<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1997
REGISTRATION NO. 333-21455
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NATIONAL MERCANTILE BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3819685
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1840 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
(310) 277-2265
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
SCOTT A. MONTGOMERY
EXECUTIVE VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER
NATIONAL MERCANTILE BANCORP
1840 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
(310) 277-2265
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
NANCY H. WOJTAS MARY M. SJOQUIST
SEEMA L. NENE MULDOON, MURPHY & FAUCETTE
MANATT, PHELPS & PHILLIPS, LLP 5101 WISCONSIN AVENUE, N.W.
11355 W. OLYMPIC BOULEVARD WASHINGTON, D.C. 20016
LOS ANGELES, CALIFORNIA 90064
(310) 312-4000 ---------------- (202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Preferred Stock Subscription
Rights.......................... 338,630 $ 0.00 $ -- $ 0
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Noncumulative Convertible
Preferred Stock, $10.00 stated
value(2)........................ 800,000 $10.00 $8,000,000 $2,425(4)
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Common Stock, no par value(3).... 800,000 $ 0.00 $ -- $ 0
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
(2) Includes shares which may be purchased upon the exercise of Rights and
shares which may be issued pursuant to the Minimum Standby Obligation
included in the Standby Purchase Agreements.
(3) Includes shares into which the Preferred Stock may be converted.
(4) $1,970 of this fee was paid at the time of the Company's original filing
on February 10, 1997, of this Registration Statement on Form S-2.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to an offering to
holders of record ("Rights Holders") of common stock, no par value, of
National Mercantile Bancorp (the "Company") pursuant to nontransferable rights
to purchase shares of the Company's 6.5% noncumulative convertible preferred
stock, $10.00 stated value ("Preferred Stock"), together with separate
prospectus pages relating to an offering of shares of Preferred Stock to
Standby Purchasers. The Prospectus for the offering to Rights Holders follows
immediately. After such Prospectus are the following alternate pages for the
Standby Purchasers: a front cover page, a "Standby Purchasers" section of the
Prospectus Summary, and a "Standby Purchasers" section. All other pages of the
Prospectus for the offering to Rights Holders are to be used for both the
offering to Rights Holders and the offering to Standby Purchasers.
The complete Prospectus for each of the offering to Rights Holders and the
offering to Standby Purchasers in the exact forms in which they are to be used
after effectiveness will be filed with the Securities and Exchange Commission
pursuant to Rule 424(b).
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
LOGO
OF NATIONAL MERCANTILE BANCORP]
NATIONAL MERCANTILE BANCORP
6.5% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, $10.00 STATED VALUE
$2.5 MILLION (MINIMUM)
$8.0 MILLION (MAXIMUM)
---------------
National Mercantile Bancorp (the "Company") is distributing to holders of
the Company's common stock, no par value (the "Common Stock"), of record at
the close of business on March 31, 1997 (the "Record Date"), nontransferable
rights (the "Rights") to subscribe for and purchase up to $5.5 million (
shares) of its 6.5% noncumulative convertible preferred stock, $10.00 stated
value (the "Preferred Stock"), at a price of $ per share (the "Subscription
Price"), subject to reduction by the Company under certain circumstances (the
"Rights Offering"). Shareholders will receive one Right for each share of
Common Stock (after giving effect to the Reverse Stock Split described below)
held as of the Record Date. Holders of Rights (the "Rights Holders") may
exercise their Rights until 5:00 p.m., Pacific time, on , 1997, unless
extended by the Company (the "Expiration Time"). Each Right entitles the
Rights Holder to subscribe for 1.624 shares (the "Underlying Preferred
Shares") of Preferred Stock (the "Basic Subscription Privilege") at the
Subscription Price. Each share of the Preferred Stock will be immediately
convertible at the option of the holder thereof at the initial rate of one
share of Common Stock for each share of Preferred Stock based on an initial
conversion price of $10.00 per share, subject to adjustment upon the
occurrence of certain dilutive and other events. See "Description of Capital
Stock" and "Risk Factors--Restrictions on Preferred Stock Dividends."
(continued on next page)
THE PURCHASE OF PREFERRED STOCK IN THE PUBLIC OFFERING INVOLVES A
SIGNIFICANT DEGREE OF INVESTMENT RISK. RIGHTS HOLDERS AND STANDBY
PURCHASERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 18.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSIONER
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSIONER PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
SUBSCRIPTION UNDERWRITERS' PROCEEDS
PRICE COMMISSIONS(1) TO COMPANY(2)
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<S> <C> <C> <C>
Per Share
Total Minimum....................................
Total Maximum....................................
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</TABLE>
(1) Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") will receive 3% of
the aggregate purchase price of the shares of Preferred Stock sold in the
Rights Offering (except for Rights exercised in Arizona) and 5% of the
aggregate value of funds committed by Standby Purchasers. Sandler O'Neill
also will receive 1.5% of the aggregate value of funds committed in the
Private Offering. The Company has agreed to reimburse Sandler O'Neill for
its reasonable out-of-pocket expenses, including fees of legal counsel,
and has agreed to indemnify Sandler O'Neill against certain liabilities
under the securities laws.
(2) Before deducting expenses of the Public Offering and the Private Offering
payable by the Company estimated at $ .
---------------
Sandler O'Neill & Partners, l.p.
---------------
The date of this Prospectus is , 1997
<PAGE>
(continued from previous page)
Pursuant to a private offering exemption from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), the Company
entered into purchase agreements (the "Private Purchase Agreements") with two
purchasers (collectively, the "Private Purchasers"). The Private Purchasers
have severally agreed, subject to certain conditions, to purchase and the
Company has agreed to sell (the "Private Offering"), in the aggregate, up to
$5.5 million ( shares) (the "Maximum Private Offering") of Preferred Stock
at a purchase price (the "Private Purchasers Price") equal to $ per share
(equal to $10.00 after giving effect to a 9.09 to 1 reverse stock split of the
Common Stock (the "Reverse Stock Split") that the Company plans to effect
prior to the closing of the Public Offering and the Private Offering and after
obtaining shareholder approval), subject to reduction under certain
circumstances. The Company has guaranteed the availability of an aggregate
minimum of $2.5 million ( shares) of Preferred Stock to the Private
Purchasers at the Private Purchasers Price (the "Private Purchasers Minimum
Obligation") irrespective of the number of shares available after the exercise
of the Basic Subscription Privilege. See "The Private Offering."
Each Rights Holder who fully exercises the Basic Subscription Privilege will
be eligible to subscribe for 0.376 shares of Preferred Stock (the "Excess
Underlying Preferred Shares"), for each Right held, which remain available
after the exercise of the Basic Subscription Privilege and purchased in the
Private Offering, subject to availability, proration and reduction by the
Company under certain circumstances (the "Oversubscription Privilege"). A
Rights Holder's election to exercise the Oversubscription Privilege must be
made at the time the Basic Subscription Privilege is exercised. Once a Rights
Holder has exercised the Basic Subscription Privilege or the Oversubscription
Privilege, such exercise may not be revoked. The maximum amount of Preferred
Stock available to Rights Holders under the Basic Subscription Privilege and
the Oversubscription Privilege is $5.5 million.
The Company has entered into purchase agreements (the "Standby Purchase
Agreements") pursuant to which certain institutional investors (the "Standby
Purchasers") have severally agreed, subject to certain conditions, to purchase
$2.5 million ( shares) of Preferred Stock at the Subscription Price (the
"Maximum Standby Offering"), to the extent available after the exercise of the
Basic Subscription Privilege, the consummation of the Private Offering and the
exercise of the Oversubscription Privilege (the "Standby Purchaser Offering").
See "Standby Purchasers" for the identities of the Standby Purchasers. The
Standby Purchasers have agreed to purchase and the Company has guaranteed the
availability of an aggregate minimum of $1.0 million ( shares) of Preferred
Stock at the Subscription Price if a sufficient number of shares of Preferred
Stock is not available after the exercise of the Basic Subscription Privilege,
the consummation of the Private Offering and the exercise of the
Oversubscription Privilege (the "Minimum Standby Obligation"). See "The
Standby Purchasers." The Rights Offering and the Standby Purchaser Offering
may sometimes be referred to collectively as the "Public Offering."
The minimum amount to be raised in the Public Offering and the Private
Offering will be $8.0 million (assuming no rights are exercised in the Rights
Offering), consisting of $5.5 million ( shares) of Preferred Stock purchased
by the Private Purchasers and $2.5 million ( shares) of Preferred Stock
purchased by the Standby Purchasers. The maximum amount to be raised in the
Public Offering and the Private Offering will be $9.0 million, consisting of
$5.5 million pursuant to the Rights Offering, $2.5 million ( shares) of
Preferred Stock purchased by the Private Purchasers and $1.0 million
( shares) of Preferred Stock purchased by the Standby Purchasers.
The number of Underlying Preferred Shares issuable by the Company as a
result of exercises of the Basic Subscription Privilege and the
Oversubscription Privilege in the aggregate or to any Rights Holder or the
Standby Purchasers may be limited by the Company, if necessary, with certain
exceptions, in its sole judgment and discretion, to reduce the risk that
certain tax benefits will be subject to limitation under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), or the risk of any
other adverse tax consequences to the Company, either at the time of the
Public Offering and the Private Offering or at any subsequent time. See "The
Rights Offering--Limitations--Tax Limitation." The number of shares issuable
by the Company to the Private Purchasers also may be limited by the Company
pursuant to the terms of the Private Purchase Agreements. See "The Private
Offering."
2
<PAGE>
THE COMPLETION OF THE PUBLIC OFFERING AND THE PRIVATE OFFERING IS SUBJECT TO
CERTAIN CONDITIONS INCLUDING, BUT NOT LIMITED TO, THE RECEIPT BY THE COMPANY
OF MINIMUM PROCEEDS OF $5.5 MILLION (THE "MINIMUM CONDITION"). IN THE EVENT
THE MINIMUM CONDITION IS NOT ACHIEVED, ANY FUNDS THAT HAVE BEEN DEPOSITED WITH
THE SUBSCRIPTION AGENT WILL BE RETURNED PROMPTLY, WITHOUT INTEREST. SEE "THE
PRIVATE OFFERING--CONDITIONS TO CLOSING; AMENDMENT AND TERMINATION" AND "THE
RIGHTS OFFERING--MINIMUM CONDITION."
The Rights are not transferable. There will be no trading market for the
Rights. The Company intends to apply to the National Association of Securities
Dealers Automated Quotation ("Nasdaq") Stock Market ("Nasdaq Stock Market")
for quotation of the Preferred Stock on the Small Cap tier of the Nasdaq Stock
Market under the trading symbol "MBLAP" if there are an adequate number of
publicly held shares of Preferred Stock to meet the requirements of Nasdaq. No
assurance can be given that there will be an adequate number of publicly held
shares or that a market will develop for the Preferred Stock. On April 9, the
last reported trade price of the Common Stock as quoted on the Small Cap tier
of the Nasdaq Stock Market under the symbol "MBLA" was $1.50. See "Market
Price for Common Stock and Dividends."
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information, reporting and proxy statement
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's Regional Offices located at Room 1228, 7 World Trade Center,
Suite 1300, New York, New York 10048 and Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
may also be obtained at prescribed rates from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The reports, proxy statements and other information can also be
inspected and copied at the offices of the National Association of Securities
Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850. The Commission
maintains a World Wide Web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-2 (333-21455) (the "Registration Statement") pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth or incorporated by reference in the Registration Statement and the
exhibits and schedules relating thereto as permitted by the rules and
regulations of the Commission. For further information pertaining to the
Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Items of information omitted
from this Prospectus, but contained in the Registration Statement, may be
obtained at prescribed rates or inspected without charge at the offices of the
Commission set forth above. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and, in each
instance, reference is made to the copy of such document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission. Each
such statement is qualified in its entirety by such reference.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated herein by reference and made a part hereof; (i)
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and (ii) all other reports filed with the Commission pursuant to
Sections 13(a), 13(e), 14 or 15(d) of the Exchange Act by the Company after
December 31, 1996 and prior to the date of this Prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in this Prospectus
or in any other subsequently filed document which is also incorporated by
reference modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. The Company will provide without charge
to each person to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
incorporated by reference herein other than exhibits to such documents.
Requests should be directed to National Mercantile Bancorp, 1840 Century Park
East, Los Angeles, California 90067, Attention: Scott A. Montgomery, Executive
Vice President and Chief Administrative Officer, (310) 277-2265.
4
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and consolidated
financial statements and notes thereto set forth elsewhere in this Prospectus.
Unless otherwise indicated, all information contained in this Prospectus
reflects the Reverse Stock Split anticipated to be effected prior to the
closing of the Public Offering and the Private Offering.
THE COMPANY
The Company is a bank holding company conducting business through its sole
subsidiary, Mercantile National Bank (the "Bank"). The Bank currently has one
office located in the Century City area of Los Angeles. As of December 31, 1996
the Company had total assets of $109.4 million, total deposits of $103.9
million and total stockholders' equity of $4.8 million. For the year ended
December 31, 1996, the Company suffered a net loss of $1.2 million (which
includes a $1.0 million charge to earnings for the settlement of a lawsuit and
a $579,000 income tax benefit) compared to a net loss of $7.2 million for the
year ended December 31, 1995. See "Business--Litigation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Income Taxes."
HISTORY
Since commencing operations in 1982 with an initial capitalization of $15.0
million, the Bank focused primarily on providing banking products and services
to the niche markets of business and private banking and entertainment in its
primary service area (a four mile radius from its office). Throughout the
1980s, the Company experienced substantial growth and profitability. In
February 1990, the Company raised additional capital of $5.7 million through
the sale of Common Stock to two investor groups at $11.00 per share (without
giving effect to the Reverse Stock Split). At December 31, 1990, the Company
had total assets of $492.8 million and total stockholders' equity of $28.5
million.
Beginning in 1990, the Bank's primary service area was severely affected by
an economic recession, including substantial declines in real estate values.
Commencing in 1991, the ongoing recession began to affect adversely the values
of collateral securing the Bank's loans and the ability of borrowers to repay
their loans. As a result of the combined effects of this prolonged recession
and the rapid growth of the Bank in the late 1980s, the Bank began to
experience substantial increases in nonperforming assets resulting in
significant losses. Although the Bank undertook to enhance credit underwriting
policies and internal controls and procedures to address operational
weaknesses, from January 1, 1991 through December 31, 1996, the Company
suffered cumulative net losses of $23.7 million. These losses were primarily
the result of substantial provisions for credit losses attributable to losses
embedded in the existing loan portfolio and losses associated with a bulk loan
purchase from the Federal Deposit Insurance Corporation (the "FDIC"), losses on
interest rate hedges and swaps, and sales of securities combined with the
adverse effects of the substantial reduction in the asset levels of the Bank.
In addition, nonperforming assets increased from $14.8 million, or 3.0% of
total assets at December 31, 1990 to a high of $22.0 million, or 7.3% of total
assets, at December 31, 1993 notwithstanding net loan chargeoffs of $15.2
million during the three year period ended December 31, 1993.
Concurrent with the deterioration in the Company's financial condition and
operations, the bank regulatory authorities designated the Company and the Bank
for special supervisory attention. Following regulatory examinations in late
1990 and early 1991, the Bank entered into a formal regulatory agreement (the
"1991 Formal Agreement") with the Office of the Comptroller of the Currency
(the "OCC"), and the Company entered into a Memorandum of Understanding (the
"1991 MOU") with the Federal Reserve Bank of San Francisco (the "Reserve
Bank"). As a result of the Bank's continuing problems, following regulatory
examinations during 1995, the Bank in December 1995 entered into a formal
regulatory agreement with the OCC (the "1995 Formal Agreement") and the Company
in October 1995 entered into a Memorandum of Understanding (the "1995
5
<PAGE>
MOU") with the Reserve Bank. The 1995 Formal Agreement and 1995 MOU supersede
and replace in their entirety the 1991 Formal Agreement and 1991 MOU,
respectively. These regulatory agreements have affected virtually every area of
the Company's and the Bank's operations, imposed on the Bank higher minimum
regulatory capital requirements than would otherwise be applicable and
restricted the ability of the Company and the Bank to pay dividends. See "The
Company--Regulatory Agreements."
RESPONSIVE MEASURES
In November 1995, the Board of Directors hired a new President of the Bank.
The President and the Board of Directors developed and began implementing a
restructuring plan to address the challenges confronting the Bank and to return
the Bank to consistent profitability. The plan includes (1) improving
management, (2) reducing nonperforming and classified assets, (3) reducing
operating expenses, (4) focusing business strategy on core business and market
opportunities, (5) enhancing policies and procedures to improve asset quality,
(6) increasing regulatory capital ratios and (7) resolving pending litigation.
Management believes that the Company has made significant progress in
implementing this plan, which is summarized below and described in greater
detail under the caption "The Company--Responsive Measures":
. Improving Management. As of August 1996, the Company and the Bank
changed senior management by hiring Scott A. Montgomery in November 1995
as President and Chief Executive Officer of the Bank and Executive Vice
President and Chief Administrative Officer of the Company, Joseph W.
Kiley III in August 1996 as Executive Vice President and Chief Financial
Officer of the Company and the Bank and Carol Ward in July 1996 as
Executive Vice President and Operations Administrator of the Bank. In
addition, as of December 31, 1996, five middle management officers, with
an average of 16 years of banking experience, have been hired by the
Bank in departments such as management information systems, note
department, business and private banking and underwriting.
. Reducing Nonperforming and Classified Assets. The Bank has reduced the
level of nonperforming assets through asset sales, write-downs,
enhancing collection procedures and improving underwriting policies and
procedures. From the peak of $22.0 million at December 31, 1993,
nonperforming assets have decreased to $6.8 million at December 31,
1996. From the peak of $47.1 million at December 31, 1991, classified
assets have been reduced to $8.3 million at December 31, 1996. One loan,
a troubled debt restructure, with a balance of $4.9 million is included
in the total of $6.8 million of nonperforming assets and is included in
the total of $8.3 million of classified assets.
. Reducing Operating Expenses. Since November 1995, management has pursued
a program to increase operational efficiencies and reduce other
operating expenses. For the year ended December 31, 1996, the Company
reduced other operating expense by $3.2 million to $8.0 million from
$11.2 million for December 31, 1995. Excluding a $1.0 million charge
relating to the settlement of a pending lawsuit, other operating
expenses for the year ended December 31, 1996 declined $4.2 million from
1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Other Operating Expenses." These savings
resulted primarily from the renegotiation of the lease for the Bank's
office and a restructuring of each operating department of the Bank.
. Focusing Business Strategy on Core Business and Market
Opportunities. Management has pursued a business strategy which focuses
on the Bank's traditional market niches of business and private banking
and entertainment. As part of its business and private banking focus,
the Bank intends to increase its emphasis on medical banking
relationships by taking advantage of its proximity to several major
hospital/medical centers and numerous health service-related companies
in West Los Angeles. Management also intends to expand its focus to
include technology/multimedia companies. Management believes the
technology/multimedia market represents a logical extension of the
Bank's focus on the entertainment industry as more technology companies
seek to develop and market applications to the entertainment industry.
6
<PAGE>
. Enhancing Policies and Procedures to Improve Asset Quality. The Bank has
strengthened its credit administration and loan review functions. The Bank's
loan policies and procedures have been revised in an attempt to reduce the
Bank's exposure to future loan problems. The Bank (i) has expanded the role
of an outside loan review firm to include a migration analysis on its loan
portfolio on a quarterly basis, (ii) has established an underwriting
department to standardize loan write-ups, enhance portfolio quality and
allow officers time to service their clients and prospects and (iii) is in
the process of hiring several experienced lending and underwriting officers
to strengthen the Bank's loan origination and monitoring functions. Total
nonperforming loans have decreased from $15.9 million at December 31, 1993
to $6.2 million at December 31, 1996. See "Business--Troubled Debt
Restructurings."
. Increasing Regulatory Capital Ratios. Primarily as a result of a
restructuring of the balance sheet and a decreasing asset base, capital
ratios have remained constant. The Bank's Tier I risk-based capital ratio
was 6.95% at December 31, 1996 and 1995. The Bank's leverage capital ratio
was 4.67% at December 31, 1996 and 1995. The Bank's total risk-based capital
ratio was 8.24% at December 31, 1996 and 1995. The Bank, however, has not
yet met the requirements of the 1995 Formal Agreement that requires a Tier 1
risk-based capital ratio of at least 10% and a leverage capital ratio of at
least 6.5% which would require a minimum net investment in the Bank of
approximately $2.5 million. See "Risk Factors--Regulatory Agreements" and
"--Capital Requirements" and "The Company--Regulatory Agreements."
Assuming gross proceeds from the Public Offering and the Private Offering of
between $8.0 million and $9.0 million, management anticipates downstreaming
sufficient capital (i.e., approximately $2.5 million) from the Company to
the Bank to comply with the capital requirements of the 1995 Formal
Agreement and the 1995 MOU and to implement the Bank's business strategy and
retaining the balance of the proceeds, if any, at the Company to be used for
general corporate purposes, including possible strategic acquisitions. See
"Reasons for the Offerings and Use of Proceeds."
. Resolving Litigation. The Company entered into a settlement agreement
relating to a lawsuit against the Bank. The total amount of the settlement
of $1.0 million was accrued in the quarter ended June 30, 1996 and was
reflected in the consolidated statement of operations for the year ended
December 31, 1996. The settlement was originally conditioned on the
recapitalization of the Bank on or before March 31, 1997. However, the
Company and all affected parties agreed to a single payment of the
settlement on a discounted lump sum basis, which payment was made prior to
December 31, 1996. See "Business--LegalProceedings--Other Litigation."
USE OF PROCEEDS
The primary purposes of the Public Offering and the Private Offering are to
enable the Company to downstream sufficient capital, approximately $2.5
million, regardless of whether the minimum or maximum amount is raised in the
Public Offering and the Private Offering, to the Bank to enable it to comply
with the requirements of the 1995 Formal Agreement and the 1995 MOU, to
facilitate the Company's and Bank's business strategies. The Company
established the Minimum Condition of $5.5 million for such purposes and to make
the Public Offering and the Private Offering cost effective. See "The Company--
Business Strategy" and "--Regulatory Agreements." The Company anticipates that
the net proceeds contributed to the Bank will ultimately be invested in
interest earning assets. The immediate use of proceeds retained by the Company
will be for general corporate purposes, including possible strategic
acquisitions and to establish a fixed income investment securities portfolio.
The Company has no current understandings or agreements, is not presently
negotiating any such acquisitions and currently is not able to effect any
acquisitions due to regulatory constraints. Proceeds from the Public Offering
and the Private Offering will not be used to pay dividends on the Preferred
Stock. The terms of the Preferred Stock provide that dividends may be paid
commencing , 1999. Notwithstanding the foregoing, the Company may not pay
dividends unless the Bank is in full compliance with federal regulatory capital
requirements, the Company and the Bank are permitted to pay dividends by their
7
<PAGE>
regulators and the Company has adequate retained earnings in accordance with
California law. At present, the Company is prohibited by the terms of the 1995
MOU from declaring or paying a dividend without prior approval of the Reserve
Bank and does not have adequate retained earnings to declare a dividend in
accordance with California law. The Company cannot assess at this time its
ability to pay dividends in the immediate future. See "Risk Factors--
Restrictions on Preferred Stock Dividends," and "The Company--Regulatory
Agreements."
RISK FACTORS
THE PURCHASE OF PREFERRED STOCK IN THE PUBLIC OFFERING INVOLVES A SIGNIFICANT
DEGREE OF INVESTMENT RISK. RIGHTS HOLDERS AND OTHER PROSPECTIVE PURCHASERS
SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK
FACTORS" WHICH FOLLOWS THIS SUMMARY, BEGINNING ON PAGE .
THE PRIVATE OFFERING
Securities Offered..........
The Company offered and guaranteed the
availability of, pursuant to a private offering
exemption from the registration requirements of
the Securities Act, a minimum of $2.5 million
( shares) of Preferred Stock to the Private
Purchasers ($2,250,000 for the Conrad Company and
$250,000 for Wildwood Enterprises Inc. Profit
Sharing Plan and Trust ("Wildwood Enterprises")).
The Private Purchasers have agreed to purchase a
maximum of $5.5 million ( shares) of Preferred
Stock ($4,950,000 for the Conrad Company and
$550,000 for Wildwood Enterprises), at the
Private Purchasers Price. See "The Private
Offering."
Private Purchase The Company has entered into Private Purchase
Agreements............ Agreements with the Private Purchasers. The
Private Purchase Agreements impose on the Company
material indemnification obligations in certain
events. See "The Private Offering--Private
Purchase Agreements." The Private Purchase
Agreements also set forth certain conditions
which must be met in order to complete the
Private Offering. See "The Private Offering--
Conditions to the Closing; Amendment and
Termination."
Private Purchasers..........
The Private Purchasers are Conrad Company, a bank
holding company which is controlled by Carl
Pohlad, and Wildwood Enterprises. In connection
with its purchase of Preferred Stock in the
Private Offering, Conrad Company is required to
seek approval from the Board of Governors of the
Federal Reserve System to purchase more than 4.9%
of the voting stock of the Company.
Private Purchasers Minimum
Obligation................. The Company has guaranteed the availability, and
will sell an aggregate minimum, of $2.5 million
( shares) of Preferred Stock to the Private
Purchasers if the Basic Subscription Privilege is
exercised in full by the Rights Holders, subject
to certain conditions. See "The Private
Offering--The Private Offering."
Maximum Private Offering....
The Company will sell up to an aggregate maximum
of $5.5 million ( shares) of Preferred Stock
to the Private Purchasers, subject to reduction
by the Company to reduce the risk that certain
tax benefits will be subject to limitation under
Section 382 of the Code ("Section 382"). See
"Certain Federal Income Tax Consequences."
8
<PAGE>
THE RIGHTS OFFERING
Securities Offered..........
The Company is offering in the Public Offering a
minimum of $2.5 million and a maximum of
$8.0 million of Preferred Stock. A total of
Underlying Preferred Shares are being offered
in the Public Offering pursuant to the exercise
of Rights, which includes the Basic Subscription
Privilege, the Oversubscription Privilege and the
Standby Purchaser Offering. See "The Rights Of-
fering--Minimum Condition" and "--Subscription
Privileges." In addition, the Standby Purchasers
have agreed to purchase and the Company has guar-
anteed the availability of an aggregate minimum
of $1.0 million ( shares) of Preferred Stock at
the Subscription Price if, as a result of the ex-
ercise of the Basic Subscription Privilege, the
consummation of the Private Offering and the
Oversubscription Privilege, an aggregate of $8.0
million of Preferred Stock has been sold. See
"The Standby Purchasers."
Once the Rights are distributed and until the Ex-
piration Time, other than the Reverse Stock Split
discussed below, the Company will not effect a
reclassification of the Company's equity securi-
ties which could have the effect of materially
altering the value of the Rights during the pen-
dency of the Rights Offering.
Basic Subscription
Privilege.................. Shareholders of record of the Company's Common
Stock at the close of business on the Record Date
will receive one nontransferable Right for each
share of Common Stock held as of the Record Date.
Each Right will entitle the Rights Holder to sub-
scribe for 1.624 Underlying Preferred Shares at
the Subscription Price. No fractional Rights will
be issued. Fractional Rights will be "rounded up"
to the next nearest whole number. ONCE A RIGHT
HAS BEEN PROPERLY EXERCISED, IT CANNOT BE RE-
VOKED.
Oversubscription Privilege..
Each Rights Holder who elects to exercise the
Basic Subscription Privilege in full also will be
eligible to subscribe at the Subscription Price
for 0.376 shares of Preferred Stock (the "Excess
Underlying Preferred Shares"), for each Right
held, that are not otherwise subscribed for
pursuant to the exercise of the Basic
Subscription Privilege and are not purchased by
the Private Purchasers pursuant to the terms of
the Private Offering (i.e., an aggregate of
$8.0 million of Preferred Stock has not been
purchased by the shareholders pursuant to the
Basic Subscription Privilege and the Private
Purchasers pursuant to the Private Offering),
subject to availability, proration and reduction
by the Company under certain circumstances. If an
insufficient number of Excess Underlying
Preferred Shares is available to satisfy fully
all exercises of the Oversubscription Privilege,
then the available Excess Underlying Preferred
Shares will be prorated among Rights Holders who
exercise their Oversubscription Privilege based
upon the respective number of shares of Common
Stock owned as of the Record Date, and all excess
payments shall be returned by mail without
interest
9
<PAGE>
or deduction promptly after the Expiration Time
and after all prorations and adjustments
contemplated by the Public Offering and the
Private Offering have been effected.
Oversubscription Privileges are not transferable.
If 45.5% of the Basic Subscription Privilege is
exercised by the Rights Holders, and assuming
$5.5 million of Preferred Stock is sold pursuant
to the Private Offering, participation in the
Oversubscription Privilege will not be available
to the Rights Holders.
Standby Purchasers..........
The Company has entered into Standby Purchase
Agreements pursuant to which the Standby Purchas-
ers have severally agreed to purchase up to $2.5
million ( shares) of Preferred Stock at the
Subscription Price to the extent available after
exercise of the Basic Subscription Privilege, the
consummation of the Private Offering and the ex-
ercise of the Oversubscription Privilege. The
Company has guaranteed the availability of the
Minimum Standby Obligation if as a result of the
exercise of the Basic Subscription Privilege, the
consummation of the Private Offering and the ex-
ercise of the Oversubscription Privilege, an ag-
gregate of $8.0 million ( shares) of Preferred
Stock have been sold.
Reasons for the Public
Offering and the Private The Board of Directors decided to conduct both
Offering.............. the Private Offering and the Public Offering (i)
to minimize the dilutive effect of the Private
Offering and the Standby Purchaser Offering to
current shareholders and (ii) to ensure, through
the Private Offering, that the Company would ob-
tain sufficient capital to meet bank regulatory
requirements and (iii) to finance the Company's
business strategy in the event the Company's
shareholders chose not to participate in the
Rights Offering.
Transferability of Rights... THE RIGHTS ARE NOT TRANSFERABLE.
Record Date.................
March 31, 1997
Subscription Price..........
$ per share. The price at which shares are
sold to the Private Purchasers may be lower than
the Subscription Price under certain circumstanc-
es. See "The Rights Offering--Subscription
Price."
Expiration Time............. The Rights will expire if not exercised prior to
5:00 p.m., Pacific Time, on , 1997, unless ex-
tended in the sole discretion of the Company. The
number and length of any such extensions will be
set at the time of any such extension. See "The
Rights Offering--Expiration Time." RIGHTS NOT EX-
ERCISED PRIOR TO THE EXPIRATION TIME WILL EXPIRE
AND BECOME WORTHLESS.
Preferred Stock
Outstanding................ No shares of Preferred Stock are currently out-
standing. Giving effect to the Maximum Private
Offering and the Maximum Standby Offering, a min-
imum of shares of Preferred Stock will be
outstanding after the completion of the Public
Offering and the Private Offering. Giving effect
to the exercise in full of the Basic Subscription
Privilege, the Private Purchasers Minimum Obliga-
tion and the
10
<PAGE>
Minimum Standby Obligation, a maximum of
shares of Preferred Stock will be outstanding af-
ter the completion of the Public Offering and the
Private Offering. Rights Holders may experience
substantial dilution of their equity ownership
interest and voting power in the Company if they
do not exercise the Basic Subscription Privilege
and the Oversubscription Privilege. Even if
Rights Holders exercise their Basic Subscription
Privilege and Oversubscription Privilege in full,
they will experience dilution due to the Private
Purchasers Minimum Obligation and the Minimum
Standby Obligation. See "Risk Factors--Dilution
of Ownership Interest," "Dilution," and "Busi-
ness--Legal Proceedings."
Subscription Agent..........
U.S. Stock Transfer Corporation
Information Agent...........
Kissel-Blake Inc.
Financial Advisor...........
The Company and Sandler O'Neill have entered into
an agreement pursuant to which Sandler O'Neill is
acting as the Company's financial advisor in con-
nection with the Public Offering and the Private
Offering. The Company has agreed to pay certain
fees to, and expenses of, Sandler O'Neill for its
services in the Public Offering and the Private
Offering. See "The Rights Offering--Financial Ad-
visor."
Procedure for Exercising
Rights..................... The Basic Subscription Privilege and the
Oversubscription Privilege may be exercised by
properly completing the Subscription Right Cer-
tificate distributed to each Rights Holder with
this Prospectus and forwarding it (or following
the Guaranteed Delivery Procedures, as defined
below) with payment of the Subscription Price for
each Underlying Share subscribed for pursuant to
the Basic Subscription Privilege and the
Oversubscription Privilege, to the Subscription
Agent, which must receive such Subscription Right
Certificate or Notice of Guaranteed Delivery and
payment at or prior to the Expiration Time. If
Subscription Right Certificates are sent by mail,
Rights Holders are urged to use insured, regis-
tered mail, return receipt requested. See "The
Rights Offering--Method of Subscription."
If the aggregate Subscription Price paid by an
exercising Rights Holder is insufficient to pur-
chase the number of Underlying Preferred Shares
that the Rights Holder indicates are being sub-
scribed for, or if no number of Underlying Pre-
ferred Shares to be purchased is specified, then
the Rights Holder will be deemed to have exer-
cised the Basic Subscription Privilege to pur-
chase Underlying Preferred Shares to the full ex-
tent of the payment price tendered. If the aggre-
gate Subscription Price paid by an exercising
Rights Holder exceeds the amount necessary to
purchase the number of Underlying Preferred
Shares for which the Rights Holder has indicated
an intention to subscribe, then the Rights Holder
will be deemed to have exercised the
Oversubscription Privilege to the full extent of
the excess payment tendered.
11
<PAGE>
ONCE A RIGHTS HOLDER HAS EXERCISED THE BASIC SUB-
SCRIPTION PRIVILEGE OR THE OVERSUBSCRIPTION PRIV-
ILEGE, SUCH EXERCISE MAY NOT BE REVOKED. RIGHTS
NOT EXERCISED PRIOR TO THE EXPIRATION DATE WILL
EXPIRE AND BECOME WORTHLESS.
Persons Holding Common
Stock, or Wishing to
Exercise Rights, Through
Others................ Persons holding shares of Common Stock benefi-
cially and receiving the Rights issuable with re-
spect thereto, through a broker, dealer, commer-
cial bank, trust company or other nominee, as
well as persons holding certificates for Common
Stock directly who would prefer to have such in-
stitutions effect transactions relating to the
Rights on their behalf should contact the appro-
priate institution or nominee and request it to
effect such transaction for them. See "The Rights
Offering--Method of Subscription--Exercise of
Rights."
Minimum Condition...........
The Public Offering and the Private Offering are
conditioned upon the receipt of minimum offering
proceeds of $5.5 million. In the event the Mini-
mum Condition is not achieved, any funds that
have been deposited with the Subscription Agent
will be returned promptly, without interest. As a
result of the Private Purchase Agreements and
Standby Purchase Agreements, pursuant to which
the Private Purchasers and the Standby Purchasers
have agreed to acquire in the aggregate $8.0 mil-
lion of Preferred Stock (subject to reduction to
avoid certain adverse tax consequences), the Com-
pany believes that the Minimum Condition will be
satisfied.
Federal Income Tax For United States federal income tax purposes,
Consequences............... receipt of Rights by a Rights Holder pursuant to
the Rights Offering should be treated as a
nontaxable distribution with respect to the
Common Stock. See "Certain Federal Income Tax
Consequences."
Issuance of Preferred
Stock...................... Certificates representing shares of Preferred
Stock purchased pursuant to the exercise of the
Rights pursuant to the Basic Subscription
Privilege and the Oversubscription Privilege will
be delivered to subscribers as soon as
practicable after the Expiration Time and after
all prorations and adjustments contemplated by
the terms of the Public Offering and the Private
Offering have been effected.
The Regulatory Limitation... The Company will not be required to issue
Preferred Stock pursuant to the exercise of the
Basic Subscription Privilege, the
Oversubscription Privilege or the Standby
Purchase Agreements to any Rights Holder or to
any Standby Purchaser who, in the opinion of the
Company, could be required to obtain prior
clearance or approval from or submit a notice to
any state or federal bank regulatory authority to
acquire, own or control such shares if, at the
Expiration Time, such clearance or approval has
not been obtained or any required waiting period
has not expired. If the Company elects not to
issue shares of Preferred Stock in such case,
such shares
12
<PAGE>
will become available to Rights Holders, the
Private Purchasers or Standby Purchasers as to
whom such conditions do not apply. See "The
Rights Offering--Limitations--The Regulatory
Limitation."
The Tax Limitation..........
The number of Underlying Preferred Shares
issuable by the Company as a result of exercises
of the Basic Subscription Privilege and the
Oversubscription Privilege in the aggregate to
any Rights Holder or the issuance of shares to
the Private Purchasers or the Standby Purchasers
shall be limited, with certain exceptions, by the
Company, if necessary, in its sole judgment and
discretion, to reduce the risk that certain tax
benefits will be subject to limitation under
Section 382 (the "Section 382 Limitation"), or
the risk of any other adverse tax consequences to
the Company, either at the time of the Public
Offering and the Private Offering or at any
subsequent time. Based on current circumstances,
the Company does not anticipate that it will have
to reduce the number of shares to any Rights
Holder or to the Private Purchasers or Standby
Purchasers to avoid an adverse effect upon the
Company's ability to utilize any federal and
state income tax benefits. See "The Rights
Offering--Limitations--Tax Limitation."
The Transfer Limitation.....
As part of the Company's efforts to avoid the
Section 382 Limitation on the use of its existing
tax net operating loss ("NOLs") carryforwards,
the terms of the Preferred Shares as reflected in
the Company's Amended and Restated Articles of
Incorporation (the "Restatement") shall prohibit,
and the certificates evidencing the Preferred
Shares and the shares of Common Stock issued upon
conversion of the Preferred Stock will contain a
legend prohibiting, transfer of such Preferred
Stock or Common Stock to any person (other than
persons to whom the Company is contractually
obligated on or before the date of issuance (the
"Date of Issuance") of the Preferred Stock in the
Public Offering and the Private Offering to
transfer up to 4.9% of the Company's stock) if
such person is or would become by reason of such
transfer the beneficial owner of 4.5% or more (or
4.9% as described above) (a "4.5% Holder") of
shares of the Company's stock, as the term is
defined, and such ownership is determined, under
Section 382 (the "NOL Transfer Restriction"). The
NOL Transfer Restriction and the legend will not
restrict future transfers by any holder to those
persons to whom the Company is contractually
obligated on or before the Date of Issuance to
transfer up to 4.9% of the Company's stock. The
Restatement also will impose the NOL Transfer
Restriction on shares of Common Stock currently
outstanding and those issued upon conversion of
the Preferred Stock or otherwise issued by the
Company in the future. The Company has the right
to demand that any stock transferred in violation
of the NOL Transfer Restriction (the "Transferred
Stock") be transferred to the Company and any
distributions received on the Transferred Stock
be remitted to the Company. In addition, the
Company has the right to demand remittance of
13
<PAGE>
proceeds received from such initial transfer. The
Company shall sell the Transferred Stock in an
arm's length transaction and remit the proceeds
thereof to the original shareholder. The NOL
Transfer Restriction expires (i) on or after
three years from the Date of Issuance of the
Preferred Stock in the Public Offering and the
Private Offering or (ii) upon the occurrence of
any transaction in which holders of all
outstanding shares of capital stock of the
Company receive, or are offered the opportunity
to receive, cash, stock or other property for all
such shares and upon the consummation of which
the acquiror will own at least a majority of the
outstanding shares of capital stock. In addition,
the Board of Directors of the Company is
expressly empowered to waive application of the
Transfer Restriction to any specific transaction,
provided that such waiver is by resolution of the
Board of Directors duly considered and approved
by at least a majority of the Board of Directors
prior to any such transfer of stock. See "Risk
Factors--Restrictions on Transfer" and "The
Rights Offering-- Limitations--Transfer
Limitation."
Dividends...................
Proceeds from the Public Offering and the Private
Offering will not be used to pay dividends on the
Preferred Stock. The Company's primary source of
funds for the payment of dividends on the
Preferred Stock will be dividends received from
the Bank and earnings (if any) on proceeds from
the Public Offering and the Private Offering
retained by the Company. Both the Bank's ability
to pay dividends to the Company and the Company's
ability to pay dividends on the Preferred Stock
are subject to significant regulatory and state
law restrictions. See "Risk Factors--Restrictions
on Preferred Stock Dividends." The terms of the
Preferred Stock provide that dividends may be
paid commencing two years after the Date of
Issuance. Generally, the Preferred Stock has
preference over the payment to or declaration of
dividends in respect of stock ranking junior to,
and places certain restrictions on dividends in
respect to stock ranking on a parity with, the
Preferred Stock. Notwithstanding the foregoing,
the Company may not pay dividends unless the Bank
is in full compliance with federal regulatory
capital requirements and is permitted by the OCC
to pay dividends to the Company, the Company is
permitted by the Reserve Bank to pay dividends
and the Company has sufficient retained earnings
under California law to pay dividends. When
payable, dividends on the Preferred Stock will be
paid at the stated rate of 6.5% per share per
annum, quarterly, in arrears, in cash. Dividends
on the Preferred Stock are not cumulative. See
"Description of Capital Stock--Preferred Stock--
Dividends." The Company cannot assess at this
time its ability to pay dividends in the
immediate future.
Conversion..................
Each share of the Preferred Stock will be
immediately convertible at the option of the
holder thereof into shares of Common Stock at an
initial rate of one share of Common Stock per
share of Preferred Stock based on an initial
conversion price of $10.00 per share which shall
be subject to adjustment upon the occurrence of
certain dilutive and other events. See
"Description of Capital Stock--Preferred Stock--
Conversion."
14
<PAGE>
Voting Rights...............
Each holder of Preferred Stock is entitled to
that number of votes on all matters submitted to
the shareholders that is equal to the number of
shares of Common Stock into which such holder's
shares of Preferred Stock are then convertible.
The holders of the Preferred Stock will vote
together with the holders of the Common Stock as
a single class on all matters except the
Preferred Stock will have a separate class vote
on (i) matters as to which California law
requires a separate class vote of Preferred Stock
and (ii) any action to (a) authorize any
additional shares of Preferred Stock or authorize
or issue shares of capital stock having priority
over or ranking on parity with the Preferred
Stock, (b) amend, alter or repeal any of the
provisions of the Restatement or adopt any
Certificate of Designation with respect to any
class or series of capital stock so as to
adversely affect the rights, preferences and
privileges relating to the Preferred Stock or the
holders thereof, or waive any of the rights
granted to the holders of the Preferred Stock,
(c) amend, alter or repeal any of the provisions
of the Restatement, or the bylaws, of the Company
with respect to the election of directors by
cumulative voting or (d) the issuance of any
authorized shares of Preferred Stock except in
connection with the Public Offering and the
Private Offering or the Warrant (as defined
herein). See "Description of Capital Stock."
Redemption..................
The Preferred Stock will be redeemable by the
Company, in whole or in part, at the option of
the Company at any time after three years after
the Date of Issuance (the "Beginning Redemption
Date"), at a redemption price per share in cash
equal to 105% of the original purchase price of
$10.00 per share, plus declared but unpaid divi-
dends. The applicable percentage of the original
purchase price will decline by one percentage
point every anniversary of the Beginning Redemp-
tion Date thereafter until five years after the
Beginning Redemption Date and thereafter when the
Preferred Stock may be redeemed at 100% of the
original purchase price per share, plus declared
but unpaid dividends.
There is no sinking fund requirement for redemp-
tion of the Preferred Stock. See "Description of
Capital Stock--Preferred Stock--Redemption Option
of the Company."
Liquidation Preference......
Each share of Preferred Stock will have a liqui-
dation preference of $10.00 per share plus de-
clared but unpaid dividends, but subordinated to
any and all indebtedness of the Company and the
Bank, including deposits. See "Description of
Capital Stock--Preferred Stock--Liquidation
Rights."
No Board or Financial
Advisor Recommendations.... An investment in the Preferred Stock must be made
pursuant to each investor's evaluation of such
investor's best interests. ACCORDINGLY, NEITHER
THE BOARD OF DIRECTORS OF THE COMPANY NOR SANDLER
O'NEILL MAKES ANY RECOMMENDATION TO RIGHTS HOLD-
ERS OR STANDBY PURCHASERS REGARDING WHETHER THEY
SHOULD EXERCISE THEIR RIGHTS OR OTHERWISE PUR-
CHASE PREFERRED STOCK.
15
<PAGE>
Nasdaq Stock Market Symbol
for Common Stock...........
"MBLA"
Nasdaq Stock Market for
Preferred Stock............
The Company intends to file an application to
have the Preferred Stock approved for quotation
on the Small Cap tier of the Nasdaq Stock Market
if there are an adequate number of publicly held
shares of Preferred Stock to meet the require-
ments of Nasdaq. No assurance can be made that
such application will be approved. See "Risk Fac-
tors--Absence of Market for the Preferred Stock."
Nasdaq Stock Market Symbol
for Preferred Stock........ "MBLAP"
Right to Terminate Public The Company expressly reserves the right, in its
Offering................... sole and absolute discretion, at any time prior
to delivery of the shares of Preferred Stock of-
fered hereby, to terminate the Public Offering if
the Public Offering is prohibited by law or regu-
lation or the Board of Directors concludes, in
its judgment, that it is not in the best inter-
ests of the Company, and its shareholders, to
complete the Public Offering under the circum-
stances. If the Public Offering is terminated,
all funds received pursuant to the Public Offer-
ing will be promptly refunded, without interest.
Shareholder Approval........
The Annual Meeting of Shareholders will be held
on May 29, 1997 at 7:00 p.m. at Mercantile
National Bank, 1840 Century Park East, Main
Floor, Los Angeles, California (the "Annual
Meeting"). At the Annual Meeting, shareholders
will be asked to vote on, among other things, (i)
the election of directors; (ii) approval of the
Reverse
Stock Split, (iii) approval of the NOL Transfer
Restriction and (iv) approval of the terms and
conditions of the Preferred Stock. A separate
proxy statement is being sent to Record Holders
with respect to the Annual Meeting. No assurance
can be made that the Reverse Stock Split, NOL
Transfer Restriction or terms and conditions of
the Preferred Stock will be approved by the
requisite vote of the Company's shareholders.
16
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected consolidated financial and other data
of the Company for each of the years in the five years ended December 31, 1996.
The data as of and for each of the five years in the period ended December 31,
1996 should be read in conjunction with, and is qualified in its entirety by,
the more detailed information included elsewhere in this Prospectus, including
the Company's audited Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets................. $ 109,416 $ 131,992 $ 232,979 $ 303,120 $ 351,638
Securities............. 18,630 20,417 62,056 83,674 101,233
Loans receivable....... 62,547 82,012 115,284 161,791 175,736
Allowance for credit
losses................ 2,969 3,805 3,063 6,697 6,009
Deposits:
Interest-bearing
demand, money market
accounts and savings.. 28,454 28,565 44,363 61,876 73,663
Noninterest-bearing de-
mand.................. 34,752 44,579 87,430 110,607 141,849
Time certificates of
deposit............... 40,648 47,099 76,022 96,363 92,724
---------- ---------- ---------- ---------- ----------
Total deposits......... 103,854 120,243 207,815 268,846 308,236
---------- ---------- ---------- ---------- ----------
Shareholders' equity... 4,845 6,011 10,308 22,199 21,601
Book value per
share(1).............. 1.57 1.95 3.35 7.29 7.12
Book value per
share(2).............. 14.31 17.75 30.44 66.28 64.69
Shares of common stock
outstanding(1)........ 3,078,146 3,078,146 3,078,146 3,044,446 3,035,379
Shares of common stock
outstanding(2)........ 338,630 338,630 338,630 334,923 333,925
CONSOLIDATED CAPITAL RA-
TIOS:
Tier 1 risk-based...... 6.96% 6.96% 9.84% 11.94% 9.85%
Total risk-based....... 8.25% 8.25% 11.11% 13.25% 11.12%
Leverage............... 4.68% 4.68% 5.65% 7.11% 7.39%
ASSET QUALITY:
Nonaccrual loans....... $ 928 $ 573 $ 3,426 $ 7,780 $ 6,316
Troubled debt
restructurings........ 5,016 5,167 5,582 5,584 5,043
Loans contractually
past due 90 or more
days with respect to
either principal or
interest and still
accruing interest..... 300 221 1,507 2,502 47
---------- ---------- ---------- ---------- ----------
Total nonperforming
loans................ 6,244 5,961 10,515 15,866 11,406
Other real estate
owned(3).............. 556 581 1,529 6,175 5,613
---------- ---------- ---------- ---------- ----------
Total nonperforming as-
sets.................. 6,800 6,542 12,044 22,041 17,019
ASSET QUALITY RATIOS:
Nonaccrual loans to to-
tal assets............ 0.8% 0.4% 1.5% 2.6% 1.8%
Nonaccrual assets to
total assets(4)....... 1.4% 0.9% 2.1% 4.6% 3.4%
Allowance for credit
losses to nonaccrual
loans................. 319.9% 664.0% 89.4% 86.1% 95.1%
Allowance for credit
losses to nonaccrual
assets(4)............. 200.1% 329.7% 61.8% 48.0% 50.4%
Classified assets to
allowance for credit
losses plus
shareholders' equity.. 106.2% 79.1% 149.2% 139.4% 156.7%
Classified assets to
allowance for credit
losses plus
shareholders'
equity(5)............. 43.9% 29.5% 112.8% 122.5% 139.1%
OTHER DATA:
Full-time equivalent
employees............. 44 52 61 92 113
</TABLE>
(continued on following page)
17
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net interest income.... $ 5,678 $ 7,655 $ 15,374 $ 14,692 $ 14,956
Provision for credit
losses................ -- 2,307 7,330 2,000 3,050
Other operating (loss-
es) income............ 502 (1,315) (2,857) 1,474 2,140
Other operating ex-
penses(6)............. 8,003 11,233 13,714 14,058 17,014
---------- ---------- ---------- ---------- ----------
(Loss) Income before
income taxes and
cumulative effect of
change in accounting
principle............. (1,823) (7,200) (8,527) 108 (2,968)
Income tax benefit..... (579) -- -- -- --
Cumulative effect of
change in accounting
principle............. -- -- -- 63 --
---------- ---------- ---------- ---------- ----------
Net (loss) income...... $ (1,244) $ (7,200) $ (8,527) $ 171 $ (2,968)
========== ========== ========== ========== ==========
PER SHARE DATA:
(Loss) income per share
before income taxes
and cumulative effect
of change in
accounting
principle(7).......... $ (0.59) $ (2.34) $ (2.79) $ 0.03 $ (0.98)
(Loss) income per share
before income taxes
and cumulative effect
of change in
accounting
principle(2).......... (5.38) (21.26) (25.37) 0.31 (8.89)
Net (loss) income per
share (fully
diluted)(7)........... (0.40) (2.34) (2.79) 0.05 (0.98)
Net (loss) income per
share (fully
diluted)(2)........... (3.67) (21.26) (25.37) 0.49 (8.89)
Weighted average shares
outstanding(7)........ 3,078,146 3,078,146 3,055,584 3,041,268 3,035,379
Weighted average shares
outstanding(2)........ 338,630 338,630 336,148 334,573 333,925
SELECTED PERFORMANCE
RATIOS:
(Loss) return on
average shareholders'
equity................ (22.16)% (79.71)% (44.68)% 0.79% (12.04)%
(Loss) return on aver-
age assets............ (1.11)% (4.82)% (3.47)% 0.06% (1.01)%
Other operating expense
to average assets(8).. 6.24 % 7.52 % 5.58 % 4.83% 5.78 %
Net interest margin.... 5.31 % 5.52 % 6.77 % 5.56% 5.53 %
</TABLE>
- -------
(1) Does not give effect to outstanding options and warrants to purchase Common
Stock. See "Dilution."
(2) Pro forma after giving effect to the Reverse Stock Split.
(3) Includes other real estate owned ("OREO") acquired by the Bank through
legal foreclosure or deed-in-lieu of foreclosure and loans classified as
in-substance foreclosures.
(4) Nonaccrual assets include nonaccrual loans plus OREO.
(5) Excludes one loan, a trouble debt restructuring, with a principal balance
of $4.9 million at December 31, 1996, 1995, 1994, 1993 and 1992,
respectively. This loan is secured by a first deed of trust on a single-
family residence which, as of December 1996, had an appraised value of
$10.0 million.
(6) Includes a $1.0 million legal settlement for the year ended December 31,
1996. See "Business--Legal Proceedings--Other Litigation."
(7) The weighted average number of shares of Common Stock outstanding for the
years ended December 31, 1996, 1995 and 1994 was used to compute loss per
share data as the use of average shares outstanding including Common Stock
equivalents would be antidilutive. The weighted average number of shares
used to compute fully diluted earnings per share in 1993 and 1992 was
3,171,250 and 3,035,660, respectively. The weighted average number of
shares used to compute (loss) income per share does not give effect to the
proposed 9.09 to one reverse stock split.
(8) Excluding a $1.0 million legal settlement for the year ended December 31,
1996.
18
<PAGE>
RISK FACTORS
THE PURCHASE OF PREFERRED STOCK IN THE PUBLIC OFFERING INVOLVES A
SIGNIFICANT DEGREE OF INVESTMENT RISK. IN DETERMINING WHETHER TO MAKE AN
INVESTMENT IN THE PREFERRED STOCK, RIGHTS HOLDERS AND STANDBY PURCHASERS
SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH BELOW, AS WELL AS THE OTHER
INFORMATION CONTAINED HEREIN. CERTAIN MATTERS DISCUSSED IN THIS PROSPECTUS AND
THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE LITIGATION REFORM ACT OF 1995 AND
AS SUCH MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF THE
COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE, OR
ACHIEVEMENT EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
SPECIFICALLY, THE FOLLOWING IMPORTANT FACTORS COULD AFFECT THE COMPANY'S
BUSINESS AND CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN
ANY FORWARD-LOOKING STATEMENT MADE BY, OR ON BEHALF OF THE COMPANY IN THIS
PROSPECTUS: (1) GENERAL ECONOMIC CONDITIONS IN ITS MARKET AREA WHICH COULD
HAVE A MATERIAL ADVERSE IMPACT ON THE QUALITY OF THE BANK'S LOAN PORTFOLIO AND
THE DEMAND FOR ITS PRODUCTS AND SERVICES; (2) INTEREST RATES MAY VARY
SUBSTANTIALLY FROM PRESENT LEVELS AND RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS CURRENTLY ANTICIPATED; (3) THE BANKING INDUSTRY IS SUBJECT TO
EXTENSIVE FEDERAL AND STATE REGULATIONS, AND SIGNIFICANT NEW LAWS OR CHANGES
IN, OR REPEALS OF, EXISTING LAWS MAY CAUSE RESULTS TO DIFFER MATERIALLY; (4)
CIRCUMSTANCES AFFECTING THE NATURE OR LEVEL OF COMPETITION MAY CHANGE, SUCH AS
THE MERGER OF COMPETING FINANCIAL INSTITUTIONS OR THE ACQUISITION OF
CALIFORNIA INSTITUTIONS BY OUT-OF-STATE COMPANIES, AND RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS CURRENTLY ANTICIPATED; AND (5) LOSSES MAY BE
SUSTAINED BECAUSE BORROWERS, GUARANTORS AND RELATED PARTIES MAY FAIL TO
PERFORM IN ACCORDANCE WITH THE TERMS OF THEIR LOANS AND THE BANK'S POLICIES
AND PROCEDURES MAY NOT PREVENT UNEXPECTED LOSSES THAT COULD MATERIALLY
ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
RISK OF FAILURE TO EXECUTE BUSINESS STRATEGY
The Bank's business strategy represents a refinement of its historical focus
since it contemplates that the Bank will emphasize further its current market
niches of business and private banking and entertainment and will extend its
operations to include the closely related niche market of
technology/multimedia. As part of its business and private banking focus, the
Bank intends to increase its emphasis on medical banking relationships, taking
advantage of the proximity of several major hospital/medical centers and
numerous health services-related companies in West Los Angeles. There can be
no assurance, however, that the Company will be successful in maintaining or
increasing its access to these markets. In addition, part of the Company's
business strategy following the Public Offering and the Private Offering is to
acquire other financial service-related companies including "in-market"
acquisitions with banks of similar size and market presence. No assurance can
be made that such acquisitions can be made, or that the Company will be able
to obtain regulatory approval to make any acquisitions. The Company has no
current understandings or agreements and is not presently negotiating with
respect to any such acquisitions. Further, the Company's ability to execute
its business strategy depends upon many factors, including competitive and
economic conditions, such as the ability to retain qualified personnel, which
are beyond the Company's control. See "The Company--Business Strategy."
RISK OF CONTINUING LOSSES
The economic recession and substantial declines in real estate values in
Southern California, combined with certain operational deficiencies noted by
the Company's and the Bank's primary regulators, led to high levels of
nonperforming assets and net charge-offs from 1991 through 1996. The foregoing
factors significantly contributed to a decline in earnings experienced by the
Bank during that time, culminating with a net loss of $7.2 million or $21.26
per share (pro forma after giving effect to the Reverse Stock Split) for the
year ended December 31, 1995. The net loss for the year ended December 31,
1996 was $1.2 million or $3.67 per share (pro forma after giving effect to the
Reverse Stock Split), including a charge of $1.0 million for the settlement of
a pending lawsuit against the Bank. See "Business--Litigation." The ability of
management to restore the Bank to consistent profitability will depend on,
among other factors, its ability to increase the level of earning assets and
to continue to reduce and control the level of nonperforming assets and other
operating expenses. There can be no assurance that the Bank will be able to
achieve these objectives and thereby return the Bank to consistent
profitability and the Company is unable to assess at this time whether it will
return to profitability during 1997.
19
<PAGE>
ECONOMIC CONDITIONS IN THE COMPANY'S MARKET AREA
The Bank's business is subject to fluctuations in interest rates, general
national and local economic conditions and consumer and institutional
confidence in the Bank. Virtually all of the Bank's lending activities are
conducted in Southern California. The Southern California economy and real
estate market have suffered from the effects of a prolonged recession that has
had a substantial adverse impact on the Company and the Bank, affecting the
ability of certain borrowers of the Bank to repay their obligations to the
Bank. While the Southern California economy has recently shown signs of
recovery in certain segments, a continuation of the recession or a worsening
of economic conditions in the region or in the Bank's market areas could have
an adverse impact on the Company's operations and financial condition.
Fluctuations in economic conditions are neither predictable nor controllable
and may have materially adverse consequences on the Company's business, even
if other favorable events occur. Such adverse effects could include further
deterioration in the quality of the loan portfolio, a continuation of high
levels of nonaccrual loans and charge-offs, a limited ability to increase
loans and increased provisions for loan losses.
ADEQUACY OF ALLOWANCE FOR CREDIT LOSSES
Substantial provisions for credit losses for the years ended December 31,
1990 through 1995 were necessitated by high levels of nonperforming loans and
charge-offs. The provision for credit losses for the year ended December 31,
1995 decreased 68.5% from the year ended December 31, 1994. During 1995, the
Company's net charge-offs were $1.6 million, compared with $11.0 million of
net charge-offs for the year ended December 31, 1994. For the year ended
December 31, 1996, the Company's net charge-offs were $836,000. There was no
provision for credit losses during 1996.
At December 31, 1996, the allowance for credit losses was $3.0 million or
4.7% of loans receivable. The Bank's ratio of classified assets (loans that
have been graded substandard and doubtful according to the Bank's grading
policy and "OREO") to allowance for credit losses plus shareholders' equity
was 106% and 79% at December 31, 1996 and 1995, respectively. The Board of
Directors reviews the adequacy of the allowance for credit losses on a
quarterly basis. Management utilizes its judgment in conjunction with an
analysis prepared by an outside loan review firm to determine the provision
for credit losses and establish the allowance for credit losses. However, the
allowance is established based on information that exists at any given point
in time and may require substantial additions depending on future events. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the Bank's allowance for credit
losses. Federal banking agencies may require the Bank to recognize additions
to the allowance for credit losses based upon their judgment of the
information available to them at the time of their examination. See
"Business--Allowance for Credit Losses."
EXPOSURE TO FLUCTUATIONS IN VALUE OF REAL ESTATE COLLATERAL
At December 31, 1996, approximately 63% of the Bank's aggregate principal
amount of loans were secured by real estate collateral. Approximately 42% of
the Bank's loans were secured by commercial real estate, approximately 5% were
secured by multifamily real estate, approximately 11% were secured by single
family real estate and approximately 5% were secured by real estate
construction and land development projects. See "Business--Loan Portfolio."
The value of the Bank's real estate collateral has been, and could in the
future continue to be, adversely affected by the economic recession and its
impact on the real estate market in Southern California. See "Risk Factors--
Economic Conditions in the Company's Market Area."
HIGH LEVEL OF NONPERFORMING ASSETS
Although nonperforming assets have decreased significantly since 1993, the
level remains high. As of December 31, 1996, total nonperforming assets were
$6.8 million comprised of $928,000 of nonaccrual loans, $300,000 of loans
delinquent for 90 days or more but still accruing interest, $5.0 million of
restructured loans and $556,000 of OREO. Nonperforming assets totaled 10.9% of
total loans receivable as of such date. One loan
20
<PAGE>
represents $4.9 million of the total $6.8 million of restructured loans. The
level of nonperforming assets may remain high in the future and the levels of
nonaccrual loans and OREO may fluctuate from period to period as problem loans
are worked out and in some instances additional properties are taken into
OREO. Further, depending on real estate values, the overall economy in
Southern California and other circumstances, the resolution of problem loans
and liquidation of OREO may be more costly than presently anticipated and may
require the Bank to make provisions for loan losses and incur OREO-related
expenses higher than in prior periods.
REQUIREMENT OF SHAREHOLDER APPROVAL OF REVERSE STOCK SPLIT
Under Section 902 of the General Corporation Law of the State of California,
the shareholders of the Company must approve the Reverse Stock Split. The
Company is seeking such approval at its annual meeting to be held May 29,
1997. The Company currently has authorized one million shares of Preferred
Stock. The Reverse Stock Split would reduce the number of outstanding shares
of Common Stock thereby ensuring that the Company will have enough authorized
shares of Preferred Stock to issue in connection with the Public Offering and
the Private Offering. In connection with the Bank's restructure of its lease
for its headquarters, the Company issued to the Bank's landlord a seven-year
warrant (the "Warrant") to purchase up to 9.9% of the outstanding shares of
Company capital stock at the lower of $1.50 per share or the lowest price at
which such shares are offered in a public offering (with certain exceptions)
or may be purchased by any other person pursuant to an option, warrant or
other right granted by the Company (with certain exceptions) on or before
December 31, 1997. If the Reverse Stock Split does not occur, and the Company
proceeds with the Public Offering and the Private Offering, the Company would
be required to sell to the Bank's landlord Preferred Stock at $1.50 per share
as opposed to the proposed $10.00 per share price contemplated by the Public
Offering and the Private Offering.
POSSIBLE LOSS OF TAX BENEFITS
As of December 31, 1996, the Company had NOL carryforwards of $22.3 million
and $11.8 million for federal and state purposes, respectively. The
acquisition of the Underlying Preferred Shares as a result of the exercise of
Rights pursuant to the Basic Subscription Privilege or the Oversubscription
Privilege, or the issuance of shares to Private Purchasers or Standby
Purchasers, combined with future trading in the Company's Common or Preferred
Stock, could result in an "ownership change" within the meaning of Section 382
of the Code. If the Public Offering and the Private Offering, or if future
trading in the Common or Preferred Stock was to cause such an ownership
change, the Company's ability to use its NOL carryforwards in the future could
be adversely affected. The Company has reserved the right in its sole judgment
and discretion to limit the number of Underlying Preferred Shares issued to
any person or control group as a result of exercises of Rights or under the
Private Purchase Agreements and Standby Purchase Agreements to reduce the risk
that the limitation imposed by Section 382 will apply. The Company has
obtained the opinion of Deloitte & Touche LLP that, subject to certain
limitations, the Public Offering and the Private Offering should not result in
an ownership change within the meaning of Section 382 of the Code. However,
even though management believes the Public Offering and the Private Offering
are structured to preserve the NOL carryforwards, there can be no assurance
that the Company's ability to use the NOL carryforwards will not be adversely
affected by future trading in the Company's Common or Preferred Stock. See
"The Rights Offering--Limitations--Tax Limitation."
RESTRICTIONS ON TRANSFER
As part of the Company's efforts to avoid the Section 382 Limitation on the
use of its NOL carryforwards, the NOL Transfer Restriction shall prohibit, and
the certificates evidencing all outstanding and newly issued shares of capital
stock of the Company will contain a legend prohibiting, transfer of any
capital stock to any person if such person is or would become by reason of
such transfer a 4.5% Holder (or the beneficial owner of more than 4.9% with
respect to persons to whom the Company is contractually obligated on or before
the Date of Issuance to transfer up to 4.9% of the Company's stock) as the
term "stock" is defined, and such ownership is determined, under Section 382.
See "The Rights Offering--Limitations--Tax Limitation" and "The Rights
Offering--Limitations--Transfer Limitation." The NOL Transfer Restriction will
limit the ability of the
21
<PAGE>
Company's current and future shareholders from transferring shares to persons
whose beneficial ownership would consequently exceed the limit without the
prior approval of the Company. See "The Rights Offering--Limitations--Transfer
Limitation." The NOL Transfer Restriction may result in the Company's capital
stock being less liquid than stock without such a transfer restriction.
POTENTIAL INFLUENCE ON THE COMPANY BY THE CONRAD COMPANY
Pursuant to one of the Private Purchase Agreements, the Conrad Company has
agreed to acquire in the Private Offering between 25.0% and 55.0% of the
Preferred Stock (or between 18.2% and 40.0% of the Common Stock assuming full
conversion), assuming the maximum amount of $9.0 million is raised in the
Public Offering and the Private Offering, depending on the level of
participation of the Rights Holders in the Rights Offering. In addition,
pursuant to the terms of the Private Offering, each of the Private Purchasers
have a right of first refusal, under certain circumstances, to acquire
additional shares of capital stock of the Company, to retain its pro rata
existing ownership of capital stock, upon the same terms and conditions
pursuant to which the Company may propose to offer shares of its capital stock
for sale in the future. See "The Private Offering--CertainCovenants--Right of
First Refusal." The NOL Transfer Restriction applies equally to the transfer
of shares by the Conrad Company. Following the consummation of the Public
Offering and the Private Offering, the Conrad Company may be in a position to
exert significant influence over corporate policy and the outcome of matters
submitted to a vote of shareholders. Conrad Company may have interests
different from that of other shareholders. Pursuant to the terms of the
Private Offering, the Company has agreed to nominate, and to use its
reasonable best efforts to cause to be elected as directors of the Company,
that number of persons designated by the Conrad Company which Conrad Company
or any affiliate thereof is entitled to elect based on the cumulative voting
provisions of the Company's bylaws. Other Board members and senior management
of the Company are not obligated to vote their respective shares of capital
stock in the Company in favor of such nominees. Based on a Board of Directors
of the Company consisting of eight directors, the Conrad Company will be
entitled to have between 1 and 3 directors nominated, depending on the
percentage ownership the Conrad Company acquires in the Private Offering.
Until such time as a nominee of Conrad Company shall have been elected to the
Board of Directors, Conrad Company is entitled to have its representative in
attendance at all meetings of the Board. In addition, there can be no
assurance that the concentration of ownership will not have an adverse effect
on the market for remaining shares of Common and Preferred Stock.
REQUIREMENT OF REGULATORY APPROVAL FOR INVESTMENT OF PRIVATE PURCHASER
Conrad Company, a Private Purchaser, and currently a bank holding company,
has filed an application with the Reserve Bank to acquire more than 4.9% of
the voting stock of the Company. If Conrad Company's application is not
approved by the Board of Governors of the Federal Reserve System, the Public
Offering and the Private Offering will not be consummated unless there is
adequate participation by the Company's shareholders in the Rights Offering
and by the Standby Purchasers to meet the Minimum Condition.
RESTRICTIONS ON PREFERRED STOCK DIVIDENDS
There can be no assurance that the Company will generate earnings in the
future which would permit the declaration of dividends. Further, it is
anticipated that for the foreseeable future any earnings which may be
generated will be retained for the purpose of increasing the Company's and the
Bank's capital and reserves to facilitate growth. The Company is prohibited by
the terms of the 1995 MOU from declaring or paying a dividend without approval
of the Reserve Bank. In addition, the primary source of such dividends is
likely to be dividends from the Bank. Under the 1995 Formal Agreement and OCC
regulations, the Bank is precluded from paying dividends without OCC approval
until it is in compliance with applicable capital requirements. The capital
requirements set forth in the 1995 Formal Agreement require the Bank to
maintain a Tier 1 risk-based capital ratio of at least 10% and a leverage
capital ratio of at least 6.5%. Such ratios currently maintained by the Bank
are 6.95% and 4.67%, respectively. See "The Company--Regulatory Agreements."
As a California corporation, the Company may not make a distribution to its
shareholders (which includes a payment of dividends but not stock dividends)
unless the Company has sufficient retained earnings under the Retained
Earnings Test. The Retained Earnings Test is defined as the Company's retained
earnings (determined on a consolidated basis
22
<PAGE>
according to generally accepted accounting principles) or if, immediately
after giving effect to the distribution, all of the Company's assets equal
1.25 times the Company's liabilities (the "Retained Earnings Test"). At the
present time, the Company does not meet the Retained Earnings Test and no
assurance can be made as to when, if ever, such test will be met. The terms of
the Preferred Stock provide that dividends on the Preferred Stock may be paid
commencing two years after the Date of Issuance. Notwithstanding the
foregoing, the Company may not pay dividends unless the Bank is in full
compliance with federal regulatory capital requirements, the Company and the
Bank are permitted by the OCC to pay dividends to the Company and the Company
meets the Retained Earnings Test. Dividends on the Preferred Stock will not
accumulate. The Company cannot assess at this time its ability to pay
dividends in the immediate future.
DEPENDENCE ON EXECUTIVE MANAGEMENT
The successful implementation of the Company's business strategy is
dependent upon the efforts of certain of its executive management. The loss of
the services of any of the Company's executive officers or the failure to
replace such persons promptly with qualified personnel should their services
become unavailable could place the Company in noncompliance with the 1995
Formal Agreement and the 1995 MOU, could lead to further regulatory action
against the Company, and could have a material adverse effect on the Company's
results of operations. The Company and the Bank have experienced significant
changes in senior management since November 1995, including the hiring of
Scott A. Montgomery as Executive Vice President and Chief Administrative
Officer of the Company and President and Chief Executive Officer of the Bank
in November 1995 and the hiring of Joseph W. Kiley III as Executive Vice
President and Chief Financial Officer of the Company and the Bank and Carol
Ward as Executive Vice President and Operations Administrator of the Bank in
August 1996. See "Directors and Executive Officers." In addition, as of
December 31, 1996, five middle management officers, with an average of 16
years of banking experience, have been hired by the Bank in departments such
as management information systems, note department, business and private
banking and underwriting. The implementation of the Company's business
strategy will require the hiring of additional personnel with specific product
experience. The Company faces substantial competition for skilled and
experienced personnel and there can be no assurance that the Company will be
successful in attracting such personnel. Historically, the Company has
experienced difficulty in attracting and retaining qualified senior and
executive management. The Company has entered into an employment agreement
with Scott Montgomery which expires on December 31, 1999. Apart from the
agreement with Mr. Montgomery, there can be no assurance, however, that the
Company can retain the services of its current management team, or that the
Company can replace any of its executives promptly should their services
become unavailable.
REGULATORY AGREEMENTS AND CAPITAL REQUIREMENTS
Following supervisory examinations of the Bank conducted in 1995, the Bank
entered into the 1995 Formal Agreement with the OCC. The 1995 Formal
Agreement, among other requirements, provides that the Bank must maintain a
Tier 1 risk-based capital ratio of at least 10% and a leverage capital ratio
of at least 6.5%. The Company also entered into the 1995 MOU with the Reserve
Bank. Among other requirements, the 1995 MOU prohibits the Company from paying
dividends without prior approval of the Reserve Bank and requires the
submission of a plan to increase the Bank's capital ratios. See "The Company--
Regulatory Agreements." At December 31, 1996, the Bank's Tier 1 risk-based
capital ratio was 6.95% and its leverage capital ratio was 4.67%. In order to
reach compliance with the capital requirements of the 1995 Formal Agreement,
the Company will have to receive and downstream to the Bank approximately $2.5
million of net proceeds in the Public Offering and the Private Offering,
assuming the level of assets remains constant with that of December 31, 1996
and the investment of such proceeds in 100% risk-weighted assets. See
"Regulation."
POTENTIAL ADDITIONAL REGULATORY ACTIONS
Bank holding companies and banks, such as the Company and the Bank, and
their institution-affiliated parties are subject to potential enforcement
actions by the OCC or the Reserve Bank for any unsafe or unsound practices in
conducting their business or for violations of any law, rule or regulation,
any cease and desist or consent order, or any written agreement with the
agency, such as the 1995 Formal Agreement and the 1995 MOU. Enforcement
actions may include cease and desist orders and written agreements, the
imposition of civil money penalties and removal or prohibition orders against
institution-affiliated parties and, in the most severe
23
<PAGE>
instances, the termination of insurance of deposits and/or the imposition of a
conservator or receiver for an insured depository institution. Even if the
Company and the Bank achieve full compliance with all regulatory capital and
other operating requirements, including those required by the 1995 Formal
Agreement and the 1995 MOU, there can be no assurance that the Company and the
Bank will remain in compliance with all such requirements. Any deficiency in
compliance with regulatory requirements such as the 1995 Formal Agreement or
the 1995 MOU could result in penalties or further regulatory restrictions that
would have a material adverse effect on the Company. See "Regulation--
Supervision and Regulation--Potential and Existing Enforcement Actions."
ABSENCE OF MARKET FOR THE PREFERRED STOCK
There is currently no Preferred Stock outstanding and therefore there is no
organized trading market for the Preferred Stock (i.e. there are no market
makers who actively trade such stock). Sandler O'Neill has agreed to act as a
market maker in the Preferred Stock. No assurance can be given that an active
trading market for the Preferred Stock will develop or be maintained, or that
price quotations for the Preferred Stock will be available. The Company
intends to file an application to have the Preferred Stock approved for
quotation on the Small Cap tier of the Nasdaq Stock Market if there are an
adequate number of publicly held shares of Preferred Stock to meet the
requirements of Nasdaq. However, the Small Cap tier may be less liquid than
the National Market tier of the Nasdaq Stock Market and there can be no
assurance that such application will be approved or that an active trading
market for the Preferred Shares will develop on the Nasdaq Stock Market. The
Subscription Price is not based on any estimate of the market value of the
Preferred Stock and no representation is made that the shares of Preferred
Stock offered hereby have a market value equivalent to, or could be resold at,
the Subscription Price. See "The Rights Offering--Determination of
Subscription Price." In addition, no representation is made that the dividend
rate on the Preferred Stock is comparable to the rates paid on equity
investments with similar risks. Investors may be required to convert their
shares of Preferred Stock into shares of the Company's Common Stock to have
market liquidity for their investment. As of April 9, 1997, there are 5 market
makers in the Company's Common Stock, which is traded on the Small Cap tier of
the Nasdaq Stock Market.
MARKET CONSIDERATIONS
There can be no assurance that the market price of the Common Stock will not
decline during or after the subscription period or that following the exercise
of the Rights and the sale of the shares of Preferred Stock upon exercise of
Rights or otherwise, a subscribing Rights Holder will be able to sell shares
purchased in the Rights Offering at a price equal to or greater than the
Subscription Price. For a discussion of the determination of the Subscription
Price see "The Rights Offering--Determination of Subscription Price." THE
ELECTION OF A RIGHTS HOLDER TO EXERCISE RIGHTS IN THE RIGHTS OFFERING IS
IRREVOCABLE. Moreover, until certificates are delivered, subscribing Rights
Holders and other Purchasers may not be able to sell the shares of Preferred
Stock that they have purchased in the Public Offering. Subject to satisfaction
of the Minimum Condition, certificates representing shares of Preferred Stock
purchased in the Public Offering will be delivered as soon as practicable
after the Expiration Time and after all prorations and adjustments
contemplated by the Public Offering have been effected. The Company reserves
the right to extend the period for the Public Offering. There can be no
assurance that the market price of the Preferred Stock purchased pursuant to
the Public Offering will not decline below the Subscription Price before the
certificates representing such shares have been delivered. NO INTEREST WILL BE
PAID TO ANY SUBSCRIBER IN THE RIGHTS OFFERING.
The market price of the Preferred Stock and the Common Stock could be
subject to significant fluctuations in response to quarterly variations in the
Company's actual or anticipated operating results, changes in general market
conditions and other factors. On April 9, 1997, the last reported trade price
of the Common Stock was $1.50.
There are two persons holding 474,536 shares of Common Stock and options and
warrants to purchase additional shares of Common Stock with rights, subject to
certain conditions, to require the Company to file registration statements
covering the shares such persons own or may acquire through option or warrant
exercises. These persons also have rights, subject to certain limitations, to
"piggyback" registrations if the Company files
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a registration statement for any other purpose. The Private Purchasers also
have certain registration rights. If such persons exercise such registration
rights, the Company will have to bear expense of such registration and the
market price of the Common Stock (or the Preferred Stock) may be adversely
affected by such proposed sales. See "Description of Capital Stock--
Registration Rights."
DILUTION OF OWNERSHIP INTEREST
Rights Holders may experience substantial dilution of their percentage of
equity ownership interest and voting power in the Company if they do not
exercise the Basic Subscription Privilege and the Oversubscription Privilege.
Depending upon the degree to which the Rights Holders exercise their Basic
Subscription Privilege and Oversubscription Privilege, they will experience a
minimum dilution of 18% (assuming shares are available pursuant to the
Oversubscription Privilege) and a maximum dilution of 72% (assuming no Rights
are exercised) in their voting rights and in their proportional interest in
any future net earnings of the Company due to the Private Purchasers Minimum
Obligation and the Minimum Standby Obligation. See "The Private Offering" and
"The Standby Purchasers." In addition, it is possible that additional capital
may be necessary or appropriate and shares of Common Stock or securities
convertible into Common Stock may be offered for sale in the future. In that
event, the relative voting power and equity interests of persons purchasing
Preferred Stock in the Public Offering and the Private Offering could be
reduced, as neither the Preferred Stock nor the Common Stock has preemptive
rights. Pursuant to the terms of the Private Offering, each of the Private
Purchasers has a right of first refusal, under certain circumstances, to
acquire additional shares of capital stock of the Company, to retain its pro
rata existing ownership of capital stock, upon the same terms and conditions
pursuant to which the Company may propose to offer shares of its capital stock
for sale in the future. See "Description of Capital Stock--Preferred Stock--
Preemptive Rights."
Rights Holders also may experience substantial dilution if options and
warrants to purchase shares of the Company's Common Stock currently
outstanding are exercised. See "Dilution" and "Business--Legal Proceedings."
RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS
The financial institutions industry is subject to significant regulation,
which has materially affected the financial institutions industry in the past
and will do so in the future. Such regulations, which affect the Company on a
daily basis, may be changed at any time, and the interpretation of the
relevant law and regulations are also subject to interpretive change by the
authorities who examine the Company and the Bank and interpret those laws and
regulations. For a description of the potentially significant regulatory
changes which have been enacted and proposals which have recently been put
forward see "Regulation--Effect of Government Policies and Recent
Legislation." There can be no assurance that any present or future changes in
the laws or regulations or in their interpretation will not adversely and
materially affect the Company.
MONETARY POLICY AND ECONOMIC CONDITIONS
On a consolidated basis, the operating income and net income of the Company
depend to a great extent on the difference between the interest paid by the
Bank on its deposits and its other borrowings and the interest received by the
Bank on its loans, securities and other earning assets. These rates are highly
sensitive to many factors that are beyond the control of the Company,
including general economic conditions and the monetary and fiscal policies of
the federal government and the policies of regulatory agencies, particularly
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). The nature and impact of any future changes in monetary policies
cannot be predicted. Adverse economic conditions could result in smaller net
interest margin, increased nonperforming assets, increased charge-offs and
higher provision for loan losses, any of which could adversely affect the
Company's net income.
FLUCTUATIONS IN INTEREST RATES AND RELIANCE ON VOLATILE LIABILITIES
Increases in interest rates may reduce the amount of demand for loans and,
thus the amount of loan and commitment fees. In addition, fluctuations in
interest rates may also result in disintermediation, which is the flow
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of funds away from depository institutions into direct investments which pay a
higher rate of return and may affect the value of the Bank's investment
securities and other interest-earning assets.
Because the Bank's assets consist of a substantial number of loans with
interest rates which change in accordance with prevailing market rates, sharp
rises in interest rates would require many of the Bank's borrowers to make
higher interest payments on their loans. Thus, increases in interest rates may
cause the Bank to experience an increase in delinquent loans and defaults to
the extent that borrowers are unable to meet their increased debt servicing
obligations.
VOLATILITY OF FUNDING SOURCES
The Bank maintains demand deposits for title and escrow companies and issues
certificates of deposit to persons, including other financial institutions,
not otherwise having banking relationships with the Bank. Such liabilities are
potentially unstable sources of deposits because they are generally attracted
to the financial institution based primarily upon the services provided and
the interest rate paid on deposits by the institution and the general
financial condition of the institution and may be withdrawn on relatively
short notice. Further, the proceeds of such liabilities are generally invested
in relatively low-yielding, short-term investment securities rather than
higher-yielding loans. Demand deposits owned by title and escrow companies
represented 8.5% and 9.5% of total deposits at December 31, 1996 and 1995,
respectively. Certificates of deposit held by other financial institutions
represented 17.9% and 22.6% of total deposits at December 31, 1996 and 1995,
respectively. The Bank no longer seeks brokered certificates of deposit.
Remaining brokered certificates of deposit maintained by the Bank represented
3.8% and 4.9% of total deposits at December 31, 1996 and 1995, respectively.
COMPETITION
The Bank faces substantial competition for loans, deposits and financial
services in its market area. The Bank competes on a daily basis with other
commercial banks, savings institutions, thrift and loans, credit unions, and
other financial service providers. The Bank's competitors are local
institutions, which have a large presence in the Bank's market area, as well
as out-of-state financial service providers which have offices in the Bank's
market area. Many of these institutions offer higher lending limits and
services which the Bank currently does not offer, such as trust services.
Further, banks with a larger capital base and financial service providers not
subject to the restrictions imposed by bank regulation have larger lending
limits and can therefore serve the needs of larger customers. The Bank will
face significant competition in implementing its business strategy,
maintaining its share of the business and private banking and entertainment
markets, expanding its focus to include the closely related niche market of
technology/multimedia and increasing its emphasis in the medical market.
Accordingly, no assurance can be made that the Company will successfully
implement its business strategy. See "The Company--Business Strategy" and
"Business--Competition."
RIGHT TO TERMINATE OFFERING
The Company expressly reserves the right, in its sole and absolute
discretion, at any time prior to delivery of any shares of Preferred Stock
offered hereby, to terminate the Public Offering by giving oral or written
notice thereof to the Subscription Agent and making a public announcement
thereof. If the Public Offering is terminated, all funds received pursuant to
the Public Offering will be refunded promptly, without interest.
PERIOD OF ESCROW
Payment of the Subscription Price will be held in an escrow account to be
maintained by the U.S. Stock Transfer Corporation as Subscription Agent.
Rights Holders who place subscription orders prior to the Expiration Time will
lose access to funds tendered for an indeterminate period of time after the
Expiration Time and may not acquire any or all of the Excess Underlying
Preferred Shares to which they subscribe. See "The Rights Offering--
Subscription Privileges--Oversubscription Privilege."
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THE COMPANY
GENERAL
National Mercantile Bancorp was formed as a California corporation on
January 17, 1983 and is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHC Act"). The Company currently
conducts its business through its subsidiary bank, Mercantile National Bank,
which was organized as a national banking association on October 29, 1981 and
began operating under a Certificate of Authority from the OCC on March 22,
1982. From its single location in Century City, the Bank currently provides
traditional banking services to the niche markets of business and private
banking and entertainment in its primary market area, a four mile radius from
its headquarters ("primary market"). As part of its business and private
banking focus, the Bank intends to increase its emphasis on medical banking
relationships, taking advantage of its proximity to several major
hospital/medical centers and numerous health service-related companies in West
Los Angeles. The Bank intends to extend its focus on the entertainment market
to include the closely related niche market of technology/multimedia
businesses in Los Angeles, Ventura and Orange Counties. In addition, the Bank
provides investment and specialized deposit services, handling the needs of
large deposit clients.
BACKGROUND
Since commencing operations in 1982 with an initial capitalization of $15.0
million, the Bank has focused primarily on providing banking products and
services to the niche markets of business and private banking and
entertainment in its primary market. Throughout the l980s, the Company
experienced substantial growth and profitability. In February 1990, the
Company raised additional capital of $5.7 million through the sale of Common
Stock to two investor groups at $11.00 per share (without giving effect to the
Reverse Stock Split). At December 31, 1990, the Company had total assets of
$492.8 million and total stockholders' equity of $28.5 million.
Beginning in 1990, the Bank's primary service area was severely affected by
an economic recession, including substantial declines in real estate values.
Commencing in 1991, the ongoing recession began to affect adversely the values
of collateral securing the Bank's loans and the ability of borrowers to repay
their loans. As a result of the combined effects of this prolonged recession
and the rapid growth of the Bank in the late 1980s, the Bank began to
experience substantial increases in nonperforming assets resulting in
significant losses. Although the Bank undertook to enhance credit underwriting
policies and internal controls and procedures to address operational
weaknesses, from January 1, 1991 through December 31, 1996, the Company
suffered cumulative net losses of $23.7 million. These losses were primarily
the result of substantial provisions for credit losses attributable to losses
in the existing loan portfolio and losses associated with a bulk loan purchase
from the FDIC, losses on interest rate hedges and swaps and sales of
securities combined with the adverse effects of the substantial reduction in
the asset levels of the Bank. In addition, nonperforming assets increased
from$14.8 million, or 3.0% of total assets at December 31, 1990 to a high of
$22.0 million, or 7.3% of total assets, at December 31, 1993 notwithstanding
net loan chargeoffs of $15.2 million during the three year period ended
December 31, 1993.
Concurrent with the deterioration in the Company's financial condition and
operations, the bank regulatory authorities designated the Company and the
Bank for special supervisory attention. Following regulatory examinations in
late 1990 and early 1991, the Bank entered into the 1991 Formal Agreement with
the OCC, and the Company entered into the 1991 MOU with the Reserve Bank. As a
result of the Bank's continuing problems, following the regulatory examination
in 1995 of the Bank, the Bank in December 1995 entered into the 1995 Formal
Agreement with the OCC, and the Company in October 1995 entered into the 1995
MOU with the Reserve Bank. The 1995 Formal Agreement and 1995 MOU supersede
and replace in their entirety the 1991 Formal Agreement and 1991 MOU,
respectively. These regulatory agreements have affected virtually every area
of the Company's and the Bank's operations, imposed on the Bank higher minimum
regulatory capital requirements than would otherwise be applicable and
restricted the ability of the Company to pay dividends. See "The Company--
Regulatory Agreements."
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RESPONSIVE MEASURES
In November 1995, the Board of Directors hired a new President of the Bank.
The President and the Board of Directors developed and began implementing a
restructuring plan to address the challenges confronting the Bank and to
return the Bank to consistent profitability. The plan includes (1) improving
management, (2) reducing nonperforming and classified assets, (3) reducing
operating expenses, (4) focusing business strategy on core business and market
opportunities, (5) enhancing policies and procedures to improve asset quality,
(6) increasing capital ratios, and (7) resolving pending litigation.
Management believes that the Company has made significant progress in
implementing this plan, which is described in greater detail below:
. Improving Management. As of August 1996, the Company and the Bank
changed senior management by hiring Scott A. Montgomery in November 1995
as President and Chief Executive Officer of the Bank and Executive Vice
President and Chief Administrative Officer of the Company, Joseph W.
Kiley III in August 1996 as Executive Vice President and Chief Financial
Officer of the Company and the Bank and Carol Ward in July 1996 as
Executive Vice President and Operations Administrator of the Bank. In
addition, as of December 1996, five middle management officers with an
average of 16 years of banking experience have been hired by the Bank in
departments such as management information systems, note department,
business banking and underwriting. This new management team, at the
direction of the Board of Directors of the Company and the Bank, has
undertaken and implemented a revision of policies, procedures and
reporting systems in almost every area of the Bank.
. Reducing Nonperforming and Classified Assets. The Bank has reduced the
level of nonperforming assets through asset sales, write-downs,
substantially enhanced collection procedures and improved underwriting
policies and procedures. From the peak of $22.0 million at December 31,
1993, nonperforming assets have decreased to $6.8 million at December
31, 1996. One loan, a troubled debt restructure, represents $4.9 million
of the total $6.8 million of nonperforming assets. From the peak of
$47.1 million at December 31, 1991, classified assets have been reduced
to $8.3 million at December 31, 1996. Excluding the $4.9 million
troubled debt restructure loan referenced above, classified assets
represent 5.5% of loans receivable. See "Business--Nonperforming
Assets," "--Troubled Debt Restructurings" and "--Asset Quality."
Notwithstanding the reduction of nonperforming loans and classified
assets, the decrease in total assets has caused the ratios of
nonperforming loans to total assets and nonperforming assets to total
assets to increase from 4.5% and 5.0%, respectively, at December 31,
1995 to 5.7% and 6.2%, respectively, at December 31, 1996. The volume of
loans receivable declined from $231.3 million at December 31, 1991 to
$62.5 million at December 31, 1996 as the result of (i) the ongoing
recession affecting the Company's primary market area; (ii) scheduled
loan amortizations; (iii) management's planned restructuring of the loan
portfolio to reduce criticized and classified assets and non-strategic
loan relationships; and (iv) the reduction of loans originated by the
Bank. Excluding the troubled debt restructure loan described above,
which is contractually performing and secured by a first deed of trust
on real property which, as of December 1996, had an appraised value of
$10.0 million, total nonperforming assets were $1.9 million,
representing 3.1% of loans receivable at December 31, 1996. The property
is currently for sale. No assurance can be given, however, that the
property will be sold at 100% of, or above, the value at which it is
carried by the Bank.
. Reducing Operating Expenses. Since November 1995, new management has
pursued a program to increase operational efficiencies and reduce other
operating expenses. For the year ended December 31, 1996, the Company
reduced other operating expenses by $3.2 million to $8.0 million from
$11.2 million for the year ended December 31, 1995. Excluding a $1.0
million charge relating to a settlement of a pending lawsuit, other
operating expenses for the year ended December 31, 1996 decreased
$4.2 million from 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Other Operating Expenses"
and "Business--Legal Proceedings--Other Litigation."
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These savings resulted primarily from the renegotiation of the lease for
the Bank's office and a restructuring of each operating department of
the Bank. In December 1995, the Bank entered into an agreement with its
landlord (the "Lease Restructuring Agreement") to restructure the lease
on its office located at 1840 Century Park East (its only location). The
Lease Restructuring Agreement will reduce costs by $850,000 per year
over the five years ending December 31, 2000 for a total cumulative
savings of $4.3 million. In conjunction with the signing of the Lease
Restructuring Agreement, the Company issued to its landlord a seven-year
warrant to purchase up to 9.9% of the outstanding shares of the
Company's capital stock and granted the landlord certain registration
rights with respect to the shares of capital stock subject to the
Warrant. See "Business--Properties" and "Description of Capital Stock--
Registration Rights."
In addition to the lease restructure, each operating department of the
Bank was reviewed for profitability and potential for future
profitability. As a result, the International Department, excluding the
letter of credit operations, was closed in December 1995. Despite
filling certain executive and upper management positions needed to
implement the Company's business strategy, the Bank reduced its full-
time equivalent employees from 52 at December 31, 1995 to 44 at December
31, 1996 primarily through the elimination of inefficient functions,
unprofitable divisions, and general staff reductions.
. Focusing Business Strategy on Core Business and Market
Opportunities. Management has pursued a business strategy which focuses
on the Bank's traditional market niches of business and private banking
and entertainment. Management believes that the Bank has an advantage
relative to its competitors by being located in Century City, the
headquarters for many entertainment and professional services clients
and prospects. As part of its business and private banking focus, the
Bank intends to increase its emphasis on medical banking relationships,
taking advantage of its proximity to several major hospital/medical
centers and numerous health service-related companies in West Los
Angeles. Management believes that the technology/multimedia industry is
an under-served market in Southern California. The technology/multimedia
market represents a logical extension of the Bank's focus on the
entertainment industry as more technology companies seek to develop and
market applications to the entertainment industry. See "The Company--
Business Strategy."
. Enhancing Policies and Procedures to Improve Asset Quality. The Bank has
strengthened its credit administration and loan review functions. The
Bank's loan policies and procedures have been revised to reduce the
Bank's exposure to future loan problems. In addition to reducing officer
lending limits, the Bank has established an officers loan committee,
with senior lending officers serving as voting members. Loans from
$100,000 to $750,000 require the approval of the officers loan
committee. The committee reviews delinquencies and documentation
exceptions and assigns a risk rating grade to each loan. Loan loss
exposure and grade performance histories are tracked and used as a part
of the quarterly loan migration analysis, to ensure that appropriate
levels of allowance for credit losses are maintained. The Bank (i) has
expanded the role of an outside loan review firm to include a migration
analysis on its loan portfolio on a quarterly basis; (ii) has
established an underwriting department to standardize loan write-ups,
enhance portfolio quality and allow officers time to service their
clients and prospects; and (iii) is in the process of hiring three
additional experienced lending and underwriting officers to further
strengthen the Bank's loan origination and monitoring functions.
Following the OCC's March 1996 examination of the Bank, the OCC accepted
the Bank's allowance for credit losses. No provision for credit losses
has been allocated to the allowance for credit losses during 1996. At
December 31, 1996, the allowance for credit losses represented 4.75% of
loans receivable. OREO has been reduced to two properties, both of which
have been written down to current fair values. See "Business--Asset
Quality."
. Increasing Regulatory Capital Ratios. Primarily as a result of balance
sheet restructuring and the decreasing asset base, capital ratios have
remained constant. The Bank's Tier I risk-based capital ratio was 6.95%
at December 31, 1996 and 1995. The Bank's leverage capital ratio was
4.67% at
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December 31, 1996 and 1995. The Bank's total risk-based capital ratio
was 8.24% at December 31, 1996 and 1995. The 1995 Formal Agreement
requires a Tier 1 risk-based capital ratio of at least 10% and a
leverage capital ratio of at least 6.5%. To reach compliance with these
capital requirements, assuming the Company's level of assets remains
constant with that of December 31, 1996, the Company will have to
receive and downstream to the Bank approximately $2.5 million of net
proceeds in the Public Offering and the Private Offering. See "Risk
Factors--Regulatory Agreements" and "--Capital Requirements" and "The
Company--Regulatory Agreements."
Assuming gross proceeds from the Public Offering and the Private
Offering of between $8.0 million and $9.0 million, management
anticipates downstreaming sufficient capital (i.e., approximately
$2.5 million) from the Company to the Bank to comply with the capital
requirements of the 1995 Formal Agreement and the 1995 MOU and to
implement the Bank's business strategy, retaining the balance of the
proceeds, if any, at the Company to be used for general corporate
purposes, including possible strategic acquisitions. The Company has no
current understandings or agreements and is not presently negotiating
with respect to any such acquisitions. See "Reasons for the Offering and
Use of Proceeds" and "The Company--Business Strategy."
. Resolving Litigation. The Company entered into a settlement agreement
relating to a lawsuit against the Bank. The total amount of the
settlement of $1.0 million, was accrued during the quarter ended June
30, 1996 and is reflected in the consolidated statement of operations
for the year ended December 31, 1996. The settlement was originally
conditioned on the recapitalization of the Bank and provided for the
payment of $500,000 on the earlier of the seventh day following the
closing of the Public Offering and the Private Offering or March 31,
1997 and an additional $500,000 on the second anniversary of that
payment. However, the Company and all affected parties agreed to a
single payment of the settlement on a discounted basis, which payment
was made prior to December 31, 1996. See "Business--Legal Proceedings--
Other Litigation."
BUSINESS STRATEGY
Generally
The business strategy of the Company and the Bank will be to continue
implementing each item of the responsive measures outlined above while
building upon the Bank's established market niches of business and private
banking and entertainment. The Bank also plans a market extension into
technology/multimedia companies as a logical extension of its focus on the
entertainment industry. In addition, as part of its business and private
banking focus, the Bank intends to increase its emphasis on medical banking
relationships, taking advantage of its proximity to several major
hospital/medical centers and numerous health service-related companies in West
Los Angeles.
The Bank is in the process of expanding upon or developing products and
services specifically tailored for each of its market niches and hiring
relationship managers who are knowledgeable about the specialized needs and
product requirements of these markets. The Bank intends to deliver these
products and services through a team approach, combining an experienced
relationship management officer with an operations support professional to
ensure the smooth transition from establishment of the account relationships
to ongoing account maintenance and service. The Bank believes that this team
approach will enable it to provide a higher level of consistent service to its
clients and enable the Bank to differentiate itself from its competitors and,
particularly, from the large banks.
Given the Bank's current size, it will primarily focus on small-sized to
medium-sized companies in its primary service area with specific emphasis on
professionals and executives, business managers, large deposit clients,
technology/multimedia companies, hospitals and health care providers. The
Company believes recent merger activity in the banking arena has created
opportunities for the Bank to compete for the business of companies and
individuals in the Bank's existing markets. A secondary benefit of such merger
activity is that a significant number of highly qualified bankers are in the
market looking for new opportunities.
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Niche Markets. The Company has begun the process of increasing the size of
its Board of Directors by adding directors that have significant contacts in
the market niches the Company serves. Robert E. Gipson recently joined the
Board of Directors of the Company. Mr. Gipson is the managing partner of
Gipson, Hoffman and Pancione, a law firm focusing on the entertainment,
business and technology markets. The Company believes that the combination of
local decision making bankers who know and understand the client's business,
and a Board of Directors whose members are actively involved in the community
will result in a substantial number of potential relationship referrals. To
achieve the goals of the Company's ongoing strategy, highly directed marketing
efforts aimed at increasing the Company's market share in its primary niche
markets have been developed. Each division of the Bank has a separate
marketing strategy with special products developed for that market.
Business Banking Division
The Company estimates that, based on demographic data from the 1990 census,
within the Bank's primary market, there are in excess of 40,000 businesses in
the manufacturing, transportation, communications and trade (wholesale and
retail) businesses many of which are believed by the Company to be small-sized
to medium-sized companies that fit the Company's target profile.
The products sold by the Business Banking Division include lines of credit,
revolving lines of credit, equipment loans, term loans, Small Business
Administration ("SBA") loans, real estate loans, cash management services,
online banking and investment services.
Private Banking Division
The Company estimates that, within its primary market, and based on
demographic data from the 1990 census, there are in excess of 65,000 potential
clients for the Private Banking Division in the professional, health,
personal, finance, insurance, real estate and repair service businesses.
Products sold by the Private Banking Division include personal lines of
credit, investment services, term loans, professional practice development
loans, cash management services, online banking and a full line of travel-
related services such as traveler's checks and foreign currency exchange.
These services are tailored to the unique requirements of the individuals who
compose this market. Following the recapitalization of the Bank, trust
services will be offered through certain strategic alliances.
Health Services. The Bank has served the medical community in its primary
market for a number of years but has not specialized in serving the needs
of this industry. Based on its proximity to several major hospital/medical
centers and numerous health service-related companies, the Bank plans to
expand its focus on the medical community. The Bank is located in the
center of one of the major medical markets in Los Angeles. Located on the
west side of Los Angeles are Cedars-Sinai Medical Center, Daniel Freeman
Hospital and the UCLA Medical Center. The university is approximately three
miles from the Bank. Cedars-Sinai Medical Center is located three miles to
the east and Daniel Freeman Hospital has facilities within five miles of
the Bank. The Company estimates that, within its primary market, based on
demographic data from the 1990 census, there are in excess of 12,800 health
services-related companies. Although no specific person has been
designated, the Company intends to add a director to its Board of Directors
with significant contacts in the medical community who can facilitate the
Company's expansion into that market. No assurance can be made that the
Company will be successful in adding such a director.
Technology/Multimedia Division
The Company estimates that, within its primary market, based on demographic
data from the 1990 census, there are in excess of 25,000 potential clients for
its Technology/Multimedia Division in the entertainment, recreational and
educational service businesses. Products sold by the Technology/Multimedia
Division will
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include lines of credit, revolving lines of credit, term loans, investment
services, foreign exchange, letters of credit, cash management services and
special handling of the needs of business managers and their clients.
High Technology. The Company estimates that, based on demographic data
from the 1990 census, over 9,000 additional companies within the three
counties of Los Angeles, Ventura and Orange become target clients of the
Bank. The Bank plans to build a banking services capability for high
technology clients by expanding its entertainment niche into the multimedia
arena and then into technology itself. This two-step approach will enable
the Bank to develop systems, train employees and expand its lending
capabilities while minimizing the increase of risk in its loan portfolio.
The Bank anticipates that in lending to technology multimedia companies its
role will not be to participate at the start-up capital level but to
finance productive capacity once the technology company has developed and
is producing and marketing a product. In the early stages of the company's
development, the Bank's objective will be to build a strong relationship
with the management of the company, develop an understanding of the
Company's products and provide appropriate financing when production is
undertaken. Niche directors will be sought from both the technology
industry as well as from among professional firms supporting the technology
industry. No assurance can be made that the Company will be successful in
adding such directors.
The Company is positioned to serve the small-sized to medium-sized
companies in this market from its central location through the use of
courier services. Recent media reports have identified a number of factors
to account for the growth of the high-tech industry in Los Angeles County,
among them, the proximity of entertainment industry consumers of
technology/multimedia products, competitive real estate costs and leasing
rates, large numbers of technologically skilled workers and the aggressive
efforts of city governments to provide incentives for high-tech companies
to locate in the area.
While the Company's high technology market will extend to three counties,
technology companies tend to be clustered in areas where the infrastructure
exists to serve their needs. The communities of Moorpark in Ventura County
and Burbank and Santa Monica in Los Angeles County are experiencing
increases in the number of technology/multimedia companies located within
their communities. Orange County has become a favored location for bio-
technology companies. DreamWorks, SKG has proposed to locate its new major
entertainment production company's 100-acre studio campus on City of Los
Angeles land in Playa Vista, approximately 10 miles from the Bank.
Barriers to Entry. Technology/multimedia represents a new market for the
Company and a developing market in the Los Angeles area. Several barriers to
entry in this market exist, including a lack of trained and experienced
lending officers in this area and the fact that the Bank is a new participant
in this market. While it is anticipated that these barriers are significant,
the Company believes that it can successfully penetrate this market based on
(i) significant contacts that Robert E. Gipson, who recently joined the
Company's Board, has in the technology/multimedia industry; (ii) the
experience and background of the Bank's Chief Executive Officer, who had
experience with Silicon Valley Bank and Cupertino National Bank in Northern
California; (iii) growing demand from the technology/multimedia industry for
banking services tailored to its needs; and (iv) the Bank's ability to offer
these services in a responsive manner.
Acquisitions
Part of the Company's business strategy following the Public Offering and
the Private Offering is to acquire other financial service-related companies
including "in-market" acquisitions with banks of similar size and market
presence. The Company and the Bank have hired a seasoned management team and
plan to build on the strengths of that team and the Company's enhanced capital
structure following the Public Offering and the Private Offering. The Company
has no current arrangements, understandings or agreements regarding any such
acquisition. Further, the Company would need bank regulatory approval before
such acquisitions could be consummated. No assurance can be made that such
regulatory approval would be obtained.
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REGULATORY AGREEMENTS
Formal Agreement (OCC)
The OCC conducted examinations of the Bank in late 1990 and early 1991 which
identified deficiencies in the Bank's loan underwriting and administrative
policies and procedures. Information derived from these examinations resulted
in significant increases in loans identified as nonperforming in 1991 and
concurrent increases in the 1991 provision for credit losses, charge-offs of
nonperforming loans and the allowance for credit losses. These developments
caused the OCC to determine that the Bank required special supervisory
attention. Accordingly, the OCC and the Bank entered into the 1991 Formal
Agreement.
The 1991 Formal Agreement provided, among other things, that the Bank must:
(i) employ a Chief Credit Officer subject to approval by the OCC; (ii) retain
an independent management consultant to evaluate the Bank's operations and
personnel; (iii) develop a strategic plan; (iv) review and revise existing
loan policies, develop written policies and procedures for loan administration
and nonaccrual loans, implement a written plan to reduce the level of
classified assets and establish an independent loan review program; (v)
develop written policies for liquidity maintenance and asset and liability
management; and (vi) achieve by October 31, 1991, and thereafter maintain, a
Tier 1 risk-based capital ratio of at least 10% and a leverage capital ratio
of at least 6.5%.
Subsequent to the 1991 Formal Agreement and 1991 MOU discussed below, the
Company continued to experience losses due to the prolonged nature of the
recession in Southern California, losses embedded in the existing loan
portfolio and losses associated with a bulk loan purchase from the FDIC in
1993. From January 1, 1991 through December 31, 1996, the Company's cumulative
net losses amounted to $23.7 million. These losses were primarily the result
of substantial provisions for credit losses, losses on interest rate hedges
and swaps and losses on the sale of securities combined with the adverse
effects of the substantial reduction in the asset levels of the Bank.
Nonperforming assets increased from $14.8 million at December 31, 1990, to a
peak of $22.0 million at December 31, 1993.
As a result of these losses, following the OCC's examination of the Bank in
1995, the Bank entered into a second formal agreement with the OCC, the 1995
Formal Agreement, which supersedes and replaces in its entirety the 1991
Formal Agreement. The 1995 Formal Agreement provides that the Bank must: (i)
provide monthly progress reports to the OCC; (ii) within sixty (60) days
thereof, employ a Chief Financial Officer subject to approval by the OCC;
(iii) not pay directors fees until the Bank has regained profitability and is
deemed to be in satisfactory condition by the OCC; (iv) review all management
fees, consulting contracts and severance plans; (v) analyze new products and
services; (vi) maintain sufficient liquidity; (vii) maintain a Tier 1 risk-
based capital ratio of at least 10% and a leverage capital ratio of at least
6.5%; (viii) develop a three-year capital plan; (ix) develop a strategic plan;
and (x) implement a written loan administration program. A capital plan was
submitted to the OCC on February 8, 1996, a loan administration program was
submitted on February 29, 1996 and a strategic plan was submitted in May,
1996. In addition, a Chief Financial Officer was employed in August, 1996. As
required under the 1995 Formal Agreement, the Bank reports quarterly on the
status of its progress to the OCC. The Bank has developed a detailed internal
tracking system for determining and reporting compliance with the Formal
Agreement.
At December 31, 1996, the Bank's Tier 1 risk-based capital ratio was 6.95%
and its leverage capital ratio was 4.67%. With the exception of the minimum
capital ratio requirements, loan administration requirements (with which the
Bank is in the process of achieving compliance), and the consulting contracts
requirements (with which the Bank is in the process of achieving compliance),
the Bank is in compliance with the 1995 Formal Agreement. The Company believes
that, following completion of the Public Offering and the Private Offering, it
will be in substantial compliance with all requirements of the 1995 Formal
Agreement. However, there can be no assurance as to whether or when the OCC
will lift the 1995 Formal Agreement. Failure to comply with the 1995 Formal
Agreement can result in further regulatory action such as a cease and desist
order, the imposition of civil money penalties against the Bank and its
directors and executive officers or the removal of one or more directors or
executive officers. See "Regulation--Supervision and Regulation--Potential and
Existing Enforcement Actions."
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Memorandum of Understanding (Reserve Bank)
The Reserve Bank periodically conducts inspections of the Company as part of
its oversight of bank holding companies. Following the Reserve Bank's
inspection of the Company in mid-1991, the Reserve Bank and the Company
entered into the 1991 MOU. In accordance with the 1991 MOU, the Company
submitted to the Reserve Bank a plan to improve its financial condition and to
assure compliance by the Bank with the 1991 Formal Agreement. Pursuant to the
1991 MOU, the Company adopted written policies concerning dividends,
intercompany transactions and tax allocations and management or service fees.
Further, the Company agreed to refrain from paying dividends or incurring debt
without the prior written approval of the Reserve Bank.
The Reserve Bank's examination of the Company as of June 30, 1993, found the
Company to be in compliance with all provisions of the 1991 MOU except one,
which was to improve the financial condition of the Bank. Based on the results
of this examination, the Reserve Bank determined that the Company continued to
require supervisory attention and required the Company to have new
appointments of senior executive officers reviewed by the Reserve Bank prior
to their appointment.
As a result of the Reserve Bank's examination of the Company as of March 31,
1995, the Company entered into the 1995 MOU on October 26, 1995, which
supersedes and replaces the 1991 MOU. Among other things, the 1995 MOU: (i)
prohibits the Company from paying dividends without the prior approval of the
Reserve Bank; (ii) requires the submission of a plan to increase the Bank's
capital ratios; (iii) requires the Company to conduct a review of the senior
and executive management of the Company and the Bank; (iv) prohibits the
incurrence or renewal of debt without the Reserve Bank's approval; (v)
restricts cash expenditures in excess of $10,000 in any month; and (vi)
prohibits the Company from making acquisitions or divestitures or engaging in
new lines of business without the Reserve Bank's approval. The Company may be
subject to further regulatory enforcement action by the Reserve Bank and its
ability to effect acquisitions may be limited by regulatory constraints. See
"Regulation--Supervision and Regulation--Potential and Existing Enforcement
Actions." The Company believes that, following the completion of the Public
Offering and the Private Offering, it will be in full compliance with the 1995
MOU. However, there can be no assurance as to whether or when the Reserve Bank
will terminate the 1995 MOU.
Management expects that, until terminated, the 1995 Formal Agreement will
substantially impair the ability of the Bank to declare and pay dividends to
the Company, since the Bank currently intends to retain any earnings to
augment its regulatory capital. Since the Company's only source of funds for
the payment of dividends on the Preferred Stock will be dividends received
from the Bank, it is unlikely that the Company will declare and pay dividends
in the foreseeable future. In accordance with the 1995 MOU, the Company has
agreed to refrain from paying dividends without the prior written approval of
the Reserve Bank. The Company's ability to pay dividends is also dependent on
whether it has adequate retained earnings under California law. See "Risk
Factors--Restrictions on Preferred Stock Dividends."
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THE PRIVATE OFFERING
THE PRIVATE PURCHASERS
Pursuant to a private offering exemption from the registration requirements
of the Securities Act, the Company has offered and guaranteed the availability
of a minimum of $2.5 million ( shares) of Preferred Stock and a maximum of
$5.5 million ( shares) of Preferred Stock to the Private Purchasers, and
the Private Purchasers have agreed to buy such shares at the Private
Purchasers Price. The shares of Preferred Stock sold to the Private Purchasers
are sometimes referred to as the "Private Shares." The Company entered into
Private Purchase Agreements with Conrad Company, and Wildwood Enterprises. In
connection with its purchase of the Preferred Shares in the Private Offering,
Conrad Company is required to seek approval of the Board of Governors of the
Federal Reserve System to acquire more than 4.9% of the voting stock of the
Company.
THE PRIVATE OFFERING
The Company has guaranteed that it will sell an aggregate minimum of $2.5
million ( shares) of Preferred Stock to the Private Purchasers (i.e. $2.25
million for the Conrad Company and $250,000 for Wildwood Enterprises) if the
Basic Subscription Privilege is exercised in full by Rights Holders. If the
Basic Subscription Privilege is not exercised in full, the Company will sell
up to an aggregate of $5.5 million ( shares) of Preferred Stock to the
Private Purchasers, subject to reduction by the Company to reduce the risk
that certain tax benefits will be subject to the Section 382 Limitation. See
"Certain Federal Income Tax Consequences."
TERMS OF THE PRIVATE PURCHASE AGREEMENTS
The following is a summary of the terms of the Private Purchase Agreements.
The Company will provide without charge to each person that so requests in
writing a copy of the Private Purchase Agreements. This summary is qualified
in its entirety by reference to the full text of the Private Purchase
Agreements which is included as an exhibit to the Registration Statement.
Capitalized terms used and not defined below or elsewhere in this Registration
Statement have the respective meanings assigned to them in the Private
Purchase Agreements. Parenthetical section references appearing at the end of
paragraphs in this summary refer to relevant sections in the Private Purchase
Agreement and are provided for convenience of reference only. All Shareholders
are encouraged to read the Private Purchase Agreements carefully and in their
entirety.
SALE AND PURCHASE OF PRIVATE SHARES
The closing of the sale and purchase of the Private Shares (the "Closing")
is subject to the satisfaction of certain conditions set forth in the Private
Purchase Agreements. See "--Conditions to the Closing; Amendment and
Termination." Subject to the satisfaction or waiver of such conditions, the
Closing shall take place immediately after the closing of the sale of the
shares of Preferred Stock in the Public Offering, which date shall be no later
than five (5) business days after the Company notifies each of the Private
Purchasers as to the number of Available Shares with respect to such Private
Purchaser. At the Closing, the Company will issue the Available Shares to the
Private Purchasers in exchange for the aggregate Private Purchasers Price
therefor. (Sections 2 and 3.)
REPRESENTATIONS AND WARRANTIES
The Private Purchase Agreements contain customary representations and
warranties of the Company and each Private Purchaser, including, among other
things, by the Company as to due organization and standing; corporate power
and authority; enforceability of the Private Purchase Agreement;
capitalization; consents, approvals, and filings; conformity in all material
respects of the Registration Statement and Proxy Statement to requirements of
the Securities Act and the Exchange Act; requisite licenses; title to
property; subsidiaries of the Company; delivery of all SEC documents and
financial statements; absence of certain changes; absence of
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undisclosed liabilities; payment of taxes; absence of litigation; and by each
of the Private Purchasers as to due organization and standing; corporate
authority with respect to Conrad Company and trust authority with respect to
Wildwood Enterprises; enforceability of the respective Private Purchase
Agreement; qualification as an accredited investor and certain investment
representations. The representations and warranties generally shall survive
delivery of, and payment for, the Available Shares for a period of two (2)
years. (Sections 4, 5 and 13.8)
CERTAIN COVENANTS
The Private Purchase Agreements contain numerous covenants and agreements,
certain of which are summarized below.
Conduct of the Company's Business Pending the Closing. The Company has
agreed that until the Closing Date: (a) the Company will maintain its
corporate existence in good standing and will operate its business
substantially as presently planned or operated and only in the ordinary, usual
and customary manner, and, consistent with such operation, it will use its
reasonable efforts to preserve intact its present business organization and
its relationships with persons having business relationships with it; (b) no
amendment will be made to the Articles of Incorporation of the Company except
as contemplated under the Private Purchase Agreements; (c) there will be no
changes in the number of shares, par value or class of authorized or issued
capital stock of the Company, other than shares of Common Stock issued
pursuant to the exercise of currently outstanding options and warrants except
for or pursuant to the Rights Offering; the Company will not grant or issue
any option, warrant, convertible security, or other right to acquire any
shares of capital stock of the Company other than options under existing stock
option plans, certain warrant and employment agreements; (d) the Company will
not declare or pay any dividend or other distribution in respect to the
capital stock of the Company; and (e) the Company will not enter into any
material transaction outside of the ordinary course of business.
(Section 6.1.)
Right of First Refusal. Pursuant to the Private Purchase Agreement, the
Company has agreed that if the Company should decide to issue and sell
additional shares of any capital stock of the Company or any warrants,
securities convertible into capital stock of the Company or other rights to
subscribe for or to purchase any capital stock of the Company (with certain
exceptions), the Company shall first offer to sell such securities to the
Private Purchasers, upon the same terms and conditions as the Company is
proposing to issue and sell such securities, pro rata to its existing
ownership of capital stock. Notwithstanding the foregoing, no securities may
be sold to a Private Purchaser to the extent a change of ownership within the
meaning of the Section 382 Limitation would occur. (Section 6.8.)
Nomination of Directors; Board Observation. So long as Conrad Company is a
holder of shares of Preferred Stock, the Company shall, at the request of
Conrad Company and subject to any applicable federal or state banking law or
regulation, cause to be nominated for election as directors of the Company,
and use its reasonable best efforts to cause to be elected, that number of
persons designated by Conrad Company (but not Wildwood Enterprises) which
Conrad Company or any affiliate thereof is entitled to elect based on
cumulative voting thereby in the election of directors. Based on a Board of
Directors of the Company consisting of eight directors, the Conrad Company
will be entitled to have between 1 and 3 directors nominated, depending on the
percentage ownership the Conrad Company acquires in the Private Offering.
So long as Conrad Company has not so designated one or more directors or a
designee of Conrad Company is not otherwise a director of the Company, the
Company shall notify Conrad Company (but not Wildwood Enterprises) of all
regular meetings and special meetings of the Board of Directors of the Company
at least two business days in advance of such meeting and afford any
representative designated by Conrad Company the right and opportunity to
attend any such meeting. Such representative shall be entitled to receive all
written materials and such other information given to directors of the Company
in connection with any such meeting at the time such materials or information
are given to such directors; provided that such representative shall have
executed a confidentiality agreement in a form acceptable to the Company.
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The Company shall maintain as part of its Articles of Incorporation or By-
laws a provision for the indemnification and limitation on liability of its
directors to the full extent permitted by law and use its reasonable best
efforts to maintain director and officer liability insurance in amounts and on
terms no less favorable than included in the Company's existing policy.
(Section 6.9.)
NASDAQ. The Company has agreed that it shall use all reasonable efforts to
(i) cause the Preferred Stock and the Common Stock issuable pursuant to the
terms of the Preferred Stock to be eligible for quotation on the Nasdaq Stock
Market--National Market (ii) maintain the continued authorization for trading
of the Common Stock of the Company on the Nasdaq Stock Market--National Market
or (iii) in the event the Company is unable after undertaking all such
reasonable efforts to maintain such authorization, be listed or otherwise
authorized for trading on the Nasdaq Stock Market--Small Cap or a national
securities exchange and to comply with all applicable maintenance criteria of
such exchange or Nasdaq applicable to continued eligibility for trading on
such market.
CONDITIONS TO THE CLOSING; AMENDMENT AND TERMINATION
Conditions to the Closing. The obligations of the Company and the Private
Purchasers to consummate the transactions contemplated by the Private Purchase
Agreements are subject to a number of conditions, including but not limited
to: (a) the receipt at the Annual Meeting of shareholder approval of the terms
of the Preferred Stock as set forth in the Restatement; (b) the receipt of all
consents, approvals and filings required to be obtained or made by the Company
or the Private Purchasers from or to applicable federal and state banking
authorities, and any other governmental body; (c) the receipt of an opinion
from Deloitte & Touche LLP, independent accountants to the Company, to the
effect that, subject to certain limitations, as of the Closing Date, there
will be no change in ownership within the meaning of the Section 382
Limitation; (d) receipt and acceptance by the Company of valid subscriptions
for shares of Preferred Stock from shareholders, the Private Purchasers and
Standby Purchasers aggregating not less than $5.5 million which shall not
trigger the Section 382 Limitation; and (e) resolution of certain claims and
litigation, in such form and substance satisfactory to the Private Purchasers.
(Sections 7, 8.)
Termination. The Private Purchase Agreements may be terminated at any time
prior to the Closing Date by (a) mutual consent of the Company and the Private
Purchasers, (b) either the Company or either of the Private Purchasers if: (i)
any governmental entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of the
transactions contemplated by the Private Purchase Agreements; (ii) the
shareholders of the Company have not approved the Restatement; (iii) the
transactions contemplated hereunder have not been consummated on or before May
31, 1997, unless the failure of consummation shall be due to the failure of
the party seeking to terminate to perform or observe in all material respects
the covenants and agreements thereunder to be performed or observed by such
party; or (iv) there shall have been an inaccuracy in any of the
representations or warranties on the part of the other party or material
breach of any covenant or agreement set forth in the Private Purchase
Agreements on the part of the other party, which breach shall not have been
cured within twenty (20) business days following receipt by the breaching
party of written notice of such breach from the other party, and (c) by either
of the Private Purchasers if there shall have occurred relative to the Company
or any subsidiary any event, change, or effect that would have Material
Adverse Effect. (Section 10.1.)
INDEMNIFICATION BY THE COMPANY
Indemnification. The Company has agreed to indemnify and hold harmless the
Private Purchasers, and their respective directors, officers, agents or
employees or persons who control the Private Purchaser within the meaning of
the Securities Act, from and against any losses, claims, damages or
liabilities, joint or several, arising out of or based directly or indirectly
upon (i) any material inaccuracy in any representation and warranty of the
Company contained in the Private Purchase Agreements and not qualified as to
materiality, and any inaccuracy in any representation and warranty of the
Company contained in the Private Purchase Agreements and qualified as to
materiality; (ii) any untrue statement or alleged untrue statement of a
material fact contained in the
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Registration Statement, any Preliminary Prospectus, the Prospectus, the Proxy
Statement, or any amendment or supplement thereto or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and (iii) any other act or omission of the Company, its officers
or directors, or any alleged act or omission. The Company will reimburse the
Private Purchaser for any legal or other expenses reasonably incurred by it in
connection with investigating or defending against such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, the Proxy Statement, or any such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by the Private Purchaser specifically for
use in the preparation thereof. (Section 11.1.)
FEES AND EXPENSES; EXPENSE REIMBURSEMENT
The Company has agreed, regardless of whether the Closing takes place, to
pay the reasonable out-of-pocket expenses incurred by Conrad Company (but not
Wildwood Enterprises) in connection with the transactions contemplated by the
Private Purchase Agreements, including, without limitation, the reasonable
fees and out-of-pocket expenses of the special counsel and tax accountants for
Conrad Company (but not Wildwood Enterprises) for services in connection with
the transactions contemplated by the Private Purchase Agreement; provided,
however, that subject to certain exceptions as set forth below, the Company's
obligation to reimburse such expenses shall not exceed $150,000. The Company
has agreed to pay all fees and expenses incurred by Conrad Company (but not
Wildwood Enterprises) (a) in connection with any amendments or waivers
requested after the execution of the Private Purchase Agreement by the Company
and (b) with respect to the enforcement of the rights granted under the
Private Purchase Agreement or the agreements contemplated by the Private
Purchase Agreement.
In the event that (i) there shall occur any termination of the Private
Purchase Agreement with Conrad Company (but not Wildwood Enterprises) for any
reason pursuant to the termination provisions therein, other than by the
mutual consent of the Company and Conrad Company or by the Company in
accordance with subsection 10.1(b)(iv) of the Private Purchase Agreement with
Conrad Company (relating to breaches of the Private Purchase Agreement by
Conrad Company), and (ii) either (a) at the time of such termination there
exists a bona fide Investment Proposal from a person other than Conrad
Company, or (b) at any time prior to such termination the Company or any
affiliate, officer, director, representative or agent of the Company has had
any discussions, conversations, negotiations or other communications regarding
any Investment Proposal with any person other than Conrad Company and before
such termination or within twelve months thereafter, the Company or any
affiliate thereof enters into any agreement with such person, or such person
acquires or has the right to acquire beneficial ownership of 25% or more of
the voting capital stock of the Company or the Bank, or (c) the Board of
Directors of the Company shall have withdrawn, modified or amended in any
respect its approval or recommendation of the Restatement, shall not have
included such recommendation in the Proxy Statement or shall have resolved to
do any of the foregoing, then the Company shall, upon termination of the
Agreement in the case of clauses (a) and (c) above, or upon execution of such
agreement or acquisition of such shares or rights thereto, in the case of
clause (b) above, promptly pay to Conrad Company in immediately available
funds $250,000. (Section 12.)
THE RIGHTS OFFERING
THE RIGHTS
The Company is hereby issuing nontransferable Rights at no cost to each
holder of record of Common Stock as of the close of business on March 31,
1997. The Company will issue one Right for each share of Common Stock held on
the Record Date. The Rights will be evidenced by Subscription Right
Certificates, which are being distributed to each Rights Holder
contemporaneously with the delivery of this Prospectus.
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The Company's Board of Directors, with the assistance of Sandler O'Neill,
determined the ratio of one Right for each share of Common Stock based on
factors the Board considered to be relevant to such determination, including
the amount of proceeds sought to be raised, pricing and dilution
characteristics of other rights offerings, negotiations with the Private
Purchasers and the then current trading price of the Common Stock. See "The
Rights Offering--Determination of Subscription Price."
No fractional Rights or cash in lieu thereof will be issued or paid.
Instead, the number of Rights issued to a Rights Holder will be rounded up to
the nearest whole number. A depository, bank, trust company or securities
broker or dealer holding shares of Common Stock on the Record Date for more
than one beneficial owner may, upon delivery to the Subscription Agent of the
Certification and Request for Additional Rights form available from the
Information Agent, exchange its Subscription Right Certificate to obtain a
Subscription Right Certificate for the number of Rights to which all such
beneficial owners in the aggregate would have been entitled had each been a
holder on the Record Date; no other Subscription Right Certificate may be so
divided as to increase the number of Rights to which the original recipient
was entitled. The Company reserves the right to refuse to issue any
Subscription Right Certificate if such issuance would be inconsistent with the
principle that each beneficial owner's holdings will be rounded up to the
nearest whole number of Rights. The Subscription Agent must receive the
Certification and Request for Additional Rights no later than 5:00 p.m.,
Pacific Time, on , 1997, after which time no new Subscription Right
Certificates will be issued.
Because the number of Rights issued to each Rights Holder will be rounded up
to the nearest whole number, beneficial owners of Common Stock who are also
the Record Date holders of their shares will receive more Rights under certain
circumstances than beneficial owners of Common Stock who are not the Record
Date holders of their shares and who do not obtain (or cause the Record Date
holder of their shares of Common Stock to obtain) a separate Subscription
Right Certificate with respect to the shares beneficially owned by them,
including shares held in an investment advisory or similar account. To the
extent that Record Date holders or beneficial owners of Common Stock who
obtain a separate Subscription Right Certificate receive more Rights, they
will be able to subscribe for more shares pursuant to the Basic Subscription
Privilege and Oversubscription Privilege. See "The Rights Offering--Method of
Subscription--Exercise of Rights."
Once the Rights are distributed and until the Expiration Time, the Company
will not effect a reclassification of the Company's equity securities (other
than the Reverse Stock Split) which could have the effect of materially
altering the value of the Rights during the pendency of the Rights Offering.
MINIMUM CONDITION
The Public Offering and the Private Offering are conditioned upon the
receipt by the Company of minimum offering proceeds of $5.5 million, which can
be achieved through the Maximum Private Offering alone, or through a
combination of participation by the Rights Holders and the Standby Purchasers
in the Public Offering and the Private Purchasers in the Private Offering or
through a combination of participation by the Rights Holders and the Standby
Purchasers in the Public Offering. In the event the Minimum Condition is not
achieved, any funds that have been deposited with the Subscription Agent will
be returned, without interest. As a result of the Private Purchase Agreements
and Standby Purchase Agreements pursuant to which the Private Purchasers and
Standby Purchasers have agreed to acquire in the aggregate up to $8.0 million
of Preferred Stock (subject to reduction to avoid certain adverse tax
consequences to the Company), the Company believes that the Minimum Condition
will be satisfied.
EXPIRATION TIME
The Rights will expire at 5:00 p.m., Pacific Time, on , 1997, subject to
extension in the sole discretion of the Company. The Company does not
currently contemplate any such extensions. After the Expiration Time,
unexercised Rights will be null and void. The Company will not be obligated to
honor any purported exercise of Rights received by the Subscription Agent
after the Expiration Time, regardless of when the documents relating to that
exercise were sent, except pursuant to the Guaranteed Delivery Procedures
described below. The Company may extend the Expiration Time by giving oral or
written notice to the
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Subscription Agent on or before the Expiration Time, followed by a press
release no later than a.m., Pacific Time, on the next business day after the
previously scheduled Expiration Time. The Rights Offering will not be extended
to a time later than 5:00 p.m., Pacific Time, on , 1997.
RIGHT TO TERMINATE OFFERING
The Company expressly reserves the right, in its sole discretion, at any
time prior to delivery of the shares of Preferred Stock offered hereby, to
terminate the Public Offering if the Public Offering is prohibited by law or
regulation or the Board of Directors concludes, in its judgment, that it is
not in the best interests of the Company and its shareholders, to complete the
Public Offering under the circumstances. If the Public Offering is terminated,
all funds received pursuant to the Public Offering will be promptly refunded,
without interest.
SUBSCRIPTION PRIVILEGES
Basic Subscription Privilege. Each Right will entitle the holder thereof to
purchase at the Subscription Price 1.624 Underlying Preferred Shares, subject
to reduction by the Company under certain circumstances. See "The Rights
Offering--Limitations--Tax Limitation" and "--Regulatory Limitation." Each
Rights Holder is entitled to subscribe for all, or any portion of, the
Underlying Preferred Shares which may be acquired through the exercise of
Rights. Payment of the Subscription Price will be held in an escrow account to
be maintained by U.S. Stock Transfer Corporation as Subscription Agent and
will be applied to the purchase of Preferred Stock or promptly returned
without interest following the Expiration Time. Subject to satisfaction of the
Minimum Condition, the certificates representing Underlying Preferred Shares
purchased pursuant to the Basic Subscription Privilege will be delivered to
subscribers as soon as practicable after the Expiration Time and all
prorations and reductions contemplated by the Public Offering and the Private
Offering have been effected. The Basic Subscription Privilege is not
transferable.
Oversubscription Privilege. Subject to proration and possible reduction, as
described below and in "The Rights Offering--Limitations--Tax Limitation" and
"--Regulatory Limitation," Rights Holders who elect to exercise the Basic
Subscription Privilege in full will also be eligible to subscribe at the
Subscription Price for 0.376 shares of Preferred Stock, for each Right held,
that are not otherwise subscribed for pursuant to the Basic Subscription
Privilege and are not purchased by the Private Purchasers pursuant to the
terms of the Private Offering (the "Oversubscription Privilege"). Only Rights
Holders who exercise the Basic Subscription Privilege in full will be entitled
to exercise the Oversubscription Privilege, which must be exercised at the
same time as the Basic Subscription Privilege is exercised. The
Oversubscription Privilege is not transferable. If 45.5% of the Basic
Subscription Privilege is exercised by the Rights Holders and assuming $5.5
million of Preferred Stock is sold pursuant to the Private Offering,
participation in the Oversubscription Privilege will be precluded.
Shares of Preferred Stock will be available for purchase pursuant to the
Oversubscription Privilege only to the extent that any Underlying Preferred
Shares are not subscribed for through exercise of the Basic Subscription
Privilege and not purchased by the Private Purchasers (i.e. an aggregate of
$8.0 million of Preferred Stock has not been purchased by the shareholders
pursuant to the Basic Subscription privilege and the Private Purchasers
pursuant to the Private Offering. If the Underlying Preferred Shares are not
sufficient to satisfy all subscriptions pursuant to the Oversubscription
Privilege, the Excess Underlying Preferred Shares will be allocated pro rata
(subject to the elimination of fractional shares) among the Rights Holders who
exercise their Oversubscription Privilege in proportion to the number of
shares of Common Stock owned as of the Record Date; provided, however, that if
such pro rata allocation results in any Rights Holder being allocated a
greater number of Excess Underlying Preferred Shares than such holder
subscribed for pursuant to the exercise of the Oversubscription Privilege,
each Rights Holder will be allocated only that number of Excess Underlying
Preferred Shares for which such holder oversubscribed, and the remaining
Excess Underlying Preferred Shares will be allocated among all other Rights
Holders exercising the Oversubscription Privilege on the same pro rata basis
outlined above. Such proration will be repeated until all Excess Underlying
Preferred Shares have been allocated to the full extent of the
Oversubscription Privilege exercised. Payments for exercises of the
Oversubscription Privilege will be deposited upon receipt by the Subscription
Agent and held in a segregated account pending a final
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determination of the number of Excess Underlying Preferred Shares to be issued
pursuant to such Oversubscription Privilege. THEREFORE, RIGHTS HOLDERS WHO
PLACE OVERSUBSCRIPTION ORDERS PRIOR TO THE EXPIRATION TIME WILL LOSE ACCESS TO
FUNDS TENDERED FOR AN INDETERMINATE PERIOD OF TIME AFTER THE EXPIRATION TIME
AND MAY NOT ACTUALLY ACQUIRE ANY OR ALL OF THE EXCESS UNDERLYING PREFERRED
SHARES TO WHICH THEY SUBSCRIBE. If a proration of the Excess Underlying
Preferred Shares results in a Rights Holder receiving fewer Excess Underlying
Preferred Shares than such Rights Holder subscribed for pursuant to the
Oversubscription Privilege, then the excess funds paid by that holder for
shares not issued will be returned without interest or deduction. Subject to
satisfaction of the Minimum Condition, certificates representing Excess
Underlying Preferred Shares purchased pursuant to the Oversubscription
Privilege will be delivered to subscribers as soon as practicable after the
Expiration Time and after all prorations and adjustments contemplated by the
terms of the Public Offering and the Private Offering have been effected.
To exercise the Oversubscription Privilege, banks, brokers and other
nominees of Rights Holders who exercise the Oversubscription Privilege on
behalf of beneficial owners of Rights will be required to certify to the
Subscription Agent and the Company the aggregate number of Rights as to which
the Oversubscription Privilege has been exercised and the number of Excess
Underlying Preferred Shares thereby subscribed for by each beneficial owner of
Rights on whose behalf such nominee holder is acting.
SUBSCRIPTION PRICE
The Subscription Price is $ . Shares purchased by the Private Purchasers
will be purchased at the lower of $1.10 per share (without giving effect to
the Reverse Stock Split) or the Subscription Price. Shares purchased by
Standby Purchasers pursuant to the Standby Purchase Agreements shall be at the
Subscription Price.
DETERMINATION OF SUBSCRIPTION PRICE
The Subscription Price was set by the Company's Board of Directors, taking
into consideration factors which the Board believes relevant to a
determination of the value of the Preferred Stock. Among the factors
considered by the Board in determining the Subscription Price, which is not an
exclusive list, were: (i) the Company's unsuccessful attempts to sell the Bank
in 1995; (ii) the Company's history of losses; (iii) the potential value of
the NOLs and advice from the Company's tax advisor regarding the structure of
the transaction as it relates to the Company's ability to raise the maximum
amount of capital in the Public Offering and the Private Offering without
subjecting the Company to the Section 382 Limitation; (iv) management's and
the Board of Directors' view that the involvement of Conrad Company would be
beneficial; (v) the benefit to the Company of raising additional capital in
excess of the requirements of the 1995 Formal Agreement; (vi) the average
price/tangible book value of the Common Stock of selected comparable
California community banks relative to the pro forma price/tangible book value
of the Preferred Stock on a fully converted basis proposed in the Public
Offering and the Private Offering; (vii) the current trading value of the
Company's Common Stock; (viii) present and projected operating results and
financial condition of the Company; (ix) an assessment of the Company's
management and management's analysis of the growth potential of the Company
and the Company's primary market; and (x) the advice of Sandler O'Neill. See
"Capitalization," "Risk Factors--Dilution of Ownership Interest" and "The
Right's Offering--Financial Advisor."
There can be no assurance, however, that the market price of the Common
Stock will not decline during the subscription period to a level equal to or
below the Subscription Price, or that, following the issuance of the Rights
and of the Preferred Stock upon exercise of Rights or pursuant to the Standby
Purchase Agreements, a subscribing Rights Holder or Standby Purchaser will be
able to sell shares purchased in the Public Offering at a price equal to or
greater than the Subscription Price.
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NO BOARD OR FINANCIAL ADVISOR RECOMMENDATION
An investment in the Preferred Stock must be made pursuant to each
investor's evaluation of such investor's best interests. ACCORDINGLY, NEITHER
THE BOARD OF DIRECTORS OF THE COMPANY NOR SANDLER O'NEILL MAKE ANY
RECOMMENDATION TO RIGHTS HOLDERS OR OTHER PROSPECTIVE PURCHASERS REGARDING
WHETHER THEY SHOULD EXERCISE THEIR RIGHTS OR OTHERWISE SUBSCRIBE FOR SHARES OF
PREFERRED STOCK.
FINANCIAL ADVISOR
The Company has engaged Sandler O'Neill as its financial advisor in
connection with the Public Offering pursuant to an agreement between the
Company and Sandler O'Neill. Sandler O'Neill is a nationally recognized
investment banking firm whose principal business specialty is banks and
savings institutions and is regularly engaged in the valuation of such
businesses and their securities in connection with mergers and acquisitions
and other corporate transactions.
In its capacity as financial advisor, Sandler O'Neill provided advice to the
Company regarding the structure of the Public Offering as well as with respect
to marketing the shares of Preferred Stock to be issued in the Public
Offering. Sandler O'Neill also assisted the Company in reviewing the Private
Purchase Agreements. Sandler O'Neill will identify potential Standby
Purchasers and will assist the Company in negotiating Standby Purchase
Agreements with the Standby Purchasers.
Sandler O'Neill has not prepared any report or opinion constituting a
recommendation or advice to the Company or its shareholders, nor has Sandler
O'Neill prepared an opinion as to the fairness of the Subscription Price or
the terms of the Public Offering to the Company or its current shareholders.
Sandler O'Neill expresses no opinion and makes no recommendation to Rights
Holders or Standby Purchasers as to the purchase by any person of shares of
Preferred Stock in the Public Offering. Sandler O'Neill also expresses no
opinion as to the prices at which shares to be distributed in connection with
the Public Offering may trade if and when they are issued or at any future
time. See "The Rights Offering--Determination of Subscription Price."
As compensation for its services, the Company has agreed to pay Sandler
O'Neill: (i) a fee of 3.0% of the aggregate purchase price of the shares of
Preferred Stock sold in the Rights Offering (other than shares of Preferred
Stock sold in the Rights Offering in Arizona) and (ii) a fee of 5.0% of the
aggregate value of funds committed by the Standby Purchasers. Sandler O'Neill
will also receive 1.5% of the aggregate value of funds committed in the
Private Offering. The fees set forth above are subject to Sandler O'Neill
receiving minimum aggregate compensation upon closing of the Public Offering
and the Private Offering of $250,000. The Company also has agreed to reimburse
Sandler O'Neill for its reasonable out-of-pocket expenses pertaining to its
engagement, including legal fees, in an aggregate amount not to exceed
$125,000. The Company has agreed to indemnify Sandler O'Neill against certain
liabilities arising out of its engagement, including certain liabilities
arising under the securities laws.
LIMITATIONS
Regulatory Limitation
The Company will not be required to issue shares of Preferred Stock pursuant
to the Public Offering to any Rights Holder or Standby Purchaser who, in the
Company's sole judgment and discretion, is required to obtain prior clearance,
approval or nondisapproval from any state or federal bank regulatory authority
to own or control such shares unless, prior to the Expiration Time, evidence
of such clearance, approval or nondisapproval has been provided to the
Company. If the Company elects not to issue shares in such case, such shares
will become available to the Rights Holders, Private Purchasers or Standby
Purchasers as to whom such conditions do not apply.
The Change in Bank Control Act of 1978 prohibits a person or group of
persons "acting in concert" from acquiring "control" of a bank holding company
unless the Reserve Bank has been given 60 days' prior written
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notice of such proposed acquisition and within that time period the Reserve
Bank has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the Reserve Bank issues written notice of its intent not
to disapprove the action. Under a rebuttable presumption established by the
Reserve Bank, the acquisition of more than 10% of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Exchange Act (such as the Common Stock into which the Preferred Stock is
convertible) would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Reserve Bank under the BHC Act before acquiring 25% (5% in the case of an
acquiror that is, or is deemed to be, a bank holding company) or more of the
outstanding shares of any class of voting securities, or such lesser number of
shares as constitute control over, the Company. Conrad Company, a bank holding
company and one of the Private Purchasers, has filed an application with the
Reserve Bank for approval to acquire more than 5.0% of the voting stock of the
Company. See "The Private Offering" and "Risk Factors--Requirement of
Regulatory Approval for Investment of Private Purchaser."
Tax Limitation
As of December 31, 1996, the Company had NOL carryforwards of $22.3 million
and $11.8 million for federal and state purposes, respectively. The
acquisition of Underlying Preferred Shares pursuant to the Basic Subscription
Privilege or Excess Underlying Preferred Shares pursuant to the
Oversubscription Privilege, or the issuance of shares to Private Purchasers or
Standby Purchasers, combined with future trading in the Company's Common or
Preferred Stock, could result in an "ownership change" within the meaning of
Section 382. The Company has reserved the right, with certain exceptions, in
its sole judgment and discretion to limit the number of Underlying Preferred
Shares issued as a result of exercises of Basic Subscription Privileges and
Oversubscription Privileges in the aggregate or to any Rights Holder or the
Standby Purchasers to reduce the risk that the Section 382 Limitation will
apply. The Company has reserved the right to limit in certain circumstances,
the number of shares of Preferred Stock the Private Purchasers may acquire to
reduce the risk that the Section 382 Limitation will apply. The Company will
determine whether to exercise this discretion by comparing the benefits of a
successful offering with any tax detriments associated with an ownership
change. The Company has obtained the opinion of Deloitte & Touche LLP that,
subject to certain limitations, the Public Offering and the Private Offering
should not result in an ownership change within the meaning of Section 382. If
the Public Offering and the Private Offering were to cause such an ownership
change, or if future trading in the Company's shares were to cause such an
ownership change, the Company's ability to use its NOL carryforwards in the
future could be adversely affected.
An "ownership change" will occur if the aggregate percentage point ownership
increase for all 5% shareholders for a "testing period" exceeds 50%. For this
purpose, a "5% shareholder" is any direct or indirect holder, taking certain
attribution rules into account, of 5% or more of a corporation's stock. For
this purpose, all holders of less than 5% are collectively treated as a single
5% shareholder. In general, the "testing period" is the three-year period
ending on the date an ownership change has occurred. Such period may be less
than three years and will begin on the first day of the most recent taxable
year from which a net operating loss or excess credit is carried forward. Once
an "ownership change" has occurred, as of that date, only subsequent ownership
changes are tested. In determining the amount by which 5% shareholders have
increased their percentage, the percentage interest of each 5% shareholder on
the testing date is compared to the lowest percentage interest of such
shareholder at any time during the testing period. For example, a shareholder
whose percentage ownership increased from 6% to 20% during the testing period
will be considered to have had an increase of 14%. If the aggregate change of
all 5% shareholders exceeds 50% as of the end of the "testing period," then an
"ownership change" will have occurred. This would impose an annual Section 382
Limitation on the ability of the Company to use its net operating loss
beginning in the year in which the "ownership change" has occurred. The amount
of the NOL carryforwards that could be used by the Company annually would be
determined by multiplying the value of the Company as of the "ownership
change" date by the long-term, tax-exempt bond rate at that time, a rate that
was 5.50% at March 31, 1997.
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Transfer Limitation
As part of the Company's efforts to avoid the Section 382 Limitation on the
use of its NOLs, the terms of the Preferred Shares as reflected in the
Restatement shall prohibit, and the certificates evidencing the Preferred
Shares and the shares of Common Stock issued upon conversion of the Preferred
Stock will contain a legend prohibiting, transfer of such Preferred Stock or
Common Stock to any person (other than persons to whom the Company is
contractually obligated on or before the Date of Issuance to transfer up to
4.9% of the Company's Stock) if such person is or would become by reason of
such transfer the beneficial owner of more than 4.5% (or 4.9% as described
above) of the Company's stock, as the term "stock" is defined and such
ownership is determined under Section 382. The Restatement also will impose
the NOL Transfer Restriction on shares of Common Stock currently outstanding
and those issued by the Company in the future. The NOL Transfer Restriction
and the legend will not restrict future transfers by any holder to those
persons to whom the Company is contractually obligated on or before the Date
of Issuance to transfer up to 4.9% of the Company's stock. The Company has the
right to demand that any stock transferred in violation of the NOL Transfer
Restriction (the "Transferred Stock") be transferred to the Company and any
distributions received on the Transferred Stock be remitted to the Company. In
addition, the Company has the right to demand remittance of proceeds received
from such initial transfer. The Company shall sell the Transferred Stock in an
arm's length transaction and remit the proceeds thereof to the original
shareholder. The NOL Transfer Restriction expires (i) on or after three years
from the Date of Issuance or (ii) upon the occurrence of any transaction in
which holders of all outstanding shares of capital stock receive, or are
offered the opportunity to receive, cash, stock or other property for all such
shares and upon the consummation of which the acquiror will own at least a
majority of the outstanding shares of capital stock. In addition, the Board of
Directors of the Company is expressly empowered to waive application of the
NOL Transfer Restriction to any specific transaction provided that such waiver
is by resolution of the Board of Directors duly considered and approved by at
least a majority of the Board of Directors prior to any such transfer of
stock.
METHOD OF SUBSCRIPTION
Exercise of Rights
Rights Holders may exercise their Rights by delivering to the Subscription
Agent, at the addresses specified below, at or prior to the Expiration Time,
properly completed and executed Subscription Right Certificate(s) evidencing
those Rights, with any signatures guaranteed as required, together with
payment in full of the Subscription Price for each Underlying Share subscribed
for pursuant to the Basic Subscription Privilege and the Oversubscription
Privilege. Payment may be made only (i) by check or bank draft drawn upon a
U.S. bank, or postal, telegraphic or express money order, payable to U.S.
Stock Transfer Corporation, as Subscription Agent; or (ii) by wire transfer of
funds to the escrow account maintained by the Subscription Agent for the
purpose of accepting subscriptions at First Professional Bank NA (with
Subscriber's name, for further credit to National Mercantile Bancorp Account)
(the "Subscription Account"). The Subscription Price will be deemed to have
been received by the Subscription Agent only upon (i) clearance of any
uncertified check; (ii) receipt by the Subscription Agent of any certified
check or bank draft drawn upon a U.S. bank or any postal, telegraphic or
express money order; or (iii) receipt of collected funds in the Subscription
Agent's account designated above. Funds paid by uncertified personal check may
take up to five business days to clear. ACCORDINGLY, RIGHTS HOLDERS WHO WISH
TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED
TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION TIME TO ENSURE THAT
SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH TIME AND ARE URGED TO CONSIDER IN
THE ALTERNATIVE PAYMENT BY MEANS OF CERTIFIED CHECK, BANK DRAFT, MONEY ORDER
OR WIRE TRANSFER OF FUNDS. All funds received in payment of the Subscription
Price shall be held by the Subscription Agent and invested at the direction of
the Company in short-term certificates of deposit, short-term obligations of
the United States or any state or any agency thereof or money market mutual
funds investing in the foregoing instruments. Subscription funds paid to
exercise the Oversubscription Privilege will be returned to the Rights Holder
in the event there are insufficient Excess Underlying Preferred Shares to
fulfill any Oversubscription Privilege. See "The Rights Offering--Subscription
Privileges." The account in which such funds will be held will not be insured
by the FDIC. Any interest earned on such funds will be retained by the
Company.
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The Subscription Right Certificates and payment of the Subscription Price
or, if applicable, Notices of Guaranteed Delivery or DTC Participant
Oversubscription Exercise Forms, as defined below, must be delivered to the
Subscription Agent, by mail, hand delivery, overnight or other courier
service, at the following address:
National Mercantile Bancorp Account
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Telephone number: (800) 835-8775
Facsimile number: (818) 502-0674
The Company will absorb the costs of the fees and expenses of the
Subscription Agent and has agreed to indemnify the Subscription Agent from
certain liabilities which it may incur in connection with the Public Offering.
Except for fees absorbed by the Company, and transfer taxes, if any, which
shall be paid by the Company, all commissions, fees and other expenses
(including brokerage commissions) incurred in connection with the exercise of
Rights will be for the account of the Rights Holder, and none of such
commissions, fees or expenses will be paid by the Company.
If a Rights Holder wishes to exercise Rights, but time will not permit such
Rights Holder to cause the Subscription Right Certificate(s) evidencing those
Rights to reach the Subscription Agent prior to the Expiration Time, such
Rights may nevertheless be exercised if all of the following conditions (the
"Guaranteed Delivery Procedures") are met:
(i) the Rights Holder has caused payment in full of the Subscription
Price for each Underlying Share being subscribed for pursuant to the Basic
Subscription Privilege and, if applicable, the Oversubscription Privilege,
to be received (in the manner set forth above) by the Subscription Agent at
or prior to the Expiration Time;
(ii) the Subscription Agent receives, at or prior to the Expiration Time,
a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in
the form provided with the Instructions as to Use of National Mercantile
Bancorp Subscription Rights Certificates (the "Instructions") distributed
with the Subscription Right Certificates, guaranteed by a member firm of an
approved Signature Guarantee Medallion Program (an "Eligible Institution"),
stating the name of the exercising Rights Holder, the number of Underlying
Preferred Shares being subscribed for pursuant to the Basic Subscription
Privilege, and, if any, pursuant to the Oversubscription Privilege, and
guaranteeing the delivery to the Subscription Agent of the Subscription
Right Certificate(s) evidencing those Rights within two (2) business days
following the date of the Notice of Guaranteed Delivery; and
(iii) the properly completed Subscription Right Certificate(s) evidencing
the Rights being exercised, with any signatures guaranteed as required, is
received by the Subscription Agent within two (2) business days following
the date of the Notice of Guaranteed Delivery relating thereto. The Notice
of Guaranteed Delivery may be delivered to the Subscription Agent in the
same manner as Subscription Right Certificates at the address set forth
above or may be transmitted to the Subscription Agent by telegram or
facsimile transmission. Additional copies of the form of Notice of
Guaranteed Delivery are available upon request from the Information Agent
whose address and telephone number are set forth below.
If an exercising Rights Holder does not indicate the number of Rights being
exercised, or does not forward full payment of the aggregate Subscription
Price for the number of Rights that the Rights Holder indicates are being
exercised, then the Rights Holder will be deemed to have exercised the Basic
Subscription Privilege with
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respect to the maximum number of Rights that may be exercised for the
aggregate payment delivered by the Rights Holder and, to the extent that the
aggregate payment delivered by the Rights Holder exceeds the product of the
Subscription Price multiplied by the number of Rights evidenced by the
Subscription Right Certificates delivered by the Rights Holder (such excess
being the "Subscription Excess"), the Rights Holder will be deemed to have
exercised the Oversubscription Privilege to purchase, to the extent available,
that number of whole Excess Underlying Shares equal to the quotient obtained
by dividing the Subscription Excess by the Subscription Price. Any amount
remaining after application of the foregoing procedures shall be returned to
the Rights Holder promptly by mail without interest or deduction.
Funds received in payment of the Subscription Price for Excess Underlying
Shares subscribed for pursuant to the Oversubscription Privilege will be held
in a Subscription Account and segregated from its other accounts pending
issuance of the Excess Underlying Shares. If a Rights Holder exercising the
Oversubscription Privilege is allocated less than all of the Excess Underlying
Shares for which that Rights Holder subscribed pursuant to the
Oversubscription Privilege, then the excess funds paid by the Rights Holder as
the Subscription Price for shares not allocated to such Rights Holder shall be
returned by mail, without interest, as soon as practicable after the
Expiration Time and after all prorations and adjustments contemplated by the
terms of the Public Offering and the Private Offering have been effected. See
"Risk Factors--Period of Escrow."
Subject to satisfaction of the Minimum Condition, certificates representing
shares of Preferred Stock subscribed for and issued pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege will be mailed as
soon as practicable after the Expiration Time and after all prorations and
adjustments contemplated by the terms of the Public Offering and the Private
Offering have been effected. Certificates for shares of Preferred Stock issued
pursuant to the exercise of Rights will be registered in the name of the
Rights Holder exercising such Rights. There can be no assurance that the value
of the Preferred Stock will not decline below the Subscription Price before
such shares of Preferred Stock are delivered. See "Risk Factors--Market
Considerations."
Unless a Subscription Right Certificate provides that the Underlying Shares
to be issued pursuant to the exercise of the Rights represented thereby are to
be issued to the Rights Holder or is submitted for the account of an Eligible
Institution, signatures on each Subscription Right Certificate must be
guaranteed by an Eligible Institution.
Holders of Common Stock of record at the Record Date ("Record Date Holders")
who hold shares of Common Stock for the account of others, such as brokers,
trustees or depositories for securities, should contact the respective
beneficial owners of such shares as soon as possible to ascertain these
beneficial owners' intentions and to obtain instructions with respect to their
Rights. If a beneficial owner so instructs, the Record Date Holder of that
beneficial owners' Rights should complete appropriate Subscription Right
Certificate(s) and submit them to the Subscription Agent with the proper
payment by noon of the next business day after the receipt of any funds from
the beneficial owner pursuant to NASD Notice to Members 84-7. In addition,
beneficial owners of Rights through such a nominee holder should contact the
nominee holder and request the nominee holder to effect transactions in
accordance with the beneficial owners' instructions. If a beneficial owner
wishes to obtain a separate Subscription Right Certificate, he, she or it
should contact the nominee as soon as possible and request that a separate
Subscription Right Certificate be issued. A Nominee may request any
Subscription Right Certificate held by it to be split into such smaller
denominations as it wishes, provided that the Subscription Right Certificate
is received by the Subscription Agent, properly endorsed, no later than 5:00
p.m., Pacific Time, on , 1997.
The Instructions accompanying the Subscription Right Certificates should be
read carefully and followed in detail. SUBSCRIPTION RIGHT CERTIFICATES SHOULD
BE SENT WITH PAYMENT TO THE SUBSCRIPTION AGENT. DO NOT SEND SUBSCRIPTION RIGHT
CERTIFICATES TO THE COMPANY.
THE METHOD OF DELIVERY OF SUBSCRIPTION RIGHT CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK
OF THE RIGHTS HOLDERS. IF SUBSCRIPTION RIGHT CERTIFICATES AND PAYMENTS ARE
SENT BY MAIL, RIGHTS HOLDERS ARE URGED TO SEND SUCH MATERIALS BY REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND ARE URGED TO ALLOW
A
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SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND
CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION TIME. BECAUSE UNCERTIFIED CHECKS
MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED CHECK, BANK DRAFT,
MONEY ORDER OR WIRE TRANSFER OF FUNDS.
Certain directors and officers of the Company will assist the Company in the
Public Offering by, among other things, participating in informational
meetings regarding the Public Offering, generally being available to answer
questions of potential subscribers and soliciting orders in the Public
Offering. None of such directors and officers will receive additional
compensation for such services. None of such directors and officers are
registered as securities brokers or dealers under the federal or applicable
state securities laws, nor are any of such persons affiliated with any broker
or dealer. Because none of such persons are in the business of either
effecting securities transactions for others or buying and selling securities
for their own account, they are not required to register as brokers or dealers
under the federal securities laws. In addition, the proposed activities of
such directors and officers are exempted from registration pursuant to a
specific safe-harbor provision under Rule 3a4-1 under the Exchange Act.
Substantially similar exemptions from registration are available under
applicable state securities laws.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determination
will be final and binding. The Company, in its sole discretion, may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscription Right Certificates will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Company determines, in its sole discretion. Neither the
Subscription Agent or the Company will be under any duty to give notification
of any defect or irregularity in connection with the submission of
Subscription Right Certificates or incur any liability for failure to give
such notification. The Company reserves the right to reject any exercise if
such exercise is not in accordance with the terms of the Rights Offering or
not in proper form or if the acceptance thereof or the issuance of the
Preferred Stock pursuant thereto could be deemed unlawful. See "The Rights
Offering--Limitations--Regulatory Limitation" and "--Tax Limitation."
All questions or requests for assistance concerning the method of exercising
Rights or requests for additional copies of this Prospectus, the Instructions
or the Notice of Guaranteed Delivery should be directed to the Information
Agent at its address set forth below (telephone (800) 554-7733 or call collect
(212) 344-6733). See "The Rights Offering--The Information Agent."
Procedures for DTC Participants
It is anticipated that the Rights will be eligible for transfer through, and
that the exercise of the Basic Subscription Privilege (but not the
Oversubscription Privilege) may be effected through, the facilities of The
Depository Trust Company ("DTC"); Rights which the holder exercises through
the DTC are referred to as ("DTC Rights"). A holder of DTC Rights may exercise
the Oversubscription Privilege in respect thereof by properly exercising and
delivering to the Subscription Agent, at or prior to the Expiration Time, a
DTC Participant Oversubscription Exercise Form, together with payment of the
appropriate Subscription Price for the number of Excess Underlying Preferred
Shares for which the Oversubscription Privilege is exercised. Copies of the
DTC Participant Oversubscription Exercise Form may be obtained from the
Information Agent or the Subscription Agent.
NO REVOCATION
ONCE A RIGHTS HOLDER HAS PROPERLY EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE
OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED.
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LATE DELIVERY OF SUBSCRIPTION RIGHT CERTIFICATES
If the Subscription Agent has received prior to the Expiration Time full
payment as specified above for the total number of shares of Preferred Stock
subscribed for, together with a letter, telegram or facsimile transmission
from a bank or trust company or a member of a recognized securities exchange
in the United States stating the name of the subscriber, the number of Rights
represented by the Subscription Right Certificate and the number of Underlying
Preferred Shares of Preferred Stock subscribed for and guaranteeing that the
Subscription Rights Certificate will be delivered promptly to the Subscription
Agent, such subscription will be deemed to be received prior to the Expiration
Time, subject to withholding of the stock certificates representing the
Underlying Preferred Shares pending receipt of the duly executed Subscription
Rights Certificate. RIGHTS HOLDERS WHO FAIL TO DELIVER THEIR SUBSCRIPTION
RIGHT CERTIFICATE(S) AND FULL PAYMENT TO THE COMPANY OR PAYMENT WITH GUARANTY
OF DELIVERY AS SET FORTH ABOVE PRIOR TO THE EXPIRATION TIME WILL BE DEEMED TO
HAVE WAIVED THEIR SUBSCRIPTION RIGHTS IN THIS OFFERING IN THEIR ENTIRETY.
INFORMATION AGENT
The Company has appointed Kissel-Blake Inc. as Information Agent for the
Rights Offering. Any questions or requests for assistance concerning the
method of subscribing for shares of Preferred Stock or for additional copies
of this Prospectus, the Instructions, the Notice of Guaranteed Delivery [or
the DTC Participant Oversubscription Exercise Form] may be directed to the
Information Agent at the address and telephone number below:
Kissel-Blake Inc.
110 Wall Street
New York, New York 10005
Telephone No.: (800) 554-7733
or(212) 344-6733 (call collect)
Banks and Brokers call: (212) 344-
6733
The Company will pay the fees and expenses of the Information Agent and has
also agreed to indemnify the Information Agent from certain liabilities which
it may incur in connection with the Rights Offering.
FOREIGN AND CERTAIN OTHER SHAREHOLDERS
Subscription Right Certificates will not be mailed to Record Date holders
whose addresses are outside the United States and Canada or who have an APO or
FPO address, but will be held by the Subscription Agent for each Record Date
holders' accounts. To exercise their Rights, such persons must notify the
Subscription Agent at or prior to on , 1997. Such Holder's Rights expire
at the Expiration Time.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of certain of the anticipated
federal income tax consequences of the issuance, exercise, transfer or lapse
of the Rights and purchase and disposition of the Preferred Stock. The
following does not consider federal income tax consequences of the Public
Offering to any particular shareholder, or federal income tax consequences of
the Public Offering that may be relevant to particular classes of
shareholders, such as banks, insurance companies and foreign individuals and
entities. This summary is not intended as tax advice, and is based on the
Company's understanding of federal income tax laws as currently interpreted.
No representation is made regarding the continuation of such laws or of such
interpretations, and no discussion is contained herein regarding the possible
effects of any applicable state, local or foreign tax laws, or taxes other
than federal income taxes. EACH RIGHTS HOLDER, STANDBY PURCHASER AND OTHER
SUBSCRIBER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO SUCH RIGHTS HOLDER OR SUBSCRIBER (INCLUDING THE
APPLICABILITY AND EFFECT OF THE CONSTRUCTIVE OWNERSHIP RULES AND STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS) OF THE ISSUANCE, EXERCISE, TRANSFER OR LAPSE OF
RIGHTS AND THE PURCHASE AND DISPOSITION OF PREFERRED STOCK PURSUANT TO THE
PUBLIC OFFERING.
SUBSCRIPTION OFFER
Section 305(a) of the Code generally provides that gross income does not
include the amount of any distribution by a corporation to its shareholders of
stock or rights to acquire stock of that corporation. Although there are
exceptions to the general rule of Section 305(a), this discussion assumes that
the general rule of Section 305(a) applies to the distribution of Rights to
the shareholders of the Company. Under Section 307 of the Code, the tax basis
of the Rights in the hands of a shareholder of the Company to whom the Rights
were issued will be determined by allocating the tax basis of the Common Stock
with respect to which the distribution was made between the existing shares of
Common Stock the shareholder holds (the "Old Stock") and the Rights in
proportion to their relative fair market values on the date of distribution.
If the fair market value of the Rights on the date of distribution is less
than 15% of the fair market value of the Old Stock, the tax basis of the
Rights will be zero and the tax basis of the Old Stock will be unchanged
unless a shareholder makes an irrevocable election to compute the basis of all
Rights received in the manner described in the preceding sentence. This
election is made by attaching a statement to such shareholder's federal income
tax return filed for the taxable year in which the Rights are received by a
shareholder. The Company has not obtained an independent appraisal of the
valuation of the Old Stock or the Rights and, therefore, each shareholder
individually must determine how the rules of Section 307 of the Code will
apply in that shareholder's particular situation. If the Rights are not
exercised but are allowed to expire, no adjustment will be made to the basis
of the Old Stock held by such shareholder and no income or loss will be
recognized by such shareholder on the expiration of such Rights. In either
case, the holding period of such Rights will include the period during which
the shareholder has held the Old Stock.
STANDBY PURCHASE AGREEMENTS
Standby Purchasers will not be taxed as a result of entering into Standby
Purchase Agreements. Since Standby Purchasers pay nothing for entering into
Standby Purchase Agreements, they have no tax basis for such Standby Purchase
Agreements as a result of entering into them.
EXERCISE OF RIGHTS
No gain or loss will be recognized by shareholders upon exercise of Rights
pursuant to the Rights Offering. The holding period of the Preferred Stock
acquired by a shareholder upon exercise of the Rights will commence upon the
exercise of the Rights by the holder thereof. The tax basis of such shares
will be equal to the sum of the basis of the Rights exercised, if any, and the
exercise price paid for such shares. Persons who acquire
49
<PAGE>
Preferred Stock as Standby Purchasers will take a basis for the shares equal
to the Subscription Price and will have a holding period that commences with
the purchase.
EXPIRATION OF THE RIGHTS AND STANDBY PURCHASE AGREEMENTS
Rights Holders who allow the Rights received by them on the date of
distribution to expire unexercised will not recognize any gain or loss, and no
adjustment will be made to the basis of their common stock. Standby Purchasers
have no tax basis in their Standby Purchase Agreements and, accordingly, will
not recognize any gain or loss if those agreements expire.
PREFERRED STOCK
Basis and Holding Period
The basis of each share of Preferred Stock acquired upon exercise of Rights
will equal the sum of the Subscription Price and the basis, if any, in the
Rights exercised. The holding period for such Preferred Stock will begin on
the date the Rights are exercised.
Dividend Payments
A holder of the Preferred Stock who receives a distribution thereon will be
treated as having received, on the dividend payment date, a dividend taxable
as ordinary income to the extent of the Company's current and accumulated
earnings and profits in the year in which such distribution is made. Corporate
holders will generally be eligible for the dividends received deduction as set
forth in Section 243 of the Code. The amount of any distribution described
above will be the amount of cash plus the fair market value of any property
received. To the extent that the amount of any distribution exceeds the
Company's allocable current and accumulated earnings and profits, such excess
will first be applied against and reduce the recipient's adjusted tax basis in
the shares with respect to which such distribution is made and second, to the
extent that such excess is greater than the recipient's adjusted tax basis,
will be treated as capital gain (assuming the shares with respect to which
such distribution is made are held as a capital asset).
Corporate holders of shares of Preferred Stock otherwise entitled to the
dividends received deduction should consider the minimum holding period
requirements of Section 246(c) of the Code, the "debt-financed portfolio
stock" rules of Section 246A of the Code, and the "extraordinary dividend"
provisions of Section 1059 of the Code, the effects of which are to reduce or
eliminate the benefit of the dividends received deduction with respect to
shares of Preferred Stock subject to such rules. Corporate holders of shares
of Preferred Stock should also consider whether any dividends received
deduction allowed for dividends received on shares of Preferred Stock may
either cause or increase the holder's liability for the alternative minimum
tax.
Sale or Exchange
Upon the sale or taxable exchange of Preferred Stock, the holder will
recognize gain or loss equal to the difference between the amount realized and
the holder's adjusted tax basis in the Preferred Stock. The resulting gain or
loss will be a capital gain or loss and will be a long-term capital gain or
loss (assuming the shares are held as a capital asset) if the Preferred Stock
was held for more than one year.
Redemption of Preferred Stock
A redemption of Preferred Stock for cash will be a taxable event. Generally,
any redemption of the Preferred Stock would result in taxable gain or loss
equal to the difference between the amount of cash received (except to the
extent of accumulated dividends on the Preferred Stock) and the shareholder's
tax basis in the Preferred Stock redeemed if the redemption (a) results in a
"complete redemption" of the holder's stock interest in the Company under
Section 302(b)(3) of the Code, (b) is "substantially disproportionate" with
respect to the stockholder under Section 302(b)(2) of the Code, (c) is "not
essentially equivalent to a dividend" with respect to the stockholder under
Section 302(b)(1) of the Code, or (d) is from a non-corporate stockholder in
partial liquidation
50
<PAGE>
of the Company under Section 302(b)(4) of the Code. In determining whether any
of these tests has been met, shares considered to be owned by the stockholder
by reason of the constructive ownership rules set forth in Section 318(a) of
the Code (pursuant to which a stockholder will be deemed to own shares owned
by certain related individuals and entities and shares that may be acquired
upon the exercise of an option, unless such constructive ownership can be
waived under Section 302(c) of the Code), as well as the shares actually
owned, would generally be taken into account. Such gain or loss would be a
capital gain or loss (assuming the shares with respect to which such
distribution is made are held as a capital asset).
If the redemption does not satisfy any of the tests under Section 302(b) of
the Code, then the gross proceeds will be treated under Section 301 of the
Code as a distribution taxable as a dividend to the extent of the Company's
current and accumulated earnings and profits (see "Certain Federal Income Tax
Consequences--Preferred Stock--Dividend Payments," above), and any excess will
be treated first as a non-taxable return of capital and then as a gain upon a
sale or exchange of the Preferred Stock, which gain will be long-term capital
gain (assuming the shares are held as a capital asset) if the Preferred Stock
has been held for more than one year. A holder who is taxed upon proceeds of
redemption as a dividend would transfer the tax basis in the Preferred Stock
(reduced for any amounts treated as a non-taxed portion of extraordinary
dividends or as a return of capital) to the holder's remaining stock interest
in the Company. If the stockholder does not retain any stock ownership in the
Company, the stockholder may lose such basis entirely.
Redemption Premium
Under Section 305 of the Code and applicable Treasury regulations, if the
redemption price of redeemable preferred stock exceeds its issue price, such
excess may constitute an unreasonable redemption which is deemed to be a
taxable distribution to the holder on an economic accrual basis over the
period during which the Preferred Stock cannot be redeemed. Such distribution
would be treated as a dividend to the extent of the Company's current and
accumulated earnings and profits, with any remaining distribution treated
first as a non-taxable return of capital and then as gain arising from a sale
or exchange.
The Company may not redeem the Preferred Stock until . Thereafter, the
Company may redeem the Preferred Stock at any time at its option for the issue
price plus a premium of 5%, together with declared but unpaid dividends. The
premium will decrease by one percentage point on January 1 of each succeeding
year such that, beginning , no premium will be paid upon redemption. A
redemption premium on stock, other than stock which is subject to mandatory
redemption by the issuer or subject to redemption at the option of the holder,
is considered to be reasonable if it is in the nature of a penalty for a
premature redemption and if such premium does not exceed the amount which the
issuer would be required to pay for such redemption right under the market
conditions existing at the time of issuance of the Preferred Stock. A
redemption premium is generally considered reasonable if it does not exceed
10% of the issue price on stock not redeemable for five years from the date of
issue. Because the Preferred Stock can be redeemed in less than five years,
there can be no assurance and none is hereby given that the redemption premium
with respect to the Preferred Stock will be considered reasonable under
Section 305 and applicable regulations.
Conversion to Common Stock
No gain or loss will be recognized for federal income tax purposes upon the
conversion of the Preferred Stock into shares of Common Stock, except with
respect to any cash received in exchange for a fractional interest. The tax
basis for the shares of Common Stock received upon conversion will be equal to
the tax basis of the Preferred Stock, reduced by the portion of such basis
allocable to any fractional interest exchanged for cash. Provided that the
Preferred Stock was held as capital assets, the holding period of the shares
of Common Stock will include the holding period of the Preferred Stock
converted. Gain realized upon the receipt of cash paid in lieu of fractional
shares of Common Stock will be taxed immediately to the holder of such
fractional shares.
51
<PAGE>
Adjustment of Conversion Ratio
Section 305 of the Code renders taxable certain actual or constructive
distributions of stock with respect to stock and convertible securities.
Regulations promulgated under Section 305 provide that an adjustment in the
conversion ratio of convertible preferred stock made pursuant to a bona fide,
reasonable formula which has the effect of preventing dilution of the interest
of the holders of such stock will not be considered to result in a taxable
dividend under Section 301 of the Code. Any adjustment in the conversion ratio
of the Preferred Stock to reflect taxable distributions on the Common Stock
would be treated as a constructive distribution of stock to the holders of
Preferred Stock and would be taxable as a dividend to the extent of current or
accumulated earnings and profits of the Company. The amount of the dividend to
a holder of Preferred Stock resulting from such an adjustment would be
measured by the fair market value of the additional Common Stock (or fraction
thereof) that would be obtainable as a result of adjustment of the conversion
price. Because the adjustments to the conversion price could occur more than
three years after the date of a taxable stock dividend, there can be no
assurance and none is hereby given that an adjustment to the conversion ratio
of the Preferred Stock will not result in a taxable dividend under Section
301.
GENERAL BACK UP WITHHOLDING AND REPORTING REQUIREMENTS
Under Section 3406 of the Code and applicable Treasury regulations, a holder
of Preferred Stock may be subject to backup withholding tax at the rate of 31%
with respect to dividends paid on or the proceeds of a sale or redemption of
Preferred Stock, as the case may be. The payor will be required to deduct and
withhold the tax if (a) the payee fails to furnish a taxpayer identification
number ("TIN") to the payor or fails to certify under the penalty of perjury
that such TIN is correct, (b) the IRS notifies the payor that the TIN
furnished by the payee is incorrect, (c) there has been a notified payee under
reporting with respect to interest, dividends or original issue discount
described in Section 3406(c) of the Code, or (d) there has been a failure of
the payee to certify under the penalty of perjury that the payees is not
subject to withholding under Section 3406(a)(1)(C) of the Code. As a result,
if any one of the events discussed above occurs, the payor will be required to
withhold a tax equal to 20% from any payment of dividends or proceeds made
with respect to the Preferred Stock unless an exemption applies under
applicable law and is established in a manner acceptable to the payor. Reports
will be made annually or otherwise as may be required to the IRS and to the
holders of record that are not excepted from such reporting requirements with
respect to distributions on the Preferred Stock. Such reporting will be made
on IRS Form 1099 or on such other form as may be prescribed under the rules
issued by the IRS.
STANDBY PURCHASERS
The Company has entered into Standby Purchase Agreements pursuant to which
the Standby Purchasers have severally agreed, subject in each case to a
maximum standby commitment and to certain conditions, to purchase up to $2.5
million ( shares) of Preferred Stock at the Subscription Price to the
extent available after exercise of the Basic Subscription Privilege, the sale
of shares in the Private Offering and the exercise of the Oversubscription
Privilege. The Standby Purchasers have agreed to purchase and the Company has
guaranteed the availability of, an aggregate minimum of $1.0 million (
shares) of Preferred Stock if a sufficient number of shares of Preferred Stock
is not available after the exercise of the Basic Subscription Privilege, the
sale of shares in the Private Offering and the Oversubscription Privilege. The
obligations of the Standby Purchasers are not subject to the purchase of any
minimum number of shares pursuant to the exercise of the Rights, but are
subject to certain conditions, including that the Public Offering shall have
been conducted substantially in the manner described in this Prospectus.
Each Standby Purchase Agreement provides that it may be terminated by the
Standby Purchaser only upon the occurrence of any of the following events: (i)
a material adverse change in the Company's financial condition prior to the
expiration of the Public Offering from that existing at December 31, 1996
(except as disclosed in the Prospectus); (ii) a suspension in the trading in
the Common Stock, a general suspension of trading or establishment of limited
or minimum prices on the Nasdaq Stock Market, any banking moratorium, any
suspension of payments with respect to banks in the United States or a
declaration of war or a national emergency
52
<PAGE>
by the United States; (iii) under any circumstances which would result in the
Standby Purchaser, individually or together with any other person or entity,
being required to register as a depository institution holding company under
federal or state laws or regulations, or to submit an application, or notice,
to a federal bank regulatory authority to acquire or retain control of a
depository institution or depository institution holding company; or (iv) if
the Public Offering, including sales of Preferred Stock to Standby Purchasers,
is not completed by , 1997 through no fault of the Standby Purchaser.
If the Company believes that the number of Underlying Preferred Shares
issuable by the Company pursuant to the Standby Purchase Agreements, both in
the aggregate and to any individual purchaser, will have an adverse effect
upon the Company's ability to utilize the NOL carryforwards, then the Company
may reduce the number of shares issuable to the Standby Purchasers, either pro
rata or individually to each Standby Purchaser whose purchase of Preferred
Stock may create such an adverse effect. Such reduction will be made to the
minimum extent necessary, in the sole opinion and discretion of the Company
after consultation with its tax advisor, to accomplish avoidance of such
adverse effect. Based on current circumstances, the Company does not
anticipate that it will have to reduce the number of shares issued to Standby
Purchasers to avoid an adverse effect upon the Company's ability to utilize
such federal income tax benefits. See "Risk Factors--Possible Loss of Tax
Benefit."
The following table sets forth certain information relating to the Standby
Purchasers. Certain Standby Purchasers are acting on behalf of investment
accounts over which they have discretionary authority or otherwise have been
empowered to act.
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------
MAXIMUM MINIMUM
STANDBY STANDBY
STANDBY PURCHASER COMMITMENT COMMITMENT
----------------- ---------- ----------
<S> <C> <C>
</TABLE>
53
<PAGE>
REASONS FOR THE PUBLIC OFFERING AND THE PRIVATE OFFERING AND USE OF PROCEEDS
The Board of Directors decided to conduct both the Public Offering and the
Private Offering to minimize the dilutive effect of the Private Offering and
the Standby Purchase Offering to current shareholders and to enable the
Company to downstream sufficient capital (approximately $2.5 million) to the
Bank to comply with the capital requirements of the 1995 Formal Agreement and
the 1995 MOU and to facilitate the implementation of the Company's and the
Bank's business strategy. The Company established the Minimum Condition of
$5.5 million for such purposes and to make the Public Offering and the Private
Offering cost effective. See "The Company--Business Strategy" and "--
Regulatory Agreements." The Company anticipates that the net proceeds,
contributed to the Bank will ultimately be invested in interest earning
assets. The immediate use of proceeds retained by the Company, if any, will be
for general corporate purposes, including possible strategic acquisitions and
to establish a fixed income investment securities portfolio. The Company has
no current arrangements, understandings or agreements, is not presently
negotiating with respect to any acquisitions and would need banking regulatory
approval prior to making any such acquisitions. PROCEEDS FROM THE PUBLIC
OFFERING AND THE PRIVATE OFFERING WILL NOT BE USED TO PAY DIVIDENDS ON THE
PREFERRED STOCK. THE TERMS OF THE PREFERRED STOCK PROVIDE THAT DIVIDENDS MAY
BE PAID COMMENCING , 1999. NOTWITHSTANDING THE FOREGOING, THE COMPANY MAY
NOT PAY DIVIDENDS FOLLOWING SUCH DATE UNLESS THE BANK IS IN FULL COMPLIANCE
WITH FEDERAL REGULATORY CAPITAL REQUIREMENTS, THE COMPANY AND THE BANK ARE
PERMITTED TO PAY DIVIDENDS BY THEIR REGULATORS AND THE COMPANY MEETS THE
RETAINED EARNINGS TEST. THE COMPANY CANNOT ASSESS AT THIS TIME ITS ABILITY TO
PAY DIVIDENDS IN THE IMMEDIATE FUTURE.
DILUTION
Rights Holders may experience substantial dilution of their percentage of
equity ownership interest and voting power in the Company if they do not
exercise the Basic Subscription Privilege and Oversubscription Privilege.
Depending upon the degree to which the Rights Holders exercise their Basic
Subscription Privilege and Oversubscription Privilege, they will experience a
minimum dilution of 18% (assuming shares are available pursuant to the
Oversubscription Privilege) and a maximum dilution of 72% (assuming no Rights
are exercised) in their equity ownership interest and voting power in the
Company due to the Private Purchasers Minimum Obligation and Minimum Standby
Obligation. See "Risk Factors--Dilution of Ownership Interest."
Rights Holders also may experience substantial dilution if options and
warrants to purchase shares of Company Common Stock currently outstanding are
exercised. In connection with the Lease Restructure Agreement, the Company
issued to its landlord a warrant expiring in December 2002 to purchase up to
9.9% of the outstanding shares of Company capital stock. See "Business--
Properties." In connection with the settlement of a shareholders' class action
lawsuit, the Company issued to the plaintiffs warrants expiring in June 1999
to purchase up to 18,680 shares of Common Stock. Under the Company's 1983 and
1994 Stock Option Plans, certain executive officers of the Company were
granted options to purchase up to 10,525 shares of Common Stock, subject to
adjustment to prevent dilution, none of which options have been exercised. In
addition, Scott A. Montgomery has been granted an option to purchase up to
22,002 shares of Common Stock under the Company's 1990 Stock Option Plan,
which option becomes exercisable in June 1997 and expires in December 2006.
Mr. Montgomery's employment agreement also provides for the grant of stock
appreciation rights to purchase an additional 8,251 shares of Common Stock.
Pursuant to an amendment to Mr. Montgomery's employment agreement, (i) if as a
consequence of a recapitalization of the Company, such as through the Public
Offering and the Private Offering, Mr. Montgomery's percentage ownership of
Common Stock would be less than 6.5% of the issued and outstanding shares of
Common Stock after giving effect to his option to purchase 22,002 shares,
Mr. Montgomery is entitled to receive additional options to purchase the
number of shares of Common Stock equal to the difference between 22,002 shares
and the number constituting 6.5% of the issued and outstanding shares of
Common Stock immediately following such recapitalization, with such provision
being effected with respect to one recapitalization only and (ii) Mr.
Montgomery has agreed to limit his right to exercise the stock options for a
period of three years following the date of such recapitalization such that
his ownership of the Company's Common Stock and/or Preferred Stock convertible
to Common Stock does not exceed 4.9%.
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<PAGE>
CAPITALIZATION
The following tables set forth the capitalization of the Company (i) at
December 31, 1996, and (ii) as adjusted to give effect to the issuance and
sale of Preferred Stock in the event that $8.0 million (minimum) and $9.0
million (maximum) is sold, and, in both cases, assuming expenses associated
with the Public Offering and the Private Offering of $1.4 million:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------------------
AS ADJUSTED(1)
---------------------------------
PRIOR TO OFFERINGS MINIMUM(2) MAXIMUM(3)
-------------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Shareholders' equity:
Preferred stock, no par
value. Authorized
1,000,000 shares; issued
0 shares; 800,000 shares,
and 900,000 shares, as
adjusted(5).............. $ -- $ 6,600 $ 7,600
Common stock, no par
value. Authorized
10,000,000 shares; issued
and outstanding 338,630
shares(4)(5)............. 24,614 24,614 24,614
Accumulated deficit....... (19,693) (19,693) (19,693)
Unrealized loss on
securities............... (76) (76) (76)
--------------- --------------- ---------------
Total shareholders'
equity................. $ 4,845 $ 11,445 $ 12,445
=============== =============== ===============
Book value per
share(4)(5).............. $ 14.31 $ 10.05 $ 10.05
</TABLE>
- --------
(1) Assumes a Subscription Price of $10.00 per share.
(2) Assumes the sale of 800,000 shares.
(3) Assumes the sale of 900,000 shares.
(4) Does not include a total of 86,052 shares that may be issued pursuant to
the exercise of stock options and warrants as follows: (i) 377 shares at
$17.04 per share under the Company's 1983 Stock Option Plan; (ii) 22,002
shares at $11.36 per share under the Company's 1990 Stock Option Plan;
(iii) 4,098 shares at $17.04 per share, 2,200 shares at $10.23 per share
and 3,850 shares at $12.50 per share under the Company's 1994 Stock Option
Plan; (iv) 1,320 shares at $26.09 per share to a director not granted
under any stock option plan; (v) 18,680 shares at $32.27 per share
pursuant to certain litigation (see "Business--Legal Proceedings--
Derivative and Class Action"); and (vi) 33,524 shares at $ per share
pursuant to the Lease Restructuring Agreement (see "Business--
Properties").
(5) Pro forma after giving effect to the Reverse Stock Split.
The following tables set forth the minimum capital ratios required by
federal regulations with respect to the Company and required by federal
regulations and the 1995 Formal Agreement with respect to the Bank, the
Company's and the Bank's actual ratios at December 31, 1996 and the Company's
and the Bank's capital ratios as adjusted to give effect to the estimated net
proceeds of the Public Offering and the Private Offering to be $6.6 million,
in the event $8.0 million (minimum) is sold and $7.6 million, if $9.0 million
(maximum) is sold. Solely for purposes of the following tables, it is assumed
that $2.5 million of the net proceeds of the Rights Offering will be
contributed to the Bank. See "Reasons for the Public Offering and the Private
Offering and Use of Proceeds." Ratios do not reflect unrealized losses on
investment securities available-for-sale.
<TABLE>
<CAPTION>
THE COMPANY
AT DECEMBER 31, 1996
-----------------------------------------
AS ADJUSTED(1)
---------------
REQUIRED(2) ACTUAL EXCESS MINIMUM MAXIMUM
----------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital ratio... 4.00% 6.96% 2.96% 15.72% 16.97%
Total risk-based capital ratio.... 8.00% 8.25% 0.25% 17.00% 18.25%
Leverage capital ratio(3)......... 4.00% 4.68% 0.68% 10.30% 11.10%
</TABLE>
<TABLE>
<CAPTION>
THE BANK
AT DECEMBER 31, 1996
--------------------------------------------
AS ADJUSTED(4)
EXCESS ---------------
REQUIRED(2) ACTUAL (DEFICIT) MINIMUM MAXIMUM
----------- ------ --------- ------- -------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital ra-
tio........................... 4.00% 6.95% 2.95 % 10.41% 10.41%
Total risk-based capital ratio. 8.00% 8.24% 0.24 % 11.69% 11.69%
Leverage capital ratio(3)...... 4.00% 4.67% 0.67 % 6.88% 6.88%
Formal Agreement--leverage cap-
ital ratio(2)................. 6.50% 4.67% (1.83)% 6.88% 6.88%
Formal Agreement--Tier 1 risk-
based capital ratio(2)........ 10.00% 6.95% (3.05)% 10.41% 10.41%
</TABLE>
- --------
(1) Assumes the investment of such funds in 20% risk-weighted (investment
securities) other than increases to the investment in the Bank.
(2) The Bank's minimum Tier 1 risk-based capital and leverage capital
requirements are based on the provisions of the 1995 Formal Agreement,
which became effective on December 14, 1995.
(3) The regulatory leverage capital ratio represents the ratio Tier 1 capital
at December 31, 1996 to average total assets during the three-month period
then ended.
(4) Assumes the investment of such funds in 100% risk-weighted assets (loans).
55
<PAGE>
MARKET PRICE OF COMMON STOCK AND DIVIDENDS
The Common Stock is included for quotation on the Small Cap tier of the
Nasdaq Stock Market. The following table sets forth on a per share basis,
without giving effect to the Reverse Stock Split, the high and low sales
prices for the periods indicated, as reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ----- -----
<C> <S> <C> <C>
1994 Second Quarter............................................. $4.50 $3.50
Third Quarter.............................................. 5.25 4.00
Fourth Quarter............................................. 4.88 2.63
1995 First Quarter.............................................. 3.75 2.06
Second Quarter............................................. 4.00 3.50
Third Quarter.............................................. 4.00 2.75
Fourth Quarter............................................. 3.50 1.25
1996 First Quarter.............................................. 2.06 1.25
Second Quarter............................................. 2.38 1.50
Third Quarter.............................................. 1.88 1.13
Fourth Quarter............................................. 1.25 1.00
</TABLE>
On March 11, 1997, the Nasdaq Stock Market, Inc. moved the Company's Common
Stock from the Nasdaq National Market tier to the Nasdaq Small Cap tier. On
the Record Date, March 31, 1997, the Company had approximately 677
shareholders of record of its Common Stock. This number does not include
beneficial owners whose shares are held by brokers, banks and other nominees.
On April 9, 1997, the last reported sale price of the Common Stock was $1.50
per share.
The Company has not paid a cash dividend on the Common Stock since July 1990
and there can be no assurance that the Company will generate earnings in the
future which would permit the declaration of dividends. The Company is
prohibited by the terms of the 1995 MOU from declaring or paying a dividend
without prior notice to the Reserve Bank, which may prohibit the payment of
dividends. In addition, the source of any such dividends is likely to be
dividends from the Bank. The Bank is also limited in the amount of dividends
which it may distribute according to the terms of the 1995 Formal Agreement.
Pursuant to the 1995 Formal Agreement, the Board of Directors of the Bank may
declare or pay dividends only: (i) when the Bank is in compliance with 12
U.S.C. Sections 56, 60, and 1831o(d)(1); (ii) when the Bank is in compliance
with the capital program developed pursuant to the 1995 Formal Agreement;
(iii) when such dividend payment is consistent with the capital levels
specified in paragraph (1) of the 1995 Formal Agreement; and (iv) with prior
written approval of the OCC. See "Regulation." Further, it is anticipated that
for the foreseeable future any earnings which may be generated will be
retained for the purpose of increasing the Company's capital and reserves to
facilitate growth.
56
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial and other data
of the Company for each of the years in the five-year period ended December
31, 1996. The information below should be read in conjunction with, and is
qualified in its entirety by, the more detailed information included elsewhere
in this Prospectus including the Company's Audited Consolidated Financial
Statements and notes thereto.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........ $ 8,757 $ 11,634 $ 20,900 $ 20,612 $ 22,577
Interest expense....... 3,079 3,979 5,526 5,920 7,621
---------- ---------- ---------- ---------- ----------
Net interest income.... 5,678 7,655 15,374 14,692 14,956
Provision for credit
losses................ -- 2,307 7,330 2,000 3,050
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses......... 5,678 5,348 8,044 12,692 11,906
Other operating (loss)
income................ 502 (1,315) (2,857) 1,474 2,140
Other operating
expense(1)............ 8,003 11,233 13,714 14,058 17,014
---------- ---------- ---------- ---------- ----------
(Loss) income before
income tax benefit and
cumulative effect of
change in accounting
principle............. (1,823) (7,200) (8,527) 108 (2,968)
Income tax benefit..... 579 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss) income
before cumulative
effect of change in
accounting principle.. (1,244) (7,200) (8,527) 108 (2,968)
Cumulative effect of
change in accounting
principle............. -- -- -- 63 --
---------- ---------- ---------- ---------- ----------
Net (loss) income...... $ (1,244) $ (7,200) $ (8,527) $ 171 $ (2,968)
========== ========== ========== ========== ==========
PER SHARE DATA:
Net (loss) income fully
diluted(2)............ $ (0.40) $ (2.34) $ (2.79) $ 0.05 $ (0.98)
Net (loss) income fully
diluted(3)............ (3.67) (21.26) (25.37) 0.49 (8.89)
Book value (period
ending)(4)............ 1.57 1.95 3.35 7.29 7.12
Book value (period
ending)(3)............ 14.31 17.75 30.44 66.28 64.69
Weighted average shares
outstanding(2)........ 3,078,146 3,078,146 3,055,584 3,041,268 3,035,379
Weighted average shares
outstanding(3)........ 338,630 338,630 336,148 334,573 333,925
AVERAGE BALANCE SHEET
DATA:
Federal funds sold..... $ 19,572 $ 16,034 $ 7,739 $ 11,822 $ 17,067
Securities............. 17,398 26,681 79,146 93,914 61,026
Short-term investments. -- 174 45 595 2,657
Loans receivable....... 69,975 95,771 140,079 159,680 192,546
Allowance for credit
losses................ 3,407 3,504 8,172 7,573 8,167
---------- ---------- ---------- ---------- ----------
Loans, net............. 66,568 92,267 131,907 152,107 184,379
---------- ---------- ---------- ---------- ----------
Total assets........... 112,303 149,399 245,555 291,166 294,406
Noninterest-bearing
demand deposits....... 36,518 52,246 77,445 89,605 78,607
Total deposits......... 104,118 134,218 212,755 251,934 246,369
Shareholders' equity... 5,500 9,033 19,086 21,713 24,643
SELECTED PERFORMANCE
RATIOS:
(Loss) return on
average assets........ (1.11)% (4.82)% (3.47)% 0.06% (1.01)%
(Loss) return on
average shareholders'
equity................ (22.61)% (79.71)% (44.68)% 0.79% (12.04)%
Average shareholders'
equity to average
assets................ 4.90 % 6.05 % 7.77 % 7.46% 8.37 %
Other core operating
expenses to average
assets(5)............. 6.24 % 7.52 % 5.58 % 4.83% 5.78 %
Net yield on interest-
earning assets........ 5.31 % 5.52 % 6.77 % 5.56% 5.53 %
Ratio of earnings to
fixed charges(6)...... -- -- -- 1.02% --
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CAPITAL RATIOS:
Company:
Tier 1 risk-based........ 6.96% 6.96% 9.84% 11.94% 9.85%
Total risk-based......... 8.25% 8.25% 11.11% 13.25% 11.12%
Leverage................. 4.68% 4.68% 5.65% 7.11% 7.39%
Bank:
Tier 1 risk-based........ 6.95% 6.95% 9.80% 11.65% 9.57%
Total risk-based......... 8.24% 8.24% 11.06% 12.95% 10.84%
Leverage................. 4.67% 4.67% 5.62% 6.93% 7.18%
ASSET QUALITY:
Nonaccrual loans......... $ 928 $ 573 $ 3,426 $ 7,780 $ 6,316
Troubled debt
restructurings.......... 5,016 5,167 5,582 5,584 5,043
Loans contractually past
due 90 or more days
with respect to either
principal or interest
and still accruing in-
terest.................. 300 221 1,507 2,502 47
-------- -------- --------- --------- ---------
Total nonperforming
loans................. 6,244 5,961 10,515 15,866 11,406
Other real estate
owned(7)................ 556 581 1,529 6,175 5,613
-------- -------- --------- --------- ---------
Total nonperforming as-
sets.................... 6,800 6,542 12,044 22,041 17,019
ASSET QUALITY RATIOS:
Nonaccrual loans to to-
tal assets.............. 0.8% 0.4% 1.5% 2.6% 1.8%
Nonaccrual assets to to-
tal assets(8)........... 1.4% 0.9% 2.1% 4.6% 3.4%
Allowance for credit
losses to nonaccrual
loans................... 319.9% 664.0% 89.4% 86.1% 95.1%
Allowance for credit
losses to nonaccrual
assets(8)............... 200.1% 329.7% 61.8% 48.0% 50.4%
Classified assets to al-
lowance for credit
losses plus sharehold-
ers' equity............. 106.2% 79.1% 149.2% 139.4% 156.7%
Classified assets to al-
lowance for credit
losses plus sharehold-
ers' equity(9).......... 43.9% 29.5% 112.8% 122.5% 139.1%
</TABLE>
- --------
(1) Includes a legal settlement of $1.0 million for the year ended December
31, 1996. (See "Business--Legal Proceedings--Other Litigation.")
(2) The weighted average number of shares of Common Stock outstanding for the
years ended December 31, 1996, 1995 and 1994 was used to compute loss per
share data as the use of average shares outstanding including Common
Stock equivalents would be antidilutive. The weighted average number of
shares used to compute fully diluted earnings per share in 1993 and 1992
was 3,171,250 and 3,035,660, respectively. The weighted average number of
shares outstanding used to compute (loss) income per share does not give
effect to the proposed 9.09 to one reverse stock split.
(3) Pro forma after giving effect to the Reverse Stock Split.
(4) Book value per share numbers are based on the number of shares
outstanding at period end and does not give effect to outstanding options
and warrants to purchase Common Stock or to the Reverse Stock Split.
(5) Other core operating expenses equals other operating expenses excluding
legal settlement of $1.0 million for the year ended December 31, 1996.
(See "Business--Legal Proceedings--Other Litigation.")
(6) The ratio of earnings to fixed charges were computed by dividing (loss)
income before income tax benefit and cumulative effect of change in
accounting principle plus fixed charges, by fixed charges. Fixed charges
represent total interest expense. Except for the year ended December 31,
1993, earnings were inadequate to cover fixed charges by $1.8 million,
$7.2 million, $8.5 million and $3.0 million for the years ended December
31, 1996, 1995, 1994 and 1992, respectively.
(7) Includes OREO acquired by the Bank through legal foreclosure or deed-in-
lieu of foreclosures and loans classified as in-substance foreclosures.
(8) Nonaccrual assets are comprised of nonaccrual loans plus OREO.
(9) Excludes one loan, a trouble debt restructuring with a principal balance
of $4.9 million at December 31, 1996, 1995, 1994, 1993 and 1992. This
loan is secured by a first deed of trust on a personal residence which,
as of December 1996, had an appraised value of $10.0 million.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the
consolidated financial condition and operating results of the Company for the
years ended December 31, 1996, 1995 and 1994. The discussion should be read in
conjunction with the Company's consolidated financial statements. Averages
presented in the tables are daily average balances unless otherwise stated.
This Prospectus includes forward looking statements concerning the Company
and the Bank. The forward looking statements are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
See "Risk Factors." References to the "Consolidated Financial Statements" are
to the consolidated financial statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, incorporated
herein by reference and made a part hereof.
GENERAL
During the 1990's the Bank experienced a continued decline in loans,
deposits and total assets in response to prolonged operating losses and an
effort to maintain capital levels above regulatory minimums. These prolonged
operating losses were the result of a deteriorating real estate market,
combined with certain internal deficiencies noted by the Company's and the
Bank's primary regulators. The volume of outstanding loans declined from the
second quarter of 1991 due to the ongoing recession affecting the Bank's
primary market area, combined with scheduled loan amortizations and
management's planned restructuring of the balance sheet. This restructuring
plan emphasized the reduction of criticized and classified assets along with
non-strategic loan relationships. In addition, the Bank's restructuring plan
called for a reduction of high rate ("money desk") deposits which originate
from institutional investors nationwide. These deposits, under this planned
restructuring, represent a non-strategic relationship and accordingly
contributed significantly to the recent decline of the Bank's deposits. The
planned run-off of deposits was designed to improve the core deposit base and
reduce potentially volatile liabilities. As a result, the balance sheet was
reduced for liquidity purposes as well as to achieve compliance with the
regulatory capital requirements. Although management does not presently intend
to further reduce the balance sheet, and anticipates that the additional
capital raised as a result of the Public Offering and the Private Offering
will be used to support an increase in assets in the post-recessionary
environment, no assurances can be given that management will be successful in
such efforts.
In addition to the planned restructuring discussed above, management
believes that a portion of the reduction in deposits was attributable to
depositors seeking higher yields on their funds than the Bank was offering as
a result of the lower interest rate environment. Further, deposit reductions
were also attributable to customers moving their banking relationships to
other institutions when the Bank restructured its balance sheet, as well as to
the public's reaction to adverse publicity about the Bank's losses and
regulatory agreements. The Company has taken steps to improve the public's
perception of the Banks' financial condition, including marketing campaigns
and enhanced business development efforts designed to generate core deposit
growth followed by a renewed expansion of total banking relationships. No
assurances can be given, however, that such efforts will be successful.
Loans receivable decreased from $115.3 million at December 31, 1994 to $82.0
million at December 31, 1995, and to $62.5 million at December 31, 1996. Total
deposits decreased from $207.8 million at December 31, 1994 to $120.2 million
at December 31, 1995 and to $103.9 million at December 31, 1996. Similarly,
total assets decreased from $233.0 million at December 31, 1994 to $132.0
million at December 31, 1995 and to $109.4 million at December 31, 1996. See
"Business--Loan Portfolio," "--Investment Portfolio" and "--Deposits."
59
<PAGE>
The Bank's decline in loans, deposits and total assets had an adverse effect
on results of operations over the same period. The net loss for the year ended
December 31, 1994 was $8.5 million or a $25.37 loss per share (pro forma after
giving effect to the Reverse Stock Split), compared to $7.2 million or a
$21.26 loss per share (pro forma after giving effect to the Reverse Stock
Split) in 1995. The net loss for the year ended December 31, 1994 was
primarily attributable to a significant provision for credit losses
accompanied by increased losses on investment securities and real estate. The
net loss for the year ended December 31, 1995 was the result of significant
decreases in net interest income as a consequence of the decline of interest
earning assets and continued losses relating to loans and investment
securities, which were compounded by minimal decreases in other operating
expense.
The net loss for the year ended December 31, 1996 was $1.2 million or a
$3.67 loss per share (pro forma after giving effect to the Reverse Stock
Split), an 83% reduction from 1995. The significant improvement over 1995 was
due to a significant decrease in the provision for credit losses and reduced
other operating expenses. However, customer-related fee income has decreased
since 1994 as a result of reduced mortgage and deposit activities.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the increase or
decrease of certain items in the statements of income as compared to the prior
periods:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
---------------- ----------------
1996 1995 AMOUNT PERCENT 1995 1994 AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income... $ 8,757 $11,634 $(2,877) (25)% $11,634 $20,900 $(9,266) (44)%
Total interest expense.. 3,079 3,979 (900) (23)% 3,979 5,526 (1,547) (28)%
------- ------- ------- ------- ------- -------
Net interest income..... 5,678 7,655 (1,977) (26)% 7,655 15,374 (7,719) (50)%
Provision for credit
losses................. -- 2,307 (2,307) (100)% 2,307 7,330 (5,023) (69)%
------- ------- ------- ------- ------- -------
Net interest income
after provision for
credit losses.......... 5,678 5,348 330 6 % 5,348 8,044 (2,696) (34)%
Other operating (loss)
income................. 502 (1,315) 1,817 138 % (1,315) (2,857) 1,542 54 %
Other operating
expense(1)............. 8,003 11,233 (3,230) (29)% 11,233 13,714 (2,481) (18)%
------- ------- ------- ------- ------- -------
(Loss) income before
income tax benefit..... (1,823) (7,200) 5,377 (75)% (7,200) (8,527) 1,327 16 %
Income tax benefit...... 579 -- 579 -- % -- -- -- --
------- ------- ------- ------- ------- -------
Net (loss) income....... $(1,244) $(7,200) $ 5,956 (83)% $(7,200) $(8,527) $ 1,327 16 %
======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes a legal settlement of $1.0 million for the year ended December
31, 1996.
NET INTEREST INCOME
The Bank's earnings depend largely upon the difference between the income
received from its loan and investment portfolios and the interest paid on its
liabilities, primarily interest paid on deposits. This difference is net
interest income. Net interest income represents the Bank's most significant
source of earnings. The Bank's ability to generate profitable levels of net
interest income is largely dependent on its ability to maintain sound asset
quality and appropriate levels of capital and liquidity. The Bank's inability
to maintain strong asset quality, capital or liquidity may adversely affect
(i) the ability to accommodate desirable borrowing customers, thereby
inhibiting growth in quality higher-yielding earning assets, (ii) the ability
to attract comparatively stable, lower-cost deposits, and (iii) the costs of
wholesale funding sources.
Net interest income for the year ended December 31, 1996 was $5.7 million, a
decrease of $2.0 million from $7.7 million for 1995. This decrease was
primarily due to the decreased volume of interest-earning assets and the
decreased volume of interest-bearing liabilities.
60
<PAGE>
Net interest income for the year ended December 31, 1995 was $7.7 million
compared to $15.4 million for the year ended December 31, 1994. This decrease
is primarily attributable to decreases in the volume of interest-earning
assets resulting from declining loan balances, and the sale of securities
during the year ended December 31, 1995 and during the fourth quarter of the
year ended December 31, 1994. In addition, net interest income for the year
ended December 31, 1994 included the accretion of discounts of $3.9 million
related to the 1993 purchase of $20.8 million of loans from the FDIC. Further,
net interest income for the year ended December 31, 1994 included the
accretion of a deferred gain of $544,000 from the sale of a prime rate based
floor component of an interest rate collar contract which expired in June
1994. See "Note 7 to the Consolidated Financial Statements."
Net interest income, when expressed as a percentage of average total
interest-earning assets, is referred to as the net yield on interest-earning
assets. The Bank's net yield on interest-earning assets is affected by changes
in the yields earned on assets and rates paid on liabilities, referred to as
rate changes. The difference between the yield earned on assets and rates paid
on liabilities is referred to as the interest rate spread. Interest rates
charged on the Bank's loans are affected principally by the demand for such
loans, the supply of money available for lending purposes and other
competitive factors. These factors are in turn affected by general economic
conditions and other factors beyond the Company's control, such as federal
economic policies, the general supply of money in the economy, legislative tax
policies, governmental budgetary matters, and the action of the Federal
Reserve Board.
The average yield on interest-earning assets was 8.19% for the year ended
December 31, 1996, a decrease of 20 basis points from the average yield of
8.39% during 1995. During this period, the rates paid on interest-bearing
liabilities decreased 14 basis points to 4.48% from 4.62% for 1995. As a
result, the net yield on interest-earning assets decreased 21 basis points to
5.31% during the year ended December 31, 1996 from 5.52% during 1995.
The average yield on interest-earning assets during the year ended December
31, 1995 was 8.39%, a decrease of 82 basis points from the average yield of
9.21% during the year ended December 31, 1994. This was primarily the result
of a significant reduction in volume during 1995 of higher yielding loans.
During this period, the rates paid on interest-bearing liabilities increased
84 basis points to 4.62% from 3.78% for the year ended December 31, 1994 due
to the increased rates paid on time deposits. As a result, the net yield on
interest-earning assets decreased from 6.77% during the year ended December
31, 1994 to 5.52% during the year ended December 31, 1995.
Average interest-earning assets decreased $31.8 million to $106.9 million
during 1996 from $138.7 million during 1995. Average interest-bearing
liabilities decreased $17.4 million to $68.7 million during 1996 from
$86.1 million during 1995. Average interest-earning assets decreased $88.3
million to $138.7 million during the year ended December 31, 1995 from $227.0
million during the year ended December 31, 1994. Average interest- bearing
liabilities decreased $60.1 million to $86.1 million during the year ended
December 31, 1995, from $146.2 million during the year ended December 31,
1994. These declines were the result of management's efforts to shrink the
balance sheet in order to maintain capital levels above regulatory minimums,
in response to prolonged operating losses which eroded shareholders' equity.
Average loan volume has continued to decline, decreasing to $70.0 million
during the year ended December 31, 1996, compared to $95.8 million during 1995
and $140.1 million for 1994. The volume of outstanding loans has continued to
declined from the second quarter of 1991 due to (i) the ongoing recession
affecting the Company's primary market area; (ii) scheduled loan
amortizations; and (iii) management's planned restructuring of the loan
portfolio to reduce criticized and classified assets and non-strategic loan
relationships. Management believes that a lower volume of loans will continue
to adversely affect the Bank's net interest income, interest rate spread and
net yield on earning assets during the foreseeable future, until such time as
the Public Offering and the Private Offering are consummated and the Bank has
the capital to increase its lending.
61
<PAGE>
AVERAGE BALANCES AND INTEREST RATES
The following tables summarize average balances and for interest-earning
assets and interest-bearing liabilities the amounts earned or paid and the
yield or rates for the periods indicated. The average balances in the following
tables and elsewhere in this Prospectus have been calculated on the basis of
the daily account balances:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1)
-------- -------- ------------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment
securities(1)......... $ 17,398 $ 990 5.69% $ 26,855 $ 1402 5.22%
Federal funds sold..... 19,572 1,024 5.23% 16,034 933 5.82%
Loans receivable(2)(3). 69,975 6,743 9.64% 95,771 9,299 9.71%
-------- ------ -------- -------
Total interest-earning
assets................ 106,945 8,757 8.19% 138,660 11,634 8.39%
NONINTEREST-EARNING
ASSETS:
Cash and due from
banks................. 5,878 9,403
Other assets........... 2,887 4,840
Less: Allowance for
credit losses......... (3,407) (3,504)
-------- --------
Total Assets........... $112,303 $149,399
======== ========
INTEREST-BEARING
LIABILITIES:
Deposits:
Demand................. $ 5,914 76 1.29% $ 7,341 137 1.87%
Money market and
savings............... 21,556 634 2.94% 29,001 1,002 3.46%
Time deposits under
$100,000.............. 32,665 1,925 5.89% 36,754 2,188 5.95%
Time deposits over
$100,000.............. 7,465 419 5.61% 8,876 542 6.11%
Federal funds purchased
and securities sold
under agreements to
repurchase............ 1,140 25 2.19% 4,154 110 2.65%
-------- ------ -------- -------
Total interest-bearing
liabilities........... 68,740 3,079 4.48% 86,126 3,979 4.62%
------ -------
NONINTEREST-BEARING
LIABILITIES:
Demand deposit......... 36,518 52,246
Other.................. 1,545 1,994
SHAREHOLDERS' EQUITY.... 5,500 9,033
-------- --------
Total liabilities and
shareholders' equity.. $112,303 $149,399
======== ========
Net interest income.... $5,678 $ 7,655
====== =======
Interest Rate Spread... 3.71% 3.77%
Net yield on interest-
earning assets(4)..... 5.31% 5.52%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1994
-------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE
----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities(1)...... $ 79,191 $ 4,418 5.58%
Federal funds sold............ 7,739 333 4.30%
Loans receivable(2)(3)........ 140,079 16,149 11.53%
----------- ----------
Total interest-earning assets. 227,009 20,900 9.21%
NONINTEREST-EARNING ASSETS:
Cash and due from banks....... 16,203
Other assets.................. 10,515
Less: Allowance for credit
losses....................... (8,172)
-----------
Total Assets.................. $ 245,555
===========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand........................ $ 9,493 144 1.52%
Money market and savings...... 39,852 1,274 3.20%
Time deposits under $100,000.. 74,484 3,309 4.44%
Time deposits over $100,000... 11,481 471 4.11%
Federal funds purchased and
securities sold under
agreements to repurchase..... 10,863 328 3.02%
----------- ----------
Total interest-bearing
liabilities.................. 146,173 5,526 3.78%
----------
NONINTEREST-BEARING
LIABILITIES:
Demand deposit................ 77,445
Other......................... 2,851
SHAREHOLDERS' EQUITY........... 19,086
-----------
Total liabilities and
shareholders' equity......... $ 245,555
===========
Net interest income........... $ 15,374
==========
Interest Rate Spread.......... 5.43%
Net yield on interest-earning
assets(4).................... 6.77%
</TABLE>
Footnotes on following page.
62
<PAGE>
- --------
(1) The average balance of tax-exempt securities held by the Bank and, in
turn, the earnings thereon have been included together with taxable
securities for the period indicated because of utilized operating loss
carryforwards.
(2) The average balance of nonperforming loans has been included in loans
receivable.
(3) Yields and amounts earned on loans include loan fees of $24,000, $150,000
and $121,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(4) Computed on a tax equivalent basis. If customer service expense was
classified as interest expense and deducted in computing net interest
income, net yield on interest-earning assets would have been 4.98%, 5.17%
and 6.58%, respectively, for the years ended December 31, 1996, 1995 and
1994.
The Bank's net yield on interest-earning assets remains high in comparison
with the interest rate spread due to the continued significance of
noninterest-bearing demand deposits relative to total funding sources.
Noninterest-bearing demand deposits totaled $34.8 million at December 31,
1996, representing 33.5% of total deposits, compared to $44.6 million and
$87.4 million, representing 37.1% and 42.1% of total deposits at December 31,
1995 and 1994, respectively. Of these noninterest-bearing demand deposits,
$8.8 million or 8.1% of total assets were represented by real estate title and
escrow company deposits at December 31, 1996, compared to $9.8 million and
$17.6 million or 7.5% and 7.6% of total assets at December 31, 1995 and 1994,
respectively. While these deposits are noninterest-bearing, they are not cost-
free funds. Customer service expense, primarily costs related to external
accounting, data processing and courier services provided to title and escrow
company depositors, are incurred by the Bank to the extent that certain
average noninterest-bearing deposits are maintained by such depositors, and
such deposit relationships are determined to be profitable. Customer service
expense is classified as other operating expense. If customer service expenses
related to escrow customers were classified as interest expense, the Bank's
reported net interest income for the years ended December 31, 1996, 1995 and
1994 would be reduced by $349,000, $489,000 and $423,000, respectively.
Similarly, this would create identical reductions in other operating expense.
The net yield on interest-earning assets for the years ended December 31,
1996, 1995 and 1994 would have decreased 32.6 basis points, 35.3 basis points
and 18.6 basis points, respectively.
63
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table represents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and expense during the
periods indicated. Information is provided for each major component of
interest-earning assets and interest-bearing liabilities with respect to (i)
changes attributable to changes in volume, (ii) changes attributable to
changes in rate, and (iii) the net change. The changes due to simultaneous
rate and volume changes have been allocated to rate and volume changes in
proportion to the relationship between their absolute dollar amounts.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------------- --------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
---------- -------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans receivable(1).... $(2,505) $ (51) $(2,556) $(5,109) $(1,743) $(6,852)
Investment
Securities(2)......... (545) 133 (412) (2,895) (119) (3,014)
Federal funds sold..... 206 (115) 91 357 243 600
---------- -------- ---------- --------- --------- ---------
Total.................. (2,844) (33) (2,877) (7,647) (1,619) (9,266)
---------- -------- ---------- --------- --------- ---------
INTEREST PAID ON:
Demand deposits........ (27) (34) (61) (33) 26 (7)
Money market and
savings deposits...... (257) (111) (368) (347) 74 (273)
Time deposits under
$100,000.............. (244) (19) (263) (1,675) 556 (1,119)
Time deposits over
$100,000.............. (86) (37) (123) (107) 177 70
Federal funds purchased
and securities sold
under agreements to
repurchase............ (80) (5) (85) (203) (15) (218)
---------- -------- ---------- --------- --------- ---------
Total.................. (694) (206) (900) (2,365) 818 (1,547)
---------- -------- ---------- --------- --------- ---------
Net interest income.... $(2,150) $ 173 $ (1,977) $ (5,282) $ (2,437) $(7,719)
========== ======== ========== ========= ========= =========
</TABLE>
- --------
(1) Table does not include interest income that would have been earned on
nonaccrual loans.
(2) The average balance of tax-exempt securities held by the Bank and, in
turn, the earnings differentials thereon have been included together with
taxable securities for the period indicated because of utilized NOLs.
Effects of Nonperforming Loans on Net Interest Income. Foregone interest
income attributable to nonperforming loans totaled $171,000, $160,000 and $1.2
million for the years ended 1996, 1995 and 1994, respectively. This resulted
in a reduction in yield on average gross loans outstanding of 24 basis points,
17 basis points and 83 basis points for the years ended December 31, 1996,
1995 and 1994, respectively. Although the Bank sold a large portion of the
nonperforming loans in February 1995, to the extent that additional loans are
identified as nonperforming in future periods, operating results will continue
to be adversely affected.
Each month the Bank reviews the allowance for credit losses and determines
the provision for credit losses, if needed. As a result of management's
periodic analysis of the adequacy of the allowance for credit losses, there
was no provision for credit losses for the year ended December 31, 1996,
compared to a provision of $2.3 million for the year ended December 30, 1995.
The Bank's allowance for credit losses as a percentage of nonperforming assets
decreased to 43.7% at December 31, 1996, from 63.8% at December 31, 1995, due
to loan charge-offs of $836,000, net of recoveries of loans previously
charged-off of 464,000.
64
<PAGE>
OTHER OPERATING INCOME
The following table sets forth for the periods indicated the various
components of the Bank's other operating income:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE YEARS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------------------------- -----------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
---------------------- -----------------------
1996 1995 AMOUNT PERCENT 1995 1994 AMOUNT PERCENT
----- ------- ---------- ---------- ------- ------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING (LOSSES)
INCOME:
Securities
transactions:
Net (loss) gain on sale
of trading securities. $ -- $ -- $ -- -- $ -- $ (112) $ 112 100 %
Net (loss) gain on sale
of securities
available-for-sale.... (3) (1,233) 1,230 100 % (1,233) (1,327) 94 7 %
Loss on termination of
interest rate swap.... -- (1,294) 1,294 100 % (1,294) -- (1,294) --
FEE INCOME:
International services. 124 224 (100) (45)% 224 435 (211) (49)%
Investment services.... 73 254 (181) (71)% 254 283 (29) (10)%
Deposit and other
customer services..... 308 737 (429) (58)% 737 696 41 6 %
OTHER:
Other income-
shareholders'
insurance claims...... -- 730 (730) (100)% 730 -- 730 --
Loss on OREO........... -- (733) 733 100 % (733) (894) 161 18 %
Loss on other assets... -- -- -- -- -- (1,087) 1,087 100 %
Lower-of-cost-or-market
adjustment on loans
held for sale......... -- -- -- -- -- (851) 851 100 %
----- ------- ---------- -------- ------- ------- ----------- -------
Total other operating
(losses) income....... $ 502 $(1,315) $ 1,817 138 % $(1,315) $(2,857) $ 1,542 54 %
===== ======= ========== ======== ======= ======= =========== =======
</TABLE>
As set forth in the accompanying consolidated statements of operations, the
Bank's principal sources of other operating income is fee income related to
international, investment, deposit and other customer services. In addition,
other operating income also includes the results of activity related to
transactions involving the Bank's securities portfolio and results of activity
related to other transactions primarily involving OREO, loans and other
assets.
Other operating income for the year ended December 31, 1996 was $502,000
compared to losses of $1.3 million for 1995. This resulted primarily from the
absence of losses on securities transactions during 1996. Fee income decreased
$710,000 or 58% during the year ended December 31, 1996 compared to the year
ended December 31, 1995 primarily due to volume decreases in international,
investment, deposit and other customer services. The international services
department was closed in December 1995, resulting in reduced letter of credit
and foreign exchange functions during 1996.
During 1996 the Bank restructured its investment service division by forming
a strategic alliance with an investment brokerage firm. This strategic
alliance enables the Bank to provide a wide array of products at a reduced
overhead cost. Management expects that this alliance will allow fees from
these services to increase without a corresponding increase in overhead
expenses experienced in prior years. In addition, the Bank is currently
reviewing the fee structure of its deposit related services to ensure such
services are competitively priced and, as a result of this review, expects
fees from these services to increase in the future.
Other operating income during the year ended December 31, 1995 resulted in a
loss of $1.3 million, representing a decrease of $1.5 million or 54% from a
loss of $2.9 million during the year ended December 31, 1994. With respect to
securities transactions during 1995, the Bank sold $46.9 million of investment
securities available for sale and terminated a related interest rate swap
contract. These transactions caused the Bank to realize a net loss of $1.2
million on the sale of securities and a loss of $1.3 million on the
termination of the interest rate swap contract during the year ended December
31, 1995. During the year ended December 31, 1994, losses on sales of
securities were $1.4 million, primarily the result of transactions during the
fourth quarter of that year. In the fourth quarter of 1994, the Bank sold
approximately $30.0 million of investment securities and realized a loss of
$1.3 million. The loss on sale of trading securities totaled $112,000 for the
year ended December 31, 1994. Activity in trading securities ceased during
1994, and management does not intend to engage in this activity in the
foreseeable future.
65
<PAGE>
Other income for the year ended December 31, 1995 included $730,000 in
income from insurance proceeds resulting from the settlement of a lawsuit. In
addition during the year ended December 31, 1994 other income included a loss
of $1.1 million on the write-down of a movie library received as collateral
for a loan.
OTHER OPERATING EXPENSES
The following table sets forth for the periods indicated the various
components of the Company's other operating expense:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE YEARS
ENDED INCREASE ENDED INCREASE
DECEMBER 31, (DECEASE) DECEMBER 31, (DECREASE)
-------------- ---------------- --------------- ----------------
1996 1995 AMOUNT PERCENT 1995 1994 AMOUNT PERCENT
------ ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING EX-
PENSES:
Salaries and related
benefits.............. $2,718 $ 3,878 $(1,160) (30)% $ 3,878 $ 5,088 $(1,210) (24)%
Severance costs........ -- 141 (141) (100)% 141 333 (192) (58)%
Net occupancy.......... 793 1,468 (675) (46)% 1,468 1,832 (364) (20)%
Furniture and
equipment............. 298 385 (87) (23)% 385 539 (154) (29)%
Printing and
communications........ 211 270 (59) (22)% 270 420 (150) (36)%
Insurance and
regulatory
assessments........... 629 971 (342) (35)% 971 1,203 (232) (19)%
Customer services...... 607 853 (246) (29)% 853 837 16 2 %
Computer data
processing............ 359 413 (54) (13)% 413 495 (82) (17)%
Legal settlement....... 1,000 -- 1,000 -- -- -- -- --
Legal services......... 503 749 (246) (33)% 749 768 (19) (2)%
Other professional
services.............. 640 1,546 (906) (59)% 1,546 1,406 140 10 %
Other real estate owned
expenses.............. 39 41 (2) (5)% 41 87 (46) (53)%
Promotion and other
expenses.............. 206 518 (312) (60)% 518 706 (188) (27)%
------ ------- ------- ---- ------- ------- ------- ---
Total other operating
expenses.............. $8,003 $11,233 $(3,230) (29)% $11,233 $13,714 $(2,481) (18)%
====== ======= ======= ==== ======= ======= ======= ===
</TABLE>
During the year ended December 31, 1996, other operating expenses was $8.0
million, a 29% decrease from the year ended December 31, 1995. This $3.2
million decrease was the result of management's continuing efforts to reduce
operating expenses, and is primarily attributable to the reduction in salaries
and related expenses of $1.2 million, the reduction in occupancy expenses of
$675,000 and the reduction in other professional services of $906,000. In
1995, the Bank negotiated with its landlord a restructuring of its lease for
the Bank's premises. This restructuring of the Bank's lease represents an
annual savings of approximately $850,000 over the five years ending December
31, 2000, and significantly contributed to the reductions in net occupancy
expense achieved during the year ended December 31, 1996. See "Business--
Properties." In addition, the decreases in compensation expense and other
professional services are due to reductions in staff and changes in management
during the year ended December 31, 1996.
Other operating expenses for the year ended December 31, 1996 includes a
litigation settlement of $1.0 million resulting from a settlement agreement
reached in relation to counterclaims filed against the Bank by underwriters
for Lloyd's ("Lloyd's Underwriters") and certain other parties. See
"Business--Legal Proceedings." Other operating expenses, excluding the $1.0
million legal settlement, decreased to $7.0 million for the year ended
December 31, 1996, representing a $4.2 million or 38% decrease when compared
to the year ended December 31, 1995. Other operating expenses for the year
ended December 31, 1996 includes $145,000 for consulting services directly
related to efforts associated with the federal income tax refund. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Income Taxes."
66
<PAGE>
In conjunction with the Bank's execution of the Lease Restructuring
Agreement, the Company issued to its landlord a seven-year warrant to purchase
shares of the Company's Common Stock and granted the landlord registration
rights with respect to any shares purchased by the landlord pursuant to such
warrant. See "Business --Properties" and "Description of Capital Stock--
Registration Rights."
Other operating expenses decreased 18.1% to $11.2 million for the year ended
December 31, 1995 as compared to $13.7 million for the year ended December 31,
1994. This decrease was primarily due to management's efforts to continue to
reduce operating expenses in response to the Bank's shrinking asset base.
Compensation expense decreased $1.2 million or 24% to $3.9 million for the
year ended December 31, 1995 compared to $5.1 million for the year ended
December 31, 1994.
Virtually all other categories of other operating expenses decreased or
remained level during the year ended December 31, 1995 compared to the year
ended December 31, 1994 except for other professional services which increased
$140,000 or 10%. This increase in other professional services was attributable
to expanded accounting and auditing services and the use of other outside
consultants to supplement management. During 1996, the Bank has reduced its
utilization of outside consultants through the addition of executive
management and streamlining operating functions. As a result, management
expects that fees paid to outside consultants will continue to decrease.
PROVISION FOR CREDIT LOSSES
Provisions for credit losses are charged to earnings to bring the total
allowance for credit losses to a level deemed appropriate by management based
on such factors as historical experience, the volume and type of lending
conducted by the Bank, the amount of nonperforming loans, regulatory policies,
generally accepted accounting principles, general economic conditions, and
other factors related to the collectability of loans in the Bank's portfolio.
Each month the Bank reviews the allowance for credit losses and makes
additional transfers to the allowance, as needed. As a result of management's
periodic analysis of the allowance for credit losses, there was no provision
for credit losses for the year ended December 31, 1996, compared to a
provision of $2.3 million for 1995. No provision was made for credit losses
for the year ended December 31, 1996. The Bank's allowance for credit losses
as a percentage of nonperforming assets decreased to 43.7% at December 31,
1996 from 58.2% at December 31, 1995 due to loan charge offs of $836,000, net
of recoveries of loans previously charged-off of $464,000.
The provision for credit losses for the year ended December 31, 1995 was
$2.3 million compared to $7.3 million for the year ended December 31, 1994.
The provision for credit losses during the year ended December 31, 1994 was
primarily due to the $20.8 million loan portfolio purchased from the FDIC
during 1993. At the time of purchase, the Bank had recorded an allowance for
credit losses of $4.0 million. This allowance was subsequently reclassified as
a purchase discount and accreted over the term of the related loans.
Concurrent with this reclassification in 1994, the Bank added $4.1 million to
the provision for credit losses to absorb losses from this portfolio. Charge-
offs related to the $20.8 million of purchased loans totaled $4.0 million
during the year ended December 31, 1994. From December 31, 1994 through
December 31, 1996, the Bank has charged off $1.3 million related to this
purchased portfolio.
To improve asset quality and future profitability, in February 1995, the
Bank sold loans with an outstanding principal balance of $13.5 million,
realizing net proceeds of $6.6 million. This loan portfolio consisted of
criticized and/or nonperforming loans and loans that were previously charged-
off. At December 31, 1994, the loans sold in February 1995 were carried based
on the ultimate sales price net of, lower of cost or market adjustment of
$851,000, charge-offs totaling $2.0 million, and loans that were previously
charged-off totaling $4.0 million.
67
<PAGE>
The decrease in the provision for credit losses during 1995 resulted from
the decrease in loan balances, the sale of loans, improved collections and
reduced net charge-offs in 1995. As of December 31, 1996, the Company believes
based on its periodic analysis that the allowance for credit losses was
adequate.
INCOME TAXES
The Company utilized all available financial statement income tax benefits
in 1991, therefore, the cumulative losses through December 31, 1996, resulted
in income tax carryforwards for the Company. The Company has recognized losses
for financial statement purposes which have not yet been recognized on an
income tax return. At December 31, 1996, the Company had $22.3 and $11.8
million of NOL carryforwards for federal and state income tax purposes,
respectively. The federal NOL carryforwards expire beginning in 2007 through
2011 and the state NOL carryforwards expire beginning in 1997 through 2001.
The Company filed a loss carryback claim in 1995, and during 1996 realized a
tax benefit for federal income tax purposes and received refund received of
approximately $579,000 (including $43,000 in interest) related to a carryback
of a portion of the Company's NOLs previously unrecognized.
Federal income tax laws permit the Company to carry back NOLs three years to
offset taxable income in those periods, if any, and forward fifteen years to
offset taxable income in those future periods. Under special circumstances,
losses may be carried back up to ten years. California Franchise Tax laws do
not provide for the carryback of such losses and generally permit one-half of
net operating losses to be carried forward five years. See "Certain Federal
Income Tax Consequences."
LIQUIDITY AND LIABILITY MANAGEMENT
Liquidity management for banks requires that funds be available to pay
anticipated deposit withdrawals and maturing financial obligations promptly
and fully in accordance with their terms. Over a very short time frame,
maturing assets provide only a limited portion of the funds required to pay
maturing liabilities. The balance of the funds required is generally provided
by payments on loans, sale of loans, liquidation of assets and the acquisition
of additional deposit liabilities.
Market and public confidence in the financial strength of the Bank and
financial institutions in general will largely determine the Bank's access to
appropriate levels of liquidity. This confidence is significantly dependent on
the Bank's ability to maintain continued sound asset credit quality and
appropriate levels of capital resources.
Management has defined liquidity as the ability of the Bank to meet
anticipated customer demands for funds under credit commitments and deposit
withdrawals at a reasonable cost and on a timely basis. Management measures
the Bank's liquidity position by giving consideration to both on- and off-
balance sheet sources of and demands for funds. Management believes this
method provides a comprehensive measure of the Bank's net liquidity position.
Liquidity includes cash and due from banks, federal funds sold and
investment securities. Sources of liquidity include loan repayments, deposits
and borrowings under informal overnight federal fund lines available from
correspondent banks. In addition to volatile noninterest-bearing demand and
interest rate-sensitive deposits, the Bank's principal demand for liquidity is
anticipated fundings under credit commitments to customers.
To meet liquidity needs, the Bank maintains a portion of its funds in cash
deposits in other banks, Federal funds sold and investment securities. As of
December 31, 1996, the Bank's liquidity ratio was 44.8%, defined as $23.0
million in Federal funds sold, $18.4 million in investment securities and $5.1
million in cash and due from banks, as a percentage of deposits.
In response to the 1995 Formal Agreement, the Bank's Board of Directors
adopted revised measurement guidelines for management of the Bank's liquidity
position (the "liquidity guidelines"), including limitations on
68
<PAGE>
the maximum acceptable ratios as follows: (i) loan-to-deposit ratio of 85%;
(ii) amounts of purchased funds as a percentage of aggregate funding sources,
comprised of purchased funds, deposits, and borrowings from customers under
retail repurchase agreements ("purchased funds ratio") of 20%; (iii) pledged
investment securities as a percentage of the total investment securities
portfolio ("pledged securities ratio") of 75%; and (iv) money desk deposits,
in the aggregate and as a percentage of total deposits of 40% and time
certificates of deposit of $100,000 or more to total deposits of 15%. For this
purpose, purchased funds include borrowings from securities dealers under
wholesale repurchase agreements, borrowings from correspondent banks under
overnight federal fund lines and brokered deposits. The liquidity guidelines
further establish a minimum net liquidity position to be maintained by the
Bank. The Bank was in compliance with these guidelines throughout the years
ended December 31, 1996 and 1995.
As described above, maintaining appropriate levels of capital is an
important factor in determining the availability of critical sources of
liquidity. Accordingly, the liquidity guidelines also require that the Bank
maintain a minimum level of total regulatory capital in excess of the minimum
level required under the Federal Reserve Board's guidelines.
Management and the Interest Rate Risk Committee of the Board of Directors
seek to maintain a stable net liquidity position while optimizing operating
results, as reflected in net interest income, the net yield on earning assets
and the cost of interest-bearing liabilities in particular. The Board meets
monthly to review the Bank's current and projected net liquidity position and
to review actions taken by management at its weekly Interest Rate Risk
Committee meetings in order to achieve this liquidity objective.
The Company's consolidated statements of cash flows included in the
accompanying consolidated financial statements present certain information
about cash flows from operating, investing and financing activities. The
Bank's principal cash flows relate to investing and financing activities,
rather than operating activities. While the statements present the net cash
flows for the periods indicated from lending and deposit activities, they do
not reflect certain important aspects of the Bank's liquidity described above,
including (i) anticipated liquidity requirements under outstanding credit
commitments to customers, (ii) intraperiod volatility of deposits,
particularly fluctuations in the volume of commercial customers' noninterest-
bearing demand deposits, and (iii) unused borrowings available under federal
funds lines, repurchase agreements, and other arrangements. As such,
management believes that the measurements provided in the liquidity guidelines
discussed above are generally more indicative of the Bank's overall liquidity
position. The Bank's principal source of operating cash flows is net interest
income.
INTEREST RATE MATURITIES OF ASSETS AND FUNDING SOURCES
The careful planning of asset and liability maturities and the matching of
interest rates to correspond with this maturity matching is an integral part
of the active management of an institution's net yield. To the extent
maturities of assets and liabilities do not match in a changing interest rate
environment, net yields may be affected. Even with perfectly matched repricing
of assets and liabilities, risks remain in the form of prepayment of assets
and timing lags in adjusting certain assets and liabilities that have varying
sensitivities to market interest rates. In its overall attempt to match assets
and liabilities, management takes into account rates and maturities to be
offered in connection with its certificates of deposit and offers variable
rate loans.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature to reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest
69
<PAGE>
rates, therefore, a negative gap would theoretically tend to adversely affect
net interest income, while a positive gap would tend to result in an increase
in net interest income. Conversely, during a period of falling interest rates,
a negative gap position would theoretically tend to result in an increase in
net interest income while a positive gap would tend to affect net interest
income adversely.
INTEREST RATE SENSITIVITY
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount
of assets and liabilities shown which reprice or mature during a particular
period were determined in accordance with the earlier of term to repricing or
the contractual maturity of the asset or liability. The table is intended to
provide an approximation of the projected repricing of assets and liabilities
at December 31, 1996, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three-month period and
subsequent selected time intervals. Money market and demand deposits and
savings accounts are all assumed to reprice immediately, and so are allocated
to the shortest period (three months or less) for purposes of the table.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------
DUE IN DUE AFTER
WITHIN THREE TO ONE YEAR
THREE TWELVE TO FIVE DUE AFTER NOT RATE
MONTHS MONTHS YEARS FIVE YEARS SENSITIVE TOTAL
------- -------- --------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold..... $23,000 $ -- $ -- $ -- $ -- $ 23,000
Investment securities.. -- -- 15,398 3,232 -- 18,630
Loans receivable....... 37,050 15,572 7,913 2,012 -- 62,547
------- ------- ------- ------- -------- --------
Total.................. 60,050 15,572 23,311 5,244 -- 104,177
NONINTEREST-EARNING
ASSETS:
Cash and due from
banks................. -- -- -- -- 5,113 5,113
Other real estate
owned................. -- -- -- -- 556 556
All other assets....... -- -- -- -- 2,539 2,539
Allowance for credit
losses................ -- -- -- -- (2,969) (2,969)
------- ------- ------- ------- -------- --------
Total assets........... 60,050 15,572 23,311 5,244 5,239 109,416
INTEREST-BEARING
LIABILITIES:
Demand deposits, money
market and savings.... 28,454 28,454
Time deposits.......... 10,934 22,346 7,368 40,648
------- ------- ------- ------- -------- --------
Total.................. 39,388 22,346 7,368 -- -- 69,102
------- ------- ------- ------- -------- --------
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
deposits.............. -- -- -- -- 34,752 34,752
Other liabilities...... -- -- -- -- 717 717
Shareholders' equity... -- -- -- -- 4,845 4,845
------- ------- ------- ------- -------- --------
Total liabilities and
shareholders equity.... 39,388 22,346 7,368 40,314 109,416
------- ------- ------- ------- -------- --------
Interest rate
sensitivity gap........ $20,662 $(6,774) $15,943 $ 5,244 $(35,075) $ --
======= ======= ======= ======= ======== ========
Cumulative interest rate
sensitivity gap........ $20,662 $13,888 $29,831 $35,075 $ -- $ --
======= ======= ======= ======= ======== ========
Cumulative interest rate
sensitivity gap ratio
based on cumulative
earning assets......... 34% 18% 30% 34%
</TABLE>
At December 31, 1996, the Bank had net repriceable assets (a "positive" gap)
as measured at one year of 18% of total assets. The net repriceable assets
over a five-year time horizon totaled approximately $5.2 million or 4.8% of
total assets. A positive gap implies that the Bank is asset sensitive, and
therefore subject to a decline
70
<PAGE>
in net interest income as interest rates decline. In a relatively stable
interest rate environment that follows a period of rising interest rates,
variable rate liabilities will continue to reprice upward while variable rate
assets, particularly those indexed to the prime rate, remain relatively
constant, thereby narrowing net interest margin. As interest rates decline,
variable rate assets reprice at lower rates immediately, while the variable
rate liabilities reprice gradually, resulting in a narrowing of the net
interest margin. During a period of rising interest rates, this positive gap
would tend to result in an increase in net interest income.
Although certain assets and liabilities are assumed to have similar
maturities or periods to repricing, they may actually react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
materially from those assumed in calculating the foregoing table. Finally, the
ability of many borrowers to service their adjustable-rate loans may decrease
in the event of a significant interest rate increase. Since interest rate
changes do not affect all categories of assets and liabilities equally or
simultaneously, a cumulative gap analysis alone cannot be used to evaluate the
Bank's interest rate sensitivity position.
CAPITAL RESOURCES
The Company's shareholders' equity at December 31, 1996 decreased to $4.8
million from $6.0 million at December 31, 1995, and $10.3 million at December
31, 1994. The decrease in 1996 is attributable to the net loss of $1.2 million
and the decrease in unrealized losses on securities available for sale of
$78,000. The decrease in 1995 is attributed to the year's net loss of $7.2
million, net of a decrease in unrealized losses on the securities available-
for-sale of $2.9 million.
The ability of the Company and the Bank to achieve and maintain appropriate
levels of capital resources is substantially dependent on their ability to
attract capital, such as through the Public Offering and the Private Offering,
and to support earning assets and sustain profitability on an ongoing basis.
The Bank's goal for 1997 is to achieve profitability by improving asset
quality through the reduction of nonperforming loans and operating expenses
and growth in interest earning assets. Although the Company and the Bank have
taken steps toward these goals, there can be no assurances that operating
losses will not continue.
The Bank is currently operating under the 1995 Formal Agreement with the
OCC. To the extent significant losses continue and capital continues to erode,
the Bank could fall into the "undercapitalized" category. In such event, the
Bank would be even more closely monitored by the federal regulators, and could
be subject to other restrictions. See "The Company--Regulatory Agreements" and
"Regulation--Supervision and Regulation--Capital Standards."
REGULATORY CAPITAL OF THE COMPANY AND THE BANK
The Federal Reserve Board and the OCC have issued guidelines to implement
risk-based capital requirements. The risk-based capital ratio of the Company
and the Bank are calculated under the guidelines by dividing their respective
qualifying total capital by their respective total risk-weighted assets. The
Company's qualifying total capital and total risk-weighted assets are
determined on a fully consolidated basis. A bank holding company's total
qualifying capital is comprised of the sum of core capital elements ("Tier 1
capital") and supplementary capital elements ("Tier 2 capital") minus certain
specified deductions (collectively, the "deductions"), if any. Tier 1 capital
consists primarily of common stock and retained earnings. Tier 2 capital is
comprised of the allowance for credit losses limited to 1.25% of total risk
weighted assets. Total risk-based capital is Tier 1 plus Tier 2 capital;
however, at least 50% of total capital must be composed of Tier 1 capital. The
capital standards specify that assets, including certain off-balance sheet
items be assigned risk weights based on credit and liquidity risk which range
from 0% risk weight for cash to 100% risk weight for commercial loans and
certain other assets. The leverage ratio is Tier 1 capital to adjusted average
assets. The Tier 1 capital ratio is
71
<PAGE>
Tier 1 capital to risk weighted assets. The total risk-based capital ratio is
Tier 1 plus Tier 2 capital to risk weighted assets.
The FDIC Improvement Act requires that for banks to be considered "well
capitalized," they must maintain a leverage ratio of 5.0%, a Tier 1 capital
ratio of 6.0% and a risk-based capital ratio of 10.0% and not be under a
written agreement or capital directive. Banks will be considered "adequately
capitalized" if they maintain a leverage ratio of 4.0%, a Tier 1 risk-based
capital ratio of 4.0%, and a total risk-based capital ratio of 8.0%.
Pursuant to the 1995 Formal Agreement, the Bank is required to achieve and
thereafter maintain a Tier 1 risk-based capital ratio of at least 10.0% and a
leverage capital ratio of at least 6.5%. At December 31, 1996, the Bank was
not in compliance with the 1995 Formal Agreement with respect to these ratios.
The Bank's Tier 1 risk-based capital and leverage capital ratios at December
31, 1996, were 6.95% and 4.67%, respectively. Accordingly, the Bank may be
subject to further regulatory enforcement action by the OCC. Pursuant to the
1995 Formal Agreement, a capital plan was filed by the Bank with the OCC on
February 8, 1996. See "The Company--Regulatory Agreements."
The following tables set forth the minimum capital ratios required by
federal regulations with respect to the Company and by federal regulations and
the 1995 Formal Agreement with respect to the Bank and the Company's and
Banks' actual ratios as of December 31, 1996.
<TABLE>
<CAPTION>
COMPANY AT DECEMBER 31, 1996
------------------------------------------------
REQUIRED ACTUAL EXCESS
------------ ------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital
ratio....................... $2,828 4.00% $4,921 6.96% $ 2,093 2.96 %
Total risk-based capital
ratio....................... 5,657 8.00% 5,831 8.25% 174 0.25 %
Leverage capital ratio(2).... 4,210 4.00% 4,921 4.68% 711 0.68 %
<CAPTION>
BANK AT DECEMBER 31, 1996
------------------------------------------------
REQUIRED ACTUAL EXCESS(DEFICIENCY)
------------ ------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital
ratio....................... $2,828 4.00% $4,911 6.95% $ 2,083 2.95 %
Total-risk-based capital
ratio....................... 5,657 8.00% 5,820 8.24% 163 0.24 %
Leverage capital ratio(2).... 4,210 4.00% 4,911 4.67% 701 0.67 %
Formal Agreement-leverage
capital ratio(1)............ 6,841 6.50% 4,911 4.67% (1,930) (1.83)%
Formal Agreement-Tier 1 risk
based capital ratio(1)...... 7,071 10.00% 4,911 6.95% (2,160) (3.05)%
</TABLE>
- --------
(1) The Bank's minimum Tier 1 risk-based capital and leverage capital
requirements are based on the provisions of the 1995 Formal Agreement,
which became effective on December 14, 1995.
(2) The regulatory leverage capital ratio represents the ratio of Tier 1
capital at December 31, 1996 to average total assets during the three-
month period then ended.
The significant losses incurred during the years ended December 31, 1995 and
1994 eroded the Bank's capital. These losses were primarily a result of
increased provisions for credit losses, losses on securities, losses on OREO
and other assets, and reductions in interest-earning assets without a
corresponding reduction in operating expenses. Although the Bank was able to
decrease the level of nonperforming assets at December 31, 1996 and 1995, it
suffered significant credit losses during the year ended December 31, 1995
related to the high level of nonperforming loans from previous years. To the
extent that the level of nonperforming loans increases and results in
increased provisions for credit losses and loan charge-offs or adversely
affects the level of income from those loans, the Bank's ability to generate
adequate future earnings will be negatively affected.
72
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial- components approach that focuses on
control. SFAS No. 125 distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Company has not completed its analysis of the impact SFAS
No. 125 may have on the financial condition and results of operations of the
Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Examples are stock
purchase plans, stock options, restricted stock awards and stock appreciation
rights. This statements also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. Those
transactions must be accounted for, or at least disclosed in the case of stock
options, based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The accounting requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an
earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose
either a new fair value-based method or the current APB Opinion 25 intrinsic
value-based method of accounting for its stock-based compensation
arrangements. The statement requires pro forma disclosures of net earnings and
earnings per share computed as if the fair value-based method had been applied
in financial statements of companies that continue to follow current practice
in accounting for such arrangements under APB Opinion 25. The Company has
chosen not to adopt the fair value provisions of SFAS No. 123 and will
continue accounting for stock compensation awards at their intrinsic value at
the grant date, and will adopt the disclosure requirements of SFAS No. 123.
BUSINESS
MARKET AREA
The Bank, through a single site location, operates primarily in the west
side of the city of Los Angeles, California. The Bank's market area for its
established niche markets of business and private banking and entertainment
banking can be defined geographically to include a radius of four miles from
the Bank. In implementing its planned extension into the technology/multimedia
market, the Bank will be offering specific products tailored to that industry
to prospective clients in a wider geographic area that includes Los Angeles,
Ventura and Orange Counties.
COMPETITION
The banking business in California generally, and in the Bank's primary
market specifically, is highly competitive with respect to both loans and
deposits, and is dominated by a relatively small number of major banks which
have many offices operating over a wide geographical area. The Bank competes
for loans and deposits primarily with other commercial banks, including many
that are much larger than the Bank, as well as with non-bank financial
institutions, including savings and loan associations, credit unions, thrift
and loan companies, mortgage companies, commercial finance lenders, offerors
of money market accounts, and other financial and non-financial institutions.
Among the advantages certain of those institutions have over the Bank is their
ability to finance wide-ranging and effective advertising campaigns and to
allocate their investment resources to regions of highest yield and demand. In
addition, many of the major commercial banks operating in the Bank's primary
market offer certain services, such as trust services, which are not currently
offered directly by the Bank and, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Bank.
73
<PAGE>
To compete with other financial institutions in its primary market, the Bank
relies principally upon personal contact by its officers, directors and
employees and providing, through third parties, specialized services such as
courier services and escrow accounting services. For customers whose loan
demands exceed the Bank's legal lending limits, the Bank has arranged for such
loans on a participation basis with other banks. The Bank also assists
customers requiring other services not offered by the Bank in obtaining such
services from other providers.
LOAN PORTFOLIO
The following table presents the Company's loan portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio composition:
Real estate construction
and land development...... $ 3,441 5% $ 4,185 5% $ 948 1%
Commercial loans:
Secured by one to four
family residential
properties.............. 6,233 10% 9,637 12% 18,398 16%
Secured by multifamily
residential properties.. 2,879 5% 2,876 3% 2,368 2%
Secured by commercial
real properties......... 26,629 42% 28,734 35% 32,061 28%
Other--secured and
unsecured............... 16,508 26% 27,393 33% 43,385 37%
Home equity lines of
credit.................... 581 1% 3,983 5% 2,867 2%
Consumer installment and
unsecured loans to
individuals............... 6,545 11% 5,435 7% 15,691 14%
------- --- ------- --- -------- ---
Gross loans outstanding.... 62,816 100% 82,243 100% 115,718 100%
Deferred net loan
origination fees,
purchased loan discount
and gains on termination
of interest rate hedging
contracts................. (269) (231) (434)
------- ------- --------
Loans receivable........... $62,547 $82,012 $115,284
======= ======= ========
</TABLE>
The Bank's real estate construction and land development loans are primarily
interim loans made by the Bank to finance construction of commercial and
single family residential property. These loans are typically short-term. The
Bank does not make loans for speculative or tract housing construction or for
acquisition and development of raw land.
The Bank's commercial loans secured by real estate consist primarily of
loans made based on the borrower's cash flow and which are secured by deeds of
trust on commercial and residential property to provide another source of
repayment in the event of default. It is the Bank's policy generally to
restrict real estate loans to no more than a range of 65% to 70% of the lower
of the Bank's appraised value or the purchase price of the property, depending
on the type of property and its utilization. The Bank offers both fixed and
floating rate loans. Maturities on such loans are generally restricted to five
years (on an amortization ranging from fifteen to twenty-five years with a
balloon payment due at maturity).
The Bank's other secured and unsecured commercial loans are made for the
purpose of providing working capital, financing the purchase of equipment or
for other business purposes. Included in this category are both secured and
unsecured loans consisting of revolving lines of credit, term loans for
equipment and short-term working capital lines of credit. Collateral for the
secured loans in this category is generally represented by accounts
receivable, inventory, equipment, real estate, marketable securities and other
assets, such as the cash surrender value of life insurance contracts. The
Bank's policy pertaining to collateral support for such loans generally
requires the filing of Uniform Commercial Code forms with the appropriate
state agency, deeds of trust, purchase money interests and proper assignments
of documents as required.
74
<PAGE>
Other Secured Commercial Loans. The Bank underwrites its commercial loans on
the basis of the borrower's cash flow and ability to service debt from cash
flow and earnings rather than on the basis of the underlying collateral value,
and seeks to structure such loans to have more than one source of repayment.
The borrower is required to provide the Bank with sufficient information to
allow a loan decision to be made and to assess the value of the proposed
collateral. This generally includes three years of financial statements,
projected cash flows, current financial information on any and all guarantors,
and other reports such as a current business plan, that show trends in the
current assets and projects the impact of the proposed financing. While most
loans do not exceed one year, except for equipment and real estate loans,
those in excess of one year have covenants which generally require financial
reporting and other financial performance.
Other Unsecured Commercial Loans. This category, which includes term loans
and lines of credit, represents a smaller portion of the portfolio, and is a
customary product provided for the Bank's business clients. The Bank's
underwriting guidelines include low levels of existing debt of the borrower,
working capital sufficient to cover the loan and a history of earnings and
cash flow. Lines of credit are generally required to be unused for a
continuous 30 day period to demonstrate the borrower's ability to have
sufficient funds to carry its operations on an annual basis. These lines are
generally used for short-term cash needs and do not represent permanent
working capital requirements. Generally, these loans do not exceed the lesser
of 50% to 100% of the borrower's verified liquid assets, or 10% to 20% of the
borrower's tangible net worth.
Home equity lines of credit loans provide the borrower a line of credit of
up to 80% of the appraised value of their residential real estate net of any
senior mortgages. This line of credit is secured by a mortgage on the
borrower's property and can be drawn upon at any time.
Consumer loans are made for the purpose of financing automobiles, various
types of consumer goods, and other personal purposes. Consumer loans generally
provide for the monthly payment of principal and interest. Most of the Bank's
consumer loans are secured by the personal property being purchased.
The loan portfolio decreased by $19.5 million to $62.5 at December 31, 1996,
from $82.0 million at December 31, 1995, or by 20.9%. See "Business Effects on
Nonperforming Loans and Net Interest Income." The table above indicates that
the loan portfolio mix at December 31, 1996 had a larger portion of loans
secured by real estate, representing approximately 63% of gross loans
outstanding as compared to 60% at December 31, 1995. Other secured and
unsecured commercial loans represented 26% of the portfolio at December 31,
1996, a decline from 33% at December 31, 1995. Loans secured by commercial
real properties increased as a percentage of the portfolio to 42% at December
31, 1996 from 35% at December 31, 1995 due to the reduced portfolio size.
The loan portfolio decreased to $82.0 million at December 31, 1995 from
$115.3 million at December 31, 1994, or by 28.9%. The above table indicates
that the loan portfolio mix at December 31, 1995, had a larger portion of
loans secured by real estate, representing approximately 60% of gross loans
outstanding as compared to 49% at December 31, 1994. Other secured and
unsecured commercial loans represented 33% of the loan portfolio at December
31, 1995, a decline from 37% at December 31, 1994, and consumer loans to
individuals represented 7% at December 31, 1995, a decline from 14% at
December 31, 1994.
MATURITIES AND RATE SENSITIVITY OF LOANS
The following table sets forth the maturity distribution of the Bank's loans
outstanding at December 31, 1996. At that date, the Bank had no loans with a
maturity greater than 30 years, other than loans totaling approximately
$496,000 which have no stated maturity, although most such loans do not have a
maturity greater than nine years. In addition, the table shows the
distribution of such loans between those loans with predetermined (fixed)
interest rates and those with variable (floating) interest rates. Floating
rates generally fluctuate with changes in various prime rates. As of December
31, 1996, over 74% of the Bank's loan portfolio
75
<PAGE>
were floating interest rate loans. Nonperforming loans are included in this
schedule based on nominal maturities, even though the Bank may be unable to
collect such loans at their maturity date.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------
OVER ONE YEAR
ONE YEAR OR BUT LESS THAN OVER FIVE
LESS(1) FIVE YEARS YEARS TOTAL
----------- ------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan portfolio composition:
Real estate construction and land
development....................... $ -- $ 3,441 $ -- $ 3,441
Commercial loans:
Secured by one to four family
residential properties.......... 6,001 189 43 6,233
Secured by multifamily
residential properties.......... -- 707 2,172 2,879
Secured by commercial real
properties...................... 7,686 14,360 4,584 26,629
Other--secured and unsecured..... 9,723 4,873 1,642 16,239
Home equity lines of credit........ 80 465 36 581
Consumer installment and unsecured
loans to individuals.............. 1,883 4,010 651 6,545
------- ------- ------ -------
Total loans.................... $25,373 $28,045 $9,128 $62,547
======= ======= ====== =======
Loans with variable (floating)
interest rates.................... $46,442 $ 22 $ -- $46,464
Loans with predetermined (fixed)
interest rates.................... 6,180 7,891 2,012 16,083
------- ------- ------ -------
Total.......................... $52,622 $ 7,913 $2,012 $62,547
======= ======= ====== =======
</TABLE>
- --------
(1) All loans due on demand, having no stated repayment schedule or maturity,
and overdrafts are reported as due in one year or less.
ASSET QUALITY
The risk of nonpayment of loans is an inherent feature of the banking
business. That risk varies with the type and purpose of the loan, the
collateral which is utilized to secure payment, and ultimately, the
creditworthiness of the borrower. To minimize this credit risk, the Bank
requires that all loans of $100,000 to $750,000 be approved by an officer's
loan committee. Larger loans must be approved by the loan committee of the
Board of Directors.
The Bank has implemented an enhanced process by which it reviews and manages
the credit quality of the loan portfolio. An officers' loan committee has been
established with the Bank's senior officers serving as voting members. The
ongoing credit control process includes a stringent risk rating system,
enhanced underwriting criteria, early identification of problem credits, and
regular monitoring of classified assets graded as "criticized" by the Bank's
internal grading system. The Bank also maintains a program of quarterly review
of loans by an independent outside loan review consultant. Loans are graded
from "pass" to "loss," depending on credit quality. Loans in the "pass"
category are generally performing in accordance with their terms, and are to
companies which have profit records, adequate capital for normal operations
and cash flow sufficient to service the loan. When a loan shows signs of
potential weakness that may affect repayment of the loan or the collateral,
the loan is reclassified "specially mentioned." A loan which has further
deterioration and exhibits defined weaknesses in the borrower's capacity to
repay is reclassified "substandard." When loan repayment is questionable or
not supported by collateral, the loan is labeled "doubtful," reserves are
established to offset the estimated risk and when loans decline further, the
partial or anticipated loss is charged off.
CLASSIFIED ASSETS
Classified assets are assets that have defined weaknesses in the borrower's
ability to repay the loan or in the underlying collateral, and are assigned a
loan grading of "substandard", "doubtful" or "loss" in accordance with the
Bank's grading policy described above. Classified assets include nonperforming
assets.
76
<PAGE>
Asset quality of the Bank improved as evidenced by the decrease in
classified assets from December 31, 1994. The table below summarizes the
Bank's classified assets at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1996 1995 1994
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Substandard......................................... $ 6,891 $ 7,025 $ 17,796
Doubtful............................................ 852 150 620
------- ------- --------
Classified loans.................................... 7,743 7,175 18,416
OREO................................................ 556 581 1,529
------- ------- --------
TOTAL............................................... $ 8,299 $ 7,756 $ 19,945
======= ======= ========
</TABLE>
Classified loans increased to $7.7 million at December 31, 1996 from $7.2
million at December 31, 1995. Classified loans decreased during the year ended
December 31, 1995 by $11.2 million from $18.4 million at December 31, 1994.
Loans held for sale at December 31, 1994, which were sold in February 1995,
further augmented a reduction in classified loans.
At December 31, 1996, $6.2 million or 75% of classified assets were
represented by loans to three borrowers in excess of $500,000 as follows: i)
two loans totaling $806,000 secured by real estate; ii) a loan of $550,000 to
an individual secured by a single family home; and iii) a loan of $4.9 million
to an individual on a single family home with an appraised value as of
December 1996 of $10.0 million. This $4.9 million loan is currently performing
in accordance with its restructured terms and is carried as a troubled debt
restructuring (TDR) due to its below market interest rate.
NONPERFORMING ASSETS
Nonperforming assets consist of nonperforming loans and OREO. Nonperforming
loans are those loans which have (i) been placed on nonaccrual status, (ii)
been subject to troubled debt restructurings, or (iii) become contractually
past due 90 days or more with respect to principal or interest and have not
been restructured or placed on nonaccrual status.
The following table sets forth information regarding the Bank's
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans................................ $ 928 $ 573 $ 3,426
Troubled debt restructurings.................... 5,016 5,167 5,582
Loans contractually past due 90 days or more
with respect to either principal or interest
and still accruing interest.................... 300 221 1,507
------- ------- --------
Nonperforming loans........................... 6,244 5,961 10,515
Other real estate owned......................... 556 581 1,529
------- ------- --------
Total nonperforming assets...................... $ 6,800 $ 6,542 $ 12,044
======= ======= ========
Allowance for credit losses to nonaccrual loans. 319.9% 664.0% 89.4%
Allowance for credit losses to nonaccrual
assets(1)...................................... 200.1% 329.7% 61.8%
Allowance for credit losses to nonperforming
loans.......................................... 47.5% 63.8% 29.1%
Allowance for credit losses to nonperforming
assets......................................... 43.7% 58.2% 25.4%
Total nonperforming assets to total assets...... 6.2% 5.0% 5.2%
</TABLE>
- --------
(1) Nonaccrual assets are comprised of nonaccrual loans plus OREO.
77
<PAGE>
NONACCRUAL LOANS
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists reasonable doubt as to the full and timely
collection of either principal or interest.
When a loan is placed on nonaccrual status, all interest previously accrued
but uncollected is reversed against current period operating results. Income
on such loans is then recognized only to the extent that cash is received and
where the ultimate collection of the carrying amount of the loan is probable,
after giving consideration to the borrower's current financial condition,
historical repayment performance and other factors. Accrual of interest is
resumed only when (i) principal and interest are brought fully current and
(ii) such loans are either considered, in management's judgment, to be fully
collectible or otherwise become well secured and in the process of collection.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Net Interest Income" for a discussion of the effects on
operating results of nonperforming loans. At December 31, 1996 a single
nonaccrual loan with an outstanding principal balance of $550,000, or 59.3% of
total nonaccrual loans was secured by residential real estate. Troubled debt
restructured loans are those for which the Company has, for reasons related to
borrowers' financial difficulties, granted concessions to borrowers (including
reductions of either interest or principal) that it would not otherwise
consider, whether or not such loans are secured or guaranteed by others.
Troubled debt restructurings occurring after January 1, 1995 are included in
impaired loans and accounted for as described below.
The FASB issued SFAS No. 114 "Accounting by Creditors for Impairment of a
Loan" which was amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures", which eliminates
the provisions of SFAS No. 114 regarding how a creditor should report income
on an impaired loan and clarifies certain disclosure requirements. SFAS No.
114 prescribes the recognition criterion for loan impairment and the
measurement methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings. SFAS No. 114 states that a loan is
impaired when it is probable that a creditor will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. A creditor is required to measure impairment by discounting
expected future cash flows at the loan's effective interest rate, by reference
to an observable market price, or by determining the fair value of the
collateral for a collateral dependent asset. Due to the size and nature of the
Bank's loan portfolio, impaired loans are determined by a periodic evaluation
on an individual loan basis. Impaired loans are characterized as loans where
it is probable that the Bank will be unable to collect the principal and
interest amounts due according to their terms.
At December 31, 1996, the Bank had classified $1.6 million of its loans as
impaired under SFAS No. 114, for which the related specific reserves of
$710,000. The average recorded investment in, and the amount of interest
income recognized on impaired loans for the year ended December 31, 1996, were
$7.8 million and $700,000, respectively. Of the loans considered to be
impaired at December 31, 1996, $4.9 million or 68% was represented by one
loan, a troubled debt restructuring.
Foregone interest income attributable to nonperforming loans amounted to
$171,000, $160,000 and $1.2 million for the years ended December 31, 1996,
1995 and 1994. See "Effects of Nonperforming Loans and Net Interest Income."
This resulted in a reduction in yield on average loans receivable of 24 basis
points, 17 basis points and 83 basis points for the years ended December 31,
1996, 1995 and 1994, respectively. Although the Bank sold a large portion of
the nonperforming loans in February 1995, to the extent that additional loans
are identified as nonperforming in future periods, operating results will
continue to be adversely affected.
TROUBLED DEBT RESTRUCTURINGS
Included within nonperforming loans are troubled debt restructurings
("TDR"). TDR is defined in Statements of Financial Accounting Standards No. 15
and No. 114 as a loan for which the Bank has, for economic or legal reasons
related to a borrower's financial difficulties, granted a concession to the
borrower it would not otherwise consider, including modifications of loan
terms to alleviate the burden of the borrower's near-term cash flow
requirements in order to help the borrower to improve its financial condition
and eventual ability to repay the loan. At December 31, 1996, a single TDR
loan represented $4.9 million of the total
78
<PAGE>
$5.0 million of TDRs. This loan is secured by a first deed of trust on
residential real property which, as of December 1996, had an appraised value
of $10.0 million. This loan is currently performing in accordance with its
restructured terms and the property is currently on the market for sale. No
assurance can be given that the property will sell for its appraised value.
OTHER REAL ESTATE OWNED
When appropriate or necessary to protect the Bank's interests, real estate
pledged as collateral on a loan may be acquired by the Bank through
foreclosure or a deed in lieu of foreclosure. Real property acquired in this
manner by the Bank is known as "other real estate owned" ("OREO"). OREO is
carried on the books of the Bank as an asset, at the lesser of the Bank's
recorded investment or the fair value. The Bank periodically revalues OREO
properties and charges other expenses for any further write-downs. OREO
represents an additional category of "nonperforming assets." OREO at December
31, 1996 consisted of two properties totaling $556,000 representing two
undeveloped commercially zoned parcels and one residential parcel. The Bank is
currently marketing the properties for sale. No assurances can be given that
the remaining properties will be sold at 100% of the value at which the
properties were carried by the Bank at December 31, 1996.
LOAN DELINQUENCIES
The following table sets forth the principal balance of loan delinquencies
as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------
30-59 60-89 90 OR
DAYS DAYS MORE DAYS
------ ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate construction and land development....... $ -- $ -- $ --
Commercial loans:
Secured by one to four family residential
properties....................................... -- -- 550
Secured by multifamily residential properties..... -- -- --
Secured by commercial real properties............. 39 41 257
Other--secured and unsecured...................... 539 224 342
Home equity lines of credit.........................
Consumer installment and unsecured loans to
individuals........................................ 6 4 9
------ ------ --------
Total delinquent loans.............................. $ 584 $ 269 $ 1,158
====== ====== ========
Delinquent loans as a percentage of loans
receivable......................................... 0.9% 0.4% 1.9%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
-------------------------- -------------------------
30-59 60-89 90 OR 30-59 60-89 90 OR
DAYS DAYS MORE DAYS DAYS DAYS MORE DAYS
------ ------ ---------- ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate construction
and land development..... $ -- $ -- $ -- $ 189 $ -- $ --
Commercial loans:
Secured by one to four
family residential
properties............. -- -- 576 336 108 683
Secured by multifamily
residential properties. -- -- -- -- -- 365
Secured by commercial
real properties........ -- 129 -- -- 621 1,340
Other--secured and
unsecured.............. 100 84 22 1,166 1,572 1,965
Home equity lines of
credit................... 74 -- 189 349 38 580
Consumer installment and
unsecured loans to
individuals.............. 43 31 7 437 140 --
------ ------ ------ ------ ------ ------
Total delinquent loans.... $ 217 $ 244 $ 794 $2,477 $2,479 $4,933
====== ====== ====== ====== ====== ======
Delinquent loans as a
percentage of loans
receivable............... 0.3% 0.3% 1.0% 2.0% 2.0% 4.0%
</TABLE>
79
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The Bank maintains an allowance for credit losses to provide for potential
losses in the loan portfolio. Additions to the allowance are made by charges
to operating expenses in the form of a provision for credit losses. All loans
which are judged to be uncollectible are charged against the allowance while
recoveries are credited to the allowance. The Bank has a process by which it
reviews and manages the credit quality of the loan portfolio. The ongoing
credit control process includes a stringent risk rating system, enhanced
underwriting criteria, early identification of problem credits, regular
monitoring of any classified assets graded as "criticized" by the Bank's
internal grading system and an independent outside loan review process. The
loan approval process is also tied to the risk rating system. The Classified
Asset Committee ("CAC") meets on a monthly basis to review, monitor and take
corrective action upon all criticized assets and review the adequacy of the
allowance for credit losses. The results of the CAC's meetings are reviewed by
the officers and directors loan committees monthly.
The calculation of the adequacy of the allowance for credit losses is based
on a variety of factors, including loan classifications and underlying cash
flow and collateral values. On a quarterly basis, management engages an
outside loan review firm to augment the preparation of the analysis of the
allowance for credit losses which utilizes both a migration factor and
specific loss reserves to determine the level necessary to allow for potential
credit losses. Migration analysis is a method by which specific charge-offs
are related to the prior life of the same loan compared to the total loan
pools in which the loan was graded. This method allows for management to use
historical trends that are relative to the Bank's portfolio rather than use
outside factors that may not take into consideration trends relative to the
specific loan portfolio. In addition, this analysis takes into consideration
other trends that are qualitative relative to the Bank's marketplace,
demographic trends, amount and trends in nonperforming assets and
concentration factors.
The Board of Directors reviews the adequacy of the allowance for credit
losses on a quarterly basis. Management utilizes its judgement in conjunction
with the analysis prepared by the outside loan review firm to determine the
provision for credit losses and establish the allowance for credit losses. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for credit losses. Such
agencies may require the Bank to recognize additions to the allowance based
upon their judgement of the information available to them at the time of their
examination. Following the OCC's March 1996 examination of the Bank, the OCC
accepted the Bank's allowance for credit losses.
80
<PAGE>
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
The following table sets forth information regarding the activity in the
Bank's accounting for credit losses for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 3,805 $ 3,063 $ 6,697
Loans charged-off:
Real estate construction and land development...... -- -- 45
Commercial loans:
Secured by one to four family residential
properties...................................... 9 120 2,215
Secured by multifamily residential properties.... -- -- 702
Secured by commercial real properties............ -- -- 1,407
Other -- secured and unsecured................... 1,183 1,913 6,781
Home equity lines of credit........................ -- -- 257
Consumer installment and unsecured loans to
individuals....................................... 108 599 2,810
------- ------- --------
Total loan charge-offs......................... 1,300 2,632 14,217
Recoveries of loans previously charged-off:
Real estate construction and land development...... -- 200 --
Commercial loans:
Secured by one to four family residential
properties...................................... 26 11 288
Other -- secured and unsecured................... 398 588 2,205
Home equity lines of credit........................ -- -- 38
Consumer installment and unsecured loans to
individuals....................................... 40 268 722
------- ------- --------
Total recoveries of loans previously charged-
off........................................... 464 1,067 3,253
Net loan charge-offs............................... 836 1,565 10,964
Provision for credit losses........................ -- 2,307 7,330
------- ------- --------
Balance at end of period........................... $ 2,969 $ 3,805 $ 3,063
======= ======= ========
Allowance for credit losses as a percent of annual
net loan
charge-offs during the period..................... 228.38% 243.13% 27.94%
Provision for credit losses as a percent of net
loan
charge-offs during the period..................... -- 147.41% 66.86%
Net loan charge-offs as a percent of average loans
receivable
during the period................................. 1.19% 1.63% 7.83%
Recoveries of loans previously charged-off as a
percent of loans
charged-off in the previous year.................. 17.6% 7.50% 133.60%
</TABLE>
LOAN CHARGE-OFFS AND RECOVERIES
Management regularly monitors the loan portfolio in order to promptly
identify loans that may become nonperforming and conducts an ongoing
evaluation of the Bank's exposure to potential losses arising from such loans,
as discussed above. Loan losses are fully or partially charged against the
allowance for credit losses when, in management's judgment, the full
collectibility of a loan's principal is in doubt. However, there is no precise
method of predicting specific losses which ultimately may be charged against
the allowance in future periods.
Loan charge-offs for the year ended December 31, 1996 were $1.3 million,
primarily related to two loans in the commercial--other secured and unsecured
portfolio pertaining to the international division and purchased lease
financing contracts.
Loan charge-offs for the year ended December 31, 1995 of $2.6 million
included $1.7 million for loans purchased in 1993 from the FDIC ("FDIC Loans")
and $700,000 for loans generated by the international division. This decrease
from 1994 was predominantly the consequence of declining loan balances from
the sale of loans.
81
<PAGE>
Charge-offs for the year ended December 31, 1994 of $14.2 million were
primarily attributable to $6.0 million of charge-offs related to the portfolio
of loans sold in February 1995. These loans had an outstanding principal
balance of $13.5 million and were identified as criticized and/or
nonperforming. In addition, charge-offs related to the FDIC Loans which were
not subsequently sold totaled $3.3 million. Charge-offs during 1994 affecting
the Bank's commercial--other secured and unsecured loan portfolio of $6.8
million were comprised of $4.0 million of loans sold in February 1995, $1.7
million of business banking and entertainment related lending and $1.1 million
of FDIC Loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Provision for Credit Losses."
Recoveries of loans previously charged-off amounted to $464,000 for the year
ended December 31, 1996 and were primarily the result of recoveries related to
the FDIC Loans and to business banking and entertainment related lending. The
majority of these loans were grouped in the commercial--other secured and
unsecured category.
Recoveries of loans previously charged-off for the year ended December 31,
1995 of $1.1 million included $700,000 of business banking and entertainment
related lending and $150,000 of FDIC Loans. Recoveries pertaining to the
commercial--other secured and unsecured loan portfolio included $400,000 of
business banking and entertainment related lending and $100,000 of FDIC Loans.
Recoveries of loans previously charged-off for the year ended December 31,
1994 of $3.3 million included $750,000 representing the proceeds of loans sold
which were previously charged-off, $1.2 million of entertainment related
loans, $900,000 of business banking and consumer loans and $350,000 of FDIC
Loans. Recoveries during 1994 pertaining to the commercial--other secured and
unsecured portfolio included $1.1 million of business banking and
entertainment related loans and $600,000 of loans sold in 1994 previously
charged-off.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
Management believes based on its periodic analysis that the allowance for
credit losses at December 31, 1996 was adequate to absorb estimated losses in
the existing portfolio, including commitments under commercial and standby
letters of credit. However, no assurance can be given on how continued
weaknesses in the real estate market or future changes in economic conditions
might affect the Bank's principal market area and may result in increased
losses in the Bank's loan portfolio.
The allocation of the allowance for credit losses to specific loan
categories presented below should not be interpreted as an indication that
loan charge-offs will occur in these amounts or proportions, or as an
indication of future charge-off trends. In addition, the portion of the
allowance allocated to each loan category does not represent the total amount
available for future losses that may occur within such categories, since the
total allowance is applicable to the entire portfolio. Consistent with the
Bank's recent charge-off experience, it is anticipated that the major
component of future charge-offs will be attributed to the commercial--other
secured and unsecured loan portfolio. However, no assurance can be made that
actual charge-offs will occur consistent with historical trends or in
accordance with the allocation of allowance for credit losses presented below.
82
<PAGE>
The Bank's current practice is to make specific allocations of the allowance
for credit losses to criticized and classified loans, and unspecified
allocations to each loan category based on management's risk assessment. The
following table presents the composition of the Bank's allocation of the
allowance for credit losses to specific loan categories designated by
management for this purpose for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate construction and land development....... $ 42 $ 11 $ 17
Commercial loans:
Secured by one to four family residential
properties....................................... 479 205 77
Secured by multifamily residential properties..... 41 25 51
Secured by commercial real properties............. 590 454 674
Other -- secured and unsecured.................... 1,642 2,521 1,645
Home equity lines of credit......................... 13 64 18
Consumer installment and unsecured loans to
individuals........................................ 161 523 578
------- ------- -------
Allowance allocable to loans receivable............. 2,968 3,803 3,060
Commitments to extend credit under standby and
commercial letters of credit....................... 1 2 3
------- ------- -------
Total allowance for credit losses............... $ 2,969 $ 3,805 $ 3,063
======= ======= =======
Allowance for credit losses allocable as a percent
of loans receivable................................ 4.75% 4.64% 2.66%
</TABLE>
INDUSTRY CONCENTRATIONS OF LOANS AND OTHER RISK ELEMENTS
The following table presents information about the Company's loans
outstanding to entertainment- related customers at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Entertainment industry-related loans(1):
Loans for single productions of motion picture
and television feature films................. $ -- $ 1,739 $ 5,662
Other loans to entertainment-related
enterprises, such as television and film
production or distribution................... 1,158 3,020 4,814
Loans to individuals involved primarily in the
entertainment industry....................... 2,516 1,663 5,633
Loans to business management, legal and
accounting firms, including their principals
and employees, serving primarily the
entertainment industry....................... 2,791 2,930 5,048
------- ------- --------
Total entertainment industry-related
loans(2)................................... $ 6,465 $ 9,352 $ 21,157
======= ======= ========
Percent of loans receivable................. 10.3% 11.4% 18.4%
</TABLE>
- --------
(1) Included are loans secured by liens on residential and commercial real
property amounting to $3.0 million, $1.2 million and $1.3 million at
December 31, 1996, 1995 and 1994, respectively.
(2) Includes nonperforming loans of $400,000 at December 31, 1995.
In addition to the Bank's concentration in loans secured by real estate, the
Bank is a provider of banking services to the entertainment industry in
Southern California. Management believes that the varying nature of customers
represented by the composition of loans within this group indicates reasonable
diversification. In addition, loans for the production of independently
produced motion picture and television feature films are supported, during
production, by performance bonds from highly rated insurers and either
distribution commitments from major studios or, in the case of smaller
studios, standby letters of credit from large commercial banks. Management
therefore believes that this concentration does not represent an undue
concentration of credit risk.
83
<PAGE>
INVESTMENT PORTFOLIO
In order to maintain a reserve of readily saleable assets to meet the Bank's
liquidity and loan requirements, the Bank purchases United States government
and agency securities and other investments. In addition, sales of "Federal
funds" (short-term loans to other banks) are regularly utilized. Placement of
funds in certificates of deposit with other financial institutions may be made
as alternative investments pending utilization of funds for loans or other
purposes.
Securities may be pledged to meet security requirements imposed as
collateral for retail (customer) repurchase agreements, FRB discount lines and
other deposits. At December 31, 1996, the carrying values of securities
pledged were $4.0 million.
At December 31, 1996, the Bank's investment portfolio consisted of U.S.
government and agency securities, mortgage-backed securities including CMOs,
and municipal securities. The Bank's policy is to stagger the maturities of
its investments to meet overall liquidity requirements of the Bank. The Bank's
current policy is to invest only in securities with maturities of generally
less than ten years.
ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES
AND DEBT SECURITIES
The following tables summarize the amounts and distribution of the Bank's
investment securities as of the dates indicated and the weighted average yield
as of December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
------------------------ --------------- ---------------
WEIGHTED
BOOK MARKET AVERAGE BOOK MARKET BOOK MARKET
VALUE VALUE YIELD VALUE VALUE VALUE VALUE
------- ------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Securities held-to-
maturity:
U.S. government and
agency securities:
One to five years...... $14,395 $14,355 6.67% -- -- -- --
======= ======= ==== ======= ======= ======= =======
Securities available-
for-sale:
U.S. government and
agency securities:
Within one year........ $ -- $ -- -- $ 4,013 $ 4,009 $12,000 $11,949
One to five years...... 1,000 1,004 6.05% 6,798 6,749 9,043 8,480
Over five years........ -- -- -- -- -- 11,151 10,586
------- ------- ---- ------- ------- ------- -------
Total U.S. government
and agency
securities........... $ 1,000 $ 1,004 6.05% $10,811 $10,758 $32,194 $31,015
------- ------- ---- ------- ------- ------- -------
Mortgage-backed
securities:
Within one year........ -- -- -- -- -- -- --
One to five years...... -- -- -- -- -- -- --
Over five years........ 3,079 2,999 5.73% 6,002 5,971 7,362 7,109
------- ------- ---- ------- ------- ------- -------
Total mortgage-backed
securities........... 3,079 2,999 5.73% 6,002 5,971 7,362 7,109
------- ------- ---- ------- ------- ------- -------
CMO and REMICS:
Within one year........ -- -- -- -- -- -- --
One to five years...... -- -- -- -- -- 2,042 1,952
Over five years........ -- -- -- 3,443 3,373 22,843 21,188
------- ------- ---- ------- ------- ------- -------
Total CMO and Remics.. -- -- -- 3,443 3,373 24,885 23,140
------- ------- ---- ------- ------- ------- -------
FRB stock:
Over five years........ 233 233 6.00% 315 315 573 573
Municipal securities:
Over five years........ -- -- -- -- -- 99 84
Interest rate swap..... -- -- -- -- -- -- 135
------- ------- ---- ------- ------- ------- -------
$ 4,312 $ 4,236 5.82% $20,571 $20,417 $65,113 $62,056
======= ======= ==== ======= ======= ======= =======
</TABLE>
84
<PAGE>
Actual maturities may differ from contractual maturities to the extent that
borrowers have the right to call or repay obligations with or without call or
repayment penalties. As of December, 1996, the only securities held by the
Bank where the aggregate book value of the Bank's investment in securities of
a single issuer exceeded ten percent (10%) of the Bank's shareholders' equity
were issued by U.S. government agencies.
DEPOSITS
Deposits are the Bank's primary source of funds. During the year ended
December, 1996, the Bank had an average deposit mix of 39% in time deposits,
26% in interest-bearing demand, money market and savings deposits and 35% in
noninterest-bearing demand deposits. The Bank's net interest income is
enhanced by its percentage of noninterest-bearing deposits.
The Bank's deposits are obtained from a cross section of the communities it
serves. No material portion of the Bank's deposits has been obtained from or
is dependent upon any one person or industry. The Bank's business is not
seasonal in nature. The Bank accepts deposits in excess of $100,000 from
customers. Those deposits are priced to remain competitive. The Bank is not
dependent upon funds from sources outside the United States.
The following table summarizes the distribution of average deposits for the
periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- -------------- --------------
AVERAGE % OF AVERAGE % OF AVERAGE % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits:
Real estate title and escrow
company customers........... $ 9,280 9% $ 10,932 8% $ 18,949 9%
All other noninterest-bearing
demand...................... 27,238 26% 41,313 31% 58,496 28%
Interest-bearing demand, money
market and savings............ 27,470 26% 36,342 27% 49,345 23%
Time certificates of deposit:
Money desk operation......... 27,014 26% 33,806 25% 74,657 35%
All other:
$100,000 or more........... 5,302 5% 6,506 5% 6,141 3%
Under $100,000............. 7,814 8% 5,318 4% 5,167 2%
-------- --- -------- --- -------- ---
Total time certificates of
deposit................... 40,130 39% 45,630 34% 85,965 40%
-------- --- -------- --- -------- ---
Total deposits............. $104,118 100% $134,217 100% $212,755 100%
======== === ======== === ======== ===
</TABLE>
As indicated above, the Bank experienced a 22.4% decline in average total
deposits for the year ended December 31, 1996 from average total deposits
during the year ended December 31, 1995 and a 37% decline during the year
ended December 31, 1995 from the same period in 1994. The decline in deposits
occurred throughout all the deposit categories as the mix of deposits for the
years ended December 31, 1996 and 1995, did not significantly change from the
year ended December 31, 1994 except for the decrease in money desk operations,
which was consistent with management's restructuring plan.
The Bank's wholesale institutional funds acquisition operation ("money
desk") was established in June 1990. The money desk solicits time certificates
of deposit from institutional investors nationwide, including other banks,
savings and loans, credit unions, trust companies, and pension funds beyond
the Bank's primary market area. Although management believed that deposits
gathered through the money desk are less costly and provide
85
<PAGE>
greater capacity for overall deposit growth than brokered deposits, the rates
paid on certificates of deposits gathered through this vehicle are higher than
those offered in the local market. At December 31, 1996, money desk deposits
totaled $27.3 million or 26.3% of total deposits. This represents a 15.5% and
54.3% decrease, respectively, from levels at December 31, 1995 and 1994 of
$32.3 million and $59.8 million, respectively.
The Bank's customers are principally commercial in nature and attracted
primarily on the basis of personal relationships and service quality. A
portion of those customers maintain deposit accounts having balances
significantly in excess of current federal deposit insurance limits. At
December 31, 1996, 1995 and 1994, 41.7%, 45.1% and 40.9%, respectively, of
total deposits, excluding time certificates of deposit attributable to the
money desk, were held in accounts with balances of $100,000 or more.
While time certificates of deposit in the aggregate do not exhibit the daily
volatility that characterizes commercial customers' noninterest-bearing demand
deposits, the stability of time certificates of deposit is dependent, in
significant part, on such depositors' perceptions of the Bank's financial
strength. Management believes that the Bank's ability to compete for potential
customers' deposits has been hampered to some extent by concerns arising from
the Bank's reported net losses.
TIME DEPOSITS OF $100,000 OR MORE
The following table indicates the maturity schedule of the Bank's
certificates of deposit of $100,000 or more as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------
MONEY ALL
DESK OTHER TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Aggregate maturities of time certificates of deposit
In three months or less.............................. $ 206 $ 5,390 $ 5,596
After three months but within six months........... 300 667 967
After six months but within twelve months.......... 1,335 803 2,138
After twelve months................................ 513 -- 513
------- ------- -------
Total time certificates of deposit of $100,000 or
more............................................ $ 2,354 $ 6,860 $ 9,214
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
-------------------- ---------------------
MONEY ALL MONEY ALL
DESK OTHER TOTAL DESK OTHER TOTAL
------ ------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Aggregate maturities of time
certificates of deposit
In three months or less......... $ 400 $4,196 $4,596 $1,300 $4,358 $ 5,658
After three months but within
six months..................... 300 958 1,258 400 1,902 2,302
After six months but within
twelve months.................. 1,392 900 2,292 2,231 1,770 4,001
After twelve months............. 405 0 405 -- 300 300
------ ------ ------ ------ ------ -------
Total time certificates of
deposit of $100,000 or more.. $2,497 $6,054 $8,551 $3,931 $8,330 $12,261
====== ====== ====== ====== ====== =======
</TABLE>
As indicated in the table above, time certificates of deposit of $100,000 or
more from money desk operations represented a less significant source of
funding at December 31, 1996 than at December 31, 1995. In general, deposits
of more than $100,000 are considered to be more volatile than fully insured
deposits in denominations of less than $100,000. At December 31, 1996, 22.7%
of total time certificates of deposit were represented by accounts
individually in excess of $100,000 as compared to 18.2% and 16.1% at December
31, 1995 and 1994.
86
<PAGE>
REPURCHASE AGREEMENTS
The Bank has borrowed funds from investment banking firms (dealers) and
customers pursuant to sales of securities under repurchase agreements. Those
repurchase agreements provide for the Bank's sale of investment securities to
dealers or customers with simultaneous agreement to repurchase identical
securities on specified dates at specified prices. The initial price paid to
the Bank under such wholesale (dealer) and retail (customer) repurchase
agreements is less than the fair market value of the investment securities
sold, and the Bank may be required to pledge or deliver additional securities
if the fair market value of the investment securities sold declines below the
price initially paid to the Bank for those securities. Borrowings under
repurchase agreements are collateralized by U.S. Treasury or government agency
securities and mortgage pass-through certificates guaranteed or issued by the
Government National Mortgage Corporation, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation.
The Bank's borrowings under wholesale (dealer) repurchase agreements have
not represented a significant source of liquidity. However, there remain
market and credit risks associated with repurchase agreements. In the event of
sudden short-term market interest rate increases, the costs of this funding
source could increase concurrent with a decline in the fair value of the
underlying investment securities. As a result, the Bank would be required to
deliver additional securities, thereby reducing the amount of investment
securities otherwise available for collateralized borrowings.
Wholesale (dealer) repurchase agreements involve credit risk to the extent
that the fair value of underlying investment securities exceeds the amount
advanced to the Bank under the related repurchase agreement. Securities
subject to such repurchase agreements are held in the name of the Bank by the
dealers who arrange the transactions. In the event the dealer defaults and the
Bank is unable to obtain the collateralizing investment securities, the Bank's
risk of loss is the amount of any such excess fair market value. The Bank's
wholesale (dealer) repurchase agreements are primarily overnight transactions.
As a result, management believes that the credit risks associated with this
funding source are limited.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The following table summarizes securities under agreements to repurchase
along with weighted average interest rate, maturity and average and maximum
balance outstanding for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance......................................... $ -- $ 4,497 $ 12,572
Weighted average interest rate.................. -- % 2.18% 2.47%
Weighted average maturity (days)................ -- 7 5
Average balance for the period.................. $ 1,140 $ 4,093 $ 10,685
Weighted average interest rate for the period... 2.20% 2.61% 2.96%
Maximum balance outstanding at any month-end
during the period.............................. $ 1,546 $ 7,031 $ 15,127
</TABLE>
OFF-BALANCE-SHEET CREDIT COMMITMENTS AND CONTINGENT OBLIGATIONS
The Bank is a party to financial instruments with off-balance-sheet credit
risk in the normal course of business to meet the financing needs of its
customers. In addition to undisbursed commitments to extend credit under loan
facilities, these instruments include conditional obligations under standby
and commercial letters of credit. The Bank's exposure to credit loss in the
event of nonperformance by customers is represented by the contractual amount
of the instruments.
Standby letters of credit are conditional commitments issued by the Bank to
secure the financial performance of a customer to a third party and are
primarily issued to support private borrowing arrangements.
87
<PAGE>
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The Bank uses the
same credit underwriting policies in accepting such contingent obligations as
it does for loan facilities. When deemed necessary, the Bank holds appropriate
collateral supporting those commitments. The nature of collateral obtained
varies and may include deposits held in financial institutions and real
properties.
Management does not anticipate any material losses as a result of
commitments under letters of credit. A portion of the allowance for credit
losses has been allocated to these contingent obligations. Losses, if any, are
charged against the allowance for credit losses. At December 31, 1996 and
1995, standby letters of credit amounted to $175,000 and $413,000,
respectively, and there were no commercial letters of credit outstanding.
Undisbursed commitments under revocable and irrevocable loan facilities
amounted to $7.9 million and $11.6 million at December 31, 1996 and 1995,
respectively. Many of these commitments are expected to expire without being
drawn upon and, as such, the total commitment amounts do not necessarily
represent future cash requirements.
EMPLOYEES
As of December 31, 1996, the Company had 5 officers but no employees while
the Bank had 44 full-time equivalent employees including 3 of the Company's
officers. The Company and the Bank believe that the Bank's employee relations
are satisfactory.
PROPERTIES
The Bank leases space in an office building at 1840 Century Park East, Los
Angeles, California. As of December 31, 1995, the Bank entered into the Lease
Restructuring Agreement with its landlord which restructured the Bank's future
obligations under its then existing leases. As a result, the Bank reduced its
leased space from approximately 42,400 square feet to 23,883 square feet and
decreased the effective rent per square foot from approximately $4.00 to $2.33
or $55,666 per month for the period November 1, 1995 to October 31, 2000. The
effective rent per square foot for the period November 1, 2000 to October 31,
2004 will be $2.83 per square foot or $67,607 per month. The Lease
Restructuring Agreement provides that the lease obligation will expire on
October 31, 2004. The rent is subject to annual adjustments for increases in
property taxes and operating costs.
In connection with the Bank's execution of the Lease Restructuring
Agreement, the Company issued to its landlord the Warrant. See "Risk Factors--
Requirement of Shareholder Approval of Reverse Stock Split." In addition, the
Company granted the landlord certain registration rights with respect to
shares of capital stock subject to the Warrant. See "Description of Capital
Stock--Registration Rights."
The Company does not directly own or lease any property. Its administrative
offices are located at the Bank's headquarters at 1840 Century Park East, Los
Angeles, California 90067.
LEGAL PROCEEDINGS
The Company is a party to routine litigation involving various aspects of
its business. As of the date of this Prospectus, except as described below,
none of the pending litigation, in the opinion of management, will have a
material adverse impact on the consolidated financial condition of the
Company.
Derivative and Class Action
On or about October 7, 1992, an action (the "Class Action") was commenced by
two of the Company's shareholders, Messrs. Berlin and Zlotnick, in the United
States District Court for the Eastern District of Pennsylvania and later
transferred to the United States District Court of California (the "Court"),
against the Company and the following former and current directors, officers
or employees of the Company: Messrs. Ladd, Thornburg, Hughes, Tomich, Bell,
Guldeman, Smith, Brewer, Wolfen, Winner, Thomson, Hickey, Grahm, and Domyan
and Ms. Romero and Ms. Thornton.
88
<PAGE>
The complaint was a derivative and class action case, which purported to
assert various violations of the Securities Exchange Act of 1934 and state
common law claims for violation of the directors' alleged duty of candor,
common law negligent misrepresentation and breach of fiduciary duty, and waste
of corporate assets, on behalf of the Company and a class of purchasers of the
Company's stock during the period October 7, 1989 through July 12, 1994 and
persons who owned shares of the Company on the record dates and who were
eligible to vote at the 1990, 1991 and 1992 Annual Meetings of Shareholders of
the Company. The plaintiffs sought declaratory and injunctive relief,
consequential and punitive damages in an unspecified amount and attorneys'
fees.
On December 22, 1994, a stipulation of settlement (the "Stipulation") was
entered by the Court. According to the Stipulation, all claims in the action
were settled, discharged and dismissed with prejudice. The monetary portion of
the settlement (approximately $1.6 million) was funded solely by the Company's
insurer. None of the defendants were required to pay any portion of the
settlement. In addition, the Company was required to issue 169,800 warrants to
the class of plaintiffs to purchase shares of Common Stock of the Company. The
exercise price of the warrants is $3.55 ($32.27 giving effect to the Reverse
Stock Split). The warrants are exercisable during a three-year period which
commenced June 2, 1996. Also, pursuant to the Court's order, in the two-year
period after the approval of the proposed settlement, which approval was
obtained in June 1996, plaintiffs will have the right to two new directors on
the Company's board of directors. One new member was scheduled to be chosen
during the first year after the effective date of the settlement, June 2, 1995
(the "Effective Date"). A second new member would be chosen during the second
year after the Effective Date. Both of the new directors would be independent
of the present or former directors of the Company. Robert E. Gipson, a Company
candidate, was approved by the plaintiff's counsel. The Company plans to
continue to seek (and will consider candidates suggested by plaintiff's
counsel) qualified candidates to serve as directors of the Company. Upon the
approval of one more candidate by the plaintiff's counsel, the Company's
obligation under the Stipulation to add two (2) new members to the Board of
Directors will be satisfied.
Other Litigation
In February 1995, counterclaims were filed against the Bank in an action
commenced by British & Commonwealth Merchant Bank ("BCMB"), as agent for
itself and the Bank, in England against Lloyd's Underwriters and certain other
parties (collectively, "Lloyd's"). The Bank and BCMB claimed that Lloyd's owed
them a further $120,659 of insurance proceeds relating to a claim filed by
BCMB (for itself and the Bank) for approximately $7.8 million under policies
insuring repayment of a loan from the Bank and BCMB to Performance Guarantees,
Inc. for production of a film entitled "Barr Sinister." On or about November
1991, Lloyd's paid approximately $7.8 million in insurance proceeds, which
Lloyd's sought to recover a half each from the Bank and BCMB. In its
counterclaim, Lloyd's contended that the Leading Underwriter lacked authority
to issue the insurance policies and endorsements on behalf of all of the
insurers under which payment was made and secondly, that material
misrepresentations were made to the Leading Underwriter as to the likely
budget for the film and that if the Leading Underwriter had known the true
position he would not have accepted the film under the relevant policies.
Lloyd's position, therefore, was that such payment should be returned to
Lloyd's.
The Bank reached an agreement with Lloyd's for the settlement of the Bank's
claim against Lloyd's and Lloyd's counterclaims against the Bank. The Bank
entered into the settlement not as a result of the Bank's conclusions as to
the merits of Lloyd's counterclaims against the Bank, but solely as a matter
of resolving those counterclaims in connection with the Bank's effort to
recapitalize.
The settlement was originally conditioned on the recapitalization of the
Bank on or before March 31, 1997, and, in light of that condition, "tolling"
agreements were entered into with various third parties to preserve the Bank's
ability to institute, if necessary, further proceedings against those third
parties for potential losses that may have arisen from the continuation of
Lloyd's counterclaims, if the settlement had not been concluded. The
settlement agreement originally provided that the Bank would pay $500,000 to
Lloyd's on the earlier of the seventh day following the completion of the
Bank's recapitalization or on March 31, 1997 and an additional $500,000 on the
second anniversary of that payment. The agreement also provided that BCMB will
release the Bank from any claim that BCMB might have against the bank should
BCMB suffer loss in connection with Lloyd's counterclaims against BCMB in the
continuing litigation. Prior to December 31, 1996, the Company and all
affected parties agreed to a single payment of the settlement on a discounted
lump sum basis, which payment was made, concluding and completing the
settlement.
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REGULATION
SUPERVISION AND REGULATION
The Company
The Company, as a registered bank holding company, is subject to regulation
under the BHC Act, and as such, is required to file with the Reserve Bank
quarterly and annual reports and such additional information as the Reserve
Bank may require pursuant to the BHC Act. The Reserve Bank may conduct
examinations of the Company and its subsidiaries. As a result of such an
examination of the Company by the Reserve Bank in 1995, the Company entered
into the MOU with the Reserve Bank on October 26, 1995. The MOU imposes
certain affirmative obligations and material restrictions on the Company which
will most likely impede asset growth and preclude dividend payments in the
foreseeable future. As a result of its examination by the Reserve Bank, the
Company is required to have new appointments of senior executive officers and
directors reviewed by the Reserve Bank prior to their appointment to such a
position. See "The Company--Regulatory Agreements."
The Reserve Bank may require that the Company terminate an activity or
control of or liquidate or divest certain nonbank subsidiaries or affiliates
when the Reserve Bank believes the activity or the control of the subsidiary
or affiliate constitutes a serious risk to the financial safety, soundness or
stability of any of its banking subsidiaries and is inconsistent with sound
banking principles or the purposes of the BHC Act or the Financial
Institutions Supervisory Act of 1966, as amended. The Reserve Bank also has
the authority to regulate provisions of certain bank holding company debt,
including authority to impose interest ceilings and reserve requirements on
such debt. Under certain circumstances, the Company must file written notice
and obtain approval from the Reserve Bank prior to purchasing or redeeming its
equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "Regulation--Supervision and Regulation--Capital Standards."
The Company is required to obtain the prior approval of the Reserve Bank for
the acquisition of more than five percent (5%) of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank
or bank holding company. Prior approval of the Reserve Bank is also required
for the merger or consolidation of the Company with another bank holding
company.
The Company is prohibited by the BHC Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than five percent (5%) of the outstanding voting shares of any company
that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks or furnishing services to its subsidiaries. However, the Company may,
subject to the prior approval of the Reserve Bank, engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Reserve Bank
to be so closely related to banking or managing or controlling banks as to be
a proper incident thereto. In making any such determination, the Reserve Bank
is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Reserve Bank is also empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern. In 1996, the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 (the "Budget Act")
eliminated the requirement that bank holding companies seek Federal Reserve
Board approval before engaging de novo in permissible nonbanking activities
listed in Regulation Y, which governs bank holding companies, if the holding
company and its lead depository institution are well-managed and well-
capitalized and certain other criteria specified in the statute are met. For
purposes of determining the capital levels at which a bank holding company
shall be considered "well-capitalized" under this section of the Budget Act
and
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Regulation Y, the FRB adopted as an interim rule, risk-based capital ratios
(on a consolidated basis) that are, with the exception of the leverage ratio
(which is lower), the same as the levels set for determining that a state
member bank is well capitalized under the provisions established under the
prompt corrective action provisions of federal law. See "Business--Supervision
and Regulation--Prompt Corrective Action and Other Enforcement Mechanisms."
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to be an
unsafe and unsound banking practice or a violation of the Federal Reserve
Board's regulations or both. This doctrine has become known as the "source of
strength" doctrine. Although the United States Court of Appeals for the Fifth
Circuit found the Federal Reserve Board's source of strength doctrine invalid
in 1990, stating that the Federal Reserve Board had no authority to assert the
doctrine under the BHC Act, the decision, which is not binding on federal
courts outside the Fifth Circuit, was reversed by the United States Supreme
Court on procedural grounds. The validity of the source of strength doctrine
is likely to continue to be the subject of litigation until definitively
resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California State Banking Department.
Finally, the Company's shares of Common Stock are registered pursuant to the
Exchange Act. Accordingly, the Company is subject to certain rules and
regulations promulgated by the Commission, including, among other things, the
periodic reporting requirements, the proxy solicitations rules and the short-
swing profit rules under Sections 13, 14 and 16 of the Exchange Act,
respectively.
The Bank
The Bank, as a national banking association, is subject to primary
supervision, periodic examination and regulation by the OCC. If, as a result
of an examination of a bank, the OCC should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of the Bank's operations are unsatisfactory or
that the Bank or its management is violating or has violated any law or
regulation, various remedies are available to the OCC. Such remedies include
the power to enjoin "unsafe or unsound" practices, to require affirmative
action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to direct an
increase in capital, to restrict the growth of the Bank, to assess civil
monetary penalties, and to remove officers and directors. The FDIC has similar
enforcement authority, in addition to its authority to terminate the Bank's
deposit insurance, in the absence of action by the OCC and upon a finding that
a bank is in an unsafe or unsound condition, is engaging in unsafe or unsound
activities, or that its conduct poses a risk to the deposit insurance fund or
may prejudice the interest of its depositors. The Bank entered into a Formal
Agreement with the OCC dated December 14, 1995, which imposes certain
affirmative obligations and material restrictions on the Bank. See
"Management's Discussion and Analysis Of Financial Condition and Results Of
Operations--Capital Resources" and "The Company--Regulatory Agreements."
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "Premiums for Deposit Insurance." The Bank is also
subject to certain regulations of the Federal Reserve Board and applicable
provisions of California law, insofar as they do not conflict with or are not
preempted by federal banking law.
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Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements and disclosure
obligations to depositors and borrowers.
Capital Standards
The Federal Reserve Board, the OCC and the FDIC have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which include off balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of, among other
things, (i) common stockholders' equity capital (includes common stock and
related surplus, and undivided profits); (ii) noncumulative perpetual
preferred stock (cumulative perpetual preferred stock for bank holding
companies), including any related surplus; and (iii) minority interests in
certain subsidiaries, less most intangible assets. Tier 2 capital may consist
of: (i) a limited amount of the allowance for possible loan and lease losses;
(ii) cumulative perpetual preferred stock; (iii) perpetual preferred stock
(and any related surplus); (iv) term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. The federal banking agencies require a minimum ratio
of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio
of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, the Federal Reserve Board and the
OCC require banking organizations to maintain a minimum amount of Tier 1
capital to total assets. For a banking organization rated in the highest of
the five categories used by regulators to rate banking organizations, the
minimum leverage ratio of Tier 1 capital to total assets is 3%. For all
banking organizations not rated in the highest category, the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to
5%. In addition to these uniform risk-based capital guidelines and leverage
ratio that apply across the industry, the regulators have the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
Under the "prompt corrective action" regulations (discussed below)
implemented pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), the Bank will be considered "adequately capitalized"
if it has a ratio of qualifying total capital to risk-weighted assets of 8%,
Tier 1 capital to risk-weighted assets of 4% and a leverage ratio of 4% or
greater. To be considered "well capitalized" the Company and the Bank must
have a ratio of qualifying total capital to risk-weighted assets of 10%, Tier
1 capital to risk-weighted assets of 6% and a leverage ratio of 5% or greater
as well as not be subject to any order or directive. Under certain
circumstances, the Reserve Bank or the OCC may require an "adequately
capitalized" institution to comply with certain mandatory or discretionary
supervisory actions as if the Company or the Bank were undercapitalized. See
"Regulation--Effects of Governmental Policies and Recent Legislation--Federal
Deposit Insurance Corporation Improvement Act of 1991--Prompt Corrective Act."
Although the Company and the Bank are each considered to be adequately
capitalized, in accordance with the Formal Agreement, the Bank must maintain a
Tier 1 risk-based capital ratio of at least 10% and a leverage capital ratio
of at least 6.5%. At December 31, 1996, the Bank's Tier 1 risk-based capital
ratio was 6.95% and the leverage capital ratio was 4.67%, both of which were
not in compliance with the Formal Agreement. A capital plan was filed with the
OCC on February 8, 1996.
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In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank
with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses (ALLL) which, among other
things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the sum
of (a) assets classified loss; (b) 50 percent of assets classified doubtful;
(c) 15 percent of assets classified substandard; and (d) estimated credit
losses on other assets over the upcoming 12 months. This amount is neither a
"floor" nor a "safe harbor" level for an institution's ALLL.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies issued final rules, effective April 1, 1995, which limit the
amount of deferred tax assets that are allowable in computing an institution's
regulatory capital. Deferred tax assets that can be realized for taxes paid in
prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year
of the quarter-end report date, or (ii) ten percent (10%) of Tier 1 capital.
The amount of any deferred tax in excess of this limit would be excluded from
Tier 1 capital and total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance, rather than the extent to which the institution
conducts needs assessments, documents community outreach, activities or
complies with other procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination:
overt evidence of discrimination, evidence of disparate treatment and evidence
of disparate impact.
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In connection with its assessment of CRA performance, the OCC assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." Based on an examination conducted during the third quarter of
1996, the Bank was rated "satisfactory."
Potential and Existing Enforcement Actions
Commercial banking organizations, such as the Bank, and their institution-
affiliated parties, such as the Company, are subject to potential enforcement
actions by the Reserve Bank, the FDIC and the OCC for any unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of
the Bank), the imposition of civil money penalties, the issuance of directives
to increase capital, the issuance of formal and informal agreements, the
issuance of removal and prohibition orders against institution-affiliated
parties and the imposition of restrictions and sanctions under the prompt
corrective action provisions of the FDICIA. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action
against the holding company.
Restrictions on Transfers of Funds to the Company by the Bank
The Company is a legal entity separate and distinct from the Bank. At
present, substantially all of the Company's revenues, including funds
available for the payments of dividends and other operating expenses, depend
upon and will continue to depend upon, the receipt of dividends paid by the
Bank. The Company's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. The prior approval of the OCC is
required if the total of all dividends declared by a national bank in any
calendar year exceeds the bank's net profits for that year combined with its
retained net profits for the preceding two years, less any transfers to
surplus or a fund for the retirement of any preferred stock. At December 31,
1996, the Bank did not have funds available for the payment of cash dividends.
At present, substantially all of the Company's revenues, including funds
available for the payment of dividends and other operating expenses, is, and
will continue to be, primarily dividends paid by the Bank. In addition, under
the 1995 Formal Agreement, the Bank is prohibited from paying cash dividends
without the prior approval of the OCC.
The OCC also has authority to prohibit the Bank from engaging in what, in
the OCC's opinion, constitutes an unsafe or unsound practice in conducting its
business. Depending upon the financial condition of the bank in question and
other factors, it is possible that the OCC could assert that the payment of
dividends or other payments is an unsafe or unsound practice under the
circumstances. Further, the OCC and the Federal Reserve Board have established
guidelines with respect to the maintenance of appropriate levels of capital by
banks or bank holding companies under their jurisdiction. Compliance with the
standards set forth in such guidelines could limit the amount of dividends
which the Bank or the Company may pay. See "Business--Supervision and
Regulation--Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms" and "--Capital Standards" for a discussion of these additional
restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Bank's
capital stock and surplus (as defined by federal regulations) and such secured
loans and investments are limited, in the aggregate, to 20% of the Bank's
capital stock and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions
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involving the Company and other controlling persons of the Bank. Additional
restrictions on transactions with affiliates may be imposed on the Bank under
the prompt corrective action provisions of federal law. See "Supervision and
Regulation--Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms."
Compliance with Environmental Regulation
Management of the Company and its subsidiaries is unaware of any material
effect upon the Company's and the Company's subsidiaries' capital
expenditures, earnings or competitive position as a result of compliance with
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment. Based on current federal, state
and local environmental laws and regulations, the Company does not intend to
make any material capital expenditures for environmental control facilities
for either the remainder of its current fiscal year or its succeeding fiscal
year.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Government Fiscal and Monetary Policies
Banking is a business which depends in large part on rate differentials. In
general, the difference between the interest rate paid by the Bank on its
deposits and its other borrowings and the interest rate received by the Bank
on loans extended to its customers and securities held in the Bank's portfolio
comprise a major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
by its open-market operations in United States Government securities, by
adjusting the required level of reserves for financial institutions subject to
its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact of any future changes in monetary policies cannot be
predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. The
likelihood of any major changes and the impact such changes might have on the
Company are impossible to predict. Certain of the potentially significant
changes which have been enacted, and proposals which have been made recently,
are discussed below. Recent and proposed accounting changes are discussed in
"Business--Recent Accounting Developments."
The following discussion of statutes and regulations is only a summary and
does not purport to be complete. This discussion is qualified in its entirety
by reference to such statutes and regulations. No assurance can be given that
such statutes or regulations will not change in the future.
Federal Deposit Insurance Corporation Improvement Act of 1991
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. Federal law
requires each federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital
ratios. In accordance
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with federal law, each federal banking agency has promulgated regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. An insured depository
institution will be classified in the following categories based, in part, on
the capital measures indicated below:
"Well capitalized" Total risk-based "Adequately capitalized"Total risk-
capital of 10%; Tier 1 risk-based based capital of 8%;Tier 1 risk-based
capital of 6%; and Leverage ratio of capital of 4%; andLeverage ratio of
5%. 4%.
"Undercapitalized"Total risk-based "Significantly undercapitalized" Total
capital less than 8%; Tier 1 risk- risk-based capital less than 6%; Tier
based capital less than 4%; or 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%
"Critically undercapitalized" Tangible
equity to total assets less than 2%.
As of December 31, 1996, the Company and Bank were deemed to be adequately
capitalized based upon their capital ratios, however, the Bank was not in
compliance with the Tier 1 risk-based capital ratio and the leverage capital
ratio requirements of the Formal Agreement. See "The Company--Regulatory
Agreements."
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
Federal law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject
to asset growth restrictions and required to obtain prior regulatory approval
for acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
receiving notice, or is deemed to have notice, that the institution is
undercapitalized. The appropriate federal banking agency cannot accept a
capital plan unless, among other things, it determines that the plan: (i)
specifies: (a) the steps the institution will take to become adequately
capitalized; (b) the levels of capital to be attained during each year in
which the plan will be in effect; (c) how the institution will comply with the
restrictions or requirements then in effect under Section 38 of the FDICIA (12
U.S.C. (S) 1831o); and (d) the types and levels of activities in which the
institution will engage; (ii) is based on realistic assumptions and is likely
to succeed in restoring the depository institution's capital; and (iii) would
not appreciably increase the risk (including credit risk, interest-rate risk,
and other types of risk) to which the institution is exposed. In addition,
each company controlling an undercapitalized depository institution must
guarantee that the institution will comply with the capital plan until the
depository institution has been adequately capitalized on average during each
of four consecutive calendar quarters and must otherwise provide appropriate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly
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undercapitalized institutions if it determines that such action will further
the purpose of the prompt corrective action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of
a receiver or conservator, a forced merger; (ii) restrictions on transactions
with affiliates; (iii) further limitations on interest rates paid on deposits;
(iv) further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by
the holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by
the appropriate federal banking agency. Although the appropriate federal
banking agency has discretion to determine which of the foregoing restrictions
or sanctions it will seek to impose, it is required to: (i) force a sale of
shares or obligations of the bank, or require the bank to be acquired by or
combine with another institution; (ii) impose restrictions on affiliate
transactions and (iii) impose restrictions on rates paid on deposits, unless
it determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in
which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most
importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. See "Supervision and Regulation--Potential Enforcement Actions."
SAFETY AND SOUNDNESS STANDARDS. Effective July 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness, as required by FDICIA. These standards are designed to identify
potential safety-and-soundness concerns and ensure that action is taken to
address those concerns before they pose a risk to the deposit insurance funds.
The standards relate to (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) asset growth; (v) earnings; and (vi) compensation, fee and benefits. If a
federal banking agency determines that an institution fails to meet any of
these standards, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard. In the
event the institution fails to submit an acceptable plan within the time
allowed by the agency or fails in any material respect to implement an
accepted plan, the agency must, by order, require the institution to correct
the deficiency. Effective October 1, 1996, the federal banking agencies
promulgated safety and soundness regulations and accompanying interagency
compliance guidelines on asset quality and earnings standards. These new
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. The
institution should: (i) conduct periodic asset quality reviews to identify
problem assets; (ii) estimate the inherent losses in those assets and
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establish reserves that are sufficient to absorb estimated losses; (iii)
compare problem asset totals to capital; (iv) take appropriate corrective
action to resolve problem assets; (v) consider the size and potential risks of
material asset concentrations; and (vi) provide periodic asset reports with
adequate information for management and the board of directors to assess the
level of asset risk. These new guidelines also set forth standards for
evaluating and monitoring earnings and for ensuring that earnings are
sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE. The FDIC has adopted final regulations
implementing a risk-based premium system required by federal law. On November
14, 1995, the FDIC issued regulations that establish a new assessment rate
schedule ranging from 0 cents per $100 of deposits to 27 cents per $100 of
deposits applicable to members of BIF. To determine the risk-based assessment
for each institution, the FDIC will categorize an institution as well
capitalized, adequately capitalized or undercapitalized based on its capital
ratios using the same standards used by the FDIC for its prompt corrective
action regulations. A well- capitalized institution is generally one that has
at least a 10% total risk-based capital ratio, a 6% Tier 1 risk- based capital
ratio and a 5% Tier 1 leverage capital ratio. An adequately capitalized
institution will generally have at least an 8% total risk-based capital ratio,
a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage capital ratio.
An undercapitalized institution will generally be one that does not meet
either of the above definitions. The FDIC will also assign each institution to
one of three subgroups based upon reviews by the institution's primary federal
or state regulator, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the institution. The
three supervisory categories are: financially sound with only a few minor
weaknesses (Group A), demonstrates weaknesses that could result in significant
deterioration (Group B), and poses a substantial probability of loss (Group
C).
The BIF assessment rates are set forth below for institutions based on their
risk-based assessment categorization.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996*
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized..................................... 0 3 17
Adequately Capitalized............................... 3 10 24
Undercapitalized..................................... 10 24 27
</TABLE>
*Assessment figures are expressed in terms of cents per $100 per deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized the
Savings Association Insurance Fund (SAIF) through a special assessment on
SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis
of the late 1980's. The special thrift SAIF assessment has been set at 65.7
cents per $100 insured by the thrift funds as of March 31, 1995. Effective
January 1, 1997, for the FICO payments, SAIF-insured institutions will pay 3.2
cents per $100 in domestic deposits and BIF-insured institutions, like the
Bank, will pay 0.64 cents per $100 in domestic deposits. Full pro rata sharing
of the FICO interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
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INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain approval under the BHCA to acquire an existing bank located in
another state without regard to state law. A bank holding company is not to be
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding
company if application of such limitation does not discriminate against out-
of-state banks or bank holding companies. An out-of-state bank holding company
may not acquire a bank in existence for less than a minimum length of time
that may be prescribed by state law except that a state may not impose more
than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that state, subject to the same requirements and conditions as for a
merger transaction.
The Interstate Act is likely to increase competition in the Company's market
areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
Under the Interstate Act, the extent of a commercial bank's ability to
branch into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a five-
year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-
state banks in the markets in which the Company operates, although it is
difficult to assess the impact that such increased competition may have on the
Company's operations.
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SHAREHOLDINGS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of this
Prospectus (pre Reverse Stock Split) regarding the beneficial ownership of the
Company's Common Stock by each person known to the Company to be the
beneficial owner of more than five percent (5%) of the outstanding Common
Stock of the Company and by each person who is currently serving as a director
or executive officer of the Company and by all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(1) OF CLASS(1)
---------------- ---------------- -----------
<S> <C> <C>
9830 Investments No. 1, Ltd, a California
limited partnership........................... 287,615 9.3%
Robert E. Gipson............................... 1,000 *
Alan Grahm..................................... 80,993 2.6%
A. Thomas Hickey (2)........................... 13,000 *
Howard P. Ladd................................. 57,827 1.9%
Scott A. Montgomery (3)........................ 4,000 *
Robert E. Thompson............................. 625 *
Joseph W. Kiley III............................ 0 *
All directors and executive officers as a group
(8 persons)................................... 157,445(4) 5.1%
</TABLE>
- --------
* Less than 1%
(1) Under the rules of the SEC, shares not actually outstanding are deemed to
be beneficially owned by an individual if such individual has the right to
acquire the shares within 60 days. Pursuant to such SEC Rules, shares
deemed beneficially owned by virtue of an individual's right to acquire
them are also treated as outstanding when calculating the percent of the
class owned by such individual and when determining the percent owned by
any group in which the individual is included.
(2) Includes 12,000 shares (pre Reverse Stock Split) which may be purchased by
Mr. Hickey upon exercise of a currently exercisable option.
(3) Excludes 200,000 shares (pre Reverse Stock Split) which may be purchased
by Mr. Montgomery upon exercise of an option which becomes exercisable on
June 20, 1997.
(4) Includes 12,000 shares (pre Reverse Stock Split) which may be purchased
upon exercise of currently exercisable options or upon exercise of options
that will become exercisable within 60 days.
The Conrad Company has agreed, subject to certain conditions, to purchase a
minimum of $2.25 million, and a maximum of $4.95 million, of Preferred Stock.
Assuming those conditions are satisfied and $9.0 million of Preferred Stock is
sold in the Public Offering and the Private Offering, if the Conrad Company
purchases 2,045,455 shares (or 225,000 shares after the Reverse Stock Split),
the minimum amount of Preferred Stock it has agreed to purchase, it would own
25% of the outstanding Preferred Stock (or 18.2% of Common Stock on an as
converted basis) and if the Conrad Company purchases 4,500,000 shares (or
495,000 shares after the Reverse Stock Split), the maximum amount of Preferred
Stock it has agreed to purchase, it would own 55% of the outstanding Preferred
Stock (or 40.0% of the Common Stock on an as converted basis).
Wildwood Enterprises has agreed, subject to certain conditions, to purchase
a minimum of $250,000, and a maximum of $550,000, of Preferred Stock. Assuming
those conditions are satisfied and $9.0 million of Preferred Stock is sold in
the Public Offering and the Private Offering, if Wildwood Enterprises
purchases 227,273 shares (or 25,000 shares after the Reverse Stock Split), the
minimum amount of Preferred stock it has agreed to purchase, it would own 2.8%
of the outstanding Preferred Stock (or 2.0% of Common Stock on an as converted
basis) and if Wildwood Enterprises purchases 500,000 shares (or 55,006 shares
after the Reverse Stock Split), the maximum amount of Preferred Stock it has
agreed to purchase, it would own 6.1% of the outstanding Preferred Stock (or
4.4% of the Common Stock on an as converted basis). Mr. Gipson is a member of
the Advisory Committee for the Wildwood Enterprises.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company and
the Bank.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY AND THE BANK
---- --- --------------------------------------
<S> <C> <C>
Robert E. Gipson.... 50 Director
Alan Grahm.......... 74 Director
A. Thomas Hickey.... 56 Director and Secretary
Joseph W. Kiley III. 41 Director, Executive Vice President and Chief Financial Officer
Howard P. Ladd...... 76 Chairman of the Board of Directors; President and Chief
Executive Officer of the Company
Scott A. Montgomery. 55 Director of the Company and the Bank; Executive Vice
President and Chief Administrative Officer of the Company
and President and Chief Executive Officer of the Bank
Robert E. Thomson... 55 Vice Chair of the Board of Directors
Carol A. Ward....... 42 Executive Vice President and Administrator of Operations
of the Bank
</TABLE>
ROBERT E. GIPSON is Principal of the law firm of Gipson Hoffman & Pancione,
A.P.C. and has served in that capacity for more than five years. He has also
been President of Corporate Management Group, Inc., a financial management
company, since 1988. Mr. Gipson was elected a director of the Company and the
Bank by the Board of Directors in October of 1996. Mr. Gipson is a trustee of
Meyers Sheppard Investment Trust.
ALAN GRAHM has served as Chairman of the Board of Trade Zone Connection
(formerly Associated Sales), an import company, for more than five years. He
has also been the owner of Bonny Doon Vineyards since 1981. Mr. Grahm has been
a director of the Company since 1983 and a director of the Bank since 1982.
A. THOMAS HICKEY has been President and Chief Executive Officer of Tea
Garden Products, Inc., a manufacturer and distributor of consumer products,
from 1992 to 1995 and from June 1996 to the present. From November 1995 until
June 1996 Mr. Hickey was a private investor. Mr. Hickey was also Vice Chairman
of Continental Airlines from 1990 to 1992. Mr. Hickey has been a director of
the Company and the Bank since 1991.
JOSEPH W. KILEY III has served as Executive Vice President and Chief
Financial Officer of the Company and the Bank since August 1996. Prior
thereto, from July 1992 to August 1996, he was Executive Vice President and
Chief Financial Officer of Hancock Savings Bank, FSB, in Los Angeles. From
June 1990 to June 1992 Mr. Kiley served as Executive Vice President--
Operations and Chief Financial Officer of Compensation Resource Group, Inc., a
benefits consulting company, in Pasadena, California. Mr. Kiley has been a
director of the Company and the Bank since April 1996.
HOWARD P. LADD serves as Chairman of the Board of Directors of the Company
and the Bank. He has been a director of the Company since 1983 and of the Bank
since 1982. He has also served as President and Chief Executive Officer of the
Company since August 1995. Mr. Ladd was Chairman of the Board of Concord
Technology Development ("Concord Technology"), an information systems company,
from 1991 to 1995. Prior to forming Concord Technology (formerly Concord Media
Systems) in 1991, Mr. Ladd was Chairman of Ladd Electronics since 1989.
SCOTT A. MONTGOMERY has served as President and Chief Executive Officer of
the Bank since November 1995 and as Executive Vice President and Chief
Administrative Officer of the Company since June 1996. Prior thereto, from
September 1990 to September 1994, he was President and Chief Operating Officer
of Cupertino National Bank, Cupertino, California. From September 1994 until
November 1995, Mr. Montgomery was a consultant for various banks. Mr.
Montgomery has also been Vice Chairman of the Board of Tracy Federal Bank
F.S.B., Tracy, California since March 1995. Mr. Montgomery has been a director
of the Company and the Bank since 1995.
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<PAGE>
ROBERT E. THOMSON is serving as of Counsel at Jekel & Howard since August
1996. Mr. Thomson was an Executive Consultant from November 1995 until August
1996. He has been an Executive Consultant to Sterling Forest Corporation
("Sterling"), a real estate development company, since August 1994, and served
as Chairman of the Board and Chief Executive Officer of Sterling from January
1989 to August 1994. Mr. Thomson has served as a director of the Company since
1983 and of the Bank since 1982 and has served as Vice Chairman of the Company
and the Bank since June 1991. He also served as Interim Chief Executive
Officer of the Bank from June to October, 1991 and as Interim President and
Chief Executive Officer of the Bank from August to November 1995.
CAROL WARD has served as Executive Vice President and Administrator of
Operations of the Bank since July 1996. Prior thereto, from January 1996 to
July 1996, she served as a consultant to financial institutions. From November
1993 to January 1996, Ms. Ward served as Vice President and General Auditor,
and as Executive Vice President and Chief Operating Officer of Ventura County
National Bancorp in Oxnard, California. From March 1990 to November 1993 she
was Vice President and Director of Risk Management and Senior Vice President
and General Auditor at Community Bank in Pasadena, California.
DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation, as amended, authorize the issuance
of 10,000,000 shares of no par value Common Stock and 1,000,000 shares of
preferred stock. As of the date of this Prospectus, there were 3,078,146
shares of the Common Stock and no shares of preferred stock issued and
outstanding. At the Annual Meeting of the Company scheduled to occur on May
29, 1997, the shareholders of the Company are being asked to approve the
Restatement to reduce the number of outstanding shares of Common Stock and to
effectuate an 9.09 to 1 reverse stock split. The Restatement will also reflect
the terms of the Preferred Stock to be issued in the Public Offering and the
Private Offering and, if approved, will reflect the reduction in the number of
outstanding shares of Common Stock. Consummation of the Public Offering and
the Private Offering is conditioned upon approval of the Restatement by the
shareholders of the Company.
COMMON STOCK
Holders of Common Stock are entitled to cast one vote for each share held of
record and to cumulate votes for the election of directors, subject to the
preferential rights of any outstanding class of Preferred Stock, to receive
such dividends as may be declared by the Board of Directors out of legally
available funds and to share ratably in any distribution of the Company's
assets after payment of all debts and other liabilities, upon liquidation,
dissolution or winding up of the Company. Common shareholders do not have
preemptive rights or other rights to subscribe for additional shares, and the
Common Stock is not subject to conversion or redemption. The outstanding
shares of Common Stock are, and the shares of Common Stock into which shares
of Preferred Stock to be issued in the Public Offering and the Private
Offering may be converted, will be, upon delivery and payment therefor in
accordance with the terms of the Public Offering and the Private Offering,
fully paid and nonassessable.
PREFERRED STOCK
Under the Company's Articles of Incorporation, the Board of Directors of the
Company has the authority to establish for the 1,000,000 authorized shares of
preferred stock (i) voting rights, if any; (ii) the rate of dividend, the
priority of payment thereof, and the right to cumulation thereof, if any;
(iii) redemption terms and conditions; and (iv) the right of conversion, if
any. No shares of preferred stock are currently outstanding.
The Preferred Stock, upon issuance in the Public Offering and the Private
Offering against full payment of the purchase price therefor, will be fully
paid and nonassessable, and will have the terms as described below. The rights
of holders of shares of Preferred Stock will be subordinate to the rights of
general creditors and there is no sinking fund with respect to the Preferred
Stock nor any other obligation of the Company to redeem or retire the
Preferred Stock. Unless redeemed by the Company or converted, the Preferred
Stock will be perpetual. The Private Purchasers and Standby Purchasers have
certain additional rights with respect to their shares of Preferred Stock. See
"The Private Offering."
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Dividends
The terms of the Preferred Stock provide that dividends may be paid
commencing two years after the Date of Issuance. Holders of shares of
Preferred Stock will be entitled to receive, if, when and as declared by the
Board of Directors of the Company out of assets of the Company legally
available for payment, non-cumulative cash dividends, payable quarterly on the
day of January, April, July, and October in each year, with respect to the
three months then ending, at the rate of 6.5% per share per annum, before any
distribution by way of dividend or otherwise shall be declared or paid upon,
or set apart for, the shares of Common Stock or any other class of shares of
the Company ranking junior to the Preferred Stock with respect to the payment
of dividends or upon liquidation, dissolution or winding up of the Company
("Junior Stock"). Each such dividend will be payable to holders of record as
they appear on the books of the Company on or about the fifteenth day of the
month preceding the payment dates thereof, as shall be fixed by the Board of
Directors of the Company. The amount of dividends payable for each quarterly
dividend period shall be computed by dividing by four the dividend due on the
basis of the 6.5% annual rate. Dividends payable on the Preferred Stock for
any period shorter than a full three months shall be computed on the basis of
30-day month and a 360-day year. Notwithstanding the foregoing, the Company
may not pay dividends following such date unless the Bank is in full
compliance with federal regulatory capital requirements, the Company and the
Bank are permitted to pay dividends by their regulators and the Company meets
the Retained Earnings Test. The ability of the Company to pay dividends on the
Preferred Stock will depend on the Company's ability to obtain funds for such
purpose from the Bank. The Company has no funds otherwise available for the
payment of dividends. Both the Bank's ability to pay dividends to the Company
and the Company's ability to pay dividends on the Preferred Stock are subject
to significant regulatory restrictions. The Company cannot assess at this time
its ability to pay dividends in the immediate future. See "Risk Factors--
Restrictions on Preferred Stock Dividends" and "The Company--Regulatory
Agreements." Dividends on the Preferred Stock will not accumulate.
No dividend (other than dividends or distributions paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, such class
or series of stock ranking on parity with the Preferred Stock as to dividends)
may be paid upon, or declared or set apart for, any class or series of stock
ranking on a parity with the Preferred Stock as to dividends, for any dividend
period, prior to two years after the Date of Issuance, and thereafter, unless
there shall be or have been declared on the Preferred Stock dividends for the
then current quarterly period coinciding with or ending before such quarterly
period, ratably in proportion to the respective annual dividend rates fixed
therefor. Except with respect to the foregoing, for a period of two years
after the Date of Issuance and thereafter, whenever full quarterly dividends
are in arrears for the Preferred Stock for a current dividend period, the
Company may not declare or pay or set aside for payment dividends or make any
other distributions (other than dividends or distributions paid in shares of,
or options, warrants or rights to subscribe for or purchase shares of Junior
Stock or Parity Stock (as defined below)) (i) on any Junior Stock or (ii) on
any shares of stock ranking on a parity (whether as to dividends or upon
liquidation, dissolution or winding up) with the Preferred Stock ("Parity
Stock"). In addition, the Company may not redeem or purchase or otherwise
acquire for consideration shares of any Junior Stock or Parity Stock unless in
exchange for shares of Junior Stock or Parity Stock. Dividends on the
Preferred Stock are not cumulative.
Liquidation Rights
The Preferred Stock will be entitled to, prior to any distribution to
holders of the Company's other capital stock, $10.00 per share upon any
liquidation, dissolution or winding up of the Company, plus an amount equal to
any declared but unpaid dividends (the "Liquidation Amount"). In the event of
either an involuntary or a voluntary liquidation or dissolution of the Company
payment shall be made to the holders of shares of Preferred Stock in an amount
equal to the Liquidation Amount before any payment shall be made or any assets
distributed to the holders of the Common Stock or any other class or series of
capital stock of the Company ranking junior to the Preferred Stock with
respect to payment upon dissolution or liquidation of the Company. If upon any
liquidation or dissolution of the Company the assets available for
distribution shall be insufficient to pay the holders of all outstanding
shares of Preferred Stock and any other class or series of capital stock
ranking on a parity with the Preferred Stock as to payments upon dissolution
or liquidation of the Company the full amounts to which they respectively
shall be entitled, then such assets or the proceeds thereof shall be
distributed among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all
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<PAGE>
amounts payable thereon were paid in full. After the payment of such amounts,
the Preferred Stock will not be entitled to any further payment. The
liquidation rights of the Preferred Stock will be subordinate to all
indebtedness of the Company.
At any time, in the event of the merger or consolidation of the Company into
or with another company or the merger or consolidation of any other company
into or with the Company or a plan of exchange between the Company and any
other company (in which consolidation or merger or plan of exchange any
shareholders of the Company receive distributions of cash or securities or
other property) or the sale, transfer or other disposition of all or
substantially all of the assets of the Company, then, such transaction shall
be deemed, solely for purposes of determining the amounts to be received by
the holders of the Preferred Stock in such merger, consolidation, plan of
exchange, sale, transfer or other disposition, and for purposes of determining
the priority of receipt of such amounts as between the holders of the
Preferred Stock and the holders of other classes or series of capital stock,
to be a liquidation or dissolution of the Company.
Conversion
Each share of the Preferred Stock will be immediately convertible at the
option of the holder thereof at the initial rate of one share of Common Stock
for each share of Preferred Stock based on an initial conversion price of
$10.00 per share which shall be subject to adjustment for any stock dividend
or stock split or other recapitalization involving the Common Stock or the
consolidation or merger of the Company or the sale of all or substantially all
of the Company's assets. No adjustment or allowance will be made for dividends
on shares of Preferred Stock surrendered for conversion whether declared or
otherwise. To exercise the conversion privilege with respect to any shares of
Preferred Stock, the holder thereof shall surrender the certificate or
certificates therefor to the transfer agent of the Company for the Preferred
Stock, duly endorsed to the Company in blank for transfer, accompanied by
written notice of election to convert such shares of Preferred Stock or a
portion thereof executed on the form set forth on such certificates or on such
other form as may be provided from time to time by the Company. As soon as
practicable after the surrender of such certificates, the Company shall cause
to be issued and delivered to or on the order of the holder of the
certificates thus surrendered, a certificate or certificates for the number of
full shares of Common Stock issuable upon the conversion of such shares. No
fractional shares of Common Stock shall be issued upon conversion, but,
instead of any fraction of a share which would otherwise be issuable, the
Company shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the market price (as defined in the Restatement)
per share of Common Stock as of the close of business on the day of
conversion. Such conversion shall be deemed to have been effected on the date
on which the certificates for such shares of Preferred Stock have been
surrendered as provided above, and the person in whose name any certificate or
certificates for shares of Common Stock are issuable upon such conversion
shall be deemed to have become on such date the holder of record of the shares
represented thereby.
In the event the Company shall (i) declare a dividend upon the Common Stock
payable in Common Stock (other than a dividend declared to effect a
subdivision of the outstanding shares of Common Stock) or Convertible
Securities, or in any rights or options to purchase Common Stock or
Convertible Securities, or (ii) declare any other dividend or make any other
distribution upon the Common Stock payable otherwise than out of earnings or
earned surplus, then thereafter each holder of shares of Preferred Stock upon
the conversion thereof will be entitled to receive the number of shares of
Common Stock into which such shares of Preferred Stock have been converted,
and, in addition and without payment therefor, each dividend described in
clause (i) above and each dividend or distribution described in clause (ii)
above which such holder would have received by way of dividends or
distributions if continuously since such holder became the record holder of
such shares of Preferred Stock such holder (i) had been the record holder of
the number of shares of Common Stock then received, and (ii) had retained all
dividends or distributions in stock or securities (including Common Stock or
Convertible Securities, and any rights or options to purchase any Common Stock
or Convertible Securities) payable in respect of such Common Stock or in
respect to any stock or securities paid as dividends or distributions and
originating directly or indirectly from such Common Stock. For the purposes of
the foregoing, a dividend or distribution other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value
of such dividend or distribution as determined by the Board of Directors of
the Company.
104
<PAGE>
Voting Rights
The Preferred Stock will vote together with the Common Stock on all matters
submitted to a vote of the holders of the Common Stock, with voting power
equal to the number of shares of Common Stock into which the Preferred Stock
is then convertible. In addition, the Preferred Stock will have the right to
vote as a separate class with respect to (a) the authorization of any
additional shares of Preferred Stock or the authorization or issuance of any
class or series of the Company's capital stock which would rank senior to or
on a parity with the Preferred Stock as to distribution of (i) assets upon the
liquidation or dissolution, voluntary or involuntary, of the Company or
(ii) dividends, (b) any other action to amend, alter or repeal any provisions
of the Restatement so as to adversely affect the rights, preferences and
privileges of the Preferred Stock or the holders thereof or waive any of the
rights granted to the holders of the Preferred Stock, (c) any action to amend,
alter or repeal any of the provisions of the Restatement, or the bylaws, of
the Company with respect to the election of directors by cumulative voting or
(d) the issuance of any authorized shares of Preferred Stock except in
connection with the Public Offering and the Private Offering or the Warrant.
Except as required by law, the Preferred Stock will not have special voting
rights in the event of a default on the payment of dividends.
Preemptive Rights
Rights Holders and the Standby Purchasers who receive shares of Preferred
Stock in the Public Offering shall not have any preemptive right to acquire
any unissued shares of any stock of the Company, now or hereafter authorized,
or any other securities of the Company, whether or not convertible into shares
of stock of the Company or carrying a right to subscribe to or acquire any
such shares of stock. Pursuant to the terms of the Private Offering, Conrad
Company, a Private Purchaser, shall have a right of first refusal, under
certain circumstances, to acquire additional shares of capital stock of the
Company upon the same terms and conditions pursuant to which the Company may
propose to offer shares of its capital stock for sale in the future. See "The
Private Offering--Certain Covenants--Right of First Refusal."
Redemption at Option of the Company
The Preferred Stock will be redeemable by the Company, in whole or in part,
at the option of the Company at any time after three years from the Date of
Issuance (the "Beginning Redemption Date"), to the extent the Company has
funds legally available therefor and upon approval of the Board of Governors
of the Federal Reserve System, at a redemption price per share in cash equal
to 105% of the original purchase price of $10.00 per share, plus declared but
unpaid dividends. The applicable percentage of the original purchase price
will decline by one percentage point every anniversary of the Beginning
Redemption Date thereafter until five years after the Beginning Redemption
Date, and thereafter the Preferred Stock may be redeemed at 100% of the
original purchase price per share, plus declared but unpaid dividends. If less
than all of the outstanding shares of Preferred Stock are to be redeemed, the
Company will select the shares to be redeemed by lot, pro rata (as nearly may
be), or in such other equitable manner as the Board of Directors of the
Company may determine.
In no event shall the Company redeem less than all the outstanding shares of
the Preferred Stock, unless dividends for the then current dividend period
(without accumulation of any accrued and unpaid dividends for prior dividend
periods unless previously declared and without interest) to the date fixed for
redemption shall have been declared and paid or set apart for payment on all
outstanding shares of Preferred Stock; provided, however, that the foregoing
shall not prevent, if otherwise permitted, the purchase or acquisition by the
Company of shares of Preferred Stock pursuant to a tender or exchange offer
made on the same terms to holders of all the outstanding shares of Preferred
Stock and mailed to the holders of record of all such outstanding shares at
such holders' addresses as the same appear on the books of the Company; and
provided further that if some, but less than all, of the shares of Preferred
Stock are to be purchased or otherwise acquired pursuant to such a tender or
exchange offer and the number of such shares so tendered exceeds the number of
shares so to be purchased or otherwise acquired by the Company, the shares of
Preferred Stock so tendered shall be purchased or otherwise acquired by the
Company on a pro rata basis (with adjustments to eliminate fractions)
according to the number of such shares duly tendered by each holder so
tendering shares of Preferred Stock for such purchase or
105
<PAGE>
exchange. If less than all of the outstanding shares of Preferred Stock are to
be redeemed, the Company will select the shares to be redeemed by lot, pro
rata (as nearly may be), or in such other equitable manner as the Board of
Directors of the Company may determine.
Notice of such redemption shall be given by first-class mail, postage paid,
mailed not less than 15 nor more than 60 days prior to the Redemption Date, to
each record holder of the shares to be redeemed, at such holder's address as
the same appears on the books of the Company. Each such notice shall state:
(i) the date as of which the redemption shall occur; (ii) the total number of
shares of Preferred Stock to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (iii) the Redemption Price; (iv) that the shares of
Preferred Stock called for redemption may be converted at any time prior to
the date fixed for redemption; (v) the applicable conversion price or rate;
(vi) the place or places where certificates for such shares are to be
surrendered for payment of the Redemption Price; and (vii) that dividends on
the shares to be redeemed will cease to accrue on such Redemption Date.
There is no sinking fund requirement for redemption of the Preferred Stock.
U.S. Stock Transfer Corporation, Glendale, California is the transfer agent
and registrar for the Common Stock.
REGISTRATION RIGHTS
Landlord Rights. In connection with the Bank's execution of the Lease
Restructuring Agreement, the Company issued to the Bank's landlord (the
"Landlord") a warrant to purchase up to 9.9% of the value of the outstanding
shares of Company capital stock (the "Warrant") and granted to the Landlord
certain registration rights with respect to shares of capital stock subject to
the Warrant (the "Warrant Shares"). Until the earlier of December 31, 1997 or
the occurrence of a recapitalization which results in a change in the
Company's ability to use its federal and state NOLs of approximately $22.3
million and $11.8 million, respectively (an "Ownership Change"), the holders
of the Warrant Shares may require the Company to use its best efforts to
effect one registration of the Warrant Shares under the Securities Act. The
Company is required to pay the expenses of such registration. In the
alternative, the Company may elect to purchase the number of Warrant Shares
for which registration has been demanded. In addition, until such time as the
Company shall have filed a "shelf" registration statement with respect to the
Warrant Shares (as described below), the holder of the Warrant Shares is
entitled to an unlimited number of demands for registration provided that it
shall pay the registration expenses.
After the earlier of an Ownership Change or January 1, 1998, the holder of
the Warrant Shares is entitled to request that the Company use its best
efforts to file a registration statement within ninety (90) days pursuant to
Rule 415 under the Securities Act (a "Shelf Registration Statement") and to
keep such registration statement continuously effective until all the Warrant
Shares included therein have been sold.
In the event that the Company proposes to register any of its securities
under the Securities Act prior to the time the Company shall have filed the
Shelf Registration Statement, the holder of the Warrant Shares is entitled to
include the Warrant Shares in such registration, subject to certain
limitations.
Class Action Plaintiff Rights. In connection with the Class Action, the
Company issued 169,800 warrants (the "Class Action Warrants") to the
plaintiffs to purchase shares of Common Stock of the Company. The exercise
price of the Class Action Warrant is $3.55 ($32.27 giving effect to the
Reverse Stock Split). The Company must file a registration statement under the
Securities Act before such holders may exercise such Class Action Warrants.
REGISTRATION RIGHTS OF THE CONRAD COMPANY AND WILDWOOD ENTERPRISES
Pursuant to the terms of the Registration Rights Agreement between the
Conrad Company and the Company, the Conrad Company is entitled to two requests
that the Company register, and the Company is
106
<PAGE>
obligated to file registration statements under the Securities Act covering,
shares of Common Stock owned by the Conrad Company at the time of the request
(the "Registrable Securities"). The Conrad Company also has the right to
request that the Company include the Registrable Securities in any
registration statement proposed to be filed by the Company for its own account
and/or upon the request or for the account of any securityholder, subject to
certain limitations with respect to the number of Registrable Securities that
may be included. Pursuant to a Registration Rights Agreement between Wildwood
Enterprises and the Company, Wildwood Enterprises has the right to request
that the Company include the securities of the Company held by Wildwood
Enterprises in any registration statement proposed to be filed by the Company
for its own account or upon the request or for the account of any
securityholder, subject to certain limitations with respect to the number of
securities that may be included. The Company does not believe that costs
incurred in connection with such registration will be material.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Manatt, Phelps & Phillips, LLP, Los Angeles, California. Muldoon,
Murphy & Faucette, Washington, D.C. is acting as counsel for Sandler O'Neill
in connection with certain legal matters related to the securities offered
hereby.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K as of December 31,
1996 and for each of the three years in the period ended December 31, 1996
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company's ability to continue as a going
concern), which is incorporated by reference herein, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
107
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN
THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NATIONAL MERCANTILE BANCORP OR
SANDLER O'NEILL. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON OR
BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 4
Documents Incorporated by Reference....................................... 4
Prospectus Summary........................................................ 5
Summary Selected Consolidated Financial and Other Data.................... 17
Risk Factors.............................................................. 19
The Company............................................................... 27
The Private Offering...................................................... 35
The Rights Offering....................................................... 38
Certain Federal Income Tax Consequences................................... 49
Standby Purchasers........................................................ 52
Reasons for the Public Offering and the Private Offering and Use of
Proceeds................................................................. 54
Dilution.................................................................. 54
Capitalization............................................................ 55
Market Price of Common Stock and Dividends................................ 56
Selected Consolidated Financial Data...................................... 57
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 59
Business.................................................................. 73
Regulation................................................................ 90
Shareholdings of Certain Beneficial Owners and Management................. 100
Directors and Executive Officers.......................................... 101
Description of Capital Stock.............................................. 102
Legal Matters............................................................. 107
Experts................................................................... 107
Index to Financial Statements............................................. F-1
</TABLE>
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LOGO
OF NATIONAL MERCANTILE BANCORP]
NATIONAL MERCANTILE BANCORP
6.5% NONCUMULATIVE
CONVERTIBLE PREFERRED STOCK
$2.5 MILLION (MINIMUM)
$8.0 MILLION (MAXIMUM)
---------------
PROSPECTUS
---------------
, 1997
Sandler O'Neill & Partners, l.p.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
LOGO
OF NATIONAL MERCANTILE BANCORP]
NATIONAL MERCANTILE BANCORP
6.5% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, $10.00 STATED VALUE
$2.5 MILLION (MINIMUM)
$8.0 MILLION (MAXIMUM)
-----------
National Mercantile Bancorp (the "Company") is hereby distributing to holders
of the Company's common stock, no par value (the "Common Stock"), of record at
the close of business on March 31, 1997 (the "Record Date"), nontransferable
rights (the "Rights") to subscribe for and purchase up to $5.5 million (
shares) of its 6.5% noncumulative convertible preferred stock, $10.00 stated
value (the "Preferred Stock"), at a price of $ per share (the "Subscription
Price"), subject to reduction by the Company under certain circumstances (the
"Rights Offering"). Shareholders will receive one Right for each share of
Common Stock (after giving effect to the Reverse Stock Split described below)
held as of the Record Date. Holders of Rights (the "Rights Holders") may
exercise their Rights until 5:00 p.m., Pacific time, on , 1997, unless
extended by the Company (the "Expiration Time"). Each Right entitles the Rights
Holder to subscribe for 1.624 shares (the "Underlying Preferred Shares") of
Preferred Stock (the "Basic Subscription Privilege") at the Subscription Price.
Each share of the Preferred Stock will be immediately convertible at the option
of the holder thereof at the initial rate of one share of Common Stock for each
share of Preferred Stock based on an initial conversion price of $10.00 per
share, subject to adjustment. See "Description of Capital Stock."
(continued on next page)
THE PURCHASE OF PREFERRED STOCK IN THE PUBLIC OFFERING INVOLVES A
SIGNIFICANT DEGREE OF INVESTMENT RISK. RIGHTS HOLDERS AND STANDBY
PURCHASERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER THE HEADING "RISK FACTORS" ON PAGE 17.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSIONER
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
SUBSCRIPTION UNDERWRITERS' PROCEEDS
PRICE COMMISSIONS(1) TO COMPANY(2)
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<S> <C> <C> <C>
Per Share
Total Minimum....................................
Total Maximum....................................
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</TABLE>
(1) Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") will receive 3% of the
aggregate purchase price of the shares of Preferred Stock sold in the
Rights Offering (except for Rights exercised in Arizona) and 5% of the
aggregate value of funds committed by Standby Purchasers. Sandler O'Neill
will receive 1.5% of the aggregate value of funds committed in the Private
Offering. The Company has agreed to reimburse Sandler O'Neill for its
reasonable out-of-pocket expenses, including fees of legal counsel, and has
agreed to indemnify Sandler O'Neill against certain liabilities under the
securities laws.
(2) Before deducting expenses of the Public Offering and the Private Offering
payable by the Company estimated at $ .
-----------
Sandler O'Neill & Partners, l.p.
-----------
The date of this Prospectus is , 1997
<PAGE>
(continued from previous page)
Pursuant to a private offering exemption from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), the Company
entered into purchase agreements (the "Private Purchase Agreements") with two
purchasers (collectively, the "Private Purchasers"). The Private Purchasers
have severally agreed, subject to certain conditions, to purchase and the
Company has agreed to sell (the "Private Offering"), in the aggregate, up to
$5.5 million ( shares) (the "Maximum Private Offering") of Preferred Stock
at a purchase price (the "Private Purchasers Price") equal to $ per share
(equal to $10.00 after giving effect to a 9.09 to 1 reverse stock split of the
Common Stock (the "Reverse Stock Split") that the Company plans to effect
prior to the closing of the Public Offering and the Private Offering and after
obtaining shareholder approval), subject to reduction under certain
circumstances. The Company has guaranteed the availability of an aggregate
minimum of $2.5 million ( shares) of Preferred Stock to the Private
Purchasers at the Private Purchasers Price (the "Private Purchasers Minimum
Obligation") irrespective of the number of shares available after the exercise
of the Basic Subscription Privilege. The offer and sale of shares pursuant to
the Private Purchase Agreements is hereinafter referred to as the "Private
Offering." See "The Private Offering."
Each Rights Holder who fully exercises the Basic Subscription Privilege will
be eligible to subscribe for 0.376 shares of Preferred Stock (the "Excess
Underlying Preferred Shares"), for each Right held, which remain available
after the exercise of the Basic Subscription Privilege and giving effect to
the Private Offering, subject to availability, proration and reduction by the
Company under certain circumstances (the "Oversubscription Privilege"). A
Rights Holder's election to exercise the Oversubscription Privilege must be
made at the time the Basic Subscription Privilege is exercised. Once a Rights
Holder has exercised the Basic Subscription Privilege or the Oversubscription
Privilege, such exercise may not be revoked. The maximum amount of Preferred
Stock available to Rights Holders under the Basic Subscription Privilege and
the Oversubscription Privilege is $5.5 million.
The Company anticipates that it will enter into purchase agreements (the
"Standby Purchase Agreements") pursuant to which certain institutional
investors (the "Standby Purchasers") would severally agree, subject to certain
conditions, to purchase $2.5 million ( shares) of Preferred Stock at the
Subscription Price (the "Maximum Standby Offering"), to the extent available
after the exercise of the Basic Subscription Privilege, the consummation of
the Private Offering and the exercise of the Oversubscription Privilege (the
"Standby Purchaser Offering"). Such Standby Purchasers are expected to require
the Company to sell an aggregate minimum of $1.0 million ( shares) of
Preferred Stock at the Subscription Price even if a sufficient number of
shares of Preferred Stock is not available after the exercise of the Basic
Subscription Privilege, the consummation of the Private Offering and the
exercise of the Oversubscription Privilege (the "Minimum Standby Obligation").
See "The Standby Purchasers." The Rights Offering and the Standby Purchaser
Offering may sometimes be referred to collectively as the "Public Offering."
The minimum amount to be raised in the Public Offering and the Private
Offering will be $8.0 million (assuming no rights are exercised in the Rights
Offering), consisting of $5.5 million ( shares) of Preferred Stock purchased
by the Private Purchasers and $2.5 million ( shares) of Preferred Stock
purchased by the Standby Purchasers. The maximum amount to be raised in the
Public Offering and the Private Offering will be $9.0 million, consisting of
$5.5 million pursuant to the Rights Offering, $2.5 million ( shares) of
Preferred Stock purchased by the Private Purchasers and $1.0 million
( shares) of Preferred Stock purchased by the Standby Purchasers.
The number of Underlying Preferred Shares issuable by the Company as a
result of exercises of the Basic Subscription Privilege and the
Oversubscription Privilege in the aggregate or to any Rights Holder, the
Private Purchasers or the Standby Purchasers may be limited by the Company, if
necessary, with certain exceptions, in its sole judgment and discretion, to
reduce the risk that certain tax benefits will be subject to limitation under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), or
the risk of any other adverse tax consequences to the Company, either at the
time of the Public Offering and the Private Offering or at any subsequent
time. See "The Rights Offering--Limitations--Tax Limitation." The number of
shares issuable by the Company to the Private Purchasers also may be limited
by the Company pursuant to the terms of the Private Purchase Agreements. See
"The Private Offering."
2
<PAGE>
THE COMPLETION OF THE PUBLIC OFFERING AND THE PRIVATE OFFERING IS SUBJECT TO
CERTAIN CONDITIONS INCLUDING, BUT NOT LIMITED TO, THE RECEIPT BY THE COMPANY
OF MINIMUM PROCEEDS OF $5.5 MILLION (THE "MINIMUM CONDITION"). IN THE EVENT
THE MINIMUM CONDITION IS NOT ACHIEVED, ANY FUNDS THAT HAVE BEEN DEPOSITED WITH
THE SUBSCRIPTION AGENT WILL BE RETURNED PROMPTLY, WITHOUT INTEREST. SEE "THE
PRIVATE OFFERING--CONDITIONS TO CLOSING; AMENDMENT AND TERMINATION" AND "THE
RIGHTS OFFERING--MINIMUM CONDITION."
The Rights will not be transferable. There will be no trading market for the
Rights. The Company intends to apply to the National Association of Securities
Dealers Automated Quotation ("Nasdaq") Stock Market ("Nasdaq Stock Market")
for quotation of the Preferred Stock on the Small Cap tier Nasdaq Stock Market
under the trading symbol "MBLAP" if there are an adequate number of publicly
held shares of Preferred Stock to meet the requirements of Nasdaq. No
assurance can be given that there will be an adequate number of publicly held
shares or that a market will develop for the Preferred Stock. On April 9, the
last reported trade price of the Common Stock as quoted on the Small Cap tier
of the Nasdaq Stock Market under the symbol "MBLA" was $1.50. See "Market
Price for Common Stock and Dividends."
AFTER THE EXPIRATION TIME, THE RIGHTS WILL NO LONGER BE EXERCISABLE AND WILL
HAVE NO VALUE. ACCORDINGLY, RIGHTS HOLDERS ARE STRONGLY URGED TO EXERCISE
THEIR RIGHTS.
3
<PAGE>
Standby Purchasers..........
The Company anticipates that it will enter into
the Standby Purchase Agreements prior to the
commencement of the Rights Offering pursuant to
which certain institutional investors will
severally agree to acquire from the Company a
portion of any shares of Preferred Stock
remaining after the exercise of the Basic
Subscription Privilege, the consummation of the
Private Offering and the exercise of the
Oversubscription Privilege Rights subject to a
maximum standby purchase commitment. The Standby
Purchase Agreements are expected to require that
the Company sell an aggregate minimum of $1.0
million ( shares) of Preferred Stock at the
Subscription Price even if sufficient shares of
Preferred Stock are not available after issuance
of all shares of Preferred Stock subscribed for
by the exercise of the Basic Subscription
Privilege, the consummation of the Private
Offering and the exercise of the Oversubscription
Privilege (the "Minimum Standby Obligation"). In
any such case, the Company will issue sufficient
new shares to satisfy such Minimum Standby
Obligation. The number of shares issuable to any
Standby Purchasers may be limited by the Company,
if necessary, with certain exceptions, in the
sole judgment and discretion of the Company, to
reduce the risk that certain tax benefits will be
subject to limitation under Section 382 or the
risk of any other adverse tax consequence to the
Company, either at the time of the Public
Offering and the Private Offering or at any
subsequent time. See "The Rights Offering--Tax
Limitation" and "Standby Purchasers." Purchases
by Standby Purchasers pursuant to the Standby
Purchase Agreements also will be subject to
limitations based on certain regulatory
requirements. See "The Rights Offering--
Regulatory Limitation" and "Standby Purchasers."
Reasons for the Public
Offering and the Private
Offering..............
The Board of Directors decided to conduct both
the Private Offering and the Public Offering (i)
to minimize the dilutive effect of the Private
Offering and the Standby Purchaser Offering to
current shareholders and (ii) to ensure, through
the Private Offering, that the Company would ob-
tain sufficient capital to meet bank regulatory
requirements and (iii) to finance the Company's
business strategy in the event the Company's
shareholders chose not to participate in the
Rights Offering.
Transferability of Rights... THE RIGHTS ARE NOT TRANSFERABLE.
Record Date.................
March 31, 1997
Subscription Price..........
$ per share. The price at which shares are
sold to the Private Purchasers may be lower than
the Subscription Price under certain circumstanc-
es. See "The Private Offering--Subscription
Price."
Expiration Time............. The Rights will expire if not exercised prior to
5:00 p.m., Pacific Time, on , 1997, unless ex-
tended in the sole discretion of the Company. The
number and length of any such extensions will be
set at the time of any such extension. See "The
Rights Offering--
9
<PAGE>
Expiration Time." RIGHTS NOT EXERCISED PRIOR TO
THE EXPIRATION TIME WILL EXPIRE AND BECOME WORTH-
LESS.
Preferred Stock
Outstanding................ No shares of Preferred Stock are currently out-
standing. Giving effect to the Private Purchasers
Maximum Offering and the Maximum Standby Offer-
ing, a minimum of shares of Preferred Stock
will be outstanding after the completion of the
Public Offering and the Private Offering. Giving
effect to the exercise in full of the Basic Sub-
scription Privilege, the Private Purchasers Mini-
mum Obligation and the Minimum Standby
Obligation, a maximum of shares of Preferred
Stock will be outstanding after the completion of
the Public Offering and the Private Offering.
Rights Holders may experience substantial dilu-
tion of their equity ownership interest and vot-
ing power in the Company if they do not exercise
the Basic Subscription Privilege and the
Oversubscription Privilege. Even if Rights Hold-
ers exercise their Basic Subscription Privilege
and Oversubscription Privilege in full, they will
experience dilution due to the Private Purchasers
Minimum Obligation and the Minimum Standby Obli-
gation. See "Risk Factors--Dilution of Ownership
Interest," "Dilution," and "Business--Legal
Proceedings."
Subscription Agent..........
U.S. Stock Transfer Corporation
Information Agent...........
Kissel-Blake Inc.
Financial Advisor...........
The Company and Sandler O'Neill have entered into
an agreement pursuant to which Sandler O'Neill is
acting as the Company's financial advisor in con-
nection with the Public Offering and the Private
Offering. The Company has agreed to pay certain
fees to, and expenses of, Sandler O'Neill for its
services in the Public Offering and the Private
Offering. See "The Rights Offering--Financial Ad-
visor."
10
<PAGE>
Adjustment of Conversion Ratio
Section 305 of the Code renders taxable certain actual or constructive
distributions of stock with respect to stock and convertible securities.
Regulations promulgated under Section 305 provide that an adjustment in the
conversion ratio of convertible preferred stock made pursuant to a bona fide,
reasonable formula which has the effect of preventing dilution of the interest
of the holders of such stock will not be considered to result in a taxable
dividend under Section 301 of the Code. Any adjustment in the conversion ratio
of the Preferred Stock to reflect taxable distributions on the Common Stock
would be treated as a constructive distribution of stock to the holders of
Preferred Stock and would be taxable as a dividend to the extent of current or
accumulated earnings and profits of the Company. The amount of the dividend to
a holder of Preferred Stock resulting from such an adjustment would be
measured by the fair market value of the additional Common Stock (or fraction
thereof) that would be obtainable as a result of adjustment of the conversion
price. Because the adjustments to the conversion price could occur more than
three years after the date of a taxable stock dividend, there can be no
assurance and none is hereby given that an adjustment to the conversion ratio
of the Preferred Stock will not result in a taxable dividend under Section
301.
GENERAL BACK UP WITHHOLDING AND REPORTING REQUIREMENTS
Under Section 3406 of the Code and applicable Treasury regulations, a holder
of Preferred Stock may be subject to backup withholding tax at the rate of 31%
with respect to dividends paid on or the proceeds of a sale or redemption of
Preferred Stock, as the case may be. The payor will be required to deduct and
withhold the tax if (a) the payee fails to furnish a taxpayer identification
number ("TIN") to the payor or fails to certify under the penalty of perjury
that such TIN is correct, (b) the IRS notifies the payor that the TIN
furnished by the payee is incorrect, (c) there has been a notified payee under
reporting with respect to interest, dividends or original issue discount
described in Section 3406(c) of the Code, or (d) there has been a failure of
the payee to certify under the penalty of perjury that the payees is not
subject to withholding under Section 3406(a)(1)(C) of the Code. As a result,
if any one of the events discussed above occurs, the payor will be required to
withhold a tax equal to 20% from any payment of dividends or proceeds made
with respect to the Preferred Stock unless an exemption applies under
applicable law and is established in a manner acceptable to the payor. Reports
will be made annually or otherwise as may be required to the IRS and to the
holders of record that are not excepted from such reporting requirements with
respect to distributions on the Preferred Stock. Such reporting will be made
on IRS Form 1099 or on such other form as may be prescribed under the rules
issued by the IRS.
STANDBY PURCHASERS
Prior to the commencement of the Rights Offering, the Company will seek to
enter into Standby Purchase Agreements pursuant to which certain institutional
investors as Standby Purchasers will severally agree, subject in each case to
a maximum standby commitment and to certain conditions, to purchase up to $2.5
million ( shares) of Preferred Stock at the Subscription Price to the
extent available after exercise of the Basic Subscription Privilege, the sale
of shares in the Private Offering and the exercise of the Oversubscription
Privilege. The Company expects that the Standby Purchasers will require the
Company to sell, and the Standby Purchasers will purchase, an aggregate
minimum of $1.0 million ( shares) of Preferred Stock if a sufficient number
of shares of Preferred Stock is not available after the exercise of the Basic
Subscription Privilege, the sale of shares in the Private Offering and the
Oversubscription Privilege. The obligations of the Standby Purchasers will not
be subject to the purchase of any minimum number of shares pursuant to the
exercise of the Rights, but are subject to certain conditions, including that
the Public Offering shall have been conducted substantially in the manner
described in the Prospectus for the Public Offering.
The Company anticipates that each Standby Purchase Agreement will provide
that it may be terminated by the Standby Purchaser only upon the occurrence of
any of the following events: (i) a material adverse change in the Company's
financial condition prior to the expiration of the Public Offering from that
existing at December 31, 1996 (except as disclosed in the Prospectus) ; (ii) a
suspension in the trading in the Common
49
<PAGE>
Stock, a general suspension of trading or establishment of limited or minimum
prices on the Nasdaq Stock Market, any banking moratorium, any suspension of
payments with respect to banks in the United States or a declaration of war or
a national emergency by the United States; (iii) under any circumstances which
would result in the Standby Purchaser, individually or together with any other
person or entity, being required to register as a depository institution
holding company under federal or state laws or regulations, or to submit an
application, or notice, to a federal bank regulatory authority to acquire or
retain control of a depository institution or depository institution holding
company; or (iv) if the Public Offering, including sales of Preferred Stock to
Standby Purchasers, is not completed by , 1997 through no fault of the
Standby Purchaser.
If the Company believes that the number of Underlying Preferred Shares
issuable by the Company pursuant to the Standby Purchase Agreements, both in
the aggregate and to any individual purchaser, will have an adverse effect
upon the Company's ability to utilize the NOL carryforwards, then the Company
may reduce the number of shares issuable to the Standby Purchasers, either pro
rata or individually to each Standby Purchaser whose purchase of Preferred
Stock may create such an adverse effect. Such reduction will be made to the
minimum extent necessary, with certain exceptions, in the sole opinion and
discretion of the Company after consultation with its tax advisor, to
accomplish avoidance of such adverse effect. Based on current circumstances,
the Company does not anticipate that it will have to reduce the number of
shares issued to Standby Purchasers to avoid an adverse effect upon the
Company's ability to utilize such federal income tax benefits. See "Risk
Factors--Possible Loss of Tax Benefit."
50
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant in connection with the offering
described in this Registration Statement, other than underwriting discounts
and commissions, are as follows (all amounts are estimated except the SEC,
Nasdaq and NASD filing fees):
<TABLE>
<S> <C>
SEC filing fee................................................. $ 2,425
Nasdaq listing fees............................................ 3,250
NASD filing fee................................................ 1,150
Printing and engraving fees.................................... 100,000
Accounting fees and expenses................................... 362,000
Legal fees and expenses........................................ 500,000
Blue sky fees and expenses..................................... 27,000
Transfer agent and registrar's fees and expenses............... 5,000
Subscription agent fees and expenses........................... 5,000
Information agent fees and expenses............................ 12,000
Miscellaneous.................................................. 28,000
----------
Total...................................................... $1,045,825
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article X of the Registrant's Articles of Incorporation, as amended,
provides that the liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law. Article XI of the Registrant's Articles of Incorporation, as amended,
provides that the corporation is authorized to provide for the indemnification
of agents (as defined in Section 317 of the California General Corporation
Law) in excess of that expressly permitted by such Section 317, subject to the
limitations set forth in the General Corporation Law of California, for breach
of duty to the corporation and its stockholders through bylaw provisions or
through agreements, or both.
Article V of the Registrant's amended Bylaws provides as follows:
ARTICLE VI
Indemnification
Section 5.01. Definitions. For the purposes of this Article, "agent"
includes any person who is or was a director, officer, employee, or other
agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of a foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or was a director, officer, employee or
agent of a foreign or domestic corporation which was a predecessor corporation
of the Corporation or of another enterprise at the request of such predecessor
corporation; "proceeding" includes any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative; and
"expenses" includes without limitation attorneys' fees and any expenses of
establishing a right to indemnification under Section 5.04 or Section 5.05(c)
of these Bylaws.
II-1
<PAGE>
Section 5.02. Indemnification in Actions by Third Parties. The Corporation
shall have the power to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by, or
in the right of, the Corporation) by reason of the fact that such person is or
was an agent of the Corporation, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with such proceeding if he acted in good faith and in a manner he reasonably
believed to be in the best interests of the Corporation and, in the case of a
criminal proceeding, had no reasonable cause to believe the conduct of such
person was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner he reasonably believed to be in the best interests of
the Corporation or that he had reasonable cause to believe that his conduct
was unlawful.
Section 5.03. Indemnification in Actions by or in the Right of the
Corporation. The Corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action by, or in the right of, the Corporation to
procure a judgment in its favor by reason of the fact that such person is or
was an agent of the Corporation against expenses actually and reasonably
incurred in connection with the defense or settlement of such action if he
acted in good faith, in a manner he believed to be in the best interests of
the Corporation, and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar
circumstances. No indemnification shall be made under this Section:
(A) in respect of any claim, issue, or matter as to which such person shall
have been adjudged to be liable to the Corporation in the performance of his
duty to the Corporation, unless and only to the extent that the court in which
such action was brought shall determine upon application that, in view of all
the circumstances of the case, he is fairly and reasonably entitled to
indemnity for the expenses which such court shall determine;
(B) of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval; or
(C) of expenses incurred in defending a threatened or pending action which
is settled or otherwise disposed of without court approval.
Section 5.04. Indemnification Against Expenses. To the extent that an agent
of the Corporation has been successful on the merits in defense of any
proceeding referred to in Section 5.02 or 5.03 of these Bylaws or in defense
of any claim, issue or matter therein, he shall be indemnified against his
expenses actually and reasonably incurred in connection therewith.
Section 5.05. Required Determinations. Except as provided in Section 5.04 of
these Bylaws, any indemnification under this Article shall be made by the
Corporation only if authorized in the specific case, upon a determination that
indemnification of the agent is proper under the circumstances because the
agent has met the applicable standard of conduct set forth in Section 5.02 or
5.03 of these Bylaws by:
(A) a majority vote of a quorum consisting of directors who are not parties
to such proceeding;
(B) approval of the shareholders, with the shares owned by the person to be
indemnified not being entitled to vote thereon; or
(C) the court in which such proceeding is or was pending upon application
made by the Corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not such application by
the agent, attorney or other person is opposed by the Corporation.
Section 5.06. Advance of Expenses. Expenses incurred in defending any
proceeding may be advanced by the Corporation before the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent or
repay such amount unless it shall be determined ultimately that the agent is
not entitled to be indemnified as authorized in this Article.
II-2
<PAGE>
Section 5.07. Other Indemnification. No provision made by the Corporation to
indemnify the directors or officers of the Corporation, or a subsidiary of the
Corporation for the defense of any proceeding, whether contained in the
Articles of Incorporation, Bylaws, a resolution of the shareholders or
directors, an agreement or otherwise, shall be valid unless consistent with
Section 317 of the California General Corporation Law. Nothing contained in
this Article shall affect any right to indemnification to which persons other
than such directors and officers may be entitled by contract or otherwise.
Section 5.08. Forms of Indemnification Not Permitted. No indemnification or
advance shall be made under this Article, except as provided in Section 5.04
or Section 5.05(c) of these Bylaws in any circumstance where it appears:
(A) that it would be inconsistent with a provision of the Articles of
Incorporation, Bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(B) that it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
Section 5.09. Insurance. The Corporation shall have the power to buy and
maintain insurance on behalf of any agent of the Corporation against any
liability asserted against or incurred by the agent in such capacity or
arising out of the agent's status as such whether or not the Corporation would
have the power to indemnify the agent against such liability under the
provisions of this Article.
Section 5.10. Nonapplicability to Fiduciaries of Employee Benefit
Plans. This Article does not apply to any proceeding against any trustee,
investment manager or other fiduciary of an employee benefit plan in his
capacity as such, even though he may also be an agent of the Corporation as
defined in Section 5.01 of these Bylaws. Nothing contained in this Article
shall limit any right to indemnification to which such trustee, investment
manager or other fiduciary may be entitled by contract or otherwise which
shall be enforceable to the extent permitted by applicable law other than
Section 317 of the California General Corporation Law.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Agency Agreement
3.1 Articles of Incorporation of the Company, as amended(1)
3.2 Amended and Restated Bylaws of the Company(3)
3.3 Form of Amended and Restated Articles of Incorporation
4.1 Subscription Right Certificate
5. Opinion of Manatt, Phelps & Phillips, LLP*
8. Tax opinion of Manatt, Phelps & Phillips, LLP*
10.1 Memorandum of Understanding dated October 25, 1991 between the
Federal Reserve Bank of San Francisco and the Company(2)
10.2 Memorandum of Understanding dated October 26, 1995 between the
Federal Reserve Bank of San Francisco and the Company(6)
10.3 Formal Agreement dated July 26, 1991 between the Office of the
Comptroller of the Currency and Mercantile National Bank(2)
10.4 Amendment to the Agreement by and between Mercantile National Bank
and the Office of the Comptroller of the Currency dated December 14,
1995(6)
10.5 Employment Agreement, dated June 21, 1996 between Mercantile National
Bank and Scott A. Montgomery(9)
10.6 Financial Institution Services Agreement dated April 8, 1993 between
Mercantile National Bank and Linsco/Private Ledger(4)
10.7 Form of Indemnity Agreement between the Company and its directors(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
Form of Indemnity Agreement between the Company and its executive
10.8 officers(1)
10.9 First Floor Lease at 1840 Century Park East, Los Angeles, California,
dated as of December 21, 1982 between Northrop Corporation and
Mercantile National Bank(3)
10.10 Second Floor Lease at 1840 Century Park East, Los Angeles, California,
dated as of December 21, 1982 between Northrop Corporation and
Mercantile National Bank for space at 1840 Century Park East, Los
Angeles, California, as amended by Amendment to Second Floor Lease
dated as of June 7, 1986, and as amended by Second Amendment to
Second Floor Lease dated as of December 18, 1992 between California
State Teachers' Retirement System and Mercantile National Bank(3)
10.11 Lease Restructure Agreement dated December 31, 1995 by and between
California State Teachers' Retirement System and Mercantile National
Bank(6)
10.12 Warrant Agreement dated December 31, 1995 by and between National
Mercantile Bancorp and California State Teachers' Retirement System(6)
10.13 Registration Rights Agreement dated December 31, 1995 by and between
the Company and California State Teachers' Retirement System(6)
10.14 National Mercantile Bancorp 1983 Stock Option Plan, as amended March
22, 1991(2)
10.15 Form of Stock Option Agreement under the 1983 Stock Option Plan(3)
10.16 National Mercantile Bancorp 1990 Stock Option Plan(7)
10.17 Form of Stock Option Agreement under the 1990 Stock Option Plan(3)
10.18 National Mercantile Bancorp 1994 Stock Option Plan(8)
10.19 Form of Stock Option Agreement under the 1994 Stock Option Plan(5)
10.20 Form of Severance Agreement between the Company, Mercantile National
Bank and some of its officers(9)
10.21 Form of Stay Bonus Agreement between the Company, Mercantile National
Bank and some of its officers(10)
10.22 Private Purchase Agreement (Conrad)
10.23 Private Purchase Agreement (Wildwood)
10.24 Form of Standby Purchase Agreement
10.25 Registration Rights Agreement (Conrad)
10.26 Registration Rights Agreement (Wildwood)*
11. Statement regarding computation of per share earnings (see "Note 1--
Summary of Significant Accounting Policies--Income (Loss) Per
Share"--of the "Notes to the Consolidated Financial Statements" in
"Item 8. Financial Statements" in this Annual Report on Form 10-K)
22. Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5)*
24. Power of Attorney (see page II-10)
99.1 Instructions as to Use of Subscription Right Certificates
99.2 Form of Letter to Shareholders
99.3 Form of Letter to Nominee Holders
99.4 Form of Nominee Holder Oversubscription Certification
99.5 Form of Letter from Nominee Holders to Beneficial Owners
99.6 Form of Special Notice to Shareholders whose addresses are outside the
United States and Canada
99.7 Form of Notice of Guaranteed Delivery
99.8 DTC Participant Oversubscription Exercise Form
99.9 Form of Information Agent Agreement
99.10 Form of Subscription Agent Agreement
</TABLE>
- --------
* To be filed by amendment.
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991 and incorporated herein by reference.
II-4
<PAGE>
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Proxy Statement dated May 24, 1990
and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Proxy Statement dated April 18, 1994
and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs 1(i) and 1(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed with or furnished to the Commission by
the registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, as amended, that are incorporated by reference to the
registration statement.
2. That, for the purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
4. That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
the registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of the
registration statement as of the time it was declared effective.
II-5
<PAGE>
5. That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment of the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
6. To supplement the prospectus, after the expiration of the subscription
period, to set forth the results of the subscription offer, the transactions
by the underwriters during the subscription period, the amount of unsubscribed
securities to be purchased by the underwriters, and the terms of any
subsequent reoffering thereof. If any public offering by the underwriters is
to be made on terms differing from those set forth on the cover page of the
prospectus, a post-effective amendment will be filed to set forth the terms of
such offering.
7. To deliver or cause to be delivered with the prospectus, to each person
to whom the prospectus is sent or given, the latest annual report to
securityholders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide
such interim financial information.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Los Angeles, State of California, on April 11, 1997.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Scott A. Montgomery and Robert E. Thomson his
or her true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
NATIONAL MERCANTILE BANCORP
By: /s/ Howard P. Ladd
----------------------------------
Howard P. Ladd
Chairman of the Board
By: /s/ Joseph W. Kiley III
----------------------------------
Joseph W. Kiley III
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Howard P. Ladd Chairman, President and April 11, 1997
____________________________________ Chief Executive Officer
Howard P. Ladd
/s/ Scott A. Montgomery Executive Vice President April 11, 1997
____________________________________ and Director
Scott A. Montgomery
/s/ Alan Grahm Director April 11, 1997
____________________________________
Alan Grahm
/s/ A. Thomas Hickey Director April 11, 1997
____________________________________
A. Thomas Hickey
/s/ Robert E. Thomson Director April 11, 1997
____________________________________
Robert E. Thomson
/s/ Robert E. Gipson Director April 11, 1997
____________________________________
Robert E. Gipson
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Agency Agreement+
3.1 Articles of Incorporation of the Company, as amended(1)
3.2 Amended and Restated Bylaws of the Company(3)
3.3 Form of Amended and Restated Articles of Incorporation+
4.1 Subscription Right Certificate+
5. Opinion of Manatt, Phelps & Phillips, LLP*
8. Tax opinion of Manatt, Phelps & Phillips, LLP*
10.1 Memorandum of Understanding dated October 25, 1991
between the Federal Reserve Bank of San Francisco and
the Company(2)
10.2 Memorandum of Understanding dated October 26, 1995
between the Federal Reserve Bank of San Francisco and
the Company(6)
10.3 Formal Agreement dated July 26, 1991 between the Office
of the Comptroller of the Currency and Mercantile
National Bank(2)
10.4 Amendment to the Agreement by and between Mercantile
National Bank and the Office of the Comptroller of the
Currency dated December 14, 1995(6)
10.5 Employment Agreement, dated June 21, 1996 between
Mercantile National Bank and Scott A. Montgomery(9)
10.6 Financial Institution Services Agreement dated April 8,
1993 between Mercantile National Bank and
Linsco/Private Ledger(4)
10.7 Form of Indemnity Agreement between the Company and its
directors(1)
Form of Indemnity Agreement between the Company and its
10.8 executive officers(1)
10.9 First Floor Lease at 1840 Century Park East, Los
Angeles, California, dated as of December 21, 1982
between Northrop Corporation and Mercantile National
Bank(3)
10.10 Second Floor Lease at 1840 Century Park East, Los
Angeles, California, dated as of December 21, 1982
between Northrop Corporation and Mercantile National
Bank for space at 1840 Century Park East, Los Angeles,
California, as amended by Amendment to Second Floor
Lease dated as of June 7, 1986, and as amended by
Second Amendment to Second Floor Lease dated as of
December 18, 1992 between California State Teachers'
Retirement System and Mercantile National Bank(3)
10.11 Lease Restructure Agreement dated December 31, 1995 by
and between California State Teachers' Retirement
System and Mercantile National Bank(6)
10.12 Warrant Agreement dated December 31, 1995 by and
between National Mercantile Bancorp and California
State Teachers' Retirement System(6)
10.13 Registration Rights Agreement dated December 31, 1995
by and between the Company and California State
Teachers' Retirement System(6)
10.14 National Mercantile Bancorp 1983 Stock Option Plan, as
amended March 22, 1991(2)
10.15 Form of Stock Option Agreement under the 1983 Stock
Option Plan(3)
10.16 National Mercantile Bancorp 1990 Stock Option Plan(7)
10.17 Form of Stock Option Agreement under the 1990 Stock
Option Plan(3)
10.18 National Mercantile Bancorp 1994 Stock Option Plan(8)
10.19 Form of Stock Option Agreement under the 1994 Stock
Option Plan(5)
10.20 Form of Severance Agreement between the Company,
Mercantile National Bank and some of its officers(9)
10.21 Form of Stay Bonus Agreement between the Company,
Mercantile National Bank and some of its officers(10)
10.22 Private Purchase Agreement (Conrad)+
10.23 Private Purchase Agreement (Wildwood)+
10.24 Form of Standby Purchase Agreement+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.25 Registration Rights Agreement (Conrad)+
10.26 Registration Rights Agreement (Wildwood)*
11. Statement regarding computation of per share earnings
(see "Note 1--Summary of Significant Accounting
Policies--Income (Loss) Per Share"--of the "Notes to
the Consolidated Financial Statements" in "Item 8.
Financial Statements" in this Annual Report on Form
10-K)
22. Subsidiaries of the Registrant+
23.1 Consent of Deloitte & Touche LLP+
23.2 Consent of Manatt, Phelps & Phillips, LLP (included in
Exhibit 5)*
24. Power of Attorney (see page II-10)
99.1 Instructions as to Use of Subscription Right
Certificates+
99.2 Form of Letter to Shareholders+
99.3 Form of Letter to Nominee Holders+
99.4 Form of Nominee Holder Oversubscription Certification+
99.5 Form of Letter from Nominee Holders to Beneficial
Owners+
99.6 Form of Special Notice to Shareholders whose addresses
are outside the United States and Canada+
99.7 Form of Notice of Guaranteed Delivery+
99.8 DTC Participant Oversubscription Exercise Form+
99.9 Form of Information Agent Agreement+
99.10 Form of Subscription Agent Agreement+
</TABLE>
- --------
+ Included in this amendment.
* To be filed by amendment.
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Proxy Statement dated May 24, 1990
and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Proxy Statement dated April 18, 1994
and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995.
<PAGE>
Maximum of Shares
------------
NATIONAL MERCANTILE BANCORP
(a California corporation)
6.5% Noncumulative Convertible Preferred Stock
($10.00 par value)
AGENCY AGREEMENT
, 1997
----------
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
National Mercantile Bancorp, a California corporation (the "Company") and
Mercantile National Bank, a national bank (the "Bank"), confirm their agreement
with Sandler O'Neill & Partners, L.P. ("Sandler O'Neill" or the "Agent") with
respect to the offer and sale by the Company of up to $ _________ (_________
shares) of 6.5% Noncumulative Convertible Preferred Stock, $10.00 par value of
the Company ("Preferred Stock").
The Company is offering up to $_________ ( ___________ shares) of Preferred
Stock to the holders of record of Common Stock ("Record Date Holder") at the
close of business on _________ ,1997 (the "Record Date"), at a subscription
price of $______ per share ("Subscription Price") and, subject to the rights of
such holders, to certain other purchasers on a standby basis. Each Record Date
Holder will receive one nontransferable subscription right ("Right") for each
share of Common Stock held of record at the close of business on the Record
Date. Each Right will enable the holder thereof ("Rights Holders") to purchase
from the Company _______ share of Preferred Stock (an "Underlying Share") at the
Subscription Price (the "Basic Subscription Privilege"). Pursuant to a private
offering exemption from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), the Company has entered into purchase
agreements (the "Private Purchaser Agreements") with the Conrad Company, a bank
holding company and Wildwood Enterprises, Inc. Profit Sharing Plan (the "Private
Purchasers") who have agreed to purchase in the aggregate up to $5.5 million
(_________ shares) of the Preferred Stock at the lower of $1.10 per share or the
Subscription Price (the "Private Purchasers' Price"), available after the
exercise of the Basic Subscription Privilege (the "Private Offering"), subject
to reduction under certain circumstances. Such Private Purchasers have agreed
to purchase and the Company has guaranteed the availability
<PAGE>
of, an aggregate minimum of $2.5 million (____shares) of Preferred Stock
("Additional Shares") to such persons at the Private Purchasers' Price if a
sufficient number of shares of Preferred Stock is not available after the
exercise of the Basic Subscription Privilege (the "Private Purchasers' Minimum
Obligation").
Each Rights Holder who fully exercises their Basic Subscription Privilege
will be eligible to subscribe at the Subscription Price for _______ share of
Preferred Stock (the "Excess Underlying Shares") for each Right held, which
remain available after the exercise by the Rights Holders of the Basic
Subscription Privilege and the purchase by the Private Purchasers pursuant to
the terms of the Private Offering, subject to availability, proration and
reduction by the Company under certain circumstances (the "Oversubscription
Privilege"). A Rights Holder's election to exercise the Oversubscription
Privilege must be made at the time the Basic Subscription Privilege is
exercised. The Rights are evidenced by nontransferable certificates. Basic
Subscription and Oversubscription Privileges are not transferable. The offer
and sale of the Underlying Shares pursuant to the exercise of the Basic
Subscription Privilege and the Oversubscription Privilege are referred to herein
as the "Rights Offering."
The Company has entered into Standby Purchase Agreements pursuant to which
an aggregate of _____ institutional investors (the "Standby Purchasers") have
severally agreed, subject to certain conditions, to purchase from the Company at
the Subscription Price up to an aggregate of $2.5 million (_____ Shares) of the
Underlying Shares to the extent available after the exercise of the Basic
Subscription Privilege, the Private Offering and the exercise of the
Oversubscription Privilege (the "Standby Purchaser Offering"). The Standby
Purchase Agreements require that the Standby Purchasers agree to purchase and
the Company has guaranteed the availability of, an aggregate minimum of $1.0
million (___ shares of Preferred Stock ("Minimum Standby Shares") at the
Subscription Price if a sufficient number of Underlying Shares are not available
after the exercise of the Basic Subscription Privilege, the Private Offering and
the exercise of the Oversubscription Privilege to satisfy the purchase
commitments of the Standby Purchasers (the "Minimum Standby Obligation"). The
Rights Offering and the offering to Standby Purchasers are together referred to
herein as the "Public Offering". The Private Offering and the Public Offering
may sometimes be referred to herein as the "Offerings". The Underlying Shares
and the Minimum Standby Shares are together referred to herein as the
"Securities."
Rights Holders may exercise subscription rights by delivering to the
subscription agent a properly completed and executed subscription rights
certificate together with payment in full of the subscription price for each
share subscribed for. Payment may be made only (i) by check or bank draft drawn
upon a U.S. bank, or postal, telegraphic or express money order payable to
__________, as subscription agent or (ii) by wire transfer of funds to the
escrow account maintained by the subscription agent for the purpose of accepting
subscriptions pursuant to the terms of an Escrow Agreement to be entered into
between the Company, the subscription agent and Sandler O'Neill. Sandler O'Neill
will not receive any funds from subscribers, Private Purchasers or Standby
Purchasers for Securities purchased in the Offerings. Also, Sandler O'Neill
will not be responsible for the performance of the subscription agent pursuant
to the Subscription Agent Agreement (as defined in the Prospectus) or for
determining when the conditions of the escrow have been met.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-2 (No. 333-_______) including a
prospectus for the registration of the Rights, the shares of Preferred Stock and
the Common Stock (the "Common Stock") of the Company into which the Preferred
Stock is convertible (together, sometimes referred to herein
-2-
<PAGE>
as the "Securities") under the Securities Act, has filed such amendments
thereto, if any, and such amended prospectuses as may have been required to the
date hereof by the Commission in order to declare such registration statement
effective, and will file such additional amendments thereto and such amended
prospectuses and prospectus supplements as may hereafter be required. Such
registration statement (as amended to date, if applicable, and as from time to
time amended or supplemented hereafter) and the prospectus constituting a part
thereof (including in each case all documents incorporated or deemed to be
incorporated by reference therein and the information, if any, deemed to be part
thereof pursuant to the rules and regulations of the Commission under the
Securities Act, as from time to time amended or supplemented pursuant to the
Securities Act or otherwise (the "Securities Act Regulations")), are hereinafter
referred to as the "Registration Statement" and the "Prospectus," respectively,
except that if any revised prospectus shall be used by the Company in connection
with the Public Offering which differs from the Prospectus on file with the
Commission at the time the Registration Statement becomes effective (whether or
not such revised prospectus is required to be filed by the Company pursuant to
Rule 424(b) of the Securities Act Regulations), the term "Prospectus" shall
refer to such revised prospectus from and after the time it is first provided to
the Agent for such use.
The Preferred Stock will be issued pursuant to and be entitled to the
benefits of the provisions of an amendment and restatement of the Articles of
Incorporation of the Company to be approved by the Company's shareholders at a
meeting to be held on ____________ ,1997 (the "Annual Meeting"). The Preferred
Stock will be convertible into Common Stock at the rate of one share of Common
Stock for each share of Preferred Stock held. If the requisite shareholder
approval is obtained, the Articles of Incorporation will be amended and restated
(the "Restated Articles of Incorporation") to (i) effect a 9.09 for 1 reverse
stock split of the Common Stock (the "Reverse Stock Split") and (ii) provide for
a limitation on the acquisition by any person of the Preferred Stock (and the
Common Stock into which such Preferred Stock is convertible) if such acquisition
would cause that persons cumulative ownership to be equal to or in excess of
4.5% and a restriction on the acquisition, sale, assignment or transfer by any
current holder of 4.5% or more of the Preferred Stock (and the Common Stock into
which such Preferred Stock is convertible.
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus to be used in the Public
Offering. Such Prospectus contains information with respect to the Company, the
Bank and the Preferred Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Bank jointly and severally represent and warrant
to the Agent as of the date hereof as follows:
(i) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto or filed
pursuant to Rule 424(a) under the Securities Act complied in all material
respects when so filed with the provisions of the Securities Act; provided,
however that this representation and warranty shall not apply to statements
in or omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with the information with respect to the
Agent furnished to the Company in writing by the Agent expressly for use in
the Registration Statement or Prospectus (the "Agent Information" (which
the Company and the Bank acknowledge appears only in the section of the
Prospectus captioned "The Rights Offering -- Financial Advisor."). The
Commission has not issued any order preventing or suspending the use of any
preliminary prospectus.
-3-
<PAGE>
(ii) The Registration Statement has been declared effective by the
Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the
Company and the Bank, threatened by the Commission. At the time the
Registration Statement became effective and at the Closing Time referred to
in Section 2 hereof, the Registration Statement complied and will comply in
all material respects with the requirements of the Securities Act and the
Securities Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading. The
Prospectus, at the date hereof does not and at the Closing Time referred to
in Section 2 hereof will not, include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this subsection shall not apply to statements in or omissions
from the Registration Statement or Prospectus made in reliance upon and in
conformity with the Agent Information furnished to the Company in writing
by the Agent expressly for use in the Registration Statement or Prospectus
(which the Company and the Bank acknowledge appears only in the section of
the Prospectus captioned "The Rights Offering -- Financial Advisor"). The
Commission has not issued any order preventing or suspending the use of any
Prospectus.
(iii) The Company will promptly file the Prospectus and any
supplemental sales literature with the Commission. The Prospectus and all
supplemental sales literature, as of the date the Registration Statement
became effective and at the Closing Time referred to in Section 2, complied
and will comply in all material respects with the applicable requirements
of the Securities Act and the Securities Act Regulations and, at or prior
to the time of their first use, will have received all required
authorizations of the Commission for use in final form.
(iv) No order, directive, request or other correspondence has been
received by the Company or the Bank from the Federal Reserve Board ("FRB")
and/or the Office of Comptroller of the Currency ("O.C.") which could have
the effect of delaying or canceling the Offerings.
(v) At the Closing Time referred to in Section 2, the Company and
the Bank will have satisfied any and all terms, conditions, requirements
and provisions imposed upon the Company and the Bank by the FRB, the O.C.
or any other regulatory authority in connection with this transaction
except for any post-closing notices or filings which may be required, or
appropriate waivers shall have been obtained.
(vi) The accountants who audited the financial statements and
supporting schedules of the Company included in the Registration Statement
are independent public accountants within the meaning of the Code of Ethics
of the American Institute of Certified Public Accountants (the "AICPA");
and such accountants are, with respect to the Company and the Bank,
independent certified public accountants as required by the Securities Act
and the Securities Act Regulations.
(vii) The consolidated financial statements and the related notes
thereto included or incorporated by reference in the Registration Statement
and the Prospectus present fairly the financial position of the Company and
the Bank at the dates indicated and the results of
-4-
<PAGE>
their operations, retained earnings and cash flows for the periods
specified and comply as to form in all material respects with the
applicable accounting requirements of the Securities Act Regulations;
except as otherwise disclosed therein, said financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and the supporting schedules and tables
included or incorporated by reference in the Registration Statement present
fairly the information required to be stated therein.
(viii) The documents incorporated by reference in the Prospectus, at
the time they were filed with the Commission, complied in all material
respects with the requirements of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), and, when read together and with the other
information in the Prospectus, did not contain an untrue statement of a
material fact or omit to state a 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 or are made, not misleading.
(ix) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein (including the documents incorporated by reference therein), (A)
there has been no material adverse change in the financial condition,
results of operations, or business of the Company and the Bank, taken as a
whole, whether or not arising in the ordinary course of business, and (B)
except for transactions specifically referred to or contemplated in the
Prospectus, there have been no transactions entered into by the Company or
the Bank, other than those in the ordinary course of business and
consistent with past practices, which are material with respect to the
Company and the Bank, taken as a whole.
(x) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of California
with corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not have
a material adverse effect on the financial condition, results of
operations, or business of the Company and its subsidiary, taken as a
whole. The Company has no direct or indirect subsidiaries other than the
Bank (which is sometimes referred to herein as the "Subsidiary").
(xi) The authorized capital stock of the Company consists of
10,000,000 shares of Common Stock, no par value, of which 3,078,146 shares
are presently issued and outstanding and 1,000,000 shares of preferred
stock, with such par or stated value as shall be determined by the Board of
Directors of which no shares are presently issued and outstanding. As of
__________, 1997, there were approximately_______ holders of record of
Common Stock. Except for the Reverse Stock Split, the Preferred Stock and
the Common Stock into which the Preferred Stock is convertible, the Company
has not authorized the issuance of, and has not issued, any other shares of
capital stock. Except for the Rights, the warrants issued in connection
with the Company's Lease Restructuring and the settlement of the
shareholders' class action lawsuit (each as described in the Prospectus),
options to acquire ___________ shares of Common Stock reserved for issuance
pursuant to the Company's 1990 Stock Option Plan and the Company's 1994
Stock Option Plan and the options and stock appreciation rights granted
pursuant to Scott Montgomery's employment agreement (as
-5-
<PAGE>
described in the Prospectus), there are no options, warrants, calls,
employee benefit or other plans, preemptive rights or commitments of any
character relating to the authorized but unissued capital stock or any
other equity security of the Company or any securities or obligations
convertible into or exchangeable for or giving any person any right to
subscribe for or acquire from the Company any shares of such capital stock.
(xii) Upon completion of the Offerings, the authorized equity capital
of the Company will be within the range set forth in the Prospectus under
the caption "Capitalization." All of the issued and outstanding shares of
the Common Stock of the Company have been duly and validly issued, fully
paid and non-assessable and are free and clear of any security interest,
pledge, lien, encumbrance, claim or equity. Upon approval of the Restated
Articles of Incorporation, the shares of Preferred Stock to be sold in the
Offerings will be duly and validly authorized for issuance and, when issued
and delivered by the Company against payment of the consideration therefor,
the shares of Preferred Stock will be duly and validly issued, fully paid
and non-assessable and will be free and clear of any security interest,
pledge, lien, encumbrance, claim or equity other than created by the
purchaser thereof; and the issuance of the shares of Preferred Stock will
not be in violation of any preemptive rights or other rights to subscribe
for or to purchase, or any restriction upon the voting or transfer of, any
shares of Preferred Stock pursuant to the Company's charter, bylaws or
other governing documents or any agreement, plan or other instrument to
which the Company or the Bank is a party or by which it is bound. The terms
and provisions of the shares of Preferred Stock conform and will conform in
all material respects to the description thereof contained in the
Prospectus and the certificates representing the shares of Preferred Stock
will conform with the requirements of applicable laws and regulations.
(xiii) A number of shares of Common Stock equal to the number of
shares of Preferred Stock have been duly authorized by all necessary
corporate action and reserved in the corporate records of the Company, and
upon conversion of the Preferred Stock into the Common Stock, when issued
and delivered will have been duly and validly issued, fully paid and non-
assessable and will be free and clear of any security interest, pledge,
lien, encumbrance, claim or equity; and the issuance of the shares of
Common Stock will not be in violation of any preemptive rights or other
rights to subscribe for or to purchase, or any restriction upon the voting
or transfer of, any shares of Common Stock pursuant to the Company's
charter, bylaws or other governing documents or any agreement, plan or
other instrument to which the Company or the Bank is a party or by which it
is bound.
(xiv) All of the issued and outstanding capital stock of the Bank has
been duly and validly issued and is fully paid and nonassessable, and all
such capital stock is owned beneficially and of record by the Company free
and clear of any mortgage, pledge, lien, encumbrance, claim or equity; all
of the issued and outstanding capital stock of the Bank has been duly
authorized and validly issued, is fully paid and nonassessable and is owned
by the Company, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity.
(xv) Except as disclosed in the Prospectus, neither the filing of
the Registration Statement nor the offering or sale of the Preferred Stock
gives rise to any rights for or relating to the registration of any shares
of Preferred or Common Stock or other securities of the Company or rights
relating to antidilution which could result in any change in the number of
shares of capital stock to be issued by the Company.
-6-
<PAGE>
(xvi) Each of the Company and the Bank have full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus; the Company and the Bank have
obtained all licenses, permits and other governmental authorizations
currently required for the conduct of their respective businesses; all such
licenses, permits and other governmental authorizations are in full force
and effect and the Company and the Bank are in all material respects in
compliance therewith; neither the Company nor the Bank have received notice
of any proceeding or action relating to the revocation or modification of
any such license, permit or other governmental authorization which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might materially and adversely affect the conduct of the business
or financial condition, results of operations, or business of the Company
and the Bank, taken as a whole; and the Bank is in good standing under the
laws of the United States and is not required to qualify as a foreign
corporation in any jurisdiction.
(xvii) The deposit accounts of the Bank are insured by the FDIC up to
the applicable limits.
(xviii) The Bank has been duly incorporated and is validly existing as
a national bank in good standing under the laws of the United States with
the full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and Prospectus, and the Bank is duly qualified to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the financial condition,
results of operations, or business of the Company and the Bank, taken as a
whole; the activities of the Bank are permitted to a national bank by the
rules, regulations, resolutions and practices of the O.C.C.
(xix) The Bank has no direct or indirect subsidiary that is a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X of the
rules and regulations of the Commission.
(xx) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate action of the Company and the Bank,
and this Agreement has been duly executed and delivered by and is the valid
and binding agreement of the Company and the Bank enforceable in accordance
with its terms, except as may be limited by bankruptcy, insolvency or other
laws affecting the enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be
limited by applicable securities laws.
(xxi) The execution, delivery and performance of the Private
Purchasers' Agreements and the consummation of the transactions
contemplated therein have been duly authorized by all necessary corporate
action of the Company and the Bank, and the Private Purchasers' Agreements
have been duly executed and delivered by and are the valid and binding
agreements of the Company and the Bank enforceable in accordance with their
terms, except as may be limited by bankruptcy, insolvency or other laws
affecting the enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be
limited by applicable securities laws.
-7-
<PAGE>
(xxii) The execution, delivery and performance of the Registration
Rights Agreements and the consummation of the transactions contemplated
therein have been duly authorized by all necessary corporate action of the
Company and the Bank, and the Registration Rights Agreements have been duly
executed and delivered by and are the valid and binding agreements of the
Company and the Bank enforceable in accordance with their terms, except as
may be limited by bankruptcy, insolvency or other laws affecting the
enforceability of the rights of creditors generally and judicial
limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be
limited by applicable securities laws.
(xxiii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the
Closing Date, except as otherwise may be indicated or contemplated therein,
none of the Company or the Bank will have (A) issued any securities or
incurred any liability or obligation, direct or contingent, for borrowed
money, except borrowings in the ordinary course of business from the same
or similar sources indicated in the Prospectus, or (B) entered into any
transaction or series of transactions which is material in light of the
business of the Company and the Bank, taken as a whole, excluding the
origination, purchase and sale of loans or the purchase or sale of
investment securities or mortgaged-backed securities in the ordinary course
of business or otherwise as indicated in the Prospectus.
(xxiv) No approval of any regulatory or supervisory or other public
authority including but not limited to the O.C. and the FRB is required in
connection with the execution and delivery of this Agreement or the
issuance of the Securities, except for the declaration of effectiveness of
any required post-effective amendment to the Registration Statement by the
Commission and as may be required under the securities laws of various
jurisdictions.
(xxv) Neither the Company nor the Bank is in violation of its
charter or bylaws or in default (nor has any event occurred which, with
notice or lapse of time or both, would constitute a default) in the
performance or observance of any obligation, agreement, covenant or
condition contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or the Bank
is a party or by which it or either of them may be bound, or to which any
of the property or assets of the Company or the Bank is subject.
(xxvi) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein do not and will
not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or the Bank pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which the Company or the Bank is a party or by which it or either of them
may be bound, or to which any of the property or assets of the Company or
the Bank is subject, nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or the Bank, or any
applicable law, administrative regulation or administrative or court
decree.
(xxvii) No labor dispute with the employees of the Company or the Bank
exists or, to the knowledge of the Company or the Bank, is imminent; and
the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal
-8-
<PAGE>
suppliers or contractors which might be expected to result in any material
adverse change in the financial condition, results of operations, or
business of the Company and the Bank, taken as a whole.
(xxviii) The Company and the Bank have good and marketable title to
all properties and assets for which ownership is material to the business
of the Company or the Bank and to those properties and assets described in
the Prospectus as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Prospectus or are not material in relation to the business of the Company
or the Bank taken as a whole; and all of the leases and subleases material
to the business of the Company or the Bank under which the Company or the
Bank hold properties, including those described in the Prospectus, are
valid and binding.
(xxix) Other than as disclosed in the Registration Statement, there
is no action, suit or proceeding before or by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company or the Bank, threatened, against or affecting the Company or
the Bank, which is required to be disclosed therein (other than as
disclosed therein), or which is likely to result in any material adverse
change in the financial condition, results of operations, or business of
the Company and the Bank, taken as a whole, or which is likely to
materially and adversely affect the properties or assets thereof or which
is likely to materially and adversely affect the performance of this
Agreement or the consummation of the transactions herein contemplated or
described in the Prospectus; all pending legal or governmental proceedings
to which the Company or the Bank is a party or of which any of their
respective property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, are, considered in the aggregate, not material; and there are
no contracts or documents of the Company or its subsidiary which are
required to be filed as exhibits to the Registration Statement which have
not been so filed.
(xxx) The Company has obtained an opinion of its counsel, Manatt,
Phelps & Phillips, with respect to the legality of the Securities issued, a
copy of which is filed as an exhibit to the Registration Statement; all
material aspects of the aforesaid opinion are accurately summarized in the
Prospectus; the facts and representations upon which such opinion is based
are truthful, accurate and complete in all material respects, and neither
the Company nor the Bank has taken or will take any action inconsistent
therewith.
(xxxi) The Company has obtained an opinion of its accountants,
Deloitte & Touche, LLP, with respect to the federal and state income tax
consequences of the Offerings, a copy of which is filed as an exhibit to
the Registration Statement; all material aspects of the aforesaid opinion
are accurately summarized in the Prospectus; the facts and representations
upon which such opinion is based are truthful, accurate and complete in all
material respects, and neither the Company nor the Bank has taken or will
take any action inconsistent therewith.
(xxxii) Each lease of real property (together with any improvements
thereon) and all material personal property to which the Company or the
Bank is a party has been duly authorized, executed and delivered, and is
the legal, valid and binding agreement of the Company or the Bank
enforceable in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, reorganization, moratorium and other laws of
general applicability
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relating to or affecting creditors' rights, to general principles of
equity, and to laws relating to the safety and soundness of insured
depository institutions and their institution affiliated parties as set
forth in 12 U.S.C. (S) 1818(b).
(xxxiii) Except as disclosed in the Prospectus, as of the date of the
Prospectus and the Closing Date, neither the Company nor the Bank is in
violation of any directive or order (including any memorandum of
understanding) specific to the Company or the Bank from the O.C., the FRB,
or any other agency to make any material change in the method of conducting
its business as described in the Prospectus or as otherwise presently
contemplated; there are no directives or orders specific to the Company or
the Bank from the FRB or the O.C. or any other regulatory agency other than
those disclosed in the Prospectus; and each of the Company and the Bank is
conducting its business so as to comply in all material respects with all
applicable statutes and regulations.
(xxxiv) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock.
(xxxv) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxxvi) The Company and the Bank are in compliance in all material
respects with the applicable financial record keeping and reporting
requirements of the Currency and Foreign Transaction Reporting Act of 1970,
as amended, and the rules and regulations thereunder, and the lending
practices of the Bank are and have been, in all material respects, in
conformity with the Real Estate Settlement Procedures Act, as amended, and
the rules and regulations thereunder.
(xxxvii) All of the loans represented as assets on the most recent
financial statements or selected financial information of the Company and
its subsidiary included in the Prospectus meet or are exempt from all
requirements of federal, state or local law pertaining to lending,
including without limitation truth in lending (including the requirements
of Regulations Z and 12 C.F.R. Part 226 and Section 563.99), consumer
credit protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted, would
not have a material adverse effect on the Bank.
(xxxviii) To the knowledge of the Company and the Bank, neither the
Company nor the Bank or employees of the Bank has made any payment of funds
of the Company or the Bank as a loan for the purchase of the Securities or
made any other payment of funds prohibited by law, and no funds have been
set aside to be used for any payment prohibited by law.
(xxxix) Neither the Company nor the Bank nor any properties owned or
operated by the Company or the Bank is in violation of or liable under any
Environmental Law (as defined below), except for such violations or
liabilities that, individually or in the aggregate, would not have a
material adverse effect on the financial condition, results of operations,
or business of the Company and the Bank, taken as a whole. There are no
actions, suits or proceedings, or demands, claims, notices or
investigations (including, without limitation, notices, demand letters or
requests for information from any governmental agency) instituted
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or pending, or to the knowledge of the Company or the Bank threatened,
relating to the liability of any property owned or operated by the Company
or the Bank, under any Environmental Law. For purposes of this subsection,
the term "Environmental Law" means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction or
agreement with any regulatory authority relating to (i) the protection,
preservation or restoration of the environment (including, without
limitation, air, water, vapor, surface water, groundwater, drinking water
supply, surface soil, subsurface soil, plant and animal life or any other
natural resource), and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of any substance presently listed, defined, designated
or classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxxx) The Company and its subsidiary have filed all federal income
and state and local franchise tax returns required to be filed, or have
received extensions thereof, and have made timely payments of all taxes
shown as due and payable in respect of such returns, and no deficiency has
been asserted with respect thereto by any taxing authority.
(xxxxi) The Company has received approval, subject to issuance, to
have the Preferred Stock quoted on the Small Caps Market of the National
Association of Securities Dealers' Automated Quotation System ("Nasdaq")
Stock Market effective on the Closing Date.
(b) Any certificate signed by any officer of the Company or the Bank and
delivered to either of the Agent or to counsel for the Agent shall be deemed a
representation and warranty by the Company or the Bank to each as to the matters
covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE
SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company
regarding the structure of the Offerings, as well as to identify Standby
Purchasers and assist the Bank in negotiating Standby Purchase Agreements with
the Standby Purchasers. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth,
Sandler O'Neill accepts such appointment and agrees to provide services to the
Company as to the matters described below; provided, however, that the Agent
shall not be obligated to sell any minimum number of shares of Common Stock to
any particular category of purchaser or in the aggregate or take any action
which is inconsistent with any applicable laws, regulations, decisions or
orders. The services to be rendered by Sandler O'Neill pursuant to this
appointment include the following: (i) identifying prospective Standby
Purchasers and assisting in the negotiation of Standby Purchase Agreements with
such Standby Purchasers; (ii) assisting the Company's management in preparing
for meetings with existing shareholders and other potential investors in the
Public Offering; (iii) reviewing the Private Purchase Agreements; and (iv)
providing such other general advice and assistance as may be requested to
promote the successful completion of the Offerings.
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If at least the total minimum of Securities, as disclosed on the cover of
the Prospectus, are sold, the Company agrees to issue or have issued the shares
of Preferred Stock sold and to release for delivery certificates for such shares
of Preferred Stock at the Closing Time against payment therefor by release of
funds from the special interest-bearing accounts referred to below. The closing
shall be held at the offices of Manatt, Phelps & Phillips, at 10:00 a.m., local
time, or at such other place and time as shall be agreed upon by the parties
hereto, on a business day to be agreed upon by the parties hereto. The Company
shall notify the Agent by telephone, confirmed in writing, when funds shall have
been received for all the shares of Preferred Stock sold. Certificates for the
shares of Preferred Stock sold shall be delivered directly to the purchasers
thereof in accordance with their directions. The date upon which the Company
shall release for delivery all of the shares of Preferred Stock sold, in
accordance with the terms hereof, is herein called the "Closing Date." The hour
on the Closing Date at which the Company shall release for delivery all of the
shares of Preferred Stock sold in accordance with the terms hereof is called the
"Closing Time."
Appropriate arrangements for placing the funds received from subscriptions
for the Preferred Stock or other offers to purchase Preferred Stock were made
prior to the commencement of the Public Offering, with provision for refund to
the purchasers as set forth in Section 9 hereof, or for delivery to the Company
if all shares of Preferred Stock are sold. The Company shall not be deemed to
have received any subscription offer or exercise of a Right accompanied by a
check or comparable instrument until final payment has been made on such check
or instrument. The Company will pay any stock issue and transfer taxes which
may be payable with respect to the sale of the shares of Preferred Stock.
In addition to reimbursement of the expenses specified in Section 4 hereof,
the Agent will receive the following compensation for its services hereunder:
(a) a non-refundable advisory fee of $25,000, previously paid by the
Company;
(b) one and one-half percent (1.50%) of the aggregate value of funds
committed in the Private Offering;
(c) three percent (3.0%) of the aggregate purchase price of the shares of
Preferred Stock sold in the Public Offering pursuant to the exercise
of subscription rights; and
(d) five percent (5.0%) of the aggregate value of funds committed by
Standby Purchasers who execute standby purchase agreements.
The above fees are subject to a minimum aggregate compensation to the Agent
of $250,000.
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Offering is terminated by the Company,
Sandler O'Neill shall be entitled to retain the financial advisory fee set forth
in Section 2(a) hereof and the Company shall reimburse Sandler O'Neill for all
of its reasonable out-of-pocket expenses incurred prior to termination including
the reasonable fees and disbursements of counsel for the Agent, up to an
aggregate of $125,000, upon receipt by the Company or the Bank of a written
accounting therefor setting forth in reasonable detail the expenses incurred by
the Agent.
All fees payable to the Agent hereunder shall be payable in immediately
available funds at the Closing Time, or upon the termination of this Agreement,
as the case may be.
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<PAGE>
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with the Agent
as follows:
(a) The Company will prepare and file such amendments or supplements to
the Registration Statement and the Prospectus as may hereafter be required by
the Securities Act Regulations or as may hereafter be requested by the Agent.
The Company will notify the Agent immediately, and confirm the notice in
writing, (i) of the effectiveness of any post-effective amendment of the
Registration Statement or the filing of any supplement to the Prospectus, (ii)
of the receipt of any comments from the Commission with respect to the
transactions contemplated by this Agreement, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, (iv) of the receipt
of any order, directive, request or other correspondence from the FRB or the OCC
relating to the Offering, (v) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (vi) of the receipt of any
notice with respect to the suspension of any qualification of the Rights or the
Preferred Stock for offering or sale in any jurisdiction. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the withdrawal thereof at the earliest possible
moment.
(b) The Company will give the Agent notice of its intention to file or
prepare any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus (including
any revised prospectus which the Company proposes for use in connection with the
Public Offering of the Rights or the Preferred Stock which differs from the
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the Securities Act Regulations), will furnish
the Agent with copies of any such amendment or supplement a reasonable amount of
time prior to such proposed filing or use, as the case may be, and will not file
any such amendment or supplement or use any such prospectus to which the Agent
or counsel for the Agent shall object.
(c) The Company will deliver to the Agent as many signed copies and as
many conformed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) as the Agent may reasonably request, and from time to time
such number of copies of the Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be delivered, the
Company will comply, at its own expense, with all requirements imposed upon it
by the Commission, as from time to time in force, and by the Securities Act, the
Securities Act Regulations, the Exchange Act and the rules and regulations of
the Commission promulgated thereunder, including, without limitation, Rule 10b-6
under the 1934 Act, so far as necessary to permit the continuance of sales or
dealing in shares of Common Stock during such period in accordance with the
provisions hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result of which it is
necessary, in the opinion of counsel for the Agent, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company
will forthwith amend or supplement the Prospectus (in form and substance
satisfactory to the Agent and counsel for the Agent) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact
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<PAGE>
necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading, and the Company will furnish to the Agent a reasonable number of
copies of such amendment or supplement. For the purpose of this subsection, the
Company will furnish such information with respect to itself as the Agent may
from time to time reasonably request.
(f) The Company will take all necessary action, in cooperation with the
Agent, to qualify the Securities for offering and sale under the applicable
securities laws of such states of the United States and other jurisdictions as
the Agent and the Company have agreed; provided, however, that the Company shall
not be obligated to file any general consent to service of process or to qualify
as a foreign corporation in any jurisdiction in which it is not so qualified.
In each jurisdiction in which the Securities have been so qualified, the Company
will file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than six months from the effective date of the Registration Statement.
(g) The Company authorizes Sandler O'Neill to act as agent of the Company
in distributing the Prospectus to persons having record addresses in the states
or jurisdictions set forth in a survey of the securities or "blue sky" laws of
the various jurisdictions in which the Public Offering will be made (the "Blue
Sky Survey").
(h) The Company will make generally available to its security holders as
soon as practicable, but not later than 60 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the 1933 Act Regulations) covering a twelve month period beginning
not later than the first day of the Company's fiscal quarter next following the
"effective date" (as defined in said Rule 158) of the Registration Statement.
(i) During the period of five years hereafter, the Company will furnish to
its stockholders as soon as practicable after the end of each fiscal year an
annual report (including statements of financial condition and statements of
income, stockholders' equity and cash flows of the Company, the Bank and their
subsidiaries, certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration Statement) consolidated summary financial information of the
Company, the Bank and its subsidiaries for such quarter in reasonable detail.
In addition, such annual report and quarterly consolidated summary financial
information shall be made public through the issuance of appropriate press
releases at the same time or prior to the time of the furnishing thereof to
stockholders of the Company.
(j) During the period of five years hereafter, the Company will furnish to
the Agent (i) as soon as available, a copy of each report or other document of
the Company furnished generally to stockholders of the Company or furnished to
or filed with the Commission under the Exchange Act or any national securities
exchange or system on which any class of securities of the Company is listed,
and (ii) from time to time, such other information concerning the Company as the
Agent may reasonably request.
(k) The Company will use the net proceeds received by it from the sale of
the Securities in the manner specified in the Prospectus under "Use of
Proceeds."
(l) The Company will file all documents and notices required by the Small
Caps Market of the Nasdaq Stock Market and will use its best efforts to maintain
the listing of the Common Stock
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on the Small Caps Market of the Nasdaq Stock Market and to cause the Preferred
Stock to be listed on the Small Caps Market of the Nasdaq Stock Market upon the
completion of the Offering.
(m) The Company will take such actions and furnish such information as are
reasonably requested by the Agent in order for the Agent to ensure compliance
with the National Association of Securities Dealers, Inc.'s "Interpretation
Relating to Free-Riding and Withholding" in connection with the sale of the
Preferred Stock.
(n) Other than the Prospectus or as permitted by applicable law, the
Company will not distribute any prospectus or other offering material in
connection with the offer and sale of the Securities and will not publish any
writing which constitutes an offer or prospectus.
(o) The Company will use all reasonable efforts to comply with such
requirements as may be necessary for the Agent or other brokerage firms to make
an active market for the shares of Preferred Stock and the Common Stock.
(p) The Company will cause to be maintained records of all funds submitted
to the Company's subscription agent in connection with the Rights Offering and
deposited by it in an escrow account to enable the Company to make appropriate
refunds of such funds in the event that such refunds are required to be made in
accordance with the Offering as described in the Prospectus.
(q) The Company will furnish to you as early as practicable prior to the
Closing Date, but no later than two (2) full business days prior thereto, a copy
of the latest available unaudited interim consolidated financial statements of
the Bank which have been read by Deloitte & Touche LLP as stated in their
letters to be furnished pursuant to subsections (d) and (e) of Section 5 hereof.
(r) The Company shall not deliver the Preferred Stock until the Company
has satisfied or caused to be satisfied each condition set forth in Section 5
hereof, unless such condition is waived by the Agent.
(s) Subsequent to the respective dates as to which information in given in
the Prospectus and prior to the Closing Date, except as otherwise may be
indicated or contemplated therein, the Company will not (i) issue any
securities, other than pursuant to the Company's existing stock option plans, or
incur any liability or obligation, direct or contingent, for borrowed money,
except borrowings from the same or similar sources indicated in the Prospectus
in the ordinary course of business, or (ii) enter into any transaction, other
than in the ordinary course of business which might result in any material
adverse change in the financial condition, results of operations, or business of
the Company and the Bank, taken as a whole.
SECTION 4. PAYMENT OF EXPENSES. The Company shall pay all expenses incident
to the performance of their obligations under this Agreement, including but not
limited to (i) the cost of obtaining all securities and bank regulatory
approvals, (ii) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (iii) the preparation, issuance
and delivery of the certificates for the Securities to the purchasers in the
Offerings, (iv) the fees and disbursements of the Company's counsel, accountants
and other advisors, (v) the qualification of the Securities under securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the fees and disbursements of counsel in connection therewith and in
connection with the preparation of the Blue Sky Survey in an amount not to
exceed $15,000, (vi) the printing and delivery to the Agent of copies of the
Registration Statement as originally filed and of each
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amendment thereto and the printing and delivery of the Prospectus and any
amendments or supplements thereto to the purchasers in the Public Offering and
the Agent, (vii) the printing and delivery to the Agent of copies of a Blue Sky
Survey, and (viii) the fees and expenses incurred in connection with the listing
of the Securities on the Small Caps Market of the Nasdaq Stock Market. In the
event the Agent incurs any such fees and expenses on behalf of the Company, the
Company will reimburse the Agent for such fees and expenses whether or not the
Offering is consummated; provided, however, that the Agent shall not incur any
substantial expenses on behalf of the Company pursuant to this Section without
the prior approval of the Company.
The Company shall pay certain expenses incident to the performance of the
Agent's obligations under this Agreement, including (i) the filing fees paid or
incurred by the Agent in connection with all filings with the National
Association of Securities Dealers, Inc., and (ii) all reasonable out of pocket
expenses incurred by the Agent relating to the Offerings, including, without
limitation, advertising, promotional, and travel expenses and fees and expenses
of the Agent's counsel, up to an aggregate of $125,000. All fees and expenses
to which the Agent is entitled to reimbursement under this paragraph of this
Section 4 shall be due and payable upon receipt by the Company of a written
accounting therefor setting forth in reasonable detail the expenses incurred by
the Agent.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS. The Company and the Agent
agree that the issuance and the sale of Preferred Stock and all obligations of
the Agent hereunder are subject to the accuracy of the representations and
warranties of the Company and the Bank herein contained as of the date hereof
and as of the Closing Date, to the accuracy of the written statements of
officers and directors of the Company made pursuant to the provisions hereof, to
the performance by the Company of their obligations hereunder, and to the
following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the sale
of the Securities in any jurisdiction shall have been issued, and no order,
directive, request or other correspondence has been received by the Company or
the Bank from the FRB or the OCC which could have the effect of delaying or
canceling the Offerings.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of Manatt,
Phelps & Phillips, counsel for the Company and the Bank, in form and
substance satisfactory to counsel for the Agent, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
California.
(ii) The Company has full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Registration Statement and Prospectus and to enter into and perform its
obligations under this Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required except where the failure to be so qualified
would not have a material adverse effect upon the financial condition,
results of operations, or business of the Company or the Bank, taken as a
whole.
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(iv) The authorized capital stock of the Company is correctly set
forth in the Registration Statement and Prospectus under the caption
"Capitalization" and, upon consummation of the Offerings, the issued and
outstanding capital stock of the Company will be no less than the Minimum
and no more than the Maximum set forth in the Registration Statement and
Prospectus under the caption "Capitalization."
(v) The Rights have been duly and validly authorized for issuance,
and when issued and delivered by the Company pursuant to the terms of the
Rights Offering, in accordance with the description set forth in the
Prospectus, will be duly and validly issued.
(vi) The Preferred Stock has been duly and validly authorized for
issuance and sale and, when issued and delivered by the Company pursuant to
the terms of the Offerings against payment of the consideration therefor in
accordance with the description set forth in the Prospectus, will be duly
and validly issued and fully paid and non-assessable and will be owned free
and clear of any mortgage, pledge, loan, security interest, encumbrance, or
claim (legal or equitable) other than that created by the purchaser thereof
or by a third party other than the Company with respect to a purchaser
thereof.
(vii) A number of shares of Common Stock equal to the number of
shares of Preferred Stock have been duly and validly authorized and
reserved in the corporate records of the Company, and upon conversion of
the Preferred Stock pursuant to the terms of the Offerings, in accordance
with the description set forth in the Prospectus, will be duly and validly
issued and fully paid and non-assessable and will be owned free and clear
of any mortgage, pledge, loan, security interest, encumbrance, or claim
(legal or equitable).
(viii) The issuance of the Preferred Stock and the Common Stock into
which the Preferred Stock is convertible is not subject to preemptive or
other similar rights arising by operation of law or, to the best of such
counsel's knowledge and information, otherwise.
(ix) The Bank has been duly organized, and is validly existing and
in good standing under the laws of the United States of America as a
national bank, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus; and the Bank is duly qualified
as a foreign corporation in each jurisdiction in which such qualification
is required.
(x) The deposit accounts of the Bank are insured by the FDIC up to
the maximum amount allowed by law.
(xi) The only direct or indirect subsidiary of the Company is the
Bank; and the Bank has no direct or indirect subsidiary. For purposes of
the opinions set forth in this section 5(b)(1) the term "subsidiaries"
refers only to those subsidiaries of the Company or the Bank which would be
considered a "significant subsidiary" within the meaning of Regulation S-X,
Rule 1-02 promulgated by the Commission.
(xii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of the Company and
the Bank and this Agreement constitutes the legal, valid and binding
agreement of the Company and the Bank, enforceable in accordance with its
terms, except as rights to indemnity, contribution and limitations of
liability hereunder
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may be limited under applicable law (it being understood that such counsel
may avail itself of customary exceptions concerning the effect of
bankruptcy, insolvency or similar laws and the availability of equitable
remedies); and to the best of such counsel's knowledge will not conflict
with or constitute a breach of, or default under, and no event has occurred
which, with notice or lapse of time or both, would constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or the Bank pursuant
to any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company or the Bank is a party or by which either
of them may be bound, or to which any of the property or assets of the
Company or the Bank is subject, nor will such execution or delivery result
in any violation of the provisions of the charter or by-laws of the Company
or the Bank.
(xiii) The execution and delivery of the Private Purchaser Agreements
and the consummation of the transactions contemplated thereby have been
duly and validly authorized by all necessary action on the part of the
Company and the Bank and the Private Purchasers' Agreements constitutes the
legal, valid and binding agreement of the Company and the Bank, enforceable
in accordance with its terms, except as rights to indemnity, contribution
and limitations of liability hereunder may be limited under applicable law
(it being understood that such counsel may avail itself of customary
exceptions concerning the effect of bankruptcy, insolvency or similar laws
and the availability of equitable remedies); and to the best of such
counsel's knowledge will not conflict with or constitute a breach of, or
default under, and no event has occurred which, with notice or lapse of
time or both, would constitute a default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or the Bank pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company or the Bank is a party or by which either of them may be bound, or
to which any of the property or assets of the Company or the Bank is
subject, nor will such execution or delivery result in any violation of the
provisions of the charter or by-laws of the Company or the Bank.
(xiv) The offer, sale and delivery of the Preferred Stock in the
manner contemplated by the Private Purchaser Agreements is exempt from the
registration requirements under the Securities Act.
(xv) The Registration Statement is effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued under the
Securities Act or proceedings therefor initiated or threatened by the
Commission.
(xvi) No further approval, authorization, consent or other order of
any public board or body is required in connection with the execution and
delivery of this Agreement or the issuance of the Securities, except as may
be required under the securities or Blue Sky laws of various jurisdictions
as to which no opinion need be rendered.
(xvii) At the time the Registration Statement became effective and at
the Closing Time, the Registration Statement (other than the financial
statements and statistical data included therein, as to which no opinion
need be rendered) complied as to form in all material respects with the
requirements of the Securities Act and the Securities Act Regulations.
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(xviii) The Securities conform to the description thereof contained in
the Prospectus, and the forms of certificates used to evidence the
Securities are in due and proper form and comply with all applicable
statutory requirements.
(xix) To the best of such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against or affecting the
Company or the Bank which are required to be disclosed in the Registration
Statement and Prospectus, other than those disclosed therein, which would
have a material adverse effect upon the financial condition or results of
operations of the Company and the Bank taken as a whole.
(xx) The information in the Prospectus under " Market Price of
Common Stock and Dividends," "Certain Federal Income Tax Consequences",
"The Company-Regulatory Agreements", "The Company-Legal Proceedings", "The
Private Offering", "Regulation," and "Description of Capital Stock," to the
extent that it constitutes matters of law, summaries of legal matters,
documents or proceedings, or legal conclusions, has been reviewed by them
and is correct in all material respects.
(xxi) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto and the descriptions
thereof or references thereto are correct.
(xxii) To the best of such counsel's knowledge, the Company and the
Bank have obtained all licenses, permits and other governmental
authorizations currently required for the conduct of their respective
businesses as described in the Registration Statement and Prospectus, and
all such licenses, permits and other governmental authorizations are in
full force and effect, and the Company and the Bank are in all material
respects complying therewith.
(xxiii) Neither the Company nor the Bank is in violation of its
charter or bylaws or, to the best of such counsel's knowledge, in default
(nor has any event occurred which, with notice or lapse of time or both,
would constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which the Company or the Bank is a party or by which the Company or the
Bank or any of their property may be bound.
(xxiv) The Company is not required to be registered as an investment
company under the Investment Company Act of 1940.
(2) The favorable opinion, dated as of Closing Time, of Muldoon, Murphy &
Faucette, counsel for the Agent, with respect to the matters set forth in
Section 5(b)(1)(i), (iv), (v), (vi) (solely as to preemptive rights arising by
operation of law), (x), (xii), (xv) and (xvi) and such other matters as the
Agent may reasonably require.
(3) In giving their opinions required by subsections (b)(l) and (b)(2),
respectively, of this Section, Manatt, Phelps & Phillips and Muldoon, Murphy &
Faucette shall each additionally state that nothing has come to their attention
that would lead them to believe that the Registration Statement (except for
financial statements and schedules and other financial or statistical data
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<PAGE>
included therein, as to which counsel need make no statement), at the time it
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (except for financial
statements and schedules and other financial or statistical data included
therein, as to which counsel need make no statement), at the time the
Registration Statement became effective or at Closing Time, included an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In giving their opinions, Manatt, Phelps
& Phillips and Muldoon, Murphy & Faucette may rely as to matters of fact on
certificates of officers and directors of the Company and the Bank and
certificates of public officials, and Muldoon, Murphy & Faucette may also rely
on the opinion of Manatt, Phelps & Phillips.
(c) At the Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in the
financial condition, results of operations, or business of the Company and the
Bank, taken as a whole, whether or not arising in the ordinary course of
business, and the Agent shall have received a certificate of the President and
Chief Executive Officer of the Company, and the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect that
(i) there has been no such material adverse change, (ii) there shall have been
no material transaction entered into by the Company or the Bank from the date of
the latest statement of financial condition of the Company or the Bank as set
forth in the Registration Statement and the Prospectus other than transactions
referred to or contemplated therein and transactions in the ordinary course of
business, (iii) except as previously disclosed in the Prospectus, neither the
Company nor the Bank shall have received from the OCC any direction (oral or
written) to make any material change in the method of conducting its business
with which it has not complied (which direction, if any, shall have been
disclosed to the Agent) or which materially and adversely would affect the
business, financial condition or results of operations of the Company or the
Bank, (iv) the representations and warranties in Section 1 hereof are true and
correct with the same force and effect as though expressly made at and as of the
Closing Time, except as to any such representation or warranty which
specifically relates to an earlier date, (v) the Company and the Bank have
complied with all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to Closing Time, (vi) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been initiated or threatened by the
Commission, (vii) no order, directive, request or other correspondence has been
received by the Company or the Bank from the FRB or the OCC which could have the
effect of delaying or canceling the Offering, and (viii) neither the Company nor
the Bank has a "significant subsidiary" within the meaning of Regulation S-X,
Rule 1-02 promulgated by the Commission.
(d) At the time of the execution of this Agreement, the Agent shall have
received from Deloitte & Touche LLP a letter dated such date, in form and
substance satisfactory to the Agent, to the effect that (i) they are independent
certified public accountants with respect to the Company and the Bank within the
meaning of the Code of Ethics of the American Institute of Certified Public
Accountants, the Securities Act and the Securities Act Regulations; (ii) it is
their opinion that the consolidated financial statements and supporting
schedules included in the Registration Statement and incorporated by reference
therein and covered by their opinions therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations; (iii) based upon limited procedures as agreed upon by the
Agent and Deloitte & Touche LLP and set forth in detail in such letter, nothing
has come to their attention which causes them to believe that (A) the unaudited
financial statements and supporting schedules of the Bank and their
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<PAGE>
subsidiaries included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act and the Securities Act Regulations or are not presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus, (B) the unaudited amounts set
forth under "Summary Selected Consolidated Financial and Other Data" in the
Prospectus were not determined on a basis substantially consistent with that
used in determining the corresponding amounts in the audited financial
statements included in the Registration Statement and the Prospectus or
incorporated therein by reference, (C)at a specified date not more than five
days prior to the date of this Agreement, there has been any increase in the
consolidated long term or short term debt of the Company and its subsidiaries or
any decrease in consolidated total assets, allowance for loan losses, total
deposits or shareholders equity of the Company and its subsidiaries, in each
case as compared with the amounts shown in the December 31, 1996 balance sheet
included in the Registration Statement or, (D) during the period from December
31, 1996 to a specified date not more than five days prior to the date of this
Agreement, there were any decreases, as compared with the corresponding period
in the preceding year, in total interest income, net interest income, net
interest income after provision for loan losses, income before income tax
expense or net income of the Bank, except in all instances for increases or
decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur; and (iv) in addition to the examination referred to in
their opinions and the limited procedures referred to in clause (iii) above,
they have carried out certain specified procedures, not constituting an audit,
with respect to certain amounts, percentages and financial information which are
included in the Registration Statement and Prospectus and which are specified by
the Agent, and have found such amounts, percentages and financial information to
be in agreement with the relevant accounting, financial and other records of the
Company and its subsidiaries identified in such letter.
(e) At Closing Time, the Agent shall have received from Deloitte & Touche
LLP a letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (d) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to Closing Time.
(f) At Closing Time, counsel for the Agent shall have been furnished with
such documents and opinions as they may require for the purpose of enabling them
to pass upon the issuance and sale of the Securities as herein contemplated and
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
satisfactory in form and substance to the Agent and counsel for the Agent.
(g) At any time prior to Closing Time, (i) there shall not have occurred
any material adverse change in the financial markets in the United States or
elsewhere or any outbreak of hostilities or escalation thereof or other calamity
or crisis the effects of which, in the judgment of the Agent, are so material
and adverse as to make it impracticable to market the Securities or to enforce
contracts, including subscriptions or orders, for the sale of the Securities,
and (ii) trading generally on either the American Stock Exchange or the New York
Stock Exchange shall not have been suspended, and minimum or maximum prices for
trading shall not have been fixed, or maximum ranges for prices for securities
have been required, by either of said Exchanges or by order of the Commission or
any other governmental authority, and a banking moratorium shall not have been
declared by Federal, New York or California authorities.
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<PAGE>
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank jointly and severally agree to indemnify and
hold harmless the Agent, each person, if any, who controls the Agent, within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
and its respective partners, directors, officers, employees and agents (the
Agent and each such person being an "Agent Indemnified Party") as follows:
(i) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, related to or arising out of the Offerings
or any action taken by the Agent where acting as agent of the Company or
otherwise as described in Section 2 hereof or in the Engagement Letter
dated December 1, 1996 between the Company and the Agent; provided,
however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense found in a final judgment by a court to
have resulted primarily from the bad faith or gross negligence of the
Agent.
(ii) from and against any and all loss, liability, claim, damage and
expense, as incurred, related to or arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
(iii) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever described in clauses (i) or (ii) above, if such settlement is
effected with the written consent of the Company or the Bank, which consent
shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as incurred
(including, subject to Section 6(c)hereof, the fees and disbursements of
counsel chosen by the Agent), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation,
proceeding or inquiry by any governmental agency or body, commenced or
threatened, or any pending or threatened claim whatsoever described in
clauses (i) or (ii) above, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, that this indemnity agreement shall not apply to any loss, liability,
- --------
claim, damage or expense to the extent arising out of any untrue statement or
alleged untrue statement of a material fact or omission or alleged omission of a
material fact required to be stated therein or necessary to make not misleading
any statements contained in the Registration Statement (or any amendment
thereto) or the Prospectus (or any amendment or supplement thereto), made in
reliance upon and in conformity with written information relating to the Agent
furnished to the Company by the Agent expressly for use in the Registration
Statement (or any amendment thereto) or the Prospectus (or any amendment or
supplement thereto), which information is included solely in the section of the
Prospectus captioned "The Rights Offering -- Financial Advisor."
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<PAGE>
(b) The Agent agrees to indemnify and hold harmless the Company its
directors and its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with the
Agent Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder. No indemnification provided
for in Section 6(a) or 6(b) shall be available to any party who shall fail to
give notice as provided in this Section 6(c)if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related and
was materially prejudiced by the failure to give such notice but the omission so
to notify such indemnifying party of any such action, suit or proceeding shall
not relieve it from any liability that it may have to any indemnified party for
contribution or otherwise than under this Section 6. An indemnifying party may,
at its own expense, participate in, and to the extent that it shall wish, assume
the defense of, any such action, provided, however, that if the defense of such
action is assumed by the Company, counsel shall be satisfactory to the Agent.
Notwithstanding the Company's election to assume the defense of such action, if,
in the sole judgment of the Agent or any other Agent Indemnified Party, it is
advisable for the Agent or any other Agent Indemnified Party to be represented
by separate counsel, the Agent or any other Agent Indemnified Party shall have
the right to employ counsel to represent the Agent or any other Agent
Indemnified Party for liability arising from any action in which indemnity may
be sought by the Agent or any other Agent Indemnified Party, in which event the
reasonable fees and expenses of such separate counsel shall be borne by the
Company and reimbursed to the Agent or any other Agent Indemnified Party as
incurred. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances.
(d) The Company also agrees that the Agent shall not have any liability
(whether direct or indirect, in contract or tort or otherwise) to the Company,
its security holders or the Company's creditors relating to or arising out of
the engagement of the Agent pursuant to, or the performance by the Agent of the
services contemplated by, this Agreement, except to the extent that any loss,
claim, damage or liability is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from the Agent's bad faith or gross
negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that the Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or any of their respective partners, directors, officers,
employees or agents is requested or required to appear as a witness or otherwise
gives testimony in any action, proceeding, investigation or inquiry brought by
or on behalf of or against the Company, the Agent or any of its respective
affiliates or any participant in the transactions contemplated hereby in which
the Agent is not named as a defendant, the Company agrees to reimburse the Agent
for all reasonable and necessary out-of-pocket expenses incurred by it in
connection with preparing or appearing as a witness or otherwise giving
testimony.
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<PAGE>
SECTION 7. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company and the
Agent shall contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity agreement incurred by the
Company and the Agent, as incurred, in such proportions (i) that the Agent is
responsible for that portion represented by the percentage that the maximum
aggregate marketing fees appearing on the cover page of the Prospectus bears to
the maximum aggregate gross proceeds appearing thereon and the Company is
responsible for the balance or (ii) if, but only if, the allocation provided for
in clause (i) is for any reason held unenforceable, in such proportion as is
appropriate to reflect not only the relative benefits to the Company on the one
hand and the Agent on the other, as reflected in clause (i), but also the
relative fault of the Company on the one hand and the Agent on the other, as
well as any other relevant equitable considerations; provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section, each person, if any, who controls the Agent within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Agent, and each director of the Company,
each officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company. Notwithstanding anything to the contrary set forth
herein, to the extent permitted by applicable law, in no event shall the Agent
be required to contribute an aggregate amount in excess of the aggregate
marketing fees to which the Agent is entitled and actually paid pursuant to this
Agreement. Neither party shall be liable for contribution for claims settled
without such party's consent provided such consent is not unreasonably withheld.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Company or the Bank submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Agent or controlling person, or
by or on behalf of the Company, and shall survive delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the Company, at
any time at or prior to Closing Time (i) if there has been, since the date of
this Agreement or since the respective dates as of which information is given in
the Registration Statement, any material adverse change in the financial
condition, results of operations, or business of the Company and the Bank, taken
as a whole, whether or not arising in the ordinary course of business; (ii) if
there has occurred any material adverse change in the financial markets in the
United States or elsewhere or any outbreak of hostilities or escalation thereof
or other calamity or crisis the effects of which, in the judgment of the Agent,
are so material and adverse as to make it impracticable to market the Securities
or to enforce contracts, including subscriptions or orders, for the sale of the
Securities; (iii) if trading generally on either the American Stock Exchange or
the New York Stock Exchange has been suspended, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required, by either of said Exchanges or by order of the Commission or any other
governmental authority, or if a banking moratorium has been declared by either
Federal, New York or California authorities; (iv) if any condition specified in
Section 5 shall not have been fulfilled when and as required to be fulfilled;
(v) if there shall have been such material
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<PAGE>
adverse change in the condition or prospects of the Company or the Bank or the
prospective market for the Company's securities as in the Agent's good faith
opinion would make it inadvisable to proceed with the offering, sale or delivery
of the Securities; or (vi) if the Company is unable to sell at least the total
minimum of Securities, as disclosed on the cover of the Prospectus, or if the
Offering is not consummated for any other reason, prior to __________, 1997.
(b) If this Agreement is terminated pursuant to this Section, the Company
shall refund to any persons who have subscribed for any of the shares of
Preferred Stock the full amount which it may have received from them, without
interest, as provided in the Prospectus, such termination shall be without
liability of any party to any other party except that the provisions of Section
4 hereof relating to reimbursement of expenses and the provisions of Sections 6
and 7 hereof shall survive any termination of this Agreement.
SECTION 10. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Agent
shall be directed to the Agent at Two World Trade Center, 104th Floor, New York,
New York 10048, attention of Thomas W. Killian, Principal, with a copy to
Muldoon, Murphy & Faucette at 5101 Wisconsin Avenue, N.W., Washington, D.C.
20016, attention of Mary M. Sjoquist.; notices to the Company shall be directed
to the Company at 1840 Century Park East, Los Angeles, California 90067,
attention of Scott A. Montgomery, Executive Vice President and Chief
Administrative Officer, with a copy to Manatt, Phelps & Phillips at 11355 West
Olympic Boulevard, Los Angeles, California 90064, attention of Nancy H. Wojtas.
SECTION 11. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the Agent and the Company and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person, firm or corporation, other than the Agent and the Company and
their respective successors and the controlling persons and officers and
directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein or therein contained. This
Agreement and all conditions and provisions hereof and thereof are intended to
be for the sole and exclusive benefit of the Agent and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the
entire understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made other than those specifically mentioned herein. No waiver,
amendment or other modification of this Agreement shall be effective unless in
writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State without regard to the
conflicts of laws provisions thereof. Specified times of day refer to Pacific
time unless otherwise noted herein.
SECTION 14. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
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<PAGE>
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
SECTION 15. HEADINGS. Sections headings are not to be considered part of
this Agreement, are for convenience and reference only, and are not to be deemed
to be full or accurate descriptions of the contents of any paragraph or
subparagraph.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Agent, the Company and the Bank in accordance with its terms.
Very truly yours,
National Mercantile Bancorp
By:
Name:
Title:
National Mercantile Bancorp
By:
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
Thomas W. Killian
Vice President
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<PAGE>
FORM OF
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AMENDED AND RESTATED
--------------------
ARTICLES OF INCORPORATION
-------------------------
OF
NATIONAL MERCANTILE BANCORP
---------------------------
A CALIFORNIA CORPORATION
I
The name of the Corporation shall be:
NATIONAL MERCANTILE BANCORP
II
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporation Code.
III
(A) Authorized Capital Stock.
------------------------
(1) General. The aggregate number of shares of stock which the Corporation
-------
is authorized to issue is 11,000,000 shares, no par value, of which 10,000,000
are designated as common shares (the "Common Stock") and 1,000,000 are
designated as preferred shares, consisting of 990,000 shares of Series A
Noncumulative Convertible Perpetual Preferred Stock (the "Preferred Stock") and
10,000 preferred shares undesignated as to series (the "Undesignated Preferred
Stock"). The shares of Common Stock, Undesignated Preferred Stock and Preferred
Stock are referred to herein collectively as the "capital stock".
Upon filing with the Secretary of State of the State of California of these
Amended and Restated Articles of Incorporation, every 9.09 outstanding shares of
Common Stock shall be combined and converted into one (1) share of Common Stock
(the "Reverse Stock Split"). The number of authorized shares of Common Stock
shall remain as 10,000,000.
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<PAGE>
(2) Authority Relative to Undesignated Preferred Stock. Authority is
--------------------------------------------------
hereby expressly vested in the Board of Directors of the Corporation, subject to
the provisions of this Article III and to limitations prescribed by law, to
authorize the issuance from time to time of one or more series of Undesignated
Preferred Stock and, with respect to each such series, to determine or fix, by
resolution or resolutions adopted by the affirmative vote of a majority of the
whole Board of Directors providing for the issue of such series, the voting
powers, full or limited, if any, of the shares of such series and the
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or conditions thereof, including,
without limitation the determination or fixing of the rates of and terms and
conditions upon which any dividends shall be payable on such series, any terms
under or conditions on which the shares of such series may be redeemed, any
provision made for the conversion or exchange of the shares of such series for
shares of any other class or classes or of any other series of the same or any
other class or classes of the Corporation's capital stock, and any rights of the
holders of the shares of such series upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
(B) Voting Privileges.
-----------------
(1) General. Each holder of Preferred Stock shall have that number of
-------
votes on all matters submitted to the shareholders that is equal to the number
of shares of Common Stock into which such holder's shares of Preferred Stock are
then convertible, as hereinafter provided. Each holder of Common Stock shall
have one vote on all matters submitted to the shareholders for each share of
Common Stock standing in the name of such holder on the books of the
Corporation. Except as otherwise provided herein, and except as otherwise
required by agreement or law, the shares of capital stock of the Corporation
shall vote as a single class on all matters submitted to the shareholders.
(2) Additional Class Votes by Preferred Stock. In addition to any class
-----------------------------------------
votes required by the California General Corporation Law, without the
affirmative vote or written consent of the holders (acting together as a class)
of a majority of the shares of Preferred Stock at the time outstanding, the
Corporation shall not:
(a) authorize any additional shares of Preferred Stock, or authorize or
issue any shares of capital stock having priority over Preferred Stock or
ranking on a parity therewith as to the payment or distribution of (i)
assets upon the liquidation or dissolution, voluntary or involuntary, of
the Corporation, or (ii) dividends; or
(b) amend, alter or repeal any of the provisions of the Amended and
Restated Articles of Incorporation of the Corporation or adopt any
Certificate of Designation of Rights and Preferences with respect to any
class or series of capital stock so as to adversely affect the rights,
preferences and privileges relating to Preferred Stock or the holders
thereof or waive any of the rights granted to the holders of the Preferred
Stock by the Amended and Restated Articles of Incorporation of the
Corporation; or
2
<PAGE>
(c) amend, alter or repeal any of the provisions of the Amended and
Restated Articles of Incorporation, or the bylaws, of the Corporation with
respect to the election of directors by cumulative voting; or
(d) issue any authorized shares of Preferred Stock except in connection
with (i) an offering of rights to holders of Common Stock to purchase
shares of the Preferred Stock (the "Rights Offering") consummated on or
before ___________, 1997, (ii) an offering of shares of the Preferred Stock
to certain institutional investors for purchase (the "Standby Purchaser
Offering") consummated on or before ___________, 1997, (iii) a sale of
shares of Preferred Stock to certain private purchasers (the "Private
Purchaser Offering") consummated on or before ___________, 1997, and (iv)
the exercise of a warrant to purchase shares of the Preferred Stock
pursuant to a certain Warrant Agreement dated December 31, 1995, between
the Corporation and California State Teachers' Retirement System. The
Rights Offering, the Private Purchasers Offering and the Standby Purchasers
Offering are referred to collectively as the "Offerings."
(C) Dividends.
---------
(1) Unless otherwise prohibited by law, the Preferred Stock shall be
entitled to receive non-cumulative cash dividends at the annual rate of 6.5% of
the Liquidation Amount (as defined in Paragraph D below) per share, payable
quarterly on the [__________] day of January, April, July and October in each
year, commencing [two years after the date of issuance of the Preferred Stock in
the Offerings], with respect to the three months then ending, before any
distribution by way of dividend or otherwise shall be declared or paid upon, or
set apart for, the shares of Common Stock or any other class of shares of the
Corporation ranking junior to the Preferred Stock with respect to the payment of
dividends or upon liquidation, dissolution or winding up of the Corporation (the
"Junior Stock"). Each such dividend will be payable to holders of record as
they appear on the books of the Corporation on or about the fifteenth day of the
month preceding the payment dates thereof, as shall be fixed by the Board of
Directors of the Corporation. The amount of dividends payable for each
quarterly dividend period shall be computed by dividing by four the dividend due
on the basis of the 6.5% annual rate. Dividends payable on the Preferred Stock
for any period shorter than a full three months shall be computed on the basis
of 30-day months and a 360-day year.
(2) No dividend (other than dividends or distributions paid in shares of,
or options, warrants or rights to subscribe for or purchase shares of, such
class or series of stock ranking on parity with the Preferred Stock as to
dividends) may be paid upon, or declared or set apart for, any class or series
of stock ranking on a parity with the Preferred Stock as to dividends, for any
dividend period, prior to [two years after the date of issuance of the Preferred
Stock in the Offerings], and thereafter, unless there shall be or have been
declared on the Preferred Stock dividends for the then current quarterly period
coinciding with or ending before such quarterly period, ratably in proportion to
the respective annual dividend rates fixed therefor.
3
<PAGE>
(3) No dividend (other than dividends or distributions paid in shares of,
or options, warrants or rights to subscribe for or purchase shares of, Junior
Stock and other than as provided in subparagraph (2) of this paragraph (C))
shall be declared or paid or set aside for payment or other distribution
declared or made upon any Junior Stock or any capital stock ranking on a parity
with the Preferred Stock as to dividends or upon liquidation or dissolution (the
"Parity Stock"), nor shall any Junior Stock or Parity Stock be redeemed,
purchased or otherwise be acquired for any consideration (or any monies to be
paid to or made available for a sinking fund for the redemption of any shares of
Junior Stock or Parity Stock) by the Corporation (except by conversion into or
exchange for Junior Stock or Parity Stock), in each case, prior to [two years
after the date of issuance of the Preferred Stock in the Offerings], and
thereafter, unless full dividends on all outstanding shares of Preferred Stock
shall have been paid for the then current dividend period or declared and a sum
sufficient for the payment thereof set aside for such payment.
(D) Other Terms of the Preferred Stock.
----------------------------------
(1) Liquidation Preference. In the event of an involuntary or voluntary
----------------------
liquidation or dissolution of the Corporation at any time, the holders of shares
of Preferred Stock shall be entitled to receive out of the assets of the
Corporation an amount equal to $10.00 per share (appropriately adjusted to
reflect stock splits, stock dividends, reorganizations, consolidations and
similar changes hereafter effected) (the "Liquidation Amount"), plus dividends
declared and unpaid thereon, if any. In the event of either an involuntary or a
voluntary liquidation or dissolution of the Corporation payment shall be made to
the holders of shares of Preferred Stock in the amounts herein fixed before any
payment shall be made or any assets distributed to the holders of the Common
Stock or any other class or series of capital stock of the Corporation ranking
junior to the Preferred Stock with respect to payment upon dissolution or
liquidation of the Corporation. If upon any liquidation or dissolution of the
Corporation the assets available for distribution shall be insufficient to pay
the holders of all outstanding shares of Preferred Stock and any other class or
series of capital stock ranking on a parity with the Preferred Stock as to
payments upon dissolution or liquidation of the Corporation the full amounts to
which they respectively shall be entitled, then such assets or the proceeds
thereof shall be distributed among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were paid in full.
At any time, in the event of the merger or consolidation of the Corporation
into or with another Corporation or the merger or consolidation of any other
Corporation into or with the Corporation or a plan of exchange between the
Corporation and any other Corporation (in which consolidation or merger or plan
of exchange any shareholders of the Corporation receive distributions of cash or
securities or other property) or the sale, transfer or other disposition of all
or substantially all of the assets of the Corporation, then, such transaction
shall be deemed, solely for purposes of determining the amounts to be received
by the holders of the Preferred Stock in such merger, consolidation, plan of
exchange, sale, transfer or other disposition, and for purposes of determining
the priority of receipt of such amounts as between the holders of the Preferred
Stock and the holders of other classes or series of capital stock, to be a
liquidation or dissolution of the Corporation.
4
<PAGE>
Nothing hereinabove set forth shall affect in any way the right of each
holder of shares of Preferred Stock to convert such shares at any time and from
time to time in accordance with subparagraph (3) below.
5
<PAGE>
(2) Redemption.
----------
(a) The shares of Preferred Stock shall not be redeemable by the
Corporation prior to [three years after the date of issuance of the
Preferred Stock in the Offerings]. On and after [three years after
the date of issuance of the Preferred Stock in the Offerings], the
Corporation, at its sole option, may redeem shares of Preferred Stock,
in whole or in part, at any time or from time to time, to the extent
the Corporation has funds legally available therefor, at the
redemption prices set forth below (expressed as a percentage of the
Liquidation Amount). If less than all of the outstanding shares of
Preferred Stock are to be redeemed, the Corporation will select the
shares to be redeemed by lot, pro rata (as nearly may be), or in such
other equitable manner as the Board of Directors of the Corporation
may determine.
If redeemed during the twelve-month period beginning [the month and
day of the issuance of the Preferred Stock in the Offerings]
<TABLE>
<CAPTION>
Year Price Per Share
---- ---------------
<S> <C>
2000............. 105%
2001............. 104%
2002............. 103%
2003............. 102%
2004............. 101%
</TABLE>
at the price indicated above, and from and after [eight years after
the date of issuance of the Preferred Stock in the Offerings], at the
price per share of 100% of the Liquidation Amount, plus in each case
declared and unpaid dividends thereon to the date fixed for redemption
(the total sum so payable on any such redemption being herein referred
to as the "redemption price").
(b) In no event shall the Corporation redeem less than all the outstanding
shares of Preferred Stock, unless dividends for the then-current
dividend period (without accumulation of any accrued and unpaid
dividends for prior dividend periods unless previously declared and
without interest) to the date fixed for redemption shall have been
declared and paid or set apart for payment on all outstanding shares
of Preferred Stock; provided, however, that the foregoing shall not
prevent, if otherwise permitted,
6
<PAGE>
the purchase or acquisition by the Corporation of shares of Preferred
Stock pursuant to a tender or exchange offer made on the same terms to
holders of all the outstanding shares of Preferred Stock and mailed to
the holders of record of all such outstanding shares at such holders'
addresses as the same appear on the books of the Corporation; and
provided further that if some, but less than all, of the shares of
Preferred Stock are to be purchased or otherwise acquired pursuant to
such a tender or exchange offer and the number of such shares so
tendered exceeds the number of shares so to be purchased or otherwise
acquired by the Corporation, the shares of Preferred Stock so tendered
shall be purchased or otherwise acquired by the Corporation on a pro
rata basis (with adjustments to eliminate fractions) according to the
number of such shares duly tendered by each holder so tendering shares
of Preferred Stock for such purchase of exchange.
(c) Notice of any redemption pursuant to this subparagraph (2) shall be
mailed at least 30, but not more than 60, days in advance of the date
designated for such redemption (herein called the "redemption date")
to the holders or record of shares of Preferred Stock so to be
redeemed at their respective addresses as the same shall appear on the
books of the Corporation. To facilitate the redemption of shares of
Preferred Stock, the Board of Directors may fix a record date for the
determination of holders of shares of Preferred Stock to be redeemed
not more than 60 days prior to the redemption date. Each such notice
shall state: (i) the redemption date; (ii) the number of shares of
Preferred Stock to be redeemed and, if less than all the shares held
by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (iii) the redemption price; (iv) that the
shares of Preferred Stock called for redemption may be converted at
any time prior to the date fixed for redemption; (v) the applicable
conversion price or rate; (vi) the place or places where certificates
for such shares are to be surrendered for payment of the redemption
price; and (vii) that dividends on the shares to be redeemed will
cease to accrue on such redemption date. If less than all the shares
represented by any such surrendered certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(d) The Corporation shall, on or prior to the date fixed for redemption of
any shares, but not earlier than 45 days prior to the date fixed for
redemption, deposit with its transfer agent or other redemption agent
selected by the Board of Directors, as a trust fund, a sum sufficient
to redeem the shares called for redemption, with irrevocable
instructions and authority to such transfer agent or other redemption
agent to give or complete the notice of redemption thereof and to pay
to the respective holders of such shares, as evidenced by a list of
such holders certified by an officer of the Corporation, the
redemption price upon surrender of their respective share
certificates. Such deposit shall be deemed to constitute full payment
of such shares to their holders; and from and after the date of such
deposit, notwithstanding that any certificates for such shares shall
not have been surrendered for cancellation, the shares represented
thereby shall no longer be deemed outstanding, rights to receive
dividends
7
<PAGE>
and distributions shall cease to accrue from and after the redemption
date, and all rights of the holders of the Preferred Stock called for
redemption, as shareholders of the Corporation with respect to such
shares, shall cease and terminate, except the right to receive the
redemption price, without interest, upon the surrender of their
respective certificates, and except the right to convert their shares
into Common Stock as provided in subparagraph (3) of this paragraph
(D), until the close of business on the redemption date. In case the
holders of any shares shall not, within six years after such deposit,
claim the amount deposited for redemption thereof, such transfer agent
or other redemption agent shall, upon demand, pay over to the
Corporation the balance of such amount so deposited. Thereupon, such
transfer agent or other redemption agent shall be relieved of all
responsibility to the holders thereof and the sole right of such
holders shall be as general creditors of the Corporation. To the
extent that shares of Preferred Stock called for redemption are
converted into common Stock prior to the date fixed for redemption,
the amount deposited by the Corporation to redeem such shares shall
immediately be returned to the Corporation. Any interest accrued on
any funds so deposited shall belong to the Corporation, and shall be
paid to it from time to time on demand.
(e) Redemption of any shares of Preferred Stock is subject to the prior
approval of any federal regulatory agency with jurisdiction over such
matters.
(3) Conversion Right. At the option of the holders thereof, the shares of
----------------
Preferred Stock shall be convertible, at the office of the Corporation (or at
such other office or offices, if any, as the Board of Directors may designate),
into fully paid and nonassessable shares (calculated as to each conversion to
the nearest 1/100th of a share) of Common Stock of the Corporation, at the
conversion price, determined as hereinafter provided, in effect at the time of
conversion, each share of Preferred Stock being deemed to have a value of $10.00
for the purpose of such conversion. The price at which shares of Common Stock
shall be delivered upon conversion (herein called the "conversion price") shall
be initially $10.00 per share of Common Stock (i.e., at an initial conversion
rate of one share of Common Stock for each share of Preferred Stock); provided,
--------
however, that such initial conversion price shall be subject to adjustment from
- -------
time to time in certain instances as hereinafter provided. In the case of the
call for redemption of any shares of Preferred Stock, such right of conversion
shall cease and terminate as to the shares designated for redemption on the day
such shares are actually redeemed by the Corporation. The following provisions
shall govern such right of conversion:
(a) To convert shares of Preferred Stock into shares of Common Stock of the
Corporation, the holder thereof shall surrender at any office
hereinabove mentioned the certificate or certificates therefor, duly
endorsed to the Corporation or in blank, and give written notice to the
Corporation at such office that such holder elects to convert such
shares. Shares of Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of the
surrender of such shares for conversion as herein provided, and the
person entitled to receive the
8
<PAGE>
shares of Common Stock of the Corporation issuable upon such conversion
shall be treated for all purposes as the record holder of such shares
of Common Stock at such time. As promptly as practicable on or after
the conversion date, the Corporation shall issue and deliver or cause
to be issued and delivered at such office a certificate or certificates
for the number of shares of Common Stock of the Corporation issuable
upon such conversion.
(b) The conversion price shall be subject to adjustment from time to time
as hereinafter provided. Upon each adjustment of the conversion price
each holder of shares of Preferred Stock shall thereafter be entitled
to receive the number of shares of Common Stock of the Corporation
obtained by multiplying the conversion price in effect immediately
prior to such adjustment by the number of shares issuable pursuant to
conversion immediately prior to such adjustment and dividing the
product thereof by the conversion price resulting from such adjustment.
(c) In case the Corporation shall (i) declare a dividend upon the Common
Stock payable in Common Stock (other than a dividend declared to effect
a subdivision of the outstanding shares of Common Stock, as described
in subparagraph (d) below) or Convertible Securities, or in any rights
or options to purchase Common Stock or Convertible Securities, or (ii)
declare any other dividend or make any other distribution upon the
Common Stock payable otherwise than out of earnings or earned surplus,
then thereafter each holder of shares of Preferred Stock upon the
conversion thereof will be entitled to receive the number of shares of
Common Stock into which such shares of Preferred Stock have been
converted, and, in addition and without payment therefor, each dividend
described in clause (i) above and each dividend or distribution
described in clause (ii) above which such holder would have received by
way of dividends or distributions if continuously since such holder
became the record holder of such shares of Preferred Stock such holder
(i) had been the record holder of the number of shares of Common Stock
then received, and (ii) had retained all dividends or distributions in
stock or securities (including Common Stock or Convertible Securities,
and any rights or options to purchase any Common Stock or Convertible
Securities) payable in respect of such Common Stock or in respect to
any stock or securities paid as dividends or distributions and
originating directly or indirectly from such Common Stock. For the
purposes of the foregoing a dividend or distribution other than in cash
shall be considered payable out of earnings or earned surplus only to
the extent that such earnings or earned surplus are charged an amount
equal to the fair value of such dividend or distribution as determined
by the Board of Directors of the Corporation.
(d) In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the conversion
price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Corporation shall be combined into a
9
<PAGE>
smaller number of shares (other than the Reverse Stock Split), the
conversion price in effect immediately prior to such combination shall
be proportionately increased.
(e) If any capital reorganization or reclassification of the capital stock
of the Corporation, or consolidation or merger of the Corporation with
another Corporation, or the sale of all or substantially all of its
assets to another Corporation shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities
or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, consolidation,
merger or sale, and subject to subparagraph (1) above, lawful and
adequate provision shall be made whereby the holders of Preferred Stock
shall thereafter have the right to receive upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of the
Common Stock of the Corporation immediately theretofore receivable upon
the conversion of Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number
of shares of such stock immediately theretofore receivable upon the
conversion of Preferred Stock had such reorganization,
reclassification, consolidation, merger or sale not taken place, plus
all declared dividends unpaid and accumulated or accrued thereon to the
date of such reorganization, reclassification, consolidation, merger or
sale, and in any such case appropriate provision shall be made with
respect to the rights and interests of the holders of Preferred Stock
to the end that the provisions hereof (including without limitation
provisions for adjustments of the conversion price and of the number of
shares receivable upon the conversion of Preferred Stock) shall
thereafter be applicable, as nearly as may be in relation to any shares
of stock, securities or assets thereafter receivable upon the
conversion of Preferred Stock. The Corporation shall not effect any
such consolidation, merger or sale, unless prior to the consummation
thereof the successor Corporation (if other than the Corporation)
resulting from such consolidation or merger or the Corporation
purchasing such assets shall assume by written instrument executed and
mailed to the registered holders of Preferred Stock, at the last
addresses of such holders appearing on the books of the Corporation,
the obligation to deliver to such holders such shares of stock,
securities or assets as, in accordance with the foregoing provisions,
such holders may be entitled to receive.
(f) Upon any adjustment of the conversion price, then and in each case the
Corporation shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holders of Preferred
Stock, at the addresses of such holders as shown on the books of the
Corporation, which notice shall state the conversion price resulting
from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such price upon the conversion of
Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
10
<PAGE>
(g) In case at any time:
(i) the Corporation shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization, or reclassification of
the capital stock of the Corporation, or consolidation or merger
of the Corporation with, or sale of all or substantially all of
its assets to, another Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give
written notice, by first-class mail, postage prepaid, addressed to the
registered holders of Preferred Stock at the addresses of such holders
as shown on the books of the Corporation, of the date on which (i) the
books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights, or (ii) such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place, as the case
may be. Such notice also shall specify the date as of which the holders
of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange
their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding up, as the case may be. Such
written notice shall be given at least 20 days prior to the action in
question and not less than 20 days prior to the record date or the date
on which the Corporation's transfer books are closed in respect
thereto.
(h) As used in this paragraph (3) the term "Common Stock" shall mean and
include the Corporation's presently authorized Common Stock and also
shall include any capital stock of any class of the Corporation
hereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, provided that the shares receivable pursuant to conversion
of shares of Preferred Stock shall include shares designated as Common
Stock of the Corporation as of the date of issuance of such shares of
Preferred Stock, or, in case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in
subparagraph (e) above.
11
<PAGE>
(i) No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be
issuable, the Corporation shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the market
price per share of Common Stock as of the close of business on the day
of conversion. "Market price" shall mean if the Common Stock is traded
on a securities exchange or on the Nasdaq Stock Market, the closing
price of the Common Stock on such exchange or the Nasdaq Stock Market,
or, if the Common Stock is otherwise traded in the over-the-counter
market, the closing bid price, in each case averaged over a period of
20 consecutive business days prior to the date as of which "market
price" is being determined. If at any time the Common Stock is not
traded on an exchange or the Nasdaq Stock Market, or otherwise traded
in the over-the-counter market, the "market price" shall be deemed to
be the higher of (i) the book value thereof as determined by any firm
of independent public accountants of recognized standing selected by
the Board of Directors of the Corporation as of the last day of any
month ending within 60 days preceding the date as of which the
determination is to be made, or (ii) the fair value thereof determined
in good faith by the Board of Directors of the Corporation as of a date
which is within 15 days of the date as of which the determination it to
be made.
(E) Transfer Restrictions
---------------------
(1) General. The shares of capital stock may not be transferred by any
-------
person (the "Initial Transferor") in any manner to any extent to any other
person (other than persons to whom the Corporation is contractually obligated on
or before the date of issuance of the Preferred Stock in the Offerings to
transfer up to 4.9% of the Corporation's stock) if such other person is or would
become by reason of the transfer a beneficial owner of more than 4.5% (or 4.9%
as described above) of the Corporation's stock (a "Prohibited Transferee"), as
the term "stock" is defined and such ownership is determined under Section 382
of the Internal Revenue Code of 1986, as amended, and regulations thereunder
(collectively "Section 382"). For purposes of this provision, transfers to a
Prohibited Transferee shall include transfers directly with or through trusts,
estates, corporations, partnerships or other entities as defined under Internal
Revenue Code Regulation (S) 1.382-3(a), and attribution through such entities
shall be determined pursuant to Section 382.
(2) Prohibited Stock. Transfers made in violation of subparagraph (1) of
----------------
this paragraph (E) shall not be effective to transfer ownership of the shares of
Preferred Stock or Common Stock subject thereto ("Prohibited Stock").
(a) Upon the transfer of Prohibited Stock, the Corporation shall have
thirty (30) days from discovery of such prohibited transfer to demand
the transfer of the Prohibited Stock from the Prohibited Transferee to
the agent designated by the Board of Directors (the "Agent"). Further,
the Agent shall demand the transfer of any distributions received on
such Prohibited Stock by the Prohibited Transferee. Discovery shall be
deemed to have been made pursuant to provisions of Section 382
12
<PAGE>
regarding discovery of ownership changes. If a Prohibited Transferee
shall refuse or fail upon demand by the Corporation to transfer such
Prohibited Stock and distributions received thereon, the Corporation
shall take all necessary action at law or equity to compel such
transfer as soon as possible.
(b) Upon transfer by the Prohibited Transferee of the Prohibited Stock,
together with distributions received thereon, the Agent shall sell such
Prohibited Stock as soon as practicable thereafter in an arm's length
transaction and in a manner consistent with the restriction set forth
in this paragraph upon the refusal by the Prohibited Transferee.
Proceeds from such sale shall not inure to the benefit of the
Corporation or the Agent but shall be remitted to the Prohibited
Transferee in an amount not to exceed the amount paid by the Prohibited
Transferee for such Prohibited Stock, or, if the transfer made in
violation of this paragraph was by gift, inheritance or similar
transfer, the fair market value of such shares at the time of receipt
of such shares by the Prohibited Transferee. For purposes of the
foregoing, the fair market value per share of the Prohibited Stock
shall not be less than: (i) the average of the highest and lowest
selling price at the time of receipt of such shares by the Prohibited
Transferee or if there were no sales on such date, then not less than
the mean between the bid and asked price on such date, if the
Prohibited Stock was listed on a national securities exchange or quoted
on the Nasdaq Stock Market on such date; (ii) the mean between the bid
and asked price on such date or, if there was no bid and asked price on
such date, then on the next prior business day on which there was a bid
and asked price if the Prohibited Stock was traded otherwise than on a
national securities exchange or the Nasdaq Stock Market on such date;
or (iii) as determined by the Board of Directors.
(c) Any sale of Prohibited Stock by a Prohibited Transferee received in
violation of this paragraph (E) shall be deemed to have been made
solely by the Agent, and the Agent shall demand of the Prohibited
Transferee the proceeds from such sale together with distributions
received from such Prohibited Stock. Such demand shall be made within
thirty (30) days of discovery (as that term is described in
subparagraph (2) of this paragraph (E)) by the Agent of the transfer of
the Prohibited Stock to the Prohibited Transferee. If the Prohibited
Transferee shall refuse or fail upon demand by the Agent to surrender
such proceeds and distributions, the Agent shall take all necessary
action at law or in equity to compel the transfer of such proceeds and
distributions. The Agent, at its discretion, may make demand of such
proceeds in the amount net of the amount which the Prohibited
Transferee would have received from the Agent had the Agent rather than
the Prohibited Transferee sold such Prohibited Stock.
(d) Any proceeds received by the Agent as a result of the sale of the
Prohibited Stock, whether by the Agent or by the Prohibited Transferee,
and the distributions received on such Prohibited Stock, shall be
transferred to the Initial Transferor, less any amounts remitted to or
retained by the Prohibited Transferee as otherwise described
13
<PAGE>
in paragraph E. If such Initial Transferor cannot be determined by the
Agent within ninety (90) days after receipt by the Agent of such
proceeds and distributions, the Agent may pay any such amounts due the
Initial Transferor into a court or governmental agency, if applicable
law permits, and otherwise must irrevocably transfer such amounts to a
charity designated by the Agent. In no event shall amounts due to such
Initial Transferor inure to the benefit of the Agent, but such amounts
may be used to reimburse the Agent, if any, for reasonable expenses
incurred in attempting to identify the Initial Transferor.
(e) The Board of Directors is expressly empowered to waive application of
this paragraph (E) to any specific transaction, provided that such
waiver is by resolution of the Board of Directors duly considered and
approved by at least a majority of the Board of Directors prior to any
such transfer of stock described within this paragraph (E).
(3) Legend. Certificates representing shares of the capital stock shall,
------
upon issuance, bear the following legend:
THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NATIONAL
MERCANTILE BANCORP (THE "COMPANY") PROHIBIT THE TRANSFER OF THE SHARES
OR INTERESTS REPRESENTED BY THIS CERTIFICATE TO ANY PERSON IF SUCH
PERSON IS OR WOULD BECOME BY REASON OF SUCH TRANSFER THE BENEFICIAL
OWNER OF MORE THAN 4.5% OF THE COMPANY'S STOCK, AS THE TERM "STOCK" IS
DEFINED, AND SUCH OWNERSHIP IS DETERMINED, UNDER SECTION 382 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED.
(4) Termination. This paragraph (E) shall have no applicability and shall
-----------
be of no force and effect, notwithstanding notations to the contrary on any
certificates evidencing ownership of any securities of the Corporation, (i) on
or after [three years from the date of issuance of the Preferred Stock in the
Offerings] or (ii) upon the occurrence of any transaction in which holders of
all outstanding shares of capital stock receive, or are offered the opportunity
to receive, cash, stock or other property for all such shares and upon the
consummation of which the acquiror will own at least a majority of the
outstanding shares of capital stock.
IV
Elections shall be by written ballot.
V
The affirmative vote of the holders of not less than two-thirds (2/3)
of the total voting power of all outstanding shares of voting stock of this
Corporation shall be required for the approval
14
<PAGE>
of any proposal (1) that this Corporation merge or consolidate with any other
corporation if such other corporation and its affiliates singly or in the
aggregate are directly or indirectly the beneficial owners of more than twenty
percent (20%) of the total voting power of all outstanding shares of the voting
stock of this Corporation (such other corporation being herein referred to as a
"Related Corporation"), or (2) that this Corporation sell or exchange all or
substantially all of its assets or business to or with such Related Corporation,
or (3) that this Corporation issue or deliver any stock or other securities of
its issue in exchange or payment for any properties or assets of such Related
Corporation or securities issued by such Related Corporation or in a merger of
any affiliate of this Corporation with or into such Related Corporation or any
of its affiliates, if to effect such transaction the approval of shareholders of
this Corporation is required by laws; provided, however, that the foregoing
shall not apply to any such merger, consolidation, sale or exchange, or issuance
or delivery of stock or other securities which was (i) approved by resolution of
the Board of Directors adopted by the affirmative vote of not less than two-
thirds (2/3) of the then authorized number of directors, or (ii) approved by
resolution of the Board of Directors prior to the acquisition of the beneficial
ownership of more than twenty percent (20%) of the total voting power of all
outstanding shares of the voting stock of this Corporation by such Related
Corporation and its affiliates, nor shall it apply to any such transaction
solely between this Corporation and another corporation fifty percent (50%) or
more of the voting stock of which is owned by this Corporation. For the purposes
hereof, an "affiliate" is any person (including a corporation, partnership,
trust, estate or individual) who directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with
the person specified; "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract, or
otherwise; and in computing the percentage of outstanding voting stock
beneficially owned by any person the shares outstanding and the shares owned
shall be determined as of the record date fixed to determine the shareholders
entitled to vote with respect to such proposal. The shareholder vote, if any,
required for mergers, consolidations, sales or exchanges of assets or issuances
of stock or other securities not expressly provided for in this Article, shall
be such as may be required by application law.
VI
No action shall be taken by the shareholders except at an annual or
special meeting of shareholders.
VII
If at any time the Corporation has a variable board, the shareholders
of the Corporation may not change the exact number of directors within the
limits specified in the bylaws, except by the vote of the holders of not less
than two-thirds (2/3) of the total voting power of all outstanding shares of
voting stock of the Corporation.
After the issuance of shares, any action by the shareholders to
specify or change the fixed number of directors (if the Corporation does not
have a variable board) or the maximum or
15
<PAGE>
minimum number of directors (if the Corporation has a variable board) or to
change from a fixed to a variable board or vice versa shall not be made,
repealed, altered, amended or rescinded except by the vote of the holders of not
less than two-thirds (2/3) of the total voting power of all outstanding shares
of voting stock of the Corporation; provided, however, that a bylaw reducing the
fixed number or the minimum number of directors to a number less than five (5)
cannot be adopted if the votes cast against its adoption at a meeting are equal
to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares
entitled to vote.
VIII
Except as otherwise set forth in Article III.B.2. or in the following
sentence, the Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on shareholders herein
are granted subject to this reservation. Notwithstanding the foregoing, the
provisions set forth in Articles IV, V, VI, VII and this Article VIII may not be
repealed or amended in any respect unless such repeal or amendment is approved
by the affirmative vote of the holders of not less than two-thirds (2/3) of the
total voting power of all outstanding shares of voting stock of this
Corporation.
IX
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
X
This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the General Corporation Law of California) for
breach of duty to the corporation and its shareholders through bylaw provisions
or through agreements with the agents, or both, in excess of the
indemnification otherwise permitted by Section 317 of the General Corporation
Law of California, subject to any limitations on indemnification under the
General Corporation Law of California which cannot be waived.
16
<PAGE>
EXHIBIT 4.1
NATIONAL MERCANTILE BANCORP
SUBSCRIPTION RIGHT CERTIFICATE NO. __________
THE TERMS AND CONDITIONS OF THE OFFERING ARE SET FORTH IN THE COMPANY'S
PROSPECTUS DATED __________, 1997 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN
BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM KISSEL-
BLAKE INC. (THE "INFORMATION AGENT") AND U.S. STOCK TRANSFER CORPORATION (THE
"SUBSCRIPTION AGENT"). CAPITALIZED TERMS USED HEREIN WITHOUT DEFINITION SHALL
HAVE THE MEANINGS ASCRIBED TO SUCH TERMS IN THE PROSPECTUS.
THIS SUBSCRIPTION RIGHT CERTIFICATE (THE "SUBSCRIPTION RIGHT CERTIFICATE")
OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE SUBSCRIPTION AGENT
WITH PAYMENT IN FULL BY 5:00 P.M., CALIFORNIA TIME, ON __________, 1997, UNLESS
EXTENDED BY THE COMPANY TO A TIME NOT LATER THAN 5:00 P.M., CALIFORNIA TIME, ON
__________, 1997 (IN EITHER CASE, THE "EXPIRATION TIME").
The Rights represented by this Subscription Right Certificate, in whole or
in part, may be (A) exercised by duly completing Form 1 and (B) exercised
through a bank or broker, by duly completing Form 2. Before exercising Rights,
Rights Holders are urged to read carefully and in their entirety the Prospectus
and Instructions as to use of Subscription Right Certificates (the
"Instructions"), additional copies of which are available from the Information
Agent and the Subscription Agent. IMPORTANT: COMPLETE THE APPROPRIATE FORM
AND, IF APPLICABLE, DELIVERY INSTRUCTIONS, AND SIGN ON REVERSE SIDE.
SUBSCRIPTION PRICE: $[1.10] PER SHARE [INSERT NUMBER OF RIGHTS]
RIGHTS TO PURCHASE
PREFERRED STOCK OF
[Name and Address of Registered Holder] NATIONAL MERCANTILE BANCORP
The registered owner whose name is inscribed hereon, or assigns, is
entitled to subscribe for and purchase from the Company, at the Subscription
Price, 1.624 shares pursuant to the Basic Subscription Privilege ("Underlying
Preferred Shares"), and 0.376 shares pursuant to the Oversubscription Privilege
("Excess Underlying Preferred Shares") if the Basic Subscription Privilege is
exercised in full, of the Company's Preferred Stock, $10.00 stated value (the
"Preferred Stock"), for each Right evidenced hereby upon the terms and subject
to the conditions set forth in the Prospectus and the Instructions. Underlying
Preferred Shares subscribed for pursuant to the Basic Subscription Privilege
shall be delivered as soon as practicable after receipt by the Subscription
Agent of this Subscription Right Certificate, duly completed, and of payment of
the applicable Subscription Price. Excess Underlying Preferred Shares subscribed
for pursuant to the Oversubscription Privilege shall be delivered as soon as
practicable after the Expiration Time and after all prorations and reductions
contemplated by the terms of the Rights Offering have been affected.
By: By:
----------------------------------- ------------------------------------
Scott A. Montgomery Joseph W. Kiley III
Executive Vice President Chief Financial Officer
THIS SUBSCRIPTION RIGHT CERTIFICATE IS NONTRANSFERABLE.
RIGHTS HOLDERS SHOULD BE AWARE IF THEY CHOOSE TO EXERCISE LESS THAN ALL OF
THE RIGHTS EVIDENCED HEREBY, A NEW SUBSCRIPTION RIGHT CERTIFICATE MAY NOT BE
RECEIVED IN SUFFICIENT TIME TO EXERCISE OR TRANSFER THE REMAINING RIGHTS
EVIDENCED THEREBY. NEITHER THE COMPANY NOR THE SUBSCRIPTION AGENT SHALL HAVE ANY
LIABILITY TO A TRANSFEREE OR TRANSFEROR OF RIGHTS IF SUBSCRIPTION RIGHT
CERTIFICATES ARE NOT RECEIVED IN TIME FOR EXERCISE OR SALE PRIOR TO THE
EXPIRATION TIME.
AN EXERCISE OF RIGHTS EVIDENCED HEREBY IS IRREVOCABLE
Countersigned and registered:
U.S. Stock Transfer Corporation
Glendale, CA
Subscription Agent
By
---------------------------------
Authorized Signature
<PAGE>
IMPORTANT: PLEASE PRINT ALL INSTRUCTIONS CAREFULLY
FORM 1 - EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably
exercises one or more Rights to subscribe for shares of Preferred Stock as
indicated below, on the terms and subject to the conditions specified in the
Prospectus, receipt of which is hereby acknowledged.
(a) Number of shares subscribed for pursuant to the Basic
Subscription Privilege: (a)_____________
(b) Number of shares subscribed for pursuant to the
Oversubscription Privilege/1/: (b)_____________
(c) Total shares (sum of lines (a) and (b)): (c)_____________
(d) Total Subscription Price (total number of shares
subscribed for pursuant to both the Basic Subscription
Privilege and the Oversubscription Privilege
multiplied by the Subscription Price of $[1.10]/2/): (d)_____________
- --------------------------
/1/ To exercise the Oversubscription Privilege, the undersigned must exercise
in full the Basic Subscription Privilege.
/2/ If the aggregate Subscription Price paid by an exercising Rights Holder is
insufficient to purchase the number of Underlying Preferred Shares that
such holder indicates are being subscribed for, or if an exercising Rights
Holder does not specify the number of Underlying Preferred Shares to be
purchased, then such Rights Holder will be deemed to have exercised first
the Basic Subscription Privilege in full and second the Oversubscription
Privilege to purchase Underlying Preferred Shares or Excess Underlying
Preferred Shares, as the case may be, to the full extent of the payment
rendered (subject to proration under certain circumstances as described in
the Prospectus). If the aggregate Subscription Price paid by an exercising
Rights Holder exceeds the amount necessary to purchase the number of
Underlying Preferred Shares and Excess Underlying Preferred Shares for
which the Rights Holder has indicated an intention to subscribe, then the
Rights Holder will be deemed to have exercised first, the Basic
Subscription Privilege (if not already fully exercised) and second, the
Oversubscription Privilege to the full extent of the excess payment
tendered.
(e) METHOD OF PAYMENT
(CHECK AND COMPLETE APPROPRIATE BOX(ES))
[_] Check or money order in the amount of $________ payable to U.S. Stock
Transfer Corporation, Subscription Agent.
[_] Wire transfer in the amount of $_________ directed to First
Professional Bank NA ABA no. 122239335, Account no. 004-082578,
National Mercantile Bancorp Account. Indicate name of institution
transferring funds and name of registered owner:
(f) IF LESS THAN ALL RIGHTS ARE EXERCISED
If the number of Rights being exercised pursuant to the Basic Subscription
Privilege is less than all of the Rights represented by this Subscription
Right Certificate:
[_] Deliver to the undersigned a new Subscription Right Certificate
evidencing the remaining Rights to which the undersigned is entitled.
If the instructions of the Rights Holder are inconsistent or are
insufficient to delineate the proper action to be taken with respect to all
of the Rights evidenced hereby, such Rights Holder will be delivered a new
Subscription Right Certificate evidencing the remaining Rights to which such
Rights Holder is entitled.
(g) NOTICE OF GUARANTEED DELIVERY
[_] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE
DATE HEREOF AND COMPLETE THE FOLLOWING,
Name(s) of Registered Owner(s)
-----------------------------------------
Window Ticket Number (if any)
-----------------------------------------
Date of Execution of Notice of
Guaranteed Delivery
-------------------------------------------------
Name of Eligible Institution
which Guaranteed Delivery
-------------------------------------------
Telephone Number
-------------------------------------------------------
FORM 2 - TO EXERCISE RIGHTS THROUGH YOUR BANK OR BROKER: For value received,
________ Rights represented by this Subscription Right Certificate are hereby
assigned to (please print name and address and tax identification or social
security number of transferee in full):
Name:
------------------------------------------------------------------------
(Please Print)
Address
----------------------------------------------------------------------
------------------------------------------------------------------------------
(Include Zip Code)
Tax Identification or Social Security Number
----------------------------------
[_] Deliver to the undersigned a new Subscription Right Certificate
evidencing remaining Rights to which the undersigned is entitled.
FORM 3 - SPECIAL PAYMENT ISSUANCE OR DELIVERY INSTRUCTIONS: Unless otherwise
indicated below, the Subscription Agent is hereby authorized to issue and
deliver any check and certificates for Preferred Stock to the undersigned at the
address appearing on the face of this Subscription Right Certificate.
SPECIAL PAYMENT INSTRUCTIONS (See paragraph 3 of the Instructions) To be
completed ONLY if the check evidencing a cash payment is to be made payable to
someone other than the registered holder.
Issue and mail to:
Name
----------------------------------------------------------------------------
(Please Print)
Address
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Tax Identification or Social Security Number
------------------------------------
SPECIAL DELIVERY INSTRUCTIONS (See paragraph 3 of the Instructions)
To be completed ONLY if the check evidencing a cash payment is to be sent to
someone other than the registered holder or to an address other than that
appearing on the face of this Subscription Right Certificate.
Mail and deliver check for Preferred Stock to:
Name
----------------------------------------------------------------------------
(Please Print)
Address
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
IMPORTANT:
RIGHTS HOLDERS SIGN HERE
AND, IF RIGHTS ARE BEING EXERCISED,
COMPLETE ATTACHED SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
(Signature(s) of Registered Holder(s))
Dated: ____________________, 1997
Must be signed by the registered holder(s) as name(s) appear(s) on this
Subscription Right Certificate. If signature is by trustee(s), executor(s),
administrator(s), guardian(s), attorney(s)-in-fact, agent(s), officer(s) of a
corporation or another acting in a fiduciary or representative capacity, please
provide the following information. See the Instructions.
Name(s)
-------------------------------------------------------------------------
(Please Print)
Capacity (Full Title)
-----------------------------------------------------------
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code
and Telephone Number
------------------------------------------------------------
(Home)
- --------------------------------------------------------------------------------
(Business)
Tax Identification or Social Security Number
------------------------------------
GUARANTEE OF SIGNATURE
NOTE: SEE PARAGRAPH 6 OF THE INSTRUCTIONS.
Authorized Signature
-----------------------------------------------------------
Name
----------------------------------------------------------------------------
(Please Print)
Title
--------------------------------------------------------------------------
Name of Firm
-------------------------------------------------------------------
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code
and Telephone Number
------------------------------------------------------------
Dated: , 1993
-------------
<PAGE>
<TABLE>
PAYER'S NAME: U.S. STOCK TRANSFER CORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Part I: PLEASE PROVIDE YOUR TIN AND CERTIFY BY ----------------------------
SUBSTITUTE SIGNING AND DATING BELOW. ----------------------------
FORM W-9 Social Security Number
OR Employer Identification No.
PAYER'S REQUEST FOR TAXPAYER ----------------------------------------------------------------------------------------------
IDENTIFICATION NUMBER (TIN) Part 2: For Payees NOT subject to backup withholding under the provisions of section
- ---------------------------- 3406(a)(1)(C) of the Internal Revenue Code, see the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 and complete as instructed therein.
----------------------------------------------------------------------------------------------
Part 3: Awaiting TIN [_]
- --------------------------------------------------------------------------------------------------------------------------------
CERTIFICATION. Under penalty of perjury, I certify that (1) the number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me and either (a) I have mailed or delivered an application to receive a
taxpayer identification number to the appropriate IRS center or Social Security Administration office or (b) I intend to mail or
deliver an application in the near future) and (2) I am not subject to backup withholding either because I have not been
notified by the IRS that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the
IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have been notified by the IRS that you are subject to
backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the
IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject
to backup withholding, do not cross out item (2). (Also see the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.)
- ---------------------------------------------------------------------------------------------------------------------------------
Signature Date
--------------------------------------------------------------------- -------------------------------------------
Name
-----------------------------------------------------------------------------------------------------------------------------
(Please Print)
Address
------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
(Include Zip Code)
</TABLE>
<PAGE>
February 6, 1997
To the Purchaser Listed On Schedule A
Attached Hereto (the "Purchaser")
Ladies and Gentlemen:
This letter confirms the agreement (the "Agreement") with respect to the
intention of National Mercantile Bancorp (the "Company") to raise additional
capital through a rights offering, with oversubscription privileges, of up to
$5.5 million in aggregate Subscription Price (as hereinafter defined) of shares
of the Company's 6.5% Series A Noncumulative Convertible Perpetual Preferred
Stock (the "Preferred Shares") to its shareholders of record as of a date to be
determined ("Rights Offering") with the participation of standby purchasers to
purchase a number of Preferred Shares, subject to applicable limitations herein
expressed, equal to the amount of unsubscribed shares in the Rights Offering.
Additional Preferred Shares of up to $2.5 million in aggregate Subscription
Price of Preferred Shares (the "Additional Shares") are to be offered to
accommodate the minimum purchase requirements of the Purchaser and the
additional standby purchasers listed on Schedule B (collectively the "Tier I
Standby Purchasers"). Up to an additional $1.0 million in aggregate Subscription
Price of Preferred Shares (the "Over-Allotment Shares") are to be offered to
accommodate oversubscription rights ("Oversubscription Rights") of shareholders
entitled to participate in the Rights Offering and subscriptions from other
standby purchasers (the "Tier II Standby Purchasers") identified by the Company.
The Rights Offering and the offering of Additional Shares and Over-Allotment
Shares is herein referred to as the "Offering."
A registration statement on Form S-2 with respect to the Offering of
Preferred Shares, including a preliminary form of prospectus, will be prepared
by the Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations (which
together with the rules and regulations under the Exchange Act referred to below
are collectively referred to herein as the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and will be
filed with the Commission; and one or more amendments to such registration
statement also will be so prepared and will be so filed. Such registration
statement, when filed with the Commission, as amended at the time it is declared
effective by the Commission, and, in the event of any amendment thereto after
the effective date and prior to the closing of the Rights Offering, such
Registration Statement, as so amended, including all exhibits and all documents
<PAGE>
incorporated by reference therein, is hereinafter called the "Registration
Statement." The prospectus included in the Registration Statement is hereinafter
called the "Prospectus."
The Preferred Shares will be issued pursuant to and be entitled to the
benefits of the provisions of an amendment and restatement of the Articles of
Incorporation of the Company substantially as set forth in Exhibit 1 hereto (the
"Restatement"). The Preferred Shares shall be convertible into shares of the
Company's Common Stock (as hereinafter defined) (such shares of Common Stock
into which the Preferred Shares are convertible and all shares of Common Stock
of the Company issued in exchange or substitution therefor being hereinafter
sometimes referred to as the "Conversion Stock"), initially at the rate of one
share of Conversion Stock for each Preferred Share, all as more fully set forth
in the Restatement. The Preferred Shares shall be subject in all respects to all
of the other provisions of the Restatement.
Pursuant to the Restatement, the Company also intends to effect a 9.09 for
1 reverse stock split (the "Recapitalization") immediately prior to the Rights
Offering Closing (as hereinafter defined) and to adopt certain restrictions on
ownership and transfer of capital stock of the Company relative to the IRC 382
Limitation (as defined below). A proxy statement has been prepared in conformity
with the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the Rules and Regulations and shall be filed by the Company with the Commission
relating to approval of the Restatement by the shareholders of the Company at a
meeting thereafter to be called (the "Annual Meeting"). Such proxy statement,
when filed with the Commission, as amended at the time all applicable waiting
periods relating to approval have expired with the Commission, at the time of
mailing the proxy statement and at all times subsequent to such mailing up to
and including the time of the Annual Meeting, is hereinafter called the "Proxy
Statement."
All share and per share data set forth herein shall be deemed
proportionately adjusted upon effectiveness of the Recapitalization.
1. Purchase and Sale of Available Shares
1.1 Purchase by Purchaser and Tier I Standby Purchasers. Subject to
the terms and conditions and in reliance upon the representations and warranties
herein set forth, the Company agrees to issue and sell to Purchaser and the
Purchaser severally agrees to purchase from the Company, ratably with all Tier I
Standby Purchasers in accordance with the percentage allocation set forth on
Schedule A and Schedule B, at the Subscription Price (a) that aggregate number
of Preferred Shares which remain available for issuance in accordance with the
Rights Offering after the issuance of all Preferred Shares validly subscribed
for through the exercise of basic subscription rights in the Rights Offering
(the "Basic Subscription Rights"), and (b) the Additional Shares (such Preferred
Shares being hereinafter referred to collectively as the "Available Shares").
-2-
<PAGE>
1.2 Minimum Purchase by Purchaser and Tier I Standby Purchaser.
Subject to the terms, conditions and limitations herein set forth, the Company
agrees to issue and sell to the Purchaser, and the Purchaser severally agrees to
purchase from the Company, ratably with all Tier I Standby Purchasers in
accordance with the percentage allocation set forth on Schedule A and Schedule
B, at the Subscription Price and otherwise in accordance with this Agreement, an
amount not less than the Additional Shares.
1.3 Subscription Price. The Subscription Price shall be $1.10 per
Preferred Share, or such lesser price at which the Preferred Shares shall be
offered in the Rights Offering.
1.4 Priority of Tier I Standby Purchasers. Subscriptions for
Preferred Shares in connection with the Offering shall be accepted by the
Company in the following order of priority: first, Basic Subscription Rights;
second, Tier I Standby Purchaser subscription rights as set forth in Sections
1.1 and 1.2 hereof; third, Oversubscription Rights; and fourth, subscription
rights of Tier II Standby Purchasers. In no event shall the aggregate
Subscription Price of the Preferred Shares offered and sold in the Offering
exceed $9.0 million. All Preferred Shares subscribed for in the Rights Offering
or pursuant hereto shall be issued all on the same date established by the
Company (the "Issuance Date").
1.5 Other Terms of Purchase by Standby Purchasers. The Company
contemplates entering into one or more standby purchase agreements with the
other Tier I Standby Purchasers and the Tier II Standby Purchasers (collectively
the "Standby Purchasers"). In no event shall any such agreement be on terms less
favorable to the Company than the terms hereof except as it may relate to the
number of Preferred Shares to be acquired, or on substantive economic terms
inconsistent with the terms of this Agreement. No binding agreement with a Tier
II Standby Purchaser shall be executed prior to the date that the Registration
Statement shall be declared effective by the Commission. In connection with the
purchase of shares of Preferred Stock by a Tier II Standby Purchaser, the
Company will receive from each Tier II Standby Purchaser a representation that
the Tier II Standby Purchaser's investment decision is not made based upon the
investment decision of any other purchaser. The aggregate maximum number of
Preferred Shares offered and sold to Tier II Standby Purchasers shall not exceed
$2.5 million in aggregate Subscription Price of Preferred Shares. The aggregate
minimum number of Preferred Shares that the Company can guarantee will be sold
pursuant to Oversubscription Rights and to Tier II Standby Purchasers (the
"Oversubscription and Tier II Standby Minimum") shall not exceed $1.0 million in
aggregate Subscription Price of Preferred Shares. The Over-Allotment Shares
shall be issued solely for the purpose of satisfying the Oversubscription and
Tier II Standby Minimum. Other than the sale of Preferred Shares to the
Purchaser or the sale of Preferred Shares to existing stockholders pursuant to
Basic Subscription Rights, the Company will not enter into any agreements or
arrangements which would allow any stockholder or groups of stockholders to
become a 5% stockholder as defined in the IRC 382 Limitation. If requested by
Purchaser, the Company shall furnish to the Purchaser a copy of each agreement
with any other Standby
-3-
<PAGE>
Purchaser promptly upon execution by the parties thereto. Purchaser further
acknowledges that its obligations hereunder are not contingent upon the
consummation of the sale of the Over-Allotment Shares.
1.6. Limitation on Issuance of Available Shares. The Purchaser
acknowledges and agrees that the Available Shares to be allocated to the
Purchaser shall be reduced to the lesser of (a) an amount which, in the judgment
of the Company and the Purchaser after consultation with their respective tax
advisors, would not likely result in an "ownership change" of the Company under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and
related regulations (the "IRC 382 Limitation"); provided, however, that for
purposes of this Agreement, the amount of "ownership change" with reference to
the IRC 382 Limitation shall not exceed 45%, or (b) $5.0 million in aggregate
Subscription Price of Preferred Shares.
2. The Closing
As soon as practicable following its determination of the number of
Available Shares, the Company shall notify the Purchaser of the number of
Available Shares to be purchased by the Purchaser. The delivery of and payment
for the Available Shares shall take place at the offices of Manatt, Phelps &
Phillips, LLP at 11:00 a.m., Pacific time, immediately after the closing of the
sale of the Preferred Shares pursuant to the Rights Offering (the "Rights
Offering Closing"), such time and date to be not more than five (5) business
days after the foregoing notification and to be specified therein (such time and
date being referred to as the "Closing Time," the date of the Closing Time being
referred to as the "Closing Date" and the consummation of the transaction being
referred to as the "Closing").
3. Delivery of Available Shares
At the Closing, the Available Shares to be purchased by the Purchaser
hereunder, registered in the name of the Purchaser or its nominee(s), as the
Purchaser may specify in writing at least three (3) days prior to the Closing
Date, shall be delivered by or on behalf of the Company to the Purchaser, for
the Purchaser's account, against delivery by the Purchaser of the aggregate
Subscription Price therefor in immediately available funds by wire transfer to
an account designated by the Company.
4. Representations and Warranties of the Company
In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect related to the financial
condition, properties, assets (including intangible assets), liabilities,
business, prospects, operations or results of operations of the Company and its
subsidiaries, taken as a whole. In this Agreement, any reference to a "Material
Adverse Effect" with respect to any entity or group of entities means any event,
change or effect that is
-4-
<PAGE>
materially adverse to the financial condition, properties, assets, liabilities,
business, prospects, operations or results or operations of the Company and its
subsidiaries, taken as a whole. For purposes of this Agreement, the term
"prospects" shall mean realization of the Company's 1997 Business Plan dated
December 20, 1996.
Except as disclosed in a document of even date herewith and delivered
by the Company to the Purchaser, and referring to the representations and
warranties in this Agreement (the "Disclosure Schedule"), or (other than where
so indicated below) in the Registration Statement in the form delivered to
Purchaser prior to execution of this Agreement, the Company represents and
warrants to the Purchaser as follows:
4.1 Organization/Qualification. Each of the Company and its
subsidiaries has been duly organized and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiaries has full corporate power and authority to own its
properties and conduct its business as currently being carried on, and is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction in which it owns or leases real property or in which the conduct of
its business makes such qualification necessary and in which the failure to so
qualify would have a Material Adverse Effect.
4.2 Capital Stock. The authorized capital stock of the Company
consists of ten million (10,000,000) common shares, of which 3,078,146 shares
are issued and outstanding, and one million (1,000,000) shares of preferred
stock, none of which shares are issued and outstanding. All of the issued and
outstanding shares of capital stock of the Company are duly authorized by all
necessary or proper corporate action, validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the holders
thereof are not subject to personal liability by reason of being such holders;
upon approval of the Restatement, as contemplated by the Proxy Statement, the
Preferred Shares which may be sold by the Company will have been duly authorized
by all necessary or proper corporate action and, when issued, delivered and paid
for as contemplated by the Registration Statement and this Agreement, will have
been validly issued and will be fully paid and nonassessable, and the holders
thereof will not be subject to personal liability by reason of being such
holders; a number of shares of Common Stock equal to the number of Preferred
Shares have been duly authorized by all necessary or proper corporate action and
reserved in the corporate records of the Company, and upon conversion of the
Preferred Shares, the Conversion Shares, when issued and delivered, will have
been validly issued and will be fully paid and nonassessable; there are no
preemptive rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, the Preferred Shares or any shares
of Common Stock pursuant to the Company's charter, by-laws or any agreement or
other instrument to which the Company is a party or by which the Company is
bound. Except as contemplated in this Agreement, neither the filing of the
Registration Statement nor the offering or sale of the Preferred Shares as
-5-
<PAGE>
contemplated by this Agreement gives rise to any rights for or relating to the
registration of any shares of Common Stock or other securities of the Company or
rights relating to antidilution which could result in any change in the number
of shares of capital stock to be issued by the Company. All of the issued and
outstanding shares of capital stock of each of the Company's subsidiaries have
been duly and validly authorized and issued and are fully paid and
nonassessable, and, except for any directors' qualifying shares, the Company
owns of record and beneficially, free and clear of any security interests,
claims, liens, proxies, equities or other encumbrances, all of the issued and
outstanding shares of such stock. There are no outstanding subscriptions,
options, warrants, calls, contracts, demands, commitments, convertible
securities or other agreements or arrangements of any character or nature
whatever, except as contemplated by this Agreement, under which the Company is
or may be obligated to issue capital stock or other securities of any kind
representing an ownership interest or contingent ownership interest in the
Company.
4.3 Authorization. Each of this Agreement and the Registration
Rights Agreement (as defined below) has been duly authorized by all necessary or
proper corporate action, executed and delivered by the Company, and constitutes
a valid, legal and binding obligation of the Company, enforceable in accordance
with its terms, except as rights to indemnity hereunder may be limited by
federal or state securities laws and except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity. The
execution, delivery and performance of this Agreement and the Registration
Rights Agreement and the consummation of the transactions herein and therein
contemplated will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any agreement or
instrument to which the Company is a party or by which it is bound or to which
any of its property is subject, or upon approval of the Restatement as
contemplated by the Proxy Statement, the Company's charter or by-laws, or any
order, rule, regulation or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its properties; no consent,
approval, authorization or order of, or filing with, any court or governmental
agency or body is required for the execution, delivery and performance of this
Agreement or for the consummation of the transactions contemplated hereby by the
Company, including the issuance or sale of the Preferred Shares by the Company,
except such as may be required under the Securities Act or state securities or
blue sky laws in connection with the Offering, and with respect to any such
approvals to be applied for, the Company has no reason to believe such approvals
will not be granted or obtained; and the Company has full power and authority to
enter into this Agreement and, upon approval of the Restatement as contemplated
by the Proxy Statement, to authorize, issue and sell the Preferred Shares as
contemplated by this Agreement. The offer and sale of the Preferred Shares to
the Purchaser and each other Tier I Standby Purchaser is exempt from the
registration, qualification and prospectus delivery requirements of applicable
federal and state law, provided that the representations and warranties of the
Purchaser hereunder and each other Tier I Standby Purchaser relating to such
laws are true and correct. Upon approval by the Stockholders as contemplated by
the Proxy Statement, the Restatement will have been
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duly authorized by all necessary or proper corporate action, and, upon filing
with the Secretary of State of the State of California, no other or additional
corporate or legal action shall be necessary to perfect the rights and
privileges of the holders of Preferred Shares under the Restatement. The holders
of capital stock of the Company are entitled to the rights, preferences and
provisions of the Restatement.
4.4 Registration Statement and Proxy Statement. The Registration
Statement, Prospectus and the Proxy Statement conform in all material respects
to the requirements of the Securities Act, the Exchange Act and the Rules and
Regulations; the Registration Statement and the Proxy Statement do not include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and the Prospectus does not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they are or were
made, not misleading, except that the foregoing does not apply to statements in
or omissions from any such document in reliance upon, and in conformity with,
written information furnished to the Company by the Purchaser, specifically for
use in the preparation thereof.
4.5 Licenses. The Company and each of its subsidiaries holds, and is
operating in compliance in all respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and orders
of any governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses, permits,
easements, consents, certifications and orders are valid and in full force and
effect; and the Company and each of its subsidiaries has been and is in
compliance in all respects with all applicable federal, state, local and foreign
laws, regulations, orders and decrees, except where the failure to so comply
would not have a Material Adverse Effect. The Company is registered as a
corporation under Section 1841 of Title 12, United States Code, as amended.
Mercantile National Bank (the "Bank") is an insured bank under the provisions of
Chapter 16 of Title 12, United States Code. No act or default on the part of the
Company or the Bank exists that could reasonably be expected to limit or impair
any of the Company's or Bank's powers, rights and privileges or, in the case of
the Bank, to affect its status as an insured bank.
4.6 Property. The Company and its subsidiaries have good and
marketable title to all property owned by them, in each case free and clear of
all liens, claims, security interests or other encumbrances; the property held
under lease by the Company and its subsidiaries is held by them under valid,
subsisting and enforceable leases with only such exceptions with respect to any
particular lease as do not interfere in any material respect with the conduct of
the business of the Company or its subsidiaries; the Company and each of its
subsidiaries owns or possesses all patents, patent applications, trademarks,
service marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets and rights necessary for the
conduct of the business of the Company
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and its subsidiaries as currently carried on, no name which the Company or any
of its subsidiaries uses and no other aspect of the business of the Company or
any of its subsidiaries will involve or give rise to any infringement of, or
license or similar fees for, any patents, patent applications, trademarks,
service marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets or other similar rights of
others material to the business or prospects of the Company and neither the
Company nor any of its subsidiaries has received any notice alleging any such
infringement or fee.
4.7 Subsidiaries. Other than the subsidiaries of the Company listed
in Exhibit 21 to the Company's 1995 10-K, neither the Company nor any subsidiary
owns any capital stock or other equity or ownership or proprietary interest in
any corporation, partnership, association, trust or other entity.
4.8 SEC Documents; Financial Statements. In addition to the
Registration Statement, the Prospectus and the Proxy Statement, the Company has
furnished to Purchaser a true and complete copy of each statement, report,
registration statement (with the prospectus in the form filed pursuant to Rule
424(b) of the Securities Act), definitive proxy statement and other filings
filed with the Commission by the Company since January 1, 1994, and, prior to
the Closing Date, the Company will have furnished Purchaser with true and
complete copies (including exhibits) of any additional documents filed with the
Commission by the Company, or by an affiliate on Schedule 13D or 13G, prior to
the Closing Date (collectively, the "SEC Documents"). All documents required to
be filed as exhibits to the SEC Documents have been so filed, and all material
contracts so filed as exhibits are in full force and effect, except those which
have expired or have been terminated in accordance with their terms, and neither
the Company nor any of its subsidiaries is in material default thereunder. True
and correct copies of all such contracts have been furnished to Purchaser. As of
their respective filing dates, the SEC Documents complied in all material
respects with the requirements of the Exchange Act and the Securities Act, and
none of the 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 made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed SEC Document. To the knowledge of the Company, other than 9830 Investments
No. 1, Ltd., there are no other persons or groups which beneficially own five
percent or more of any class of the Company's capital stock nor any material
inaccuracies in any Schedule 13D or 13G delivered to the Company and filed with
the SEC. The financial statements of the Company, including the notes thereto,
included in the SEC Documents (the "Company Financial Statements") were complete
and correct in all material respects as of their respective dates, complied as
to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the Commission with respect thereto
as of their respective dates, and have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent
throughout the periods indicated and consistent with each other (except as may
be indicated in the notes thereto or, in the case of unaudited statements
included in Quarterly Reports on Form 10-Qs, as permitted by Form
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10-Q). The Company Financial Statements fairly present the consolidated
financial condition and operating results of the Company and its subsidiaries at
the dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal, recurring year-end adjustments). There has been
no change in the Company accounting policies except as described in the notes to
the Company Financial Statements.
The Company has heretofore delivered to Purchaser copies of its
monthly reporting package to the Board of Directors of the Company for December
1995 and March, June, September and December of 1996 (collectively the "Board
Package Financial Information"). The Board Package Financial Information has
been prepared in accordance with the books and records of the Company and its
subsidiaries, is true and correct in all material respects and has been prepared
on a basis consistent with the Company Financial Statements and on a basis
consistent throughout the periods presented.
4.9 Absence of Certain Changes. Except for the transactions
contemplated by this Agreement, since September 30, 1996, neither the Company
nor any of its subsidiaries has: (a) incurred any debts, obligations or
liabilities, absolute, accrued or contingent and whether due or to become due,
except current liabilities incurred in the ordinary course of business; (b) paid
any obligation or liability other than, or discharged or satisfied any liens or
encumbrances other than those securing, current liabilities, in each case in the
ordinary course of business; (c) declared or made any payment or distribution to
its stockholders as such, or purchased or redeemed any of it shares of capital
stock or other securities, or obligated itself to do so; (d) mortgaged, pledged
or subjected to lien, charge, security interest or other encumbrance any of its
assets, tangible or intangible, except in the ordinary course of business; (e)
sold, transferred or leased any of its assets except in the ordinary course of
business; (f) cancelled or compromised any debt or claim, or waived or released
any right of material value; (g) suffered any physical damage, destruction or
loss (whether or not covered by insurance) which would have a Material Adverse
Effect; (h) entered into any transaction other than in the ordinary course of
business; (i) encountered any labor difficulties or labor union organizing
activities; (j) issued or sold any shares of capital stock or other securities
or granted any options, warrants or other purchase rights with respect thereto
other than as contemplated by this Agreement; (k) made any acquisition or
disposition of any material assets or become involved in any other material
transaction, other than in the ordinary course of business; (1) increased the
compensation payable, or to become payable, to any of its directors or
employees, or made any bonus payment or similar arrangement with any directors
or employees or increased the scope or nature of any fringe benefits provided
for its employees or directors other than regularly scheduled increases or as
contemplated by any written employment agreement; or (m) agreed to do any of the
foregoing other than pursuant hereto. There has not occurred since September 30,
1996, any change, event or condition (whether or not covered by insurance) that
has resulted in or might reasonably be expected to result in, a Material Adverse
Effect.
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4.10 Absence of Undisclosed Liabilities. The Company has no
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth in or adequately provided for in the
balance sheet (the "Company Balance Sheet") included in the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1996; (ii) those incurred
in the ordinary course of business and not required to be set forth in the
Company Balance Sheet under generally accepted accounting principles; (iii)
those incurred in the ordinary course of business since September 30, 1996,
consistent with past practice and not individually in excess of $100,000; and
(iv) those incurred pursuant to this Agreement.
4.11 Taxes. The Company and each of its subsidiaries, and any
consolidated, combined or unitary group for Tax purposes of which the Company or
any of its subsidiaries is or has been a member have timely filed all Tax
Returns required to be filed by them and have paid all Taxes shown thereon to be
due. The Company Financial Statements (i) fully accrue under generally accepted
accounting principles all liabilities for Taxes with respect to all periods
through September 30, 1996 and, to the knowledge of the Company, the Company and
each of its subsidiaries have not and will not incur any material Tax liability
in excess of the amount reflected on the Company Financial Statements with
respect to such periods and (ii) properly accrue in accordance with generally
accepted accounting principles all liabilities for Taxes payable after September
30, 1996 with respect to all transactions and events occurring on or prior to
such date. No material Tax liability since September 30, 1996 has been incurred
by the Company or its subsidiaries other than in the ordinary course of business
and adequate provision has been made in the Company Financial Statements for all
Taxes since that date in accordance with generally accepted accounting
principles on at least a quarterly basis. The Company and each of its
subsidiaries have withheld and paid or will timely pay to the applicable Tax
Authority all amounts required to be withheld. No notice of deficiency or
similar documents of any Tax Authority has been received by either the Company
or any of its subsidiaries, and there are no liabilities for Taxes with respect
to the issues that have been raised (and are currently pending) by any Tax
Authority that could, if determined adversely to the Company and its
subsidiaries, materially and adversely affect the liability of the Company and
its subsidiaries for Taxes. There is (i) no material claim for Taxes that is a
lien against the property of the Company or any of its subsidiaries other than
liens for Taxes not yet due and payable, (ii) no notification received by the
Company of any audit of any Tax Return of the Company or any of its subsidiaries
being conducted pending or threatened by a Tax Authority, (iii) no extension or
waiver of the statute of limitations on the assessment of any Taxes granted by
the Company or any of its subsidiaries that may result in the payment of any
material amount that would not be deductible by reason of Sections 280G or 404
of the Code. The Company will not be required to include any material adjustment
in Taxable income for any Tax period (or portion thereof) pursuant to Section
481 or 263A of the Code or any comparable provision under state or foreign Tax
laws as a result of transactions, events or accounting methods employed prior to
the Closing Date. Neither the Company nor any of its subsidiaries is a party to
any tax sharing or tax allocation agreement nor does the Company or any of its
subsidiaries owe any amount under any such agreement.
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For purposes of this Agreement, the following terms have the following meanings:
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other government fee or
other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax Authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in
parts (i) or (ii) of this sentence as a result of any express or implied
obligation to indemnify any other person. as used herein, "Tax Return" shall
mean any return, statement, report or form including, without limitation,
estimated Tax returns and reports, withholding Tax returns and reports and
information reports and returns required to be filed with respect to Taxes. The
Company and each of its subsidiaries are in full compliance with all terms and
conditions of any Tax exemptions or other Tax sharing agreement or order of a
foreign government applicable to them and the execution and performance of this
Agreement shall not have any adverse effect on the continued validity and
effectiveness of any such Tax exemptions or other Tax sharing agreement. As of
September 30, 1996 the Company had net operating loss carryforwards of no less
than $19.7 million and $10.6 million for federal and California state tax
purposes, respectively (the "Net Operating Loss Carryforwards") and there has
not occurred any event that would restrict or prevent the Company from using the
Net Operating Loss Carryforwards to reduce future tax liabilities. Based in part
in reliance upon the certificate to be delivered by Purchaser in accordance with
Section 9.2 hereof and in the form of Exhibit 6, the completion of the Rights
Offering and the purchase of the Preferred Shares by the Standby Purchasers will
not result in an "ownership change" within the meaning of the IRC 382 Limitation
or otherwise restrict the Company's ability to use the Net Operating Loss
Carryforwards to reduce future tax liabilities.
4.12 Internal Accounting. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
4.13 Broker's or Agent's Fee. The Company has not incurred any
liability for any finder's, broker's, agent's or financial advisor's fee or
commission in connection with the execution and delivery of this Agreement, the
Offering or the consummation of the transactions contemplated hereby or thereby.
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4.14 Litigation and Claims. Except as set forth in the Disclosure
Schedule, neither the Company nor any subsidiaries is subject to any continuing
order of, or written agreement or memorandum of understanding, directive,
supervisory letter, or other formal or informal enforcement action or commitment
that restricts or adversely affects it operations or financial condition, with
any federal or state depository institution or insurance authority or other
governmental entity, or any judgment, order, writ, injunction, decree or award
of any governmental entity or arbitrator, including, without limitation,
cease-and-desist or other orders of any depository institution regulatory
authority, and, to the knowledge of the Company, there exists no reasonable
basis therefor. Except as set forth in the Disclosure Schedule, there is no
action, suit, litigation, proceeding or arbitration ("Proceeding") against or
affecting the Company or any subsidiary of the Company or, to the knowledge of
the Company, any directors, officers, employees or agents of the Company or any
subsidiary of the Company (in their respective capacities as directors,
officers, employees or agents) pending or, to the knowledge of the Company,
threatened or, to the knowledge of the Company, any reasonable basis therefor
and there are no uncured material violations, or violations with respect to
which material refunds or restitutions may be required, cited in any compliance
report to the Company or any subsidiary of the Company as a result of the
examination by any depository institution regulatory authority.
4.15 Insurance. The Company is presently insured, and during each of
the past three calendar years has been insured, for reasonable amounts with
insurance companies listed on the Disclosure Schedule. Neither the Company nor
any of its subsidiaries has any liability for material unpaid premiums or
premium adjustments not properly reflected on the Company's Financial Statements
and no notice of cancellation or termination has been received by the Company or
any of its subsidiaries with respect to any material insurance policy currently
in effect. Within the last three years, neither the Company nor any of is
subsidiaries has been refused any insurance with respect to any assets or
operations, nor has any coverage been limited in any material respect as to any
assets or operations, by any insurance carrier to which it has applied for any
such insurance or with which it has carried insurance during the last three
years.
4.16 Interests of Affiliates. No officer, director or stockholder of
the Company or any affiliate (as such term is defined in Rule 405 under the
Securities Act) of any such person has any direct or indirect interest (a) in
any entity which does business with the Company, or (b) in any property, asset
or right which is used by the Company in the conduct of its business, or (c) in
any contractual relationship with the Company other than as an employee. For the
purpose of this Section 4.16, there shall be disregarded any interest which
arises solely from the ownership of less than a 1% equity interest in a
corporation whose stock is regularly traded on any national securities exchange
or in the over-the-counter market.
4.17 Listing on Nasdaq. The Company has applied to have the
Preferred Shares approved for quotation on the Nasdaq National Market. The
Common Stock is
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approved for quotation on the Nasdaq National Market. The Company and such
Common Stock are in compliance with the maintenance criteria of the NASD
applicable to continued eligibility for quotation on such market, and the
Company has not received any notification concerning, and has no reason to
believe it is subject to, termination of quotation privileges on such market.
4.18 Employee Benefit Plans.
(a) With respect to the Company, any subsidiary of the Company and
any trade or business (whether or not incorporated) which is treated as a
single employer with the Company (an "ERISA Affiliate") within the meaning
of Section 414(b), (c), (m) or (o) of the Code, there are no (i) material
employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) stock
option, stock purchase, phantom stock, stock appreciation right,
supplemental retirement, severance, sabbatical, medical, dental, vision
care, disability, employee relocation, cafeteria benefit (Code Section 125)
or dependent care (Code Section 129), life insurance or accident insurance
plans, programs or arrangement, (iii) bonus, pension, profit sharing,
savings, deferred compensation or incentive plans, programs or
arrangements, (iv) fringe or employee benefit plans, programs or
arrangements that apply to senior management of the Company and that do not
generally apply to all employees, and (v) current or former employment or
executive compensation or severance agreements, written or otherwise, as to
which unsatisfied obligations of the Company of greater than $60,000 remain
for the benefit of, or relating to, any present or former employee,
consultant or director of the Company (together, the "Company Employee
Plans").
(b) Any Company Employee Plan intended to be qualified under Section
401(a) of the Code has either obtained from the Internal Revenue Service a
favorable determination letter as to its qualified status under the Code,
including all amendments to the Code effected by the Tax Reform Act of 1986
and subsequent legislation, or has applied to the Internal Revenue Service
for such a determination letter prior to the expiration of the requisite
period under applicable Treasury Regulations or Internal Revenue Service
pronouncements in which to apply for such determination letter and to make
any amendments necessary to obtain a favorable determination, or has been
established under a standardized prototype plan for which an Internal
Revenue Service opinion letter has been obtained by the plan sponsor and is
valid as to the adopting employer, the Company has also furnished Purchaser
with the most recent Internal Revenue Service determination or opinion
letter issued with respect to each such Company Employee Plan, and nothing
has occurred since the issuance of each such letter which could reasonably
be expected to
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cause the loss of the tax-qualified status of any Company Employee Plan
subject to Code Section 401(a).
(c) (i) None of the Company Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person; (ii) there
has been no "prohibited transaction," as such term is defined in Section
406 of ERISA and Section 4975 of the Code, with respect to any Company
Employee Plan, which could reasonably be expected to have, in the
aggregate, a Material Adverse Effect; (iii) each Company Employee Plan has
been administered in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), except as would not have, in the aggregate,
a Material Adverse Effect, and the Company and each subsidiary or ERISA
Affiliate have performed all material obligations required to be performed
by them under, are not in any material respect in default under or
violation of, and have no knowledge of any material default or violation by
any other party to, any of the Company Employee Plans; (iv) neither the
Company nor any subsidiary or ERISA Affiliate is subject to any liability
or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA
with respect to any of the Company Employee Plans; (v) all material
contributions required to be made by the Company or any subsidiary or ERISA
Affiliate to any Company Employee Plan have been made on or before their
due dates and a reasonable amount has been accrued for contributions to
each Company Employee Plan for the current plan years; (vi) with respect to
each Company Employee Plan, no "reportable event" within the meaning of
Section 4043 of ERISA (excluding any such event for which the thirty (30)
day notice requirement has been waived under the regulations to Section
4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of
ERISA has occurred; and (vii) no Company Employee Plan is covered by, and
neither the Company nor any subsidiary or ERISA Affiliate has incurred or
expects to incur any liability under Title IV of ERISA or Section 412 of
the Code. With respect to each Company Employee Plan subject to ERISA as
either an employee pension plan within the meaning of Section 3(2) of ERISA
or any employee welfare benefit plan within the meaning of Section 3(1) of
ERISA, the Company has prepared in good faith and timely filed all
requisite governmental reports (which were true and correct as of the date
filed) and has properly and timely filed and distributed or posted all
notices and reports to employees required to be filed, distributed or
posted with respect to each such Company Employee Plan. No suit,
administrative proceeding, action or other litigation has been brought, or
to the best knowledge of the Company is threatened, against or with respect
to any such Company Employee Plan, including any audit or inquiry by the
IRS or United States Department of Labor. Neither the Company nor any
subsidiary or other ERISA Affiliate is a party to, or has made any
contribution
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to or otherwise incurred any obligation under, any "multiemployer plan" as
defined in Section 3(37) of ERISA.
(d) With respect to each Company Employee Plan, the Company and each
of its United States subsidiaries have complied with (i) the applicable
health care continuation and notice provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") and the proposed regulations
thereunder and (ii) the applicable requirements of the Family Leave Act of
1993 and the regulations thereunder, except to the extent that such failure
to comply would not, in the aggregate, have a Material Adverse Effect.
(e) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or other
service provider of the Company, any subsidiary or any other ERISA
Affiliate to severance benefits or any other payment (including, without
limitation, unemployment compensation, golden parachute or bonus), or (ii)
accelerate the time of payment or vesting of any such benefits, or increase
the amount of compensation due any such employee or service provider.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written by the Company, and subsidiary or
other ERISA Affiliate relating to, or change in participation or coverage
under, any Company Employee Plan which would materially increase the
expense of maintaining such Plan above the level of expense incurred with
respect to that Plan for the most recent fiscal year included in the
Company's financial statements.
4.19 Environmental Matters. Neither the Company nor any subsidiary
nor any of the property owned, leased, possessed or controlled by them in the
operation of their respective businesses (including in connection with their
lending or fiduciary operations) ("Property") is in violation of any applicable
zoning ordinance or other law, regulation or requirement relating to the
operation of any properties used, including, without limitation, applicable
environmental protection laws, rules and regulations (collectively,
"Environmental Law"), other than violations that, in the aggregate with any
other conditions described in this Section 4.19, would not result in costs that
would have a Material Adverse Effect; and neither the Company nor any subsidiary
has received any notice of any such violation, or the existence of any
condemnation proceeding with respect to any Property. No Toxic Substances (as
defined below) have been deposited or disposed of in, on or under any Property
during the period in which the Company or any of its subsidiaries has owned,
occupied, managed, controlled or operated such properties, except to the extent
the same, in the aggregate with any other conditions described in this Section
4.19, would not result in costs that would have a Material Adverse Effect. To
the Company's knowledge (a) no prior owners, occupants or operators of all or
any part of the Property ever used such properties as a dump or gasoline
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service station, (b) no prior owners, occupants or operators of all or part of
the Property ever deposited or disposed of or allowed to be deposited or
disposed of in, on or under such properties any Toxic Substances or (c) no past,
present or known future event, condition, circumstances, plans, errors or
omissions have existed or occurred, are existing or occurring or are reasonably
expected to exist or occur on or with respect to any Property, or any other
property as to which the Company or any subsidiary has held or currently holds
ownership or indicia of ownership, except as to the matters in clauses (b) and
(c) to the extent the same, in the aggregate with any other conditions described
in this Section 4.19, would not result in costs that would have a Material
Adverse Effect. To the Company's knowledge, there are no conditions or
circumstances in connection with the Property that could reasonably be
anticipated to (i) cause any Property to be subject to any restrictions or
ownership, occupancy, use or transferability under any applicable Environmental
Laws or (ii) materially reduce the value of any Property. To the Company's
knowledge and its subsidiaries, neither the Company nor any subsidiary has been
identified as a potentially responsible party by any governmental entity in a
matter arising under any Environmental Laws. For purposes of this Agreement, (1)
"Toxic Substances" shall mean petroleum or petroleum-based substance or waste,
solid waste, PCBs, pesticides, herbicides, lead, radioactive materials, urea
formaldehyde foam insulation, or substances defined as "hazardous substances" or
"toxic substances" in any Environmental Laws; (2) materials will be considered
to be deposited or disposed of in, or under any real property if such materials
have been stored, treated, recycled, used or accidentally or intentionally
spilled, released, dumped, emitted or otherwise placed, deposited or disposed
of, or used in any construction, in, on or under such property; and (3) costs of
violations or conditions shall take into account, without limitation,
liabilities, damages, penalties, injunctive relief or removal, remediation or
other costs under any applicable Environmental Law.
4.20 Use of Proceeds. The Company will apply the net proceeds from
the sale of the Preferred Shares to be sold by it hereunder for the purposes set
forth in the Prospectus.
4.21 Loan Portfolio. All loans and loan commitments in excess of
$50,000 (the "Loans") extended by the Bank have been made in accordance with
customary lending standards of the Bank in the ordinary course of business. The
Loans are evidenced by appropriate and sufficient documentation consistent with
standards in the industry and constitute, to the Company's knowledge, valid and
binding obligations of the borrowers enforceable in accordance with their terms,
except as limited by applicable bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors' rights and remedies
generally from time to time in effect and by applicable law which may affect the
availability of equitable remedies. The Bank's interest in the notes receivable
associated with all such Loans is, and at the Closing Date will be, free and
clear of any security interest, lien, encumbrance or other charge and the Bank
has complied, and at the Closing Date will have complied, in all material
respects with all laws and regulations relating to such Loans. The Loans, taken
as a whole, are not subject to any material offsets, or to the knowledge of the
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Company, claims of material offset, or claims of other material liability on the
part of the Company or any of its subsidiaries.
4.22 Fiduciary Accounts. Each of the Company and its subsidiaries
has properly administered 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 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, any of the
subsidiaries, nor any director, officer or employee of the Company or any of its
subsidiaries has committed any breach of trust with respect to any such
fiduciary account, and the accountings for each such fiduciary account are true
and correct statements and accurately reflect the assets of such fiduciary
account.
4.23 Employees. To the Company's knowledge, no employee of the
Company or subsidiary whose annual compensation is in excess of $75,000 has any
plans to terminate his or her employment with the Company or any subsidiary.
Each of the Company and its subsidiaries has complied in all material respects
with all laws relating to the employment of labor, including provisions relating
to wages, hours, equal opportunity, collective bargaining and payment of Social
Security and other taxes, and neither the Company nor any subsidiary has
encountered any material labor difficulties.
4.24 Representations Complete. None of the representations or
warranties made by the Company herein (as qualified by the Disclosure Schedule)
or in any exhibit hereto, or any written statement furnished to Purchaser by the
Company pursuant hereto or in connection with the transactions contemplated
hereby, when all such documents are read together in their entirety, contains or
will contain at the Closing Date any untrue statement of a material fact, or
omits or will omit at the Closing Date to state any material fact necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
5. Representations and Warranties of Purchaser
The Purchaser represents and warrants to the Company as follows:
5.1 Organization. The Purchaser is a corporation duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation with corporate power and authority to perform its obligation under
this Agreement.
5.2 Investment Intent. The Purchaser is acquiring the Preferred
Shares pursuant to this Agreement for its own account for investment only and
not with a view to any distribution thereof within the meaning of the Securities
Act.
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5.3 Authorization of Agreement. This Agreement has been duly
authorized by all necessary or proper corporate action, executed and delivered
by the Purchaser, and constitutes a valid, legal and binding obligation of the
Purchaser, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting the rights of creditors generally and subject to general
principles of equity. The execution and delivery of this Agreement, the
consummation by the Purchaser of the transactions herein contemplated and the
compliance by the Purchaser with the terms hereof do not and will not conflict
with, or result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Purchaser is a party or
by which any of the Purchaser's properties or assets are bound, or, subject to
receipt of approvals of applicable bank regulatory authorities, any applicable
law, rule, regulation, judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction over the
Purchaser or any of the Purchaser's properties or assets; and no consent,
approval, authorization, order, registration or qualification of or with any
such government, governmental instrumentality or court, domestic or foreign, is
required for the valid authorization, execution, delivery and performance by the
Purchaser of this Agreement or the consummation by the Purchaser of the
transactions contemplated by this Agreement.
5.4 Qualification of Purchaser. The state in which the Purchaser's
principal office is located is set forth on Schedule A. The Purchaser qualifies
as an accredited investor within the meaning of Rule 501 under the Securities
Act. The Purchaser has such knowledge and experience in financial and business
matters that the Purchaser is capable of evaluating the merits and risks of the
investment to be made hereunder by the Purchaser. The Purchaser has received and
reviewed this Agreement and all other documents and materials the Company has
provided to it in connection with the purchase of the Available Shares. The
Purchaser has had access to and an opportunity to review all documents and other
materials requested of the Company and has been given an opportunity to ask such
questions of the Company concerning the terms and conditions of the sale of the
Available Shares and the business, operations, financial condition, prospects,
assets and liabilities of the Company and other relevant matters as it has
deemed necessary or desirable and has been given all such information as it has
requested, to evaluate the merits and risks of the investment contemplated
herein. The Purchaser understands that the Available Shares being purchased
hereunder have not been registered under the Securities Act or registered or
qualified under any state securities laws on the grounds that such Available
Shares are being issued in a transaction exempt from the registration
requirements of the Securities Act and the registration or qualification
requirements of applicable state securities laws, and that such Available Shares
must be held indefinitely unless such Available Shares are subsequently
registered under the Securities Act and qualified or registered under applicable
state securities laws or an exemption from registration and qualification is
available, and that the Company is under no obligation to register or qualify
the Available Shares except as contemplated by the Registration Rights
Agreement. The Purchaser has not seen or received and is not acquiring
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the Available Shares purchased hereunder pursuant to any advertisement with
respect to the sale of the Available Shares.
5.5 Certain Relationships. Except for the concurrent purchase with
other Tier I Standby Purchasers contemplated hereby, the Purchaser has not
entered into any contracts, arrangements, understandings or relationships (legal
or otherwise) with any other person or persons with respect to the transactions
contemplated by this Agreement or any securities of the Company, including, but
not limited to, transfer or voting of any of the securities, finder's fees,
joint ventures, loan or option arrangements, puts or calls, guarantees of
profits, division of profits or loss, or the giving or withholding of proxies;
and the Purchaser does not own any securities of the Company which are pledged
or otherwise subject to a contingency the occurrence of which would give another
person voting power or investment power of such securities.
6. Covenants
6.1 Conduct of the Company's Business Pending the Closing Date. The
Company covenants and agrees that, from the date hereof to the Closing Date,
except for entering into this Agreement and consummating the transactions
expressly contemplated hereby or to the extent that the Purchaser shall
otherwise consent in writing:
(a) The Company will maintain its corporate existence in good
standing and will operate its business substantially as presently planned
or operated and only in the ordinary, usual and customary manner, and,
consistent with such operation, it will use its reasonable efforts to
preserve intact its present business organization and its relationships
with persons having business relationships with it.
(b) No amendment will be made to the Articles of Incorporation of
the Company except the Restatement.
(c) There will be no changes in the number of shares, par value or
class of authorized or issued capital stock of the Company, other than
shares of Common Stock pursuant to the exercise of currently outstanding
options and warrants except for the Offering. In addition, the Company has
not granted and shall not grant or issue any option, warrant, convertible
security, or other right to acquire any shares of capital stock of the
Company other than options under existing stock option plans, warrants
under the Warrant Agreement dated December 31, 1995 by and between the
Company and California State Teachers' Retirement System, warrants under
the Warrant Agreement dated December 31, 1995 between the Company and U.S.
Stock Transfer Corporation, and options or rights under the Montgomery
Employment Agreement referred to in Section 8.7 hereof.
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(d) There will not be any declaration or payment of any dividend or
other distribution in respect to the capital stock of the Company.
(e) The Company will not enter into any material transaction outside
of the ordinary course of business.
6.2 Registration Statement; Proxy Statement. As promptly as
practicable after the execution of this Agreement, the Company will file with
the Commission and other applicable federal and state regulators the
Registration Statement and the Proxy Statement. The Company shall use reasonable
efforts to cause, at the earliest practicable date, the Registration Statement
to become effective under the Securities Act and applicable state securities law
and the Proxy Statement to be approved under the Exchange Act and applicable
state securities laws. Copies of the Registration Statement, Prospectus and
Proxy Statement (including any amendment or supplement thereto), as filed with
any federal or state regulator, will be delivered to Purchaser promptly
following such filing. Purchaser shall have the right to review and comment on
the form of Registration Statement and Proxy Statement prior to any such filing
for a period of not less than 48 hours after receipt of such document.
6.3 No Solicitation. Until the earlier of the consummation of the
Rights Offering or the termination of this Agreement, with respect to any
Investment Proposal (as hereinafter defined):
(a) The Company will not (and will use its reasonable best efforts
to assure that its officers, directors, employees, agents and affiliates do
not on its behalf) take any action to solicit, initiate, encourage or
support any inquiry, proposal or offer from, furnish any information to, or
participate in any negotiations with, any corporation, partnership, person
or other entity or group regarding any acquisition of the Company or any
subsidiary thereof, any merger, amalgamation, or consolidation with or
involving the Company or any subsidiary thereof, or any take-over bid, or
(other than the Standby Purchasers in connection with the Offering and in
accordance with the other terms of this Agreement) any sale of stock or
other equity securities (including, without limitation, by way of a tender
offer) or any material portion of the assets of the Company or any
subsidiary thereof (any of the foregoing inquiries or proposals being
referred to herein as an "Investment Proposal").
(b) The Company shall immediately notify the Purchaser after receipt
of any Investment Proposal, or any request for information relating to the
Company in connection with an Investment Proposal, or any request for
access to the properties, books or records of the Company by any person or
entity that informs the Company that it is considering making, or has made,
an Investment Proposal. Such notice to the Purchaser shall be made orally
and in
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writing and shall indicate in reasonable detail the terms and conditions of
any such proposal, inquiry or contact.
6.4 Books and Records; Access and Information. From the date of this
Agreement until the Closing Date, the Company will give to the Purchaser, its
officers and representatives reasonable access to the premises, books and
records of the Company and its subsidiaries, and provide the Purchaser with such
financial and operating data and other information with respect to its business
and properties as it shall from time to time reasonably request, including,
without limitation, all interim financial data within five (5) days of it
becoming available; provided, however, that any such investigation shall be
conducted in such manner as not to interfere unreasonably with the operation of
the business of the Company.
6.5 Rights Offering; Annual Meeting. The Company will conduct, and
use its reasonable best effort to close, the Rights Offering substantially in
the manner described in the Prospectus. The Company shall call an Annual Meeting
of its stockholders, deliver notice of such meeting to Company stockholders in
accordance with applicable law and shall use its reasonable best efforts to hold
the Annual Meeting as soon as practicable. The Company, through its Board of
Directors, will unanimously recommend to its stockholders approval of the
Restatement and issuance of the Available Shares to the Purchaser.
6.6 Notification by Company of Certain Matters. Subsequent to the
date of this Agreement and on or prior to the Closing Date, the Company shall
promptly notify the Purchaser of:
(a) the receipt of any notice of, or other communication relating to,
a default or event which, with notice or lapse of time or both, would
become a default, under any material agreement to which it is a party or to
which it or any of its respective material properties or assets may be
subject or bound;
(b) the receipt of any notice or other communication from any third
party whose consent or approval is or may be required in connection with
the transactions contemplated by this Agreement, denying such consent or
approval;
(c) the receipt of any notice or other communication from any
governmental regulatory agency or authority in connection with the
transactions contemplated hereby; or
(d) any condition or fact which would not permit it to satisfy a
condition to the Purchaser's obligation to effect the transactions
contemplated in this Agreement or results or would result in any inaccuracy
in a representation or warranty of the Company.
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6.7 NASDAQ. The Company shall use all reasonable efforts to (i)
cause the Preferred Shares and the Conversion Shares issuable pursuant to the
terms of the Preferred Shares to be eligible for quotation on the Nasdaq Stock
Market--National Market, (ii) maintain the continued authorization for trading
of the Common Stock of the Company on the Nasdaq Stock Market--National Market,
or (iii) in the event the Company is unable, after undertaking all such
reasonable efforts, to maintain such authorization, be listed or otherwise
authorized for trading on the Nasdaq Stock Market--Small Cap or a national
securities exchange and to comply with all applicable maintenance criteria of
such exchange or Nasdaq applicable to continued eligibility for trading on such
market.
6.8 Right of First Refusal. If the Company should decide to issue
and sell additional shares of any capital stock of the Company or any warrants,
securities convertible into capital stock of the Company or other rights to
subscribe for or to purchase any capital stock of the Company, other than (a)
shares of Common Stock sold to the public pursuant to a registration statement
filed under the Securities Act, if such offering is underwritten on a firm
commitment basis, (b) shares of Common Stock awarded or issued upon the exercise
of options granted pursuant to employee and consultant benefit plans adopted by
the Company, and the grant of such options themselves, (c) shares of Common
Stock issued upon conversion of the Preferred Shares, (d) shares of Common Stock
or Preferred Shares issued pursuant to the exercise of warrants of the Company
outstanding at the date of this Agreement; and (e) shares of Common Stock issued
pursuant to the Montgomery Employment Agreement (all such capital stock,
warrants, securities convertible into capital stock and other rights, other than
securities referred to in (a), (b), (c), (d) and (e) above, being hereinafter
sometimes collectively referred to as "Additional Securities"), the Company
shall first offer to sell to the Purchaser, upon the same terms and conditions
as the Company is proposing to issue and sell such Additional Securities to
others, such Purchaser's pro rata share (as defined below) of such Additional
Securities. Notwithstanding the foregoing, no Additional Securities may be sold
to the Purchaser to the extent a change of ownership within the meaning of the
IRC 382 Limitation would occur. Such offer shall be made by written notice given
to the Purchaser and specifying therein the amount of the Additional Securities
being offered, the purchase price and other terms of such offer. The Purchaser
shall have a period of 30 days from and after the date of receipt by it of such
notice within which to accept such offer. If the Purchaser elects to accept such
offer in whole or in part, the Purchaser shall so accept by written notice to
the Company given within such 30-day period. If the Purchaser fails to accept
such offer in whole or in part within such 30-day period, any of such Additional
Securities not purchased by the Purchaser pursuant to such offer may be offered
for sale to others by the Company for a period of 180 days from the last day of
such 30-day period, but only on the same terms and conditions as set forth in
the initial offer to the Purchaser, free and clear of the restrictions imposed
by this Section.
For purposes of the previous paragraph, the Purchaser's "pro rata
share" is the number of shares of Additional Securities (rounded to the nearest
whole share) as is equal to the product of (a)(i) the number of shares of Common
Stock issued, or issuable upon the
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exercise or conversion of rights, options or Convertible Securities without the
payment of any additional cash consideration or with the payment of a nominal
cash consideration, as the case may be (collectively, "Fully Paid Securities"),
to the Purchaser immediately prior to the issuance of the Additional Securities
being offered divided by (ii) the total number of Fully Paid Securities issued
or issuable by the Company immediately prior to the issuance of the Additional
Securities, multiplied by (b) the entire offering of Additional Securities.
6.9 Nomination of Directors; Board Observation. So long as Purchaser
is a holder of Preferred Shares, the Company shall, at the request of the
Purchaser and subject to any applicable federal or state banking law or
regulation, cause to be nominated for election as directors of the Company, and
use its reasonable best efforts to cause to be elected, that number of persons
designated by the Purchaser which the Purchaser or any affiliate thereof is
entitled to elect based on cumulative voting thereby in the election of
directors.
So long as Purchaser has not so designated one or more directors or a
designee of the Purchaser is not otherwise a director of the Company, the
Company shall notify the Purchaser of all regular meetings and special meetings
of the Board of Directors of the Company at least two business days in advance
of such meeting and afford any representative designated by the Purchaser the
right and opportunity to attend any such meeting. Such representative shall be
entitled to receive all written materials and such other information given to
directors of the Company in connection with any such meeting at the time such
materials or information are given to such directors; provided that such
representative shall have executed the Company's Confidentiality Agreement in
the form attached hereto as Exhibit 2.
The Company shall maintain as part of its Articles of Incorporation or
By-Laws a provision for the indemnification and limitation on liability of its
directors to the full extent permitted by law and use its reasonable best
efforts to maintain director and officer liability insurance in amounts and on
terms no less favorable than included in the Company's existing policy.
6.10 Press Releases and Public Announcements. No party hereto shall
issue any press release or make any public announcement relating to the proposed
purchase of Preferred Shares by the Purchaser contemplated by this Agreement
prior to the Closing without the prior approval of the other party; provided,
however, that any party may make any public disclosures it believes in good
faith (based on advice of outside counsel) is required by applicable law or any
listing or trading agreement concerning its publicly traded securities (in which
case the disclosing party will use its reasonable best efforts to advise the
other party prior to making the disclosure and to seek their counsel concerning
the timing and content of such disclosure). For purposes of this Agreement, in
the event that a party shall provide 24 hours notice to the other of a proposed
press release or public announcement and such party receiving such notice shall
not respond in writing objecting to such release or announcement, such proposed
press release or public announcement shall be deemed a permitted release or
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announcement pursuant hereto provided such release or announcement was reviewed
and approved by outside counsel to the party issuing the press release or
announcement.
6.11 Cooperation. Each party will use all reasonable efforts and
will cooperate with the other in the preparation and filing, as soon as
practicable, of all applications and documents required to obtain regulatory
approvals and consents. Each party will use all reasonable efforts and shall
cooperate with the other in taking any other actions necessary to obtain such
regulatory or other approvals and consents. Subject to the terms and conditions
herein provided, each party will use all reasonable efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable to cause the conditions set forth in Sections 7, 8 and 9
hereof to be satisfied and to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement.
6.12 Notification by Purchaser of Certain Matters. Subsequent to the
date of this Agreement and on or prior to the Closing Date, the Purchaser shall
promptly notify the Company of:
(a) the receipt of any notice or other communication from any third
party whose consent or approval is or may be required in connection with
the transactions contemplated by this Agreement, denying such consent or
approval;
(b) the receipt of any notice or other communication from any
governmental regulatory agency or authority in connection with the
transactions contemplated hereby; or
(c) any condition or fact which would not permit it to satisfy a
condition to the Company's obligation to effect the transactions
contemplated in this Agreement or results or would result in any inaccuracy
in a representation or warranty of the Purchaser.
6.13 Regulatory Application. Within thirty (30) days of the date
hereof, the Purchaser shall file all necessary applications with any federal or
state agency required by the purchase of the Preferred Shares by the Purchaser
contemplated hereunder.
6.14 Net Operating Loss. Prior to the third anniversary of the
Closing Date, the Company will not (i) amend, or propose an amendment to, the
Restatement to amend the restrictions on transfer with respect to the shares of
the Company's capital stock, or waive the operation of such restrictions, or
(ii) approve any acquisition, sale, issuance, assignment or transfer of its
capital stock or options or warrants to purchase shares of its capital stock,
unless, in any such event, the Board of Directors determines, after discussion
and due deliberation, with the assistance, as necessary or appropriate, of
legal, financial, tax,
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accounting and other advisors, at a duly called meeting, that such event would
be in the best interests of the shareholders of the Company.
6.15 Director Liability. The Purchaser agrees not to assert any
Claim against a Director of the Company. For purposes of this Section 6.15,
"Claim" shall mean any action, suit, arbitration or proceeding (a "Proceeding")
for money damages, expenses, penalties or similar payments from such person
individually ("Liabilities") arising out of or relating to the execution,
delivery and performance of this Agreement by the Company, except to the extent
Purchaser reasonably determines (i) a Director subject to any such Proceeding or
Liabilities would not be entitled indemnification from the Company under
applicable law, or (ii) such Proceeding or Liabilities are insured risks under
policies of insurance issued by third parties; and "Director" shall mean any
director of the Company who is not also an executive officer of the Bank.
7. Conditions to Obligations of Each Party
The respective obligations of the Company and the Purchaser as set
forth in this Agreement are subject to the following conditions:
7.1 Stockholder Approval. The Restatement shall have been duly
approved and adopted by the holders of the Company's Common Stock at the Annual
Meeting.
7.2 No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the investment by the Purchaser shall be in effect; nor
shall there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the investment by the
Purchaser, which makes the investment by the Purchaser illegal; and no temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint
provision limiting or restricting the Purchaser's conduct or operation of the
business of the Company and its subsidiaries, following the investment by the
Purchaser shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other governmental entity, domestic or
foreign, seeking the foregoing be pending. In the event an injunction or other
order shall have been issued, each party agrees to use its reasonable diligent
efforts to have such injunction or other order lifted.
7.3 Registration Statement Effective. The Registration Statement
will have been declared effective by the Commission, no stop order suspending
the effectiveness of the Registration Statement or any amendment or supplement
thereto shall have been issued and no proceedings for such purpose shall be
pending before or threatened by the Commission and any requests for additional
information by the Commission (to be included in the
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Registration Statement, in the Prospectus or otherwise) shall have been complied
with in all material respects.
7.4 Regulatory Approvals. The purchase of Available Shares shall
have been approved by applicable federal and state banking authorities without
any condition not reasonably satisfactory to Purchaser, all conditions required
to be satisfied prior to the Closing Date imposed by the terms of such approvals
shall have been satisfied and all waiting periods relating to such approvals
shall have expired. All other governmental consents, approvals and filings
required for the consummation of the Offering and the transactions contemplated
hereby and effectiveness of the Restatement have been obtained or made and are
in full force and effect.
7.5 Tax Opinion. Deloitte & Touche, independent accountants to the
Company, shall have delivered to the Company and Purchaser its opinion, in form
and substance satisfactory to each, to the effect that following the Offering
and the transactions contemplated by this Agreement and similar agreements with
Standby Purchasers, and considering all other stock transactions during the
relevant testing period and ending on the Issuance Date, there has not been a
change in ownership within the meaning of the IRC 382 Limitation.
7.6 Minimum Subscriptions. The Company shall have received and
accepted in the Offering valid subscriptions for Preferred Shares from
stockholders and Standby Purchasers aggregating not less than $5.5 million which
shall not trigger the IRC 382 Limitation.
8. Additional Conditions of Purchaser's Obligations
The obligations of the Purchaser to purchase the Preferred Shares as
set forth in this Agreement are subject to the following additional conditions:
8.1 Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and correct
as of the Closing Date and the Company shall have performed in all material
respects all covenants and agreements herein required to be performed on its
part at or prior to the Closing Date.
8.2 Certificate of the Company. The Company shall have been provided
with a certificate dated the Closing Date executed on behalf of the Company by
its President and its Chief Financial Officer to the effect that, as of the
Closing Date, the condition provided for in subsection 8.1 above has been
satisfied.
8.3 Registration Rights Agreement. The Company and the Purchaser
will have entered into a Registration Rights Agreement (the "Registration Rights
Agreement") in the form attached hereto as Exhibit 3.
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8.4 Comfort Letter. The Purchaser shall have received a letter of
Deloitte & Touche dated the Closing Date and addressed to Purchaser, in form
reasonably satisfactory to Purchaser and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement, regarding the
financial data and information included in the Registration Statement.
8.5 Opinion of Counsel to Company. The Purchaser shall have received
an opinion of Manatt, Phelps & Phillips, special counsel for the Company, dated
the Closing Date and addressed to Purchaser, substantially in the form of
Exhibit 4.
8.6 Litigation. The Company shall have settled the pending
litigation involving the Barr Sinister film and resolved the threatened
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litigation captioned TV Interactive Corporation, Apollo Telecom Network v.
-----------------------------------------------------
Philip Cavana and Mercantile National Bank, in form satisfactory to the
- ------------------------------------------
Purchaser and its counsel.
8.7 Montgomery Employment Agreement. The Company and Scott
Montgomery shall have amended that certain Employment Agreement dated June 21,
1996 between them to include the modifications set forth in Exhibit 5, such
amendment to be in form satisfactory to Purchaser and its counsel.
8.8 Additional Documents. The Company shall have furnished to
Purchaser and your counsel such additional documents, certificates and evidence
as Purchaser or they may have reasonably requested. All such certificates,
letters and other documents will be in compliance with the provisions hereof
only if they are satisfactory in form and substance to Purchaser and counsel for
the Purchaser. The Company will furnish Purchaser with such conformed copies of
such certificates, letters and other documents as Purchaser shall reasonably
request.
8.9 Director Nominees. The Company shall have taken all necessary
steps to assure election as directors, immediately following the Closing, of the
director nominees designated to the Company for election in accordance with
Section 6.9 hereof.
9. Additional Conditions of Company's Obligations
The obligations of the Company to sell and issue the Preferred Shares
as set forth in this Agreement are subject to the following additional
conditions:
9.1 Representations and Warranties. The representations and
warranties of the Purchaser contained in this Agreement shall be true and
correct in all material respects as of the Closing Date and the Purchaser shall
have performed in all material respects all covenants and agreements herein
required to be performed on its part at or prior to the Closing Date.
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9.2 Certificates of Purchaser. The Company shall have been provided
with a certificate dated the Closing Date executed on behalf of the Purchaser by
its President and its Chief Financial Officer to the effect that, as of the
Closing Date, the condition provided for in subsection 9.1 above has been
satisfied. The Purchaser shall have delivered to Deloitte & Touche a certificate
in the form attached hereto as Exhibit 6.
9.3 Opinion of Counsel to Purchaser. The Company shall have received
an opinion of Jay L. Kim, Vice President of The Conrad Company, dated the
Closing Date and addressed to the Company, substantially in the form of Exhibit
7.
9.4 Legend.
(a) Each certificate or other document evidencing the Preferred
Shares purchased hereunder by the Purchaser shall be endorsed with the
legends set forth below:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS,
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION OR
QUALIFICATION THEREOF UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH AN
AVAILABLE EXEMPTION FROM REGISTRATION OR QUALIFICATION. THE
COMPANY MAY REFUSE TO AUTHORIZE ANY TRANSFER OF THE SHARES
IN RELIANCE ON AN EXEMPTION FROM REGISTRATION OR
QUALIFICATION UNTIL IT HAS RECEIVED AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
(b) Any legend endorsed on a certificate or instrument evidencing a
security pursuant to paragraph (a) above shall be removed, and the Company
shall issue a certificate or instrument without such legend to the holder
of such security, (i) in accordance with paragraph (a) above, (b) if such
security is being disposed of pursuant to registration under the Securities
Act and any applicable state acts or pursuant to Rule 144 or any similar
rule then in effect, or (iii) if such holder provides the Company with an
opinion of counsel satisfactory to the Company to the effect that a sale,
transfer, assignment, offer, pledge or distribution for value of such
security may be
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made without registration and that such legend is not required to satisfy
the applicable exemption from registration.
9.5 Additional Documents. The Purchaser shall have furnished to the
Company and its counsel such additional documents, certificates and evidence as
the Company or its counsel may have reasonably requested. All such certificates,
letters and other documents will be in compliance with the provisions hereof
only if they are satisfactory in form and substance to the Company and its
counsel. The Purchaser will furnish the Company with such conformed copies of
such certificates, letters and documents as the Company shall reasonably
request.
10. Termination
10.1 Termination Events. This Agreement may be terminated in writing
at any time prior to the Closing Date by the Company or Purchaser, only in the
following circumstances:
(a) by mutual consent of the Company and Purchaser;
(b) by either the Company or Purchaser if (i) any governmental
entity of competent jurisdiction shall have issued a final nonappealable
order enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement; (ii) the shareholders of the
Company have not approved the Restatement; (iii) the transactions
contemplated hereunder have not been consummated on or before May 31, 1997,
unless the failure of consummation shall be due to the failure of the party
seeking to terminate to perform or observe in all material respects the
covenants and agreements hereunder to be performed or observed by such
party; or (iv) there shall have been an inaccuracy in any of the
representations or warranties on the part of the other party or material
breach of any covenant or agreement set forth in this Agreement on the part
of the other party, which breach shall not have been cured within twenty
(20) business days following receipt by the breaching party of written
notice of such breach from the other party;
(c) by the Purchaser if there shall have occurred relative to the
Company or any subsidiary any event, change, or effect that would have a
Material Adverse Effect.
10.2 Effect of Termination. The Company and the Purchaser hereby
agree that any termination of this Agreement pursuant to this Section 10 (other
than termination by one party in the event of an inaccuracy in a representation
or warranty or breach of a covenant or agreement in this Agreement by the other
party ) shall be without liability of the Company
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or the Purchaser, except as contemplated by Section 12. The obligations under
Section 11 shall also survive any termination of this Agreement.
11. Indemnification and Contribution
11.1 Indemnification by Company. The Company agrees to indemnify and
hold harmless the Purchaser (which term shall include for purposes of this
Section 11, each director, officer, agent or employee of Purchaser or person who
controls the Purchaser within the meaning of the Act) against any losses,
claims, damages or liabilities, joint or several (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based directly or indirectly, in whole or
in part, upon (i) any material inaccuracy in the representations and warranties
of the Company contained herein and not qualified as to materiality, or any
inaccuracy in the representations and warranties of the Company contained herein
and qualified as to materiality, (ii) an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, the Proxy Statement, or any amendment or
supplement thereto or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) any other act
or omission of the Company, its officers or directors, or any alleged act or
omission; and will reimburse the Purchaser for any legal or other expenses
reasonably incurred by it in connection with investigating, prosecuting or
defending against such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, the Proxy Statement, or any such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by the Purchaser specifically for use in the preparation thereof.
11.2 Advancement of Expenses. In addition to their other obligations
under this Section 11, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any act, statement or omission, or any alleged act,
statement or omission, described in subsection 11.1 it will reimburse the
Purchaser on a monthly basis for all reasonable legal fees or other expenses
incurred in connection with investigating, prosecuting or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse the Purchaser for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Purchaser shall
promptly return any reimbursement payment to the Company, together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of
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the highest credit standing) announced from time to time by the Bank (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Purchaser within 30 days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request. This indemnity agreement shall be
in addition to any liabilities which the Company may otherwise have.
11.3 Procedure for Indemnification Involving Third Party Claims.
Promptly after receipt by the Purchaser of notice of the commencement of any
action by a third party, the Purchaser shall, if a claim in respect thereof is
to be made against the Company under subsection 11.1, notify the Company in
writing of the commencement thereof; but the omission so to notify the Company
shall not relieve the Company from any liability that it may have to the
Purchaser. In case any such action shall be brought against the Purchaser, and
it shall notify the Company of the commencement thereof, the Company shall be
entitled to participate in, and, to the extent that it shall wish, to assume the
defense thereof, with counsel satisfactory to the Purchaser, and after notice
from the Company to the Purchaser of the Company's election so to assume the
defense thereof, the Company shall not be liable to the Purchaser under such
subsection for any legal or other expenses subsequently incurred by the
Purchaser in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the sole judgment of the
Purchaser, it is advisable for the Purchaser to be represented by separate
counsel, the Purchaser shall have the right to employ counsel to represent the
Purchaser for liability arising from any claim in respect of which indemnity may
be sought by the Purchaser, in which event the reasonable fees and expenses of
such separate counsel shall be borne by the Company and reimbursed to the
Purchaser as incurred (in accordance with the provisions of subsections 11.1 and
11.2 above). The Company shall not be obligated under any settlement agreement
relating to any action under this Section 11 to which it has not agreed in
writing.
11.4 Contribution. If for any reason indemnification is unavailable
to Purchaser or insufficient to hold it harmless, then the Company shall
contribute to the amount paid or payable by Purchaser as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and Purchaser on the
other hand, the relative fault of the Company and of Purchaser and any other
relevant equitable considerations; provided that in no event will the aggregate
contribution of Purchaser exceed the then fair market value of the Preferred
Shares acquired by the Purchaser, less the amount of any damages the Purchaser
has otherwise been required to pay.
11.5 Indemnification and Contribution Not Exclusive. The obligations
of the Company under this Section 11 shall be in addition to any liability which
the Company may otherwise have.
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12. Payment of Fees and Expenses of Purchaser
Irrespective of whether a Closing hereunder is effected, the Company
will pay the reasonable out-of-pocket expenses incurred by the Purchaser in
connection with the transactions herein contemplated, including without
limitation the reasonable fees and out-of-pocket expenses of Faegre & Benson LLP
for their services as special counsel to the Purchaser and Arthur Andersen & Co.
for their services as tax accountants to the Purchaser in connection with the
transactions herein contemplated; provided, however, that except as set forth in
the following paragraph or unless this Agreement shall have been terminated by
Purchaser pursuant to Section 10(b)(iv) hereof, the Company's obligation to
reimburse such expenses shall not exceed $150,000. The Company will also pay (a)
all fees and expenses incurred by the Purchaser with respect to any amendments
or waivers requested after the execution of this Agreement by the Company
(whether or not the same become effective) under or in respect of this Agreement
or the agreements contemplated hereby, and (b) all fees and expenses incurred by
the Purchaser with respect to the enforcement of the rights granted under this
Agreement or the agreements contemplated hereby.
In the event that (i) there shall occur any termination of this
Agreement for any reason pursuant to Section 10 hereof, other than by the
Company and Purchaser in accordance with subsection 10.1(a) or by the Company in
accordance with subsection 10.1(b)(iv), and (ii) either (a) at the time of such
termination there exists a bona fide Investment Proposal from a person other
than Purchaser, or (b) at any time prior to such termination the Company or any
affiliate, officer, director, representative or agent of the Company has had any
discussions, conversations, negotiations or other communications regarding any
Investment Proposal with any person other than the Purchaser and before such
termination or within twelve months thereafter, the Company or any affiliate
thereof enters into any agreement with such person, or such person acquires or
has the right to acquire beneficial ownership of 25% or more of the voting
capital stock of the Company or the Bank, or (c) the Board of Directors of the
Company shall have withdrawn, modified or amended in any respect its approval or
recommendation of the Restatement, shall not have included such recommendation
in the Proxy Statement or shall have resolved to do any of the foregoing, then
the Company shall, upon termination of the Agreement in the case of clauses (a)
and (c) above, or upon execution of such agreement or acquisition of such shares
or rights thereto, in the case of clause (b) above, promptly pay to the
Purchaser in immediately available funds $250,000. The payment of any such
amount shall not in any way limit any remedies of the Purchaser against the
Company under this Agreement for any breach by the Company of any of its
representations, warranties or covenants contained in this Agreement, and the
Purchaser reserves its rights to pursue its remedies, at law or in equity,
against the Company or any third party.
13. Miscellaneous
13.1 Rights of Third Parties. Except as contemplated by Section 11,
this Agreement is made solely for the benefit of the Purchaser and the Company,
and their
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respective successors and assigns, and no other person, partnership, association
or corporation shall acquire or have any right under or by virtue of this
Agreement.
13.2 Assignment. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto.
13.3 Entire Agreement; Invalidity. This Agreement constitutes the
entire agreement and understanding between the Purchaser and the Company, and
supersedes all prior agreements and understandings relating to the subject
matter hereof. In case any one or more of the provisions contained in this
Agreement, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable in any respect under the laws of any jurisdiction, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
affected or impaired thereby or under the laws of any other jurisdiction.
13.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
and all such counterparts together constitute but one and the same instrument.
13.5 Amendments. This Agreement may not be amended, modified or
changed, in whole or in part, except by an instrument in writing signed by the
Company and the Purchaser.
13.6 Notices. Except as otherwise provided in this Agreement, and
unless otherwise notified by the respective addressee, all notices and
communications hereunder shall be in writing and mailed first class or overnight
delivery or hand delivered or by facsimile or telephone if subsequently
confirmed in writing, to:
If to the Company: National Mercantile Bancorp
1840 Century Park East
Los Angeles, CA 90067-2103
Attention: Executive Vice President
Telephone: (310) 282-6778
Facsimile: (310) 201-0629
If to the Purchaser: To the address set forth in Schedule
A or at such other address as
Purchaser may specify by written
notice.
13.7 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to the conflict of laws rules thereof.
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13.8 Representations and Agreements to Survive Delivery. All
representations and warranties (as qualified by the Disclosure Schedule), and
agreements of the Company and the Purchaser contained herein or in certificates
delivered pursuant hereto shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Purchaser or the
Company and shall survive delivery of, and payment for, the Available Shares to
and by the Purchaser for a period of two (2) years after the delivery of and
payment for such shares; provided, however, that the representations and
warranties of the Company made in Sections 4.4, 4.11 and 4.19 shall survive for
the period of any applicable statute of limitations; provided further that in
the event that the Company discloses in the certificate, dated the Closing Date
and required to be furnished by the Company to Purchaser pursuant to Section
8.2, inaccuracies as of the Closing Date in its representations and warranties
contained herein, as qualified by the Disclosure Schedule, and made at the time
of the execution of this Agreement, and Purchaser elects to waive the Company's
failure to satisfy the condition set forth in Section 8.1 and to proceed with
the purchase of the Available Shares under this Agreement, then the
representations and warranties that survive the delivery of, and payment for,
the Available Shares to and by the Purchaser shall be those representations and
warranties, as qualified by the Disclosure Schedule, made at the time of the
execution of this Agreement, to the extent any inaccuracies so disclosed in such
certificate existed at the time of execution and delivery of this Agreement or
to the extent such certificate discloses no inaccuracy and, in all other cases,
shall be those representations and warranties, as qualified by the Disclosure
Schedule and as further qualified by such certificate.
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IN WITNESS WHEREOF, and intending to be legally bound hereby, each of the
Purchaser and the Company has signed or caused to be signed its name as of the
day and year first above written.
NATIONAL MERCANTILE BANCORP
By /s/ Scott A. Montgomery
------------------------
Name Scott A. Montgomery
-------------------
Title EVP & CAO
------------------
Agreed and Accepted as of the
6th day of February, 1997:
CONRAD COMPANY
By /s/ Janice Ozzello Wilcox
-------------------------
Name Janice Ozzello Wilcox
-----------------------
Title CFO
----------------------
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February 7, 1997
To the Purchaser Listed on Schedule A
Attached Hereto (the "Purchaser")
Ladies and Gentlemen:
This letter confirms the agreement (the "Agreement") with respect to the
intention of National Mercantile Bancorp (the "Company") to raise additional
capital through a rights offering, with oversubscription privileges, of up to
$5.5 million in aggregate Subscription Price (as hereinafter defined) of shares
of the Company's 6.5% Series A Noncumulative Convertible Perpetual Preferred
Stock (the "Preferred Shares") to its shareholders of record as of a date to be
determined ("Rights Offering") with the participation of standby purchasers to
purchase a number of Preferred Shares, subject to applicable limitations herein
expressed, equal to the amount of unsubscribed shares in the Rights Offering.
Additional Preferred Shares of up to $2.5 million in aggregate Subscription
Price of Preferred Shares (the "Additional Shares") are to be offered to
accommodate the minimum purchase requirements of the Purchaser and the
additional standby purchasers listed on Schedule B
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(collectively, the "Tier I Standby Purchasers"). Up to an additional $1.0
million in aggregate Subscription Price of Preferred Shares (the "Over-Allotment
Shares") are to be offered to accommodate oversubscription rights
("Oversubscription Rights") of shareholders entitled to participate in the
Rights Offering and subscriptions from other standby purchasers (the "Tier II
Standby Purchasers") identified by the Company. The Rights Offering and the
offering of Additional Shares and Over-Allotment Shares is herein referred to as
the "Offering."
A registration statement on Form S-2 with respect to the Offering of
Preferred Shares, including a preliminary form of prospectus, will be prepared
by the Company in conformity with the requirements of the Securities Act of
1993, as amended (the "Securities Act"), and the rules and regulations (which
together with the rules and regulations under the Exchange Act referred to below
are collectively referred to herein as the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and will be
filed with the Commission; and one or more amendments to such registration
statement also will be so prepared and will be so filed. When filed with the
Commission, as amended at the time it is declared effective by the Commission,
and, in the event of any amendment thereto after the effective date and prior to
the closing of the Rights Offering, such registration statement, as so amended,
including all exhibits and documents incorporated by reference therein, is
hereinafter called the "Registration Statement." The prospectus included in the
Registration Statement is hereinafter called the "Prospectus."
The Preferred Shares will be issued pursuant to and be entitled to the
benefits of the provisions of an amendment and restatement of the Articles of
Incorporation of the Company
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<PAGE>
substantially as described in the Registration Statement (the "Restatement").
The Preferred Shares shall be convertible into shares of the Company's Common
Stock (as hereinafter defined) (such shares of Common Stock into which the
Preferred Shares are convertible and all shares of Common Stock of the Company
issued in exchange or substitution therefor being hereinafter sometimes referred
to as the "Conversion Stock"), initially at the rate of one share of Conversion
Stock for each Preferred Share, all as more fully set forth in the Restatement.
The Preferred Shares shall be subject in all respects to all of the other
provisions of the Restatement.
Pursuant to the Restatement, the Company also intends to effect a 9.09 for
1 reverse stock split (the "Recapitalization") immediately prior to the Rights
Offering Closing (as hereinafter defined) and to adopt certain restrictions on
ownership and transfer of capital stock of the Company relative to the IRC 382
Limitation (as defined below). A proxy statement has been prepared in
conformity with the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Rules and Regulations and shall be filed by the Company with the
Commission relating to approval of the Restatement by the shareholders of the
Company at a meeting thereafter to be called (the "Annual Meeting"). Such proxy
statement, when filed with the Commission, as amended at the time all applicable
waiting periods relating to approval have expired with the Commission, at the
time of mailing the proxy statement and at all times subsequent to such mailing
up to and including the time of the Annual Meeting, is hereinafter called the
"Proxy Statement."
All share and per share data set forth herein shall be deemed
proportionately adjusted upon effectiveness of the Recapitalization.
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1. PURCHASE AND SALE OF AVAILABLE SHARES
1.1 PURCHASE BY PURCHASER AND TIER I STANDBY PURCHASERS. Subject to
the terms and conditions and in reliance upon the representations and warranties
herein set forth, the Company agrees to issue and sell to Purchaser and
Purchaser severally agrees to purchase from the Company, ratably with all Tier I
Standby Purchasers in accordance with the percentage allocation set forth on
Schedule A and Schedule B, at the Subscription Price (a) that aggregate number
of Preferred Shares which remain available for issuance in accordance with the
Rights Offering after the issuance of all Preferred Shares validly subscribed
for through the exercise of basic subscription rights in the Rights Offering
(the "Basic Subscription Rights"), and (b) the Additional Shares (such Preferred
Shares being hereinafter referred to collectively as the "Available Shares").
1.2 MINIMUM PURCHASE BY PURCHASER AND TIER I STANDBY PURCHASER.
Subject to the terms, conditions and limitations herein set forth, the Company
agrees to issue and sell to the Purchaser, and the Purchaser severally agrees to
purchase from the Company, ratably with all Tier I Standby Purchasers in
accordance with the percentage allocation set forth on Schedule A and Schedule
B, at the Subscription Price and otherwise in accordance with this Agreement, an
amount not less than the Additional Shares, but in no event shall the
Subscription Price paid by Wildwood Enterprises Inc. Profit Sharing Plan and
Trust exceed $500,000.
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1.3 SUBSCRIPTION PRICE. The Subscription Price shall be $1.10 ($9.999
post-Recapitalization) per Preferred Share, or such lesser price at which the
Preferred Shares shall be offered in the Rights Offering.
1.4 PRIORITY OF TIER I STANDBY PURCHASERS. Subscriptions for
Preferred Shares in connection with the Offering shall be accepted by the
Company in the following order of priority: first, Basic Subscription Rights;
second, Tier I Standby Purchaser subscription rights as set forth in Sections
1.1 and 1.2 hereof; third, Oversubscription Rights; and fourth, subscription
rights of Tier II Standby Purchasers. In no event shall the aggregate
Subscription Price of the Preferred Shares offered and sold in the Offering
exceed $9.0 million. All Preferred Shares subscribed for in the Rights Offering
or pursuant hereto shall be issued on the same date established by the Company
(the "Issuance Date").
1.5 OTHER TERMS OF PURCHASE BY STANDBY PURCHASERS. The Company
contemplates entering into one or more standby purchase agreements with the
other Tier I Standby Purchasers and the Tier II Standby Purchasers
(collectively, the "Standby Purchasers"). In no event shall any such agreement
be on terms less favorable to the Company than the terms hereof except as it may
relate to the number of Preferred Shares to be acquired, or on substantive
economic terms inconsistent with the terms of this Agreement. No binding
agreement with a Tier II Standby Purchaser shall be executed prior to the date
that the Registration Statement shall be declared effective by the Commission.
In connection with the purchase of shares of Preferred Stock by a Tier II
Standby Purchaser, the Company will receive from each Tier II Standby Purchaser
a representation
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<PAGE>
that the Tier II Standby Purchaser's investment decision is not made based upon
the investment decision of any other purchaser. The aggregate maximum number of
Preferred Shares offered and sold to Tier II Standby Purchasers shall not exceed
$2.5 million in aggregate Subscription Price of Preferred Shares. The aggregate
minimum number of Preferred Shares that the Company can guarantee will be sold
pursuant to Oversubscription Rights and to Tier II Standby Purchasers (the
"Oversubscription and Tier II Standby Minimum") shall not exceed $1.0 million in
aggregate Subscription Price of Preferred Shares. The Over-Allotment Shares
shall be issued solely for the purpose of satisfying the Oversubscription and
Tier II Standby Minimum. Other than the sale of Preferred Shares to the
Purchaser or the sale of Preferred Shares to existing stockholders pursuant to
Basic Subscription Rights, the Company will not enter into any agreements or
arrangements which would allow any stockholder or groups of stockholders to
become a 5% stockholder as defined in the IRC 382 Limitation. If requested by
Purchaser, the Company shall furnish to the Purchaser a copy of each agreement
with any other Standby Purchaser promptly upon execution by the parties thereto.
Purchaser further acknowledges that its obligations hereunder are not contingent
upon the consummation of the sale of the Over-Allotment Shares.
1.6 LIMITATION ON ISSUANCE OF AVAILABLE SHARES. The Purchaser
acknowledges and agrees that the Available Shares to be allocated to the
Purchaser shall be reduced to the lesser of (a) an amount which, in the judgment
of the Company and the Purchaser after consultation with their respective tax
advisors, would not likely result in an "ownership change" of the Company under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and
related regulations (the "IRC 382 Limitation"); provided, however, that for
purposes of this Agreement, the amount of
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<PAGE>
"ownership change" with reference to the IRC 382 Limitation shall not exceed
45%, or (b) $5.0 million in aggregate Subscription Price of Preferred Shares.
2. The Closing
As soon as practicable following its determination of the number of
Available Shares, the Company shall notify the Purchaser of the number of
Available Shares to be purchased by the Purchaser. The delivery of and payment
for the Available Shares shall take place at the office of Manatt, Phelps &
Phillips, LLP at 11:00 a.m. Pacific time, immediately after the closing of the
sale of the Preferred Shares pursuant to the Rights Offering (the "Rights
Offering Closing"), such time and date to be not more than five (5) business
days after the foregoing notification and to be specified therein (such time and
date being referred to as the "Closing Time," the date of the Closing Time being
referred to as the "Closing Date" and the consummation of the transaction being
referred to as the "Closing").
3. Delivery of Available Shares
At the Closing, the Available Shares to be purchased by the Purchaser
hereunder, registered in the name of the Purchaser or its nominee(s), as the
Purchaser may specify in writing at least three (3) days prior to the Closing
Date, shall be delivered by or on behalf of the Company to the Purchaser, for
the Purchaser's account, against delivery by the Purchaser of the aggregate
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Subscription Price therefor in immediately available funds by wire transfer to
an account designated by the Company.
4. Representation and Warranties of the Company
In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect related to the financial
condition, properties, assets (including intangible assets), liabilities,
business, prospects, operations or results of operations of the Company and its
subsidiaries, taken as a whole. In this Agreement, any reference to a "Material
Adverse Effect" with respect to any entity or group of entities means any event,
change or effect that is materially adverse to the financial condition,
properties, assets, liabilities, business, prospects, operations or results or
operations of the Company and its subsidiaries, taken as a whole. For purposes
of this Agreement the term "prospects" shall mean realization of the Company's
1997 Business Plan dated December 20, 1996.
Except as disclosed in a document of even date herewith and delivered
by the Company to the Purchaser, and referring to the representations and
warranties in this Agreement (the "Disclosure Schedule"), or (other than where
so indicated below) in the Registration Statement in the form delivered to
Purchaser prior to execution of this Agreement, the Company represents and
warrants to the Purchaser as follows:
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4.1 ORGANIZATION/QUALIFICATION. Each of the Company and its
subsidiary has been duly organized and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiary has full corporate power and authority to own its
properties and conduct its business as currently being carried on, and is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction in which it owns or leases real property or in which the conduct of
its business makes such qualification necessary and in which the failure to so
qualify would have a Material Adverse Effect.
4.2 CAPITAL STOCK. The authorized capital stock of the Company
consists of ten million (10,000,000) common shares, of which 3,078,146 shares
(pre-Recapitalization) are issued and outstanding and one million (1,000,000)
shares of preferred stock, none of which shares are issued and outstanding. All
of the issued and outstanding shares of capital stock of the Company are duly
authorized by all necessary or proper corporate action, validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
the holders thereof are not subject to personal liability by reason of being
such holders; upon approval of the Restatement, as contemplated by the Proxy
Statement, the Preferred Shares which may be sold by the Company will have been
duly authorized by all necessary or proper corporate action and, when issued,
delivered and paid for as contemplated by the Registration Statement and this
Agreement, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal liability
by reason of being such holders; a number of shares of Common Stock equal to the
number of Preferred Shares have been duly authorized by all necessary or proper
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corporate action and reserved in the corporate records of the Company, and upon
conversion of the Preferred Shares, the Conversion Shares, when issued and
delivered, will have, been validly issued and will be fully paid and
nonassessable; there are no preemptive rights or other rights to subscribe for
or to purchase, or any restriction upon the voting or transfer of, the Preferred
Shares or any shares of Common Stock pursuant to the Company's charter, by-laws
or any agreement or other instrument to which the Company is a party or by which
the Company is bound. Except as contemplated in this Agreement, neither the
filing of the Registration Statement nor the offering or sale of the Preferred
Shares as contemplated by this Agreement gives rise to any rights for or
relating to the registration of any shares of Common Stock or other securities
of the Company or rights relating to antidilution which could result in any
change in the number of shares of capital stock to be issued by the Company. All
of the issued and outstanding shares of capital stock of each of the Company's
subsidiaries have been duly and validly authorized and issued and are fully paid
and nonassessable, and, except for any directors' qualifying shares, the Company
owns of record and beneficially, free and clear of any security interests,
claims, liens, proxies, equities or other encumbrances, all of the issued and
outstanding shares of such stock. There are no outstanding subscriptions,
options, warrants, calls, contracts, demands, commitments, convertible
securities or other agreements or arrangements of any character or nature
whatever, except as contemplated by this Agreement under which the Company is or
may be obligated to issue capital stock or other securities of any kind
representing an ownership interest or contingent ownership interest in the
Company.
4.3 AUTHORIZATION. Each of this Agreement and the Registration Rights
Agreement (as defined below) has been duly authorized by all necessary or proper
corporate action,
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executed and delivered by the Company, and each such agreement constitutes a
valid, legal and binding obligation of the Company, enforceable in accordance
with its terms, except as rights to indemnity hereunder may be limited by
federal or state securities laws and except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity. The
execution, delivery and performance of each of this Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated herein and therein will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any statute, any
agreement or instrument to which the Company is a party or by which it is bound
or to which any of its property is subject, or upon approval of the Restatement
as contemplated by the Proxy Statement, the Company's charter or by-laws, or any
order, rule, regulation or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its properties; no consent,
approval, authorization or order of, or filing with, any court or governmental
agency or body is required for the execution, delivery and performance of this
Agreement or the Registration Rights Agreement or for the consummation of the
transactions contemplated hereby or thereby by the Company, including the
issuance or sale of the Preferred Shares by the Company, except such as may be
required under the Securities Act or state securities or blue sky laws, and with
respect to any such approvals to be applied for, the Company has no reason to
believe such approvals will not be granted or obtained; and the Company has full
power and authority to enter into this Agreement and the Registration Rights
Agreement and, upon approval of the Restatement as contemplated by the Proxy
Statement, to authorize, issue and sell the Preferred Shares as contemplated by
this Agreement. The offer and sale of the Preferred Shares to the Purchaser and
each other Tier I Standby Purchaser is exempt from
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the registration, qualification and prospectus delivery requirements of
applicable federal and state law, provided that the representations and
warranties of the Purchaser hereunder and each other Tier I Standby Purchaser
relating to such laws are true and correct. Upon approval by the Stockholders as
contemplated by the Proxy Statement, the Restatement will have been duly
authorized by all necessary or proper corporate action, and, upon filing with
the Secretary of State of the State of California, no other or additional
corporate or legal action shall be necessary to perfect the rights and
privileges of the holders of Preferred Shares under the Restatement. The holders
of capital stock of the Company are entitled to the rights, preferences and
provisions of the Restatement.
4.4 REGISTRATION STATEMENT AND PROXY STATEMENT. The Registration
Statement, Prospectus and the Proxy Statement conform in all material respects
to the requirements of the Securities Act, the Exchange Act and the Rules and
Regulations; the Registration Statement and the Proxy Statement do not include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and the Prospectus does not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they are or were
made, not misleading, except that the foregoing does not apply to statements in
or omissions from any such document in reliance upon, and in conformity with,
written information furnished to the Company by the Purchaser, specifically for
use in the preparation thereof.
4.5 LICENSES. The Company and its subsidiary holds, and is operating
in compliance in all respects with, all franchises, grants, authorizations,
licenses, permits, easements,
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consents, certificates and orders of any governmental or self-regulatory body
required for the conduct of its business and all such franchises, grants,
authorizations, licenses, permits, easements, consents, certifications and
orders are valid and in full force and effect; and the Company and its
subsidiary has been and is in compliance in all respects with all applicable
federal, state, local and foreign laws, regulations, orders and decrees, except
where the failure to so comply would not have a Material Adverse Effect. The
Company is registered as a corporation under Section 1841 of Title 12, United
States Code, as amended. Mercantile National Bank (the "Bank") is an insured
bank under the provisions of Chapter 16 of Title 12, United States Code. No act
or default on the part of the Company or the Bank exists that could reasonably
be expected to limit or impair any of the Company's or Bank's powers, rights and
privileges or, in the case of the Bank, to affect its status as an insured bank.
4.6 PROPERTY. The Company and its subsidiary have good and marketable
title to all property owned by them, in each case free and clear of all liens,
claims, security interests or other encumbrances, the property held under lease
by the Company and its subsidiary is held by them under valid, subsisting and
enforceable leases with only such exceptions with respect to any particular
lease as do not interfere in any material respect with the conduct of the
business of the Company or its subsidiary; the Company and its subsidiary own,
or possess all patents, patent applications, trademarks, service marks,
tradenames, trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets and rights necessary for the conduct of the
business of the Company and its subsidiary as currently carried on, no name
which the Company or its subsidiary use and no other aspect of the business of
the Company or its subsidiary will involve or give rise to
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any infringement of, or license or similar fees for, any patents, patent
applications, trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets or
other similar rights of others material to the business or prospects of the
Company and neither the Company nor its subsidiary has received any notice
alleging any such infringement or fee.
4.7 SUBSIDIARIES. Other than the one subsidiary of the Company listed
in Exhibit 21 to the Company's 1995 10-K, neither the Company nor its subsidiary
owns any capital stock or other equity or ownership or proprietary interest in
any corporation, partnership, association, trust or other entity.
4.8 SEC DOCUMENTS; FINANCIAL STATEMENTS. In addition to the
Registration Statement, the Prospectus and the Proxy Statement, the Company has
furnished to Purchaser a true and complete copy of each statement, report,
registration statement (with the prospectus in the form filed pursuant to Rule
424(b) of the Securities Act), definitive proxy statement and other filings
filed with the Commission by the Company since January 1, 1994, and, prior to
the Closing Date, the Company will have furnished Purchaser with true and
complete copies (including exhibits) of any additional documents filed with the
Commission by the Company, or by an affiliate on Schedule 13D or 13G, prior to
the Closing Date (collectively, the "SEC Documents"). All documents required to
be filed as exhibits to the SEC Documents have been so filed, and all material
contracts so filed as exhibits are in full force and effect, except those which
have expired or have been terminated in accordance with their terms, and neither
the Company nor any of its subsidiaries is in material default
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thereunder. True and correct copies of all such contracts have been furnished to
Purchaser. As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act and the
Securities Act, and none of the 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 made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a subsequently filed SEC Document. To the knowledge of the Company,
other than 9830 Investments No. 1, Ltd., there are no other persons or groups
which beneficially own five percent or more of any class of the Company's
capital stock nor any material inaccuracies in any Schedule 13D or 13G delivered
to the Company and filed with the SEC. The financial statements of the Company,
including the notes thereto, included in the SEC Documents (the "Company
Financial Statements") were complete and correct in all material respects as of
their respective dates, complied as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto as of their respective dates, and have
been prepared in accordance with generally accepted accounting principles
applied on a basis consistent throughout the periods indicated and consistent
with each other (except as may be indicated in the notes thereto or, in the case
of unaudited statements included in Quarterly Reports on Form 10-Qs, as
permitted by Form 10-Q). The Company Financial Statements fairly present the
consolidated financial condition and operating results of the Company and its
subsidiaries at the dates and during the periods indicated therein (subject, in
the case of unaudited statements, to normal, recurring year-end adjustments).
There has been no change in the Company accounting policies except as described
in the notes to the Company Financial Statements.
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The Company has heretofore delivered to Purchaser copies of its
monthly reporting package to the Board of Directors of the Company for December
1995 and March, June and September of 1996 (collectively, the "Board Package
Financial Information"). The Board Package Financial Information has been
prepared in accordance with the books and records of the Company and its
subsidiary, is true and correct in all material respects and has been prepared
on a basis consistent with the Company Financial Statements and on a basis
consistent throughout the periods presented.
4.9 ABSENCE OF CERTAIN CHANGES. Except for the transactions
contemplated by this Agreement, since September 30, 1996, neither the Company
nor its subsidiary has: (a) incurred any debts, obligations or liabilities,
absolute, accrued or contingent and whether due or to become due, except current
liabilities incurred in the ordinary course of business; (b) paid any obligation
or liability other than, or discharged or satisfied any liens or encumbrances
other than those securing current liabilities, in each case in the ordinary
course of business; (c) declared or made any payment or distribution to its
stockholders as such, or purchased or redeemed any of its shares of capital
stock or other securities, or obligated itself to do so; (d) mortgaged, pledged
or subjected to lien, charge, security interest or other encumbrance any of its
assets, tangible or intangible, except in the ordinary course of business; (e)
sold, transferred or leased any of its assets except in the ordinary course of
business; (f) canceled or compromised any debt or claim, or waived or released
any right of material value; (g) suffered any physical damage, destruction or
loss (whether or not covered by insurance) which would have a Material Adverse
Effect; (h) entered into any transaction other than in the ordinary course of
business; (i) encountered any labor difficulties or labor union organizing
activities;
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(j) issued or sold any shares of capital stock or other securities or granted
any options, warrants or other purchase rights with respect thereto other than
as contemplated by this Agreement; (k) made any acquisition or disposition of
any material assets or become involved in any other material transaction, other
than in the ordinary course of business; (l) increased the compensation payable,
or to become payable, to any of its directors or employees, or made any bonus
payment or similar arrangement with any directors or employees or increased the
scope or nature of any fringe benefits provided for its employees or directors
other than regularly scheduled increases or as contemplated by any written
employment agreement; or (m) agreed to do any of the foregoing other than
pursuant hereto. There has not occurred since September 30, 1996, any change,
event or condition (whether or not covered by insurance) that has resulted in or
might reasonably be expected to result in, a Material Adverse Effect.
4.10 ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth in or adequately provided for in the
balance sheet (the "Company Balance Sheet") included in the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1996; (ii) those incurred
in the ordinary course of business and not required to be set forth in the
Company Balance Sheet under generally accepted accounting principles; (iii)
those incurred in the ordinary course of business since September 30, 1996,
consistent with past practice and not individually in excess of $100,000; and
(iv) those incurred pursuant to this Agreement.
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4.11 TAXES. The Company and its subsidiary, and any consolidated,
combined or unitary group for Tax purposes of which the Company or its
subsidiary is or has been a member have timely filed all Tax Returns required to
be filed by them and have paid all Taxes shown thereon to be due. The Company
Financial Statements (i) fully accrue under generally accepted accounting
principles all liabilities for Taxes with respect to all periods through
September 30, 1996 and, to the knowledge of the Company, the Company and its
subsidiary have not and will not incur any material Tax liability in excess of
the amount reflected on the Company Financial Statements with respect to such
periods and (ii) properly accrue in accordance with generally accepted
accounting principles all liabilities for Taxes payable after September 30, 1996
with respect to all transactions and events occurring on or prior to such date.
No material Tax liability since September 30, 1996 has been incurred by the
Company or its subsidiary other than in the ordinary course of business and
adequate provision has been made in the Company Financial Statements for all
Taxes since that date in accordance with generally accepted accounting
principles on at least a quarterly basis. The Company and its subsidiary have
withheld and paid or will timely pay to the applicable Tax Authority all amounts
required to be withheld. No notice of deficiency or similar documents of any Tax
Authority has been received by either the Company or its subsidiary, and there
are no liabilities for Taxes with respect to the issues that have been raised
(and are currently pending) by any Tax Authority that could, if determined
adversely to the Company and its subsidiary, materially and adversely affect the
liability of the Company and its subsidiary for Taxes. There is (i) no material
claim for Taxes that is a lien against the property of the Company or its
subsidiary other than liens for Taxes not yet due and payable, (ii) no
notification received by the Company of any audit of any Tax Return of the
Company or its subsidiary being conducted pending or threatened, by a Tax
Authority, (iii) no extension or
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waiver of the statute of limitations on the assessment of any Taxes granted by
the Company or its subsidiary that may result in the payment of any material
amount that would not be deductible by reason of Sections 280G or 404 of the
Code. The Company will not be required to include any material adjustment in
Taxable income for any Tax period (or portion thereof) pursuant to Section 481
or 263A of the Code or any comparable provision under state or foreign Tax laws
as a result of transactions, events or accounting methods employed prior to the
Closing Date. Neither the Company nor its subsidiary is a party to any tax
sharing or tax allocation agreement nor does the Company or its subsidiary owe
any amount under any such agreement. For purposes of this Agreement, the
following terms have the following meanings: "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other government fee or other like assessment or
charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Governmental Entity (a "Tax
Authority") responsible for the imposition of any such tax (domestic or
foreign), (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group for any Taxable period and (iii) any liability for the
payment of any amounts of the type described in parts (i) or (ii) of this
sentence as a result of any express or implied obligation to indemnify any other
person. As used herein, "Tax Return" shall mean any return, statement, report or
form including, without limitation, estimated Tax returns and reports,
withholding Tax returns and reports and information reports and returns required
to be filed with respect to Taxes. The Company and its subsidiary are
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in full compliance with all terms and conditions of any Tax exemptions or other
Tax sharing agreement or order of a foreign government applicable to them and
the execution and performance of this Agreement shall not have any adverse
effect on the continued validity and effectiveness of any such Tax exemptions or
other Tax sharing agreement. As of September 30, 1996, the Company had net
operating loss carryforwards of no less than the $18.5 million and $10.6 million
for federal and California state tax purposes, respectively (the "Net Operating
Loss Carryforwards") related to tax years through December 31, 1995, and there
has not occurred any event that would restrict or prevent the Company from using
the Net Operating Loss Carryforwards to reduce future tax liabilities. To the
Company's knowledge, the completion of the Rights Offering and the purchase of
Preferred Shares by the Standby Purchasers will not result in an "ownership
change" within the meaning of the IRC 382 Limitation or otherwise restrict the
Company's ability to use the Net Operating Loss Carryforwards to reduce future
tax liabilities.
4.12 INTERNAL ACCOUNTING. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any difference.
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4.13 BROKER'S OR AGENT'S FEE. The Company has not incurred any
liability for any finder's, broker's, agent's or financial advisor's fee or
commission in connection with the execution and delivery of this Agreement, the
Offering or the consummation of the transactions contemplated hereby or thereby.
4.14 LITIGATION AND CLAIMS. Except as set forth in the Disclosure
Schedule, neither the Company nor its subsidiary is subject to any continuing
order of, or written agreement or memorandum of understanding, director,
supervisory letter, or other formal or informal enforcement action or commitment
that restricts or adversely affects its operation or financial condition, with
any federal or state depository institution or insurance authority or other
governmental entity, or any judgment, order, writ, injunction, decree or award
of any governmental entity or arbitrator, including, without limitation, cease-
and-desist or other orders of any depository institution regulatory authority,
and, to the knowledge of the Company, there exists no reasonable basis therefor.
Except as set forth in the Disclosure Schedule, there is no action, suit,
litigation, proceeding or arbitration ("Proceeding") against or affecting the
Company or its subsidiary, or, to the knowledge of the Company, any directors,
officers, employees or agents of the Company or its subsidiary(in their
respective capacities as directors, officers, employees or agents) pending or,
to the knowledge of the Company, threatened or, to the knowledge of the Company,
any reasonable basis therefor and there are no uncured material violations, or
violations with respect to which material refunds or restitutions may be
required, cited in any compliance report to the Company or its subsidiary as a
result of the examination by any depository institution regulatory authority.
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4.15 INSURANCE. The Company is presently insured, and during each of
the past three calendar years has been insured, for reasonable amounts with
insurance companies listed on the Disclosure Schedule. Neither the Company nor
its subsidiary has any liability for material unpaid premiums or premium
adjustments not properly reflected on the Company's Financial Statements and no
notice of cancellation or termination has been received by the Company or its
subsidiary with respect to any material insurance policy currently in effect.
Within the last three years, neither the Company nor its subsidiary has been
refused any insurance with respect to any assets or operations, nor has any
coverage been limited in any material respect as to any assets or operations, by
any insurance carrier to which it has applied for any such insurance or with
which it has carried insurance during the last three years.
4.16 INTERESTS OF AFFILIATES. No officer, director or stockholder of
the Company or any affiliate (as such term is defined in Rule 405 under the
Securities Act) of any such person has any, direct or indirect interest (a) in
any entity which does business with the Company, or (b) in any property, asset
or right which is used by the Company in the conduct of its business, or (c) in
any contractual relationship with the Company other than as an employee. For the
purpose of this Section 4.16, there shall be disregarded any interest which
arises solely from the ownership of less than a 1% equity interest in a
corporation whose stock is regularly traded on any national securities exchange
or in the over-the-counter market.
4.17 LISTING ON NASDAQ. On or before the closing, the Company will
apply to have the Preferred Shares approved for quotation on the Nasdaq Stock
Market -- National Market. The
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Common Stock is approved for quotation on the Nasdaq Stock Market -- National
Market. The Company and such Common Stock are in compliance with the maintenance
criteria of the NASD applicable to continued eligibility for quotation on such
market, and the Company has not received any notification concerning, and has no
reason to believe it is subject to, termination of quotation privileges on such
market.
4.18 EMPLOYEE BENEFIT PLANS.
(a) With respect to the Company, the subsidiary of the Company
and any trade or business (whether or not incorporated) which is treated as a
single employer with the Company (an "ERISA Affiliate") within the meaning of
Section 414(b), (c), (m) or (o) of the Code, there are no (i) material employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (ii) stock option, stock purchase,
phantom stock, stock appreciation right, supplemental retirement, severance,
sabbatical, medical, dental, vision care, disability, employee relocation,
cafeteria benefit (Code Section 125) or dependent care (Code Section 129), life
insurance or accident insurance plans, programs or arrangement, (iii) bonus,
pension, profit sharing, savings, deferred compensation or incentive plans,
programs or arrangements, (iv) fringe or employee benefit plans, programs or
arrangements that apply to senior management of the Company and that do not
generally apply to all employees, and (v) current or former employment or
executive compensation or severance agreements, written or
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otherwise, as to which unsatisfied obligations of the Company of greater than
$60,000 remain for the benefit of, or relating to, any present or former
employee, consultant or director of the Company (together, the "Company Employee
Plans").
(b) Any Company Employee Plan intended to be qualified under
Section 401(a) of the Code has either obtained from the Internal Revenue Service
a favorable determination letter as to its qualified status under the Code,
including all amendments to the Code effected by the Tax Reform Act of 1986 and
subsequent legislation, or has applied to the Internal Revenue Service for such
a determination letter prior to the expiration of the requisite period under
applicable Treasury Regulations or Internal Revenue Service pronouncements in
which to apply for such determination letter and to make any amendments
necessary to obtain a favorable determination, or has been established under a
standardized prototype plan for which an Internal Revenue Service opinion letter
has been obtained by the plan sponsor and is valid as to the adopting employer.
The Company also has furnished Purchaser with the most recent Internal Revenue
Service determination or opinion letter issued with respect to each such Company
Employee Plan, and nothing has occurred since the issuance of each such letter
which could reasonably be expected to cause the loss of the tax-qualified status
of any Company Employee Plan subject to Code Section 401(a).
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(c) (i) None of the Company Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person; (ii) there has
been no "prohibited transaction," as such term is defined in Section 406 of
ERISA and Section 4975 of the Code, with respect to any Company Employee Plan,
which could reasonably be expected to have, in the aggregate, a Material Adverse
Effect; (iii) each Company Employee Plan has been administered in accordance
with its terms and in compliance with the requirements prescribed by any and all
statutes, rules and regulations (including ERISA and the Code), except as would
not have, in the aggregate, a Material Adverse Effect, and the Company and its
subsidiary or ERISA Affiliate have performed all material obligations required
to be performed by them under, are not in any material respect in default under
or violation of, and have no knowledge of any material default or violation by
any other party to, any of the Company Employee Plans; (iv) neither the Company
nor its subsidiary or ERISA Affiliate is subject to any liability or penalty
under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to
any of the Company Employee Plans; (v) all material contributions required to be
made by the Company or its subsidiary or ERISA Affiliate to any Company Employee
Plan have been made on or before their due dates and a reasonable amount has
been accrued for contributions to each Company Employee Plan for the current
plan years; (vi) with respect to each Company Employee Plan, no "reportable
event" within the meaning of Section 4043 of ERISA (excluding any such event for
which the thirty (30) day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event
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described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) no
Company Employee Plan is covered by, and neither the Company nor its subsidiary
or ERISA Affiliate has incurred or expects to incur any liability under Title IV
of ERISA or Section 412 of the Code. With respect to each Company Employee Plan
subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or any employee welfare benefit plan within the meaning of
Section 3(l) of ERISA, the Company has prepared in good faith and timely filed
all requisite governmental reports (which were true and correct as of the date
filed) and has properly and timely filed and distributed or posted all notices
and reports to employees required to be filed, distributed or posted with
respect to each such Company Employee Plan. No suit, administrative proceeding,
action or other litigation has been brought, or to the best knowledge of the
Company is threatened, against or with respect to any such Company Employee
Plan, including any audit or inquiry by the IRS or United States Department of
Labor. Neither the Company nor its subsidiary or other ERISA Affiliate is a
party to, or has made any contribution to or otherwise incurred any obligation
under, any "multiemployer plan" as defined in Section 3(37) of ERISA.
(d) With respect to each Company Employee Plan, the Company and
its subsidiary have complied with (i) the applicable health care continuation
and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") and the proposed regulations thereunder and (ii) the applicable
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requirements of the Family Leave Act of 1993 and the regulations thereunder,
except to the extent that such failure to comply would not, in the aggregate,
have a Material Adverse Effect.
(e) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or other service
provider of the Company, its subsidiary or any other ERISA Affiliate to
severance benefits or any other payment (including, without limitation,
unemployment compensation, golden parachute or bonus), or (ii) accelerate the
time of payment or vesting of any such benefits, or increase the amount of
compensation due any such employee or service provider.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written by the Company, its subsidiary or other
ERISA Affiliate relating to, or change in participation or coverage under, any
Company Employee Plan which would materially increase the expense of maintaining
such Plan above the level of expense incurred with respect to that Plan for the
most recent fiscal year included in the Company's financial statements.
4.19 ENVIRONMENTAL MATTERS. To the Company's knowledge, neither the
Company nor its subsidiary nor any of the property owned, leased, possessed or
controlled by them in the operation of their respective businesses (including in
connection with their lending or fiduciary
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operations) ("Property") is in violation of any applicable zoning ordinance or
other law, regulation or requirement relating to the operation of any properties
used, including, without limitation, applicable environmental protection laws,
rules and regulations (collectively, "Environmental Law"), other than violations
that, in the aggregate with any other conditions described in this Section 4.19,
would not result in costs that would have a Material Adverse Effect; and neither
the Company nor its subsidiary has received any notice of any such violation, or
the existence of any condemnation proceeding with respect to any Property. To
the Company's knowledge, no Toxic Substances (as defined below) have been
deposited or disposed of in, on or under any Property during the period in which
the Company or any of its subsidiaries has owned, occupied, managed, controlled
or operated such properties, except to the extent the same, in the aggregate
with any other conditions described in this Section 4.19, would not result in
costs that would have a Material Adverse Effect. To the Company's knowledge (a)
no prior owners, occupants or operators of all or any part of the Property ever
used such properties as a dump or gasoline service station, (b) no prior owners,
occupants or operators of all or part of the Property ever deposited or disposed
of or allowed to be deposited or disposed of in, on or under such properties any
Toxic Substances or (c) no past, present or known future event, condition,
circumstances, plans, efforts or omissions have existed or occurred, are
existing or occurring or are reasonably expected to exist or occur on or with
respect to any Property, or any other property as to which the Company or any
subsidiary has held or currently holds ownership or indicia of ownership, except
as to the matters in clauses (b) and (c) to the extent the same, in the
aggregate with any other conditions described in this Section 4.19, would not
result in costs that would have a Material Adverse Effect. To the Company's
knowledge, there are no conditions or circumstances in connection with the
Property that could reasonably be anticipated to
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(i) cause any Property to be subject to any restrictions on ownership,
occupancy, use or transferability under any applicable Environmental Laws or
(ii) materially reduce the value of any Property. To the Company's knowledge,
neither the Company nor its subsidiary has been identified as a potentially
responsible party by any governmental entity in a matter arising under any
Environmental Laws. For purposes of this Agreement, (1) "Toxic Substances" shall
mean petroleum or petroleum-based substance or waste, solid waste, PCBs,
pesticides, herbicides, lead, radioactive materials, urea formaldehyde foam
insulation, or substances defined as "hazardous substances" or "toxic
substances" in any Environmental Laws; (2) materials will be considered to be
deposited or disposed of in, or under any real property if such materials have
been stored, treated, recycled, used or accidentally or intentionally spilled,
released, dumped, emitted or otherwise placed, deposited or disposed of, or used
in any construction, in, on or under such property; and (3) costs of violations
or conditions shall take into account without limitation, liabilities, damages,
penalties, injunctive relief or removal, remediation or other costs under any
applicable Environmental Law.
4.20 USE OF PROCEEDS. The Company will apply the net proceeds from the
sale of the Preferred Shares to be sold by it hereunder to facilitate and
implement its business strategies and those of its subsidiary as set forth in
the Prospectus.
4.21 LOAN PORTFOLIO. All loans and loan commitments in excess of
$50,000 (the "Loans") extended by the Bank have been made in accordance with
customary lending standards of the Bank in the ordinary course of business. The
Loans are evidenced by appropriate and sufficient documentation consistent with
standards in the industry and constitute, to the Company's knowledge,
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valid and binding obligations of the borrowers enforceable in accordance with
their terms, except as limited by applicable bankruptcy, insolvency, moratorium
or other similar laws affecting the enforcement of creditor's rights and
remedies generally from time to time in effect and by applicable law which may
affect the availability of equitable remedies. The Bank's interest in the Notes
receivable associated with all such Loans is, and at the Closing Date will be,
free and clear of any security interest, lien, encumbrance or other charge and
the Bank has complied, and at the Closing Date will have complied, in all
material respects with all laws and regulations relating to such Loans. The
Loans, taken as a whole, are not subject to any material offsets, or to the
knowledge of the Company, claims of material offset or claims of other material
liability on the part of the Company or its subsidiary.
4.22 FIDUCIARY ACCOUNTS. Each of the Company and its subsidiary has
properly administered 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 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, its subsidiary, nor any
director, officer or employee of the Company or its subsidiary has committed any
breach of trust with respect to any such fiduciary account, and the accountings
for each such fiduciary account are true and correct statements and accurately
reflect the assets of such fiduciary account.
4.23 EMPLOYEES. To the Company's knowledge, no employee of the Company
or subsidiary whose annual compensation is in excess of $75,000 has any plans to
terminate his or her
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employment with the Company or its subsidiary. Each of the Company and its
subsidiary, has complied in all material respects with all laws relating to the
employment of labor, including provisions relating to wages, hours, equal
opportunity, collective bargaining and payment of Social Security and other
taxes, and neither the Company nor its subsidiary has encountered any material
labor difficulties.
4.24 SECURITIES OFFERED. At time of Closing, the Preferred Shares
which are the subject of this Agreement (i) constitute and are intended to
constitute an equity interest in the Company and (ii) shall be registered under
section 12(g) of the Exchange Act. The Company is primarily engaged through its
subsidiary in the offering of services including general retail banking services
including general retail banking services permitted by its charter as a national
bank regulated by the Office of the Comptroller (collectively, the "Company's
Business").
4.25 REPRESENTATIONS COMPLETE. None of the representations or
warranties made by the Company herein (as qualified by the Disclosure Schedule)
or in any exhibit hereto, or any written statement furnished to Purchaser by the
Company pursuant hereto or in connection with the transactions contemplated
hereby, when all such documents are read together in their entirety, contains or
will contain at the Closing Date any untrue statement of a material fact, or
omits or will omit at the Closing Date to state any material fact necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
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5. Representations and Warranties of Purchaser
The Purchaser represents and warrants to the Company as follows:
5.1 ORGANIZATION. The Purchaser (if Purchaser is Wildwood Enterprises
Inc. Profit Sharing Plan and Trust) is a trust created pursuant to an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA. Purchaser has
full power and authority under the terms of all applicable laws, governmental
rules and governmental regulations, including, without limitation, ERISA and the
Code (if Purchaser is Wildwood Enterprises Inc. Profit Sharing Plan and Trust),
to perform its or his (as the case may be) obligations under this Agreement.
5.2 INVESTMENT INTENT. The Purchaser is acquiring the Preferred
Shares pursuant to this Agreement for its or his (as the case may be) own
account for investment only and not with a view to any distribution thereof
within the meaning of the Securities Act.
5.3 AUTHORIZATION OF AGREEMENT. This Agreement has been duly
authorized by all necessary action required of an entity or person such as the
Purchaser, executed and delivered by the Purchaser, and constitutes a valid,
legal and binding obligation of the Purchaser, enforceable in accordance with
its terms, except as such enforceability may be limited by ERISA or the Code or
by bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity. The
execution and delivery of this Agreement, the consummation by the Purchaser of
the transactions herein contemplated and the compliance by the
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Purchaser with the terms hereof do not and will not conflict with, or result in
a breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Purchaser is a party or by which any of the
Purchaser's properties or assets are bound, or any applicable law, rule,
regulation, judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction over the
Purchaser or any of the Purchaser's properties or assets; and no consent,
approval, authorization, order, registration or qualification of or with any
such government, governmental instrumentality or court, domestic or foreign, is
required for the valid authorization, execution, delivery and performance by the
Purchaser of this Agreement or the consummation by the Purchaser of the
transactions contemplated by this Agreement.
5.4 QUALIFICATION OF PURCHASER. The state in which the Purchaser's
principal office or residence (as the case may be) as located is set forth on
Schedule A. The Purchaser qualifies as an accredited investor within the meaning
of Rule 501 under the Securities Act. The Purchaser has such knowledge and
experience in financial and business matters that the Purchaser is capable of
evaluating the merits and risks of the investment to be made hereunder by the
Purchaser. The Purchaser has received and reviewed this Agreement and all other
documents and materials the Company has provided to it in connection with the
purchase of the Available Shares. The Purchaser has had access to and an
opportunity to review all documents and other materials requested of the Company
and has been given an opportunity to ask such questions of the Company
concerning the terms and conditions of the sale of the Available Shares and the
business, operations, financial condition, prospects, assets and liabilities of
the Company and other relevant matters as it has deemed
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necessary or desirable and has been given all such information as it has
requested, to evaluate the merits and risks of the investment contemplated
herein. The Purchaser understands that the Available Shares being purchased
hereunder have not been registered under the Securities Act or registered or
qualified under any state securities laws on the grounds that such Available
Shares are being issued in a transaction exempt from the registration
requirements of the Securities Act and the registration or qualification
requirements of applicable state securities laws, and that such Available Shares
must be held indefinitely unless such Available Shares are subsequently
registered under the Securities Act and qualified or registered under applicable
state securities laws or an exemption from registration and qualification is
available, and that the Company is under no obligation to register or qualify
the Available Shares except as contemplated by the Registration Rights
Agreement. The Purchaser has not seen or received and is not acquiring the
Available Shares purchased hereunder pursuant to any advertisement with respect
to the sale of the Available Shares.
5.5 CERTAIN RELATIONSHIPS. Except for the concurrent purchase with
other Tier I Standby Purchasers contemplated hereby, the Purchaser has not
entered into any contracts, arrangements, understandings or relationships (legal
or otherwise) with any other person or persons with respect to the transactions
contemplated by this Agreement or any securities of the Company, including, but
not limited to, transfer or voting of any of the securities, finder's fees,
joint ventures, loan or option arrangements, puts or calls, guarantees of
profits, division of profits or loss, or the giving or withholding of proxies;
and the Purchaser does not own any securities of the Company which are pledged
or otherwise subject to a contingency the occurrence of which would give another
person voting power or investment power of such securities.
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6. COVENANTS
6.1 CONDUCT OF THE COMPANY'S BUSINESS PENDING THE CLOSING DATE. The
Company covenants and agrees that, from the date hereof to the Closing Date,
except for entering into this Agreement and consummating the transactions
expressly contemplated hereby or to the extent that the Purchaser shall
otherwise consent in writing:
(a) The Company will maintain its corporate existence in good
standing and will operate its business substantially as presently planned
or operated and only in the ordinary, usual and customary manner, and,
consistent with such operation, it will use its reasonable efforts to
preserve intact its present business organization and its relationships
with persons having business relationships with it.
(b) No amendment will be made to the Articles of Incorporation
of the Company, except the Restatement.
(c) There will be no changes in the number of shares, par value
or class of authorized or issued capital stock of the Company, other than
shares of Common Stock pursuant to the exercise of currently outstanding
options and warrants except for the Offering. In addition, the Company has
not and shall not grant or issue any option, warrant, convertible security,
or other right to acquire any shares of capital stock of the Company other
than options under existing stock option
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plans, warrants under the Warrant Agreement dated December 31, 1995 by and
between the Company and California State Teachers' Retirement System,
warrants under the Warrant Agreement dated December 31, 1995, between the
Company and U.S. Stock Transfer Corporation and options or rights under the
Employment Agreement dated as of June 20, 1996, as amended between
Mercantile National Bank and Scott A. Montgomery.
(d) There will not be any declaration or payment of any dividend
or other distribution in respect of the capital stock of the Company.
(e) The Company will not enter into any material transaction
outside of the ordinary course of business.
6.2 REGISTRATION STATEMENT; PROXY STATEMENT. As promptly as
practicable after the execution of this Agreement, the Company will file with
the Commission and other applicable federal and state regulators the
Registration Statement and the Proxy Statement. The Company shall use reasonable
efforts to cause, at the earliest practicable date, the Registration Statement
to become effective under the Securities Act and applicable state securities law
and the Proxy Statement to be approved under the Exchange Act and applicable
state securities laws. Copies of the Registration Statement, Prospectus and
Proxy Statement (including any amendment or supplement thereto), as filed with
any federal or state regulator, will be delivered to Purchaser promptly
following such filing. Purchaser shall have the right to review and comment on
the form of Registration Statement and
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Proxy Statement prior to any such filing for a period of not less than 48 hours
after receipt of such document.
6.3 NO SOLICITATION. Until the earlier of the consummation of the
Rights Offering or the termination of this Agreement, with respect to any
Investment Proposal (as hereinafter defined):
(a) The Company will not (and will use its reasonable best
efforts to assure that its officers, directors, employees, agents and
affiliates do not on its behalf) take any action to solicit, initiate,
encourage or support any inquiry, proposal or offer from, furnish any
information to, or participate in any negotiations with, any corporation,
partnership, person or other entity or group regarding any acquisition of
the Company or any subsidiary thereof, any merger, amalgamation, or
consolidation with or involving the Company or any subsidiary thereof, or
any take-over bid, or (other than the Standby Purchasers in connection with
the Offering and in accordance with the other terms of this Agreement) any
sale of stock or other equity securities (including, without limitation, by
way of a tender offer) or any material portion of the assets of the Company
or any subsidiary thereof (any of the foregoing inquiries or proposals
being referred to herein as an "Investment Proposal").
(b) The Company shall immediately notify the Purchaser after
receipt of any Investment Proposal, or any request for information relating
to the
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Company in connection with an Investment Proposal, or any request for
access to the properties, books or records of the Company by any person or
entity that informs the Company that it is considering making, or has made,
an Investment Proposal. Such notice to the Purchaser shall be made orally
and in writing and shall indicate in reasonable detail the terms and
conditions of any such proposal, inquiry or contact.
6.4 BOOKS AND RECORDS; ACCESS AND INFORMATION. From the date of this
Agreement until the Closing Date, the Company will give to the Purchaser, its
officers and representatives reasonable access to the premises, books and
records of the Company and its subsidiaries, and provide the Purchaser with such
financial and operating data and other information with respect to its business
and properties as it shall from time to time reasonably request, including,
without limitation, all interim financial data within five (5) days of it
becoming available; provided, however, that any such investigation shall be
conducted in such manner as not to interfere unreasonably with the operation of
the business of the Company.
6.5 RIGHTS OFFERING; ANNUAL MEETING. The Company will conduct, and
use its reasonable best efforts to close, the Rights Offering substantially in
the manner described in the Prospectus. The Company shall call an Annual Meeting
of its stockholders, deliver notice of such meeting to Company stockholders in
accordance with applicable law and shall use its reasonable best efforts to hold
the Annual Meeting as soon as practicable. The Company, through its Board of
Directors, will unanimously recommend to its stockholders approval of the
Restatement and issuance of the Available Shares to the Purchaser.
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6.6 NOTIFICATION BY COMPANY OF CERTAIN MATTERS. Subsequent to the
date of this Agreement and on or prior to the Closing Date, the Company shall
promptly notify the Purchaser of:
(a) the receipt of any notice of, or other communication
relating to, a default or event which, with notice or lapse of time or
both, would become a default, under any material agreement to which it is a
party or to which it or any of its respective material properties or assets
may be subject or bound;
(b) the receipt of any notice or other communication from any
third party whose consent or approval is or may be required in connection
with the transactions contemplated by this Agreement or the Registration
Rights Agreement, denying such consent or approval;
(c) the receipt of any notice or other communication from any
governmental regulatory agency or authority in connection with the
transactions contemplated hereby; or
(d) any condition or fact which would not permit it to satisfy a
condition to the Purchaser's obligation to effect the transactions contemplated
in this Agreement or the Registration Rights Agreement or results or would
result in any inaccuracy in a representation or warranty of the Company.
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6.7 NASDAQ. The Company shall use all reasonable efforts to (i) cause
the Preferred Shares and the Conversion Shares issuable pursuant to the terms of
the Preferred Shares to be eligible for quotation on the Nasdaq Stock Market--
National Market, (ii) maintain the continued authorization for trading of the
Common Stock of the Company on the Nasdaq Stock Market--National Market, or
(iii) in the event the Company is unable after undertaking all such reasonable
efforts to maintain such authorization be listed or otherwise authorized for
trading on the Nasdaq Stock Market--Small Cap or a national securities exchange
and to comply with all applicable maintenance criteria of such exchange of
Nasdaq applicable to continued eligibility for trading on such market.
6.8 RIGHT OF FIRST REFUSAL. If the Company should decide to issue and
sell additional shares of any capital stock of the Company or any warrants,
securities convertible into capital stock of the Company or other rights to
subscribe for or to purchase any capital stock of the Company, other than (a)
shares of Common Stock sold to the public pursuant to a registration statement
filed under the Securities Act if such offering is underwritten on a firm
commitment basis, (b) shares of Common Stock awarded or issued upon the exercise
of options granted pursuant to employee and consultant benefit plans adopted by
the Company, and the grant of such options themselves, (c) shares of Common
Stock issued upon conversion of the Preferred Shares, (d) shares of Common Stock
or Preferred Shares issued pursuant to the exercise of warrants of the Company
outstanding at the date of this Agreement; and (e) shares of Common Stock issued
pursuant to the Montgomery Employment Agreement (all such capital stock,
warrants, securities convertible into capital stock and other rights, other than
securities referred to in (a), (b), (c), (d) and (e) above, being
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hereinafter sometimes collectively referred to as "Additional Securities"), the
Company shall first offer to sell to the Purchaser, upon the same terms and
conditions as the Company is proposing to issue and sell such Additional
Securities to others, such Purchaser's pro rata share (as defined below) of such
Additional Securities. Notwithstanding the foregoing, no Additional Securities
may be sold to the Purchaser to the extent a change of ownership within the
meaning of the IRC 382 Limitation would occur. Such offer shall be made by
written notice given to the Purchaser and specifying therein the amount of the
Additional Securities being offered, the purchase price and other terms of such
offer. The Purchaser shall have a period of thirty (30) days from and after the
date of receipt by it of such notice within which to accept such offer. If the
Purchaser elects to accept such offer in whole or in part, the Purchaser shall
so accept by written notice to the Company given within such 30-day period. If
the Purchaser fails to accept such offer in whole or in part within such 30-day
period, any of such Additional Securities not purchased by the Purchaser
pursuant to such offer may be offered for sale to others by the Company for a
period of 180 days from the last day of such 30-day period, but only on the same
terms and conditions as set forth in the initial offer to the Purchaser, free
and clear of the restrictions imposed by this Section.
For purposes of the previous paragraph, the Purchaser's "pro rata
share" is the number of shares of Additional Securities (rounded to the nearest
whole share) as is equal to the product of (a)(i) the number of shares of Common
Stock issued, or issuable upon the exercise or conversion of rights, options or
Convertible Securities without the payment of any additional cash consideration
or with the payment of a nominal cash consideration, as the case may be
(collectively, "Fully Paid Securities"), to the Purchaser immediately prior to
the issuance of the Additional Securities being
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offered divided by (ii) the total number of Fully Paid Securities issued or
issuable by the Company immediately prior to the issuance of the Additional
Securities, multiplied by (b) the entire offering of Additional Securities.
6.9 COOPERATION. Subject to the terms and conditions herein provided,
each party will use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to cause the conditions set forth in Sections 7, 8 and 9 hereof to be
satisfied and to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement.
6.10 NET OPERATING LOSS. Prior to the third anniversary of the Closing
Date, the Company will not (i) amend, or propose an amendment to, the
Restatement to amend the restrictions on transfer with respect to the shares of
the Company's capital stock, or waive the operation of such restrictions, or
(ii) approve any acquisition, sale, issuance, assignment or transfer of its
capital stock or options or warrants to purchase shares of its capital stock,
unless, in any such event, the Board of Directors determines, after discussion
and due deliberation with the assistance, as necessary or appropriate, of legal,
financial, tax, accounting and other advisors, at a duly called meeting, that
such event would be in the best interests of the shareholders of the Company.
6.11 DIRECTOR LIABILITY. The Purchaser agrees not to assert any Claim
against a Director of the Company. For purposes of this Section 6.11, "Claim"
shall mean any action, suit, arbitration or proceeding (a "Proceeding") for
money damages, expenses, penalties or similar
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payments from such person individually ("Liabilities") arising out of or
relating to the execution, delivery and performance of this Agreement by the
Company, except to the extent Purchaser reasonably determines (i) a Director
subject to any such Proceeding or Liabilities would not be entitled
indemnification from the Company under applicable law, or (ii) such Proceeding
or Liabilities are insured risks under polices of insurance issued by third
parties.
6.12 SECTION 12(g) REGISTRATION. On or after the Closing, the
Preferred Stock shall be registered under Section 12(g) of the Exchange Act.
6.13 CONTINUED BUSINESS ACTIVITY. On or after the Closing, the Company
will use its reasonable best efforts to continue to engage in the Company's
Business.
6.14 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No party hereto shall
issue any press release or make any public announcement relating to the proposed
purchase of Preferred Shares which identifies the Purchaser by name prior to the
Closing without the prior approval of the other party; provided, however, that
any party may make any public disclosures it believes in good faith (based on
advice of outside counsel) is required by applicable law or any listing or
trading agreement concerning its publicly traded securities (in which case the
disclosing party will use its reasonable best efforts to advise the other party
prior to making the disclosure and to seek their counsel concerning the timing
and content of such disclosure). For purposes of this Agreement, in the event
that a party shall provide 24 hours notice to the other of a proposed press
release or public announcement and such party receiving such notice shall not
respond in writing objecting to such release or
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announcement, such proposed press release or public announcement shall be deemed
a permitted release or announcement pursuant hereto provided such release or
announcement was reviewed and approved by outside counsel to the party issuing
the press release or announcement.
6.15 NOTICE. In the event that the Company proposes to materially
change the Company's Business, the Company shall give the Purchaser thirty (30)
days prior written notice thereof.
7. Conditions to Obligations of Each Party
The respective obligations of the Company and the Purchaser as set
forth in this Agreement are subject to the following conditions:
7.1 STOCKHOLDER APPROVAL. The Restatement shall have been duly
approved and adopted by the holders of the Company's Common Stock at the Annual
Meeting.
7.2 NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the investment by the Purchaser shall be in effect; nor
shall there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the investment by the
Purchaser, which makes the investment by the Purchaser illegal; and no temporary
restraining order, preliminary or permanent injunction or
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other order issued by any court of competent jurisdiction or other legal, or
regulatory restraint provision limiting or restricting the Purchaser's conduct
or operation of the business of the Company and its subsidiaries, following the
investment by the Purchaser shall be in effect, nor shall any proceeding brought
by an administrative agency or commission or other governmental entity, domestic
or foreign, seeking the foregoing be pending. In the event an injunction or
other order shall have been issued, each party agrees to use its reasonable
diligent efforts to have such injunction or other order lifted.
7.3 REGISTRATION STATEMENT EFFECTIVE. The Registration Statement will
have been declared effective by the Commission, no stop order suspending the
effectiveness of the Registration Statement or any amendment or supplement
thereto shall have been issued and no proceedings for such purpose shall be
pending before or threatened by the Commission and any requests for additional
information by the Commission (to be included in the Registration Statement, in
the Prospectus or otherwise) shall have been complied with in all material
respects.
7.4 REGULATORY APPROVALS. The purchase of Available Shares shall have
been approved by applicable federal and state banking authorities without any
condition not reasonably satisfactory to Purchaser, all conditions required to
be satisfied prior to the Closing Date imposed by the terms of such approvals
shall have been satisfied and all waiting periods relating to such approvals
shall have expired. All other governmental consents, approvals and filings
required for the consummation of the Offering and the transactions contemplated
hereby and effectiveness of the Restatement have been obtained or made and are
in full force and effect.
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7.5 TAX OPINION. Deloitte & Touche, independent accountants to the
Company, shall have delivered to the Company its opinion, in form and substance
satisfactory to each, to the effect that following the Offering and the
transactions contemplated by this Agreement and similar agreements with Standby
Purchasers, and considering all other stock transactions during the relevant
testing period and ending on the Issuance Date, there has not been a change in
ownership within the meaning of the IRC 382 Limitation.
7.6 MINIMUM SUBSCRIPTIONS. The Company shall have received and
accepted in the Offering valid subscriptions for Preferred Shares from
stockholders and Standby Purchasers aggregating not less than $5.5 million which
shall not trigger the IRC 382 Limitation.
8. Additional Conditions of Purchaser's Obligations
The obligations of the Purchaser to purchase the Preferred Shares as
set forth in this Agreement are subject to the following additional conditions:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Agreement shall be true and correct
as of the Closing Date and the Company shall have performed in all material
respects all covenants and agreements herein required to be performed on its
part at or prior to the Closing Date.
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8.2 CERTIFICATE OF THE COMPANY. The Company shall have been provided
with a certificate dated the Closing Date executed on behalf of the Company by
its President and its Chief Financial Officer to the effect that, as of the
Closing Date, the condition provided for in subsection 8.1 above has been
satisfied.
8.3 REGISTRATION RIGHTS AGREEMENT. The Company and the Purchaser will
have entered into a Registration Rights Agreement (the "Registration Rights
Agreement") in form and substance reasonably satisfactory to the Company and the
Purchaser.
8.4 COMFORT LETTER. The Purchaser shall have received a letter of
Deloitte & Touche dated the Closing Date and addressed to Purchaser, in form
reasonably satisfactory to Purchaser and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement, regarding the
financial data and information included in the Registration Statement.
8.5 CONRAD COMPANY. On the Closing Date, Conrad Company shall have
purchased Preferred Shares pursuant to that certain Purchase Agreement dated the
same date hereof between the Conrad Company and the Company.
8.6 ADDITIONAL DOCUMENTS. The Company shall have furnished to
Purchaser and your counsel such additional documents, certificates and evidence
as Purchaser or they may have reasonably requested. All such certificates,
letters and other documents will be in compliance with
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the provisions hereof only if they are satisfactory in form and substance to
Purchaser and counsel for the Purchaser. The Company will furnish Purchaser with
such conformed copies of such certificates, letters and other documents as
Purchaser shall reasonably request.
9. Additional Conditions of Company's Obligations
The obligations of the Company to sell and issue the Preferred Shares
as set forth in this Agreement are subject to the following additional
conditions:
9.1 REPRESENTATION AND WARRANTIES. The representations and warranties
of the Purchaser contained in this Agreement shall be true and correct in all
material respects as of the Closing Date and the Purchaser shall have performed
in all material respects all covenants and agreements herein required to be
performed on its part at or prior to the Closing Date.
9.2 CERTIFICATES OF PURCHASER. The Company shall have been provided
with a certificate dated the Closing Date executed on behalf of the Purchaser by
its President and its Chief Financial Officer to the effect that, as of the
Closing Date, the condition provided for in subsection 9.1 above has been
satisfied. The Purchaser shall have delivered to Deloitte & Touche a certificate
in the form attached hereto as Exhibit 6.
9.3 LEGEND.
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(a) Each certificate or other document evidencing the Preferred
Shares purchased hereunder by the Purchaser shall be endorsed with the
legends set forth below:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE
REGISTRATION OR QUALIFICATION THEREOF UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH AN AVAILABLE
EXEMPTION FROM REGISTRATION OR QUALIFICATION. THE COMPANY MAY REFUSE
TO AUTHORIZE ANY TRANSFER OF THE SHARES IN RELIANCE ON AN EXEMPTION
FROM REGISTRATION OR QUALIFICATION UNTIL IT HAS RECEIVED AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION OR QUALIFICATIONS IS NOT REQUIRED.
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(b) Any legend endorsed on a certificate or instrument
evidencing a security pursuant to paragraph (a) above shall be removed, and
the Company shall issue a certificate or instrument without such legend to
the holder of such security, (i) in accordance with paragraph (a) above,
(b) if such security is being disposed of pursuant to registration under
the Securities Act and any applicable state acts or pursuant to Rule 144 or
any similar rule then in effect, or (iii) if such holder provides the
Company with an opinion of counsel satisfactory to the Company to the
effect that a safe, transfer, assignment, offer, pledge or distribution for
value of such security may be made without registration and that such
legend is not required to satisfy the applicable exemption from
registration.
9.4 ADDITIONAL DOCUMENTS. The Purchaser shall have furnished to the
Company and its counsel such additional documents, certificates and evidence as
the Company or its counsel may have reasonably requested. All such certificates,
letters and other documents will be in compliance with the provisions hereof
only if they are satisfactory in form and substance to the Company and its
counsel. The Purchaser will furnish the Company with such conformed copies of
such certificates, letters and documents as the Company shall reasonably
request.
10. Termination
10.1 TERMINATION EVENTS. This Agreement may be terminated in writing
at any time prior to the Closing Date by the Company or Purchaser, only in the
following circumstances:
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(a) by mutual consent of the Company and Purchaser;
(b) by either the Company or Purchaser if (i) any governmental
entity of competent jurisdiction shall have issued a final nonappealable
order enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement; (ii) the shareholders of the
Company have not approved the Restatement; (iii) the transactions
contemplated hereunder have not been consummated on or before May 31, 1997,
unless the failure of consummation shall be due to the failure of the party
seeking to terminate to perform or observe in all material respects the
covenants and agreements hereunder to be performed or observed by such
party; or (iv) there shall have been an inaccuracy in any of the
representations or warranties on the part of the other party or material
breach of any covenant or agreement set forth in this Agreement on the part
of the other party, which breach shall not have been cured within twenty
(20) business days following receipt by the breaching party of written
notice of such breach from the other party;
(c) by the Purchaser if there shall have occurred relative to
the Company or any subsidiary any event, change, or effect that would have
a Material Adverse Effect.
10.2 EFFECT OF TERMINATION. The Company and the Purchaser hereby agree
that any termination of this Agreement pursuant to this Section 10 (other than
termination by one party
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<PAGE>
in the event of an inaccuracy in a representation or warranty or breach of a
covenant or agreement in this Agreement by the other party ) shall be without
liability of the Company or the Purchaser, except as contemplated by Section 12.
The obligations under Section 11 shall also survive any termination of this
Agreement.
11. Indemnification and Contribution
11.1 INDEMNIFICATION BY COMPANY. The Company agrees to indemnify and
hold harmless the Purchaser (which term shall include for purposes of this
Section 11, each director, officer, agent or employee of Purchaser or person who
controls the Purchaser within the meaning of the Act) against any losses,
claims, damages or liabilities, joint or several (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based directly or indirectly, in whole or
in part, upon (i) any material inaccuracy in the representations and warranties
of the Company contained herein and not qualified as to materiality or any
inaccuracy in the representations and warranties of the Company contained herein
and qualified as to materiality, (ii) an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, the Proxy Statement, or any amendment or
supplement thereto or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) any other act
or omission of the Company, its officers or directors, or any alleged act or
omission, and will reimburse the Purchaser for any legal or other expenses
reasonably incurred
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<PAGE>
by it in connection with investigating or defending against such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, the Proxy
Statement, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by the Purchaser
specifically for use in the preparation thereof.
11.2 ADVANCEMENT OF EXPENSES. In addition to their other obligations
under this Section 11, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any act, statement or omission, or any alleged act,
statement or omission, described in subsection 11.1 it will reimburse the
Purchaser on a monthly basis for all reasonable legal fees or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Purchaser for such expenses and the possibility that
such payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Purchaser shall promptly return any
reimbursement payment to the Company, together with interest compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by the
Bank (the "Prime Rate"). Any such interim reimbursement payments which are not
made to the Purchaser within thirty
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<PAGE>
(30) days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement shall be in addition to
any liabilities which the Company may otherwise have.
11.3 PROCEDURE FOR INDEMNIFICATION INVOLVING THIRD-PARTY CLAIMS.
Promptly after receipt by the Purchaser of notice of the commencement of any
action by a third party, the Purchaser shall, if a claim in respect thereof is
to be made against the Company under subsection 11.1, notify the Company in
writing of the commencement thereof, but the omission so to notify the Company
shall not relieve the Company from any liability that it may have to the
Purchaser. In case any such action shall be brought against the Purchaser, and
it shall notify the Company of the commencement thereof, the Company shall be
entitled to participate in, and, to the extent that it shall wish, to assume the
defense thereof, with counsel satisfactory to the Purchaser, and after notice
from the Company to the Purchaser of the Company's election so to assume the
defense thereof, the Company shall not be liable to the Purchaser under such
subsection for any legal or other expenses subsequently incurred by the
Purchaser in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the sole judgment of the
Purchaser, it is advisable for the Purchaser to be represented by separate
counsel, the Purchaser shall have the right to employ counsel to represent the
Purchaser for liability arising from any claim in respect of which indemnity may
be sought by the Purchaser, in which event the reasonable fees and expenses of
such separate counsel shall be borne by the Company and reimbursed to the
Purchaser as incurred (in accordance with the provisions of subsections 11.1 and
11.2 above). The Company shall not be
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<PAGE>
obligated under any settlement agreement relating to any action under this
Section 11 to which it has not agreed in writing.
11.4 CONTRIBUTION. If for any reason indemnification is unavailable to
Purchaser or insufficient to hold it harmless, then the Company shall contribute
to the amount paid or payable by Purchaser as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and Purchaser on the other
hand, the relative fault of the Company and of Purchaser and any other relevant
equitable considerations; provided that in no event will the aggregate
contribution of Purchaser exceed the then fair market value of the Preferred
Shares acquired by the Purchaser, less the amount of any damages the Purchaser
has otherwise been required to pay.
11.5 INDEMNIFICATION AND CONTRIBUTION NOT EXCLUSIVE. The obligations
of the Company under this Section 11 shall be in addition to any liability which
the Company may otherwise have.
12. PAYMENT OF FEES AND EXPENSES OF PURCHASER
Each party shall be responsible for and pay its own fees and expenses
relating to the transactions contemplated by this Agreement.
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<PAGE>
13. Miscellaneous
13.1 RIGHTS OF THIRD PARTIES. Except as contemplated by Section 11,
this Agreement is made solely for the benefit of the Purchaser and the Company,
and their respective successors and assigns, and no other person, partnership,
association or corporation shall acquire or have any right under or by virtue of
this Agreement.
13.2 ASSIGNMENT. All the terms and provisions of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto.
13.3 ENTIRE AGREEMENT; INVALIDITY. This Agreement constitutes the
entire agreement and understanding between the Purchaser and the Company, and
supersedes all prior agreements and understandings relating to the subject
matter hereof. In case any one or more of the provisions contained in this
Agreement, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable in any respect under the laws of any jurisdiction, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
affected or impaired thereby or under the laws of any other jurisdiction.
13.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
and all such counterparts together constitute but one and the same instrument.
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<PAGE>
13.5 AMENDMENTS. This Agreement may not be amended, modified or
changed, in whole or in part, except by an instrument in writing signed by the
Company and the Purchaser.
13.6 NOTICES. Except as otherwise provided in this Agreement, and
unless otherwise notified by the respective addressee, all notices and
communications hereunder shall be in writing and mailed first class or overnight
delivery or hand delivered or by facsimile or telephone if subsequently
confirmed in writing, to:
If to the Company: National Mercantile Bancorp
1840 Century Park East
Los Angeles, CA 90067-2103
Attention: Executive Vice President
Telephone: 310-277-2265
Facsimile: 310-201-0629
If to the Purchaser: To the address set forth in Schedule A or at such
other address as Purchaser may specify by written
notice.
13.7 APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to the
conflict of laws rules thereof.
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<PAGE>
13.8 REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations and warranties (as qualified by the Disclosure Schedule and the
Registration Statement), and agreements of the Company and the Purchaser
contained herein or in certificates delivered pursuant hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Purchaser or the Company and shall survive delivery of, and
payment for, the Available Shares to and by the Purchaser for a period of two
(2) years after the delivery of and payment for such shares; provided, however,
that the representations and warranties of the Company made in Sections 4.4,
4.11 and 4.19 shall survive for the period of any applicable statute of
limitations; provided further that in the event that the Company discloses in
the certificate, dated the Closing Date and required to be furnished by the
Company to Purchaser pursuant to Section 8.2, inaccuracies as of the Closing
Date in its representations and warranties contained herein, as qualified by the
Disclosure Schedule, and made at the time of the execution of this Agreement,
and Purchaser elects to waive the Company's failure to satisfy the condition set
forth in Section 8.1 and to proceed with the purchase of the Available Shares
under this Agreement, then the representations and warranties that survive the
delivery of, and payment for, the Available Shares to and by the Purchaser shall
be those representations and warranties, as qualified by the Disclosure
Schedule, made at the time of the execution of the Agreement to the extent any
inaccuracies so disclosed in such certificate existed at the time of execution
and delivery of this Agreement or to the extent such certificate discloses no
inaccuracy and, in all other cases, shall be those representations and
warranties, as qualified by the Disclosure Schedule and as further qualified by
such certificate.
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<PAGE>
13.9 PROHIBITED TRANSACTION. In the event that Wildwood Enterprises
Inc. Profit Sharing Plan and Trust shall not purchase the Preferred Shares
contemplated hereunder as a result of such purchase being a "Prohibited
Transaction" as defined under ERISA and the Code, Robert Redford shall make such
purchase on the terms and conditions set forth herein.
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<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, each of the
Purchaser and the Company has signed or caused to be signed its name as of the
day and year first above written.
NATIONAL MERCANTILE BANCORP
By /s/ Scott A. Montgomery
-----------------------------------
Name Scott A. Montgomery
---------------------------------
Title EVP and CEO
--------------------------------
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<PAGE>
Agreed and Accepted as of the
7th day of February, 1997:
- --- --------
WILDWOOD ENTERPRISES INC.
PROFIT SHARING PLAN AND TRUST
CITY NATIONAL BANK, TRUSTEE
By: /s/ Keith Askin
------------------------------
Trust Officer
Name: Keith Askin
----------------------------
Asst. V.P. & Trust Officer
Title:
---------------------------
/s/ Robert Redford
- ---------------------------------
Robert Redford
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<PAGE>
EXHIBIT 10.24
March ___, 1997
[Addressee]
Attention:
Dear:
This letter confirms our agreement with respect to the intention of
National Mercantile Bancorp (the "Company") to raise additional capital through
a rights offering, with oversubscription privileges, of up to $____ or
___________ shares of the Company's 6.5% Noncumulative Convertible Preferred
Stock, $10.00 stated value (the "Preferred Stock"), to its shareholders of
record of common stock as of _________ ("Rights Offering") and a Private
Offering (as described herein) with the participation of standby purchasers for
any shares which remain available after the Rights Offering and the Private
Offering. Pursuant to a private offering exemption from the registration
requirements of the Securities Act of 1933, as amended, the Company has agreed
to sell up to $5.5 million or _________ shares of Preferred Stock to certain
investors (the "Private Offering"). The Company has guaranteed the availability
of an aggregate minimum of $1.0 million or ___________ shares of Preferred
Stock to the Standby Purchasers if a sufficient number of shares is not
available after the Rights Offing and the Private Offering. (The Rights
Offering and the offering to standby purchasers are hereinafter referred to as
the "Private Offering".) Capitalized terms used herein and not defined herein
shall have the meanings set forth in the Prospectus (as hereinafter defined.)
A REGISTRATION STATEMENT ON FORM S-2, AS AMENDED (THE "REGISTRATION
STATEMENT"), RELATING TO THE COMPANY'S PREFERRED STOCK WAS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") ON FEBRUARY 10, 1997. NO OFFER TO
BUY SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED
UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE
WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME
PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE.
1. Purchase and Sale of Unsubscribed Shares.
----------------------------------------
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to issue and
sell to you, on behalf of your discretionary clients listed on Exhibit A hereto
(the "Discretionary Clients"), as a standby
<PAGE>
[Addressee]
, 1997
- ----------
Page 2
purchaser (the "Standby Purchaser") and the Standby Purchaser agrees to purchase
from the Company, on behalf of the Discretionary Clients, at the Subscription
Price of $_____ per share up to $____ million or ______ shares of Preferred
Stock ("Standby Shares") which remain available for issuance in accordance with
the Rights Offering after the issuance of all shares of Preferred Stock validly
subscribed for through the exercise of Rights (including the exercise of all
oversubscription privileges) in the Rights Offering and the Private Offering
(such remaining shares being hereinafter referred to as the "Unsubscribed
Shares").
(b) The Standby Purchaser and the Company acknowledge and agree that the
Company has entered into, or contemplates entering into, one or more other
Standby Purchase Agreements with certain other parties (collectively, the
"Standby Purchasers") on terms substantially similar to this Agreement, except
that they may provide for the purchase of a different maximum amount of Standby
Shares in Section 1(a) and a different amount (as defined in Section 1(c)). The
Unsubscribed Shares available for issuance to Standby Purchasers and any
additional shares which the Company shall have elected to issue shall be
allocated (to the extent any allocation thereof is necessary) as nearly as
possible on a pro rata basis among the Standby Purchasers based upon the number
of Standby Shares subscribed for by each such Standby Purchaser, after giving
effect to the limitation set forth in Section 2(a).
(c) Subject to the terms, conditions and limitations herein set forth, in
the event there is not a sufficient number of Unsubscribed Shares remaining upon
completion of the Private Offering and the Rights Offering (including the
exercise of all oversubscription privileges) for sale to the Standby Purchasers
to allow you to purchase at least $____ million shares pursuant to Section 1(a)
(the "Minimum Shares"), the Company agrees to issue and sell to the Standby
Purchaser, and the Standby Purchaser agrees to purchase from the Company, at the
Subscription Price and otherwise in accordance with this Agreement, sufficient
additional shares so that the Standby Purchaser shall have purchased the Minimum
Shares. The shares to be issued and sold to the Standby Purchaser (other than
the Unsubscribed Shares) in order that the Standby Purchaser may purchase the
Minimum Shares are hereinafter referred to as the "Additional Shares."
1. Limitations on Issuance of Standby Shares.
-----------------------------------------
(a) Section 382 Limitation. The Standby Purchaser acknowledges and agrees
----------------------
that the shares allocated to the Standby Purchaser (and/or to any other Standby
Purchaser) may be reduced (the "Section 382 Limitation") to an amount which, in
the sole judgment of the Company after consultation with its tax advisor, would
not likely result in an "ownership change" of the Company under Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code").
<PAGE>
[Addressee]
, 1997
- ----------
Page 3
(b) Maximum Holding. The Standby Purchaser acknowledges and agrees that,
---------------
not withstanding anything to the contrary herein contained or implied, the
Company will not issue to the Standby Purchaser shares of Preferred Stock in an
amount which, when aggregated with other shares of Preferred Stock owned or
controlled by the Standby Purchaser, would exceed 4.5% of the total issued and
outstanding shares of Preferred Stock upon completion of the Offering, including
shares issued pursuant to any Standby Purchase Agreements.
(c) Failure to Obtain Regulatory Approval. The Standby Purchaser hereby
-------------------------------------
acknowledges and agrees that the Company may decline to issue shares of
Preferred Stock to the Standby Purchaser hereunder if, in the opinion of the
Company, the Standby Purchaser is required to obtain prior clearance or approval
of such purchase from any state or federal bank regulatory authority and if such
approval or clearance has not been obtained or if satisfactory evidence thereof
has not been presented to the Company prior to the expiration of the Offering.
3. The Closing. As soon as practicable following its determination of the
-----------
number of Unsubscribed Shares, the Company shall notify the Standby Purchaser of
the number of Standby Shares, if any, to be purchased by the Standby Purchaser
pursuant to Section 1(a) and the number of Additional Shares, if any, to be
purchased by the Standby Purchaser pursuant to Section 1(c). The delivery of
and payment for the Standby Shares and the Additional Shares shall take place
at the Offices of Manatt, Phelps & Phillips at 9:00 a.m., Pacific Time,
immediately after the closing of the sale of shares of Preferred Stock pursuant
to the Rights Offering and the Private Offering, such time and date to be not
more than five (5) business days after the foregoing notification and to be
specified therein (such time and date being referred to as the "Closing Time,"
the date of the Closing Time being referred to as the "Closing Date" and the
consummation of the transaction being referred to as the "Closing").
4. Delivery of Standby Shares and Additional Shares. At the Closing, the
------------------------------------------------
Standby Shares and Additional Shares to be purchased by the Standby Purchaser
hereunder, registered in the name of the Standby Purchaser, the Discretionary
Clients or their nominee(s), as the Standby Purchaser may specify in writing at
least three (3) days prior to the Closing Date, shall be delivered by or on
behalf of the Company to the Standby Purchaser, for the Standby Purchaser's
account, against delivery by the Standby Purchaser of the Subscription Price
therefore in immediately available funds in the form of one or more federal
funds checks or a wire transfer to an account designated by the Company.
5. Representations and Warranties. The Company and the Standby Purchaser
------------------------------
hereby confirm their agreement as follows:
(a) The Company represents and warrants to, and covenants with, the Standby
Purchaser as follows:
<PAGE>
[Addressee]
, 1997
- ----------
Page 4
(i) The Company has filed a Registration Statement on Form S-2 with the
SEC and all amendments thereto. Such Registration Statement as
amended at the time it becomes effective (the "Effective Date"),
including all exhibits and all documents incorporated therein by
reference, is herein called the "Registration Statement." The
prospectus filed with the SEC pursuant to the Securities Act of 1933,
as amended (the "Securities Act") and the regulations promulgated
thereunder ("Regulations") and which constitutes a part of the
Registration Statement is herein called the "Prospectus."
(ii) The Underlying Shares, the Standby Shares and the Additional Shares
have been duly authorized by the Company, and when issued and
delivered by the Company against payment therefore, will be duly and
validly issued, fully paid and non-assessable. The rights have been
duly authorized by the Company, and when issued and delivered by the
Company, will constitute valid and legally binding obligations of the
company, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to the safety and soundness of insured depository
institutions as set forth in 12 U.S.C. (S) 1818(b).
(iii) The execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action of the Company and this Agreement, when duly executed
and delivered by the Standby Purchaser, will constitute a valid and
legally binding agreement of the Company enforceable in accordance
with its terms, except as may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights, to
general equity principles and to laws relating to the safety and
soundness of insured depository institutions as set forth in 12 U.S.C.
(S) 1818(b).
(iv) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of California, with
corporate power and authority to perform its obligations under this
Agreement.
(v) At the time when the Registration Statement was declared effective by
the SEC pursuant to the Securities Act and the Regulations and at the
Closing Time, the Registration Statement and the Prospectus complied
and will comply in all material respects with the requirements of the
Securities Act, the Prospectus at the date hereof does not and at the
Closing Time will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated
<PAGE>
[Addressee]
, 1997
- ----------
Page 5
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; except
that the foregoing does not apply to statements or omissions in the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished by the Standby Purchaser to the
Company expressly for use therein.
(vi) Neither the Company nor any of its direct subsidiaries that is
considered to be a "significant the subsidiary" within the meaning of
the Regulations ("Subsidiary") is in violation of its charter or by-
laws or in default under any agreement, indenture or instrument to
which the Company or its Subsidiary is a party, the effect of which
violation or default would be material to the business, properties,
financial condition or results of operations of the Company and its
Subsidiary, taken as a whole, and the execution, delivery and
performance of this Agreement by the Company and the consummation of
the transactions contemplated hereby will not conflict with, or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets
of the Company or its Subsidiary pursuant to the terms of any
agreement, indenture or instrument to which the Company or its
Subsidiary is a party, or result in a violation of the charter or by-
laws of the Company or its Subsidiary or any order, rule or regulation
of any court or governmental agency having jurisdiction over the
Company, its Subsidiary or any of their property; and, except as
required by the Regulations, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and applicable state securities law, no
consent, authorization or order of, or filing or registration with,
any court or governmental agency is required for the execution,
delivery and performance of this Agreement, except as has been
obtained or applied for as of the date hereof, and with respect to any
approvals applied for, the Company has no reason to believe such
approvals will not be granted or obtained.
(vii) The Company has applied to have the shares of Preferred Stock
approved for quotation on the Smallcap tier of the Nasdaq Stock Market
and will use its best efforts to obtain such approval.
(b) The Standby Purchaser represents and warrants to, and covenants with,
the Company as follows:
(i) If the Standby Purchaser is an individual, he or she has full power
and authority to perform his or her obligations under this Agreement.
<PAGE>
[Addressee]
, 1997
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Page 6
(ii) If the Standby Purchaser is a corporation, the Standby Purchaser is a
corporation duly incorporated, validly existing and in good standing
under the laws of _____________, with corporate power and authority to
perform its obligation under this Agreement.
(iii) If the Standby Purchaser is a trust, the Trustee has been duly
appointed as Trustee to the Standby Purchaser with full power and
authority to act on behalf of the Standby Purchaser and to perform the
obligations of the Standby Purchaser under this Agreement.
(iv) If the Standby Purchaser is a partnership or limited liability
company, the Standby Purchaser is a ______________, duly organized,
validly existing and in good standing under the laws of
________________, with full power and authority to perform its
obligations under this Agreement.
(v) The Standby Purchaser has received from the Company and has reviewed
carefully a copy of the Prospectus as amended to date as well as the
documents incorporated therein by reference and the public documents
filed in connection therewith, and except as set forth in this
Agreement and in the Prospectus, the Standby Purchaser is not relying
on any information other than information contained in this Agreement
or the Prospectus.
(vi) The Standby Purchaser is acquiring the shares of Preferred Stock
pursuant to this Agreement for the account of the Discretionary
Clients for investment only and not with a view to any resale,
distribution or other disposition thereof.
(vii) The execution, delivery and performance of this Agreement by the
Standby Purchaser and the consummation by the Standby Purchaser of the
transactions contemplated hereby been duly authorized by all necessary
action of the Standby Purchaser; and this Agreement, when duly
executed and delivered by the Standby Purchaser, will constitute a
valid and legally binding instrument, enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(viii) The Standby Purchaser is not insolvent and has access to sufficient
cash funds of the Discretionary Clients to purchase the Standby Shares
and Additional Shares on the terms and conditions contained in this
Agreement and will have such funds on the Closing Date. The Standby
Purchaser has simultaneously with the execution and delivery of this
Agreement or prior thereto provided the
<PAGE>
[Addressee]
, 1997
- ----------
Page 7
Company with evidence or substantiated that such Standby Purchaser has
the financial means to satisfy the financial obligations under this
Agreement and the foregoing evidence and substantiation is a true and
accurate representation of such means.
(ix) No state, federal or foreign regulatory approvals, permits, licenses
or consents or other contractual or legal obligations are required in
order for the Standby Purchaser to enter into this Agreement or
purchase the Standby Shares and the Additional Shares.
(x) The execution and delivery of this Agreement, the consummation by the
Standby Purchaser of the transactions herein contemplated and the
compliance by the Standby Purchaser with the terms hereof do not and
will not conflict with, or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Standby Purchaser is a party or by which
any of the Standby Purchaser's properties or assets are bound, or any
applicable law, rule, regulation, judgment, order or decree of any
government, governmental instrumentality or court, domestic or
foreign, having jurisdiction over the Standby Purchaser or any of the
Standby Purchaser's properties or assets; and no consent, approval,
authorization, order, registration or qualification of or with any
such government, governmental instrumentality or court, domestic or
foreign, is required for the valid authorization, execution, delivery
and performance by the Standby Purchaser of this Agreement or the
consummation by the Standby Purchaser of the transactions contemplated
by this Agreement.
(xi) The Standby Purchaser, and, to the best of its knowledge, the
Discretionary Clients have not entered into any contracts,
arrangements, understandings or relationships (legal or otherwise)
with any other person or persons with respect to the transactions
contemplated by this Agreement or any securities of the Company,
including but not limited to transfer or voting of any of the
securities, finder's fees, joint ventures, loan or option
arrangements, puts or calls, guarantees of profits, division of
profits or loss, or the giving or withholding of proxies; and the
Standby Purchaser and, to the best of its knowledge, the Discretionary
Clients, do not own any securities of the Company which are pledged or
otherwise subject to a contingency the occurrence of which would give
another person voting power or investment power of such securities.
<PAGE>
[Addressee]
, 1997
- ----------
Page 8
6. Conditions. The respective obligations of the Company and the Standby
----------
Purchaser to purchase shares of Preferred Stock as set forth in this Agreement
are subject to the following conditions:
(a) No order suspending the effectiveness of the Registration Statement or
any amendment or supplement thereto shall have been issued and no proceedings
for such purpose shall be pending before or threatened by the SEC and any
requests for additional information by the SEC (to be included in the
Registration Statement, in the Prospectus or otherwise) shall have been complied
with in all material respects.
(b) The representatives and warrants of the Company and the Standby
Purchaser contained herein shall be true and correct in all material respects as
of the Closing Date and the Company and the Standby Purchaser shall have
performed all covenants and agreements herein required to be performed on its
part at or prior to the Closing Date.
(c) The Company shall have conducted the Rights Offering and the Private
Offering substantially in the manner described in the Prospectus.
7. Termination.
-----------
(a) The Standby Purchaser may terminate this Agreement (i) upon the
occurrence of a suspension of trading in the common stock, no par value of the
Company (the "Common Stock"), the establishment of limited or minimum process
for the Common Stock or a general suspension of trading in or the establishment
of limited or minimum prices on any national securities exchange or the Nasdaq
Stock Market, any banking moratorium, any suspension of payments with respect to
banks in the United States or a declaration of war or national emergency in the
United States, (ii) under any circumstances which would result in the Standby
Purchaser, individually or together with any other person or entity, being
required to register as a depository institution holding company under federal
or state laws or regulations, or to submit an application, or notice, to acquire
or retain control of a depository institution or depository institution holding
company, to a federal bank regulatory authority, or (iii) prior to the
expiration of the Offering, if the Company experiences a material adverse change
in its financial condition from its financial condition on December 31, 1996,
except as specifically disclosed in the Prospectus.
(b) In the event (x) the Company, in its reasonable judgment, determines
that it is not in the best interests of the Company and its shareholders to go
forward with the Rights Offering or (y) consummation of the Rights Offering is
prohibited by law, rule or regulation and the company terminates the Rights
Offering, in each case, the Company may terminate this Agreement without
liability.
<PAGE>
[Addressee]
, 1997
- ----------
Page 9
(c) Either of the parties hereto may terminate this Agreement (i) if the
transactions contemplated hereby are not consummated by _________, 1997 through
no fault of the Standby Purchaser or (ii) in the event that the Company is
unable to obtain any required federal or state approvals for the transactions
contemplated hereby on conditions reasonably satisfactory to it despite its
reasonable efforts to obtain such approvals. In addition, this Agreement shall
terminate upon mutual consent of the parties hereto.
(d) The Company and the Standby Purchaser hereby agree that any termination
of this Agreement pursuant to Section 7(a) (b) or (c), (other than termination
by one party in the event of a breach of this Agreement by the other party or
misrepresentation of any of the statements made hereby by the other party) shall
be without liability of the Company or the Standby Purchaser.
8. Future Acquisitions.
-------------------
(a) For a period of five (5) years from the Closing Date, the Standby
Purchaser agrees to give the Company sufficient prior written notice of any
proposed acquisition of additional shares of "stock" of the Company (as defined
under Section 382 of the Code and the regulations promulgated thereunder) so
that the Company may determine in its reasonable judgment whether such purchase
of additional shares could reasonably be expected to result in an " ownership
change" under Section 382 of the Code and the regulations promulgated thereunder
and, in the event the Company makes such a determination, the Standby Purchaser
agrees to limit its purchases of additional shares of Common Stock or interests
therein as the Company may request to avoid such an ownership change.
(b) The Standby Purchaser agrees that (i) during the period beginning on
the date hereof and continuing until the Closing Date, it will not offer, sell,
contract to sell or otherwise dispose of, or bid for, purchase, contract to
purchase or otherwise acquire, any shares of Common Stock or interest therein,
or cause the Discretionary Clients to take any such actions, without the prior
written consent of the Company and (ii) during the period commencing the day
after the Closing Date and continuing until the fifth anniversary of the Closing
Date, it will not, nor will it cause the Discretionary Client to, bid for,
purchase, contract to purchase or otherwise acquire, directly or indirectly, any
shares of Preferred Stock or the Common Stock into which it is convertible or
interests therein if, after consummation of such acquisition, its percentage
ownership, together with that of its affiliates, of the total number of shares
of the Common Stock of the Company would exceed 4.5%.
9. Continuing Provisions. The representations and warranties of the
---------------------
Company and the Standby Purchaser set forth in this Agreement shall be true and
correct in all material respects only as of the date of this Agreement and as of
the Closing Date. All of the covenants, agreements and obligations of each of
the Company and the Standby Purchaser
<PAGE>
[Addressee]
, 1997
- ----------
Page 10
required to be performed by the Closing Date shall have been duly performed and
complied with by the Closing Date unless such performance shall have been waived
in writing by the Company or the Standby Purchaser, as the case may be. The
respective representatives, warranties, covenants, agreements and obligations of
the parties to this Agreement shall survive the Closing Date.
10. Recapitalization, etc. Other than as disclosed in the Prospectus,
---------------------
prior to Closing, the Company shall not split, combine, reclassify or repurchase
any of its capital stock or declare or pay any extraordinary dividends on any of
its capital stock.
11. Miscellaneous. This Agreement is made solely for the benefit of the
-------------
Standby Purchaser and the Company, and their respective personal representatives
and successors, and no other person, partnership, association or corporation
shall acquire or have any right under or by virtue of this Agreement.
12. Assignment. Neither the Company nor the Standby Purchaser may assign
----------
any of its rights under this Agreement without the prior written consent of the
other party hereto; provided that it is acknowledged and agreed that the
Standby Purchaser is acquiring the Standby Shares and the Additional Shares for
the Discretionary Clients.
13. Entire Agreement. This Agreement constitutes the entire agreement and
----------------
understanding between the Standby Purchaser and the Company, and supersedes all
prior agreements and understandings relating to the subject matter hereof. In
case any one or more of the provisions contained in this Agreement, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect under the laws of any jurisdiction, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way affected or
impaired thereby or under the laws of any other jurisdiction.
14. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
and all such counterparts together constitute but one and the same instrument.
15. Amendments. This Agreement may not be amended, modified or changed,
----------
in whole or in part, except by an instrument in writing signed by the Company
and the Standby Purchaser.
16. Notices. Except as otherwise provided in this Agreement, and unless
-------
otherwise notified by the respective addressee, all notices and communications
hereunder shall be in writing and mailed or delivered or by facsimile or
telephone if subsequently confirmed in writing to:
<PAGE>
[Addressee]
, 1997
- ----------
Page 11
If to the Company: National Mercantile Bancorp
1840 Century Park East
Los Angeles, CA 90067
Attention: Scott A. Montgomery
Executive Vice President and
Chief Administrative Officer
Telephone: 310-282-6778
Facsimile: 310-201-0629
With a copy to: Manatt, Phelps & Phillips
11355 W. Olympic Boulevard
Los Angeles, California 90064
Attention: Nancy Wojtas
Telephone: 310-312-4307
Facsimile: 310-312-4224
If to the Standby Purchaser: [Addressee]
17. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California, without regard to the
conflict of laws rules thereof.
18. Business Day. The term "business day" shall mean a day on which
------------
banking institutions are open generally in New York.
<PAGE>
[Addressee]
, 1997
- ----------
Page 12
IN WITNESS WHEREOF, and intending to be legally bound hereby, each of the
Standby Purchaser and the Company has signed or caused to be signed its name as
of the day and year first above written.
NATIONAL MERCANTILE BANCORP
By: ___________________________
Scott A. Montgomery
Executive Vice President and
Chief Administrative Officer
Agreed and Accepted as of the
_________ day of _________, 1997:
[Company]
By: ______________________________
Title: ______________________________
<PAGE>
[Addressee]
, 1997
- ----------
Page 13
EXHIBIT A
Discretionary Clients
---------------------
<PAGE>
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of ________, 1997
By and Between
NATIONAL MERCANTILE BANCORP
and
THE CONRAD COMPANY
================================================================================
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of ___________, 1997 is
by and among NATIONAL MERCANTILE BANCORP, a California corporation (the
"Company") and THE CONRAD COMPANY, a Montana corporation (the "Investor").
RECITALS
--------
WHEREAS, the Company and the Investor have entered into that certain
Standby Purchase Agreement, dated _______ (the "Purchase Agreement"), providing
for, among other things, the sale by the Company and the purchase by the
Investor of ______ shares of 6.5% Series A Noncumulative Convertible Perpetual
Preferred Stock of the Company (the "Shares");
NOW, THEREFORE, in consideration of the premises, and of the mutual
covenants, representations, warranties and agreements herein contained, and in
order to induce the Investors to enter into the Purchase Agreement, the parties
hereto agree as follows:
1. Certain Definitions.
As used in this Agreement, the following terms shall have the
following respective meanings:
1.1 "Commission" shall mean the Securities and Exchange
----------
Commission.
1.2 "Common Stock" shall mean the common stock of the Company.
------------
1.3 "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, or any successor thereto, as the same shall be amended from time to time.
1.4 "Holder" and "Holders" shall mean any person or persons
------ -------
holding Registrable Securities and transferees qualifying under Section 8.2
hereof.
1.5 "Initiating Holders" shall mean any Holder or Holders who
------------------
in the aggregate are Holders of a majority of the Registrable Securities.
1.6 The term "Person" shall mean a corporation, association,
------
limited liability company, partnership, organization, business, individual,
government or political subdivision thereof or governmental agency.
1.7 "Registrable Securities" shall mean such Common Stock as
----------------------
hereafter may be issued or are issuable upon conversion of the Shares, and any
securities of the Company issued successively in exchange for or in respect of
any of the foregoing, whether as a result of any successive stock split or
reclassification of, or stock dividend on, any of the foregoing or otherwise;
provided, however, that such shares of Common Stock or securities shall cease to
be Registrable Securities when (i) a registration statement registering such
shares of Common Stock
-1-
<PAGE>
or securities, as the case may be, under the Securities Act has been declared
effective and such shares of Common Stock or securities, as the case may be,
have been sold or otherwise transferred by the Holder thereof pursuant to such
effective registration statement or (ii) such shares of Common Stock or
securities, as the case may be, are sold pursuant to Rule 144 (or any successor
provision) promulgated under the Securities Act under circumstances in which any
legend borne by such shares of Common Stock or securities relating to
restrictions on transferability thereof, under the Securities Act or otherwise,
is removed by the Company.
1.8 "Securities Act" shall mean the Securities Act of 1933, or
--------------
any successor thereto, as the same shall be amended from time to time.
1.9 "Selling Shareholder" shall have the meaning assigned to
-------------------
such term in Section 2.2(a) of this Agreement.
--------------
2. Registration Under the Securities Act.
2.1 Demand Registrations. If the Company shall receive a
written request therefor from the Initiating Holders, the Company shall prepare
and file as soon as practicable a registration statement under the Securities
Act covering the shares of Registrable Securities which are the subject of such
request and shall use its reasonable best efforts to cause such registration
statement to become effective; provided such registration statement covers
Registrable Securities issued or issuable upon conversion of not less than 25%
of the Shares purchased by Investor (the "Minimum Share Amount"); and, provided,
further, not more than one such request may be made in any 12-month period. In
addition, upon the receipt of such request, the Company shall promptly give
written notice to all other Holders that such registration is to be effected.
The Company shall include in such registration statement such shares of
Registrable Securities for which it has received written requests to register by
such other record holders within 30 days after the delivery of the Company's
written notice to such other record holders. The Company shall be obligated to
prepare, file and cause to become effective two registration statements pursuant
to this Section 2.1. In the event that the Holders of a majority of the
Registrable Securities for which registration has been requested pursuant to
this Section 2.1 determine for any reason not to proceed with a registration at
any time before a registration statement has been declared effective by the
Commission, and such registration statement, if theretofore filed with the
Commission, is withdrawn with respect to the Registrable Securities covered
thereby, and the Holders of such Registrable Securities agree to bear their own
expenses incurred in connection therewith and to reimburse the Company for the
Registration Fees incurred by it attributable to the registration of such
Registrable Securities, then the Holders of such Registrable Securities shall
not be deemed to have exercised their right to require the Company to register
Registrable Securities pursuant to this Section 2.1.
If, at the time any written request for registration is received
by the Company pursuant to this Section 2.1, the Company has determined to
proceed with the actual preparation and filing of a registration statement under
the Securities Act in connection with the proposed offer and sale for cash of
any of its securities by it or any of its security holders, such written request
shall be deemed to have been given pursuant to Section 2.2 hereof rather than
this
-2-
<PAGE>
Section 2.1, and the rights of the Holders of Registrable Securities covered by
such written request shall be governed by Section 2.2 hereof.
Without the written consent of the Holders of a majority of the
Registrable Securities for which registration has been requested pursuant to
this Section 2.1, neither the Company nor any other holder of securities of the
Company may include securities in such registration if in the good faith
judgment of the managing underwriter of such public offering the inclusion of
such securities would interfere with the successful marketing of the Registrable
Securities or require the exclusion of any portion of the Registrable Securities
to be registered.
Notwithstanding any of the foregoing, if the Company shall
furnish to the Holders participating in such registration a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors, it would be seriously detrimental, based on the Company's
own material financing plans or the need for confidentiality due to a pending
material transaction, for the Company to proceed with such registration and it
is therefor essential to defer such registration, the Company shall have the
right to defer action under this Section 2.1 for a period of not more than 90
days after receipt of the request of the Initiating Holders; provided, however,
-----------------
that the Company may not utilize this right more than once in any 12 month
period.
2.2 "Piggy-Back" Registrations.
(a) If, at any time, the Company proposes to register any of
its securities under the Securities Act on a registration statement (other than
a registration statement on a form that does not permit the inclusion of shares
by its security holders) for purposes of an offering or sale by or on behalf of
the Company for its own account (a "primary offering"), or upon the request or
for the account of any securityholder (a "secondary offering"), or for purposes
of a combined primary and secondary offering (a "combined offering"), then each
such time the Company shall, at least ten (10) business days prior to the time
when any such registration statement is filed with the Commission, give prompt
written notice to the Holders of its intention to do so. Such notice shall
specify, at a minimum, the number and class of securities so proposed to be
registered, the proposed date of filing of such registration statement, any
proposed means of distribution of such securities, any proposed managing
underwriter or underwriters of such securities and a good faith estimate by the
Company of the proposed maximum offering price thereof, as such price is
proposed to appear on the facing page of such registration statement. Upon the
written direction of any Holder or Holders, given within five (5) business days
following the receipt by such Holder of any such written notice (which direction
shall specify the number of Registrable Securities intended to be disposed of by
such Holder, and the intended method of distribution thereof), the Company shall
include in such registration statement any or all of the Registrable Securities
then held by such Holder requesting such registration (such Holder, together
with any other security holder of the Company including shares in such
registration statement being referred to hereafter as a "Selling Shareholder")
to the extent necessary to permit the sale or other disposition of such
Registrable Securities as such Holder has so directed the Company to be so
registered.
(b) In the event that the Company proposes to register
securities for purposes of a primary offering or in the event of a proposed
combined offering, and any managing
-3-
<PAGE>
underwriter shall advise the Company and the Selling Shareholders in writing
that, in its opinion, the inclusion in the registration statement of some or all
of the securities sought to be registered by such Selling Shareholders creates a
substantial risk that the price per security the Company will derive from such
registration will be materially and adversely affected, or that the number of
securities sought to be registered (including any securities sought to be
registered by the Selling Shareholders) is too large a number to be reasonably
sold, then the Company will include in such registration statement such number
of securities as the Company and such Selling Shareholders are so advised can be
sold in such offering without such an effect (the "Maximum Number"), as follows
and in the following order of priority: (A) first, such number of securities of
the Company as the Company, in its reasonable judgment and acting in good faith
and in accordance with sound financial practice, shall have determined to sell
for its account and (B) second, if and to the extent that the number of
securities to be registered under clause (A) is less than the Maximum Number,
securities of each Selling Shareholder (including, without limitation,
Registrable Securities), pro rata in proportion to the number sought to be
--- ----
registered by such Selling Shareholder relative to the number sought to be
registered by all the Selling Shareholders.
(c) In the event that the Company proposes to register
securities for purposes of a secondary offering, upon the request or for the
account of any shareholder (other than a Holder) thereof (each a "Requesting
Shareholder"), and any managing underwriter shall advise the Requesting
Shareholder or Shareholders and the Selling Shareholders in writing that, in its
opinion, the inclusion in the registration statement of some or all of the
securities sought to be registered by the Requesting Shareholders and the
Selling Shareholders creates a substantial risk that the price per security that
such Requesting Shareholder or Shareholders and such Selling Shareholders will
derive from such registration will be materially and adversely affected or that
the number of securities sought to be registered (including any securities
sought to be registered at the instance of the Requesting Shareholder or
Shareholders and those sought to be registered by the Selling Shareholders) is
too large a number to be reasonably sold, the Company will include in such
registration statement such number of securities as the Requesting Shareholders
and the Selling Shareholders are so advised can reasonably be sold in such
offering, or can be sold without such an effect, pro rata in proportion to the
--- ----
number of the securities sought to be registered by all such parties.
(d) Nothing herein shall prevent the Company from, at any time,
abandoning or delaying any registration initiated by it; provided, however, that
-------- -------
if the Company determines not to proceed with a registration after the
registration statement has been filed with the Commission and the Company's
decision not to proceed is primarily based upon the anticipated public offering
price of the securities to be sold by the Company, the Company shall promptly
complete the registration for the benefit of those Selling Shareholders who wish
to proceed with a public offering of their securities and who bear all expenses
in excess of $25,000 incurred by the Company as the result of such registration
after the Company has decided not to proceed.
(e) Any Holder of Registrable Securities who has notified the
Company to include any securities in a registration statement pursuant to
Section 2.2 hereof shall have the right to withdraw any or all of the securities
designated for registration thereby by giving written notice to such effect to
the Company at least three business days prior to the anticipated effective date
of such registration statement. In the event of any such withdrawal, the Company
shall
-4-
<PAGE>
amend such registration statement and take such other actions as may be
necessary so that such Registrable Securities of such Holder are not included in
the applicable registration and not sold pursuant thereto, and such Registrable
Securities shall continue to be Registrable Securities in accordance herewith.
No such withdrawal shall affect the obligations of the Company with respect to
Registrable Securities not so withdrawn.
3. Registration Procedures. If and whenever the Company is required
by the provisions of Sections 2.1 or 2.2 to effect the registration of any
------------ ---
Registrable Securities under the Securities Act, the Company will:
3.1 Prepare and file with the Commission a registration
statement with respect to the Registrable Securities and use its reasonable best
efforts to cause such registration statement to become and remain effective; for
such period as may be reasonably necessary to effect the sale of such
Registrable Securities, not to exceed six months from the effective date.
3.2 Prepare and file with the Commission such amendments to
such registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective for such
period as may be reasonably necessary to effect the sale of such Registrable
Securities, not to exceed six months from the effective date;
3.3 Furnish to each Holder participating in such registration
and to the underwriters of the Registrable Securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such Holders and
underwriters may reasonably request in order to facilitate the public offering
of such Registrable Securities;
3.4 Use its reasonable best efforts to (i) register or qualify
the Registrable Securities covered by such registration statement under such
state securities or blue sky laws of such jurisdictions as such participating
Holders and underwriters may reasonably request and (ii) do any and all other
acts and things that may be necessary or proper to enable the Holders or
underwriters to consummate the public offering of the Registrable Securities;
provided, that the Company shall not be required to execute a general consent to
service of process in any jurisdiction or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
3.5 Notify the Holders participating in such registration,
promptly after it receives notice thereof, of the time when such registration
statement has become effective or a supplement to any prospectus forming a part
of such registration statement has been filed;
3.6 Notify the Holders promptly of any request by the
Commission for the amendment of or supplement to such registration statement or
prospectus or for additional information;
3.7 Prepare and file with the Commission, promptly upon the
request of any such Holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such Holders, is
required under the Securities Act or the rules
-5-
<PAGE>
and regulations thereunder in connection with the distribution of the
Registrable Securities by such Holder;
3.8 Prepare and promptly file with the Commission and promptly
notify such Holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
3.9 Advise such Holders, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its reasonable
best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
3.10 Not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such Holders shall
have reasonably objected on the grounds that such amendment or supplement does
not comply in all material respects with the requirements of the Securities Act
or the rules and regulations thereunder, after having been furnished with a copy
(in substantially final form) at least five business days prior to the filing
thereof, unless in the opinion of counsel for the Company the filing of such
amendment or supplement is reasonably necessary to protect the Company from any
liabilities under any applicable federal or state law and such filing will not
violate applicable law; and
3.11 At the request of any such Holder, furnish on the effective
date of the registration statement and, if such registration includes an
underwritten public offering, at the closing provided for in the underwriting
agreement: (i) opinions, dated such respective dates, of the counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the Holder(s) making such request, in which opinion
such counsel shall state that (a) such registration statement has become
effective under the Securities Act; (b) to the best of such counsel's knowledge
no stop order suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or contemplated
under the Securities Act; (c) the registration statement and each amendment or
supplement thereto comply as to form in all material respects with the
requirements of the Securities Act and the applicable rules and regulations of
the Commission thereunder (except that such counsel need express no opinion as
to financial statements and statistical data contained therein); (d) such
counsel does not know of any material legal or governmental proceedings, pending
or threatened, required to be described in the registration statement or any
amendment or supplement thereto which are not described as required nor of any
contracts or documents or instruments of the character required to be described
in the registration statement or amendment or supplement thereto or to be filed
as Exhibits to the registration statement, which are not described or filed as
required; and (e) covering such other matters of law as such underwriter may
reasonably request; and (ii) letters, dated such respective dates, from the
independent certified
-6-
<PAGE>
public accountants of the Company, addressed to the underwriters, if any, and to
the Holder(s) making such request, covering such matters as such underwriters
and Holder(s) may reasonably request, in which letters such accountants shall
state (without limiting the generality of the foregoing) that they are
independent certified public accountants within the meaning of the Securities
Act and that in the opinion of such accountants the financial statements and
schedules of the Company included in the registration statement or any amendment
or supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.
4. Expenses. With respect to one registration pursuant to Section
2.1 of this Agreement (except as otherwise provided in such section with respect
to registrations voluntarily terminated at the request of the requesting Holders
and except as provided in the following sentence) and with respect to each
inclusion of Registrable Securities in a registration pursuant to Section 2.2
hereof (except as otherwise provided in Section 2.2 with respect to
registrations initiated by the Company but as to which the Company has
determined not to proceed), the Company shall bear the all expenses of each such
registration (the "Registration Fees"). The Company shall pay the Registration
Fees of the second registration requested pursuant to Section 2.1 if any Holder
requesting participation in the first registration pursuant to Section 2.1 was
not afforded the opportunity to sell all Registrable Securities that were the
subject of the first such request by Initiating Holders by reason of the
operation of any other right to register securities to which the Company is
subject. For purposes of this Section 4, Registration Fees shall mean all
expenses incurred by the Company in complying with this Agreement including,
without limitation, all registration, filing and NASD fees, exchange listing
fees, printing expenses, fees and disbursements of counsel and accountants for
the Company, fees and disbursements of counsel for the underwriter (if the
Company and/or the selling securityholders are required to bear such expenses),
fees and disbursements (not to exceed $25,000) of one counsel selected by the
participating Holders to represent such Holders as a class, all internal Company
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, the expense of any special audits
incident to or required by any such registration, and all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered or qualified. Fees and disbursements of counsel for a selling Holder
that do not represent the participating Holders as a class, accountants for a
selling Holder, underwriting discounts and underwriting commissions relating to
the Registrable Securities to be sold by such Holders shall be borne by the
participating Holders.
5. Indemnification. In the event that any shares of Registrable
Securities are included in a registration statement pursuant to Sections 2.1 or
2.2:
5.1 The Company will indemnify and hold harmless each Holder
whose shares of Registrable Securities are included in a registration statement
pursuant to the provisions of this Agreement, its directors and officers, and
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or such underwriter within the meaning
of the Securities Act, from and against, and will reimburse each such person
with respect to, any and all loss, damage, liability, cost and expense to which
any of the foregoing persons may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs or expenses are
caused by any untrue statement or alleged untrue statement of any material
-7-
<PAGE>
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such Holders, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
5.2 Each Holder whose Shares of Registrable Securities are
included in a registration statement pursuant to the provisions of this
Agreement will indemnify and hold harmless the Company, its directors and
officers, any controlling person, any other participating Holder, its officers,
directors, partners, legal counsel and accountants and any underwriter from and
against, and will reimburse each such person with respect to, any and all loss,
damage, liability, cost or expense to which any of the foregoing persons may
become subject under the Securities Act or otherwise, insofar as such losses,
damages, liabilities, costs or expenses are caused by any untrue or alleged
untrue statement of any material fact contained in such registration statement,
any prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with written information
furnished by such Holder specifically for use in the preparation thereof.
5.3 Promptly after receipt by an indemnified party pursuant to
the provisions of Section 5.1 or 5.2 of notice of the commencement of any action
involving the subject matter of the foregoing indemnity provisions such
indemnified party will, if a claim thereof is to be made against the
indemnifying party pursuant to the provisions of said paragraph (a) or (b),
promptly notify the indemnifying party of the commencement thereof; but the
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than hereunder.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party, provided, however,
if the defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, or if there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select separate counsel
to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of said
paragraph (a) or (b) for any legal or other expense subsequently incurred by
such indemnified
-8-
<PAGE>
party in connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the proviso of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of the
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.
5.4 If the indemnification provided for in Sections 5.1 and 5.2
above is unavailable or insufficient to hold harmless an Indemnified Party under
Sections 5.1 and 5.2 above, then each Indemnifying Party shall contribute to the
amount paid or payable by such Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in Sections 5.1 and 5.2 above, in
such proportion as is appropriate to reflect the relative fault of the
respective parties in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or any holder and each party's
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an Indemnified
Party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this Section 5.4 shall be deemed to include any legal or
other expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending against any action or claim which is the subject of
this Paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
6. Exception to Registration Obligations. The Company shall not be
obligated to honor a demand to register its Registrable Securities under this
Agreement if all such Registrable Securities which could be registered pursuant
to such demand are otherwise eligible for immediate sale by the Holders under
paragraph (k) of Rule 144.
7. Certain Limitations in Connection with Existing and Future Grants
of Registration Rights. From and after the date of this Agreement, the Company
shall not enter into any agreement with any holder or prospective holder of any
securities of the Company providing for the granting to such holder of
registration rights, unless such agreement: (a) includes a provision that, in
the case of a public offering involving an underwritten registered offering
under Section 2.2, confirms the rights of the Holders to include Registrable
Securities in such offering pursuant to this Agreement; (b) is consistent with
the terms and conditions of the Purchase Agreement; and (c) such new
registration rights are subordinate to the registration rights granted
hereunder. Notwithstanding anything to the contrary herein, the rights of any
Holder hereunder shall at all times be subject to the rights of California State
Teachers' Retirement System (STRS) and permitted assignees under that certain
Registration Rights Agreement dated December 31, 1995 between the Company and
STRS.
-9-
<PAGE>
8. Miscellaneous.
8.1 Governing Laws. This Agreement shall be governed by and
construed under the internal laws of the State of California without regard to
the conflicts of laws provisions thereof.
8.2 Successors and Assigns. The rights hereunder of a Holder
may be transferred or assigned in connection with a sale or transfer of Shares
or shares of Registrable Securities; provided if such sale or transfer involves
persons other than affiliates of a Holder, such transferee acquires at least the
Minimum Share Amount. Any assignment of rights hereunder in accordance with the
preceding sentence shall be effective only if written notice of such assignment,
identifying the name and address (for purposes of Section 8.11 hereof) of such
assignee, is given to the Company. Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
8.3 Severability. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
8.4 Entire Agreement. This Agreement, the exhibits hereto, the
documents referenced herein and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
8.5 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original as against any party whose
signature appears thereon, and all of which together shall constitute one and
the same instrument.
8.6 Other Remedies. Any and all remedies herein expressly
conferred upon a party shall be deemed cumulative with, and not exclusive of,
any other remedy conferred hereby or by law on such party, and the exercise of
any one remedy shall not preclude the exercise of any other.
8.7 Amendment and Waivers. Any term or provisions of this
Agreement requiring performance by or binding upon the Company or Holder may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only by a writing signed by the Company, and
-10-
<PAGE>
the Holders of at least a majority of the Registrable Securities. Any amendment
or waiver effected in accordance with this Section shall be binding upon each
Holder (including permitted assigns pursuant to Section 8.1 hereof). The waiver
by a party of any breach hereof or default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or succeeding breach or default.
8.8 Survival of Agreements. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby. The representations, warranties, covenants and agreements of the Company
contained in or made pursuant to this Agreement shall survive the execution and
delivery of this Agreement and shall in no way be affected by any investigation
of the subject matter thereof made by or on behalf of the Holder.
8.9 Delays or Omissions. Except as expressly provided herein,
no delay or omission to exercise any right, power or remedy accruing to any
party under this Agreement shall impair any such right, power or remedy of such
party nor shall it be construed to be a waiver of any such breach or default, or
an acquiescence therein, or of or in a similar breach of default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party hereto of any breach of default under the Agreement, or any waiver on the
part of any party of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
8.10 Notices. Whenever any party hereto desires or is required
to give any notice, demand or request with respect to this Agreement, each such
communication shall be in writing and shall be deemed to be valid and duly given
for all proposes when hand-delivered, or five (5) business days after it is
deposited in the mail if marked for registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
Company: National Mercantile Bancorp
1840 Century Park East
Los Angeles, California 90067
Attention: Executive Vice President
Holders: The Conrad Company
3800 Dain Bosworth Plaza
P.O. Box 1000
Minneapolis, Minnesota 55480-1000
Attention: President
Any party may change its address for such communications by giving notice
thereof to the Company in conformity with this Section.
-11-
<PAGE>
8.11 Construction of Agreement. This Agreement has been
negotiated by the respective parties hereto and their attorneys and the language
hereof shall not be construed for or against any party. A reference in this
Agreement to any Section shall include a reference to every Section the number
of which begins with the number of the Section to which reference is
specifically made (e.g., a reference to Section 3 shall include a reference to
----
Sections 3.1 through 3.4 inclusive). The titles and headings herein are for
reference purposes only and shall not in any manner limit the construction of
this Agreement which shall be considered as a whole. A reference to a Section
means a Section of this Agreement, unless the context expressly otherwise
requires.
8.12 Pronouns. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
(Signatures on Following Page)
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed as of the date first written above.
NATIONAL MERCANTILE BANCORP THE CONRAD COMPANY
By: By:
------------------------------- -------------------------------------
Its: Its:
--------------------------- ---------------------------------
-13-
<PAGE>
EXHIBIT 22
Subsidiaries of the Registrant
Mercantile National Bank
1840 Century Park East
Los Angeles, California 90067
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement No. 333-21455 of National Mercantile Bancorp on Form S-2
of our report dated March 7, 1997 (which expresses an unqualified opinion and
includes an explanatory paragraph relating National Mercantile Bancorp and
Subsidiary's ability to continue as a going concern) appearing in and
incorporated by reference in the Annual Report on Form 10-K of National
Mercantile Bancorp for the year ended December 31, 1996, and to the reference to
us under the heading of "Experts" in the Prospectus, which is a part of this
Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 11, 1997
<PAGE>
EXHIBIT 99.1
NATIONAL MERCANTILE BANCORP
INSTRUCTIONS AS TO USE OF
SUBSCRIPTION RIGHT CERTIFICATES
------------------------
CONSULT THE INFORMATION AGENT, OR YOUR BANK OR BROKER,
IF YOU HAVE ANY QUESTIONS AFTER READING THESE INSTRUCTIONS
-----------------------
The following instructions relate to the rights offering (the
"Offering") by National Mercantile Bancorp, a California corporation (the
"Company"), to the holders of its Common Stock, no par value (the "Common
Stock"), as described in the Company's Prospectus dated ___________, 1997 (the
"Prospectus"). Holders of record (the "Record Date Holder") of Common Stock at
the close of business on _________________, 1997 (the "Record Date") are
receiving one (1) nontransferable subscription rights (each a "Right") for
each share of Common Stock held on the Record Date. Each Right entitles the
holder thereof (the "Rights Holder") to subscribe for and purchase from the
Company 1.624 shares of Preferred Stock (the "Basic Subscription Privilege")
at the subscription price (the "Subscription Price") of $1.10. In lieu of
fractional Rights, the aggregate number of Rights issued to a Record Date
Holder will be rounded up to the next whole number. An aggregate number of up
to 550,000 shares of Preferred Stock (the "Underlying Preferred Shares") will
be distributed in connection with the Offering. Subject to the proration and
possible reduction described below, each Right also entitles any Rights
Holder exercising in full the Basic Subscription Privilege the right to
subscribe for additional shares of Preferred Stock available after
satisfaction of all subscriptions pursuant to the Basic Subscription Privilege
(the "Oversubscription Privilege"). Subject to the allocation and possible
reduction described below, shares of Preferred Stock will be available for
purchase pursuant to the Oversubscription Privilege only to the extent that
any Underlying Preferred Shares are not subscribed for through the
Basic Subscription Privilege. If the Underlying Preferred Shares not
subscribed for through the Basic Subscription Privilege or purchased pursuant
to the Private Offering (as defined in the Prospectus) (the "Excess
Underlying Preferred Shares") are not sufficient to satisfy all subscriptions
pursuant to the Oversubscription Privilege, the Excess Underlying Preferred
Shares will be allocated pro rata (subject to the elimination of fractional
shares) among those Rights Holders exercising the Oversubscription Privilege
in proportion to the respective numbers of shares each such Rights Holder
subscribes for pursuant to the Basic Subscription Privilege; provided,
however, that if such pro rata allocation results in any Rights Holder being
allocated a greater number of Excess Underlying Preferred Shares than such
Holder subscribed for pursuant to the exercise of the Oversubscription
Privilege, then each Rights Holder will be allocated only that number of
Excess Underlying Preferred Shares for which such holder oversubscribed, and
the remaining Excess Underlying Preferred Shares will be allocated
among all other Rights Holders exercising the
<PAGE>
Oversubscription Privilege on the same pro rata basis as described above. The
Subscription Price is payable in cash. See "The Rights Offering" in the
Prospectus. The Rights will expire at 5:00 p.m. California time on
________________, unless extended by the Company to a time not later than 5:00
p.m., California time, on ________________ (in either case, the "Expiration
Time"). The number of Rights to which you are entitled is printed on the face of
your Subscription Right Certificate. You should indicate your wishes with regard
to the exercise of your Rights by completing the appropriate form or forms on
the reverse side of your Subscription Right Certificate and returning the
Subscription Right Certificate to the Subscription Agent in the envelope
provided.
YOUR SUBSCRIPTION RIGHT CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY
MUST BE RECEIVED BY THE SUBSCRIPTION AGENT AND PAYMENT OF THE SUBSCRIPTION
PRICE, INCLUDING FINAL CLEARANCE OF ANY UNCERTIFIED CHECKS, MUST BE RECEIVED BY
THE SUBSCRIPTION AGENT, AT OR BEFORE 5:00 P.M. CALIFORNIA TIME, ON
________________________. YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT.
1. SUBSCRIPTION PRIVILEGES.
TO EXERCISE RIGHTS. To exercise your Rights, complete Form 1 of
your Subscription Right Certificate and send to the Subscription Agent your
properly completed and executed Subscription Right Certificate together with
payment in full of the Subscription Price for each Underlying Preferred Share
subscribed for pursuant to the Basic Subscription Privilege and the
Oversubscription Privilege. Payment of the Subscription Price must be made
for the full number of Underlying Preferred Shares being subscribed for (a)
by check or bank draft drawn upon a U.S. bank, or postal, telegraphic or
express money order, in each case, payable to U.S. Stock Transfer Corporation,
as Subscription Agent, or (b) by wire transfer of funds to the account
maintained by the Subscription Agent for such purpose of accepting
subscriptions at First Professional Bank NA, ABA No. 122239335, National
Mercantile Bancorp Account No. 004-082578. The Subscription Price will be
deemed to have been received by the Subscription Agent only upon (i)
clearance of any uncertified check, (ii) receipt by the Subscription Agent of
any certified check or bank draft drawn upon a U.S. bank, or of any postal,
telegraphic or express money order or (iii) receipt of collected funds in the
Subscription Agent's account designated above. IF PAYING BY UNCERTIFIED
CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTS HOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED CHECK ARE URGED TO MAKE PAYMENT
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION TIME TO ENSURE THAT SUCH PAYMENT IS
RECEIVED AND CLEARS BEFORE THE EXPIRATION TIME AND ARE URGED TO CONSIDER, IN
THE ALTERNATIVE, PAYMENT BY MEANS OF CERTIFIED CHECK, BANK DRAFT, MONEY ORDER
OR WIRE TRANSFER OF FUNDS.
<PAGE>
If you exercise less than all of the Rights evidenced by your
Subscription Right Certificate by so indicating on Form 1 of your Subscription
Right Certificate, the Subscription Agent will issue to you a new Subscription
Right Certificate representing the remaining Rights. If no indication is made,
the Subscription Agent will issue to you a new Subscription Right Certificate
evidencing the unexercised Rights. If you choose, however, to have a new
Subscription Right Certificate sent to you, any such new Subscription Right
Certificate may not be received in sufficient time to permit you or the
designated transferee to sell or exercise the Rights evidenced thereby.
Moreover, a new Subscription Right Certificate will be issued to a submitting
Rights Holder upon the partial exercise only if the Subscription Agent received
a properly endorsed Subscription Right Certificate no later than 5:00 p.m.,
California time, on _______________. After such time and date, no new
Subscription Right Certificates will be issued. A new Subscription Right
Certificate will be sent by first class mail to the submitting Rights Holder
only if the Subscription Agent receives the properly completed Subscription
Right Certificate by 5:00 p.m California time, on _________________. Unless the
submitting Rights Holder makes other arrangements with the Subscription Agent, a
new Subscription Right Certificate issued after 5 p.m. California time on
_________________ will be held for pick-up by the Submitting Rights Holder,
at the Subscription Agent's hand delivery address provided in paragraph 2
below. All deliveries of newly issued Subscription Right Certificates will be
at the risk of the submitting Rights Holder.
If you have not indicated the number of Rights being exercised, or if
you have not forwarded full payment of the Subscription Price for the number of
Rights that you have indicated are being exercised, then you will be deemed to
have exercised the Basic Subscription Privilege with respect to the maximum
number of Rights which may be exercised for the aggregate payment delivered by
you and, to the extent that the aggregate payment delivered by you exceeds the
product of the Subscription Price multiplied by the number of Rights evidenced
by the Subscription Right Certificate(s) delivered by you (such excess being the
"Subscription Excess"), you will be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, that number of
whole Excess Underlying Preferred Shares equal to the quotient obtained by
dividing the Subscription Excess by the Subscription Price and any amount
remaining after such division shall be returned to you.
TO EXERCISE RIGHTS THROUGH A NOMINEE. If you wish to have your bank,
broker or other nominee exercise some or all of your Rights, you must complete
Forms 1 and 2 of your Subscription Right Certificate, providing clear direction
as to how many Rights are to be exercised and what action a should be taken in
regards to any unexercised Rights. Banks, brokers and other nominees who
exercise the Oversubscription Privilege on behalf of the beneficial owners of
Rights will be required to certify to the Subscription Agent and the Company, by
delivery to the Subscription Agent of a Nominee Holder Oversubscription
Certification in the form available from the Subscription Agent or the
Information Agent, the aggregate number of Rights as to which the
Oversubscription Privilege are being exercised and the number of Underlying
Preferred Shares thereby subscribed for by each beneficial owner of Rights on
whose behalf such nominee holder is acting.
<PAGE>
TO EXERCISE RIGHTS IF SUBSCRIPTION RIGHT CERTIFICATE MIGHT NOT
PROPERLY REACH THE SUBSCRIPTION AGENT PRIOR TO THE EXPIRATION TIME. You may
cause a written guarantee substantially in the form of Exhibit A to these
Instructions (the "Notice of Guaranteed Delivery") from a member firm of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc., or from a commercial bank or trust company having
an office or correspondent in the United States (each, an "Eligible
Institution"), to be received by the Subscription Agent at or prior to the
Expiration Time; payment in full of the applicable Subscription Price may be
made separately as long as said payment also is received by the Subscription
Agent at or prior to the Expiration Time. Such Notice of Guaranteed Delivery
must state your name, the number of Rights represented by your Subscription
Right Certificate and the number of Underlying Preferred Shares being
subscribed for pursuant to the Basic Subscription Privilege and being
subscribed for, if any, pursuant to the Oversubscription Privilege, and the
Eligible Institution must guarantee the delivery to the Subscription Agent of
your properly completed and executed Subscription Right Certificate(s)
evidencing those Rights within two (2) business days following the date of
the Notice of Guaranteed Delivery. If this procedure is followed, your
Subscription Right Certificate(s) must be received by the Subscription Agent
within two (2) business days following the date of the Notice of Guaranteed
Delivery relating thereto. Additional copies of the Notice of Guaranteed
Delivery may be obtained upon request from the Information Agent.
LIMITATION ON SUBSCRIPTION PRIVILEGES. The Company will not be
required to issue Underlying Preferred Shares pursuant to the Offering to any
Rights Holder who, in the Company's sole judgment and discretion, is required
to obtain prior clearance, approval or nondisapproval from any state or
Federal bank regulatory authority to own or control such shares unless, prior
to the Expiration Time, evidence of such clearance, approval or
nondisapproval has been provided to the Company. Further, the Company will
not be required to issue to any Rights Holder, if in the sole judgment and
discretion of the Company, such action is necessary to reduce the risk that
certain tax benefits will be subject to the limitations under Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code") or to reduce the
risk of any other adverse tax consequence to the Company. If the Company
elects not to issue shares in such case, such shares will become available to
satisfy subscriptions pursuant to the Basic Subscription Privilege, to the
Private Purchasers (as defined in the Prospectus) pursuant to the
Oversubscription Privilege or to Standby Purchasers (as defined in the
Prospectus). See "The Rights Offering -- Limitations -- Tax Limitation" and
"The Rights Offering -- Limitations -- Regulatory Limitation" in the Prospectus.
2. THE SUBSCRIPTION AGENT AND THE INFORMATION AGENT. The address and
telephone and telecopier numbers of the Subscription Agent are as follow:
<PAGE>
U.S. STOCK TRANSFER CORPORATION
General Information:
(805) 835-8778
By Mail: By Hand or Overnight Courier:
U.S. Stock Transfer Corporation U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200 1745 Gardena Avenue, Suite 200
Glendale, CA 91204 Glendale, CA 91204
Facsimile Transmission
Fax Number (818) 502-0674
The address and telephone number of the Information Agent are as follows:
KISSEL BLAKE INC.
110 Wall Street
New York, New York 10005
(800) 554-7733 (toll free)
(212) 344-6733 (call collect)
Banks and Brokers
Call (212) 344-6733
3. ISSUANCE AND DELIVERY OF STOCK CERTIFICATES, ETC. The following
issuances, deliveries and payments will be made to you at the address shown on
the face of your Subscription Right Certificate unless you provide special
payment, issuance or delivery instructions to the contrary by completing the
applicable part of Form 3 of your Subscription Right Certificate. See "The
Rights Offering - Subscription Privileges" in the Prospectus.
BASIC SUBSCRIPTION PRIVILEGE. As soon as practicable after the
Experation Time and after all prorations and possible reductions contemplated
by the terms of the Offering have been effected, the Subscription Agent will
issue and mail in accordance with the instruction of the exercising Rights
Holder, a certificate representing Underlying Preferred Shares purchased
pursuant to the Basic Subscription Privilege. See "The Rights Offering -
Subscription Privileges" in the Prospectus.
OVERSUBSCRIPTION PRIVILEGE. As soon as practicable after the
Expiration Time and after all prorations and possible reductions contemplated by
the terms of the Offering have been effected, the Subscription Agent will issue
and mail to each Rights Holder who validly exercises the Oversubscription
Privilege a certificate representing Excess Underlying Preferred Shares
purchased pursuant to the Oversubscription Privilege. See "The Rights
Offering - Subscription Privileges" in the Prospectus.
REFUNDING OF EXCESS PAYMENTS. As soon as practicable after the
Expiration Time and after all prorations and possible reductions contemplated by
the terms of the
<PAGE>
Offering have been effected, the Subscription Agent will return by mail, without
interest or deduction, to each Rights Holder exercising the Oversubscription
Privilege any excess funds received in payment of the Subscription Price for
Underlying Preferred Shares that were subscribed for by such Rights Holder but
not allocated to such Rights Holder pursuant to the Oversubscription Privilege.
4. DIVIDING SUBSCRIPTION RIGHT CERTIFICATES. The Subscription
Right Certificates may not be divided.
5. SIGNATURES.
EXECUTION BY RIGHTS HOLDER. The signature on the Subscription
Right Certificate must correspond with the name of the Rights Holder exactly as
it appears on the face of the Subscription Right Certificate without any
alteration or change whatsoever. Persons who sign the Subscription Right
Certificate in a representative or other fiduciary capacity must indicate their
capacity when signing and, unless waived by the Company in its sole and absolute
discretion, must present to the Subscription Agent satisfactory evidence of
their authority to so act.
EXECUTION BY PERSON OTHER THAN RIGHTS HOLDER. If the Subscription
Right Certificate is executed by a person other than the Rights Holder named on
the face of the Subscription Right Certificate, proper evidence of authority of
the person executing the Subscription Right Certificate must accompany the same
unless, for good cause, the Company dispenses with proof of authority.
SIGNATURE GUARANTEES. Unless your Subscription Right Certificate
(i) provides that the Underlying Preferred Shares to be issued pursuant to
the exercise of the Rights represented thereby are to be issued to you or
(ii) is submitted for the account of an Eligible Institution (as defined in
paragraph 1), your signature on each Subscription Right Certificate must be
guaranteed by an Eligible Guarantor Institution (as defined in Rule 17Ad-15(a)
(2) of the Securities Exchange Act of 1934, as amended).
<PAGE>
6. METHOD OF DELIVERY.
The method of delivery of Subscription Right Certificates and
payment of the Subscription Price to the Subscription Agent will be at your
election and risk, but, if sent by mail, you are urged to send such materials by
registered mail, properly insured, with return receipt requested, and are urged
to allow a sufficient number of days to ensure delivery to the Subscription
Agent and, if you are paying by uncertified check, the clearance of payment of
the Subscription Price prior to the Expiration Time. Because uncertified checks
may take at least five business days to clear, you are strongly urged to
consider payment by means of certified check, cashier's check, money order or
wire transfer.
7. SPECIAL PROVISIONS RELATING TO THE DELIVERY OF RIGHTS
THROUGH THE DEPOSITORY TRUST COMPANY.
In the case of Rights that are held of record through The
Depository Trust Company ("DTC"), exercises of the Basic Subscription Privilege
(but not the Oversubscription Privilege) may be effected by instructing DTC to
transfer Rights (such Rights being "DTC Rights") from the DTC account of the
Rights Holder to the DTC account of the Subscription Agent, together with
payment of the Subscription Price for each Underlying Preferred Share
subscribed for pursuant to the Basic Subscription Privilege. THE
OVERSUBSCRIPTION PRIVILEGE IN RESPECT OF DTC RIGHTS MAY NOT BE EXERCISED
THROUGH DTC. The holder of DTC Rights may exercise the Oversubscription
Privilege in respect thereof by properly executing and delivering to the
Subscription Agent, at or prior to the Expiration Time, a DTC Participant
Oversubscription Exercise Form, in the form available from the Information
Agent or the Subscription Agent, together with payment of the appropriate
Subscription Price for the number of Excess Underlying Shares for which the
Oversubscription Privilege is exercised.
If a notice of Guaranteed Delivery relates to Rights with respect
to which exercise of the Basic Subscription Privilege will be made through DTC
and such Notice of Guaranteed Delivery also relates to the exercise of the
Oversubscription Privilege, a DTC Participant Oversubscription Exercise Form
also must be received by the Subscription Agent in respect of such exercise of
the Oversubscription Privilege at or prior to the Expiration Time.
8. SUBSTITUTE FORM W-9.
Each Rights Holder who elects to exercise Rights should provide
the Subscription Agent with a correct Taxpayer Identification Number on the
Substitute Form W-9 attached to the Subscription Right Certificate. Additional
copies of Substitute Form W-9 may be obtained upon request from the Information
Agent or Subscription Agent. Failure to provide the information on the
Substitute Form W-9 may subject such Rights Holder to a $50 penalty and to a 31%
Federal income tax withholding with respect to (i) dividends that may be paid by
the Company on shares of Common Stock purchased upon the exercise of Rights (for
those Rights Holders exercising Rights) or (ii) funds to be remitted to Rights
Holders in respect of Rights sold by the Subscription Agent (for those Rights
Holders electing to have the Subscription Agent sell
<PAGE>
their Rights). For more information see "Important Tax Information" attached as
Exhibit B hereto.
9. TRANSFER TAXES.
All commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the purchase,
sale or exercise of Rights will be for the account of the Rights Holder, and
none of such commissions, fees or expenses will be paid by the Company or the
Subscription Agent.
10. IRREGULARITIES.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Company, whose
determinations will be final and binding. The Company, in its sole discretion,
may waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported exercise
of any Right. Subscription Right Certificates will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Company determines, in its sole discretion. Neither the Company
nor the Subscription Agent will be under any duty to give notification of any
defect or irregularity in connection with the submission of Subscription Right
Certificates or incur any liability for failure to give such notification. The
Company reserves the right to reject any exercise if such exercise is not in
accordance with the terms of the Offering or not in proper form or if the
acceptance thereof or the issuance of the shares of Preferred Stock pursuant
thereto could be deemed unlawful.
<PAGE>
EXHIBIT A TO INSTRUCTIONS
NOTICE OF GUARANTEED DELIVERY
FOR SUBSCRIPTION RIGHTS CERTIFICATES
ISSUED BY NATIONAL MERCANTILE BANCORP
This form, or one substantially equivalent hereto, must be used to
exercise Rights pursuant to the Rights Offering described in the Prospectus
dated ______________________ (the "Prospectus") of National Mercantile Bancorp,
a California corporation (the "Company"), if a holder of Rights cannot deliver
the Subscription Right Certificate(s) evidencing the Rights (the "Subscription
Right Certificate(s)"), to the Subscription Agent listed below (the
"Subscription Agent") at or prior to 5:00 p.m. California time on ___________,
1997, unless extended by the Company to a time not later than 5:00 p.m.,
California time, on ____________, 1997 (in either case, the "Expiration Time").
Such form must be delivered by hand or sent by facsimile transmission, overnight
courier or mail to the Subscription Agent, and must be received by the
Subscription Agent at or prior to the Expiration Time. Properly completed and
executed Subscription Right Certificate(s) relating to this Notice of Guaranteed
Delivery must be received by the Subscription Agent within two (2) business
days following the date of this Notice of Guaranteed Delivery. See "The
Rights Offering -- Exercise of Rights" in the Prospectus. Payment of the
Subscription Price of $1.10 per share for each Underlying Preferred Share
subscribed for pursuant to the Basic Subscription Privilege and the
Oversubscription Privilege must be received by the Subscription Agent in the
manner specified in the Instructions as to Use of Subscription Right
Certificates at or prior to the Expiration Time even if the Subscription Right
Certificate evidencing such Right is being delivered pursuant to the procedure
for guaranteed delivery thereof.
THE SUBSCRIPTION AGENT IS:
U.S. STOCK TRANSFER CORPORATION
General Information
(800) 835-8778
<TABLE>
<S> <C> <C>
Facsimile Transmission By Hand or
If by Mail: Copy Number: Overnight Courier:
U.S. TRANSFER CORP. (818) 502-0674 U.S. TRANSFER CORP.
1745 Gardena Avenue, Suite 200 1745 Gardena Avenue, Suite 200
Glendale, Ca 91204 Glendale, CA 91204
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE OTHER THAN THAT SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
A-1
<PAGE>
Ladies and Gentlemen:
The undersigned represents that he or she is the holder of
Subscription Right Certificate(s) representing __________ Rights and that such
Subscription Right Certificate(s) cannot be delivered to the Subscription Agent
at or before 5:00 p.m., California time on _____________, 1997, or such later
time to which the Rights Offering has been extended by the Company to a time not
later than 5:00 p.m., California time, on _____________, 1997 (in either case,
the "Expiration Time"). Upon the terms and subject to the conditions set forth
in the Prospectus, receipt of which is hereby acknowledged, the undersigned
hereby elects to exercise (i) the Basic Subscription Privilege to subscribe for
1.624 shares of Preferred Stock per Right with respect to Rights represented by
such Subscription Right Certificate and (ii) the Oversubscription Privilege, to
the extent that Excess Underlying Preferred Shares (as defined in the
Prospectus) are available therefor, for an aggregate of up to __________
Excess Underlying Preferred Shares. The undersigned understands that payment
of the Subscription Price of $1.10 per share for each share of Preferred
Stock subscribed for pursuant to the Basic Subscription Privilege and the
Oversubscription Privilege must be received by the Subscription Agent at or
before the Expiration Time, and represents that such payment, in the
aggregate amount of $__________, either (check appropriate box(es)):
[_] Wire transfer of funds directed to U.S. Stock Transfer Corporation
Name of transferor institution _________________________________
Date of transfer _____________________________________________
Federal Reference number ____________________________________
[_] Uncertified check payable to U.S. Stock Transfer Corporation (Payment
by uncertified check will not be deemed to have been received by the
Subscription Agent until such check has cleared. Rights holders paying
by such means are urged to make payment sufficiently in advance of the
Expiration Time to ensure that such payment clears by such date.)
[_] Certified check payable to U.S. Stock Transfer Corporation
[_] Draft payable to U.S. Stock Transfer Corporation
[_] Money order payable to U.S. Stock Transfer Corporation.
Signature(s) Address
--------------------------- --------------------------------
--------------------------- --------------------------------
Name(s)
-------------------------------- --------------------------------
Please Type or Print (Include Zip Code)
- --------------------------------------- --------------------------------
Area Code and Tel. No(s).
-------
- ---------------------------------------
--------------------------------
A-2
<PAGE>
(If signature is by a trustee(s),
executor(s), administrator(s),
guardian(s), attorney(s)-in-fact, Subscription Right Certificate
agent(s), officer(s), of a corporation No(s). (if available)
or another acting in a fiduciary or ---------------
representative capacity, such capacity
must be clearly indicated above.)
- --------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(Not to Be Used for Subscription Right Certificate Signature Guarantee)
The Undersigned, a member firm or a registered national securities exchange or
of the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States, guarantees
that the undersigned will deliver to the Subscription Agent the Subscription
Right Certificate(s) representing the Rights being exercised hereby, with any
required signature guarantees and any other required documents, all within two
(2) business days after the date hereof.
Dated: , 19
- ------------------------------------ ----------------------------- ----
(Name of Firm)
Address:
- ------------------------------------ ----------------------------------
(Authorized Signature)
- ------------------------------------ ------------------------------------------
(Name) (Include Zip Code)
- ------------------------------------ ------------------------------------------
(Title) (Area Code and Telephone Number)
The institution which completes this form must communicate the guarantee to the
Subscription Agent and must deliver the Subscription Right Certificate(s) to the
Subscription Agent within the time period shown herein. Failure to do so could
result in financial loss to such institution.
- --------------------------------------------------------------------------------
A-3
<PAGE>
EXHIBIT B
TO INSTRUCTIONS
IMPORTANT TAX INFORMATION
Under the U.S. Federal income tax law, dividend payments that may be
made by the Company on shares of Preferred Stock issued upon the exercise of
Rights may be subject to backup withholding, and each Rights Holder who
exercises Rights should provide the Subscription Agent (as the Company's agent,
in respect of exercised Rights, with such Rights Holders' correct taxpayer
identification number on the Substitute Form W-9 attached to the Subscription
Right Certificate. If such Rights Holder is an individual, the taxpayer
identification number is his or her social security number. If the Subscription
Agent is not provided with the correct taxpayer identification number in
connection with such payments, the Rights Holder may be subject to a $50 penalty
imposed by the Internal Revenue Service. Exempt Rights Holders (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and information reporting requirements. In general, for
a foreign individual to qualify as an exempt recipient, the Rights Holder must
submit a statement, signed under the penalties of perjury, attesting to that
individual's exempt status. Such statements can be obtained from the
Subscription Agent. See the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional instructions. If
backup withholding applies, the Company or the Subscription Agent, as the case
may be, will be required to withhold 31% of any such payments made to the Rights
Holder. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding, the Rights Holder is required to notify
the Subscription Agent of his or her correct taxpayer identification number by
completing the Substitute Form W-9 included as a part of the Subscription Right
Certificate certifying that the taxpayer identification number provided on
Substitute Form W-9 is correct (or that such Rights Holder is awaiting a
taxpayer identification number).
WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT
The Rights Holder is required to furnish the Subscription Agent such
Rights Holder's social security number or employer identification number. If the
Rights are in more than one name or are not in the name of the actual owner,
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to report.
B-1
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give
the Payer. Social Security numbers have nine digits separated by two hyphens:
I.E., 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: I.E., 00-0000000. The table below will help you determine the
number to give the payer.
<TABLE>
<CAPTION>
============================================================================================================================
Give the name and
SOCIAL SECURITY
For this type of account number of:
<C> <S> <C>
1. Individual The individual
- ----------------------------------------------------------------------------------------------------------------------------
2. a. Two or more individuals (joint account) The actual owner of the account or, if combined funds,
the first individual on the account(1)
- ----------------------------------------------------------------------------------------------------------------------------
3. Custodian account number of a minor (Uniform Gift The minor(2)
to Minors Act)
- ----------------------------------------------------------------------------------------------------------------------------
4. a. The usual revocable savings trust (grantor is The grantor-trustee(1)
also trustee)
b. The so-called trust account that is not a legal The actual owner(1)
or valid trust under State law
- ----------------------------------------------------------------------------------------------------------------------------
5. Sole proprietorship The owner(3)
============================================================================================================================
Give the name and
EMPLOYER IDENTIFICATION
For this type of account: number of:
============================================================================================================================
6. A valid trust, estate or pension trust Legal entity (do not furnish the identification number of
the personal representative or trustee unless the legal
entity itself is not designated in the account title)(4)
- ----------------------------------------------------------------------------------------------------------------------------
7. Corporation The corporation
- ----------------------------------------------------------------------------------------------------------------------------
8. Association, club, religious, charitable, educational The organization
or other tax-exempt organization
- ----------------------------------------------------------------------------------------------------------------------------
9. Partnership The partnership
- ----------------------------------------------------------------------------------------------------------------------------
10. A broker or registered nominee The broker or nominee
- ----------------------------------------------------------------------------------------------------------------------------
11. Account with the Department of Agriculture in the The public entity
name of a public entity (such as a State or
local government, school district, or prison)
that receives agricultural program payments.
============================================================================================================================
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the name of the owner. You may also use an Employer Identification Number.
(4) List first and circle the name of legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed.
</TABLE>
B-2
<PAGE>
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know
your number, obtain Form SS-5, Application for a Social Security Number Card, or
SS-4, Application for Employer Identification Number, at your local office of
the Social Security Administration or the Internal Revenue Service ("IRS") and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments
include the following:
. A corporation
. A financial institution
. An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7)
. The United States or any agency or instrumentality thereof
. A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof
. A foreign government, a political subdivision of a foreign government,
or any agency or instrumentality thereof
. An international organization or any agency or instrumentality thereof
. A dealer in securities or commodities registered in the United States or
a possession of the United States
. A real estate investment trust
. A common trust fund operated by a bank under section 584(a)
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1)
. An entity registered at all times under the Investment Company Act of
1940
. A foreign central bank of issue Payment of dividends and patronage
dividends not generally subject to backup withholding include the
following:
. Payments to nonresident aliens subject to withholding under section 1441
. Payments to partnerships not engaged in a trade or business in the
United States and which have at least one nonresident partner
. Payments or patronage dividends where the amount received is not paid in
money
. Payments made by certain foreign organizations
. Payments made to a nominee
Payments of interest not generally subject to backup withholding include the
following:
. Payments of tax-exempt interest (including exempt-interest dividends
under section 852)
. Payments described in section 6049(b)(5) to nonresident aliens
. Payments made by certain foreign organizations
. Payments made to a nominee
B-3
<PAGE>
Exempt payers described above should file the Substitute Form W-9 attached to
the Subscription Right Certificate to avoid erroneous backup withholding. FILE
THE FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE
"EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE
PAYER.
Payments that are not subject to information reporting are also not
subject to backup withholding. For details, see sections 6041, 6041A(a), 6042,
6044, 6045, 6049, 6050A and 6050N and the regulations thereunder.
PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividends, interest, or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes and to
help verify the accuracy of your tax return. Payers must be given the numbers
whether or not recipients are required to file tax returns. Payers must
generally withhold 31% of taxable interest, dividends, and certain other
payments to a payee who does not furnish a taxpayer identification number.
PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If
you fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Civil Penalty for False Information with Respect to Withholding.
If you make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) Criminal Penalty for Falsifying Information. Falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX ADVISOR OR THE
INTERNAL REVENUE SERVICE
B-4
<PAGE>
[COMPANY NAME AND LOGO] EXHIBIT 99.2
[Date]
Dear Shareholder:
National Mercantile Bancorp (the "Company") has begun an offering (the
"Offering") of up to 550,000 shares of its Preferred Stock, $10.00 stated value
(the "Preferred Stock"), to holders of record of Common Stock at the close of
business on ___________, 1997 (the "Record Date"), pursuant to nontransferable
subscription rights ("Rights") to subscribe for and purchase shares of Preferred
Stock at a price of $1.10 per share (the "Subscription Price"). Each
shareholder will receive one (1) Right for each share of Common Stock held of
record by such shareholder on the Record Date, and the aggregate number of
Rights issued by the Company to each shareholder will be rounded up to the next
whole number.
Each Right will entitle the holder thereof (the "Rights Holder") to
subscribe for and purchase at the Subscription Price 1.624 shares of Preferred
Stock (the "Basic Subscription Privilege"), subject to proration and reduction
by the Company under certain circumstances. Any Rights Holder who exercises the
Basic Subscription Privelege in full is entitled to subscribe for and purchase
additional shares of Preferred Stock that are not otherwise subscribed for by
all Rights Holders pursuant to the exercise of the Basic Subscription Privilege,
subject to proration and reduction by the Company under certain circumstances.
The number of Rights to which you are entitled is printed on the front of your
Subscription Rights Certificate.
Enclosed for your review is the Prospectus, a nontransferable
Subscription Right Certificate and related documents concerning the Offering.
The Offering will expire at 5:00 p.m., California time, on ____________, 1997
unless extended by the Company to a time not later than 5:00 p.m., California
time, on ____________, 1997. Rights not exercised or sold by such time will
expire and become worthless. Any questions or requests for assistance should be
directed to KISSEL-BLAKE, INC., the Information Agent for the Offering, at (800)
554-7733 (toll free) or (212) 344-6733 (call collect).
<PAGE>
The Offering is being made only pursuant to the Prospectus which sets
forth detailed information about the Company, National Mercantile Bank and the
Offering. Please read these enclosed materials carefully.
Sincerely,
- ---------------------------- ----------------------------
Howard P. Ladd Scott A. Montgomery
CHAIRMAN OF THE BOARD, PRESIDENT EXECUTIVE VICE PRESIDENT
and CHIEF EXECUTIVE OFFICER and
CHIEF ADMINISTRATIVE OFFICER
<PAGE>
EXHIBIT 99.3
____________ Shares
NATIONAL MERCANTILE BANCORP
Preferred Stock ($10.00 stated value)
Initially Offered Pursuant to Rights
Distributed to Shareholders
TO SECURITIES DEALERS, COMMERCIAL BANKS,
BROKERS, TRUST COMPANIES AND OTHER NOMINEES:
Enclosed are a Prospectus, dated __________, _____ (the "Prospectus"),
and Instructions as to Use of Subscription Right Certificates (the
"Instructions"), relating to the offering of up to 800,000 shares of Preferred
Stock, $10.00 stated value (the "Preferred Stock"), of National Mercantile
Bancorp (the "Company"), at a subscription price of $1.10 per share in cash.
Nontransferable subscription rights ("Rights") are being distributed
to holders of record of shares of Common Stock as of the close of business on
____________, 1997 (the "Record Date") in connection with 550,000 shares of
preferred stock. The Rights are described in the Prospectus and evidenced by
a Subscription Right Certificate (a "Subscription Right Certificate")
registered in your name or the name of your nominee.
Each beneficial owner of Common Stock registered in your name or the
name of your nominee is entitled to one Right for each share of Common Stock so
owned by such beneficial owner on the Record Date. In lieu of fractional shares,
the aggregate number of Rights issued in respect of each beneficial owner will
be rounded up to the next whole number, upon your timely request on the enclosed
Certificate and Request for Additional Rights.
We are asking you to contract your clients for whom you hold shares of
Common Stock registered in your name, or in the name of your nominee to obtain
instructions with respect to Rights. You will be reimbursed for customary
mailing and handling expenses incurred by you in forwarding any of the enclosed
materials to your clients. The Company will pay all transfer taxes, if any,
applicable to the sale of shares of Common Stock to a Rights Holder upon
exercise of Rights, subject to certain exceptions described in the Prospectus
and the Subscription Right Certificate.
Enclosed are copies of the following documents:
1. The Prospectus;
2. The Instructions;
3. A form of letter which may be sent to your clients for whose
accounts you hold shares of Common Stock registered in your name or the name of
your nominee, with space provided for obtaining such clients' instructions with
regard to the Rights;
<PAGE>
4. Certification and Request for Additional Rights;
5. A Nominee Holder Oversubscription Certification; and
6. A Notice of Guaranteed Delivery.
Your prompt action is requested. The Rights will expire at 5:00 p.m.,
California time, on _____________, ______, unless extended by the Company to a
time not later than 5:00 p.m. California time, on ___________, ______ (in either
case, the "Expiration Time").
TO EXERCISE RIGHTS, PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION RIGHT
CERTIFICATE(S) (UNLESS THE GUARANTEED DELIVERY PROCEDURES ARE COMPLIED WITH) AND
PAYMENT IN FULL FOR ALL RIGHTS EXERCISED MUST BE DELIVERED TO THE SUBSCRIPTION
AGENT AS INDICATED IN THE PROSPECTUS PRIOR TO THE EXPIRATION TIME. EXERCISE OF
OVERSUBSCRIPTION PRIVILEGES (AS DEFINED IN THE PROSPECTUS) MUST BE ACCOMPANIED
BY A COMPLETE NOMINEE HOLDER OVERSUBSCRIPTION CERTIFICATION.
Additional copies of the enclosed materials may be obtained from
Kissel Blake Inc., the Information Agent, by calling (800) 554-7733. Rights
holders requesting assistance or information may call (800) 554-7733 (toll free)
or (212) 344-6733 (collect).
Very truly yours,
NATIONAL MERCANTILE BANCORP
By: _______________________
Howard P. Ladd
PRESIDENT
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON
AS AN AGENT OF THE COMPANY, THE SUBSCRIPTION AGENT OR ANY OTHER PERSON MAKING OR
DEEMED TO BE MAKING OFFERS OF THE COMMON STOCK, OR AUTHORIZED YOU OR ANY OTHER
PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE
OFFERING, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE
SUBSCRIPTION DOCUMENTS.
<PAGE>
EXHIBIT 99.4
NATIONAL MERCANTILE BANCORP
NOMINEE HOLDER OVERSUBSCRIPTION CERTIFICATION
The undersigned, a bank, broker or other nominee holder of Rights
("Rights") to purchase shares of Preferred Stock, $10.00 stated value
("Preferred Stock"), of National Mercantile Bancorp (the "Company") pursuant
to the Rights offering (the "Offering") described and provided for in the
Company's Prospectus dated _________________, 1997 (the "Prospectus"), hereby
certifies to the Company and to U.S. Stock Transfer Corporation, as
Subscription Agent for such Offering, that for each numbered line filled in
below the undersigned has exercised, on behalf of the beneficial owner
thereof (which may be the undersigned), the number of Rights specified on
such line pursuant to the Basic Subscription Privilege (as defined in the
Prospectus) and such beneficial owner wishes to subscribe for the purchase of
additional shares of Preferred Stock pursuant to the Oversubscription
Privilege (as defined in the Prospectus), in the amount set forth in the
second column of such line:
Number of Rights Exercised Number of Shares Subscribed for
Pursuant to Basic Pursuant to
----------------- -----------
Subscription Privilege Oversubscription Privilege
---------------------- --------------------------
1.
------------------------------------ -------------------------------------
2.
------------------------------------ -------------------------------------
3.
------------------------------------ -------------------------------------
4.
------------------------------------ -------------------------------------
5.
------------------------------------ -------------------------------------
6.
------------------------------------ -------------------------------------
7.
------------------------------------ -------------------------------------
8.
------------------------------------ -------------------------------------
9.
------------------------------------ -------------------------------------
10
------------------------------------ -------------------------------------
Provide the following information, if applicable
- ----------------------------------
Name of Nominee Holder
---------------------------------------
Depository Trust Company ("DTC")
Participant Number
By:________________________________
Name:
Title:
---------------------------------------
Dated:_________________________, 19__ DTC Basic Subscription
Confirmation Number(s)
1
<PAGE>
EXHIBIT 99.5
550,000 Shares
NATIONAL MERCANTILE BANCORP
Preferred Stock ($10.00 stated value)
Initially Offered Pursuant to Rights
Distributed to Shareholders
TO OUR CLIENTS:
Enclosed for your consideration are a Prospectus, dated
_________________, 1997 (the "Prospectus"), and the Instructions as to Use of
Subscription Right Certificates (the "Instructions") relating to the offering
(the "Offering") of up to 800,000 shares (the "Underlying Perferred Shares")
of Preferred Stock, $10.00 stated value (the "Preferred Stock"), of National
Mercantile Bancorp (the "Company"), at a price of $1.10 per share (the
"Subscription Price"). Nontransferable subscription rights ("Rights") are being
distributed to holders of record of Common Stock, at the close of business on
______________, 1997 (the "Record Date")in connection with 550,000 shares of
Preferred Stock.
As described in the accompanying Prospectus, you will receive one
Right for each share of Common Stock carried by us in your account as of the
Record Date. Each Right will entitle you to subscribe for and purchase from the
Company 1.624 shares of Preferred Stock (the "Basic Subscription Privilege") at
the Subscription Price, subject to proration and reduction as described in the
Prospectus. If you exercise the Basic Subscription Privilege in full you will
also have the right (the "Oversubscription Privilege") to subscribe, at the
Subscription Price, for 0.376 shares of Preferred Stock (for each Right held)
available after satisfaction of all subscriptions pursuant to the Basic
Subscription Privilege and the purchase by the Private Purchasers (as defined in
the Prospectus), (the "Excess Underlying Perferred Shares"), subject to
proration and reduction, all as more fully described in the Prospectus. If the
number of Excess Underlying Perferred Shares is not sufficient to satisfy all
subscriptions pursuant to the Oversubscription Privilege, the Excess
Underlying Perferred Shares will be allocated pro rata (subject to the
elimination of fractional shares) among those Rights Holders exercising the
Oversubscription Privilege in proportion to the respective number of shares
each such Rights Holder subscribes for pursuant to the Basic Subscription
Privilege; provided, however, that if such pro rata allocation results in any
Rights Holder being allocated a greater number of Excess Underlying Perferred
Shares than such Holder subscribed for pursuant to the exercise of the
Oversubscription Privilege, then each Rights Holder will be allocated only
that number of Excess Underlying Perferred Shares for which such holder
oversubscribed, and the remaining Excess Underlying Perferred Shares will be
allocated among all other Rights Holders exercising the Oversubscription
Privilege on the same pro rata basis as described above.
The materials enclosed are being forwarded to you as the beneficial
owner of shares of Common Stock carried by us in your account but not registered
in your name. Exercises and sales of Rights may only be made by us as the
registered holder of Rights and pursuant to your
1
<PAGE>
instructions. Accordingly, we request instructions as to whether you wish us to
elect to subscribe for any Underlying Perferred Shares to which you are
entitled pursuant to the terms and subject to the conditions set forth in the
enclosed Prospectus and Instructions.
Your instructions to us should be forwarded as promptly as possible to
permit us to exercise Rights on your behalf in accordance with the provisions of
the Offering. The Offering will expire at 5:00 p.m., California time on
____________, 1997 unless extended by the Company, to a date not later than 5:00
p.m., California time on _______________, 1997 (in either case, the "Expiration
Time"). Once a Rights Holder has properly exercised the Basic Subscription
Privilege or the Oversubscription Privilege, such exercise may not be revoked.
If you wish to have us, on your behalf, exercise Rights to purchase
any Underlying Perferred Shares to which you are entitled, please so instruct
us by completing, executing and returning to us the instruction form on the
reverse side of this letter.
IF WE DO NOT RECEIVE COMPLETE WRITTEN INSTRUCTIONS IN ACCORDANCE WITH
THE PROCEDURES OUTLINED IN THE PROSPECTUS, WE WILL NOT EXERCISE YOUR RIGHTS, AND
YOUR RIGHTS WILL EXPIRE VALUELESS.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING
SHOULD BE DIRECTED TO KISSEL-BLAKE, INC., THE INFORMATION AGENT, AT (800)
554-7733 OR (212) 344-6733 (collect).
Very truly yours,
2
<PAGE>
INSTRUCTIONS TO RECORD DATE HOLDER
The undersigned acknowledge(s) receipt of your letter and the enclosed
materials referred to therein relating to the offering of shares of Preferred
Stock.
This will instruct you whether to exercise Rights to purchase
Preferred Stock distributed with respect to the Common Stock held by you for the
account of the undersigned, pursuant to the terms and subject to the conditions
set forth in the Prospectus and the related Instructions as to Use of
Subscription Right Certificates.
1. [_] Please DO NOT EXERCISE RIGHTS for shares of Preferred Stock.
2. [_] Please EXERCISE RIGHTS for shares of Preferred Stock as set
forth below:
Basic Subscription Right:_______________ X $1.10 = $_____(a)
(no. of shares)
Oversubscription Right: ________________ X $1.10 = $_____(b)
(no. of shares)
Total Payment Required = $_____(c)
[_] Payment in the following amount is enclosed: $__________(d)
[_] Please deduct payment from the following account maintained by
you as follows:
--------------------- ---------------------------
Type of Account Account No.
Amount to be deducted: $________________(e)
3
<PAGE>
================================================================================
- ------------------------------------
- ------------------------------------
- ------------------------------------
Signature(s)
Please type or print name(s) below Date:__________________________
- ------------------------------------
- ------------------------------------
================================================================================
4
<PAGE>
EXHIBIT 99.6
SPECIAL NOTICE TO HOLDERS OF
NATIONAL MERCANTILE BANCORP
Preferred Stock ($10.00 Stated Value)
WHOSE ADDRESSES ARE OUTSIDE
THE UNITED STATES AND CANADA
Dear Shareholder(s):
Enclosed you will find materials relating to the rights offering (the
"Offering") of National Mercantile Bancorp (the "Company"). A Subscription Right
Certificate representing Rights to subscribe for shares of the Company's
Preferred Stock at $1.10 per share is not included in this mailing, but instead
is being held on your behalf by the Subscription Agent, U.S. Transfer
Corporation. If you wish to exercise any or all of these Rights, you must so
instruct the Subscription Agent in the manner described in the accompanying
Prospectus and Instructions as to Use of Subscription Right Certificates by 5:00
p.m., California time, on _______________, 1997.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING SHOULD BE
DIRECTED TO KISSEL-BLAKE INC., THE INFORMATION AGENT, AT (800) 554-7733 OR (212)
344-6733(CALL COLLECT).
1
<PAGE>
EXHIBIT 99.7
NOTICE OF GUARANTEED DELIVERY
for
SUBSCRIPTION RIGHT CERTIFICATES
issued by
NATIONAL MERCANTILE BANCORP
This form, or one substantially equivalent hereto, must be used to
exercise Rights pursuant to the Rights offering described in the Prospectus
dated __________, 1997 (the "Prospectus") of National Mercantile Bancorp, a
California corporation (the "Company"), if a holder of Rights cannot deliver the
Subscription Right Certificate(s) evidencing Rights (the "Subscription Right
Certificate(s)"), to the Subscription Agent listed below (the "Subscription
Agent") at or prior to 5:00 p.m. California time on __________, 1997, unless
extended by the Company, to a time not later than 5:00 p.m., California time, on
__________, 1997 (in either case, the "Expiration Time"). This form must be
delivered by hand or sent by facsimile transmission, overnight courier or mail
to the Subscription Agent and must be received by the Subscription Agent at or
prior to the Expiration Time. Properly completed and executed Subscription Right
Certificate(s) relating to this Notice of Guaranteed Delivery must be received
by the Subscription Agent within two (2) business days following the date of
this Notice of Guaranteed Delivery. See "The Rights Offering -- Exercise of
Rights" in the Prospectus. Payment of the Subscription Price of $1.10 per
share for each Underlying Perferred Share subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege must be received by
the Subscription Agent in the manner specified in the Instructions as to Use
of Subscription Right Certificates at or prior to the Expiration Time even if
the Subscription Right Certificate evidencing such Right is being delivered
pursuant to the procedure for guaranteed delivery thereof.
1
<PAGE>
THE SUBSCRIPTION AGENT IS:
U.S. STOCK TRANSFER CORPORATION
General Information:
(800) 835-8775
<TABLE>
<S> <C> <C>
By Mail: Facsimile Transmission By Hand or
U.S. Stock Transfer Corporation Copy numbers: Overnight Courier:
1745 Gardena Avenue, Suite 200 (818) 502-0674 U.S. Stock Transfer Corporation
Glendale, CA 91204 1745 Gardena Avenue, Suite 200
Glendale, CA 91204
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN THAT SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby represents that he or she is the holder of
Subscription Right Certificate(s) representing ____ Rights and that such
Subscription Right Certificate(s) cannot be delivered to the Subscription Agent
at or before 5:00 p.m., California time on __________, 1997, or such later time
to which the Rights offering has been extended by the Company to a time not
later than 5:00 p.m. California time, on __________, 1997 (in either case, the
"Expiration Time"). Upon the terms and subject to the conditions set forth in
the Prospectus, receipt of which is hereby acknowledged, the undersigned hereby
elects to exercise (i) the Basic Subscription Privilege to subscribe for one
share of Preferred Stock per Right with respect to _____ Rights represented by
such Subscription Right Certificate and (ii) the Oversubscription Privilege, to
the extent that Excess Underlying Shares (as defined in the Prospectus) are
available therefor, for an aggregate of up to ____ Excess Underlying Shares. The
undersigned understands that payment of the Subscription Price of $1.10 per
share for each share of Preferred Stock subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege must be received by
the Subscription Agent at or before the Expiration Time, and represents that
such payment, in the aggregate amount of $________, either (check appropriate
box(es)):
[_] is being delivered to the Subscription Agent; or [_] has been
delivered separately to the Subscription Agent; and is being or
was delivered in the manner set forth below (check appropriate box
and complete information relating thereto):
[_] Wire transfer of funds directed to U.S. Stock Transfer Corporation
Name of transferor institution
------------------------------------------------------------------
Date of transfer
------------------------------------------------------------------
Federal Reference number (if available)
------------------------------------------------------------------
[_] Uncertified check payable to U.S. Stock Transfer Corporation
(Payment by uncertified check will not be deemed to have been
received by the Subscription Agent until such check has cleared.
Rights holders paying by such means are urged to make payment
sufficiently in advance of the Expiration Time to ensure that such
payment clears by such date.)
[_] Certified check payable to U.S. Stock Transfer Corporation
[_] Bank draft payable to U.S. Stock Transfer Corporation
[_] Money order payable to U.S. Stock Transfer Corporation
3
<PAGE>
Signature(s) Address
---------------------------- -------------------------------
, 1997
- ---------------------------------------- ---------------------------
Name(s)
--------------------------------- --------------------------------------
Please Type or Print
--------------------------------------
- ---------------------------------------- (Include Zip Code)
- ---------------------------------------- --------------------------------------
(If signature is by a trustee(s), Area Code and Tel. No.(s)
executor(s), administrator(s), -------------
guardian(s), attorney(s)-in-fact,
agent(s), officer(s), of a corporation Subscription Right Certificate
or another acting in a fiduciary or No(s). (if available)
representative capacity, such capacity -----------------
must be clearly indicated above.)
- --------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SUBSCRIPTION RIGHT CERTIFICATE SIGNATURE GUARANTEE)
The Undersigned, a member firm or a registered national securities exchange or
of the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States, guarantees
that the undersigned will deliver to the Subscription Agent the Subscription
Right Certificate(s) representing the Rights being exercised hereby, with any
required signature guarantees and any other required documents, all within 48
hours after the date hereof.
Dated: , 1997
- ------------------------------------ ---------------------------
(Name of Firm)
Address:
- ------------------------------------ ---------------------------------
(Authorized Signature)
- ------------------------------------ -----------------------------------------
(Name) (Include Zip Code)
- ------------------------------------ -----------------------------------------
(Title) (Area Code and Telephone Number)
The institution which completes this form must communicate the guarantee to the
Subscription Agent and must deliver the Subscription Right Certificate(s) to the
Subscription Agent within the time period shown herein. Failure to do so could
result in a financial loss to such institution.
- --------------------------------------------------------------------------------
4
<PAGE>
EXHIBIT 99.8
NATIONAL MERCANTILE BANCORP
DTC PARTICIPANT OVERSUBSCRIPTION EXERCISE FORM
This form is to be used only by the Depository Trust Company ("DTC")
participants to exercise the Oversubscription Privilege in respect of Rights
with respect to which the Basic Subscription Privilege was exercised and
delivered through the facilities of DTC. All other exercises of Oversubscription
Privileges must be effected by the delivery of Subscription Right
Certificate(s).
The terms and conditions of the Offering are set forth in the
Prospectus dated _________________ (the "Prospectus") of National Mercantile
Bancorp (the "Company") and are available upon request from Kissel-Blake Inc.,
the Information Agent, and U.S. Stock Transfer Corporation, the Subscription
Agent. Terms used but not defined herein have the meaning ascribed to them in
the Prospectus.
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY
5:00 P.M., CALIFORNIA TIME, ON ________________, UNLESS EXTENDED BY THE COMPANY
TO A TIME NOT LATER THAN 5:00 P.M., CALIFORNIA TIME, ON ________________ (IN
EITHER CASE, THE "EXPIRATION TIME").
1. The undersigned hereby certifies to the Company and U.S. Stock
Transfer Corporation, as the Subscription Agent, that it is a participant in DTC
and that it has either (a) exercised the Basic Subscription Privilege in respect
of Rights and delivered such exercised Rights to the Subscription Agent by means
of transfer to the DTC account of the Subscription Agent designated in the
Prospectus or (b) delivered to the Subscription Agent a Notice of Guaranteed
Delivery in respect of the exercise of the Basic Subscription Privilege and will
deliver the Rights called for in such Notice of Guaranteed Delivery to the
Subscription Agent by means of transfer to such DTC account of the Subscription
Agent.
2. The undersigned hereby exercises the Oversubscription Privilege to
purchase, to the extent available, shares of Preferred Stock -- and certifies to
the Company and the Subscription Agent that such Oversubscription Privilege is
being exercised for the account or accounts of persons (which may include the
undersigned) on whose behalf the Basic Subscription Privilege has been exercised
in full. A true and correct Nominee Holder Oversubscription Certification is
attached as Exhibit A hereto.
3. The undersigned understands that payment of the Subscription Price
of $1.10 per Underlying Share subscribed for pursuant to the Oversubscription
Privilege must be received by the Subscription Agent before the Expiration Time
and represents that such payment, in the aggregate amount of $____________,
either (check appropriate box):
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<PAGE>
[_] has been or is being delivered to the Subscription Agent pursuant
to the Notice of Guaranteed Delivery referred to above
or
[_] is being delivered to the Subscription Agent herewith
or
[_] has been delivered separately to the Subscription Agent;
and, in the case of funds not delivered pursuant to a Notice of Guaranteed
Delivery, is or was delivered in the manner set forth below (check appropriate
box and complete information relating thereto):
[_] Wire transfer of funds directed to U.S. Stock Transfer
Corporation
Name of transferor institution
---------------------------------------
Date of transfer
-----------------------------------------------------
Federal Reference number
---------------------------------------------
[_] Uncertified check payable to U.S. Stock Transfer Corporation
(Payment by uncertified check will not be deemed to have been received by the
Subscription Agent until such check has cleared. Rights holders paying by such
means are urged to make payment sufficiently in advance of the Expiration Time
to ensure that such payment clears by such date.)
[_] Certified check payable to U.S. Stock Transfer Corporation
[_] Bank draft payable to U.S. Stock Transfer Corporation
[_] Money order payable to U.S. Stock Transfer Corporation
2
<PAGE>
================================================================================
DATE AND SIGN HERE:
By:______________________________ _________________________________
Name: DTC Basic Subscription
Title: Confirmation Number
Dated:_____________________, 19__ _________________________________
DTC Participant Number
_________________________________
Name of DTC Participant
================================================================================
PARTICIPANTS EXERCISING THE OVERSUBSCRIPTION PRIVILEGE PURSUANT HERETO MUST ALSO
SUBMIT THE NOMINEE HOLDER OVERSUBSCRIPTION CERTIFICATION ATTACHED HERETO AS
EXHIBIT A TO THE SUBSCRIPTION AGENT.
3
<PAGE>
EXHIBIT A
NATIONAL MERCANTILE BANCORP
NOMINEE HOLDER OVERSUBSCRIPTION CERTIFICATION
The undersigned, a bank, broker or other nominee holder of Rights
("Rights") to purchase shares of Preferred Stock, $10.00 stated value
("Preferred Stock"), of National Mercantile Bancorp (the "Company") pursuant to
the Rights offering (the "Offering") described and provided for in the Company's
Prospectus dated ___________ (the "Prospectus"), hereby certifies to the Company
and to U.S. Stock Transfer Corporation, as Subscription Agent for such Offering,
that for each numbered line filled in below the undersigned has exercised, on
behalf of the beneficial owner thereof (which may be the undersigned), the
number of Rights specified on such line pursuant to the Basic Subscription
Privilege (as defined in the Prospectus) and such beneficial owner wishes to
subscribe for the purchase of additional shares of Common Stock pursuant to the
Oversubscription Privilege (as defined in the Prospectus), in the amount set
forth in the second column of such line:
Number of Rights Exercised Number of Shares Subscribed for
Pursuant to Pursuant to
----------- -----------
Basic Subscription Privilege Oversubscription Privilege
---------------------------- --------------------------
1.
----------------------------------- -------------------------------------
2.
----------------------------------- -------------------------------------
3.
----------------------------------- -------------------------------------
4.
----------------------------------- -------------------------------------
5.
----------------------------------- -------------------------------------
6.
----------------------------------- -------------------------------------
7.
----------------------------------- -------------------------------------
8.
----------------------------------- -------------------------------------
9.
----------------------------------- -------------------------------------
10.
----------------------------------- -------------------------------------
Provide the following information, if applicable
- -----------------------------------
Name of Nominee Holder
------------------------------------------
Depository Trust Company ("DTC")
Participant Number
By:
--------------------------------
Name:
Title:
------------------------------------------
Dated: , 19 DTC Basic Subscription Confirmation
-------------------- -- Number(s)
4
<PAGE>
EXHIBIT 99.9
[LETTERHEAD OF NATIONAL MERCANTILE BANCORP]
March 11, 1997
Kissel-Blake Inc.
110 Wall Street, 11th Floor
New York, NY 10005
Gentlemen:
National Mercantile Bancorp, a California corporation, proposes to offer
for purchase up to $6.5 million of its 6.5% noncumulative convertible preferred
stock, $10.00 stated value (the "Shares") in connection with a rights offering
(the "Offering") to its stockholders and certain standby purchasers and subject
to the conditions set forth in the registration statement filed on Form S-2 (the
"Registration Statement"), with the Securities and Exchange Commission on
February 10, 1997, as such registration statement may be amended from time to
time.
We hereby confirm your appointment as our Information Agent in connection
with the Offering, and by your signature below you hereby confirm your
acceptance of such appointment. You hereby further agree that your authority
and action as Information Agent shall be governed by the terms of this
Agreement, as follows.
1. Duties of Information Agent: It is understood and agreed that your
---------------------------
primary duties as our Information Agent will include (a) advice to and
confidential consultation with us and our authorized representative in
connection with the Offering and our related communications; (b) disseminating
printed materials relating to the Offering (including all amendments and
supplements thereto) to brokers, securities dealers, banks, trust companies,
nominees and any stockholder of the Company who may request the same; (c)
responding promptly and accurately to every party who contacts you as our
Information Agent requesting information pertaining to the Offering; and (d)
initiating calls to stockholders concerning the Offering (should we so
elect). In no event will you make any premature disclosure concerning the
Offering or any recommendation, either directly or indirectly, regarding the
advisability of exercising the Rights pursuant to the Offering. If any such
advice is requested of you, you shall respond that you are not authorized to
give such advice and shall recommend that the person requesting such advice
consult his or her own investment advisor or broker.
<PAGE>
Kissel-Blake Inc.
March 4, 1997
Page Two
2. Compensation: In consideration of the services to be performed by you
------------
in connection with the Offering, we hereby agree to pay to you a fee of U.S.
$8,000 plus your ordinary and customary charges for reasonable disbursements and
expenses incurred by you in connection with the Offering. It is further
understood and agreed that one half of your fee is payable herewith and the
balance of your fee plus your compensation for disbursements and expenses
incurred by you on our behalf will be paid upon receipt by us of your final
statement, after completion, expiration or termination of the Offering,
provided, however, that should the Offering be extended for more than forty-five
(45) days after the expiration date of the Offering as set forth in the Offering
materials mailed to the Company's stockholders and standby purchasers, you
reserve the right to charge an additional fee of not in excess of $4,000.00. We
understand that disbursements and expenses include, without limitation (a) all
postage, air freight, trucking and other delivery costs relating to the
forwarding of our printed materials to brokerage firms, banks and any
stockholder of the Company who may request them; and (b) $2.50 per collect or
toll free telephone call accepted (plus telephone line charges) from
stockholders seeking assistance or information. In the event we opt to have you
do so, we understand that the cost of initiating calls to stockholders of record
at their homes or places of business will be at the rate of $3.75 per call (plus
telephone look up and line charges).
We acknowledge that our obligations under this Section 2 are not
conditioned upon the successful consummation of the Offering or any number of
Shares being subscribed to pursuant to the Offering and that in the event of our
failure to make prompt payment of your invoices for any amounts which may become
due to you under this Agreement, you shall be entitled to recover interest
compounded at 1-1/2% percent per month and reasonable costs and expenses of
collection (including reasonable fees and expenses of counsel) on any overdue
amounts from ourselves or any affiliate which may guarantee our payment and
performance at your further request.
3. Indemnity and Failure: (a) We hereby covenant and agree to hold you
---------------------
harmless and to indemnify you against any loss, claim, damage, liability or
expense (including reasonable fees and expenses of your legal counsel) arising
out of or resulting from the performance of your duties under this Agreement;
except any such loss, claim, damage, liability or expense arising out of or
resulting from your gross negligence or material breach of this Agreement.
(b) It is stipulated and agreed that the foregoing indemnification is
subject to the further condition that in no case shall we be liable with
respect to any claim against you unless we shall be notified by registered or
certified letter or by cable,
<PAGE>
Kissel-Blake Inc.
March 4, 1997
Page Three
telex, or telecopier message confirmed by letter, of the written assertion of a
claim against you or of your involvement in any action or proceeding, promptly
after you shall have been served with a written notice of claim, summons or
other first legal process giving information as to the nature and basis of the
claim. It is further understood and agreed that upon receipt of such notice, we
shall be entitled to participate at our own expense in the defense of any suit
brought to enforce any such claim, and, if we so elect, we shall assume your
defense of any such suit. In the event that we assume the defense of any such
suit, we shall not be liable for the fees and expenses of any additional counsel
thereafter retained by you, so long as we shall retain counsel reasonably
satisfactory to you to defend such suit. In addition, you agree not to settle
any litigation in connection with any claim of liability with respect to which
you may seek indemnification from us without our prior written consent.
4. Assignment: This Agreement and the appointment as Information Agent
----------
hereunder shall inure to the benefit of, and the obligations created thereby
shall be binding upon the successors and assigns of the parties hereto, except
that if we assign this Agreement, we shall remain liable to you for the prompt
and full payment of your fees and expenses, and you may neither assign your
rights nor delegate your duties hereunder without our prior written consent.
5. Interpretation:
--------------
(a) This Agreement shall be construed and enforced in accordance with the
laws of the State of New York.
(b) If any provision of this Agreement shall be held illegal, invalid or
unenforceable by any court, this Agreement shall be construed and
enforced as if such provision had not been contained herein and shall
be deemed an agreement between us to the full extent permitted by
applicable law.
(c) Section headings have been inserted for convenience of reference only,
are not part of this Agreement and shall not be used in any way in the
interpretation of any of the provisions hereof.
<PAGE>
Kissel-Blake Inc.
March 4, 1997
Page Four
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy of the undersigned,
whereupon this Agreement and the terms and conditions herein provided shall
constitute a binding agreement between us.
Sincerely,
/s/ Joseph W. Kiley III /s/ Scott A. Montgomery
- -------------------------- --------------------------
Joseph W. Kiley III Scott A. Montgomery
Executive Vice President & Executive Vice President &
Chief Financial Officer Chief Administrative Officer
Accepted as of this 17th
------
day of March, 1997
Kissel-Blake Inc.
by
/s/ Sean P. O'Hara /s/ Christopher G. Dowd
- -------------------------- --------------------------
(Witness) Christopher G. Dowd
Director
Sean P. O'Hara
- ---------------------------
(Type Full Name of Witness)
<PAGE>
EXHIBIT 99.10
SUBSCRIPTION AGENT AGREEMENT
This SUBSCRIPTION AGENT AGREEMENT (the "Agreement") is made and
entered into as of ___________, 1997, by and between NATIONAL MERCANTILE
BANCORP, a California corporation (the "Company"), and U.S. STOCK TRANSFER
CORPORATION, a California corporation (the "Subscription Agent"), with reference
to the following:
A. The Company has filed with the Securities and Exchange Commission
(the "Commission"), under the Securities Act of 1933, as amended, and the rules
and regulations of the Commission thereunder (collectively the "1933 Act"), a
Registration Statement on Form S-2, No. 333-21455 (in the form in which it first
becomes effective under the 1933 Act, and as it may thereafter be amended, the
"Registration Statement"), relating to the proposed distribution by the Company
of nontransferable subscription rights (the "Rights") to holders of record
("Record Date Holders") of shares of common stock, no par value, of the Company
(the "Common Stock") as of the close of business on March 31, 1997 (the "Record
Date"), at a rate of one Right for each share of Common Stock held on the Record
Date, and the proposed sale of up to 650,000 newly-issued shares (the
"Underlying Shares") of noncumulative convertible preferred stock (the
"Preferred Stock"), $10.00 stated value, (collectively, the "Offering").
B. Holders of Rights ("Rights Holders") will be entitled to
subscribe to purchase 1.624 Underlying Shares for each Right (the "Basic
Subscription Privilege") at a per share price (the "Subscription Price"), which
price will be set forth in the prospectus which forms a part of the Registration
Statement (in the form in which the Registration Statement first becomes
effective, and as thereafter amended or supplemented, the "Prospectus") by post-
effective amendment to the Registration Statement.
C. Rights Holders who exercise the Basic Subscription Privilege in
full also will be entitled to subscribe at the Subscription Price (the
"Oversubscription Privilege") to purchase additional Underlying Shares, if any,
remaining after satisfaction of all subscriptions pursuant to the Basic
Subscription Privilege and the sale of shares of Preferred Stock to the Private
Purchasers (as described in the Prospectus) (the "Excess Underlying Shares").
D. The Company wishes the Subscription Agent to act on its behalf in
connection with the Offering as set forth herein, and the Subscription Agent is
willing so to act.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. APPOINTMENT OF SUBSCRIPTION AGENT. The Company hereby
appoints the Subscription Agent to act as agent in accordance with the
instructions set forth in this Agreement, and the Subscription Agent hereby
accepts such appointment and shall take such
1
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actions as may be necessary to effectuate the terms of this Agreement. The
Company may from time to time appoint such co-agents as it may deem necessary or
desirable.
SECTION 2. DISTRIBUTION OF RIGHTS. The Company has authorized the
distribution of the Rights and, following the effectiveness of the Registration
Statement and the Record Date, will issue such Rights to Record Date Holders as
contemplated by the Registration Statement and the Prospectus. The Company will
notify promptly the Subscription Agent upon the effectiveness of the
Registration Statement. The Company will cause U.S. Stock Transfer Corporation,
as transfer agent and registrar for the Common Stock (the "Transfer Agent"), to
provide such assistance as the Company may require to effect the distribution of
the Rights to Record Date Holders, including assistance in determining the
number of Rights to be distributed to each such Record Date Holder (including
Rights distributed to Record Date Holders on behalf of beneficial owners holding
through such Record Date Holders pursuant to the provisions for rounding up
fractional Rights set forth in Section 5(a), below). The Subscription Agent
will provide assistance in distributing the Prospectus, the Subscription Right
Certificates evidencing the Rights (the "Subscription Right Certificates"), the
Instructions As to Use of Subscription Right Certificates (the "Instructions")
and all other ancillary documents relating to the Offering to Record Date
Holders. The Subscription Right Certificates and the Instructions will be
substantially in the forms attached hereto as Exhibits A and B, respectively.
SECTION 3. OVERSUBSCRIPTION PRIVILEGE. If there are insufficient
Excess Underlying Shares to satisfy all exercised Oversubscription Privileges,
Excess Underlying Shares will be allocated among Rights Holders, including
Qualified Financial Institutions (as defined below) that hold Rights for
beneficial owners, who exercise the Oversubscription Privilege. Subject to the
allocation and possible deduction described in Section 7(i) below, Excess
Underlying Shares will be allocated pro rata among such Rights Holders based
upon the number of Underlying Shares subscribed for pursuant to each such Rights
Holder's Basic Subscription Privilege relative to the aggregate Underlying
Shares subscribed for pursuant to the Basic Subscription Privilege by all such
Rights Holders. To the extent that such pro rata allocation results in any
Rights Holder being allocated more Excess Underlying Shares than such Rights
Holder subscribed for pursuant to the Oversubscription Privilege, then such
Rights Holder will be allocated only the number of Excess Underlying Shares
subscribed for, and the remaining Excess Underlying Shares will be similarly and
successively reallocated among all other Rights Holders exercising the
Oversubscription Privilege. It will be the responsibility of Rights Holders to
allocate prorated Excess Underlying Shares among any beneficial owners for which
such Rights Holders are acting.
SECTION 4. SIGNATURE AND REGISTRATION.
(a) The Subscription Right Certificates will be executed on behalf of
the Company by its President, Chairman of the Board and Chief Executive Officer
and by its Secretary, an Assistant Secretary or Chief Financial Officer by
facsimile signature. Any Subscription Right Certificate may be signed on behalf
of the Company by any person who, at the actual date of execution of such
facsimile signature, is a proper officer of the Company to sign
2
<PAGE>
such Subscription Right Certificate, even if at the date of the execution of
this Agreement or the date of actual issuance of such certificate such person is
not such an officer.
(b) The Subscription Agent will keep or cause to be kept, at its
principal offices in the State of California, books for registration and
transfer of the Rights issued hereunder. Such books will show the names and
addresses of the respective Rights Holders and the number of Rights evidenced by
each outstanding Subscription Right Certificate.
SECTION 5. EXCHANGE OF SUBSCRIPTION RIGHT CERTIFICATES; MUTILATED,
DESTROYED, LOST OR STOLEN SUBSCRIPTION RIGHT CERTIFICATES.
(a) Subject to the provisions of Section 9 hereof, any Subscription
Right Certificate, may be exchanged for any number of Subscription Right
Certificates or for a single Subscription Right Certificate of different
denominations; provided, however, that the aggregate number of Rights evidenced
by the Subscription Right Certificate or Certificates so issued does not exceed
the aggregate number of Rights evidenced by the Subscription Right Certificate
or Certificates surrendered in exchange therefor. No Subscription Right
Certificates evidencing fractional Rights will be issued upon exchange of
other Subscription Right Certificates, and any instructions to exchange
Subscription Right Certificates that would result in the issuance of
Subscription Right Certificates evidencing fractional Rights are to be rejected.
(b) Any Rights Holder desiring to exchange any Subscription Right
Certificate or Certificates must make such requests in writing to the
Subscription Agent and surrender the Subscription Right Certificate or
Certificates to be exchanged to the Subscription Agent. Thereupon the
Subscription Agent will deliver to the person entitled thereto a Subscription
Right Certificate or Certificates, as the case may be, as so requested. In all
cases of transfer by an attorney-in-fact, the original power of attorney, duly
approved, or a copy thereof, duly certified, must be deposited and remain with
the Subscription Agent. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority satisfactory to the Subscription Agent must be produced and may be
required to be deposited and to remain with the Subscription Agent in its
discretion. The Company may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any exchange
of Subscription Right Certificates.
3
<PAGE>
(c) Upon receipt by the Company and the Subscription Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Subscription Right Certificate, and, in case of loss, theft or destruction, of
indemnity and/or security satisfactory to them, in their sole discretion, and
reimbursement to the Company and the Subscription Agent of all reasonable
expenses incidental thereto, and upon surrender and cancellation of the
Subscription Right Certificate, if mutilated, the Subscription Agent will make
and deliver a new Subscription Right Certificate of like tenor to the registered
Rights Holder in lieu of the Subscription Right Certificate so lost, stolen,
destroyed or mutilated. If required by the Company or the Subscription Agent,
an indemnity bond must be sufficient in the judgment of each party to protect
the Company, the Subscription Agent or any agent thereof from any loss which any
of them may suffer if a lost, stolen, destroyed or mutilated Subscription Right
Certificate is replaced.
SECTION 6. SUBSEQUENT ISSUE OF SUBSCRIPTION RIGHT CERTIFICATES.
Subsequent to the original issuance of the Subscription Right Certificates, no
Subscription Right Certificates will be issued except as provided herein.
SECTION 7. EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE;
LIMITATIONS.
(a) Subject to the allocation and possible reduction described in
Section 7(i) below, a Rights Holder may exercise Rights held by such Rights
Holder by properly completing, signing and delivering the Subscription Right
Certificate representing such Rights, with any required signature guarantees,
together with payment in full of the Subscription Price for the aggregate number
of Underlying Shares subscribed for pursuant to such Rights Holder's exercise of
the Basic Subscription Privilege and the Oversubscription Privilege, before any
proration or reduction with respect to the Oversubscription Privilege. Subject
to the allocation and possible reduction described in Section 7(i) below, a
Rights Holder also may exercise Basic Subscription Privileges by complying with
the procedures described in Section 7(f), below, with respect to DTC Exercised
Rights (as hereinafter defined). Except as provided in Sections 7(d) and 7(f),
below, and subject to Section 12(b), below, Subscription Right Certificates and
payment of the Subscription Price must be received by the Subscription Agent
before 5:00 p.m., California time, on __________, 1997, or such later time and
date to which the Rights may be extended by the Company at its option (the
"Expiration Time"), and a Right will not be deemed exercised until the
Subscription Agent receives both payment of the Subscription Price and a duly
executed Subscription Right Certificate (or until the Guaranteed Delivery
Procedures set forth in Section 7(d), below, or the procedures with respect to
DTC Exercised Rights set forth in Section 7(f), below, have been complied with).
A Rights Holder's Oversubscription Privilege must be exercised concurrently with
such Rights Holder's Basic Subscription Privilege, except for DTC Exercised
Rights, as described in Section 7(f), below. Once a Rights Holder has exercised
a Right, such exercise may not be revoked. The Rights will expire at the
Expiration Time. The Company may notify the Subscription Agent either orally or
in writing of any extension of the Expiration Time. If the Company gives an
oral notice of an extension, it will confirm such extension in writing.
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<PAGE>
(b) Unless a Subscription Right Certificate (i) provides that the
Underlying Shares to be issued pursuant to the exercise of Rights represented
thereby are to be registered in the name of and delivered to the registered
holder of such Subscription Right Certificate, or (ii) is submitted for the
account of a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. (the "NASD"), or
a commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), signatures on such Subscription
Right Certificate must be guaranteed by an Eligible Guarantor Institution, as
defined in Rule 17Ad-15(a)(2) of the Securities Exchange Act of 1934, as
amended.
(c) The Subscription Price will be payable in United States dollars
(i) by check, certified check or bank draft drawn upon a United States bank, or
postal, telegraphic or express money order, payable to the order of the
Subscription Agent, or (ii) by wire transfer of funds to the account of the
Subscription Agent, as agent for the Company maintained for such purpose at
First Professional Bank, ABA #122239335 credit to (Subscriber's name, for
further credit to National Mercantile Bancorp Account #004-802578. The
Subscription Price will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check, (ii) receipt by the
Subscription Agent of any certified check or bank draft drawn upon a United
States bank, or any postal, telegraphic or express money order, or (iii) receipt
of collected funds in the Subscription Agent's account designated above, in
payment of the Subscription Price.
(d) If a Rights Holder wishes to exercise Rights, but time will not
permit such Rights Holder to cause the Subscription Right Certificate or
Certificates evidencing such Rights to reach the Subscription Agent at or prior
to the Expiration Time, such Rights may nevertheless be exercised if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:
(i) Such Rights Holder has caused payment in full of the Subscription
Price for the aggregate number of Underlying Shares subscribed for pursuant to
such Rights Holder's exercise of the Basic Subscription Privilege and, if
applicable, the Oversubscription Privilege, before any proration or reduction
with respect to the Oversubscription Privilege, to be received as set forth in
Section 7(c) above, by the Subscription Agent at or before the Expiration Time;
(ii) The Subscription Agent receives, at or prior to the Expiration
Time, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in
the form distributed with the Subscription Right Certificates, from an Eligible
Institution, stating the name of the exercising Rights Holder, the number of
Rights represented by the Subscription Right Certificate or Certificates held by
such exercising Rights Holder, the number of Underlying Shares being subscribed
for pursuant to the Basic Subscription Privilege and the number of Underlying
Shares, if any, being subscribed for pursuant to the Oversubscription Privilege,
and guaranteeing the delivery to the Subscription Agent of the Subscription
Right Certificate or Certificates evidencing such Rights within two (2) business
days following the date of the Notice of Guaranteed Delivery; and
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<PAGE>
(iii) The properly completed Subscription Right Certificate or
Certificates evidencing the Rights being exercised, with any required signatures
guarantee, are received by the Subscription Agent within two (2) business days
following the date of the Notice of Guaranteed Delivery relating thereto. The
Notice of Guaranteed Delivery may be delivered to the Subscription Agent in the
same manner as Subscription Right Certificates, or may be transmitted to the
Subscription Agent by telegram or facsimile transmission (telecopy no. (818)
502-0674.
(e) If a Subscription Right Certificate does not indicate the number
of Underlying Shares subscribed for or if the Subscription Price payment
forwarded to the Subscription Agent is insufficient to purchase the number of
Underlying Shares subscribed for, the Rights Holder will be deemed to have
exercised the Basic Subscription Privilege with respect to the maximum number of
whole Underlying Shares that may be subscribed for based on the Subscription
Price delivered to the Subscription Agent and, to the extent that the payment
delivered by such Rights Holder exceeds the aggregate Subscription Price with
respect to the Basic Subscription Privilege, the Rights Holder will be deemed to
have exercised the Oversubscription Privilege with respect to the maximum number
of whole Underlying Shares that may be subscribed for with such excess amount.
If a Rights Holder (other than a Qualified Financial Institution) exercises an
Oversubscription Privilege without exercising its Basic Subscription Privilege
in full, such Rights Holder will be deemed to have exercised such Basic
Subscription Privilege to the fullest possible extent, and the Oversubscription
Privilege will be deemed exercised only to the extent of payments received from
such Rights Holder in excess of the aggregate Subscription Price applicable to
such deemed Basic Subscription Privilege exercise.
(f) The exercise of the Basic Subscription Privilege (but not the
Oversubscription Privilege) may be effected, through the facilities of the
Depository Trust Company the Midwest Securities Trust Company or the
Philadelphia Depository Trust Company (Rights so exercised are referred to as
"DTC Exercised Rights"). A holder of DTC Exercised Rights may exercise the
Oversubscription Privilege in respect thereof by properly executing and
delivering to the Subscription Agent, at or before the Expiration Time, a DTC
Participant Oversubscription Exercise Form (substantially in the form attached
hereto as Exhibit D), together with payment of the appropriate Subscription
Price for the number of Underlying Shares for which the Oversubscription
Privilege is to be exercised, before any proration or reduction.
(g) The Subscription Agent will pay to, credit to the account of, or
otherwise transfer to the Company all funds received by the Subscription Agent
in payment of the Subscription Price for Underlying Shares subscribed for
pursuant to the Basic Subscription Privilege as soon as practicable following
receipt thereof and of all related documents.
(h) Funds received by the Subscription Agent in payment of the
Subscription Price for Excess Underlying Shares subscribed for pursuant to the
Oversubscription Privilege will be held in a segregated account pending issuance
of such Excess Underlying Shares. The Subscription Agent will pay to, credit to
the account of, or otherwise transfer to the Company all funds received in
payment of the Subscription Price pursuant to the Oversubscription Privilege,
6
<PAGE>
as soon as practicable following the Expiration Time and allocation of Excess
Underlying Shares for purchase pursuant to the Oversubscription Privilege.
(i) The Company may notify the Subscription Agent either orally or in
writing that (i) it will not issue shares of Common Stock to any Rights Holder
who is required, in the Company's sole judgment and discretion, to obtain prior
clearance, approval or nondisapproval from any state or federal bank regulatory
authority to own or control such shares unless, prior to the Expiration Time,
evidence of such clearance, approval or nondisapproval has been provided to the
Company; or (ii) it will limit the number of shares issuable to any Rights
Holder if, as a result of exercises of Rights (pursuant to the Basic
Subscription Privilege or the Oversubscription Privilege), in the aggregate or
to any Rights Holder, there exists a risk, in the Company's sole judgment and
discretion, that certain tax benefits will be subject to limitation under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") or
there exists a risk of any other adverse tax consequence to the Company.
SECTION 8. DELIVERY OF STOCK CERTIFICATES; REFUNDS.
The Subscription Agent will, on each business day commencing
___________, 1997, and ending on the second business day immediately following
the Expiration Time, furnish the Transfer Agent with such information as the
Transfer Agent may reasonably require, and in such form as the Transfer Agent
may reasonably request, to allow the Transfer Agent to issue certificates
representing all Underlying Shares to be issued pursuant to Basic Subscription
Privileges exercised on the previous business day and will, as soon as
practicable following the Expiration Time and allocation of Excess Underlying
Shares for purchase pursuant to the Oversubscription Privilege and as requested
by the Transfer Agent, furnish the Transfer Agent with such information as the
Transfer Agent may reasonably require, and in such form as the Transfer Agent
may reasonably request, to allow the Transfer Agent to issue certificates
evidencing any Excess Underlying Shares purchased pursuant to Oversubscription
Privileges. Unless the Subscription Right Certificate provides otherwise,
certificates for Underlying Shares purchased pursuant to the exercise of Rights
will be registered in the name of the Rights Holder exercising such Rights. Any
refund, without interest, of the Subscription Price for Excess Underlying Shares
subscribed for but not sold due to proration or otherwise will be mailed or
delivered by the Subscription Agent to the Rights Holder to whom such refund is
due as soon as practicable after the Expiration Time.
SECTION 9. FRACTIONAL RIGHTS AND SHARES. No fractional Rights or
cash in lieu thereof will be issued or paid. The number of Rights distributed
to each Record Date Holder or beneficial owner holding through a Qualified
Financial Institution that complies with the procedures set forth in Section
5(a) above will be rounded up to the next whole number. All questions as to the
validity and eligibility of any rounding of fractional Rights (including,
without limitation, in connection with the surrender by a Qualified Financial
Institution of a Subscription Right Certificate, as set forth in Section 5(a)
hereof) will be determined by the Company in its sole discretion, and its
determination will be final and binding.
7
<PAGE>
SECTION 10. FOREIGN AND CERTAIN OTHER SHAREHOLDERS. Subscription
Right Certificates will not be mailed to Record Date Holders whose registered
addresses are outside the United States and Canada or who have an APO or FPO
address (collectively, "Foreign Record Date Holders"). Subscription Right
Certificates evidencing Rights otherwise distributable to Foreign Record Date
Holders will be delivered to the Subscription Agent, which will hold such
Subscription Right Certificates for the account of such Foreign Record Date
Holders and upon notice from such Foreign Record Date Holders will exercise the
Rights on their behalf. To so exercise their Rights, Foreign Record Date
Holders must notify the Subscription Agent not later than 5:00 p.m., California
time, on ________, 1997. If no such instructions have been received by the
Subscription Agent by such time, the rights will expire and become worthless.
SECTION 11. AMENDMENTS AND WAIVERS; TERMINATION.
(a) The Company reserves the right to extend the Expiration Time, and
to amend the terms and conditions of the Offering, whether the amended terms are
more or less favorable to Rights Holders.
(b) All questions as to the validity, form, eligibility (including
time of receipt and record ownership) and acceptance of any exercise of Rights
will be determined by the Company, in its sole discretion, and Company reserves
the right to reject any exercise if such exercise is not in accordance with the
terms of the Offering or is not in proper form, or if the acceptance thereof or
the issuance of Underlying Shares pursuant thereto could be deemed unlawful.
The Company also reserves the right to waive any deficiency or irregularity
(including, without limitation, any deficiency with respect to time of receipt
of a Subscription Right Certificate or the Subscription Price for all Underlying
Shares subscribed for pursuant thereto) or to permit a defect or irregularity to
be corrected within such time as it may determine. Subscriptions will not be
deemed to have been received or accepted until all irregularities have been
waived or cured within such time as the Company determines in its sole
discretion. Neither the Company nor the Subscription Agent will be under any
duty to give notification of any defect or irregularity in connection with the
submission of Subscription Right Certificates or incur any liability for failure
to give such notification.
(c) The Subscription Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, President and Chief Executive Officer, any Vice President
(including any Senior or Executive Vice President), the Treasurer, any Assistant
Treasurer, the Secretary or any Assistant Secretary of the Company, or any other
person designated by any of them, and to apply to such officers for advice or
instructions in connection with its duties, and it will not be liable for any
action taken or suffered to be taken by it in good faith in accordance with the
instructions of any such officer.
SECTION 12. REPORTS. The Subscription Agent will notify Sandler
O'Neill & Partners, L.P., (the "Dealer Manager"), the Company and their
designated representatives by telephone each business day during the period
commencing on ___________, 1997, and ending at the Expiration Time (and in the
case of deliveries pursuant to the Guaranteed Delivery
8
<PAGE>
Procedure, the period ending two (2) business days after the Expiration Time),
which notice will thereafter be conformed in writing, of (i) the number of
Rights exercised each day, (ii) the number of Underlying Shares subscribed for
pursuant to the Basic Subscription Privilege each day and the number of such
shares for which payment has been received, (iii) the number of Underlying
Shares subscribed for pursuant to the Oversubscription Privilege each day and
the number of such Underlying Shares for which payment has been received, (iv)
the number of Rights exercised pursuant to the Guaranteed Delivery Procedure
each day, (v) the number of Rights for which defective Subscription Right
Certificates have been received each day, (vi) the number of requests from
Qualified Financial Institutions holding Rights on behalf of more than one
beneficial holder to effect an exchange of a Subscription Right Certificate or
Certificates so as to obtain additional Rights to which such beneficial holders
are entitled, as set forth in Section 5(a), above, and the increase in the
number of Rights that would result from such exchange, and (vii) cumulative
totals with respect to the information set forth in each of the clauses (i)
through (vii) above. At or before 5:00 p.m., California time, on the first
business day following the Expiration Time, the Subscription Agent will certify
in writing to the Company and the Dealer Manager the cumulative totals through
the Expiration Time with respect to the information set forth in clauses (i)
through (iv) above. The Subscription Agent also will maintain and update a
listing of Rights Holders who have fully or partially exercised their Rights and
Rights Holders who have not exercised their Rights. The Subscription Agent will
provide the Company, the Dealer Manager and their respective designated
representatives with the information compiled pursuant to this Section 12 and
any Subscription Right Certificates or other documents or date from which such
information derived, as any of them may request. The Subscription Agent hereby
represents and warrants that the information contained in each notification
referred to in this Section 12 will be accurate in all material respects.
SECTION 13. PAYMENT OF TAXES. The Company will pay when due all
document, stamp and other taxes, if any, that may be payable with respect to the
issuance or delivery of any Rights or the issuance of any Underlying Shares upon
the exercise of Rights; provided, however, that the Company will not be liable
for any tax arising out of any transaction that results in, or is deemed to
constitute, an exchange of Rights or Underlying Shares or a constructive
dividend with respect to the Rights or Underlying Shares. Except as provided
above, all transfer and other taxes incurred in connection with the exercise of
Rights will be for the account of the transferor of the Rights, and no such
taxes will be paid by the Company or the Subscription Agent. If any transfer
tax is imposed for any reason other than the issuance of Underlying Shares to a
Rights Holder upon exercise of Rights by such Rights Holder, the amount of any
such transfer taxes (whether imposed on such Rights Holder or any other person)
will be payable by such person and the Subscription Agent will be entitled to
refuse to implement such exercise or other requested action unless it is
furnished with proof satisfactory to it of the payment of such transfer taxes by
such Rights Holder or other person.
SECTION 14. CANCELLATION AND DESTRUCTION OF SUBSCRIPTION RIGHT
CERTIFICATES. All Subscription Right Certificates surrendered for the purpose of
exercise, exchange, substitution or transfer will be canceled by the
Subscription Agent, and no Subscription Right Certificates will be issued in
lieu thereof, except as expressly permitted by this Agreement. The Company will
deliver to the Subscription Agent for cancellation and retirement, and the
Subscription Agent will
9
<PAGE>
so cancel and retire, any Subscription Right Certificates purchased or acquired
by the Company otherwise than upon the exercise thereof. The Subscription Agent
will either deliver all canceled Subscription Right Certificates to the Company
or, at the written request of the Company, destroy such canceled Subscription
Right Certificates, and in such case will deliver a certificate of destruction
thereof to the Company.
SECTION 15. FEES OF THE SUBSCRIPTION AGENT; INDEMNIFICATION.
(a) The Company shall pay to the Subscription Agent compensation in
accordance with the fee schedule attached hereto as Exhibit E for all services
rendered by it hereunder and, from time to time, on demand of the Subscription
Agent, its reasonable expenses and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder.
(b) The Company shall indemnify and hold the Subscription Agent
harmless against any losses, claims, damages, liabilities, costs and expenses
(including reasonable fees and disbursements of legal counsel) which the
Subscription Agent may incur or become subject to arising from or out of any
claim or liability resulting from actions taken as Subscription Agent pursuant
to this Agreement; provided, however, that indemnity does not extend to, and the
Subscription Agent will not be indemnified or held harmless with respect to,
such losses, claims, damages, liabilities, costs and expenses incurred or
suffered by the Subscription Agent as a result, or arising out, of the
Subscription Agent's negligence, misconduct, bad faith or breach of this
Agreement. In connection therewith, (i) in no case will the Company be liable
with respect to any claim against the Subscription Agent unless the Subscription
Agent notifies the Company in writing of the assertion of a claim against it or
of any action commenced against it, promptly after the Subscription Agent has
notice of any such assertion of a claim or has been served with the summons or
other first legal process giving information as to the nature and basis of the
claim; (ii) the Company will be entitled to participate at its own expense in
the defense of any suit brought to enforce any such claim, and if the Company so
elects, it will assume the defense of any such suit, in which event the Company
will not thereafter be liable for the fees and expenses of any additional
counsel that the Subscription Agent may retain, so long as the Company retains
counsel satisfactory to the Subscription Agent, in the exercise of the
Subscription Agent's reasonable judgment, to defend such suit; and (iii) the
Subscription Agent agrees not to settle any litigation in connection with any
claim or liability with respect to which it may seek indemnification from the
Company without the prior written consent of the Company.
(c) The Subscription Agent will be protected and will incur no
liability for or with respect to any action taken, suffered or omitted by it
without negligence and in good faith in connection with its administration of
this Agreement in reliance upon any Subscription Right Certificate, instrument
of assignment or transfer, power of attorney, endorsement, affidavit letter,
notice, direction, consent, certificate, statement or other paper or document
reasonably believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged by the proper person or persons.
10
<PAGE>
(d) Anything in this Agreement to the contrary notwithstanding, in no
event will the Subscription Agent be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Subscription Agent has been advised of the
likelihood of such loss or damage and regardless of the form of action.
SECTION 16. MERGER OR CONSOLIDATION OF SUBSCRIPTION AGENT. Any
corporation into which the Subscription Agent or any successor Subscription
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Subscription Agent or
any successor Subscription Agent may be a party, or any corporation succeeding
to the corporate trust business of the Subscription Agent or any successor
Subscription Agent, will be the successor to the Subscription Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto.
SECTION 17. CONCERNING THE SUBSCRIPTION AGENT. The Subscription
Agent undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions:
(a) The Subscription Agent may consult with legal counsel acceptable
to the Company (who may be, but is not required to be, legal counsel for the
Company), and the opinion of such counsel will be full and complete
authorization and protection to the Subscription Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Subscription Agent may deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, President and
Chief Executive Officer, any Vice President (including any Senior or Executive
Vice President), the Treasurer or any Assistant Treasurer, or the Secretary of
the Company and delivered to the Subscription Agent, and such certificate will
be full authorization to the Subscription Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Subscription Agent will have no responsibility with respect to
the validity of this Agreement or the execution and delivery hereof (except the
due execution by the Subscription Agent, and the enforceability of, this
agreement), or with respect to the validity or execution of any Subscription
Right Certificate.
(d) Nothing herein precludes the Subscription Agent from acting
in any other capacity for the Company.
(e) The Subscription Agent shall not, and shall not permit any
affiliate to sell or purchase, from the date hereof to the Expiration Time, any
Common Stock, or establish any short or long position with respect thereto, for
its own account or the account of any affiliate of the Subscription Agent.
11
<PAGE>
SECTION 18. CERTIFICATE TAX MATTERS.
(a) The Subscription Agent shall comply with the information reporting
and backup withholding requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), including, without limitation, where appropriate, on a
timely basis, filing with the Internal Revenue Service and furnishing to Rights
Holders duly completed Forms 1099B. The Subscription Agent also will collect
and duly preserve Forms W-8 and W-9 and other forms or information necessary to
comply with the backup withholding requirement of the Code.
(b) The Subscription Agent shall withhold from payments made to Rights
Holders amounts sufficient to comply with the backup withholding requirements of
the Code.
SECTION 19. NOTICES TO THE COMPANY, RIGHTS HOLDERS AND SUBSCRIPTION
AGENT. All notices and other communication provided for or permitted hereunder
are to be made by hand delivery, prepaid first class mail, telex or telecopier:
(a) If to the Company, to:
National Mercantile Bancorp
1840 Century Park East
Los Angeles, California 90067
Attention: Scott A. Montgomery,
Executive Vice President and Chief
Administration Officer
(b) If to the Subscription Agent:
By hand delivery, Overnight Courier or mail to:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attention:
(c) If to the Dealer Manager, to:
Sandler O'Neill & Partners, L.P.
Two World Trade Center
104th Floor
New York, New York 10048
Attention: Thomas W. Killian
With a copy to:
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
12
<PAGE>
Washington, D.C. 20016
Attention: Mary Sjoquist, Esq.
(d) If to a Rights Holder, to the address shown on the registry
books of the Company.
All such notices and communications will be deemed to have been duly
given when delivered by hand, if personally delivered; two business days after
being deposited in the mail, postage, prepaid, if mailed as aforesaid; when
answered back, if telexed; and when receipt is acknowledged, if telecopied.
SECTION 20. SUPPLEMENTS AND AMENDMENTS. The Company and the
Subscription Agent may from time to time supplement or amend this Agreement
without the approval of any Rights Holders.
SECTION 21. SUCCESSORS. All the covenants and provisions of the
Agreement by or for the benefit of the Company or the Subscription Agent will
bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 22. TERMINATION. This Agreement will terminate at 5:00 p.m.,
California time, on the thirtieth day following the Expiration Time.
SECTION 23. GOVERNING LAW. This Agreement will be deemed to be a
contract made under the laws of the State of California and for all purposes is
to be construed in accordance with the internal laws of said State.
SECTION 24. BENEFITS OF THIS AGREEMENT. Except as set forth in
Section 12, nothing in this Agreement is to be construed to give to any person
or corporation other than the Company, the Subscription Agent and the Rights
Holders any legal or equitable right, remedy or claim under this Agreement.
This Agreement is for the sole and exclusive benefit of the Company, the
Subscription Agent and the Rights Holders. Notwithstanding the foregoing, the
representations, warranties and agreements of the Subscription Agent also are
made for the benefit of the Dealer Manager, who is intended to be, and hereby
expressly is constituted, third party beneficiary of such representations,
warranties and agreements.
SECTION 25. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts will for all purposes be
deemed to be an original, but all such counterparts will together constitute one
and the same instrument.
SECTION 26. DESCRIPTIVE HEADINGS. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and do not
control or affect the meaning or construction of any of the provision hereof.
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IN WITNESS WHEREOF, each of the parties hereto has caused the
Agreement to be duly executed as of the date first above written.
NATIONAL MERCANTILE BANCORP,
a California corporation
By
-----------------------------------------------
Its
----------------------------------------------
U.S. STOCK TRANSFER CORPORATION,
a California Corporation
By
------------------------------------------------
Its
----------------------------------------------
14
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EXHIBIT E
U.S. STOCK TRANSFER CORPORATION
SUBSCRIPTION AGENT DUTIES AND FEES
FOR NATIONAL MERCANTILE BANCORP
Subscription Agent Duties and Services
- --------------------------------------
. Calculate and verify number of rights to be issued to each
shareholder.
. Issue and mail notice of exercise form to each subscriber along with
the appropriate rights offering material.
. Split-up, issue and mail subscription right certificates as requested
by offerees.
. Receive and time stamp surrendered subscription right certificates and
checks.
. Examine subscription right certificates and checks for acceptance.
. Write regarding deficient items.
. Calculate and verify exercise price received and number of shares to
be issued for each basic and oversubscription privilege.
. Deposit checks into a fiduciary account.
. Invest funds into [name of Account] on second business day after
deposit.
. Wire funds to corporation's account on business day following end of
offering period.
. Handle all letters of inquiry regarding lost, destroyed or stolen
subscription right certificates.
. If applicable, adjust rights on disputed claims as per Company's
instructions and refund to the holder any excess subscription price
resulting from a reduction of rights exercised.
. Reflect restrictive legend on certain stock certificates to be issued
in connection with the offering. Please provide us the exact legend to
be shown on the new certificates.
. Keep accurate controls of all subscription right certificates
exercised and cancellation of certificates.
<PAGE>
. Issue and mail stock certificates to subscribers covering basic
subscription shares.
. Issue and mail stock certificates to subscribers, covering
oversubscription shares.
. Issue and mail stock certificates covering shares resulting from the
standby purchase agreements.
. Furnish periodic reports of exercised rights.
. Track oversubscription privileges.
. Calculate pro-ration on oversubscription.
Subscription Agent Fees
- -----------------------
[$5,000.00]
Plus out-of-pocket expenses incurred such as postage, telephone and
telegraph, shipping costs, insurance, stationery, overtime, counsel and
fees, etc.
