May 6, 2005
Mail Stop 0408
By U.S. Mail and facsimile to (760) 736-8906
Mr. James P. Kelley, II
President and Chief Executive Officer
Discovery Bancorp
338 Via Vera Cruz
San Marcos, CA 92078
Re: Discovery Bancorp
Amendment Number One to Form S-4 filed April 6, 2005
File No. 333-122090
Dear Mr. Kelley:
We have reviewed your filing and have the following comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
The purpose of our review process is to assist you in your
compliance with the applicable disclosure requirements and to
enhance
the overall disclosure in your filing. We look forward to working
with you in these respects. We welcome any questions you may have
about our comments or any other aspect of our review. Feel free
to
call us at the telephone numbers listed at the end of this letter.
General
1. On page 14 you state that Discovery Bancorp may be liable to
Celtic for expenses in the event that shareholders fail to approve
the merger. Please advise the staff whether Discovery Bank would
be
liable, in any respect, for these fees. If Discovery Bank would
be
liable, provide us with an extensive and detailed legal analysis
as
to how this is permissible under California Law.
2.
In your response to prior comment 6 you state that the proxy has
been
revised so that shareholders may provide specific authorization
for
their proxies to be voted upon a motion to suspend the meeting to
solicit additional votes. The current form of proxy filed with
this
amendment and the disclosure about the voting items throughout the
prospectus do not discuss this specific grant of proxy authority.
The general grant of discretionary authority mentioned on page 10
is
not sufficient to grant the proxy holder from exercising
discretion
on a substantive matter such as suspension to solicit additional
proxies. Revise the proxy and the registration statement to
either
clarify that the proxy holder does not have this authority or
specifically seek authorization from the shareholders.
3. Revise your registration statement coverpage to register the
shares issuable upon the exercise of warrants. If the shares are
included in the 1,235,508 shares of common stock, revise the
footnotes to clarify that fact or add them to the table.
Introduction - page 4
4. In your discussion on page 5 and in the acquisition agreements
with Celtic, you indicate that part of the payment to the
principals
of Celtic will be in Discovery Bancorp stock valued at the time of
the company`s IPO. Since management had the present intent to
undertake an IPO of Discovery Bancorp, discuss these plans in the
Introduction and in discussion of Proposal 1.
Celtic Capital Corporation - page 4
5. Revise this section to note Celtic`s net income and revenues in
each of the past 2 fiscal years and any stub periods.
6. We note your response to comment 11. Please consider including
disclosure relating to the continued consulting agreement and
employment agreements that are part of the Celtic acquisition.
7. Revise this section to clarify what will happen to the Celtic
acquisitions in the event that shareholders fail to approve the
merger/reorganization.
Differences in Corporate Structure - page 5
8. Revise the heading in this section to clarify that you are
discussing changes in the rights of shareholders of the new
holding
company compared to the rights enjoyed by Discovery Bank
shareholders.
9. Revise this section to briefly discuss all material changes in
shareholder rights.
Available Information; Cautionary Statement Regarding Forward-
Looking
Statements - page 8
10. We note your response to comment 9. However, these sections
still appear in the forepart of the prospectus. Please move these
sections to after the section entitled "Risk Factors."
Risk Factors - page 9
11. We note the addition of the section entitled "Risk Factors" in
response to comment 3. However, please consider disclosing risks
relating, but not limited, to: dilution, market for securities,
liability of the Holding Company if shareholders do not approve
the
Celtic acquisition, the implications of the losses Celtic
corporation
has experienced in 2004, increased interest rates for certificates
that reprice annually (see "Note" on page 49), consequences of
administration of stock option plan by non-independent directors.
Proposal 1: Bank Holding Company Reorganization
Reasons for the Merger: General - page 13
12. We note your response to comments 16 and 18. However, you
have
failed to address the determination of the price (including the
premium) in connection with the Celtic Acquisition. Please advise
the staff regarding all actions taken by the Board to determine
that
the price paid for Celtic was fair to Discovery and its
shareholders.
Did the Board receive a fairness opinion? If not, please disclose
the fact that the Board did not seek an independent appraisal and
state how they determined that not seeking expert advice was
consistent with their fiduciary duty to the shareholders of
Discovery.
13. In your response to comment 19, please confirm that the
percentage of stock shareholders of the Company will own
immediately
subsequent to the Celtic merger will be 97.3% and not 2.7%.
Federal Income Tax Consequences - page 27
14. We note your response to comment 24. However, the disclaimers
have not been deleted.
15. In your response to prior comment 23, you state that tax
counsel
has determined that there would not be any material tax
consequences
from the exchange. However, on page 27, the disclosure states
that
the merger is being structured as a tax fee exchange. The fact
that
the merger will not be taxable must be supported by a tax opinion.
Alternatively, if counsel concluded that the merger would be
taxable,
revise the Cover Page, Summary (Introduction), Risk Factors and
this
section to state that shareholders will be taxed. If counsel is
not
able to provide a tax opinion because it unable to opine on the
tax
consequences, revise the disclosure to clarify that counsel is not
able to opine and state the particular factual or legal questions
about which counsel is not able to reach a conclusion. Please
refer
to Item 601(b)(8) of Regulation S-K.
Management`s Discussion & Analysis of Financial Condition &
Results
of Operations
General - page 33
16. We note your response to comment 27. Please update your MD&A
to
reflect that the Poway branch was, in fact, profitable in the
first
quarter.
Business of Discovery Bank - page 38
17. We note your response to comment 25, however the changes to
which
you refer have not been made and consequently we reissue prior
comment 25.
Liquidity and Liquidity Management - page 38
18. We note your response to comment 39, however, we are unable to
locate management`s analysis of why liquidity has declined and how
the change affects Discovery Bank`s profitability that you have
added.
Business of Celtic - page 66
19. Revise the last paragraph of this section to eliminate the
first
sentence, or provide an extensive discussion of the facts that
support the assertion that a well managed commercial finance
business
will earn attractive returns. Also, expand this section to
indicate
why management believes that Discovery and the managers who had
been
operating Celtic have the capacity to manage Celtic`s business in
a
profitable manner.
Allowance and Provision for Loan Losses - page 73
20. Please revise to include the allowance allocation for each of
Celtic`s major loan categories.
Quantitative and Qualitative Disclosures about Market Risk - page
75
21. Please revise to clarify Celtic`s primary strategy discussed
in
the fourth sentence.
Pro Forma Financial Information - page 75
22. You state that the effect of estimated merger and
reorganization
costs expected to be incurred in connection with the proposed
transactions have been reflected in the pro forma information. We
are unclear how and where they were considered and/or reflected in
your pro forma information. We remind you that only direct,
merger-
related expenses should be presented as a pro forma equity
adjustment. Please revise this introductory paragraph, other
related disclosures and your detailed pro forma financials, as
necessary.
23. As a related matter, we note you may have differing gross
proceeds from your planned 2005 Public Offering (Note 1 on page
77).
Please provide separate pro forma financial statements for
differing
possibilities. You may opt to present scenarios for the minimum
acceptable gross proceeds from this offering, a mid-range and a
maximum range, for example. We note Article 11-02(b)(8) of
Regulation S-X. Revise your introductory paragraph to clearly
indicate the scenarios you present and the basis for their
presentation. Ensure that each scenario complies with Article 11-
02(b)(7) of Regulation S-X as it relates to historical and pro
forma
primary and fully diluted per share information. See additional
related comments below.
Pro Forma Balance Sheet - page 76
24. Please revise your Discovery Bancorp historical financial
statements column to reflect only historical amounts which should
agree to your audited financial statements. Net proceeds
anticipated
should be reflected in another column with a clearly delineated
footnote quantifying the number of shares, price per share and
total
gross offering proceeds.
25. Please review all pro forma and other adjustments to ensure
that
each is individually self-balancing (equal debits and credits) and
that each refers to a detailed and appropriate footnote explaining
all relevant assumptions used.
26. Include a table or footnote detailing the purchase price
calculation, including all components and their individual values.
27. We note the disclosures in Note 15 of the Celtic Capital
Corporation financial statements on page F-60 which states that
you
would assume the note payable, bank. This amount is reflected in
the
Celtic historical balance sheet at $19,917,688 at December 31,
2004.
Pro forma adjustment (9) states that total borrowings were only
reduced by $2,236,010. Please revise the relevant footnotes and
pro
forma presentation as necessary or advise why the current
presentation is correct. Please also review the disclosures on
pages
13-14 as well as pages 64-65 and revise any inconsistencies as
presented in the terms of this agreement.
28. As a related matter, you also refer to a payment or premium of
$900,000 (Note 15 of the Celtic financials and elsewhere) as part
of
the transaction. This amount is not discussed in your
introductory
paragraph nor is it clearly reflected in your pro forma
financials.
Note 4 should more plainly identify individual components of the
adjustment. Please revise or advise.
29.
We note the employment agreement with Mark Hafner which is part of
the asset purchase agreement as detailed on page 65. We
specifically
refer to a stock grant of 2,000 shares of Bancorp stock when the
transaction is closed. Please revise the disclosures to indicate
how
these shares are valued, if at all. Please supplementally advise
why
these shares are not reflected in the pro forma financials and
related footnotes or revise accordingly.
30. Please revise the notes to include a description of the
adjustment of $275,931 to Other Assets, $275,985 to Accrued
Interest
Payable and Other Liabilities and $(54) to Accumulated Deficit.
These amounts do not agree to the Audited Discovery Bank
Consolidated
Balance Sheets, located at page F-3.
31. Please revise note 7 to state either Goodwill represents an
estimate of the difference in value of assets and liabilities
being
purchased or disclose the specific values of the asset or
liabilities
used to calculated the Goodwill amount.
Pro Forma Statement of Operations - page 77
32. Please revise to specify the rounding denomination used within
the Pro Forma Statements of Operations. For example: "(dollars in
thousands)".
Related Party Transactions - page 81
33. We note your response to prior comment 51. Confirm that the
San
Marco`s transaction was not otherwise required to be disclosed
under
Item 404.
Discovery Bank`s Audited December 31, 2004 and 2003 Consolidated
Financial Statements
Consolidated Balance Sheets - page F-3
34. Please review the 2003 results for Deferred Income Tax Asset,
Net
of Valuation Allowance, Premises and Equipment, Net and Accrued
Interest Receivable and Other Assets for internal consistency and
revise the Balance Sheet to properly reflect these account values.
Please refer to footnote 4 and 7 and the Audited Consolidated
Financial Statements for December 31, 2003 and 2002.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies - page F-13
35. Please revise third paragraph addressing the adoption of EITF
No.
03-1 to reflect management`s position as of December 31, 2004 and
2003.
Note 7 - Income Taxes - page F-17 & F-18
36. Please supplementally explain why you released valuation
allowances booked prior to 2003 during 2003 and 2004, specifically
addressing why the deferred tax asset is not expected to be
realized.
In your response, please tell us how you considered the guidance
in
paragraph 23 of SFAS No. 109. For example, we note that you have
had
cumulative losses over the last several years and given your
current
circumstances with a proposed merger, we are unsure how you could
conclude that no valuation allowance is necessary. Please provide
persuasive evidence supporting your current accounting or revise
the
financial statements accordingly.
37. Please review and compare to the Audited Financial Statements
for
December 31, 2003 for consistency. The account balances do not
appear to be properly aligned with the correct account title.
Please
insure the proper balances appear on the Consolidated Balance
Sheet
located at page F-3.
Other
38. Include updated consents from the independent accountants in
your
next amendment.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as defense in any
proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
acceleration of a registration statement. Please allow adequate
time
after the filing of any amendment for further review before
submitting a request for acceleration. Please provide this
request
at least two business days in advance of the requested effective
date.
You may contact Paula Smith at (202) 551-3696 or John P.
Nolan,
Accounting Branch Chief, at (202) 551-3492 if you have questions
regarding comments on the financial statements and related
matters.
Please contact Kathryn McHale at (202) 551-3464 or me at (202)
551-
3419 with any other questions.
Sincerely,
Christian Windsor
Special Counsel
cc: S. Alan Rosen, Esq.
Horgan, Rosen, Beckham & Coren, LLP
23975 Park Sorrento, Suite 200
Calabasas, CA 91302
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