information as the
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Partnership reasonably may request; provided, however,that if the Company
receives a Strategic Transaction Proposal and the foregoing disclosure of such
Proposal to the Partnership would violate a confidentiality agreement by which
the Company is bound, the Company (a) shall make the foregoing disclosure only
to the maximum extent permissible under such confidentiality agreement, (b)
shall return such Strategic Transaction Proposal to the initiating party without
substantive response, and (c) to the extent such disclosure has not been made
under clause (a), shall notify the Partnership that a Strategic Transaction
Proposal has been received and that the same has been returned to the initiating
party without substantive response.
7.1.2 Notwithstanding Section 7.1.1, following receipt of a
Qualifying Strategic Transaction Proposal, neither the Company nor any of its
Representatives shall be prohibited from (a) engaging in discussions or
negotiations with a third party which has made a proposal that satisfies the
requirements of a Qualifying Strategic Transaction Proposal and thereafter
providing to such third party information previously provided or made available
to the Partnership, provided the third party shall have entered into a
confidentiality agreement substantially similar to the confidentiality
provisions of Section 7.3, (b) taking and disclosing to Bancorp's shareholders a
position contemplated by Rule 14e-2(a) under the Exchange Act, or otherwise
making disclosure of the Qualifying Strategic Transaction Proposal to Bancorp's
shareholders, or (c) subject to the terms of Section 11.3 and Section 11.4,
terminating this Agreement. A "Qualifying Strategic Transaction Proposal" shall
mean a bona fide written Strategic Transaction Proposal with respect to which
the Board of Directors shall have determined, after consultation with Bancorp's
counsel, that the action by Bancorp contemplated under either clause (a), (b) or
(c), as applicable, of the immediately preceding sentence is required under the
fiduciary duties owed by the Board of Directors to the holders of the Common
Stock, which determination has been made acting in good faith and on the basis
of a written opinion from the Company's financial advisor to the effect that the
financial terms of such Strategic Transaction Proposal are, from the Company's
perspective, financially superior to the proposed Transaction.
7.2 PROXY STATEMENT; SHAREHOLDER MEETING.
7.2.1 Bancorp shall use its best efforts to prepare and
distribute the Proxy Statement to its shareholders not later than 20 Business
Days following the date of this Agreement, and to duly call, give notice of,
convene and hold a meeting of its stockholders to be held as soon as is
reasonably practicable thereafter for the purpose of voting upon the approval of
the Merger. Except as expressly provided in Section 7.2.2, the Proxy Statement
shall include a Recommendation of Approval by the Board of Directors. Bancorp
shall deliver to the Partnership
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and afford the Partnership an opportunity to comment on drafts of the Proxy
Statement prior to the distribution of the definitive Proxy Statement to
shareholders. None of the information included, directly or indirectly by
incorporation by reference, in the Proxy Statement will, at the date of mailing
to Bancorp's stockholders or at the time of the meeting of stockholders to be
held in connection with the Transactions, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that Bancorp and the Bank make no representations regarding any information
supplied to Bancorp by the Purchasers. Regardless of whether Bancorp is required
to file the Proxy Statement with the SEC, the Proxy Statement will contain no
less detail than is required by Regulation SB of the SEC. The Partnership shall
cooperate in all reasonable respects with Bancorp in the preparation of the
Proxy Statement, and no statement of fact relating to the Partnership or the
Purchasers that is made by the Partnership in writing to Bancorp for inclusion
in the Proxy Statement, and that is in fact so included, will be false or
misleading in any material respect or will omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made or disclosed, not misleading.
7.2.2 In the event that the Company has received a Strategic
Transaction Proposal and the Board of Directors has determined, in accordance
with Section 7.1.2, that such Strategic Transaction Proposal constitutes a
Qualifying Strategic Transaction Proposal, then the Board of Directors shall not
be prohibited from failing to include a Recommendation of Approval in the Proxy
Statement, from retracting or qualifying its Recommendation of Approval if
previously given, or from postponing or adjourning the meeting of shareholders
called for the purpose of approving the Merger.
7.3 ACCESS. The Company shall make available to the Partnership all
information regarding the Company that the Partnership reasonably may request
and shall authorize all reasonable visits to the Company's premises with such
staff, consultants and experts as the Partnership deems necessary or desirable.
The Partnership agrees to coordinate closely all such activities with the
Company's President and to conduct any such inquiries with appropriate
discretion and sensitivity to the Company's relationships with its employees,
customers and suppliers. Each of the Partnership and the Company acknowledges
that certain of the information that it has received and that it shall hereafter
receive regarding the other is Confidential Information. Each party agrees, for
itself and each of its Representatives, that it shall (i) hold in confidence all
Confidential Information received by it subject to the terms of this Section
7.3, (ii) disclose such Confidential Information only to those of its
Representatives and, in the case of the
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Partnership, its current or prospective investors, in each case having a need to
know the same for purposes of evaluating, negotiating or financing the
Transactions, and (iii) inform each Representative or investor to whom
Confidential Information is disclosed that such information is confidential and
direct such Representative or investor not to disclose the same. Each party
shall remain responsible for any disclosure of Confidential Information by any
of its Representatives or investors.
7.4 COOPERATION, INCLUDING GOVERNMENTAL APPROVALS. The parties
anticipate that, taken together, the Company Governmental Approvals listed on
Schedule 5.7 and the Partnership Governmental Approvals listed on Schedule 6.4
constitute all of the Governmental Approvals necessary or advisable to be
obtained in connection with the execution and delivery of this Agreement or the
consummation of the Transactions. The parties agree that each party will
promptly advise the other if it becomes aware of any Governmental Approval not
listed on such Schedules 5.7 and 6.4 that is necessary or advisable for either
party to obtain in connection with this Agreement or the Transactions. The
parties shall cooperate with each other and use their best efforts to promptly
prepare and file all necessary documentation, to effect all applications,
notices, petitions and filings, and to obtain as promptly as practicable all
Governmental Approvals and all other permits, consents, approvals and
authorizations of third parties which are necessary or advisable to consummate
the Transactions. The parties agree that they will consult with each other with
respect to the obtaining of all Governmental Approvals and all other permits,
consents, approvals and authorizations of third parties necessary or advisable
to consummate the Transactions and each party will keep the other apprised of
the status of matters relating to completion of the Transactions. Each party
shall, upon request, furnish each other party with all information concerning
itself as may be reasonably necessary or advisable in connection with any filing
or application made by or on behalf of such party to any Governmental Entity in
connection with the Transactions. Each party shall promptly advise each other
party upon receiving any communication from any Governmental Entity whose
consent or approval is required for consummation of the Transactions which
causes such party to believe that there is a reasonable likelihood that any
required Governmental Approval will not be obtained or that the receipt of any
such Governmental Approval will be materially delayed, and shall promptly advise
each other party upon receiving any communication from any Bank Regulator that
is party to a Regulatory Agreement Termination which causes such party to
believe that there is a reasonable likelihood that such Regulatory Agreement
Termination may be revoked or modified in any way.
7.5 ADVICE OF CHANGES. Each party shall promptly advise each other
party of any change or event having a Material Adverse Effect on it or which it
believes would or would be
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reasonably likely to cause or constitute a material breach of any of its
representations, warranties or covenants contained herein. From time to time
prior to the Closing Date, each party will promptly supplement or amend the
Schedules delivered in connection with the execution of this Agreement to
reflect any matter which, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in such
Schedules or which is necessary to correct any information in such Schedules
which has been rendered inaccurate thereby. No supplement or amendment to such
Schedules shall have any effect for the purpose of determining the satisfaction
of the conditions set forth in Article VIII or the compliance by any party with
any other provision of this Agreement.
7.6 CURRENT INFORMATION. During the period from the date of this
Agreement to the Closing Date, the Company will cause one or more of its
designated representatives to confer on a regular and frequent basis (not less
than bi-weekly) with representatives of the Partnership and to report the
general status of the ongoing operations of the Company. The Company will
promptly notify the Partnership of any material change in the normal course of
business or in the operation of the properties of the Company and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of significant litigation involving the Company, and will keep the Partnership
fully informed of such events. The Company will keep the Partnership fully
informed of the status of, and the action proposed to be taken with respect to,
Classified Assets that, individually or in combination with one or more other
loans to the same borrower thereunder, have an original principal amount of
$100,000 or more.
7.7 CONDUCT OF BUSINESS BY THE COMPANY. The Company shall (a) conduct
its business in the usual, regular and ordinary course of business consistent
with the past practice (except as required by applicable Law or as required by
this Agreement), (b) use reasonable best efforts to maintain and preserve intact
its business organization, employees and advantageous business relationships and
retain the services of its officers and key employees and (c) take no action
(other than actions expressly permitted pursuant to Section 7.1.1, Section 7.1.2
or Section 7.2.2) which would adversely affect or delay the ability of the
Company, the Partnership or any Purchaser to obtain any of the Governmental
Approvals or to perform its covenants and agreements under this Agreement.
7.8 INTERIM AND ANNUAL FINANCIAL STATEMENTS. Between the date hereof
and the earlier of the Closing or the termination of this Agreement, Bancorp
will deliver to the Partnership (a) as soon as reasonably available, but in no
event more than 5 Business Days after the end of
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each calendar month, a set of internal financial statements for the month then
ended as delivered to management of Bancorp, (b) as soon as reasonably
available, but in no event more than 45 calendar days after the end of each
fiscal quarter, Bancorp's Quarterly Report on Form 10-QSB as filed with the SEC
under the Exchange Act, and (c) as soon as reasonably available, but in no event
later than March 31, 1996, Bancorp's Annual Report on Form 10-KSB as filed with
the SEC under the Exchange Act.
7.9 NEGATIVE COVENANTS OF THE COMPANY. Without the Partnership's prior
written consent (which consent, in the case of Sections 7.9.10 through 7.9.16,
shall not be unreasonably withheld or delayed), and except as expressly
contemplated by this Agreement, the Company shall not:
7.9.1 declare or make any payment or distribution with respect
to the Senior Debt (other than the promissory notes of Bancorp held by the
Bank), the Debentures or the capital stock of Bancorp, whether by way of payment
of interest or principal, redemption, dividend or otherwise;
7.9.2 create, authorize, issue, sell or deliver any of its
capital stock, bonds or other of its securities (whether authorized and unissued
or held in treasury) or any instrument convertible into any of them, or grant or
otherwise issue any options, warrants or other rights with respect thereto, or
split up, combine or reclassify any of its outstanding stock;
7.9.3 create, renew, amend or terminate, or give notice of a
proposed renewal, amendment or termination of, any material contract, agreement
or lease for goods, services or office space to which the Company is a party or
by which the Company or any of its properties is bound, excepting only
contracts, agreements and leases under which the aggregate annual payments by
either party do not exceed $5,000;
7.9.4 acquire, by merging or consolidating with, by purchasing
a substantial equity interest in or a substantial portion of the assets of, or
otherwise acquire by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof,
provided, however, that in the case of any purchase at a foreclosure sale
conducted by the Bank in the ordinary course of business, the Partnership shall
not unreasonably withhold or delay its content;
7.9.5 enter into any new line of business;
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7.9.6 change its methods of accounting in effect at December
31, 1994, except as required by changes in GAAP or RAP as concurred with by the
Company's independent auditors;
7.9.7 file any application to relocate or terminate the
operations of any of its banking offices;
7.9.8 commit any act or omission which constitutes a Violation
of any Regulatory Agreement or any material contract or license to which the
Company is a party or by which it or any of its properties is bound;
7.9.9 make any equity investment in any real estate or real
estate development project, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructurings in
the ordinary course of business consistent with prudent banking practices;
7.9.10 make any single capital expenditure exceeding $5,000 or
any capital expenditures exceeding $50,000 in the aggregate;
7.9.11 sell, lease, assign, transfer or otherwise dispose of
any property or asset, except for (a) investment portfolio transactions in the
ordinary course of business and substantially consistent with past practice, and
(b) sales of assets having a gross book value not in excess of $5,000
individually or $25,000 in the aggregate;
7.9.12 enter into any agreement with any labor union or
association representing any employee, or increase any wage or salary or pay any
bonus other than customary annual (or less frequent) increases in the wages or
salaries of non-officer employees consistent with past practice, which on an
annualized basis does not increase the salary or wage of any employee by more
than 4% and which in the aggregate do not increase personnel costs for all
non-officer employees by more than 2% over the levels in effect as of March 31,
1995, or increase any other direct or indirect compensation or employee benefit
for or to any of its officers, directors or employees;
7.9.13 make, amend or compromise any loan or advance (whether
in cash or other property) to any officer, to any director, or to any holder of
record or beneficial owner of more than 1% of the Common Stock, except advances
made (a) to employees in the usual, regular and
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ordinary course of business consistent with the past practice or (b) after
reasonable notice to the Partnership, pursuant to a legally binding loan
commitment made prior to the date of this Agreement;
7.9.14 make, amend or renew, or enter into any commitment to
make, amend or renew, any loan having a principal balance (inclusive of accrued
and unpaid interest) in excess of $50,000, except that if the Partnership does
not grant or refuse its consent or reasonably request additional information
regarding such proposed loan within five Business Days of the Partnership's
receipt of the Company's request for consent, then the Partnership shall be
deemed to have granted its consent;
7.9.15 except in the usual, regular and ordinary course of
business consistent with the past practice, incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or other
entity (other than short-term indebtedness incurred to refinance short-term
indebtedness), it being understood and agreed that incurrence of indebtedness in
the ordinary course of business shall include, without limitation, the creation
of deposit liabilities, purchases of federal funds, sales of certificates of
deposit and entering into repurchase agreements, provided that in each case the
maturity of such indebtedness does not exceed 12 months;
7.9.16 restructure or materially change its investment
securities portfolio through purchases, sales or otherwise, or the manner in
which the portfolio is classified or reported; or
7.9.17 enter into any agreement or commitment to do any of the
foregoing.
ARTICLE VIII
CONDITIONS TO CLOSING
8.1 CONDITIONS TO OBLIGATIONS OF BOTH PARTIES. The obligations of the
Partnership and Bancorp to consummate the Transactions are subject to the
satisfaction of each of the following conditions:
8.1.1 REGULATORY APPROVALS. All necessary Governmental
Approvals shall have been obtained and shall remain in full force and effect;
all statutory or other required waiting
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periods in respect thereof shall have expired; and no approval of any
Governmental Entity shall have imposed any condition or requirement which, in
the reasonable opinion of the Partnership, would so materially adversely affect
the economic or business benefits to the Partnership of the purchase of the
Shares, so as to render inadvisable the consummation of the Transactions;
provided, however, that the Partnership shall not be excused from its obligation
to consummate the Transactions by a failure to obtain a necessary Governmental
Approval that relates solely to an intended Purchaser other than the Partnership
or an intended officer or director other than Robert P. Keller.
8.1.2 NO PENDING OR THREATENED CLAIMS. There shall be no
claim, action, suit, investigation or other proceeding pending or overtly
threatened before any court or other Governmental Entity that presents a
substantial risk of the restraint or prohibition of the Transactions or the
obtaining of material damages from the Company, the Partnership, any Purchaser,
or their respective officers or directors in connection therewith; and no such
restraint or prohibition shall be effective as of the Closing, whether or not
the action in which the same was entered shall remain pending.
8.2 CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP. The obligation of
the Partnership to purchase the Shares and otherwise to consummate the
Transactions are subject to the satisfaction of, or the Partnership's written
waiver of, each of the following conditions:
8.2.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES; COMPLIANCE
WITH COVENANTS. Each of Bancorp's and the Bank's representations and warranties
contained in this Agreement were true and correct as of the dates when made and
shall be true and correct as of the Closing as though made on and as of the
Closing, except for representations and warranties which speak as of an earlier
specified date, which need only be true and correct as of such date. The Company
shall have performed, satisfied and complied with, in all material respects,
each of the agreements and covenants contained in Articles III and VII and
elsewhere in this Agreement.
8.2.2 TERMINATION OF REGULATORY AGREEMENTS. Each Regulatory
Agreement Termination shall remain unmodified and in full force and effect as of
the Closing and the Partnership shall have no reasonable basis to believe that
any Bank Regulator that has issued or is a party to any such Regulatory
Agreement Termination shall then be contemplating any modification or recision
of such Regulatory Agreement Termination.
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8.2.3 CANCELLATION OF DEBENTURES. Debentures having an
aggregate face amount (excluding interest) of not less than $670,725 either
shall have been cancelled without payment by the Company and without future
payment being required to be made by the Company or any Purchaser or shall have
been transferred to the Partnership pursuant to the Debenture Option Agreement.
8.2.4 SECURITIES OUTSTANDING. All stock options outstanding
under the Stock Option Plan shall have been cancelled without exercise and,
excepting only Debentures having an aggregate face amount of not more than
$548,775 (excluding interest), there shall be no other option, warrant, call,
right or agreement outstanding that obligates Bancorp or the Bank to issue,
deliver or sell, or cause to be issued, delivered or sold, any share of capital
stock or other securities of Bancorp or the Bank, or that obligates Bancorp or
the Bank to grant, extend or enter into any such option, warrant, call, right or
agreement.
8.2.5 APPROVAL BY BANCORP'S SHAREHOLDERS. Each facet of, or
matter prerequisite to or otherwise relating to, the Transactions that, pursuant
to Law or Bancorp's corporate charter or By-laws, must be approved by Bancorp's
shareholders, shall have been approved by the affirmative vote of a majority of
all shares of Common Stock held by Persons not named on Exhibit M. To the extent
that any aspect of Transactions may have given rise to dissenters' rights of
appraisal, the aggregate number of shares of Common Stock owned by Persons who
have perfected and not abandoned dissenters' rights of appraisal shall not
constitute more than more than 2.5% of all shares of Common Stock outstanding
immediately prior to the Closing.
8.2.6 REDUCTION OF OUTSTANDING SHARES; CHANGE OF DOMICILE.
Bancorp shall have completed the actions described in Section 3.1 to the
reasonable satisfaction of the Partnership.
8.2.7 SECURITIES LAW COMPLIANCE. Any necessary securities law
filings shall have been made.
8.2.8 THIRD PARTY CONSENTS. The consent, approval or waiver of
each Person (other than the Governmental Entities referred to in Section 8.1.1)
whose consent, approval or waiver shall be required in order to permit the
consummation of the Transactions or the preservation of the contractual rights
of the Company or with respect to its business shall have been obtained except
where the failure to obtain such consent, approval or waiver would not
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materially adversely affect the economic or business benefits of the
Transactions to the Partnership so as to render inadvisable the consummation of
the Transactions.
8.2.9 PRE-AGREEMENT DELIVERIES UNALTERED. The opinion rendered
by Danielson Associates Inc. specified in Section 5.24. as of or prior to the
date of this Agreement shall not have been retracted and shall remain
unmodified.
8.2.10 TERMINATION OF EMPLOYMENT AGREEMENT. Excepting only the
Severance Agreement, all agreements between either Bancorp or the Bank and Paul
E. Schedler relating to employment, salary continuation, severance and similar
matters shall have been terminated as of or prior to the Closing without the
requirement of any payment thereunder (or under any agreement providing for the
termination of such agreements) by the Company after the Closing.
8.2.11 RECEIPT OF LEGAL OPINION. The Partnership shall have
received a legal opinion from Manatt, Phelps and Phillips, counsel for the
Company, addressed to the Purchasers and dated the Closing Date, in form and
substance reasonably satisfactory to the Partnership, opining to the matters set
forth on Exhibit N, subject to customary assumptions and qualifications.
8.2.12 RECEIPT OF AUDITORS' LETTER. The Partnership shall have
received a letter from Deloitte & Touche LLP (or such firm as the Partnership
may request), addressed to the Purchasers and dated the Closing Date, in form
and substance reasonably satisfactory to the Partnership and customary in
transactions such as the Transactions, indicating that such firm has reviewed
the books, records and internal accounting statements and accounting procedures
of the Company as of a date not more than five business days prior to the
Closing and has performed certain procedures customary in transactions such as
the Transactions as were identified by the Partnership, and based upon that
review and such firm's knowledge of the internal controls of the Company it has
found no material weakness in the Company's internal control procedures.
8.2.13 REGISTRATION RIGHTS AGREEMENT. Bancorp shall have
executed a Registration Rights Agreement in the form attached as Exhibit O,
providing for the future registration of the Shares on the terms provided
therein.
8.2.14 CERTIFICATES AND DOCUMENTS. Bancorp shall have
delivered to the Partnership (on its own behalf and as agent for the other
Purchasers) (a) certificates representing all of the Shares and (b) each of the
Company Closing Documents.
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8.2.15 DOCUMENTS AND INSTRUMENTS IN SATISFACTORY FORM. All
corporate and other proceedings in connection with the Transactions and all
documents and instruments incident to such Transactions shall be reasonably
satisfactory in substance and form to the Partnership and its counsel, and the
Partnership and its counsel shall have received all such counterpart originals
or certified or other copies of such documents as they may reasonably request.
8.2.16 NO MATERIAL ADVERSE CHANGE. No material adverse change
in the business, property, assets (including loan portfolios), liabilities
(whether absolute, contingent or otherwise) prospects, operations, liquidity,
income or condition (financial or otherwise) of Bancorp or the Bank shall have
occurred since December 31, 1994 other than those identified on Schedule 5.13
and other than as a result of changes in banking laws or regulations of general
applicability or interpretation thereof.
8.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligation of
Bancorp to issue and sell the Shares and otherwise to consummate the
Transactions are subject to the satisfaction of, or Bancorp's written waiver of,
each of the following conditions:
8.3.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES; COMPLIANCE
WITH COVENANTS. Each of the Partnership's representations and warranties
contained in this Agreement were true and correct as of the dates when made and
shall be true and correct as of the Closing as though made on and as of the
Closing, except for representations and warranties which speak as of an earlier
specified date, which need only be true and correct as of such date. The
Partnership shall have performed, satisfied and complied with, in all material
respects, each of the agreements and covenants contained in Article VII and
elsewhere in this Agreement.
8.3.2 APPROVAL BY BANCORP'S SHAREHOLDERS. The Merger shall
have been approved by the affirmative vote of a majority of all shares of Common
Stock entitled to vote thereon.
8.3.3 RECEIPT OF LEGAL OPINION. The Company shall have
received a legal opinion from Nutter, McClennen & Fish, counsel for the
Partnership, addressed to Bancorp and the Bank and dated the Closing Date, in
form and substance reasonably satisfactory to the Company, opining to the
matters set forth on Exhibit P, subject to customary assumptions and
qualifications.
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8.3.4 RECEIPT OF PURCHASE PRICE AND CERTIFICATE. Bancorp shall
have received (a) the Purchase Price and (b) the Partnership Closing
Certificate.
ARTICLE IX
THE CLOSING
9.1 DATE, TIME AND PLACE OF CLOSING. The Closing Date shall be that
date (or the next subsequent Tuesday, Wednesday or Thursday that is a Business
Day) that is five Business Days following the receipt of the final Governmental
Approval and the expiration of any waiting period imposed by any Governmental
Entity, or such other date as the parties may agree. Subject to the fulfillment
or waiver of the conditions precedent set forth in Article VIII, the Closing of
the Transactions shall take place at the offices of Manatt, Phelps & Phillips in
Los Angeles, California, at 10:00 a.m. (local time) on the Closing Date. Except
as otherwise provided herein, all proceedings to be taken and all documents to
be executed at the Closing shall be deemed to have been taken, delivered and
executed simultaneously, and no proceeding shall be deemed taken nor documents
deemed executed or delivered until all have been taken, delivered and executed.
9.2 DELIVERY OF SHARES AND PURCHASE PRICE. At the Closing, Bancorp
shall deliver to the Partnership certificates evidencing all of the Shares,
registered respectively in the names of the Partnership and the other Purchasers
in accordance with a schedule of Purchasers to be delivered by the Partnership
to Bancorp not less than three Business Days prior to the Closing Date. At the
Closing, the Partnership shall pay the Purchase Price to Bancorp by wire
transfer of immediately available funds to an account or accounts designated by
Bancorp in writing prior to the Closing Date.
9.3 COMPANY CLOSING DOCUMENTS. At or prior to the Closing, the Company
shall deliver to the Partnership each of the following (collectively, the
"Company Closing Documents"):
9.3.1 A copy of the Articles of Incorporation of Bancorp-CA,
as amended and in effect immediately prior to the Merger, certified by the
California Secretary of State as of the most recent practicable date;
9.3.2 A copy of the Certificate of Incorporation of
Bancorp-DE, as amended and in effect as of the Closing, certified by the
Delaware Secretary of State as of the most recent practicable date;
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9.3.3 A copy of the Certificate of Merger certified by the
Delaware Secretary of State, together with a copy of the Agreement and Plan of
Merger as executed by Bancorp-CA and Bancorp-DE;
9.3.4 Copies of all documents required to be filed with the
California Secretary of State to effectuate the Merger, certified by the
California Secretary of State;
9.3.5 A certificate, as of the most recent practicable date
(prior to the Merger), as to the legal existence of Bancorp-CA issued by the
California Secretary of State;
9.3.6 A certificate, as of the most recent practicable date,
as to the legal existence of Bancorp-DE issued by the Delaware Secretary of
State;
9.3.7 A copy of the By-Laws of Bancorp-DE, certified by its
Secretary as of the Closing Date;
9.3.8 A copy of the Articles of Association of the Bank, as
amended and in effect as of the Closing Date, certified by the OCC;
9.3.9 A certificate, as of the most recent practicable date,
as to the legal existence of the Bank and its authority to conduct banking
business issued by the OCC;
9.3.10 A copy of the By-Laws of the Bank, certified by its
Secretary as of the Closing Date;
9.3.11 Certificates, executed by the President and Chief
Financial Officer of Bancorp and by the President and Controller of the Bank, in
each case dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in Section 8.1 (with regard to the Company only) and
Section 8.2 and certifying that each representation or warranty contained in
Article V that is made as of the Closing is true and correct.
9.3.12 Resolutions of the Boards of Directors of Bancorp and
the Bank, (i) authorizing and approving all matters applicable to Bancorp and
the Bank, respectively, in connection with this Agreement and the Transactions,
certified as of the Closing Date by, respectively, the Secretary of Bancorp and
the Secretary of the Bank, and (ii) electing Robert P. Keller as President and
Chief Executive Officer of each of Bancorp and the Bank
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effective immediately following the Closing, subject in each case to any
necessary approval of a Bank Regulator if such approval has not been received
prior thereto;
9.3.13 Resignations, effective as of immediately following the
Closing, of each of member of the Board of Directors of Bancorp, and of the
President, Chief Financial Officer and Secretary of each of Bancorp and the
Bank.
9.4 PARTNERSHIP CLOSING CERTIFICATE. At or prior to the Closing, the
Partnership shall deliver to Bancorp a certificate, executed by the President of
the general partner of the Partnership, dated as of the Closing Date, certifying
to the fulfillment of the conditions specified in Sections 8.1 (with regard to
the Partnership only) and Section 8.3 and certifying that each representation or
warranty contained in Article VI that is made as of the Closing is true and
correct (the "Partnership Closing Certificate").
ARTICLE X
TERMINATION
10.1 MEANS OF TERMINATION. This Agreement may be terminated, and the
Transactions abandoned, prior to the Closing as follows:
10.1.1 BY MUTUAL AGREEMENT. By Bancorp and the Partnership by
mutual written consent at any time;
10.1.2 REGULATORY IMPEDIMENT. By the Partnership or Bancorp at
any time prior to the Closing if (a) a Bank Regulator shall have made a final
determination denying an application of either party the granting of which is
essential to the consummation of the Transactions, or (b) the occurrence of the
Closing would violate any final order, decree or judgment of any court having
competent jurisdiction.
10.1.3 BY THE PARTNERSHIP. By the Partnership:
(a) if Bancorp or the Bank has breached any representation,
warranty, covenant or agreement of either of them contained in this
Agreement (other than those contained in Section 4.3 or Section 4.4) in
any material respect, then the Agreement shall be terminated 10
Business Days after the notice from the Partnership identifying such
breach if such
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breach has not been cured prior to the expiration of such period;
provided, however, that for purposes only of this subsection 10.1.3(a)
such breaches shall exclude breaches of the covenant requiring the
Board of Directors to give (and not withdraw) its Recommendation of
Approval;
(b) if the Board of Directors fails to give its Recommendation
of Approval to Bancorp's shareholders, or withdraws its Recommendation
of Approval prior to the affirmative vote of Bancorp's shareholders;
(c) if Bancorp's shareholders have not approved the Merger on
or before the date that is 90 days following the date of this
Agreement;
(d) if, in the judgment of the Partnership reasonably and
objectively exercised, it shall become certain that a condition set
forth in Section 8.1 or Section 8.2 shall not be fulfilled on or before
December 29, 1995; or
(e) at any time after 12:00 noon (Pacific time) on December
29, 1995, if the Closing shall not have occurred prior to such date and
time, unless such failure results primarily from the Partnership itself
breaching any representation, warranty, covenant or agreement of the
Partnership contained in this Agreement.
10.1.4 BY BANCORP. By Bancorp:
(a) if the Partnership has breached any representation,
warranty, covenant or agreement of the Partnership contained in this
Agreement in any material respect, in which event the Agreement shall
be terminated 10 Business Days after the notice from Bancorp
identifying such breach if such breach has not been cured prior to the
expiration of such period;
(b) if Bancorp receives a Qualifying Strategic Transaction
Proposal, in which event the Agreement shall be terminated upon the
later of (i) notice from Bancorp to the Partnership and (ii) payment of
the Partnership's Expenses pursuant to Section 11.3 and the Termination
Fee pursuant to Section 11.4;
(c) if Bancorp has held a meeting of its shareholders at which
it has sought the approval of the Merger and the Board of Directors has
given (and not withdrawn) its
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Recommendation of Approval, but Bancorp's shareholders have failed to
approve the Merger at such meeting, in which event the Agreement shall
be terminated upon the later of (i) notice from Bancorp to the
Partnership and (ii) payment of the Partnership's Expenses pursuant to
Section 11.3 and the Termination Fee pursuant to Section 11.4(b), in
each case only to the extent required pursuant to those Sections;
(d) if, in the judgment of Bancorp reasonably and objectively
exercised, it shall become certain that the condition set forth in
Section 8.1.1 shall not be fulfilled on or before December 29, 1995; or
(e) after 12:00 noon (Pacific time) on December 29, 1995, if
the Closing shall not have occurred prior to such date and time, unless
the failure results primarily from Bancorp or the Bank itself breaching
any representation, warranty, covenant or agreement of such party
contained in this Agreement.
10.2 EFFECT OF TERMINATION. In the event this Agreement is terminated
pursuant to Section 10.1, all rights and obligations of the parties hereunder
shall terminate without liability of any party to any other party (except for
any liability of any party then in breach); provided, however, that the
provisions of this Section 10.2 and Article XI shall remain in full force and
effect.
ARTICLE XI
ALLOCATION OF EXPENSES; TERMINATION FEE
11.1 EXPENSES - GENERAL. Except as expressly provided in this Article
XI, the Purchasers and the Company each shall be responsible for its own
Expenses.
11.2 RESPONSIBILITY FOR CERTAIN LEGAL MATTERS. The Partnership's
counsel shall take primary responsibility for (a) preparing the disclosures in
the Company's securities filings (if any) and proxy solicitations relating to
the description of the terms of the Definitive Agreement, and (b) the
preparation of the Certificate of Incorporation and By-Laws of the Bancorp-DE,
the Agreement and Plan of Merger and Certificate of Merger by which the Merger
will be effected, and the filing of such Certificate of Incorporation and
Certificate of Merger, each in connection with the Merger.
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11.3 PAYMENT OF EXPENSES UPON TERMINATION. If this Agreement is
terminated by the Partnership pursuant to subsection 10.1.3(a), subsection
10.1.3(b), subsection 10.1.3(c) or subsection 10.1.3(d), or is terminated by
Bancorp pursuant to subsection 10.1.4(b) or subsection 10.1.4(c), Bancorp and
the Bank jointly and severally agree to pay to the Partnership all of the
Partnership's Expenses; provided, however, that Bancorp's and the Bank's
liability for such Expenses shall not exceed $125,000 if such termination is
effected pursuant to subsection 10.1.3(c), subsection 10.1.3(d) or subsection
10.1.4(c). The Partnership shall reasonably categorize its expenses in any
request for the payment thereof.
11.4 TERMINATION FEE. Bancorp and the Bank jointly and severally agree
to pay to the Partnership a Termination Fee in the amount of $225,000 (the
"Termination Fee") in the event that (a) this Agreement is terminated (i) by the
Partnership pursuant to subsection 10.1.3(a) or subsection 10.1.3(b), or (ii) by
Bancorp pursuant to subsection 10.1.4(b), or (b) (i) the Company receives a
Strategic Transaction Proposal on or after the date hereof and prior to the
termination of this Agreement, (ii) the shareholders of Bancorp fail to approve
the Merger, and (iii) the Company consummates a Strategic Transaction pursuant
to a definitive agreement entered into within one year following the termination
of this Agreement; provided, however, this Section 11.4 shall not apply to a
termination by the Partnership principally on the basis of a breach of (or an
inability of the Company to make) any representation or warranty made (or to be
made) by the Company as of the Closing pursuant to Article V if the same
representation or warranty was also made as the date of this Agreement and was
correct as of such earlier date, unless the inability of the Company to make
such representation or warranty as of Closing is caused by an affirmative act of
the Company or a failure by the Company to perform an affirmative act.
11.5 EXCLUSIVITY OF REMEDIES. Unless the failure of the condition or
other event giving rise to the termination shall have been primarily as a result
of a breach of a covenant or representation of the Company hereunder, the
Partnership's recovery of its Expenses pursuant to Section 11.3 and, if
applicable, its receipt of the Termination Fee pursuant to Section 11.4, shall
collectively be an exclusive remedy in the case of (a) a termination of this
Agreement (i) primarily as a result of a breach of the representations and
warranties contained in Section 5.9.2 (relating to Regulatory Agreement
Terminations), (ii) pursuant to subsection 10.1.3(b) but only if the Company has
received a Qualifying Strategic Transaction Proposal, (iii) pursuant to
subsection 10.1.3(c), (iv) pursuant to subsection 10.1.4(b), or (v) pursuant to
subsection 10.1.4(c), or (b) a Termination Fee paid under the circumstances
described in clause (b) of Section 11.4. Except as set forth in the preceding
sentence, the Partnership's recovery of its Expenses and/or its receipt and
acceptance of the Termination Fee shall not be an exclusive remedy, and shall be
without
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prejudice to the Partnership's right to recover damages for any breach of any
term of this Agreement.
ARTICLE XII
MISCELLANEOUS
12.1 PUBLICITY. Promptly following the execution and delivery of this
Agreement, the Company and the Partnership shall issue a joint press release in
the form of Exhibit Q hereto. The Company and the Partnership shall not, and
shall instruct their Representatives not to, issue or cause the publication of
any press release or other public announcement with respect to, or otherwise
make any public statement concerning, this Agreement or the Transactions without
the consent of the other party, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing, in the event that the Company
determines, based upon the advice of counsel, that a press release, disclosure
in a public filing, or other public disclosure of, or reference to, this
Agreement, the Transactions or the Partnership is required by law, the Company
shall first notify the Partnership of the potential disclosure, afford the
Partnership a reasonable opportunity to review and comment on the proposed
disclosure, and obtain the Partnership's approval of such disclosure, which
approval shall not be withheld or delayed in any manner that is unreasonable
under the circumstances.
12.2 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person or by electronic facsimile transmission
(with confirmation) or on the next business day after dispatch by an overnight
courier of national reputation to the respective parties as follows:
If to the Partnership or the other Purchasers, to it or them at:
Dartmouth Capital Group, L.P.
c/o Robert P. Keller
129 Shore Road
Gilford, NH 03246
46
<PAGE> 47
with a copy by facsimile to:
Nutter, McClennen & Fish
One International Place
Boston, Massachusetts 02110-2699
Attention: Michael K. Krebs, Esquire
Hugh A. O'Reilly, Esquire
fax: (617) 973-9748
If to Bancorp or the Bank, to it or them at:
SDN Bancorp
135 Saxony Road
Encinitas, California 92024-0905
Attention: Paul E. Schedler, President & CEO
fax: (619) 436-2882
with a copy by facsimile to:
Manatt, Phelps & Phillips
11355 West Olympic Boulevard
Trident Center, East Tower
Los Angeles, California 90064
Attention: Barbara S. Polsky, Esquire
fax: (310) 312-4345
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
12.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior agreements, understandings, negotiations and discussions,
both written and oral, among the parties hereto with respect to the subject
matter hereof.
12.4 BENEFITS; BINDING EFFEC; ASSIGNMENT AND DESIGNATION. This
Agreement shall be for the benefit of and binding upon the parties hereto, their
respective successors and, where applicable, assigns. No party may assign this
Agreement or any of its rights, interests or
47
<PAGE> 48
obligations hereunder without the prior written consent of the other party;
provided, however, that before the Closing is effected, the Partnership may
designate one or more other persons (not inconsistent with the representations
contained in Section 6.5) in whose name(s) a portion of the Shares are to be
issued and registered. The Shares to be issued and registered in the names of
Purchasers other than the Partnership shall not exceed in the aggregate 60% of
the Shares and no Purchaser other than the Partnership shall have the right to
receive more than 20% of the Shares. Notwithstanding any assignment or
delegation of any party's rights, interests or obligations hereunder, and
notwithstanding any designation of other Purchasers by the Partnership, (a) each
party shall remain responsible for the performance of all of its obligations
hereunder, and (b) unless such Purchaser is the assignee of all of the
Partnership's rights, interests and obligations hereunder (such assignment
having been made with the prior written consent of the Company), no Purchaser
other than the Partnership shall have any rights against the Company under this
Agreement unless and until shares of Common Stock are issued in the name of such
Person pursuant to Second 9.2 and the second sentence of this Section 12.4.
12.5 WAIVER AND AMENDMENT. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar), nor shall any such waiver constitute a
continuing waiver unless otherwise expressly so provided. No waiver shall be
effective unless it shall be in writing and shall be signed by the party to be
charged thereby. This Agreement, including the Exhibits hereto, may be amended
only by a writing signed by Bancorp, the Bank and the Partnership.
12.6 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any Person
any rights or remedies under or by reason of this Agreement other than the
parties hereto and their respective successors, permitted assigns and, upon and
after the issuance of Shares in the names of other Purchasers, the Partnership's
designees.
12.7 SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses, Sections or Articles contained in this Agreement
shall not affect the enforceability of the remaining portions of the Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law and, in the event that any one or more of the words, phrases, sentences,
clauses, sections or subsections contained in this Agreement shall be declared
invalid, this Agreement shall be construed as if such invalid word or words,
phrase or phrases, sentence or sentences, clause or clauses, section or
sections, or subsection or subsections, had not been inserted; provided,
however, that if any provision is declared to be unenforceable because it is
48
<PAGE> 49
determined to be overbroad, then, to the extent possible, such provision shall
be modified to the minimum extent necessary to render such provision
enforceable.
12.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the several parties hereto in separate counterparts, each of
which shall be deemed to be one and the same instrument.
12.9 REMEDIES CUMULATIVE. Except as provided in Section 11.5, no remedy
made available by any of the provisions of this Agreement is intended to be
exclusive of any other remedy, and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity.
12.10 APPLICABLE LAW; CONSENT TO JURISDICTION. THIS AGREEMENT SHALL BE
GOVERNED BY THE INTERNAL LAW OF THE STATE OF DELAWARE (WITHOUT REGARD TO THE
CONFLICT OF LAWS PROVISIONS THEREOF) AND ALL QUESTIONS CONCERNING THE VALIDITY
AND CONSTRUCTION THEREOF SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF SAID
STATE. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF
THE FEDERAL AND STATE COURTS SITTING IN THE STATE OF DELAWARE IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND HEREBY IRREVOCABLY
AGREES, ON BEHALF OF ITSELF AND ON BEHALF OF SUCH PARTY'S SUCCESSORS AND
PERMITTED ASSIGNS, THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION
SUCH PERSON MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION
OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT
FORUM.
12.11 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE TRIAL BY
JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO,
OR CONNECTED WITH THIS AGREEMENT, THE RELATED DOCUMENTS OR THE RELATIONSHIP
ESTABLISHED HEREUNDER.
49
<PAGE> 50
[The rest of this page is intentionally left blank.]
50
<PAGE> 51
IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first above written.
DARTMOUTH CAPITAL GROUP, L.P.
By: DARTMOUTH CAPITAL GROUP, INC.
Its General Partner
By: /s/ Robert P. Keller
------------------------------
Robert P. Keller, President
SDN BANCORP
By: /s/ J. Peter Fitzpatrick
------------------------------
J. Peter Fitzpatrick, Chairman
By: /s/ Paul E. Schedler
------------------------------
Paul E. Schedler, President &
Chief Executive Officer
SAN DIEGUITO NATIONAL BANK
By: /s/ Paul E. Schedler
------------------------------
Paul E. Schedler, President &
Chief Executive Officer
51
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<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 4155
<INT-BEARING-DEPOSITS> 889
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<LOANS> 42272
<ALLOWANCE> 789
<TOTAL-ASSETS> 54261
<DEPOSITS> 53003
<SHORT-TERM> 675
<LIABILITIES-OTHER> 762
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<COMMON> 2951
0
0
<OTHER-SE> (4349)
<TOTAL-LIABILITIES-AND-EQUITY> 54261
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<INCOME-PRETAX> (450)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (450)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.5
<LOANS-NON> 2330
<LOANS-PAST> 62
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 821
<CHARGE-OFFS> 183
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