[HORGAN, ROSEN, BECKHAM & COREN LETTERHEAD]
April 6, 2005
VIA EDGAR AND OVERNIGHT DELIVERY Client No.: D092-005
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Christian Windsor, Special Counsel
Re: Discovery Bancorp, San Marcos, California
Pre-Effective Amendment No. 1 to Form S-4 (File No. 333-122090)
Gentlemen:
On behalf of our client, Discovery Bancorp (the "Company"), and in
response to your comment letter dated February 17, 2005, we respectfully submit
for your review the Pre-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-4, marked to show the changes from the original filing dated
January 18, 2005. By overnight we are submitting three (3) copies, also marked
to show changes. Please note that due to the comprehensive updating for the
financial results of 2004, the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS section is shown as being entirely revised.
Please note that the following corresponds to the numbered items listed
in your comment letter, a copy of which is also enclosed (capitalized terms not
otherwise defined herein shall have the same meanings ascribed to them in the
Registration Statement, as amended) (all page references below correspond to the
enclosed marked version):
1. The updating requirements of Rule 3-12 of Regulation S-X are
reflected in the Pre-Effective Amendment No. 1.
2. An updated consent from Moss Adams (Discovery Bank's
accountants) and a new consent from Good Swartz Brown and Berns
LLP (Celtic Capital Corporation's accountants) for all audited
financial statements included in the Pre-Effective Amendment No.
1.
3. A new section under the caption "RISK FACTORS" has been added at
the beginning of the document after "CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS" and provides a discussion
of the most significant factors
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April 6, 2005
Page 2
contributing to the risks involved in the holding company
reorganization and the Celtic Capital Corporation ("Celtic")
transaction.
4. Enclosed herewith, as Attachment I, are copies of Discovery
Bank's Articles of Incorporation and Bylaws.
5. California law does not require shareholder approval of the
Company's Articles of Incorporation or Bylaws. The Company was
formed upon the filing of its Articles of Incorporation on
October 7, 2004 by the Company's sole incorporator, S. Alan
Rosen, Esq. There is no requirement under California law for
subsequent approval or ratification of the Articles by the
Company's shareholders. California Corporations Code Section 211
provides that Bylaws may be adopted either by approval of the
outstanding shares or by the approval of the board of directors.
The Bylaws were approved by the Company's Board at its
organizational board meeting held on October 20, 2004.
Therefore, shareholder approval of the Bylaws is not required.
6. The form of proxy to be used in connection with the holding
company reorganization has been revised to specifically
authorize the proxy holders to vote in favor of any motion to
adjourn the meeting in order to solicit additional proxies or
for any other reasons that they deem to be in the best interests
of the Company. Furthermore, we have added a new paragraph to
the section entitled "VOTING SECURITIES" (on page 10) which
includes a disclosure that the proxy confers discretionary
authority to vote on administrative matters, such as
adjournment, in accordance with the recommendations of Discovery
Bank's Board of Directors.
7. The discussions regarding material legal proceedings have been
revised to include any legal proceedings to which Discovery Bank
is a party. Please see "PROPOSAL 1 - BANK HOLDING COMPANY
REORGANIZATION - The Holding Company - General."
8. The Company is registering an aggregate total of 1,243,508
shares of common stock (which includes 206,210 shares issuable
pursuant to the exercise of outstanding stock options) and
60,500 warrants (60,500 shares of common stock are issuable upon
exercise of these warrants).
9. The sections entitled "CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS" and "ADDITIONAL INFORMATION" have
been moved from the forepart of the Registration Statement to
page 8, immediately following the section entitled
"INTRODUCTION."
10. The section entitled "AVAILABLE INFORMATION" (on page 8) has
been revised to clarify that investors can obtain the same
information on the SEC's website as they can from the Public
Reference Room.
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April 6, 2005
Page 3
11. The discussion regarding the acquisition of all assets and
liabilities of Celtic as set forth in section entitled
"INTRODUCTION" (on page 4) has been expanded, and includes a
brief discussion of Celtic's business, management's plan to use
the assets acquired and the price that the Company will pay for
Celtic's assets.
12. The section entitled "INTRODUCTION" (on page 4) has been revised
to briefly describe the material changes to the rights of
shareholders under the holding company compared to their current
rights as bank shareholders.
13. The Bank's Board of Directors has fixed March 31, 2005 as the
record date for shares entitled to vote on the holding company
reorganization proposal.
14. The section entitled "Vote Required" (on page 6) has been
revised to clarify how abstentions and broker non-votes will be
treated for purposes of voting on the holding company
reorganization proposal as well as the approval of the Company's
stock option plan.
15. The section entitled "Vote Required" (on page 6) has been
revised to reflect that a quorum requirement exists and also
identify the specific percentage of shares required for quorum
(i.e., a majority of the issued and outstanding shares of common
stock of Discovery Bank).
16. The section entitled "PROPOSAL 1 - BANK HOLDING COMPANY
REORGANIZATION - Reasons for the Merger" (on page 13) has been
revised to provide all the information regarding the acquisition
of Celtic required by Item 14 of Schedule 14A. The revised
section also addresses the questions relating to the Celtic
transaction that were posed in Item 16 of your comment letter.
17. On behalf of the Company, we hereby certify that there are no
affiliations between the owners of Celtic, on the one hand, and
the officers and directors of the Company and Discovery Bank, on
the other hand.
18. The section entitled "PROPOSAL 1 - BANK HOLDING COMPANY
REORGANIZATION - Reasons for the Merger - Celtic Transaction"
(on page 13) has been revised to address the questions relating
to the Celtic transaction that were posed in Item 18 of your
comment letter.
19. Under California law (Corporations Code Section 1201),
shareholder approval of the principal terms of a reorganization
is not required if the acquiring company, or its shareholders,
immediately before the reorganization will own (immediately
after the reorganization) equity securities of the surviving or
acquiring company or a parent party possessing more than
five-sixths (83.3%) of the voting power of the surviving or
acquiring company or parent party. Since the shareholders of the
Company, immediately prior to the closing of the Celtic
transaction, will own, immediately after the closing of
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April 6, 2005
Page 4
the Celtic transaction, greater than 83.3% of the issued and
outstanding shares of common stock of the Company, shareholder
approval is not required. As of the date hereof, Discovery Bank
has 1,037,298 shares of common stock outstanding. Upon closing
the bank holding company reorganization, the Company will have
1,037,298 shares outstanding. The Company intends to raise
approximately $12.0 million in capital through the issuance of
new common stock (the "2005 Public Offering"). Based upon an
approximate market value of $16.75 per share (the "FMV"), the
Company will issue approximately 716,418 shares of additional
common stock in connection with the 2005 Public Offering. Thus,
immediately prior to the closing of the Celtic transaction, it
is anticipated that there will be approximately 1,753,716 shares
of common stock held by the Company's shareholders. In
connection with the Celtic transaction, the Company will issue
shares of its common stock equal to $800,000 in value to Celtic.
Based upon the FMV, the Company will issue approximately 47,761
shares to Celtic. Thus, it is anticipated that the shareholders
of the Company, immediately prior to the closing of the Celtic
transaction, will own, immediately after the closing of the
Celtic transaction, approximately 2.7% of the issued and
outstanding shares of common stock of the Company. Accordingly,
no shareholder approval will be required under California law.
20. Immediately following the section entitled "Description of
Discovery Bancorp Common Stock" under "PROPOSAL 1 - BANK HOLDING
COMPANY REORGANIZATION," a new section under the caption
"Description of Discovery Bancorp Warrants" (on page 16) has
been added and provides a description of the warrants.
21. The following sentence has been deleted: "The Holding Company
has not yet engaged in business activity." Please see "PROPOSAL
1 - BANK HOLDING COMPANY REORGANIZATION - The Holding Company -
General," at page 18.
22. While the Company's Board has determined that each of the
current members of the Audit Committee are "independent," as
that term is defined in the Nasdaq listing standards, the Board
has not yet determined which of its directors will serve as the
"audit committee financial expert" within the meaning of the
rules and regulations of the SEC. The section entitled
"Directors and Executive Officers" (on page 22) has been revised
to include this disclosure.
23. Item 601(b)(8) requires that a tax opinion be included as an
exhibit (to a registration statement on S-4) only where the tax
consequences are material to an investor and a representation as
to tax consequences is set forth in the filing. The Company's
special tax counsel determined that the tax consequences of the
proposed holding company reorganization are not material to the
shareholders of Discovery Bank (as prospective shareholders of
the Company). Accordingly, no tax opinion has been filed as an
exhibit.
24. The disclaimers contained in the final paragraph in the section
entitled "PROPOSAL 1 - BANK HOLDING COMPANY REORGANIZATION -
Federal Income Tax
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April 6, 2005
Page 5
Consequences" have been deleted.
25. All references to "asset based loans" have been revised to
"asset-backed loans." Also, we have added a definition in
parenthesis for the common industry jargon "mini-perm
financing."
26. Discovery Bank's status as an SBA "preferred lender" will not be
altered as a result of the proposed holding company
reorganization or the Celtic transaction.
27. The projection regarding Poway branch profitability was
accurate.
28. We have added a new footnote number 2 to the chart on page 33
that discloses that there were no non-accrual loans at December
31, 2004, 2003 or 2002. Please see "PROPOSAL 1 - BANK HOLDING
COMPANY REORGANIZATION - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Distribution of
Assets, Liabilities and Shareholders' Equity."
29. We have added sub-categories of loans comprising "Other Real
Estate" and "Commercial" in the chart and related discussion on
pages 38 and 41. Please see "PROPOSAL 1 - BANK HOLDING COMPANY
REORGANIZATION - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Loans."
30. The Net Loans balances provided in both the comparative December
31, 2004 and comparative December 31, 2003 tables agree with the
balances shown in the audited Consolidated Balance Sheets (page
F-3).
31. The discussion on loan categories has been revised to include
all major sub-categories of loan products being offered by
Discovery Bank. Please see "PROPOSAL 1 - BANK HOLDING COMPANY
REORGANIZATION - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Loans - Loan
Categories." Additionally, the limited discussion on page 28
regarding specialized banking products relating to loans has
been revised to specifically identify these major sub-categories
of loan products.
32. The discussion of loan origination and underwriting has been
expanded to include a discussion of Discovery Bank's process for
managing and mitigating the risk factors inherent in loan
origination and underwriting. Please see "PROPOSAL 1 - BANK
HOLDING COMPANY REORGANIZATION - Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Loans - Loan Origination and Underwriting," at page 40.
33. The total balances by loan category for the Loan Maturity table
(on page 41) have been updated and reconciled with the balances
provided in the Loan Category table (on page 38). The relevant
disclosures and tables have also been revised accordingly.
Please see
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April 6, 2005
Page 6
"PROPOSAL 1 - BANK HOLDING COMPANY REORGANIZATION - Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Loans."
34. The interest rate portion of the Loan Maturity table (on page
41) has been revised to separately present the required specific
loan categories. Please see "PROPOSAL 1 - BANK HOLDING COMPANY
REORGANIZATION - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Loans - Loan
Maturities."
35. As of and for the periods presented, Discovery Bank does not
have balances of any non-accrual loans and an affirmative
statement to that effect has been added to the discussion
contained in the section entitled "Non-Performing Assets" on
page 42. The discussion under the same section has also been
expanded to more fully explain the relationship between those
loans on the internal watch list and those guaranteed by
government and other agencies.
36. The discussion of borrowings (on page 45) has been expanded to
include a disclosure that all advances are open-end overnight
borrowings to supplement liquidity and are repaid during the
periods when liquidity needs are met with deposits. Please see
"PROPOSAL 1 - BANK HOLDING COMPANY REORGANIZATION - Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Borrowings."
37. The definition of "brokered deposits" (on page 46) has been
added.
38. The discussion under "Borrowings" (on page 45) has been revised
to state the total amount of outstanding advances or funding
from the FHLB San Francisco line of credit.
39. The discussion under "Liquidity and Liquidity Management" (on
page 46) has been revised to provide management's analysis of
why liquidity has declined and provides management's view as to
how the change affects the risks that affects Discovery Bank's
profitability.
40. The discussion under "Interest Rate Risk" (on page 49) has been
revised to include a disclosure regarding Discovery Bank's
policies and procedures to monitor and manage nominal and
cumulative gap amounts and/or percentages.
41. The discussion under "Interest Rate Risk" (see the "Note"
following the cumulative gap table on page 49) has been revised
to address the issue of retention of deposits.
42. The discussion under "Interest Rate Risk" (on page 49) has been
revised to include a description of the model and the
assumptions used to generate the data in the Interest Rate
Scenario table.
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April 6, 2005
Page 7
43. Celtic is deemed to be a "significant subsidiary" for disclosure
purposes and we have substantially expanded our discussions
regarding the Celtic transaction. Also added are Celtic's
Audited Financial Statements for the two years ended December
31, 2004, as well as pro forma financial statements reflecting
the acquisition of substantially all of the assets and
liabilities of Celtic. We have added a new major section heading
caption entitled "CELTIC CAPITAL CORPORATION" (on page 64) with
the following sub-sections: "Introduction," "Background and
Description of Celtic Transaction," "Business of Celtic,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations of Celtic," and "Pro Forma Financial
Information."
44. Please refer to the response provided under Item 43 above.
45. Please see the pro forma financial statements (on page 76). All
assets and liabilities are being booked at fair market value,
adjusted as reflected in the notes to the pro forma balance
sheet.
46. A detailed discussion of the specific terms and conditions of
the Purchase Agreement has been added to the new section
"Background and Description of Celtic Transaction" (on page 64).
47. Enclosed herewith is "Attachment II" which provides detailed
information regarding Discovery Bank's stock options, all of
which were granted at 100% of fair market value on the date of
grant. Please note: expiration dates are 10 years from date of
grant and we hand corrected one incorrect date.
48. Financial Statement footnote 15 (on page F-24) has been added to
deal with the nature and terms of the employment agreements and
potential contingent payments.
49. Footnote 1 (on page 79) has been updated to reflect the share
price as of December 31, 2004.
50. The section entitled "Certain Transactions" (on page 81) has
been changed to "Related Party Transactions."
51. The discussion regarding the San Marcos office building (on page
81) has been removed since the transaction did not involve any
director or executive officer and is, therefore, not deemed to
be a related party transaction.
52. The discussion under "Administration" (on page 82) has been
revised to include a statement that the certain of the directors
administering the stock option plan are executive officers and
therefore would not be deemed to be "independent" as that term
is defined in the listing standards of the Nasdaq Stock Market,
Inc.
53. The percentage (on page 83) has been filled in.
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April 6, 2005
Page 8
54. The Income Statements have been revised to comport to the
requirements of Regulation S-X.
55. The financial statement footnotes do not include disclosures
otherwise required by SFAS 87, 106, 112 and 132R. The Company
does not have any pension plans requiring these disclosures. The
Company only has a 401(k) Plan.
56. Note - 10 Related Party Transactions (on page F - 20) has been
revised to comport with the applicable requirements of
Regulation S-X.
57. A revised opinion letter has been filed as Exhibit 5.
58. The Asset Purchase Agreement, dated January 27, 2005 by and
among the Company, Celtic Merger Corp, and certain of Celtic's
principals and Celtic, has been filed as Exhibit 10.9.
We trust that the Pre-Effective Amendment No. 1 to the registration
statement and the above information fully responds to the issues raised in your
comment letter. Should you have any questions or need additional information,
please do not hesitate to contact the undersigned at your earliest possible
convenience.
Sincerely,
/s/ S. Alan Rosen
S. Alan Rosen
Professional Corporation
SAR:lu
Enclosures (via overnight only)
cc: Mr. James P. Kelley, II (w/encls.)
Ms. Lou Ellen Ficke (w/encls.)
Mr. Travis Kawelmacher (w/encls.)
Mr. Russell Dysart (w/encls.)
Mr. Richard Sprayregan (w/encls.)