<PAGE>
As filed on February 1, 2000 File No. 333-95927
================================================================================
United States
Securities and Exchange Commission
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
Registration Statement Under the Securities Act of 1933
Ocean West Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware 6162 applied for
(State of Incorporation) (Primary Standard (IRS Employer
Industrial Classification Identification
Code Number) Number)
________________________________________
15991 Redhill Avenue, Suite 110
Tustin, California 92780
(714) 247-4220
(Address and telephone number of
Registrant's principal executive offices)
Daryl Meddings, Executive Vice President
Ocean West Holding Corporation
15991 Redhill Avenue, Suite 110
Tustin, California 92780
(714) 247-4220
(Name, address and telephone number of agent for service)
Copy to: Lynn H. Wangerin, Esq.
Ogden Newell & Welch PLLC
1700 Citizens Plaza
500 W. Jefferson Street
Louisville, Kentucky 40202
(502) 582-1601 / (502) 581-9564 (facsimile)
________________________________________
Approximate date of commencement of proposed distribution to public: As soon
as practicable after the registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Calculation of Registration Fee
<TABLE>
<CAPTION>
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Title of each class Amount to be Proposed maximum Proposed maximum Amount of
of securities to be registered offering price aggregate offering registration fee
registered per unit price
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<S> <C> <C> <C> <C>
Common Shares (1) 2,434,652 $0.10 $ 243,465 $ 64
Common Shares (2) 3,000,000 $2.00 $6,000,000 $1,584
Common Stock
Purchase Warrants 3,000,000 $ (3) $ (3) $ (3)
Total Fee $1,648
Amount paid with initial filing $2,178
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</TABLE>
(1) These securities include 300,000 shares which were issued to Monogenesis
Corporation at a price of $0.01 per share in contemplation of
distribution of 249,900 of such shares by Monogenesis. They will be
distributed to holders of shares of Monogenesis Corporation as a
dividend at a rate of 100 shares for each share held. The remaining
shares are to be offered for sale at market price from time to time and
are currently held by former shareholders of Ocean West Enterprises,
Inc. and Monogenesis (the 50,100 shares not distributed to its
shareholders). There is no current offering price for these shares. The
fee calculation is based upon the book value of Ocean West Enterprises,
Inc., the wholly owned subsidiary of Ocean West Holding Corporation, as
of September 30, 1999.
(2) These are the Common Shares which will be issued in the event the Common
Stock Purchase Warrants are exercised. The maximum offering price is
based upon the exercise price of the warrants.
(3) The warrants were issued to Monogenesis Corporation at a price of $0.001
each and will be distributed to holders of shares of Monogenesis
Corporation as a dividend at a rate of 1,100 warrants for each share
held. The warrants are registered in the same registration statement as
the Common Shares underlying the warrants and, therefore, no separate
registration fee is required pursuant to Rule 457(i).
================================================================================
<PAGE>
Ocean West Holding Corporation
Cross Reference Sheet
<TABLE>
<CAPTION>
Page
Item Number - Part I, Form S-1 Location Number
------------------------------ -------- ------
<S> <C> <C>
1. Forepart of the Registration Statement and Same 1
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Same 2, *
Pages of Prospectus
3. Summary Information, Risk Factors and Summary; Risk Factors 4, 8
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds 20
5. Determination of Offering Price Risk Factors - The exercise 17
price of the warrants is not
based on market prices
6. Dilution Not applicable
7. Selling Security Holders Risk Factors - Future sale 17, 18, 46
of shares by substantial
shareholders may
adversely affect the price
of shares; Plan of
Distribution; Principal and
Selling Shareholders
8. Plan of Distribution Plan of Distribution 18
9. Description of Securities to Be Registered Securities 49
10. Interests of Named Experts and Counsel Not applicable
11. Information With Respect to the Registrant
(a) Description of business Business 23
(b) Description of property Business - Properties 34
(c) Legal proceedings Legal Proceedings 35
</TABLE>
* Immediately after financial statements.
<PAGE>
<TABLE>
<CAPTION>
Page
Item Number - Part I, Form S-1 Location Number
------------------------------ -------- ------
<S> <C> <C>
(d) Market price of and dividends on the Risk Factors - No payment 16, 17, 49,
registrant's common stock and related of dividends on Common 53
stockholder matters Shares is expected in the
near future and Future sale
of shares by substantial
shareholders may adversely
affect the price of shares;
Securities; Dividends
(e) Financial statements Financial Statements 57
(f) Selected financial data Summary - Selected 6
Financial Data
(g) Supplementary financial information Not applicable
(h) Management's discussion and Management's Discussion 36
analysis of financial condition and and Analysis of Financial
results of operations Condition and Results of
Operations
(i) Changes in and disagreements with Experts 55
accountants on accounting and
financial disclosure
(j) Quantitative and qualitive disclosures Not applicable
about market risk
(k) Directors and executive officers Management 43
(l) Executive compensation Management - Executive 45
Compensation
(m) Security ownership of certain Principal and Selling 46
beneficial owners and management Shareholders
(n) Certain relationships and related Management - Certain 46
transactions Relationships and Related
Transactions
12. Disclosure of Commission Position on Liability and 53
Indemnification for Securities Act Indemnification of
Liabilities Directors and Officers
</TABLE>
<PAGE>
Prospectus
----------
Ocean West Holding Corporation [corporate logo]
15991 Redhill Avenue, Suite 110
Tustin, California 92780
(800) 500-6232
5,434,652 Common Shares
3,000,000 Common Stock Purchase Warrants
Ocean West Holding Corporation is registering 249,900 Common Shares and
2,748,900 Common Stock Purchase Warrants which will be distributed by
Monogenesis Corporation to its shareholders, 100 shares and 1,100 warrants for
each share of stock held by its shareholders. Ocean West will not receive any
proceeds from the distribution, but will receive $6,000 from Monogenesis, $0.01
for each share and $0.001 for each warrant, to purchase the shares and warrants.
No public market currently exists for the shares or the warrants.
Each warrant entitles the holder to purchase one Common Share for $2.00 for
10 months. Ocean West is registering the 3,000,000 shares which may be issued
upon exercise of the warrants. Ocean West will only receive funds for warrants
which are exercised. It is uncertain whether or not any warrants will be
exercised.
Ocean West is also registering 2,184,752 shares on behalf of shareholders
and Monogenesis for sale from time to time. Ocean West will not receive any
proceeds from the sale of shares by selling shareholders.
Ocean West is controlled by two shareholders, Marshall Stewart and Daryl
Meddings. Together they own 100% of the issued and outstanding Class B Common
Shares and elect 75% of the directors. They also own 72% of the Common Shares
and control all other votes.
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INVESTING IN THE COMMON SHARES OR WARRANTS INVOLVES RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
Monogenesis Corporation
The date of this prospectus is ________________, 2000.
<PAGE>
The information contained in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery. In this prospectus,
"Ocean West" refers to Ocean West Holding Corporation, a Delaware corporation
and Ocean West Enterprises refers to Ocean West Enterprises, Inc. a California
corporation which also does business under the name Ocean West Funding. The
"Company," "we," "us," and "our" refer to both Ocean West and Ocean West
Enterprises.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY......................................................................................... 4
Plan of Distribution........................................................................ 4
The Company................................................................................. 4
Losses from Operations...................................................................... 5
Formation of Ocean West..................................................................... 6
Selected Financial Data..................................................................... 6
RISK FACTORS.................................................................................... 8
PLAN OF DISTRIBUTION............................................................................ 18
USE OF PROCEEDS................................................................................. 20
CAPITALIZATION.................................................................................. 21
BUSINESS........................................................................................ 23
General..................................................................................... 23
Wholesale Division.......................................................................... 27
Product Types............................................................................... 28
Quality Control............................................................................. 29
Sale of Loans............................................................................... 31
Mortgage Loan Servicing Rights.............................................................. 32
Competition................................................................................. 32
Mortgage Loan Funding and Financing Arrangements............................................ 33
Employees................................................................................... 33
Properties.................................................................................. 34
Regulation.................................................................................. 34
Legal Proceedings........................................................................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................... 36
Overview.................................................................................... 36
Results of Operations....................................................................... 37
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Liquidity and Capital Resources............................................................. 40
Interest Rate Risks......................................................................... 42
Year 2000 Issues............................................................................ 42
MANAGEMENT...................................................................................... 43
Executive Officers and Directors of Ocean West and Ocean West Enterprises................... 43
Executive Compensation...................................................................... 44
Compensation Committee Interlocks and Insider Participation in Compensation Decisions....... 45
Certain Relationships and Related Transactions.............................................. 45
PRINCIPAL AND SELLING SHAREHOLDERS............................................................. 46
Management and 5% or Greater Shareholders................................................... 46
Other Selling Shareholders.................................................................. 47
SECURITIES...................................................................................... 49
Common Shares............................................................................... 49
Class B Common Shares....................................................................... 50
Class D Common Shares....................................................................... 51
Preferred Shares............................................................................ 51
Common Stock Purchase Warrants.............................................................. 52
Transfer Agent, Registrar and Warrant Agent................................................. 53
DIVIDENDS....................................................................................... 53
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................... 53
Limitations on Liability.................................................................... 53
Indemnification............................................................................. 54
AVAILABLE INFORMATION........................................................................... 55
LEGAL MATTERS................................................................................... 55
EXPERTS......................................................................................... 55
FINANCIAL STATEMENTS............................................................................ 57
</TABLE>
3
<PAGE>
SUMMARY
-------
This is a summary of information contained elsewhere in the prospectus and
may not contain all of the information that is important to you. Before making
any investment decision, you should read the entire prospectus including the
risk factors section and the financial statements and related notes.
Plan of Distribution
--------------------
Ocean West Holding Corporation was formed to hold the stock of Ocean West
Enterprises, Inc. Monogenesis Corporation purchased 300,000 Common Shares and
3,000,000 Common Stock Purchase Warrants from Ocean West. Monogenesis is a
closed-end investment company which is distributing 249,900 of the shares and
2,748,900 of the warrants to its shareholders of record on ______________, 2000.
The shares underlying the warrants are also being registered. The transaction
is intended to create a public company with a substantial shareholder base
without having to sell shares in a traditional initial public offering. There
will be no immediate trading market and there is no assurance a trading market
will ever develop.
Ocean West is also registering 2,184,752 Common Shares held by its
shareholders for resale from time to time. These shares include the 50,100
shares purchased by Monogenesis but not distributed to its shareholders and
88,800 shares which Monogenesis received upon the exercise of warrants issued to
Monogenesis as part of its compensation. Monogenesis paid $7,104 to exercise
the warrants. The difference between the price paid by Monogenesis for the
securities and the value of the 138,900 shares and the 251,100 warrants held by
Monogenesis constitutes its compensation for effecting the distribution.
Shares to be distributed by Monogenesis.... 249,900, 100 for each share
of Monogenesis held
Warrants to be distributed by Monogenesis.. 2,748,900, 1,100 for each share
of Monogenesis held
Warrant exercise........................... $2.00 per share for 10 months
Selling shareholder shares................. 2,184,752
The Company
-----------
Ocean West Enterprises was formed in 1988 as a real estate finance company
engaged in the mortgage banking business. We also do business under the name
Ocean West Funding. We primarily package, fund and sell on a whole loan basis
conventional, government and non-conforming residential mortgage loans secured
by one-to-four family residences. For purposes of this prospectus, "non-
conforming loans" are loans made to borrowers who are unable or unwilling
4
<PAGE>
to obtain mortgage financing from conventional mortgage sources whether for
reasons of credit impairment, income qualifications, or credit history or a
desire to receive funding on an expedited basis. Currently, most of the loans
which we sell are originated by a network of independent loan brokers. During
the most recent fiscal year, approximately 72% of our loans were originated by
brokers. The remaining 28% were originated through our retail branches. We also
sell more than 99% of the mortgage servicing rights on the loans we originate.
We primarily make loans to:
. purchase existing residences
. construct new residences
. refinance existing mortgages
. consolidate other debt
. finance home improvements, education or similar needs
Our core borrower base is individuals who purchase homes using government
financing. Substantially all, 98%, of loans originated by us are secured by a
first priority mortgage. The remainder typically are in a second position.
We currently have two divisions:
. a wholesale division which has relationships with approximately 1,000
approved independent loan brokers and which historically has accounted
for substantially all of our total loan originations
. a retail branch division aimed at expanding our loan originations
across the nation
We are also in the process of developing new retail divisions to market loans
directly to builders and real estate agents.
Losses from Operations
----------------------
For the year ended March 31, 2000, we funded approximately $262,604,000 in
loans compared to approximately $300,645,000 in the year ended March 31, 1999
and $258,514,000 in the year ended March 31, 1998. Over that same three-year
period, we had total revenues, before cost of loans and originations, from
operations of $15,910,464 in fiscal year 2000, $17,927,542 in fiscal year 1999
and $14,851,547 in fiscal year 1998. Operating expenses exceeded operating
revenues in all three years generating $1,110,324 in operating losses for fiscal
year 2000, $87,773 in operating losses for fiscal year 1999 and a $825,392 in
operating losses for fiscal year 1998. During the first three months of the
current fiscal year, we had total revenues, before costs of loans and
originations, of $5,340,287 compared to $4,784,640 for the first three months of
fiscal year 2000. Operating expenses were $5,159,996 for the first three months
of fiscal year 2001 and $4,979,256 for the same period of fiscal year 2000
resulting in income from operations of $180,291 for the first three months
5
<PAGE>
of the current year and an operating loss of $194,173 for the same period of
fiscal year 2000. Overall since our inception and through June 30, 2000, we have
accumulated losses of $1,945,592. We anticipate additional losses in the
foreseeable future.
Most of the loans that we make and sell, approximately 61% in total dollar
value for the 2000 fiscal year, 71% in fiscal year 1999 and 63% in fiscal year
1998, are insured by the U.S. Department of Housing and Urban Development, more
commonly known as HUD. However, we have been unable to continuously maintain
the net worth HUD requires of its certified lenders. Up to this point, each
time HUD has commented on the deficiency and given us a time table to correct
it, we have been able to raise additional capital. To the extent that
continuing losses reduce our net worth, we will continue to need to obtain
additional equity investments and our status as a HUD-approved lender will be
jeopardized. We may or may not be able to raise additional equity.
Formation of Ocean West
-----------------------
Ocean West is a Delaware corporation which was formed to hold the issued
and outstanding shares of Ocean West Enterprises. All of the shareholders of
Ocean West Enterprises exchanged their shares of Ocean West Enterprises for
shares of the holding company, Ocean West. Other than Monogenesis and the
shareholders of Monogenesis receiving shares in the distribution, Ocean West has
the same shareholders as Ocean West Enterprises.
Selected Financial Data
-----------------------
The selected financial data is that of Ocean West Enterprises. The pro
forma figures of net income per share and stockholders' equity per share reflect
the capitalization of Ocean West.
--------------------------------------------------------------------------------
Statement of Earnings Data (1):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30,
(Amounts in thousands except
per share amounts)
------------------------------------
2000 1999
---- ------
<S> <C> <C>
Net revenues $ 2,139 $ 927
General & administrative expenses 1,959 1,122
-------- --------
Income (loss) from operations 180 (195)
Other expense (3) (1)
-------- --------
Net income (loss) $ 177 $ (196)
======== ========
Basic and diluted net income (loss) available to common $ 0.03
shareholders per proforma common share (2) ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
(Amounts in thousands except
per share amounts)
----------------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Revenue -- origination and sale of loans, net $ 3,855 $4,642 $3,188 $2,392 $1,969
Servicing fees, net -- 6 22 166 86
Gain -- origination of mortgage servicing rights 21 17 49 225 --
Gain -- sale of mortgage servicing rights -- -- 155 281 34
------- ------ ------ ------ ------
Net revenues 3,876 4,665 3,414 3,064 2,089
Total operating expenses 4,986 4,753 4,239 2,785 1,899
------- ------ ------ ------ ------
(Loss) income from operations (1,110) (88) (825) 279 190
Other income 184 188 17 -- --
------- ------ ------ ------ ------
(Loss) income before taxes (926) 100 (808) 279 190
(Benefit) provision for income taxes 243 (242) 1 142 (102)
------- ------ ------ ------ ------
(Loss) income before extraordinary item (1,169) 342 (809) 137 292
Extraordinary item - forgiveness of debt 17 -- -- -- --
------- ------ ------ ------ ------
Net (loss) income $(1,152) $ 342 $ (809) $ 137 $ 292
======= ====== ====== ====== ======
Basic and diluted net (loss) income available to $ (0.18)
common shareholders per proforma common share(2) =======
</TABLE>
----------------------------------------------------------------------------
Balance Sheet Data (1):
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
(Amounts in thousands except
per share amounts)
----------------------------
<S> <C>
2000
----
Total assets $18,548
Total long-term obligations, net (3) $ 472
Total redeemable preferred stock and stockholders' equity $ 146
Stockholders' equity per proforma common share (2) $ (0.07)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
March 31,
(Amounts in thousands except
per share amounts)
------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total assets $23,303 $21,522 $19,169 $10,925 $15,949
Total long-term obligations, net $ 438 $ 421 $ 877 $ 395 $ 310
Total redeemable preferred $ (209) $ 827 $ 239 $ 1,007 $ 593
stock and stockholders' equity
Stockholders' equity per $ (0.12)
proforma common share (2)
</TABLE>
________________________________________________________________________________
(1) The statement of earnings data for the years ended March 31, 2000, 1999 and
1998 and the balance sheet data at March 31, 2000 and 1999 were derived
from the audited financial statements of Ocean West Enterprises which are
included in their entirety in the "Financial Statements" section.
Financial information for the three months ended June 30, 2000 and 1999 was
derived from unaudited financial statements prepared by management which
are also included in their entirety in the Financial Statements section.
(2) Pro forma basic and diluted net income (loss) available to common
shareholders per common share is calculated by dividing net income
applicable to all of Ocean West's common shareholders by the pro forma
shares which are outstanding on the date of this prospectus (6,521,120
shares) on the applicable dates. Stockholders' equity per pro forma common
share is calculated by dividing stockholders' equity by pro forma common
shares. The per share figures have been rounded to the nearest cent and do
not include shares which may be issued upon exercise of the warrants
registered as part of this registration statement.
(3) Total long-term obligations include the long-term portion of capital lease
obligations.
RISK FACTORS
------------
This prospectus contains forward-looking statements that address, among
other things, general business strategy and expected trends, acquisition and
growth strategy, use of proceeds, effects of interest rate and legislation
changes, and possible future actions. The statements may be found specifically
in the sections entitled "Summary," "Risk Factors," "Use of Proceeds,"
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and in this prospectus generally. Actual results could
differ materially from those anticipated in forward-looking statements for
various reasons, including risks discussed in the "Risk Factors" section and
elsewhere in this prospectus.
8
<PAGE>
The securities described in this prospectus involve a high degree of risk.
Prior to purchasing shares or warrants, you should consider the possible risks
of the business described below.
We have lost in excess of $1,946,000 since inception. We incurred a
----------------------------------------------------
substantial net loss in fiscal year 2000 and have incurred net operating losses
in two of the last three fiscal years. We may continue to incur losses or even
if we do not have a loss, we may not have sufficient earnings to meet HUD net
worth requirements or achieve profitability. As of June 30, 2000, we had
accumulated losses of approximately $1,946,000. For our fiscal year ending
March 31, 2000, we had a net loss of $1,152,028. We had a net loss of $808,767
during the 1998 fiscal year. Although we had net income of $341,635 in fiscal
year 1999, we had a net operating loss of $87,773 in that year and a decrease in
net income from $291,932 for fiscal year 1996 to $136,985 for fiscal year 1997.
For the first three months of fiscal 2001, we had pre-tax net income of
$177,135 compared to pre-tax loss of $196,163 for the first three months of
fiscal 2000.
General economic conditions may adversely affect our business. Economic
-------------------------------------------------------------
conditions affect the overall level of activity in the mortgage business. The
decision to buy, sell or refinance a residence is affected by such economic
conditions as the overall growth or decline of the economy, the level of
consumer confidence, real estate values, interest rates and investment returns
expected by the financial community. These conditions can affect the number and
size of mortgage loans of the types we typically originate and make these
mortgage loans less attractive to borrowers or to investors in the mortgages.
In addition, a decline in real estate values will have an adverse effect on the
loan-to-value ratios for the related mortgage loans, weakening the collateral
coverage and resulting in greater exposure in the event of a default. This
greater exposure to default could make it more difficult for us to obtain
interim financing for mortgage loans we originate or purchase or decrease the
availability of purchasers of such mortgage loans.
We are likely to originate and sell fewer mortgage loans if interest rates
--------------------------------------------------------------------------
rise. In periods of rising interest rates like we are currently experiencing,
----
historically the demand for mortgage loans has declined which could result in
lower revenues for us. The refinancing segment of the mortgage business is
usually the first segment affected. The reason is that as interest rates rise,
the costs of refinancing outweigh any interest rate saving eliminating those who
are refinancing solely to reduce their interest rate. Typically, refinance
loans make up approximately 24% in total dollar volume of our loans. Rising
interest rates also affect the purchase segment of the mortgage business. As
interest rates increase, payment amounts increase decreasing the number of
potential borrowers who feel they can afford the payments and who qualify for
the mortgages.
Interest rate fluctuations can affect the profitability of our mortgage
-----------------------------------------------------------------------
loans. Changes in interest rates can affect the volume, net interest income and
-----
sale of mortgage loans originated and purchased by us. When we purchase or
originate a loan, we usually have a commitment from a third party to purchase
that loan. Generally, we fund the loan using borrowings from our lines of
credit which are limited to specific uses and are known as warehouse lines of
credit. The warehouse line of credit is repaid upon the sale of the warehoused
loans. Before we sell the mortgage loan, we are entitled to receive interest
income on the loan from the borrower and we simultaneously pay interest
9
<PAGE>
expense to the institution providing the warehouse line of credit. The interest
rate we receive during this period and the interest rate we pay are usually
different. The profitability of the loan is affected by this difference and
fluctuations in interest rates before the mortgage loan is sold. Although we
generally have a commitment to sell the mortgage loan before we commit to fund
the mortgage loan, there are situations in which we bear a risk of changes in
interest rates prior to the mortgage loan being sold. In particular, if interest
rates increase during the time before we sell an uncommitted mortgage loan but
after we have funded the mortgage loan, we could be required to sell the
principal of the mortgage loan for less than we funded, thereby decreasing the
mortgage loan's profitability or incurring a loss on the mortgage loan's sale.
Payments for mortgage loan servicing rights may be less in times of stable
--------------------------------------------------------------------------
or declining interest rates. The prices we receive upon the sale of mortgage
---------------------------
loans and servicing rights depend upon a number of factors, including the
general supply of and demand for mortgage servicing rights, as well as
prepayment and delinquency rates on the portfolios of mortgage servicing rights
being sold. Interest rate changes can also affect the profitability of the sale
of mortgage loan servicing rights to a third party. Purchasers of mortgage loan
servicing rights analyze a variety of factors to determine the purchase price
they are willing to pay, including the prepayment sensitivity of servicing
rights. Because of the increased likelihood of prepayment of loans in periods
of declining interest rates, the price of mortgage loan servicing rights related
to higher rate mortgage loans may be less than in times of stable or increasing
interest rates, which could adversely affect our operations and financial
condition.
We do not have significant servicing rights income to offset some of the
------------------------------------------------------------------------
effect of an economic downturn. Mortgage companies often offset some of the
------------------------------
effects of an economic downturn caused by high interest rates through fees
received for servicing mortgages. Currently, mortgage servicers receive a
minimum of one quarter of one percent of the outstanding mortgage loan balance
per annum for services rendered and consequently have a continuing revenue
stream during periods when the volume of new originations slows. However, we
sell the servicing rights on more than 99% of the mortgage loans we originate or
purchase. Because we are not servicing a large portfolio of mortgage loans, we
must rely upon the generation or purchase of mortgage loans for revenues. This
makes us more vulnerable to changes in the economic cycle and general economic
health in the geographic area or areas in which we operate.
We depend on wholesale brokers that are not under our control to generate
-------------------------------------------------------------------------
loans. If we are not successful in maintaining or expanding our broker network,
-----
our loan volume and therefore our revenues could decline significantly. During
the year ended March 31, 2000, approximately 72% of the mortgage loans closed or
purchased by us based on total dollar value were originated by wholesale
brokers. Our retail division originated the remainder of our loans. None of
these brokers are contractually obligated to do business with us and, in fact,
the brokers also have relationships with our competitors who actively compete
with us in efforts to expand broker relationships. In addition, we typically
receive 15% to 20% of our loan volume in dollars through one broker, First
Capital Mortgage. For our 2000 fiscal year, 14% in total dollar value of loans
made
10
<PAGE>
were derived through First Capital Mortgage. First Capital is not obligated to
provide us with loans. Their loss as a provider could have a material adverse
effect on our business.
We must depend on brokers to be accurate in their representations regarding
---------------------------------------------------------------------------
compliance and loan quality and may incur losses if representations are
-----------------------------------------------------------------------
inaccurate. In addition to depending on brokers to generate mortgage loans, we
----------
depend on brokers to be accurate in their representations and warranties
regarding compliance with regulations and the quality of the loans to be funded.
During 1997, we suffered losses due to broker fraud primarily with respect to
two loans. Primarily due to the misrepresentations made by brokers on two
loans, the values of each of the properties securing the loans were overstated
by approximately $100,000. In addition, the assets and employment status of
each of the two borrowers appear to have been misrepresented. We estimate that
these misrepresentations cost us approximately $400,000. In order to address
this situation, we restructured our pre-funding quality control procedures.
Shortly after the change in procedures, our loan volume generated through
brokers decreased causing additional losses.
If we are unable to maintain adequate funding sources, our ability to
---------------------------------------------------------------------
originate and fund loans will be impaired. Our ability to originate and purchase
-----------------------------------------
mortgage loans depends to a large extent upon our ability to secure financing
upon acceptable terms to fund and hold the mortgage loans until sold. We
currently fund all but a few of the mortgage loans we purchase and originate
through credit facilities with commercial banks and financial institutions
collateralized by loan purchase agreements. On rare occasions, we fund loans
out of cash flow without using our credit facilities. These agreements are
generally terminable at will by either party and must be renewed each year. Our
borrowings are in turn repaid with proceeds received when mortgage loans are
sold. We currently primarily rely on First Collateral Services to provide our
primary credit facilities for our loan originations and purchases. We also have
a credit faculty with Provident Bank. Any failure to renew or obtain adequate
funding under our financing facilities or other financing arrangements, or any
substantial reduction in the size of or increase in the cost of such facilities,
could have a material adverse effect on our business, results of operations and
financial condition. To the extent we are not successful in maintaining or
replacing existing financing, we may have to curtail our mortgage loan
origination and purchase activities, which could have a material adverse effect
on our operations and financial condition.
We are not in compliance with restrictive covenants imposed by our primary
--------------------------------------------------------------------------
lender and the lender could demand repayment at any time. At March 31, 2000, we
--------------------------------------------------------
had drawn $4,292,446 in excess of the amount allowable on one of our lines of
credit. In addition, substantially all of the restrictive covenants on such
line were not satisfied. On August 14, 2000, we received a letter from the
lender waiving the violations for the period ending on March 31, 2000.
Currently, we are out of compliance with such covenants. We may not be able to
get waivers for these or future violations. The lender can demand full repayment
of the overdrawn amount on the entire outstanding balance at any time so long as
we are not in compliance with restrictive covenants in the credit facility and
the lender has not waived compliance. We would not have the funds available to
satisfy such a demand. The lender could seize the mortgage loans which are
collateral for the line of credit and proceed against our assets and the
guarantors of the line of credit. We anticipate that
11
<PAGE>
we will be in compliance with the loan documents relating to the line of credit
by December of 2000. However, this assumes that loan production continues to
remain at least at current levels.
We depend on programs that purchase and guarantee loans. Generally, the
-------------------------------------------------------
institutional investors that purchase mortgage loans that we originate generate
funds by selling mortgage-backed securities. This funding mechanism is largely
dependent upon the continuation of programs administered by national government-
sponsored mortgage entities, such as Freddie Mac, Fannie Mae and Ginnie Mae,
which provide the context for, and facilitate the issuance of, such securities.
Although we are not aware of any proposed changes in these programs, the
discontinuation of, or a significant reduction in, the operations of such
programs could have a material adverse effect on our operations. In addition,
the mortgage loan products eligible for these programs may be changed from time
to time by the sponsor. Changes could affect the profitability of specific
types of mortgage loan products by changing the administrative costs of
purchasing or originating the mortgage loans or other aspects of the programs.
Our competitors in the mortgage banking industry are often larger making it
---------------------------------------------------------------------------
more difficult for us to compete successfully. We face strong competition in
---------------------------------------------
originating, purchasing and selling mortgage loans and related mortgage
servicing rights. Our competition is principally from savings and loans
associations, other mortgage companies, commercial banks and, to a lesser
degree, credit unions and insurance companies, depending upon the type of
mortgage loan product offered. We compete with these entities by striving to
provide timely service to mortgage brokers and borrowers and develop competitive
products. Many of these institutions have greater financial resources than we
do and maintain a significant number of branch offices in the areas in which we
conduct operations. Increased competition for mortgage loans from other lenders
may result in a decrease in the volume of mortgage loans that we are able to
originate and purchase. If we are unable to compete effectively, our operations
and financial condition could be materially and adversely affected.
Real property with environmental problems securing our loans may cause us
-------------------------------------------------------------------------
to incur liability. In the course of our business, we sometimes acquire
------------------
residential real estate which served as collateral for loans that are in
default. It is possible that hazardous substances or waste, contaminants or
pollutants could be present on such properties and not discovered until after we
have taken possession. In such event, we might be required to remove such
substances from the affected properties at our expense. The cost of such
removal could substantially exceed the value of the affected properties or the
loans secured by such properties. There can be no assurance that we would have
adequate remedies against the prior owners or other responsible parties, or that
we would not find it difficult or impossible to sell the affected real
properties either prior to or following such removal. These costs could have a
material adverse effect on our operations and financial condition.
Most of our assets are pledged to secure debt leaving few if any assets
-----------------------------------------------------------------------
that might be distributed to shareholders in liquidation. Due to our financing
--------------------------------------------------------
needs, with the occasional exception of loans funded by us, all of our mortgage
assets will be used to secure purchase agreements, bank borrowings or other
credit arrangements for at least the near future. We hope to
12
<PAGE>
be able to fund more loans ourselves at some point in the future, but may never
be able to do so on a significant scale. At most times, our debt under the line
of credit is approximately equal to the value of our mortgage loan assets.
Therefore, such mortgage assets would not be distributed to stockholders in the
event of liquidation, except to the extent that the market value of the assets
exceeds amounts due our creditors. The market value of the mortgage assets will
fluctuate as a result of market factors such as interest rates and prepayment
rates as well as the supply of, and demand for, such mortgage assets. In the
event of the bankruptcy of a counter-party with whom we have an agreement, we
might experience difficulty recovering our pledged mortgage assets, which may
adversely affect our operations and financial condition.
We could be required to sell mortgage assets under adverse market
-----------------------------------------------------------------
conditions. If we are not able to renew or replace credit facilities as they
----------
come up for renewal, we could be required to sell mortgage assets under adverse
market conditions and, as a result, could incur permanent capital losses. A
sharp rise in interest rates or increasing market concern about the value or
liquidity of mortgage assets in which we have a significant investment will
reduce the market value of the mortgage assets, which would likely cause lenders
to require additional collateral. A number of such factors in combination may
cause difficulties for us including a possible liquidation of a major portion of
our mortgage assets at disadvantageous prices with consequent losses, which
would have a material adverse effect on our financial status and could render us
insolvent. Additionally, although we intend generally to sell our mortgage
assets within ninety days or less of generation or purchase because such assets
will be pledged under financing agreements, our ability to sell mortgage assets
to obtain cash will be greatly limited. Our inability to sell such assets could
have a material adverse effect on our operations and financial condition.
We may need additional equity financing, which may or may not be available,
---------------------------------------------------------------------------
to expand our business and to reduce our interest costs. Our primary operating
-------------------------------------------------------
cash requirement is the funding or payment of interest expense incurred on
borrowings. We also must fund general operating and administrative expenses and
from time to time capital expenditures. We currently fund these cash
requirements primarily through our lines of credit and the sale of loans.
Management's plan is to decrease our reliance on the lines of credit and
increase the volume of loan sales. Our ability to implement this business
strategy will depend upon our ability to increase stockholders' equity thereby
establishing a reserve which may be used to fund loans. There can be no
assurance that we will be able to raise additional equity on favorable terms. We
cannot presently estimate the amount and timing of additional equity financing
requirements because such requirements are tied to, among other things, our
growth. If we were unable to raise such additional capital, our results of
operations and financial condition could be adversely affected.
Defaults in mortgage loans or characteristics of property securing the
----------------------------------------------------------------------
mortgages may adversely affect our ability to sustain the volume of mortgages.
-----------------------------------------------------------------------------
We fund mortgage loans by drawing on our line of credit, then as soon as
possible and typically within fifteen days, sell the loan in the secondary
market. We use the proceeds of the sale of a loan to repay the amount borrowed
to fund that loan. Thus, the composition of mortgage loans we hold changes from
day to day. There are also loans that for one reason or another we do not sell,
but hold. This is rare, but does happen
13
<PAGE>
from time to time. During the time we hold any mortgage loans, we are be subject
to increased credit risks, including risks of borrower defaults and bankruptcies
and special hazard losses that are not covered by standard hazard insurance,
such as those occurring from earthquakes or floods. In the event of a default on
any mortgage loan we hold, we will bear the risk of loss of principal to the
extent that the value of the secured property and any payments from an insurer
or guarantor are less than the amount owed on the mortgage loan and the costs of
realizing on the collateral. Any loans in default will also cease to be eligible
collateral for our borrowings, which means we will have to finance the loan out
of other funds until it is ultimately liquidated. Although we intend to
establish reserves in amounts we believe are adequate to cover these risks,
there can be no assurance that any such reserves will be sufficient to offset
losses on mortgage loans in the future. Even assuming that properties securing
mortgage loans we hold provide adequate security for such mortgage loans, there
will likely be delays, which could be substantial, in prosecuting foreclosures.
State and local statutes and rules may delay or prevent foreclosure on, or sale
of, the mortgaged property and may limit revenues in which case proceeds we
receive may not be sufficient to repay all amounts due on the related mortgage
loan. Some properties that collateralize our mortgage loans may have unique
characteristics or may be subject to seasonal factors that could materially
prolong the time period required to resell the property.
Real estate is illiquid and its value is dependent on conditions beyond our
---------------------------------------------------------------------------
control. The fair market value of the real property underlying any mortgage we
-------
acquire may decrease. The value is largely dependent on factors beyond our
control and may be affected by adverse changes in national or local economic
conditions. The value may also be affected by the need to comply with
environmental laws or the ongoing need for capital improvements, particularly in
older structures. National disasters could result in unusual loss as could
adverse changes in zoning laws and other factors which are beyond our control.
We are liable for representations and warranties made to purchasers and
-----------------------------------------------------------------------
insurers. In the ordinary course of business, we make representations and
--------
warranties to the purchasers and insurers of mortgage loans and the related
mortgage servicing rights regarding compliance with laws, regulations and
program standards. In broker generated loans, we generally receive similar
representations and warranties from the brokers from whom we purchase the loans.
If any of these representations and warranties are inaccurate, we may be
required to repurchase the corresponding mortgage loans and/or may be liable for
damages. For the last two years, we have been required to repurchase one loan
each year. Prior to that, we typically were required to repurchase two to three
loans each year. These loans averaged approximately $165,000. In some cases, a
portion of the costs of a repurchase are covered by our errors and omissions
insurance. Some or all of the costs are also often recovered upon the sale of
the collateral for the loan or by ultimate repayment. There can be no
assurances that we will not experience greater losses in the future.
We are not in compliance with all of HUD's regulations which means that HUD
---------------------------------------------------------------------------
could prevent us from originating HUD insured loans which made up 61% of our
----------------------------------------------------------------------------
loan volume in fiscal year 2000. Federal, state and local authorities regulate
-------------------------------
and examine the origination, processing, underwriting, selling and servicing of
mortgage loans. The United States Department
14
<PAGE>
of Housing and Urban Development, commonly known as HUD, has approved us as a
mortgagee in HUD programs. HUD insured loans comprised 61%, 71% and 63% of total
loans we originated based on total dollar value during the years ended March 31,
2000, 1999 and 1998, respectively. In addition, we are an approved
seller/servicer of mortgage loans for Fannie Mae. Among other consequences, the
failure to comply with HUD or Fannie Mae regulations could prevent us from
reselling our mortgage loans or restrict our ability to service mortgage loans
should we choose to do so. Such failure could also result in demands for
indemnification or mortgage loan repurchase, rights of recission for mortgage
loans, class action lawsuits and administrative enforcement actions, any of
which could have a material adverse effect on our operations and financial
condition. We failed to maintain the minimum adjusted net worth required by HUD
in fiscal years 1998, 1999 and 2000. We filed a capital restoration plan and had
satisfied the net worth requirement by September 15, 1998, but were again out of
compliance in fiscal years 1999 and 2000 and since the end of fiscal year 2000.
We expect to be required to submit a capital restoration plan. HUD has the
ability to take away certification at any time. If we lost our HUD approval, our
ability to originate mortgages would be reduced significantly.
Mortgage loans are subject to significant government regulation. Federal,
---------------------------------------------------------------
state and local governmental authorities also regulate our activities as a
lender. The Truth in Lending Act, and Regulation Z promulgated thereunder,
mandate that mortgage lenders meet requirements designed to provide consumers
with uniform, understandable information on the terms and conditions of mortgage
loans and credit transactions. The Equal Credit Opportunity Act prohibits
creditors from discriminating against applicants on the basis of race, color,
sex, age or marital status, among other restrictions and requirements. In
instances in which the applicant is denied credit, or the rate or charge for a
mortgage loan increases as a result of information obtained from a consumer
credit agency, the Fair Credit Reporting Act of 1970 requires the lender to
supply the applicant with a name and address of the reporting agency. The Real
Estate Settlement Procedures Act and the Debt Collection Practices Act require
us to file an annual report with HUD.
We currently hold licenses or exception certificates in the following
states: Alaska, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Montana,
Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South
Carolina, Tennessee, Utah, Washington, and Wisconsin. We are subject to the
laws of all of these states which include licensing requirements as well as
limitations on interest rates. We believe that we are in substantial compliance
with the laws of all states in which we do business.
There can be no assurance that we will maintain compliance with these
requirements in the future without additional expenses, or that more restrictive
local, state or federal laws, rules and regulations will not be adopted or that
existing laws and regulations will not be interpreted in a more restrictive
manner, which would make compliance more difficult and more expensive for us.
Our business is concentrated in the Southern California area. Based on
------------------------------------------------------------
total dollar values, 75% to 85% of our mortgage loan originations and purchases
are typically secured by
15
<PAGE>
property in the Southern California area. Although we are working to diversify
our holdings, there is no assurance that we will be successful in entering any
other markets. Even if we do expand to new markets, there is no assurance that
we will be able to generate revenues exceeding the costs associated with
activities in the new markets or that the business activity in those new markets
will match that achieved in the Southern California area. Whether or not we
enter into new geographic markets, our results of operations and financial
condition will be significantly affected by general trends in the economy and
the real estate market in the Southern California area for the foreseeable
future.
We are dependent on the services of key personnel. Our business is
-------------------------------------------------
substantially dependent on the efforts of Marshall Stewart, our President, and
Daryl Meddings, our Chief Financial Officer. We have entered into employment
agreements with both of them which are described in the "Management" section of
this prospectus. However, under the employment agreements either of them may
terminate employment on thirty days notice. Loss of either of their services
could have a material adverse effect on our operations.
Marshall Stewart and Daryl Meddings control the company. Ocean West has
-------------------------------------------------------
four classes of stock authorized in its Certificate of Incorporation and
currently has three classes of voting stock which are issued and outstanding.
Although each holder of Common Shares, Class B Common Shares and currently
outstanding Preferred Shares is entitled to one vote for each share of stock
held, the holders of Class B Common Shares are entitled to elect 75% of the
members of the board of directors of Ocean West which is presently two members
out of three. Holders of Common Shares and currently outstanding Preferred
Shares, together with holders of Class D Common Shares and any additional series
of voting Preferred Shares which are created, are only entitled to elect 25% of
the members of the board of directors, presently one member. Thus, holders of
Class B Common Shares will control the board of directors and, therefore, Ocean
West. Mark Stewart and Daryl Meddings, the founders of Ocean West Enterprises,
together own 100% of the issued and outstanding Class B Common Shares and will,
therefore, control votes by holders of Class B Common Shares. In addition, they
own 72% of the issued and outstanding Common Shares and will therefore also
elect the remaining director so long as they hold more than 50% of the number of
issued and outstanding Common Shares. On all matters other than the election of
directors, Mark Stewart and Daryl Meddings together control 70% of the issued
and outstanding shares of voting stock of Ocean West and therefore will control
the company.
No payment of dividends on Common Shares is expected in the near future.
-----------------------------------------------------------------------
Ocean West is newly formed and has not paid dividends. Presently, the only
significant source of earnings out of which to pay dividends is dividends from
its subsidiary, Ocean West Enterprises. Ocean West Enterprises has not
historically paid dividends to its common shareholders; although it has paid
dividends on outstanding preferred stock. Ocean West will be required to pay
dividends on the Preferred Shares which will total $116,055 annually assuming no
changes in outstanding preferred stock. Ocean West has no present plans to
institute a policy of declaring dividends on other than Preferred Shares. In
the foreseeable future, our capital requirements will likely consume all
operating profits and other available cash. There is no guarantee that Ocean
West Enterprises, and
16
<PAGE>
therefore Ocean West, will pay dividends in the future or will pay dividends in
excess of those owed on the Preferred Shares.
We have issued and may issue additional Preferred Shares which have
-------------------------------------------------------------------
preferences over Common Shares. Ocean West's Certificate of Incorporation
------------------------------
authorizes the issuance of Preferred Shares with designations, rights and
preferences as determined from time to time by its Board of Directors.
Currently, Ocean West has 4,929 Preferred Shares of six series outstanding. The
Board of Directors is empowered, without shareholder approval, to issue
additional series of Preferred Shares with dividends, liquidation, conversion,
voting or other rights that could adversely affect the rights of the holders of
Common Shares. The voting rights of any Preferred Shares, however, are limited
by the Certificate of Incorporation and cannot exceed the voting rights of any
Common Shares. The issuance of preferred shares can be used as a method of
discouraging, delaying or preventing a change of control of Ocean West.
The exercise price of the warrants is not based on market prices. The
----------------------------------------------------------------
exercise price of the warrants was determined by management based upon
management's assessment of business potential and earnings prospects. It
reflects management's opinion relating to the future and may not be indicative
of future market prices of the warrants or the underlying shares, revenues or
profitability.
Future sales of shares by substantial shareholders may adversely affect the
---------------------------------------------------------------------------
price of shares. Assuming the exercise of all warrants, 5,434,652 shares are
---------------
registered and available for public sale. The remaining outstanding shares,
including the 205,872 Class B Common Shares which may be converted to Common
Shares, numbering 4,086,468 are "restricted securities" as defined in Rule 144
promulgated under the Securities Act of 1933. The restricted shares constitute
approximately 43% of the issued and outstanding common shares including shares
which would be issued upon the exercise of the warrants and conversion of the
Class B Common Shares. Sales of securities by affiliates of Ocean West may also
be subject to Rule 144 resale limitations. Rule 144 provides a safe harbor from
registration requirements for some sales of restricted securities or securities
held by affiliates. Currently, all of the restricted Common Shares are held by
Mark Stewart, Daryl Meddings and Agape Foundation Trust. In general, under Rule
144, if adequate public information on Ocean West is available, beginning ninety
days after the date of this prospectus, a person who has satisfied a one year
holding period may sell, during any three month period, up to the greater of 1%
of the then outstanding Common Shares or the average weekly trading volume
during the four calendar weeks prior to such sale. Sales under Rule 144 are
also subject to restrictions relating to manner of sale and notice. Sales of
restricted securities by a person who is not an affiliate of Ocean West under
the Securities Act and who has satisfied a two year holding period may be made
without regard to volume limitations, notice or other requirements of Rule 144.
Management is unable to predict the effect that sales made pursuant to Rule 144
or other exemptions under the 1933 Act may have on the prevailing market price
of the registered Common Shares, or when such sales may begin under Rule 144.
17
<PAGE>
PLAN OF DISTRIBUTION
--------------------
Ocean West issued 300,000 Common Shares and 3,000,000 Common Stock Purchase
Warrants to Monogenesis, a closed-end registered investment company, and
Monogenesis distributed 249,900 of those shares and 2,748,900 of those warrants
to its shareholders as of the date of this prospectus. The Monogenesis
shareholders received 100 Common Shares and 1,100 warrants for each share of
stock of Monogenesis held on ______________, 2000. Monogenesis is distributing
the shares and warrants on behalf of Ocean West to make it a public company with
a substantial shareholder base without having to sell shares in a traditional
initial public offering. Monogenesis will retain the 50,100 shares and 251,100
warrants which were not distributed as well as the 88,800 shares acquired upon
exercise of warrants as compensation for distributing the shares and warrants to
its shareholders. It expects to sell the shares periodically which sales may be
made under Rule 144 and may also exercise or sell the warrants.
Monogenesis purchased the 300,000 shares at a price of $0.01 each and the
warrants, most of which are being distributed to its shareholders, at a price of
$0.001 each. It also exercised warrants it received from Ocean West Enterprises
and purchased 88,800 shares for $7,104. In addition, Monogenesis agreed to
distribute shares and warrants to its shareholders approximately 1,200 of which
are considered institutional shareholders and include employee benefit plans and
trust funds. The price was determined by Monogenesis and management of Ocean
West Enterprises. Ocean West recorded $259,056 in expense and in additional paid
in capital based on the estimated fair value of the 388,800 Common Shares and
251,100 warrants issued to Monogenesis less the price Monogenesis paid for the
shares and warrants. The estimated fair value used to calculate the expense is
based on an appraisal of the value of Ocean West Enterprises by certified public
accountants. Monogenesis will retain the shares and warrants not distributed as
compensation for effecting the distribution. The following table describes the
compensation received by Monogenesis:
<TABLE>
<CAPTION>
Less Purchase Total
Undistributed Shares Estimated Price Paid by Estimated
From Ocean West Value Monogenesis Value
--------------- ----- ----------- -----
<S> <C> <C> <C>
138,900 Common Shares (1) $ 97,230 $ 10,104 $ 87,126
251,100 Warrants (2) $ 0 $ 3,000 (3,000)
Total Compensation $ 84,126
</TABLE>
________________________________________________________________________________
(1) The estimated value of $0.70 per Common Share is based on a business
appraisal by a firm of certified public accountants.
(2) The warrants have an estimated value of zero based on the Black-Scholes
pricing model under Statement of Financial Accounting Standards No. 123.
18
<PAGE>
Monogenesis will own approximately 2% of the outstanding Common Shares of
Ocean West after the distribution. We have agreed to pay the expenses of
registering the shares and warrants issued to Monogenesis which expenses include
legal, accounting, consulting, transfer agent and filing fees and are estimated
to be $__________. Through the distribution of the shares and warrants by
Monogenesis and the periodic sale of shares by shareholders we hope to create a
public trading market in our Common Shares. We hope that a public market for
the shares will facilitate access to public markets and equity capital for
future acquisitions and working capital and provide liquidity for employee stock
incentive programs and existing shareholders.
Since Monogenesis is purchasing shares and warrants with the intent to
distribute them, it is deemed an underwriter under the 1933 Act. An underwriter
is a person who purchases securities from an issuer with a view to the
distribution of such securities. Monogenesis is not a broker-dealer and has not
participated in any traditional underwritings. It is registered as a closed-end
investment company under the Investment Company Act of 1940 and was formed to
provide a mechanism for companies to become reporting companies under the 1934
Act in transactions similar to the distribution described in this prospectus.
Monogenesis completed one such distribution in 1992 and two in 1997. Ocean West
and it shareholders have agreed to indemnify Monogenesis against any liability
arising out of a breech of any representation, warranty or covenant made by
Ocean West Enterprises or its shareholders in the agreement with Monogenesis.
Shareholders of Monogenesis that receive shares and warrants will receive
such securities as a dividend. No holder of Monogenesis stock will be required
to pay any cash or other consideration for the shares or the warrants received
in the distribution or surrender or exchange Monogenesis stock in order to
receive shares or warrants. Holders of the warrants will be required to pay the
exercise price to exercise the warrants.
Shareholders, including the recipients of Common Shares distributed by
Monogenesis, will be able to sell their shares and warrants which are
registered, at any time, although the sale of securities by affiliates is
limited and will generally be subject to Rule 144. Monogenesis does not believe
that any person who receives shares or warrants in the distribution will be an
affiliate. It is expected that registered shares or warrants will be sold
through the selling efforts of brokers or dealers. There is no agreement with
any specific brokers or dealers relating to the shares or the warrants nor has
any plan of distribution or sale of the shares or warrants been developed, other
than the distribution to Monogenesis shareholders described in this section.
Shareholders of Ocean West holding registered shares may sell them:
. to purchasers directly
. in ordinary brokerage transactions and transactions in which the
broker solicits purchasers
. through underwriters or dealers who may receive compensation in the
form of underwriting discounts, concessions or commissions from such
shareholders or from the purchasers of the securities for whom they
may act as agent
19
<PAGE>
. by the pledge of the shares or warrants as security for any loan or
obligation, including pledges to brokers or dealers who may effect
distribution of the shares or warrants or interests in such securities
. to purchasers by a broker or dealer as principal and resale by such
broker or dealer for its own account pursuant to this prospectus
. in a block trade in which the broker or dealer so engaged will attempt
to sell the securities as agent but may position and resell a portion
of the block as principal to facilitate a transaction
. through an exchange distribution in accordance with the rules of the
exchange or in transactions in the over-the-counter market
. pursuant to Rule 144
Such sales may be made at then prevailing prices and terms which may be related
to the then current market price or at negotiated prices and terms. In
effecting sales, brokers or dealers may arrange for other brokers or dealers to
participate.
Shareholders that sell their shares or their successors in interest, and
any underwriters, brokers, dealers or agents that participate in the
distribution of the shares and warrants held by such shareholders, may be deemed
"underwriters" within the meaning of the 1933 Act, and any profit on the sale of
securities by them and any discounts, concessions or commissions received by any
of them may be deemed to be underwriting commissions or discounts under the 1933
Act. We have agreed to pay all expenses incident to the registration of
shareholders' shares and warrants other than underwriting discounts or
commissions, brokerage fees and the fees and expenses of counsel to such
shareholders, if any. We will not receive any proceeds from the sale of shares
or warrants by the shareholders. In the event of a material change in the
information disclosed in this prospectus, the shareholders will not be able to
effect transactions in the shares and warrants pursuant to this prospectus until
a post-effective amendment to the registration statement is filed with, and
declared effective by, the SEC.
Ocean West became subject to the reporting requirements of the 1934 Act on
the date of this prospectus. The first report will be due _______________,
2000. We intend to apply for quotation of the shares and warrants on the OTC
Bulletin Board.
USE OF PROCEEDS
---------------
The cash proceeds of $6,000 derived from the sale of the shares and
warrants to Monogenesis will be used to pay the expenses of registering shares
and warrants or as working capital. We will not receive any proceeds from the
sale of shares or warrants by the selling shareholders.
20
<PAGE>
If all of the warrants are exercised, we expect to use the $6,000,000
proceeds as follows:
<TABLE>
<CAPTION>
Use Amount
--- ------
<S> <C>
Pay down warehouse
line of credit $1,000,000
Redeem outstanding Preferred
Shares 1,683,000
Fund loan production 2,500,000
Working capital 817,000
-----------
Total $6,000,000
===========
</TABLE>
If we receive less than $6,000,000 and more than a de minimus amount, any
proceeds will first be used to pay down the warehouse line of credit, then to
redeem outstanding Preferred Shares. Use of the proceeds is subject to change
based upon our financial position and other factors which might be applicable at
the time the proceeds are received.
CAPITALIZATION
--------------
The capitalization of Ocean West Enterprises (prior to acquisition by Ocean
West) and the pro forma capitalization of Ocean West (giving effect to the
acquisition of shares of Ocean West Enterprises) as of June 30, 2000 are as
follows:
--------------------------------------------------------------------------------
Capitalization of Ocean West Enterprises Prior to Acquisition:
--------------------------------------------------------------------------------
Stockholders' Equity and Redeemable Preferred Stock:
<TABLE>
<S> <C>
Redeemable Preferred Stock
Series D; no par value; 1,500 shares issued and outstanding $ 600,000
Common stock no par value; 100,000 shares authorized;
30,000 shares issued and outstanding 408,348
Preferred Stock; no par value; 50,000 shares authorized:
Series C, 1,000 shares issued and outstanding 100,000
Series E, 1,200 shares issued and outstanding 300,000
Series F, 1,250 shares issued and outstanding 125,000
Series G, 2,000 shares issued and outstanding 200,000
Series I, 550 shares issued and outstanding 55,000
Series K, 1,000 shares issued and outstanding 120,000
Series L, 183 shares issued and outstanding 183,000
Accumulated deficit (1,945,592)
------------
Total stockholders' equity and redeemable preferred stock $ 145,756
============
</TABLE>
21
<PAGE>
--------------------------------------------------------------------------------
Pro Forma Capitalization of Ocean West Assuming Acquisition of Shares of Ocean
West Enterprises (1):
--------------------------------------------------------------------------------
Stockholders' Equity:
<TABLE>
<S> <C>
Common Shares
par value - $0.01 per share; 30,000,000 shares authorized;
6,315,248 shares issued and outstanding (2) $ 63,152
Class B Common Shares
par value - $0.01 per share; convertible; 5,000,000 shares
authorized; 205,872 shares issued and outstanding 2,059
Class D Common Shares
par value - $0.01 per share; convertible; 600,000 shares
authorized; no shares issued and outstanding -0-
Preferred Shares
par value - $0.01 per share; 10,000,000 shares authorized;
Series C, 1,000 shares issued and outstanding 100,000
Series E, 680 shares issued and outstanding 170,000
Series F, 1,050 shares issued and outstanding 105,000
Series G, 2,000 shares issued and outstanding 200,000
Series I, 125 shares issued and outstanding 12,500
Series L, 74 shares issued and outstanding 74,000
Additional paid-in capital 1,636,797
Accumulated deficit (2,204,648)
-----------
Total stockholders' equity $ 158,860
===========
</TABLE>
________________________________________________________________________________
(1) Pro forma balance sheets assuming acquisition of Ocean West Enterprises by
Ocean West and showing pro forma adjustments are included in their entirety
in the Financial Statements section of this prospectus.
(2) The number of issued and outstanding Common Shares of Ocean West includes
5,926,448 shares held by the former shareholders of Ocean West Enterprises
and the 388,800 Common Shares issued to Monogenesis for $10,104. This
number does not include the 3,000,000 Common Shares which may be issued
upon the exercise of the warrants.
22
<PAGE>
BUSINESS
--------
General
-------
Ocean West Enterprises, which also does business under the name Ocean West
Funding, is a real estate finance company principally engaged in mortgage
banking. We originate, package, fund and sell on a whole loan basis
conventional, government and non-conforming residential mortgage loans secured
by one-to-four family residences. We consider "non-conforming" loans to be
loans made to borrowers who are unable to obtain mortgage financing from
conventional mortgage sources whether for reasons of credit impairment, income
qualifications or credit history or have a desire or need to receive funding on
an expedited basis. We primarily make loans to purchase existing or new
residential properties, refinance existing mortgages, consolidate other debt or
finance home improvements, education or similar items. We do not currently make
any commercial loans.
Ocean West Enterprises originates and funds loans with the goal of selling
the loans into the secondary market as quickly as possible for a profit. In
most cases, the loans are funded through advances from a credit facility which
advances are repaid upon sale of the loans. The interest we receive from the
borrowers prior to sales of the loans is in most cases equal to the interest we
pay on our line of credit. The secondary market is any investor willing to
purchase these types of loans; however, we sell loans almost exclusively to
institutional investors, such as financial institutions. Typically, the
institutional investors will specialize in purchasing a specific type of loan
and will require that the loan documentation contain specified provisions and
the loans meet specified parameters.
The only loans that we do not sell are loans which for one reason or
another are not immediately salable into the secondary market. Usually, these
are loans that do not fit a purchaser's guidelines. This happens in the case of
less than 1% of the loans we fund. Typically, we will hold the loans for a
period of time, usually less than a year, and then sell them in the secondary
market. It is easier to sell these loans after a payment history has been
established.
Ocean West Enterprises was formed in 1988. From the beginning, we have
been primarily engaged in the origination and sale of residential real estate
mortgages. Almost all of our originations were derived through independent
mortgage brokers until 1998 when we established a retail telemarketing division
to market loans directly to homeowners. With interest rate increases and the
resultant decline in the refinancing market, we closed the telemarketing
division in the first quarter of fiscal 2000. However, we continue to market
loans directly to homeowners through a retail division and through branch
offices. Our current expansion plans are centered on new geographic markets and
marketing directly to builders and real estate agents.
The mortgage loans we originate generally range in size from $80,000 to
$2,000,000 with most loans being in the $100,000 to $180,000 range. The
following table illustrates the breakdown by size of loans originated during the
last three fiscal years:
23
<PAGE>
<TABLE>
<CAPTION>
Year ended March 31,
2000 1999 1998
---- ---- ----
Number Number Number
of Loans Percent of Loans Percent of Loans Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Less than $100,000 634 32% 827 35% 832 38%
Between $100,000 and 949 49% 1,292 55% 1,161 53%
$180,000
More than $180,000 375 19% 245 10% 195 9%
------- ---- ------- ---- ------- ---
Total 1,958 100% 2,364 100% 2,188 100%
======= ==== ======= ==== ======= ===
</TABLE>
Substantially all loans we originate are secured by a first priority real
estate mortgage with the remainder secured by less than a first priority
mortgage. Typically less than 2% of the principal balance of loans are secured
by second priority mortgages. Our core borrower base is individuals who purchase
homes using government financing. Our non-conforming borrower base is
individuals who do not qualify for traditional "A" credit because their credit
history, income or some other factor does not conform to standard agency lending
criteria.
We are an approved mortgage lender for HUD programs under which eligible
loans are insured. HUD insured loans comprised 61% of the total loans in dollar
value we originated during our most recent fiscal year and 71% and 63% during
the two previous fiscal years. In order to maintain HUD certification, we must,
among other things, maintain a minimum adjusted net worth which we failed to
maintain in our last three fiscal years 2000, 1999 and 1998. We raised
additional capital recently and are working to remedy the situation. We expect
to be required to submit a capital restoration plan. To date, HUD has not
terminated our right to make loans under the program, but could begin the
procedure at any time. Our loss of the right to make loans under the HUD
program would have a material adverse effect on our business. Termination of
the right to make HUD insured loans would not affect the insured status of loans
previously made or our right to apply for, and be granted, a new certification
if we later meet the criteria.
Business Strategy
-----------------
We have had an operating loss in three of the last five years. However,
for the first quarter of fiscal 2001, we had net income before taxes of $177,135
compared to a net loss of $196,163 for the same period of the previous year.
Management believes that the primary strengths of Ocean West Enterprises
are the following:
24
<PAGE>
. Our management has over forty years of combined experience in the
lending industry. Marshall Stewart, Daryl Meddings and Thomas
Melsheimer have worked together since 1989.
. Our management's experience in the mortgage lending industry means
that these individuals have worked with many of the mortgage brokers
that originate loans for us for a number of years enhancing efficiency
and trust in the working relationship.
. We have worked to foster, and believe that we have established, a
reputation for a service oriented sales culture emphasizing quick and
efficient responses to customer needs and market demands. One recent
feature implemented to further this goal is the use of automated
underwriting and laptop computers to provide "point of sale" loan
approvals.
. We have also worked to establish an operating philosophy among our
employees requiring adherence to consistent and prudent underwriting
guidelines for loans we make designed to produce mortgage products
which are desirable to the secondary market.
. We have been able to remain a low cost originator of loans by
controlling expenses despite the fact that we have suffered losses in
many years. The losses have been primarily due to expansion costs or
misrepresentations which were made on a few loans. We revised our
quality control procedures to reduce the risks of misrepresentations
in the future.
Our operating strategy is based on the following key elements:
Whole Loan Sales for Cash: We sell almost all of our originated mortgage
loans monthly for cash, historically at a premium over the principal balance of
the mortgage loans.
Continuing Growth of Wholesale Production: We believe that we can continue
to grow wholesale production of loans by increasing penetration in existing
markets and by selectively expanding into new geographic markets.
Expansion of Product Offerings: We use relationships with mortgage loan
brokers and real estate professionals which we have developed over the last six
years to obtain the information necessary to quickly and efficiently tailor
existing products or introduce new products to satisfy broker and consumer
product needs. As part of this expansion, we have set up a wholesale web site
and begun to use the internet to solicit new retail borrowers.
Servicing: Currently, we sell more than 99% of the servicing rights to
loans we originate.
25
<PAGE>
Warehouse Facility: Our management intends to continue to work to lower
our costs of originating loans by attempting to negotiate more favorable credit
facilities.
Management's current plan is to work to expand the business into other
markets. We believe also that a presence in other markets may help lessen the
effect of any downturn in the Southern California market which is where 75% to
85% of our current loans are generated. We can only expand into states in which
we have licenses or exemption certificates, although we may also make occasional
loans in states which do not require a license for certain types, such as cash
out refinancings involving a first priority mortgage or a certain number of
loans made in a given period. For example, several states do not require a
license if no more than three loans are made in that state during a twelve month
period.
In furthering the expansion, we currently hold license or exemption
certificates in twenty-eight states although we have not had significant loan
activity in all of those. Currently, in addition to California, during our last
fiscal year we made ten or more loans in Hawaii, Indiana, Michigan, Missouri,
Nevada, Oregon, Tennessee, Texas and Washington. We also made occasional loans
in sixteen additional states. We believe we are in substantial compliance with
the laws of all states in which we do business.
Divisions
---------
Ocean West Enterprises currently has two divisions -- a wholesale division
and a retail division. In wholesale transactions, we typically do not have any
contact with the borrower at application while in retail funding, we have
contact with the borrower from the beginning of the application process. Our
wholesale division has relationships with approximately 1,000 approved
independent loan brokers and has historically accounted for substantially all of
our loan originations. Our retail branch division was created to expand our loan
originations across the nation. Several years ago, we created a retail
telemarketing division to market loans directly to homeowners. As the interest
rate increased and the refinancing market decreased, we determined that this
division was no longer profitable and closed the division in the first quarter
of fiscal 2000.
During fiscal year 2000, 72% in total dollar value of loans we made were
originated by wholesale brokers with approximately 17% in total dollar value of
our loans originated by one broker, First Capital Mortgage. The remaining 28%
in dollar value of the loans were originated through our retail division branch
offices through direct contact with borrowers. We are also working to develop a
retail division to market loans directly to builders and real estate agents.
The following table sets forth the volume of mortgage loans originated
through the Wholesale Division versus the Retail Division (which numbers include
loans generated through the Telemarketing Division before it was closed):
26
<PAGE>
<TABLE>
<CAPTION>
Year ended March 31,
2000 1999 1998
---- ---- ----
Volume Percent Volume Percent Volume Percent
------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Wholesale $219,997,953 84% $218,987,397 73% $221,947,299 86%
Retail 42,606,223 16% 81,657,518 27% 36,566,531 14%
------------ ------- ------------ ------- ------------ -------
Total $262,604,176 100% $300,644,915 100% $258,513,830 100%
============ ======= ============ ======= ============ =======
</TABLE>
Wholesale Division
------------------
Historically, our primary source of mortgage loans has been our Wholesale
Division which maintains relationships with approximately 1,000 independent
mortgage brokers. The mortgage loan brokers act as intermediaries in arranging
mortgage loans. We typically receive loans from 128 brokers in a year with
approximately $3 million to $4 million per month, or 10% to 20% of our loans
based on the dollar value, originated through First Capital Mortgage.
We typically enter into a mortgage broker agreement with each independent
mortgage broker requiring the broker to meet licensing and other criteria.
Basically, we establish a non-exclusive relationship with the mortgage brokers
who generally also act for other mortgage loan companies as well. The mortgage
broker, from time-to-time and at its option, will submit completed mortgage loan
application packages from the general public to us for funding consideration and
then will facilitate the closing of mortgage loan applications that we approve
for funding. The broker's role is to identify applicants, assist in completing
loan application forms, gather necessary information and documents and serve as
our liaison with the borrower throughout the lending process.
We review and underwrite the applications submitted by brokers, approve or
deny the applications and set the interest rate and other terms of the loans.
Upon acceptance by the borrower and satisfaction of all of the lending
conditions, we fund the loan. Because brokers conduct their own marketing and
use their own employees to obtain loan applications and maintain contact with
borrowers, originating loans through brokers allows us to increase loan volume
without incurring marketing, labor and other overhead costs associated with
retail originations. We have no obligation to pay a mortgage broker any sums
owed to the mortgage broker by a borrower or to pay a mortgage broker any sum
with respect to any mortgage loan application package which is not closed and
funded.
Generally, mortgage brokers submit loan applications to an account
executive in one of our sales offices. The loan is logged-in as required by the
Real Estate Settlement Procedures Act, underwritten and, in most cases,
conditionally approved or denied within forty-eight hours of receipt. We attempt
to respond to each application as quickly as possible, since mortgage brokers
generally submit individual loan files to several perspective lenders
simultaneously and the lender with the quickest response has a better chance of
obtaining the loan. If the application meets our underwriting criteria, we will
issue a "conditional approval" to the broker with a list of specific conditions
to be met and additional documents to be supplied prior to funding the loan.
Some examples of additional
27
<PAGE>
documents which may be required are credit verifications and independent third
party appraisals. In most cases, we fund loans within fifteen days of the
approval of the loan application.
We require that all independent brokers submitting loans to us be
registered or licensed in the jurisdiction in which they operate and be approved
by us in advance. We annually audit all brokers that submit loans to us in order
to confirm possession of current licenses or registrations and to update the
broker's financial statements and employees' names and addresses. We believe
that an important element in developing, maintaining and expanding our
relationships with independent mortgage loan brokers is to provide a high level
of product knowledge and customer service to the brokers.
Product Types
-------------
Ocean West Enterprises offers a broad range of mortgage loan products to
provide flexibility to mortgage loan brokers and retail divisions. These
products vary in loan-to-value ratio and income requirements as well as other
factors.
The following is a list of our primary standard products:
. FHA/VA - Thirty-year fully amortizing adjustable or fixed rate program
------
-- adjustable rate program indexed to the one-year treasury featuring
a cap of annual interest rate increases of 1% and a life cap on
increases of 5%.
. 95% LTV (loan-to-value) First Mortgage Loan -- Thirty-year fully
-------------------------------------------
amortized adjustable or fixed rate program that meets guidelines
provided by purchasers of loans.
. Conforming Mortgage Products -- Adjustable and fixed rate loan
----------------------------
programs that meet the guidelines for purchase by government-sponsored
entities, such as FNMA and FHLMC which guarantee mortgage backed
securities, and by permanent investors in mortgage backed securities
secured by or representing ownership in such mortgage loans.
. Second Mortgage Program -- Fixed rate amortizing and fixed rate with a
-----------------------
balloon payment programs that are limited to borrowers identified as
A+ through B credit, risks, with a maximum combined loan-to-value
ratio equal to 100%. Borrowers are given a credit grade through two
basic methods. One is through an underwriter that knows and
understands the end investors' credit requirements and grades the
borrowers accordingly. The other is through automated underwriting
systems used by many investors including Fannie Mae and Freddie Mac.
In the automated system, the borrower's credit information is entered
into a computer-driven underwriting system which analyzes the data and
runs a credit report.
28
<PAGE>
. JUMBO Loans -- Adjustable and fixed rate loan program for loans that
-----------
exceed the loan limits set by the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage
Association (Freddie Mac). These loans are sold to investors in the
secondary market that specialize in these types of loans and are
structured to meet the guidelines provided by specific investors.
For non-conforming loans, we typically offer fixed-rate first mortgage loans
which are amortized over a fifteen- or thirty-year period as well as loans with
a balloon payment in fifteen years and payable during the fifteen year period
under a thirty-year amortization schedule.
The following table sets out loan originations by product type for the last
three fiscal years:
<TABLE>
<CAPTION>
Year ended March 31,
2000 1999 1998
---- ---- ----
Volume Percent Volume Percent Volume Percent
------ ------- ------ ------- ------ -------
(in thousands) (in thousands) (in thousands)
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Loan Types:
-----------
FHA/VA-Government $159,894 61% $213,967 71% $162,804 63%
Conforming - Conventional 76,881 29% 62,585 21% 58,503 23%
Jumbo Loans 24,684 9% 21,311 7% 31,254 12%
Second Mortgages 1,145 1% 2,782 1% 5,953 2%
-------- --- -------- ---- -------- ---
Total $262,604 100% $300,645 100% $258,514 100%
======== ======== ========
Loan Products:
--------------
15/30 Year Fixed - All Loan
Types $230,254 88% $289,538 96% $187,002 72%
Adjustable - All Loan Types 33,350 12% 11,107 4% 71,512 28%
-------- --- -------- ---- -------- ---
Total $262,604 100% $300,645 100% $258,514 100%
======== ======== ========
</TABLE>
Quality Control
---------------
Ocean West Enterprises has implemented a loan quality control process to
help enforce sound lending practices and compliance with our policies and
procedures as well the compliance requirements of agencies such as HUD, Fannie
Mae and the requirements of other purchasers of mortgages. Prior to funding a
loan, we perform a "pre-funding quality control audit" in which our staff re-
verifies the borrower's credit history and employment, using automated services
as well as verbal verifications. In addition, properties which will potentially
secure the mortgage loans are appraised by an independent appraiser. All
appraisals must be conducted by a qualified licensed independent appraiser and
the appraisal must conform to the Uniform Standards of Professional
29
<PAGE>
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation. Our personnel also review every appraisal to confirm the adequacy of
the property as collateral prior to funding.
In addition, our quality assurance department audits a percentage of all
loans which are funded. The department reviews the documentation, including
appraisals and recertifications, for compliance with established underwriting
guidelines and lending procedures. The department also reexamines the funding
documents for accuracy, completeness and adherence to corporate, state and
federal requirements. As part of the audit process, any deficiencies discovered
are reported to senior management to determine trends and any need for
additional training of personnel.
Underwriting
------------
Ocean West Enterprises has established underwriting criteria under which
mortgage loans are originated. The loans originated under these underwriting
guidelines generally also satisfy the underwriting standards used by the Federal
Housing Association, the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation. The underwriting guidelines are intended to aid
in evaluating the credit history of the potential borrower, the capacity of the
borrower to repay the mortgage loan, the value of the real property which will
secure the loan and the adequacy of such property as collateral for the proposed
loan. The loan terms, including interest rate and maximum loan-to-value ratio,
are determined based upon the underwriter's review of the loan application and
related data and the application of the underwriting guidelines.
We employ only experienced underwriters. Our Underwriting Manager must
approve the hiring of all underwriters, including those who will be located in a
regional or branch office. Our underwriters must have had either substantial
underwriting experience or substantial experience with us in other aspects of
the mortgage finance industry before becoming part of the underwriting
department. All underwriters are required to participate in ongoing training,
including regular supervisory critiques of each underwriter's work. We believe
that our underwriting personnel have the ability to analyze the specific
characteristics of each loan application and make appropriate credit judgments.
The underwriting guidelines include three levels of documentation
requirements for applicants which are referred to as the "Full Documentation,"
"Lite Documentation" and "Stated Income Documentation" programs. The level of
documentation required for a specific loan is dictated by the purchasers in the
secondary market. Under all three programs, we review:
. the applicant's source of income;
. calculate the amount of income from sources listed on the loan
application or other documentation;
. review the credit history of the applicant;
. calculate the debt service-to-income ratio to determine the
applicant's ability to repay the loan;
30
<PAGE>
. review the type and use of the property being financed; and
. review the property.
In determining the ability of the applicant to repay the loan, our underwriters
use: (a) a qualifying rate that is equal to the stated interest rate on fixed-
rate loans, (b) the initial interest rate on loans which provide for three years
of fixed interest rate and payments before the initial interest rate adjustment,
or (c) 2% above the initial interest rate on other adjustable-rate loans. The
underwriting guidelines require that mortgage loans be underwritten following a
standard procedure which complies with applicable federal and state laws and
regulations and requires our underwriters to be satisfied of the value of the
property to be mortgaged based upon a review of the appraisal. In general, the
maximum principal amount of loans originated under our conventional program is
$650,000; however, management may approve and make larger loans on a case-by-
case basis. Larger loans also require approval by the intended purchaser of the
loan.
Under the Full Documentation program, applicants are generally required to
submit two written forms of verification of stable income for at least twelve
months. Under the Lite Documentation program, the applicant submits twenty-four
months of bank statements. Under the Stated Income Documentation program, an
application may be accepted based upon the monthly income stated on the mortgage
loan application if other criteria are met. All of the programs require a
telephone verification of the employment of salaried employees. In the case of
purchase money loans, under the Full Documentation program guidelines and, on
all purchase loans where the loan-to-value ratio is greater than 80%, we also
verify source of funds to be deposited by the applicant into escrow.
Management evaluates the underwriting guidelines on an ongoing basis and
periodically modifies them to reflect current assessments of various issues
relating to underwriting analysis. In addition, as new loan products are
developed, we adopt underwriting guidelines which are appropriate for the new
products. Conventional mortgage loans and second mortgage loans, including 125%
loan-to-value loans, are underwritten to the standards of the intended
purchasers of the loans and use information, including credit scores, which we
do not generally consider under our standard underwriting guidelines.
Sale of Loans
-------------
Ocean West Enterprises generally sells substantially all of the loans
originated. The dollar amount of loans held for sale varies from day to day, but
on March 31, 2000 was approximately $6,500,000. Once we have funded a loan
through a credit facility, the next objective is to sell the loan as quickly as
possible which typically happens in ten to fifteen business days. A
reconciliation package is prepared for accounting. The file then moves on to the
shipping department where it is copied and stacked to specific investor
guidelines. After we receive the final HUD or other closing statement, usually
two to three days after funding, the file is sent to the appropriate investor
and revenue is recognized. We typically make general representations and
warranties to purchasers of the mortgages relating to borrower disclosures,
closing procedures, credit documentation, follow-up
31
<PAGE>
documentation and accuracy of representations. In many cases, purchasers of the
mortgages will require language in the documentation mandating that we return
all or a portion of the premium and any premium paid for servicing rights for
loans that are paid off early, typically prior to the end of the first year. In
most cases, we are only liable for premium recapture if the loan is being
prepaid as a result of a refinancing with us or one of our affiliates.
Most of our loans are purchased by the following institutional investors:
Chase Manhattan Mortgage, Citmorgage, Inc., Headlands Mortgage Corporation,
Green Point Mortgage, Indy Mae, G.E. Capital Corporation, Interfirst Mortgage,
Fleet Mortgage, Firstar Bank N.A., First Union Mortgage Corporation, Saxon
Mortgage and Washington Mutual. The purchaser for a particular loan is chosen by
our secondary marketing department. Commitments to purchase loans are made on a
loan by loan basis. We are not required to provide a certain number of loans to
any purchaser.
Mortgage Loan Servicing Rights
------------------------------
Ocean West Enterprises currently sells the servicing rights on the loans it
funds to the purchaser of the loan. At the time the loan is sold, the purchaser
of the loan typically pays us a premium for the release of the servicing rights.
The premium is paid for the right to collect the servicing fees for the period
the loan remains on the investor's books. A typical spread for an "A" grade loan
is 1/4 of 1% annually. In the past, we occasionally retained servicing rights,
but no longer do so regularly. However, we are not currently set up to service
loans in-house and contract with Dovenmuehle Mortgage, Inc. to subservice such
loans. The subservicer is responsible for accepting and posting all payments,
maintaining escrow accounts and reporting to the end investors, such as Fannie
Mae, Indy Mae, etc. For this service, we typically pay the subservicer a monthly
fee averaging $6 to $7 per loan. Currently, the subservicer is servicing
seventy-six loans with approximately $7,400,000 in total principal balance. The
amounts paid to the subservicer will decline as the loans are paid off.
Competition
-----------
The mortgage banking business is highly competitive and there are many
participants. The market for mortgage loans is influenced by interest rate
levels as well as other general economic and demographic factors. We compete
with other wholesale and retail mortgage banking entities and financial
institutions, many of which have substantially greater financial and other
resources than we do. We also compete with mortgage brokers, including those
that have agreements with us who usually represent and submit applications to
more than one mortgage provider. Mortgage brokers compete on the basis of
service, range of mortgage loan products and pricing. We currently depend
primarily on mortgage brokers for loan originations. Competitors seek to
establish relationships with the same mortgage brokers we do. The mortgage
brokers are not obligated to continue to provide loans to us.
32
<PAGE>
Mortgage Loan Funding and Financing Arrangements
------------------------------------------------
Ocean West Enterprises funds mortgage loans primarily through warehouse
facilities provided by First Collateral Services and Provident Bank. A warehouse
facility or warehouse line of credit is a credit facility under which the
borrower may borrow funds from time to time for a specific purpose, in this
case, to fund mortgage loans. First Collateral provides us with up to
$15,000,000, and Provident provides us with up to $5,000,000, for a total of
$20,000,000 in warehouse line capabilities. Both facilities are secured by the
mortgage loans financed through the line, related mortgage servicing agreements
and the personal guarantees of the two primary shareholders.
The warehouse line provided through First Collateral bears interest at the
LIBOR rate plus 2.5% (9.125% on June 30, 2000) and expires on December 31, 2000.
The lender has imposed restrictions on the types of loans and maximum amounts
per individual loans which may be funded through the line. Borrowing pursuant to
the line is limited to the lesser of the credit line and the value of the loans
securing the line calculated as provided in the loan documents. The value of the
loans for the purposes of calculating the borrowing limits is typically limited
to 98% of the purchase price of the loan; we must fund the remaining 2% out of
working capital. Interest is payable monthly and each advance is payable at the
time of the loan sale. The outstanding balance under this warehouse line of
credit was $20,019,054, including $748,787 which had been drawn, but had not
been funded at March 31, 2000, $17,493,914 at March 31, 1999 and $16,792,260 at
March 31, 1998.
The loan agreement governing the terms of the First Collateral line of
credit contains various restrictive covenants relating to tangible net worth and
various debt and other ratios. Payment of cash dividends or redemption of shares
is also restricted to net income after the date of the applicable agreement
computed on a cumulative basis. We had drawn approximately $5,000,000 on the
line in excess of its limits as of March 31, 2000, including drawn but unfunded
amounts, and are in violation of the restrictive covenants. The lender waived
the covenant violations through March 31, 2000.
Our second warehouse line of credit with Provident Bank bears interest at
the prime rate as reflected in The Wall Street Journal plus 1.00% to 1.25%
-----------------------
depending upon the grade of the loan product financed and was between 10.5% and
10.635% on June 30, 2000. Interest is payable monthly and each advance must be
repaid within 45 days. It expires on September 30, 2000, and we are currently in
negotiations to renew the facility. On March 31, 2000, the outstanding balance
under this line of credit was $1,374,545 and on March 31, 1999, it was
$1,267,330. There was no outstanding balance on March 31, 1998.
Employees
---------
Ocean West Enterprises has approximately 106 employees of which a little
over one-half are primarily employed in sales. Approximately one-third of such
employees hold clerical positions.
33
<PAGE>
The remaining employees hold administrative positions and include Marshall
Stewart, the Chief Executive Officer, and Daryl Meddings, the Chief Financial
Officer.
Properties
----------
Our headquarters are located at 15991 Redhill Avenue, #110 in Tustin,
California. We lease approximately 13,160 square feet of office space under a
lease the current term of which expires November 30, 2003. The two founding
shareholders personally guaranteed the lease. Rent is currently $16,450 per
month plus overrides and increases annually beginning December 1, 1999 to
$18,555.64 for the last year of the term. We have the right to renew the lease
for one additional sixty month term. During the renewal term, the rent will be
adjusted to the then current market rate. We also have branch offices in
Honolulu, Hawaii and Moreno Valley, California.
Regulation
----------
The consumer finance industry is highly regulated, therefore Ocean West
Enterprises is subject to extensive and complex rules and regulations of, and
examinations by, various federal, state and local government authorities. These
rules impose obligations and restrictions on our loan origination, credit
activities and secured transactions. In addition, these rules limit the interest
rates, finance charges and other fees that we may assess, mandate extensive
disclosure to borrowers, prohibit discrimination, and impose multiple
qualifications and licensing obligations. Failure to comply with these
requirements may result in, among other things, loss of HUD approved status,
demands by purchasers of mortgages for indemnification or mortgage loan
repurchases, exercise of rights of recission of mortgage loans by borrowers,
class action lawsuits by borrowers, administrative enforcement actions, and
civil and criminal liability. We use our quality assurance program to monitor
compliance and, based upon assessments of our compliance staff, believe that we
are in compliance with applicable rules and regulations in all material
respects.
Our loan origination activities are subject to the laws and regulations in
each state in which we conduct lending activities. For example, state usury laws
limit the interest rates that we can charge on our loans. In connection with
plans to expand on geographic reach, we have investigated licensing requirements
in additional states. We currently hold licenses or exemption certificates in
twenty-eight states. We do not have operations or significant loan activity in
all of these states at this time. Our current operations and loan activity is
primarily in California. However, we made ten or more loans in nine other states
and occasional loans in sixteen more states.
Our lending activities are also subject to various federal laws, including
the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Real Estate Settlement Procedures Act and the Home Mortgage
Disclosure Act. We are not currently making loans subject to the Homeownership
and Equity Protection Act of 1994. More specifically, we are subject to
disclosure requirements under the Truth-in-Lending Act and Regulation Z
promulgated thereunder. The Truth-in-Lending Act is designed to provide
consumers with uniform, understandable information relating to specified terms
and conditions of loan and credit transactions and, by
34
<PAGE>
standardizing the form of information provided, facilitate comparisons among
available credit options. The act also gives consumers the right to change their
minds about a credit transaction by guaranteeing consumers a three-day right to
cancel some credit transactions, such as loans of the type we originate. In
addition, the Truth-in-Lending Act gives consumers the right to rescind the loan
transaction if the lender fails to provide the required disclosures to the
consumer.
We are also required to comply with the Equal Credit Opportunity Act of
1994 and Regulation B promulgated thereunder, the Fair Credit Reporting Act, the
Real Estate Settlement Procedures Act of 1975 and the Home Mortgage Disclosure
Act of 1975. The Equal Credit Opportunity Act prohibits lenders from
discriminating against an applicant for a loan on the basis of race, color, sex,
age, religion, national origin or marital status. Regulation B prohibits lenders
from requesting some types of information from loan applicants. The Fair Credit
Reporting Act requires lenders to supply applicants with information relating to
the denial of any loan application. Beginning with loans originated in 1997, the
Home Mortgage Disclosure Act requires that we file annual reports with HUD for
collection and reporting of statistical data in loan transactions. The Real
Estate Settlement Procedures Act mandates disclosures concerning settlement fees
and charges and mortgage servicing transfer practices. It also prohibits the
payment or receipt of kickbacks or referral fees in connection with the
performance of settlement services.
Ocean West Enterprises is highly regulated by government entities. The laws
and regulations under which we operate are subject to change at any time. In
addition, new laws or regulations may be added at any time. There can be no
assurance that any change or addition of laws will not make compliance more
difficult or more extensive, restrict ability to originate, broker, purchase or
sell loans, further limit the amount of commissions, interest or other charges
which may be earned, or otherwise adversely affect our business or prospects.
Legal Proceedings
-----------------
Ocean West Enterprises is involved in litigation relating to a loan which
it sold; the land and house securing the loan was condemned because of a slide
problem. A complaint for breach of contract relating to repurchase obligations
was filed on May 20, 1999 in the Los Angeles, California Superior Court. The
case was styled Homeside Lending, Inc. v. Ocean West Enterprises, Inc. et al.
------------------------------------------------------------
The case with the purchaser of the mortgage was settled for approximately
$84,000 which amount includes costs and attorneys fees. We received a judgment
for the same amount plus our costs and fees against the broker and the
appraiser. We may or may not be able to collect the judgment. We are not aware
of any pending or threatened claims which might materially affect our business.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Overview
---------
Ocean West Enterprises is primarily engaged in the origination, packaging,
funding and sale of mortgage loans secured by one-to-four family residences. Our
income mainly consists of gains from sales of mortgage loans on the secondary
market and to private investors. We also generate revenues through fees such as
underwriting fees, processing fees and document drawing fees, in connection with
the funding of a loan. During fiscal year 2000, approximately two-thirds of our
revenues were derived from the sale of loans and approximately one-third were
derived from fees charged in connection with loans originated. This breakdown is
typical and has not changed significantly in recent years.
For the most part, we fund loans through credit facilities. The amount
drawn from a line of credit for a particular loan is repaid when that loan is
sold to an investor. We receive funds from loan fees and origination and/or
discount fees charged to the borrower. The fees collected at the time of funding
are paid to us and recorded to the loan balance on the day of funding. When a
loan is purchased by an investor, the remaining fees, including a fee for the
release of the servicing rights, are paid, less any fees to investors and any
further servicing obligations on that loan. Servicing release premiums range
from 0% to 2.55% of loan principal depending on the type of loan, term and
principal amount. Revenues from sales are recognized at the time of sale, net of
the related loan balance and net fees paid on the sale.
Currently, we fund loans primarily through a line of credit with First
Collateral Services. The line of credit expires December 31, 2000. We are not in
compliance with the restrictive covenants which were waived through March 31,
2000. We are currently in discussion with the lender to revise the restrictive
covenants.
We receive most of our revenues from the sale of loans to investors. Once a
loan is sold, the amount advanced through the warehouse line of credit is repaid
and the overage is deposited in our account. Frequently, we receive the
borrower's first monthly payment if the investor buys the loan one payment down.
Loan fees we charge are made up of underwriting, funding, administrative,
document drawing and other miscellaneous fees depending on the type of loan
funded which also provide revenue. Fees collected on loans range from $575 to
$995 per loan. The amount of the fees generated on a particular loan vary based
upon the type of loan.
Occasionally, typically two to three times per year, Ocean West Enterprises
is required to repurchase loans from investors. The repurchase price is equal to
the amount of the original purchase price, plus interest and fees associated
with the loan, less any payments made by the borrower. Our disposition of the
loan upon repurchase depends upon the reason for the repurchase. In most cases,
the repurchase occurs because the investor believes the loan does not fit into
the investor's guidelines. Usually, in these cases, we are able to sell the loan
to another investor as a
36
<PAGE>
"seasoned" loan with a payment history in three to six months time. In the event
of resale, there is little ultimate effect on our results of operations other
than a delay in recognition of income and a loss potential of 10% to 15% of the
loan balance based on our historical experience. If the loan is not resalable as
is, we will work with the borrower to refinance the loan into a different loan
program. On rare occasions, three times over the last five to six years, we were
forced to hold the loan for a longer period of time.
Results of Operations
---------------------
The uncertainty which potentially has the single largest effect on the
results of operations of Ocean West Enterprises is interest rate trends. Trends
in interest rates are not only important to the refinance business, but are also
very important in the purchase market as well. As interest rates rise, more
individuals are eliminated as potential borrowers. The reason for this is
simple -as interest rates get higher, so do the mortgage payments. Higher
payments mean fewer people have the ability to qualify for loans. Historically,
a rising interest rate market is more difficult for mortgage bankers like us to
deal with than for banks. The reason for this is that banks tend to have an
advantage in an adjustable rate market, because banks have the ability to hold
loans and, therefore, can be more creative in designing adjustable rate loans to
fit the borrower's needs. Mortgage bankers are limited to loan products which
can be sold in the secondary market or securitized. These programs have become
more competitive in recent years, but banks still retain a competitive
advantage.
Inflation has an impact on us because it typically has an impact on
interest rates. As the threat of inflation becomes more of a concern, interest
rates tend to rise. This result is based upon the perception that the FED will
revise short-term interest rates to keep inflation in check. This concern
ultimately affects mortgage rates.
During the last three fiscal years, we have had operating losses and in the
year prior to those, had a significant decrease in operating income. Management
attributes the decrease in income and increase in loss to the following:
. broker fraud resulting in loss on two loans of approximately $250,000
which was recognized in fiscal year 1998
. decrease in loan volume resulting from the adoption of stricter
prefunding quality control measures
. costs of operating the retail telemarketing division which was
recently shut down
To counter the reduction in loan volume, we lowered some of our prices and
volume levels increased. More favorable pricing was then reestablished and loan
volumes are holding up. For the first three months of fiscal year 2001, we have
operating income of $180,291.
37
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
During the three month period ending June 30, 2000, Ocean West Enterprises
made 755 loans with an aggregate dollar value of $96,331,822 compared to 492
loans with an aggregate dollar value of $69,592,211 for the same period of the
previous fiscal year. Most of the loans originated and sold for the three month
period ending June 30, 2000 were in principal amounts between $13,950 and
$860,000 and for the three month period ending June 30, 1999, between $17,500
and $636,000.
Net revenues from origination and sales of loans for the three month period
ending June 30, 2000 increased 130% to $2.1 million from $0.9 million for the
same period in the previous year. The increase in revenues resulted in $180,000
in income from operations.
General and administrative expenses increased by 75% to $2.0 million from
$1.1 million. The increase was attributable to increases in overhead due to the
addition of several branch locations.
Ocean West Enterprises had net income of $177,135 for the three month
period ending June 30, 2000 as opposed to net loss of $196,163 for the same
three month period of the previous year. The improvement was primarily due to an
increase in dollar volume of loans and a decrease in the cost of originating
such loans.
Year Ended March 31, 2000 compared to Year Ended March 31, 1999
During fiscal year 2000, Ocean West Enterprises made 1,958 loans with an
aggregate dollar value of approximately $262,604,176 compared to 2,364 loans
with an aggregate dollar value of approximately $300,645,000 in fiscal year
1999. Most of the loans originated were in principal amounts between $100,000
and $180,000.
Net revenues from origination and sale of loans decreased 15% from $4.6
million for fiscal year 1999 to $3.9 million for fiscal year 2000. This decrease
resulted from the closing of the telemarketing division in the first quarter of
fiscal year 2000. As the refinancing market declined, the costs of operating the
division outweighed the benefits. The cost of closing the division was minimal,
but eliminated approximately $100,000 in monthly expenses. Net servicing fees
decreased 99% to $61 for fiscal year 2000 from $5,924 for fiscal year 1999 due
to the prior sale of most of the servicing rights. Gain on origination of
mortgaging servicing rights increased by 22% from $17,105 for fiscal year 1999
to $20,861 for fiscal year 2000.
Total operating expenses increased 4% from $4.8 million for fiscal year
1999 to $5.0 million for fiscal year 2000. Salary, wages and payroll taxes
decreased by 7% from $2.9 million for fiscal year 1999 to $2.7 million for
fiscal year 2000 and other general and administrative expenses increased 29% to
$2.2 million for fiscal year 2000 from $1.7 million for fiscal year 1999.
Interest expense decreased 15% from $149,172 for fiscal year 1999 to $126,715
for fiscal year 2000. This decrease was a result of reductions in borrowings due
to the payoff of capital leases.
38
<PAGE>
Ocean West Enterprises posted net income of $341,635 for fiscal year 1999
compared to a net loss of $1,152,028 for fiscal year 2000. We had a net
operating loss of $1,110,324 in fiscal year 2000 which was slightly offset by
interest and other income of $184,581 compared to a net operating loss of
$87,773 for fiscal year 1999 offset by other income of $187,974. Approximately
32% of the difference in results between fiscal year 2000 and fiscal year 1999
are due to the effect of income taxes. For fiscal year 1999, we recognized a tax
benefit of $241,434 which resulted from the elimination of the valuation
allowance on income taxes as a result of the 1999 net income. In fiscal year
2000, we paid income taxes of $800 and recognized a 100% valuation allowance of
$241,434 on the tax benefit recognized in fiscal year 1999. In fiscal year 2000,
we recorded an extraordinary item which was gain on the forgiveness of debt of
$17,429. There was no comparable item for fiscal year 1999.
Year Ended March 31, 1999 Compared to the Year Ended March 31, 1998
During fiscal year 1999, Ocean West Enterprises made 2,364 loans with an
aggregate dollar value of approximately $300,645,000 compared to 2,188 loans
with an aggregate dollar value of approximately $285,514,000 in fiscal year
1998. Most of the loans originated in both years were in principal amounts
between $100,000 and $180,000.
Net revenue from origination and sale of loans increased 44% to $4.6
million for fiscal year 1999 from $3.2 million for fiscal year 1998. Net revenue
increased 44% even though the total dollar value of loans increased only 5% due
to the increase in the number of FHA streamline loans made which have a lower
cost of sales. Net servicing fees decreased by 73% from $21,615 for fiscal year
1998 to $5,924 for fiscal year 1999. Gains on the origination of mortgage
servicing rights also decreased by 65% from $49,283 for fiscal year 1998 to
$17,105 for fiscal year 1999. Gains on sale of mortgage servicing rights
decreased to $0 from $155,440 for fiscal year 1998. We sold off most of our
servicing rights causing income relating to servicing rights to decrease
significantly from fiscal year 1998 to fiscal year 1999.
Total operating expenses increased by 14% to $4.8 million for fiscal year
1999 from $4.2 million for fiscal year 1998. This increase was due primarily to
increases in salaries and wages and interest expense.
Operating expenses increased 14% from $4.2 million for fiscal year 1998 to
$4.8 million for fiscal year 1999. Most of the increase was the result of a 21%
increase in salaries, wages and payroll taxes from $2.4 million in fiscal year
1998 to $2.9 million in fiscal year 1999 and a 145% increase in interest expense
to $149,172 for fiscal year 1999 from $61,010 for fiscal year 1998. Other
general and administrative expenses decreased 4%.
Ocean West Enterprises posted net income of $341,635 for fiscal year 1999
compared to a net loss of $808,767 for fiscal year 1998. Approximately 21% of
the reported increase in net income was due to a tax benefit of $241,434 in
fiscal year 1999 with no corresponding benefit in fiscal 1998. The tax benefit
resulted from the elimination of the valuation allowance on income
39
<PAGE>
taxes as a result of the 1999 net income. Income before the income tax benefit
for fiscal year 1999 was $100,201 as opposed to a pre-tax loss of $807,967 for
fiscal year 1998. This difference arose from two sources. Our loss from
operations was reduced significantly from a loss of $825,392 for fiscal year
1998 to a loss of $87,773 for fiscal year 1999. In addition, we recognized a
gain of $104,500 on the sale of a single family residence located in Anaheim
Hills, California in fiscal year 1999 for which there was not a corresponding
gain in fiscal year 1998 and had interest and other income of $83,474 in fiscal
year 1999 versus $17,425 in fiscal year 1998.
Liquidity and Capital Resources
-------------------------------
Liquidity is the ability of a company to generate funds to support asset
growth, satisfy disbursement needs, maintain reserve requirements and otherwise
operate on an ongoing basis. If our loan volume increases too rapidly, the
increase could have a severe impact on liquidity. The warehouse facilities limit
the amount which may be advanced on each loan funded. Therefore, we must use our
cash to fund the additional dollars needed to close escrow. The cash is not
recognized until the loan is sold. Thus, it is crucial that we monitor loan
volume closely.
Ocean West Enterprises funds operations through a combination of borrowings
and issuance of preferred stock. From April 1, 1997 through June 30, 2000, we
received proceeds of $335,000 from the issuance of 1,340 shares of Ocean West
Enterprises common stock, $936,000 from the issuance of Ocean West Enterprises
preferred stock, redeemed $253,000 of preferred stock and paid dividends on
preferred stock of approximately $437,000. On the effective date of this
registration statement, 2,254 shares of the outstanding preferred stock of Ocean
West Enterprises were exchanged for 1,073,200 Common Shares of Ocean West.
Our primary need for operating capital is to fund mortgage loans upon
closing prior to their eventual delivery to purchasers in the secondary market.
We typically fund these loans through our warehouse lines of credit. We have two
separate credit facilities that will typically fund up to 98% of the price paid
by the purchaser to a maximum of 100% of the note amount. The average time
between funding a mortgage and the receipt of the proceeds from the sale of the
mortgage was approximately fifteen days during fiscal 2000.
As of July 31, 2000, the outstanding balance on the line of credit with
First Collateral Services was $18,483,908. It bears interest at a rate equal to
the LIBOR rate plus 2.5% and the rate on July 31, 2000 was 6.894%. There was no
balance on the Provident Bank line of credit on that same date. It bears
interest at a rate equal to the prime rate as reflected in The Wall Street
---------------
Journal plus 1.00% to 1.25% depending upon the grade of the loan product
-------
financed and was between 10.5% and 10.75% on July 31, 2000.
At the present time, our liquidity resources are minimal. We are not in
compliance with the HUD net worth requirements. We are also not in compliance
with substantially all of the restrictive covenants of the credit facility. In
addition, the line has been drawn on in excess of the maximum amount provided
for in the agreement.
40
<PAGE>
HUD has not rescinded our certifications nor have the lenders declared us
in default. If either of those were to happen, we most likely would not be able
to continue operations. We have recently raised additional capital of $335,000
and converted $241,000 in notes payable to preferred stock to help address the
situation. At this time, management believes that we are able to fund current
production levels; provided that we are able to maintain production levels
sufficient to produce profits. Currently, we believe a loan volume level of at
least $25,000,000 per month is necessary to do that.
In the future, we hope to be able to increase capital and liquidity so that
we can increase loan production. Management believes that, in the long-term, a
development of a market in our stock should aid in increasing capital.
Management intends to retain earnings for the foreseeable future to help
increase liquidity. In the short term, management's goal is to maintain current
production levels with no significant increases or decreases until our liquidity
increases.
Net cash used in operating activities for the fiscal year ended March 31,
2000 totaled $2.8 million. The primary use of this cash was an increase in
mortgage loans held for sale and the net loss. For the three month period ended
June 30, 2000, net cash provided by operating activities totaled $5.2 million
which was primarily made up of a reduction in mortgages held for sale. As loans
are purchased by investors, the amounts advanced for such loans through the
warehouse line of credit are paid. At that time, the receivables are cleared and
the cash deposited in our operating account.
Net cash provided by investing activities during fiscal year 2000 was
$210,452 which cash was primarily proceeds from the sale of property and
equipment of $206,219 and to a lesser extent collections of notes receivable of
$25,130 which was offset by $20,897 in purchases of office equipment. Net cash
used in investing activities for the first three months of fiscal 2001 was
$3,800.
Net cash provided by financing activities for the 2000 fiscal year was $2.6
million which was provided primarily through borrowings under the warehouse line
of credit ($2.6 million). Issuance of long-term debt ($331,237) and issuance of
stock ($303,000) provided additional funds while funds were used to make
payments on long-term debt and capital lease obligations ($527,072), and pay
dividends on preferred stock ($163,350). Net cash used in financing activities
for the three month period ending June 30, 2000 was $5.0 million consisting
primarily of repayments under the warehouse lines of credit ($5.2 million)
offset by $215,000 in proceeds from the issuance of common stock and $65,000
from the issuance of long-term debt. We also paid $13,382 on long-term debt,
$20,215 on capital leases and $37,850 in preferred stock dividends.
As of March 31, 2000, Ocean West Enterprises had net operating loss
carryforwards for Federal income tax purposes of approximately $1,632,000 and,
for state reporting purposes, of approximately $640,000, available to reduce
future taxable income, portions of which expire on various dates through 2013.
Management has recorded a valuation allowance for the related deferred tax asset
as the asset may not be realized through future taxable income.
41
<PAGE>
Interest Rate Risks
-------------------
The primary market risks that we face are interest rate risks. Interest
rate movements affect the interest expense on our warehouse lines of credit, the
interest income earned on loans held for sale, the value of mortgages held for
sale and the ultimate gain recognized on mortgage loans which are sold. In a
high interest rate environment, borrower demands for mortgage loans, especially
refinancing of existing mortgages, decline. Higher interest rates may also
adversely affect the volume of mortgage loans. In a low interest rate market,
typically one in which the interest rates have declined sufficiently to make
refinancings for lower rates economical, we may incur prepayment penalties when
significant number of loans we originate are refinanced early on the life of the
loan to take advantage of lower interest rates.
We protect against interest rate risks to the extent we can by pre-selling
most loans to investors prior to funding, locking in rates and returns. The
method of locking in rates and returns varies from investor to investor. Some
investors will commit to rates by telephone while others require written
commitments via facsimile or e-mail. The investor responds with a commitment or
trade number upon confirmation. At that point, the rate and purchase price for
that loan are guaranteed for a definite period of time. We have the option with
most investors to lock in rates for either a "best efforts" or mandatory
delivery. A mandatory delivery brings the best price, typically 1/4 of 1%
higher, but requires us to deliver the loan within the committed time frame. If
we do not meet the deadline, we may have to pay a penalty, usually ranging from
$300 to $1,000. The lock period that we give to the broker/borrower is typically
a minimum of five days before the loan package needs to be delivered to the
investor. The loan must be in "fundable" form when it is delivered to the
investor. This means that both the credit and the collateral packages must be
complete. If this is not the case, which happens rarely, the investor may
reprice the loan. In such event, if the market has deteriorated, we have some
interest rate risk.
We also monitor and work to match the interest rates we charge on our loans
to the interest rates on the warehouse line of credit used to fund the loan.
Since the time period that the financing for any one loan is outstanding is
short, typically ten to fifteen business days, the risk of a negative interest
rate gap continuing for an extended period time is lessened. Upon sale of the
loan, the interest rate risk shifts to the investor. In the past, management has
at times used hedging strategies to lessen the risks arising out of rising and
falling interest rates, but is not currently using hedging strategies due to the
complexities involved in hedging and personnel needed to properly manage it.
Year 2000 Issues
----------------
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years. For example, the year
"1998" would be represented by "98." After December 31, 1999, these systems and
products needed to be able to accept four-digit entries to distinguish years. As
a result, systems and products that do not accept four-digit year entries must
be upgraded or replaced. We tested and updated our equipment at a cost of
approximately $10,000.
42
<PAGE>
As of the date of this prospectus, we have not experienced any material adverse
effect on our operations or results of operations relating to Year 2000 issues
associated with our systems or those of third parties with which we have
significant business relations. However, although we believe there are no
significant issues relating to Year 2000 compliance, there is no guarantee that
we have identified all of the risks associated with this issue.
MANAGEMENT
----------
Executive Officers and Directors of Ocean West and Ocean West Enterprises
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Position with Ocean West(1) Position with Ocean West Enterprises
---- --------------------------- ------------------------------------
<S> <C> <C>
Marshall L. Stewart President, Chief Executive President, Chief Executive Officer,
Officer, Director Director
Daryl S. Meddings Executive Vice President, Executive Vice President, Chief
Chief Financial Officer, Financial Officer, Secretary/
Secretary/Treasurer, Director Treasurer, Director
Thomas G. Melsheimer Vice President of Operations
Charles H. Finn, Jr. Director
</TABLE>
________________________________________________________________________________
(1) All persons listed were appointed to such positions in 2000.
Officers serve at the discretion of the Board of Directors. Directors hold
office until the next annual meeting of shareholders and until their successors
have been elected and accept office.
Marshall J. Stewart, 43, has worked in the mortgage industry since 1982.
-------------------
He was founder of Ocean West Enterprises and has been President, a director and
an owner since 1988. Prior to founding Ocean West Enterprises, from 1986 to
1988, Mr. Stewart was a Vice President of Westport Savings Bank in Laguna Beach,
California. His responsibilities included overseeing the mortgage banking
department, secondary marketing and the Laguna Bank Savings branch. Prior to
joining Westport Savings Bank, from 1984 to 1986, he was Production Manager of
Irvine City Savings in Newport Beach, California and had the responsibilities of
staffing and training the loan origination department and overseeing production,
underwriting, funding, shipping and the sale of funded loans to institutional
investors such as FNMA and FHLMC. Mr. Stewart received his B.A. in English with
a minor in Business Administration from California State University in
Fullerton, California in 1980.
Daryl S. Meddings, 35, was also a founder of Ocean West Enterprises and has
-----------------
been Executive Vice President, Chief Financial Officer, Secretary/Treasurer and
a director and an owner since 1988. As Chief Financial Officer at Ocean West
Enterprises, Mr. Meddings implemented and monitors accounting and financial
reporting system. Other duties include budget planning, expense control,
commercial banking relationships and oversight of quality control, loan
servicing and loss mitigation. From late 1987 to 1988, Mr. Meddings was a
production manager with Westport
43
<PAGE>
Savings Bank in Laguna Beach, California. His duties included establishing both
retail and wholesale production departments and recruiting, hiring and training
mortgage origination personnel. Prior to that, he began his career in mortgage
banking in 1986 as a loan officer at Pro Mortgage Services in Diamond Bay,
California and worked his way up to top producer at Irvine City Savings in
Irvine, California. Mr. Meddings received his B.S. in Finance, Real Estate and
Insurance with a concentration in Real Estate from California Polytechnical
State University-Pomona in 1987.
Thomas G. Melsheimer, 41, has been with Ocean West Enterprises for the past
--------------------
ten years. He is currently Vice President of Operations with the responsibility
of supervising underwriting, funding, shipping and data input and has held that
position since May of 1999. Prior to holding this position, Mr. Melsheimer has
been Operations Manager, Underwriting Manager and Underwriter Processor with
Ocean West Enterprises. Before joining Ocean West Enterprises, he held positions
as senior loan processor and internal auditor with Coastal Funding Corporation
in Irvine, California and as an auditor with Mission Hills Mortgage in Santa
Ana, California. Mr. Melsheimer is currently working on his broker's license.
Charles H. Finn, Jr., 45, was recently elected a director of Ocean West.
--------------------
He is currently Vice President - Marketing in connection with the origination
and sale of second trust deed loans with Linear Capital Inc. in Long Beach,
California and has held such position since June of 1998. Prior to taking that
position, he was Vice President at Clearview Capital / Argent Capital in
Huntington Beach, California for a little over eight months and managed the sale
of second trust deeds into the secondary market. For the seven months prior to
that, he was Vice President at Classical Financial in Tustin, California and
originated second trust deeds from correspondents nationwide. From 1994 to 1997,
he was Senior Vice President at Pioneer Savings and Loan in Irvine, California
and supervised the loan department. From 1989 to 1994, Mr. Finn was Senior Vice
President of Renet Financial in Anaheim, California and managed the Mortgage
Banking Division. Mr. Finn received his B.A. in Economics from U.C. Berkeley in
1976.
Executive Compensation
----------------------
The following table sets forth the compensation of the President (the Chief
Executive Officer) and the Executive Vice President (the Chief Financial
Officer) paid by Ocean West Enterprises for the fiscal years ending March 31,
2000, 1999 and 1998. Ocean West has not paid any compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation
-------------------
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation ($) (1)
------------------ ---- ---------- --------- --------------------
<S> <C> <C> <C> <C>
Marshall L. Stewart, President, 2000 123,750 0 0
Chief Executive Officer 1999 171,250 0 0
1998 175,872 0 0
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation ($) (1)
------------------ ---- ---------- --------- --------------------
<S> <C> <C> <C> <C>
Daryl Meddings, Executive Vice 2000 123,750 0 0
President, Chief Financial Officer 1999 171,250 0 0
1998 181,000 0 0
</TABLE>
________________________________________________________________________________
Ocean West Enterprises has entered into substantially identical employment
agreements with the primary shareholders, Marshall Stewart, with initial duties
as President, and Daryl Meddings, with initial duties as Executive Vice
President and Chief Financial Officer. The term of each agreement is five years
beginning on October 1, 1999. We may terminate the agreement for "just cause" or
if we cease operations; the employees may terminate the agreement on thirty days
notice. Each employee is entitled to a base annual salary of $300,000 with
amounts not paid to be considered deferred compensation.
In addition, Ocean West Enterprises has agreed to create an Officers
Deferred Compensation Account for each of them. Each is entitled to receive an
amount equal to 20% of net profit before taxes each year. The employee is
entitled to such amounts annually or within thirty days of termination of
employment.
Compensation Committee Interlocks and Insider Participation in Compensation
---------------------------------------------------------------------------
For all years referenced in the Summary Compensation Table, the two
shareholders of Ocean West Enterprises, Mark Stewart and Daryl Meddings,
determined executive compensation. Ocean West has not paid any compensation to
date and does not expect to pay any in the near future.
Certain Relationships and Related Transactions
----------------------------------------------
Douglas M. Sharp, an agent of Agape Foundation Trust which benefits his
children and which holds 9.9% of the Common Shares, purchased residential real
estate from Ocean West Enterprises. The appraised value of the real estate was
$420,000 and we received it as a result of a default on a loan in March of 1998.
The property was purchased with a note with original principal amount of
$375,000 which matures in April 2005 and bears interest at 7.5% per annum.
Interest is payable monthly and principal at maturity of the note. Mr. Sharp
defaulted on the note, Ocean West took the property back and has sold it for
approximately $405,000.
In November 1996, Ocean West Enterprises redeemed 1,500 shares of the
Series B Preferred Stock for $400,000 in cash, $200,000 in promissory notes and
a guaranteed two year consulting agreement under which Southern Cross Financial
was entitled to receive consulting fees of $6,000 per month. A total of $144,000
in consulting fees were paid over the two year term of the agreement which ended
in November 1998. The Series B Preferred Shares had a stated value and initial
purchase price of $400 per share and entitled the holder to cumulative dividends
at an annual rate of 2% of the stated value, payable on a monthly basis.
45
<PAGE>
In connection with the issuance of 1,500 shares of Series D Preferred Stock
in 1997, Ocean West Enterprises entered into a consulting agreement with Auther
Mickel and Ed Simmons of Cheyenne Properties, Inc., the purchaser of the shares.
Cheyenne Properties owns 8% of the Common Shares. Under the agreement, Cheyenne
Properties is entitled to consulting fees in the amount of $6,000 per month. The
agreement expires upon the redemption of the shares. Consulting fees totaling
$72,000 were paid under this agreement in fiscal 1998, 1999 and 2000.
PRINCIPAL AND SELLING SHAREHOLDERS
----------------------------------
Management and 5% or Greater Shareholders
-----------------------------------------
The following table sets forth information with respect to ownership of
issued and outstanding stock and warrants of Ocean West by management and 5% or
greater shareholders as of the date hereof:
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class (1) Shares Sale (2)
---------------- -------------- ---------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Daryl Meddings (3) Common Shares 2,380,316 37% 569,345 28.2%
21791 Via del Lago Class B Common Shares 102,936 50% (4) (4)
Trabuco, CA
Marshall L. Stewart (5) Common Shares 2,368,316 36.9% 566,345 28%
21372 Brookhurst St., #515 Class B Common Shares 102,936 50% (4) (4)
Huntington Beach, CA
Agape Foundation Trust Common Shares 631,368 9.9% 157,842 7.4%
607 S. Pathfinder Trail
Anaheim, CA
Cheyenne Properties, Inc. Common Shares 480,000 8% 480,000 0%
219 N.E. 100/th/ Avenue
Portland, OR
Monogenesis Corp. (6) Common Shares 390,000 5.9% 390,000 0%
88 Walker Creek Road Common Stock 251,100 * 251,100 0%
Walker, WV Purchase Warrants
Thomas G. Melsheimer (7) Common Shares 11,840 * 11,840 0%
5 Westchester Court
Coto DeCaza, CA
Total number of shares Common Shares 4,748,632 72.8% 1,135,690 55.4%
owned by directors and Class B Common Shares 205,872 100% (4) (4)
executive officers as a
group (8)
</TABLE>
________________________________________________________________________________
* less than 1%
46
<PAGE>
(1) The percentage calculation does not include Common Shares which may be
issued upon the exercise of the warrants or any outstanding employee stock
options, unless otherwise noted.
(2) This percent relates to the shares held by selling shareholders assuming
all 2,184,752 shares registered on behalf of the selling shareholders are
sold and no warrants are exercised.
(3) The number of Common Shares listed as beneficially owned by Mr. Meddings
and the related percentages include the 102,936 Common Shares which Mr.
Meddings would receive if he converted his Class B Common Shares to Common
Shares.
(4) No Class B Common Shares will be registered or available for public sale by
selling shareholders.
(5) The number of Common Shares listed as beneficially owned by Mr. Stewart and
the related percentage include the 102,936 Common Shares which Mr. Stewart
would receive if he converted his Class B Common Shares to Common
Shares.
(6) The number of Common Shares listed as beneficially owned by Monogenesis
Corporation and the related percentages include the 251,100 Common Shares
which Monogenesis Corporation would receive if it exercised its warrants.
(7) The number of Common Shares listed as beneficially owned by Mr. Melsheimer
is made up of 5,920 shares held by him as custodian for his daughter,
Megan, and 5,920 shares held by him as custodian for his daughter, Madison.
(8) The number of Common Shares beneficially owned by officers and directors as
a group and the related percentage include the 102,936 Common Shares which
Mr. Meddings would receive if he converted his Class B Common Shares to
Common Shares and the 102,936 Common Shares which Mr. Stewart would receive
if he converted his Class B Common Shares to Common Shares.
Other Selling Shareholders
--------------------------
The following table sets forth information with respect to ownership of
Ocean West by selling shareholders who are not part of management and hold less
than 5% of the issued and outstanding shares of any class as of the date hereof.
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class (1) Securities Sale
---------------- -------------- ---------------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Tracy A. Jochen Common Shares 118,400 1.8% 118,400 0%
3272 Redrock Street
Las Vegas, NV
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class (1) Securities Sale
---------------- -------------- ---------------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Ronald C. and Judy M. Common Shares 40,000 * 40,000 0%
Meddings (2) Series E Preferred 680 100% 0 100%
8271 Simerdale Lane Series F Preferred 1,050 100% 0 100%
LaPalma, CA
Kingsley and Nancy Cannon Common Shares 29,920 * 29,920 0%
1193 Mountainside Trace
Kennesaw, GA
Kevin P. Burke Common Shares 14,800 * 14,800 0%
400 Crenshaw Blvd., #105
Torrance, CA
Jennifer Ericson Common Shares 10,000 * 10,000 0%
601 Vista Bonita Series I Preferred 125 100% 0 100%
Newport Beach, CA Series L Preferred 74 100% 0 100%
William H. and Denise A. Common Shares 8,880 * 8,880 0%
Van Herpen
40 Via Tronido
Rancho Santa Margarita, CA
John S. Allgyer Common Shares 5,920 * 5,920 0%
13831 Grovesite Drive
Santa Ana, CA
Milton G. Brandolino Common Shares 5,920 * 5,920 0%
2150 Glendon Avenue
Los Angeles, CA
Robert Brandolino Common Shares 5,920 * 5,920 0%
1068 San Pueblo Circle
Costa Mesa, CA
Frederick J. Thomson Common Shares 5,920 * 5,920 0%
10861 Colima Road
Whitter, CA
Thomas Thomson Common Shares 5,920 * 5,920 0%
1110 Candace Lane
La Habra, CA
Victoria Lee Coine-Arguello Common Shares 2,960 * 2,960 0%
604 E. Almond Avenue
Orange, CA
Roy Jenkins Common Shares 2,960 * 2,960 0%
1224 Burnside Avenue
Los Angeles, CA
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class (1) Securities Sale
---------------- -------------- ---------------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Scott Herbert Robinson Common Shares 2,960 * 2,960 0%
14780 Beach Blvd.
La Mirada, CA
</TABLE>
________________________________________________________________________________
* less than 1%
(1) The percentage calculation does not include any Common Shares which may be
issued upon the exercise of the warrants or any outstanding options.
(2) Ronald C. and Judy M. Meddings are the parents of Daryl Meddings, the Chief
Financial Officer of Ocean West.
SECURITIES
----------
Common Shares
-------------
Issued. Ocean West is authorized to issue 30,000,000 Common Shares, par
------
value $.01 per share, of which 6,315,248 shares were issued and outstanding on
the date of this prospectus. There will be approximately 1,265 holders of the
issued and outstanding Common Shares after the distribution. However, Mark
Stewart and Daryl Meddings currently own 72% of the issued and outstanding
Common Shares and together with their ownership of 100% of the Class B Common
Shares control Ocean West. All Common Shares now outstanding are fully paid and
nonassessable and do not have preemptive rights.
Voting. The holders of Common Shares are generally entitled to one vote per
------
share on all entitled matters including the election of directors. However with
respect to the election of directors, holders of Common Shares, Class D Common
Shares and preferred shares with voting rights, vote as a separate class. Such
holders elect only 25% of the members of the Board of Directors of Ocean West.
Holders of Class B Common Shares are entitled to elect the remaining directors
and control the board of directors. Except with respect to some exchange listed
shares described in the statute, California law generally requires that
corporations domiciled there allow holders of common shares to cumulate votes
for the election of directors. Holders may give one candidate a number of votes
equal to the number of directors to be elected multiplied by the number of votes
to which the shares are normally entitled or distribute such votes on the same
principle among as many candidates as the shareholder determines. However, no
shareholder may cumulate votes unless a candidate has been nominated prior to
voting and the shareholder has given notice at the meeting, prior to the voting,
of the intention to cumulate votes. Under Ocean West's Bylaws, shareholders of
Ocean West will only be entitled to cumulative voting rights as long as required
under California law.
49
<PAGE>
Dividends. The holders of Common Shares have a noncumulative $.05 per
---------
share annual dividend preference over non-stock dividends paid on Class B Common
Shares if declared by the Board of Directors. In addition, holders of Class B
Common Shares may not receive any dividends unless holders of Common Shares
receive a dividend at least equal to the dividend paid to holders of Class B
Common Shares. Stock dividends may only be paid to holders of Common Shares in
Common Shares and only if the same number of Class B Common Shares will be paid
with respect to each outstanding Class B Common Share. The payment of dividends
are subject to the preferential dividend rights of the issued and outstanding
Preferred Shares.
Liquidation. Common Shares have a liquidation preference equal to the par
-----------
value of the shares, $0.01 per share. Otherwise, holders of Common Shares share
ratably in all assets available for distribution with all other classes of
common shares. Any distribution with respect to Common Shares will not be made
until the stated value and any unpaid cumulative dividends of the issued and
outstanding Preferred Shares is first distributed to holders of such shares and
is also subject to any preferential rights of the holders of any other
outstanding securities.
Class B Common Shares
----------------------
Issued. In addition to Common Shares, Ocean West is authorized to issue
------
5,000,000 Class B Common Shares, $.01 par value per share, of which 205,872
shares were issued and outstanding on the date of this prospectus. There are
two holders of Class B Common Shares, Mark Stewart and Daryl Meddings. Holders
of Class B Common Shares have preemptive rights, but only with respect to the
issuance of Class B Common Shares. All Class B Common Shares now outstanding
are fully paid and nonassessable.
Voting. Holders of Class B Common Shares have the right to one vote per
------
share on all matters on which they are entitled to vote. However with respect
to the election of directors, the holders of Class B Common Shares elect 75% of
the members of the Board of Directors. Holders of Class B Common Shares have
the same cumulative voting rights as holders of Common Shares.
Dividends. Holders of Class B Common Shares are entitled to receive
---------
dividends if declared subject to dividend rights of holders of Preferred Shares
and to a non-cumulative $.05 per share annual dividend preference on each Common
Share. In addition, holders of Class B Common Shares may not receive any
dividend unless holders of Common Shares receive a dividend at least equal to
the dividend paid to holders of Class B Common Shares. Stock dividends may only
be paid to holders of Class B Common Shares in Class B Common Shares and may
only be paid in shares at all if the same number of Common Shares will be paid
with respect to each outstanding Common Share.
Liquidation. Holders of Class B Common Shares are entitled to share
-----------
ratably in all of the assets of Ocean West available for distribution to holders
of all classes of its common shares upon liquidation, dissolution or winding up,
subject to the preference of holders of Common Shares, the
50
<PAGE>
stated value and unpaid cumulative dividend of outstanding Preferred Shares and
to any preferential rights of other shareholders.
Additional Terms. The Board of Directors must seek the approval of a
----------------
majority of the holders of Class B Common Shares to grant rights to subscribe
for, purchase or issue additional Class B Common Shares. Each Class B Common
Share may also be converted into one Common Share at any time at the option of
the holder.
Class D Common Shares
----------------------
General. Class D Common Shares are a convertible security created in order
-------
to secure highly motivated executive personnel for Ocean West and its
subsidiaries and take the place of compensation stock options, although Ocean
West remains authorized to issue stock options and intends to establish an
equity incentive plan. There are 600,000 Class D Common Shares authorized at
$.01 par value per share. Class D Common Shares are identical to Common Shares
and have equal rights and privileges with Common Shares except as described
below. Class D Common Shares are nontransferable. The Board of Directors may
authorize the issuance of Class D Common Shares; provided that, any resolution
issuing the shares contains a formula under which the shares may be converted to
Common Shares. In no case may the Board of Directors set any conversion rights
which could result in the issuance of more than ten Common Shares for each Class
D Common Share. At the close of business on the fifth anniversary of the date
of a resolution authorizing the issuance of any Class D Common Shares, any
unconverted shares will be deemed to have been converted at the rate of one
Common Share for each Class D Common Share. There are no issued and outstanding
Class D Common Shares on the date of this prospectus.
Preferred Shares
-----------------
General. The Board of Directors has the authority to issue, in one or more
-------
series, up to 10,000,000 Preferred Shares. Such shares will have the
preferences, rights and limitations established by the Board of Directors,
except that the voting rights, if any, of one Preferred Share may not exceed the
voting rights of one Common Share. Six Series of Preferred Shares have been
created with a total of 4,929 Preferred Shares issued and outstanding on the
date of this prospectus. So long as any of the currently issued Preferred Shares
are outstanding, Ocean West may not, without the approval of the holders of two-
thirds of the outstanding shares of each series, amend the Certificate of
Incorporation of Ocean West to: (a) alter or change any rights of, or adversely
affect, the holders of a series; (b) increase the authorized number of shares of
a series; or (c) transfer, lease or encumber all or substantially all of the
assets of the company. The outstanding Preferred Shares have the same voting
rights as the Common Shares (including cumulative voting rights).
Preferred Shares - Series C. There are 1,000 Series C Preferred Shares
---------------------------
which are outstanding held by one person. The shares are redeemable by Ocean
West at any time for the investment amount ($100,000) plus an amount
representing an annual rate of return of 12% on the
51
<PAGE>
investment less any amounts paid as dividends on the shares. The holder of the
shares has a liquidation preference in the same amount.
Preferred Shares - Series E. Ocean West has 680 Series E Preferred Shares
---------------------------
held jointly in one account which are outstanding and which were received in
exchange for shares sold for $250 per share. Each of the shares is entitled to
cumulative annual dividends at the rate of 18% of the purchase price or $45
payable in equal monthly installments. The holders have a liquidation
preference over holders of all shares except earlier series of Preferred Shares
in an amount equal to the purchase price of the shares plus any unpaid
dividends. Ocean West may redeem the shares at any time upon payment of the
original purchase price plus any unpaid dividends. The holder must give Ocean
West notice of any intent to transfer the shares and Ocean West has the right of
first refusal to purchase at the lesser of the offered price and terms or the
redemption price and terms.
Preferred Shares - Series F, G, I and L. Ocean West also has outstanding
---------------------------------------
1,050 Series F Preferred Shares, 2,000 Series G Preferred Shares, 125 Series I
Preferred Shares and 74 Series L Preferred Shares. There is only one holder of
each series. All of the listed series have the same terms as Series E except
for the purchase price of the shares for which they were exchanged and dividend
amounts which are as follows: Series F - purchase price $100 per share,
cumulative annual dividend at the rate of 14% of the purchase price or $14;
Series G - purchase price $100 per share, cumulative annual dividend at the rate
of 24% of the purchase price or $24; Series I - purchase price $100 per share,
annual cumulative dividend at the rate of 15% of the purchase price or $15; and
Series L - purchase price $1,000 per share, cumulative annual dividend at the
rate of 12% of the purchase price or $120.
Common Stock Purchase Warrants
-------------------------------
Issued. Ocean West has outstanding 3,000,000 Common Stock Purchase
------
Warrants, each warrant entitling the holder to purchase one Common Share. There
are approximately 1,245 holders of the warrants. A holder of warrants will not
have any rights or privileges of a shareholder prior to exercise of such
warrants. Ocean West will keep available a sufficient number of authorized
Common Shares to permit exercise of the warrants. The warrants were issued
pursuant to a Warrant Agreement between Ocean West and Registrar and Transfer
Company. All descriptions of the warrants are qualified in their entirety by
reference to the Warrant Agreement which is included as an exhibit to the
Registration Statement of which this prospectus is a part.
Exercise. The warrants may be exercised at any time during the 10 month
--------
period beginning on the date of this prospectus at an exercise price of $2.00
per share, subject to adjustment. No fractional Common Shares will be issued in
connection with the exercise of warrants. Ocean West has no right to call the
warrants. If a holder of warrants fails to exercise the warrants prior to their
expiration, the warrants will expire and the holder will have no further rights
under the warrants. The exercise price of the warrants and the number of shares
issuable upon exercise of the warrants will be subject to adjustment in the
event of stock dividends, stock splits, combinations, reorganizations,
subdivisions and reclassifications. No assurance can be given that the market
price
52
<PAGE>
of Ocean West's Common Shares will exceed the exercise price at any time during
the term of the warrants.
Trading. If a market for the warrants develops, the holder may sell the
-------
warrants instead of exercising them. There can be no assurance that a market
for the warrants will develop or continue. If Ocean West is unable to qualify
the Common Shares underlying the warrants for sale (or the shares are exempt
from qualification) under the securities laws of the states in which the various
holders of the warrants then reside, holders of the warrants may have no choice
but to let the warrants expire.
Transfer Agent, Registrar and Warrant Agent
--------------------------------------------
The transfer agent and registrar for the Common Shares and the Warrant
Agent is Registrar and Transfer Company, 10 Commerce Drive, Cranford, New Jersey
07016-3572.
DIVIDENDS
---------
Ocean West has not paid any dividends and must receive funds from its
subsidiary, Ocean West Enterprises, in order to pay dividends. In addition,
Ocean West Enterprises historically has only paid dividends on preferred shares.
We agreed not to pay any dividends in excess of our net income in connection
with our warehouse line of credit. There is no guarantee that Ocean West
Enterprises, and therefore Ocean West, will pay dividends in the future and
payment of dividends on Common Shares will not occur, if at all, until the
dividend preferences of outstanding Preferred Shares are satisfied.
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS
----------------------
Officers and directors of Ocean West are covered by provisions of the
Delaware General Corporation Law and the Certificate of Incorporation and Bylaws
of Ocean West, which serve to limit, and, sometimes to indemnify them against,
some of the liabilities which they may incur in such capacities.
Limitations on Liability
------------------------
Both Delaware and California have enacted legislation which authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their shareholders for monetary damages for breach of a
director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by the legislation, directors are accountable to
corporations and their shareholders for monetary damages for conduct
constituting negligence or gross negligence in the exercise of their duty of
care. Although the statute does not change a directors' duty of care, it enables
corporations to limit
53
<PAGE>
available relief to equitable remedies such as injunction or rescission by
including specified provisions in its Certificate of Incorporation.
Ocean West's Certificate of Incorporation limits the liability of its
directors to the corporation or its shareholders (in their capacity as
directors, but not in their capacity as officers) to the fullest extent
permitted by the legislation. Specifically, the directors of Ocean West will
not be personally liable for monetary damages for breach of director's fiduciary
duty as a director, except for liability:
(a) for any breach of the director's duty of loyalty to Ocean West or its
shareholders;
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing and culpable violation of law;
(c) for acts or omissions that a director believes to be contrary to the
best interests of Ocean West or its shareholders or that involve the
absence of good faith on the part of the director;
(d) for unlawful payments of dividends or making of a distribution or
unlawful stock repurchases or redemptions;
(e) for any transaction from which the director derived an improper
personal benefit;
(f) for acts or omissions that show a reckless disregard for the director's
duty to Ocean West or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course
of performing his duties, of a risk of services injury to Ocean West or
its shareholders; or
(g) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to
Ocean West or its shareholders.
Indemnification
----------------
Ocean West's Certificate of Incorporation provides that Ocean West
indemnify its directors or officers, its former directors or officers, or any
person who may have served at its request as a director or officer of another
corporation in which it owns shares of capital stock or of which it is a
creditor, against expenses of the defense of any proceeding in which any of them
is a party because they are or were directors or officers of Ocean West, or of
such other corporation, to the fullest extent permitted under California or
other law. There is no indemnification if such person is found to be liable for
negligence or misconduct in the performance of duty or if the exclusion of
personal liability of directors for monetary damage described above is not
available.
The indemnification and advancement of expenses under Ocean West's Bylaws
are not exclusive of any other rights to which those seeking indemnification or
advancement of expenses
54
<PAGE>
may otherwise be entitled. It is our policy that indemnification of the persons
specified in the Bylaws is to be made to the fullest extent permitted by law.
The indemnification and advancement of expenses under Ocean West's Bylaws,
unless otherwise provided when authorized or ratified, continues as to a person
who has ceased to be a director, officer, employee or agent and inures to the
benefit of the heirs, executors and administrators of such person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Ocean
West pursuant to the foregoing provisions, Ocean West has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
AVAILABLE INFORMATION
---------------------
Ocean West will furnish annual reports containing audited financial
statements to shareholders. Additional unaudited reports may be provided to
shareholders at such time as Ocean West may determine or as required by law.
Ocean West also expects to be subject to the reporting requirements of the
Securities Exchange Act of 1934.
Ocean West has filed a registration statement on Form S-1 under the
Securities Act of 1933 with the Securities and Exchange Commission in
Washington, D.C. The prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement as filed including the exhibits thereto. The registration statement
may be reviewed and copied at the Public Reference Room of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, Ocean West is an electronic filer. The SEC
maintains an Internet site which contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov. Statements made in
-------------------
this prospectus as to the contents of any contract or other document are not
necessarily complete, and, where such contract or other document has been filed
as an exhibit to the registration statement, reference is hereby made to such
exhibit and each such statement is qualified in all respects by such reference.
LEGAL MATTERS
-------------
Ocean West has been advised with respect to some legal aspects of the
offering by Ogden Newell & Welch PLLC, 1700 Citizens Plaza, 500 West Jefferson,
Louisville, Kentucky 40202-2874.
EXPERTS
-------
The financial statements of Ocean West Enterprises as of March 31, 2000 and
1999 and each of the three years in the period ended March 31, 2000 included in
this prospectus have been audited by Corbin & Wertz, independent public
accountants, as indicated in their report with respect thereto,
55
<PAGE>
and are included herein in reliance upon the authority of said firm as experts
in giving said reports. Reference is made to said report which includes an
explanatory paragraph regarding the uncertainty of the company's ability to
process and fund HUD insured loans in the future.
Corbin & Wertz resigned as auditors of Ocean West Enterprises on August 22,
2000; they have consented to the inclusion of their report in this prospectus.
Their report dated June 14, 2000 contained an explanatory paragraph regarding
the uncertainty of the company's ability to process and fund HUD-insured loans
in the future. There were no disagreements with the accountants which were not
resolved to the satisfaction of the accountants.
The financial statements of Ocean West Holding Corporation as of September
30, 2000 and for the period from inception (April 15, 2000) to September 30,
2000 included in this prospectus have been audited by Link, Murrel & Company,
independent public accountants as indicated in their report with respect
thereto, and are included herein on reliance upon the authority of said firm as
experts in giving said reports.
The appraised value of the shares of stock of Ocean West on January 31,
2000 and assuming the acquisition of Ocean West Enterprises by Ocean West
Holding Corporation included in this prospectus and elsewhere in the
Registration Statement, have been included in reliance on the valuation prepared
by Norman Jones Enlow & Co., Certified Public Accountants & Management
Consultants, given on the authority of that firm as experts.
56
<PAGE>
FINANCIAL STATEMENTS
--------------------
TABLE OF CONTENTS
-----------------
Ocean West Enterprises, Inc.
Three Months Ended June 30, 2000 and 1999
Years Ended March 31, 2000, 1999 and 1998
Ocean West Holding Corporation
For the Period April 15, 2000 (inception) through September 30, 2000
<TABLE>
<CAPTION>
Ocean West Enterprises, Inc. Page
--------------------------- ----
<S> <C>
Balance Sheet - June 30, 2000 (unaudited) ................................. F - 1
Statements of Operations - For the three months ended June 30, 2000
and 1999 (unaudited) ................................................... F - 3
Statements of Cash Flows - For the three months ended June 30, 2000
and 1999 (unaudited) ................................................... F - 4
Notes to Financial Statements (unaudited) ................................. F - 5
Independent Auditors' Report .............................................. F - 6
Balance Sheets - March 31, 2000 and 1999 .................................. F - 7
Statements of Operations - For the three years ended March 31, 2000 ....... F - 9
Statements of Stockholders' Equity (Deficit) - For the three years ended
March 31, 2000 ......................................................... F - 10
Statements of Cash Flows - For the three years ended March 31, 2000 ....... F - 14
Notes to Financial Statements ............................................. F - 16
Ocean West Holding Corporation
------------------------------
Independent Auditors' Report .............................................. F - 41
Balance Sheet - September 30, 2000 ........................................ F - 42
Notes to Financial Statement .............................................. F - 43
</TABLE>
57
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
BALANCE SHEET (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS June 30, 2000
-------------
<S> <C>
Current assets:
Cash and cash equivalents $ 302,805
Restricted cash 55,132
Mortgage loans held for sale 16,886,753
Receivable from loans sold 160,714
Current portion of notes receivable 760
Other current assets 326,851
-----------
Total current assets 17,733,015
-----------
Property and equipment, net 402,140
-----------
Other assets:
Originated mortgage servicing rights 56,678
Property held for sale 65,144
Notes receivable, less current portion 185,375
Deposits 105,855
-----------
Total other assets 413,052
-----------
$18,548,207
===========
</TABLE>
Continued F-1
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
BALANCE SHEET (Unaudited) - CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY June 30, 2000
-------------
<S> <C>
Current liabilities:
Accounts payable and accrued expenses $ 1,576,294
Current maturities of long-term debt 122,996
Current portion of capital lease obligations 77,029
Borrowings under warehouse lines of credit 16,153,167
Income tax provision 800
-----------
Total current liabilities 17,930,286
Long-term debt, net of current portion 389,676
Capital lease obligations, net of current portion 82,489
-----------
Total liabilities 18,402,451
-----------
Redeemable preferred stock:
Series D, no par value; 1,500 shares issued
and outstanding 600,000
-----------
Stockholders' equity (deficit):
Preferred stock, no par value; 50,000 shares authorized:
Series C, 1,000 shares issued and outstanding 100,000
Series E, 1,200 shares issued and outstanding 300,000
Series F, 1,250 shares issued and outstanding 125,000
Series G, 2,000 shares issued and outstanding 200,000
Series I, 550 shares issued and outstanding 55,000
Series K, 1,000 shares issued and outstanding 120,000
Series L, 183 shares issued and outstanding 183,000
Common stock, no par value; 100,000 shares
authorized; 30,000 shares issued and outstanding 408,348
Accumulated deficit (1,945,592)
-----------
Total stockholders' equity (deficit) (454,244)
-----------
$18,548,207
===========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF OPERATIONS (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net revenues $2,139,123 $ 928,048
General and administrative expenses 1,958,832 1,122,221
---------- ----------
Net income (loss) from operations 180,291 (194,173)
Other expense (3,156) (1,547)
---------- ----------
Net income (loss) $ 177,135 $ (195,720)
========== ==========
Basic and diluted net loss available to common
shareholders per common share $ 5.65 $ (6.52)
========== ==========
Basic and diluted weighted average common
shares outstanding 31,340 30,000
</TABLE> ========== ==========
See accompanying notes to financial statements
F-3
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
For the Three Months Ended June 30,
-----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 177,135 $ (195,720)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 33,563 29,561
Gain on the origination of mortgage servicing rights 19,437 -
Changes in operating assets and liabilities:
Restricted cash (46,183) 15,038
Mortgage loans held for sale 4,985,719 (6,820,009)
Receivable from loans sold 45,142 14,821,636
Other current assets (126,605) 179,190
Accounts payable and accrued expenses 100,094 (59,437)
----------- -----------
Net cash provided by operating activities 5,188,302 7,970,259
----------- -----------
Cash flows from investing activities:
Collection of notes receivable 200 600
Purchases of property and equipment (4,000) -
----------- -----------
Net cash (used in) provided by investing activities (3,800) 600
----------- -----------
Cash flows from financing activities:
Net repayments under warehouse lines of credit (5,240,432) (8,145,934)
Issuance of long-term debt 65,000 40,000
Principal repayments on long-term debt (13,362) (4,503)
Payments on capital lease obligations (20,215) (14,938)
Proceeds from issuance of preferred stock - 241,000
Issuance of common stock 215,000 -
Preferred stock dividends (37,850) (39,936)
----------- -----------
Net cash used in financing activities (5,031,859) (7,924,311)
----------- -----------
Net increase in cash and cash equivalents 152,643 46,548
Cash and cash equivalents at beginning of period 150,162 217,392
----------- -----------
Cash and cash equivalents at end of period $ 302,805 $ 263,940
=========== ===========
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest $ 350,194 $ 257,193
Income taxes $ 800 $ -
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS (Unaudited)
For the three months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
NOTE 1 - MANAGEMENT'S REPRESENTATION
------------------------------------
The management of Ocean West Enterprises, Inc. (the "Company" or "OWE") without
audit has prepared the financial statements included herein. Certain
information and note disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the financial statements have been
included and were of a normal recurring nature, and the accompanying financial
statements present fairly the financial position as of June 30, 2000, the
results of operations for the three months ended June 30, 2000 and 1999, and
cash flows for the three months ended June 30, 2000 and 1999.
It is suggested that these financial statements be read in conjunction with the
OWE audited financial statements and notes for the period ending March 31, 2000.
The interim results are not necessarily indicative of the results for a full
year.
NOTE 2 - PREFERRED STOCK ISSUANCES
----------------------------------
During the period ended June 1999, the Company issued 241 shares of Series L
preferred stock in exchange for $241,000.
During the period ended June 1999, the Company paid preferred stock dividends of
$39,936 based on preferred stock agreements.
During the period ended June 2000, the Company issued 860 shares of common stock
in exchange for $215,000.
During the period ended June 2000, the Company paid preferred stock dividends of
$37,850 based on preferred stock agreements.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Ocean West Enterprises, Inc.
dba Ocean West Funding
We have audited the financial statements of Ocean West Enterprises, Inc. dba
Ocean West Funding (the "Company") as of March 31, 2000 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the three-years in the period ended March 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ocean West Enterprises, Inc.
dba Ocean West Funding as of March 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2000 in conformity with generally accepted accounting principles.
As more thoroughly discussed in Note 1 to the accompanying financial statements,
the Company did not maintain the minimum adjusted net worth required by the
United States Department of Housing and Urban Development ("HUD"). The Company
intends to file a capital restoration plan with HUD which will indicate that the
Company subsequently satisfied this requirement on September 30, 2000. Should
the Company not satisfy the net worth requirement at September 30, 2000, and/or
HUD rejects the Company's capital restoration plan, HUD may suspend the
Company's ability to process and fund HUD insured loans. Such an event could
have a materially adverse effect on the Company's future financial position and
results of operations.
CORBIN & WERTZ
Irvine, California
June 14, 2000, except for Note 6
as to which the date is August 14, 2000
F-6
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
BALANCE SHEETS
-------------------------------------------------------------------------------
March 31,
------------------------
2000 1999
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 150,162 $ 217,392
Restricted cash 17,644 41,610
Mortgage loans held for sale 6,494,910 4,563,413
Receivable from loans sold 15,583,418 14,913,028
Current portion of notes receivable 760 97,709
Other current assets 191,553 269,025
----------- -----------
Total current assets 22,438,447 20,102,177
----------- -----------
Property and equipment, net 429,443 414,317
----------- -----------
Other assets:
Originated mortgage servicing rights 78,375 70,571
Property held for sale 65,144 410,144
Notes receivable, less current portion 185,575 173,756
Deferred income taxes - 242,234
Deposits 105,855 108,470
----------- -----------
Total other assets 434,949 1,005,175
----------- -----------
$23,302,839 $21,521,669
=========== ===========
Continued
F-7
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
BALANCE SHEETS - CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
-------------------------
2000 1999
----------- -----------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 1,477,002 $ 908,111
Current maturities of long-term debt 126,316 458,042
Current portion of capital lease obligations 76,786 48,539
Borrowings under line of credit - 97,165
Borrowings under warehouse lines of credit 21,393,599 18,761,294
----------- -----------
Total current liabilities 23,073,703 20,273,151
Long-term debt, net of current maturities 334,718 408,278
Capital lease obligations, net of current portion 102,947 13,141
----------- -----------
Total liabilities 23,511,368 20,694,570
----------- -----------
Commitments and contingencies
Redeemable Preferred Stock:
Series D, no par value; 1,500 shares issued
and outstanding 600,000 600,000
----------- -----------
Stockholders' equity (deficit):
Preferred stock, no par value; 50,000 shares authorized:
Series C, 1,000 shares issued and outstanding 100,000 100,000
Series E, 1,200 shares issued and outstanding 300,000 300,000
Series F, 1,250 shares issued and outstanding 125,000 125,000
Series G, 2,000 shares issued and outstanding 200,000 200,000
Series I, 550 shares issued and outstanding 55,000 55,000
Series K, 1,000 shares issued and outstanding 120,000 120,000
Series L, 183 and 0 shares issued and outstanding, respectively 183,000 -
Common stock, no par value; 100,000 shares
authorized; 30,480 (including 480 shares
committed but not issued) and 30,000 shares
issued and outstanding, respectively 193,348 73,348
Accumulated deficit (2,084,877) (746,249)
----------- -----------
Total stockholders' equity (deficit) (808,529) 227,099
----------- -----------
$23,302,839 $21,521,669
=========== ===========
</TABLE>
See independent auditors' report and accompanying notes to financial statements
F-8
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended March 31,
--------------------------------------
2000 1999 1998
----------- ----------- ----------
Revenues:
<S> <C> <C> <C>
Revenue from origination and sale of mortgage loans, net $ 3,855,339 $4,642,172 $3,187,689
Servicing fees, net 61 5,924 21,615
Gain on origination of mortgage servicing rights 20,861 17,105 49,283
Gain on sale of mortgage servicing rights - - 155,440
----------- ---------- ----------
Net revenues 3,876,261 4,665,201 3,414,027
----------- ---------- ----------
Operating expenses:
Interest expense 126,715 149,172 61,010
Other general and administrative expenses 2,184,280 1,668,094 1,743,110
Salaries and wages 2,404,245 2,672,109 2,201,715
Payroll taxes 271,345 263,599 233,584
----------- ---------- ----------
Total operating expenses 4,986,585 4,752,974 4,239,419
----------- ---------- ----------
Loss from operations (1,110,324) (87,773) (825,392)
----------- ---------- ----------
Other income:
Gain on sale of property 139,719 104,500 -
Interest and other 44,862 83,474 17,425
----------- ---------- ----------
Total other income 184,581 187,974 17,425
----------- ---------- ----------
Loss (income) before (benefit) provision for income taxes (925,743) 100,201 (807,967)
and extraordinary item
(Benefit) provision for income taxes 243,714 (241,434) 800
----------- ---------- ----------
Income (loss) before extraordinary item (1,169,457) 341,635 (808,767)
Extraordinary item - Gain on forgiveness of debt, net of
income taxes of $0 17,429 - -
----------- ---------- ----------
Net (loss) income (1,152,028) 341,635 (808,767)
Preferred stock dividends (186,600) (128,610) (84,000)
----------- ---------- ----------
Net (loss) income available to common shareholders $(1,338,628) $ 213,025 $ (892,767)
=========== ========== ==========
Net (loss) income available to common
shareholders per common share:
Income (loss) before extraordinary item $ (45.18) $ 7.10 $ (29.76)
Extraordinary item - gain on forgiveness of debt 0.58 - -
----------- ---------- ----------
(Loss) income per common share $ (44.60) $ 7.10 $ (29.76)
=========== ========== ==========
Weighted average common shares outstanding 30,000 30,000 30,000
=========== ========== ==========
</TABLE>
See independent auditors' report and accompanying notes to financial statements
F-9
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Three Years Ended March 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
-------------------------------------------------------------------
Series C Series E Series F
---------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997 1,000 $ 100,000 1,200 $ 300,000 -- $ --
Issuance of Series F preferred stock -- -- -- -- 1,250 125,000
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 1998 1,000 100,000 1,200 300,000 1,250 125,000
Issuance of Series G preferred stock
pursuant to conversion of notes payable -- -- -- -- -- --
Issuance of Series H preferred stock -- -- -- -- -- --
Issuance of Series I preferred stock -- -- -- -- -- --
Issuance of Series J preferred stock -- -- -- -- -- --
Issuance of Series K preferred stock -- -- -- -- -- --
Redemption of Series H preferred stock -- -- -- -- -- --
Redemption of Series J preferred stock -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 1999 1,000 100,000 1,200 300,000 1,250 125,000
Issuance of Series L preferred stock -- -- -- -- -- --
Redemption of Series L preferred stock -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Subscription advances received in March 2000
for the purchase of 480 shares of common
stock not yet issued -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 2000 1,000 $ 100,000 1,200 $ 300,000 1,250 $ 125,000
========== ========== ======== ========== ========= =========
</TABLE>
Continued
F-10
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Three Years Ended March 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
-------------------------------------------------------------------
Series G Series H Series I
---------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997 -- $ -- -- $ -- -- $ --
Issuance of Series F preferred stock -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 1998 -- -- -- -- -- --
Issuance of Series G preferred stock
pursuant to conversion of notes payable 2,000 200,000 -- -- -- --
Issuance of Series H preferred stock -- -- 1,000 35,000 -- --
Issuance of Series I preferred stock -- -- -- -- 550 55,000
Issuance of Series J preferred stock -- -- -- -- -- --
Issuance of Series K preferred stock -- -- -- -- -- --
Redemption of Series H preferred stock -- -- (1,000) (35,000) -- --
Redemption of Series J preferred stock -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 1999 2,000 200,000 -- -- 550 55,000
Issuance of Series L preferred stock -- -- -- -- -- --
Redemption of Series L preferred stock -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Subscription advances received in March 2000
for the purchase of 480 shares of common
stock not yet issued -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 2000 2,000 $ 200,000 -- $ -- 550 $ 55,000
========== ========== ======== ========== ========= =========
</TABLE>
Continued
F-11
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Three Years Ended March 31, 2000
================================================================================
<TABLE>
<CAPTION>
Preferred Stock
-------------------------------------------------------------------
Series J Series K Series L
---------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997 -- $ -- -- $ -- -- $ --
Issuance of Series F preferred stock -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 1998 -- -- -- -- -- --
Issuance of Series G preferred stock
pursuant to conversion of notes payable -- -- -- -- -- --
Issuance of Series H preferred stock -- -- -- -- -- --
Issuance of Series I preferred stock -- -- -- -- -- --
Issuance of Series J preferred stock 1,000 160,000 -- -- -- --
Issuance of Series K preferred stock -- -- 1,000 120,000 -- --
Redemption of Series H preferred stock -- -- -- -- -- --
Redemption of Series J preferred stock (1,000) (160,000) -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 1999 -- -- 1,000 120,000 -- --
Issuance of Series L preferred stock -- -- -- -- 241 241,000
Redemption of Series L preferred stock -- -- -- -- (58) (58,000)
Dividends on preferred stock -- -- -- -- -- --
Subscription advances received in March 2000
for the purchase of 480 shares of common
stock not yet issued -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- -------- ---------- --------- ---------
Balances at March 31, 2000 -- $ -- 1,000 $ 120,000 183 $ 183,000
========== ========== ======== ========== ========= =========
</TABLE>
Continued
F-12
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Three Years Ended March 31, 2000
================================================================================
<TABLE>
<CAPTION>
Common Stock Common Stk. Subscribed Accumulated
----------------------- ------------------------
Shares Amount Shares Amount Deficit Total
--------- ---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997 30,000 $ 73,348 -- $ -- $ (66,507) $ 406,841
Issuance of Series F preferred stock -- -- -- -- -- 125,000
Dividends on preferred stock -- -- -- -- (84,000) (84,000)
Net loss -- -- -- -- (808,767) (808,767)
--------- ---------- --------- ----------- ------------ ------------
Balances at March 31, 1998 30,000 73,348 -- -- (959,274) (360,926)
Issuance of Series G preferred stock
pursuant to conversion of notes payable -- -- -- -- -- 200,000
Issuance of Series H preferred stock -- -- -- -- -- 35,000
Issuance of Series I preferred stock -- -- -- -- -- 55,000
Issuance of Series J preferred stock -- -- -- -- -- 160,000
Issuance of Series K preferred stock -- -- -- -- -- 120,000
Redemption of Series H preferred stock -- -- -- -- -- (35,000)
Redemption of Series J preferred stock -- -- -- -- -- (160,000)
Dividends on preferred stock -- -- -- -- (128,610) (128,610)
Net loss -- -- -- -- 341,635 341,635
--------- ---------- --------- ----------- ------------ ------------
Balances at March 31, 1999 30,000 73,348 -- -- (746,249) 227,099
Issuance of Series L preferred stock -- -- -- -- -- 241,000
Redemption of Series L preferred stock -- -- -- -- -- (58,000)
Dividends on preferred stock -- -- -- -- (186,600) (186,600)
Subscription advances received in March
2000 for the purchase of 480 shares of
common stock not yet issued -- -- 480 120,000 -- 120,000
Net loss -- -- -- -- (1,152,028) (1,152,028)
--------- ---------- --------- ----------- ------------ ------------
Balances at March 31, 2000 30,000 $ 73,348 480 $ 120,000 $ (2,084,877) $ (808,529)
========= ========== ========= =========== ============ ============
</TABLE>
See independent auditors' report and accompanying notes to financial statements
F-13
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------
2000 1999 1998
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,152,028) $ 341,635 $ (808,767)
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Provision for doubtful receivables - 33,055 -
Depreciation and amortization 127,600 81,689 79,267
Gain on the origination of mortgage servicing rights (20,861) (17,105) (49,283)
Gain on sale of mortgage servicing rights - - (155,440)
Deferred income taxes 242,234 (242,234) 3,978
Write-off of note receivable 60,000 - -
Gain on sale of property (139,719) (104,500) -
Forgiveness of debt (17,429) - -
Changes in operating assets and liabilities:
Restricted cash 23,966 (41,610) -
Accounts receivable - - -
Mortgage loans held for sale (1,931,497) 12,609,239 (8,184,327)
Receivable from loans sold (670,390) (14,913,028) -
Other current assets 77,472 (77,880) 219,063
Deposits 3,064 (4,208) (71,324)
Accounts payable and accrued expenses 543,641 69,258 217,480
----------- ------------ -----------
Net cash used in operating activities (2,853,947) (2,265,689) (8,749,353)
----------- ------------ -----------
Cash flows from investing activities:
Collection of receivable from sale of mortgage
servicing rights - - 102,454
Collection of notes receivable 25,130 6,185 4,519
Purchases of property and equipment (20,897) (103,016) (105,396)
Proceeds from sale of property and equipment 206,219 61,279 -
Purchases of property held for sale - (21,144) (64,500)
Sale (purchase) of mortgage loan held for investment - 22,491 (22,491)
Issuance of notes receivable - - (7,083)
Proceeds from sale of mortgage servicing rights - - 293,139
----------- ------------ -----------
Net cash provided by (used in) investing activities 210,452 (34,205) 200,642
----------- ------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) under bank line of credit (1,855) 407 -
Net borrowings (repayments) under warehouse lines
of credit 2,632,305 1,969,034 8,098,421
Issuance of long-term debt 331,237 480,500 215,430
</TABLE>
Continued F-14
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
STATEMENTS OF CASH FLOWS - CONTINUED
________________________________________________________________________________
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Principal repayments on long-term debt (425,853) (127,802) (124,823)
Payments on capital lease obligations (101,219) (36,321) (15,862)
Proceeds from stock subscriptions 120,000 - -
Proceeds from issuance of preferred stock 183,000 370,000 125,000
Redemption of preferred stock - (195,000) -
Preferred stock dividends (161,350) (128,610) (84,000)
---------- ---------- ----------
Net cash provided by financing activities 2,576,265 2,332,208 8,214,166
---------- ---------- ----------
Net change in cash and cash equivalents (67,230) 32,314 (334,545)
Cash and cash equivalents at beginning of year 217,392 185,078 519,623
---------- ---------- ----------
Cash and cash equivalents at end of year $ 150,162 $ 217,392 $ 185,078
========== ========== ==========
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $1,196,996 $1,276,925 $1,227,842
========== ========== ==========
Income taxes $ 800 $ 800 $ 800
========== ========== ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During fiscal 2000, the Company sold property held for sale with a book value
of $345,000 for $329,194 which was comprised of a receivable of $449 and
the settlement of notes payable in the amount of $328,745 and a $17,429
note payable due to the president of the Company which was forgiven,
resulting in a loss on sale of property held for sale of $15,806.
During fiscal 2000, the Company sold property and equipment with a book value
of $110,500 for $266,025 which was comprised of $206,219 in cash and the
settlement of a note payable in the amount of $59,806, resulting in a gain
on sale of property and equipment of $155,525.
During fiscal 2000, the Company refinanced its line of credit in the amount of
$95,310 into a term note payable.
During fiscal 2000, 1999 and 1998, the Company incurred capital lease
obligations in the amount of $219,272, $42,279 and $40,306, respectively,
for the purchase of property and equipment.
During fiscal 1999, the Company incurred long-term debt in the amount of
$44,000 for the purchase of property held for sale.
During fiscal 1999, the Company sold property with a cost of $599,500 for
$704,000 which was comprised of $61,279 in cash, a note receivable for
$166,428 and the settlement of notes payable in the amount of $476,293.
During fiscal 1999, holders of notes payable totaling $200,000 exercised the
conversion feature which allowed them to convert the notes payable into
2,000 shares of Series G preferred stock.
During fiscal 1998, the Company sold servicing rights for total consideration
of $326,194, of which $33,055 was a note receivable.
During fiscal 1998, the Company purchased certain property to be held for sale
valued at $645,000 in exchange for cash down payments totaling $64,500 and
notes payable of $580,500.
See accompanying auditors' report and accompanying notes to financial statements
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Nature of Business
------------------
Ocean West Enterprises, Inc., dba Ocean West Funding (the "Company"), a C
corporation, was incorporated in November 1988 in the State of California for
the purpose of engaging in mortgage banking activities. The Company is involved
in the process of originating, packaging and funding of HUD and other government
insured loans and non-government insured loans in the Southern California
region. HUD insured loans comprised 61%, 71% and 63% of total loans originated
by the Company during the years ended March 31, 2000, 1999 and 1998,
respectively. Certain of the non-government insured loans are sold "servicing
retained" whereby the Company receives a fee for servicing the loans.
Risks and Uncertainties
-----------------------
As discussed above, the Company originates HUD and other government insured
loans primarily in the Southern California region. The Company generates
revenue from the origination, sale and servicing of these loans. Significant
changes in interest rates or the underlying economic condition of the Southern
California real estate market could have a materially adverse impact on the
Company's operations.
Liquidity
---------
The Company has losses from operations, negative working capital, stockholders'
deficit, an overdrawn line of credit and HUD violations (see below) as of March
31, 2000. Management believes the following arrangements will be sufficient to
fund its capital expenditures, working capital requirements and other cash
requirements through March 31, 2001.
. The Company has generated positive cash flows from operations and
increased revenue sources subsequent to the year ended March 31, 2000.
. Subsequent to March 31, 2000, the Company has sold 860 shares of its
common stock for $215,000 (see Note 18).
. Subsequent to March 31, 2000, stockholders converted certain notes
payable in the amount of $241,000 into 241 shares of Series L
preferred stock (see Note 18).
. The Company has letters of interest from investors for over $400,000.
F-16
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
. Certain stockholders have the ability and commitment to contribute
property and other assets in the amount of $430,000 (estimated by the
Company to be the net fair market value).
There can be no assurance the Company will be able to obtain sufficient
additional funds when needed, or that such funds if available, will be on terms
satisfactory to the Company.
In addition, the Company did not maintain the minimum adjusted net worth
required by the United States Department of Housing and Urban Development
("HUD"). The Company intends to file a capital restoration plan with HUD which
will indicate that the Company subsequently will satisfy this requirement on
September 30, 2000. Should the Company not satisfy such net worth requirement
as of September 30, 2000, and/or HUD rejects the Company's capital restoration
plan, HUD may suspend the Company's ability to process and fund HUD insured
loans. Given that HUD comprises 61% of the Company's loan origination during
the year ended March 31, 2000, such event could have a materially adverse effect
on the Company's future financial position and results of operations.
Concentration of Credit Risk
----------------------------
The Company maintains, at times, cash balances at certain financial institutions
in excess of amounts insured by Federal agencies.
Significant Supplier
--------------------
One loan broker accounted for approximately 14%, 9% and 11% of the Company's
loan volume (in dollars) for the years ending March 31, 2000, 1999 and 1998,
respectively. The loss of this loan broker could have an adverse effect on the
Company.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reported periods.
Significant estimates made by the Company's management include, but are not
limited to, the realizability of mortgage loans held for sale, mortgage
servicing rights and property held for sale, the collectibility of notes
receivable, and the recoverability of property and equipment through future
operating profits. Actual results could materially differ from those estimates.
F-17
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Cash and Cash Equivalents
-------------------------
For the purpose of the statement of cash flows, the Company considers all highly
liquid holdings with maturities of three months or less, at the time of
purchase, to be cash equivalents.
Restricted Cash
---------------
Restricted cash represents monies deposited in escrow for the benefit of a
borrower who advanced funds to the Company.
Mortgage Loans Held For Sale
----------------------------
Mortgage loans held for sale to investors are stated at the lower of cost or
market value computed on the aggregate method by residential loan type
(unrealized losses are offset by unrealized gains) and are evaluated each year
end, determined by outstanding commitments from investors or current investor
yield requirements. The amount primarily by which cost exceeds market value is
accounted for as a valuation allowance and any changes in the valuation are
included in the determination of net income. As of March 31, 2000 and 1999, the
Company determined no valuation was required as cost was estimated to be less
than fair market value. As of March 31, 2000 and 1999, included in the carrying
value of mortgage loans held for sale are $489,350 and $430,312, respectively,
of net expenses incurred in the origination of such loans. A substantial
portion of such loans were sold to investors within 30 days subsequent to March
31, 2000 and 1999.
Receivable from Loans Sold
--------------------------
In fiscal 1999, the Company began recognizing revenues on loans sold (along with
corresponding costs) at the time the loan file with completed documentation was
shipped to the designated investors due to a change in the Company's records
retention policy on shipping documentation. In preceding years, the Company did
not retain loan shipping documentation; therefore, the Company recognized
revenues upon the funding of the loans by the designated investors. All
mortgage loans sold or held for sale have investor commitment sales prices. To
ensure the original investor commitment price and to validate the receivable
from loans sold, only loans shipped to investors in accordance with investor
requirements are included in receivables from loans sold. This change resulted
in an increase in income before provision for income taxes and net income by
approximately $55,000 and $92,000 for the years ended March 31, 2000 and 1999,
respectively.
F-18
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Property and Equipment
----------------------
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the related assets, ranging from three to thirty years.
Depreciation expense related to property and equipment during the years ended
March 31, 2000, 1999 and 1998 totaled $114,543, $67,851 and $66,600,
respectively. Maintenance and repairs are charged to operations when incurred.
Major betterments and renewals are capitalized. Gains or losses are recognized
upon sale or disposition of assets.
Long-Lived Assets
-----------------
During 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting For The
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of,"
which requires that long-lived assets and certain identifiable intangibles to be
held and used by any entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Pursuant to SFAS 121, management of the Company assesses the
recoverability of property and equipment by determining whether the depreciation
of such assets over their remaining lives can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured based on
fair value (projected discounted cash flows) and is charged to operations in the
period in which such impairment is determined by management. To date,
management has not identified any impairment of property and equipment. There
can be no assurance, however, that market conditions will not change or demands
for the Company's services will continue which could result in future long-lived
asset impairment.
Mortgage Servicing
------------------
The Company recognizes as separate assets or liabilities the obligation to
service mortgage loans for others, through loan origination by allocating total
costs incurred between the loan and the servicing rights retained based on their
relative fair values. Amortization of mortgage service assets or rights
("MSRs") is based on the ratio of net servicing income received in the current
period to total net servicing income projected to be realized from the MSRs.
Amortization of mortgage service liabilities ("MSLs") is based on the ratio of
net servicing costs paid in the current period to total net servicing costs
projected to be paid from the MSL. Based on management's estimate, the Company
has no MSLs for the three years ended March 31, 2000. Projected net servicing
income is in turn determined by the estimated future balance of the underlying
mortgage loan portfolio, which declines over time from prepayments and scheduled
loan amortization. The Company estimates future prepayment rates based on
current interest rate levels, other economic conditions and market orecasts, as
well as relevant characteristics of the servicing portfolio, such as loan types,
interest rate
F-19
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
stratification and recent prepayment experience. MSRs are periodically evaluated
for impairment, which is recognized in the statement of operations during the
applicable period through additions to an impairment reserve. For purposes of
performing its impairment evaluation, the Company stratifies its servicing
portfolio on the basis of certain risk characteristics including loan type and
interest rate. The Company has determined that no impairment allowance is needed
as of March 31, 2000 and 1999.
The Company capitalized $20,861, $17,105 and $49,283 of mortgage servicing
rights during the years ended March 31, 2000, 1999 and 1998, respectively. As
a result, the Company recorded a gain on the origination of mortgage servicing
rights in the amounts of $20,861, $17,105 and $49,283 which is reflected in the
accompanying statements of operations for the years ended March 31, 2000, 1999
and 1998, respectively. Amortization expense related to mortgage servicing
rights during the years ended March 31, 2000, 1999 and 1998 totaled $13,057,
$13,838 and $12,667, respectively.
Mortgage Backed Securities
--------------------------
The Company has adopted Standards of Financial Accounting Standards No. 134
("SFAS 134"), "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS 134 is an amendment of SFAS 65 "Accounting for Certain
Mortgage Banking Activities." It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interest
based on its ability and intent to sell or hold those instruments. The adoption
of this standard had no material impact on its results of operations, financial
position or cash flows as it currently does not utilize or deal in mortgage-
backed securities.
Property Held For Sale
----------------------
Property held for sale at March 31, 2000 consists of one residential property
which is recorded at the lower of cost or fair value less cost to sell. The
property is subject to a short-term lease. The Company intends to market the
property for sale during the year ended March 31, 2001.
Revenue and Cost Recognition
----------------------------
Revenue from the sale of loans is recognized at the time the loans are sold or
when the loan file has completed shipping documentation to independent
investors. Loan origination costs and incremental direct costs are deferred and
recognized over the term of the loan as an adjustment of the loan yield until
the loan is sold. Incremental direct costs include credit reports, appraisal
fees, document preparation fees, wire fees, tax and filing fees, funding fees
and commissions. When the loan is sold and service is released, the unamortized
loan origination costs and incremental direct selling costs
F-20
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
are netted against the revenue and recorded to the statement of operations.
Revenue from the servicing of loans is recognized as earned.
Accounting for Stock-Based Compensation
---------------------------------------
The Company accounts for stock-based compensation issued to employees, if any,
using the intrinsic value based method as prescribed by APB Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic
value based method, compensation is the excess, if any, of the fair value of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. Compensation, if any, is recognized over the
applicable service period, which is usually the vesting period.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"). This standard, if fully adopted, changes the method of accounting
for employee stock-based compensation plans to the fair value based method. For
stock options and warrants, fair value is determined using an option pricing
model that takes into account the stock price at the grant date, the exercise
price, the expected life of the option or warrant and the annual rate of
quarterly dividends. Compensation expense, if any, is recognized over the
applicable service period, which is usually the vesting period.
The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as if the Company
adopted the cost recognition requirements under SFAS 123, are required to be
presented.
Basic and Diluted Loss Per Share
--------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"). SFAS 128 changes the methodology of
calculating earnings per share by eliminating any common stock equivalents (such
as stock options, warrants, etc.) from basic earnings per share and changes
certain calculations when computing diluted earnings per share.
Basic earnings (loss) per share is computed based on the weighted average number
of common shares outstanding for the period. Diluted earnings per share is
computed by dividing net income available to common shareholders by the weighted
average common shares outstanding, assuming all dilutive potential common shares
were issued (none for 2000, 1999 and 1998).
F-21
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Advertising
------------
The Company expenses advertising costs as incurred. The advertising costs for
the years ended March 31, 2000, 1999 and 1998 totaled $143,728, $40,121 and
$24,827, respectively.
Income Taxes
------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under the asset
and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period the enactment occurs. A
valuation allowance is provided for certain deferred tax assets if it is more
likely than not that the Company will not realize tax assets through future
operations.
Fair Value of Financial Instruments
-----------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 107
("SFAS 107"), "Disclosures About Fair Value of Financial Instruments." SFAS 107
requires disclosure of fair value information about financial instruments when
it is practicable to estimate that value. The carrying amount of the Company's
cash, accounts payable and accrued expenses approximates their estimated fair
values due to the short-term maturities of those financial instruments (see Note
16).
Comprehensive Income
--------------------
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The adoption of SFAS 130 has not
impacted the Company's financial statements as it has no comprehensive income
items.
Segment Information
--------------------
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information
about segments of their business in their annual financial
F-22
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers.
The Company has only one business segment, so no additional disclosures are
required.
New Accounting Pronouncements
-----------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of this standard to
have a material impact on its results of operations, financial position or cash
flows as it currently does not engage in any derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the fourth quarter of
the fiscal year beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position and
results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion 25." FIN 44 clarifies the application of Opinion
25 for (a) the definition of employee for purposes of applying Opinion 25, (b)
the criteria for determining whether a plan qualifies as a non-compensatory
plan, (c) the accounting consequence for various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain provisions cover specific events that occur after
either December 15, 1998, or January 12, 2000. The adoption of certain other
provisions of FIN 44 prior to March 31, 2000 did not have a material effect on
the financial statements. The Company does not expect that the adoption of the
remaining provisions will have a material effect on the financial statements.
F-23
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 and 1999 financial
statements to conform to the 2000 presentation.
NOTE 2 - MORTGAGE SERVICING RIGHTS
----------------------------------
Mortgage servicing rights are as follows for the year ended March 31:
2000 1999 1998
---------- ---------- ----------
Balance, beginning of year $ 70,571 $ 67,304 $ 30,688
Additions, net 20,861 17,105 49,283
Amortization (13,057) (13,838) (12,667)
---------- ---------- ----------
Balance, end of year $ 78,375 $ 70,571 $ 67,304
========== ========== ==========
The estimated fair market value of mortgage servicing rights approximated their
respective book values for each of the three years ended March 31, 2000, 1999
and 1998. The fair market value was determined by discounting estimated net
future cash flows from loan servicing using a discount and repayment rates that
approximate current market rates.
F-24
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 3 - NOTES RECEIVABLE
-------------------------
Notes receivable consist of the following at March 31:
2000 1999
--------- ---------
Secured note receivable from an employee of the
Company, bearing interest at 7.50% per annum,
payable in monthly interest installments with all
principal and unpaid interest due and payable in
April 2005. $ 166,428 $ 166,428
Note receivable from a third party, bearing interest at
8% per annum; interest payable monthly; paid in full
September 1999. - 75,000
Other 19,907 30,037
--------- ---------
186,335 271,465
Less current portion (760) (97,709)
--------- ---------
$ 185,575 $ 173,756
========= ==========
NOTE 4 - PROPERTY AND EQUIPMENT
--------------------------------
Property and equipment consist of the following at March 31:
2000 1999
-------- ----------
Real estate $ - $ 149,000
Office equipment 342,563 321,666
Furniture and fixtures 97,801 97,801
Automobiles 12,000 12,000
Property under capital leases 349,908 130,636
--------- ---------
802,272 711,103
Less accumulated depreciation and amortization (372,829) (296,786)
--------- ---------
$ 429,443 $ 414,317
========= =========
F-25
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 5 - LINE OF CREDIT
-----------------------
The Company has an unsecured bank line of credit in the amount of $100,000.
When the line of credit expired on November 18, the Company refinanced the
outstanding balance of $95,310 into a term note payable (see Note 7). At March
1, 2000 and 1999, the outstanding balance under the line of credit was $0 and
$97,165, respectively.
Interest expense incurred under the unsecured bank line of credit amounted to
$9,129, $9,939 and $10,639 for the years ended March 31, 2000, 1999 and 1998,
respectively.
NOTE 6 - WAREHOUSE LINES OF CREDIT
----------------------------------
The Company has a $15,000,000 mortgage loan purchasing warehouse line of credit,
collateralized by the related mortgage loans receivable with a carrying value of
$19,292,446 and $17,625,281 at March 31, 2000 and 1999, respectively, mortgage
loan servicing agreements entered into by the Company (see Note 12) and
personally guaranteed by the common stockholders of the Company, with interest
due monthly at the bank reference rate plus an established percentage (totaling
8.9% at March 31, 2000). The warehouse line of credit expires on September 30,
2000 and the Company is currently in negotiations with the existing lender to
renew the line of credit. The warehouse line of credit has restrictions as to
the types of loans (and the maximum amounts per individual loans) for which said
line can be used to fund. Furthermore, the line can only be used to fund loans
at a percentage of par, as defined; the remainder must be funded by the Company
utilizing its own cash resources. At March 31, 2000 and 1999, the outstanding
balance under the warehouse line of credit was $20,019,054 (including $748,787
of monies drawn against the warehouse line of credit but not yet financed) and
$17,493,914, respectively.
The warehouse line of credit agreement contains restrictive covenants relating
to net worth, tangible net worth, and various ratios, as defined. Furthermore,
the warehouse line of credit permits dividends solely to the extent of net
income. Substantially all of such restrictive covenants were not satisfied at
March 31, 2000. In addition, the warehouse line of credit was drawn in excess
of the maximum amount allowable pursuant to the related agreement. On August
14, 2000, the Company received a waiver from the line lender waiving such
covenant violations as of March 31, 2000. As the Company has not received a
waiver for the period after March 31, 2000, the line lender could demand
repayment at any time. The loss of this line of credit could have a material
adverse effect on the Company.
The Company has another $5,000,000 mortgage loan purchasing warehouse line of
credit, collateralized by the related mortgage loans receivable with a carrying
value of $1,374,545 and $1,267,380 at March 31, 2000 and 1999, respectively,
mortgage loan servicing agreements entered into by the Company (see Note 11) and
personally guaranteed by the common stockholders of the
F-26
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 6 - WAREHOUSE LINES OF CREDIT, continued
---------------------------------------------
Company, with interest due monthly at the bank reference rate plus an
established percentage (totaling 10% at March 31, 2000). The warehouse line of
credit expires on September 30, 2000 and the Company is currently in
negotiations with the existing lender to renew the line of credit. Each advance
is to be repaid within 45 days of the advance. At March 31, 2000 and 1999, the
outstanding balance under this warehouse line of credit was $1,374,545 and
$1,267,380, respectively.
Interest expense incurred under the warehouse lines of credit amounted to
$984,955, $1,115,304 and $1,187,087 for the years ended March 31, 2000, 1999 and
1998, respectively.
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
-----------------------------------------------------
Long-Term Debt
---------------
Long-term debt consists of the following at March 31:
2000 1999
--------- ---------
Note payable to a bank, bearing interest at 12% per
annum; payable in monthly installments of $3,165,
including interest, through February 2003 personally
guaranteed by the President of the Company. $ 93,098 $ -
Notes payable to a third party, bearing interest at
7.25% per annum; paid in full March 2000. - 370,500
Note payable to a third party, bearing interest at
8.875% per annum; payable in monthly installments
of $2,470, including interest. Balance was paid in full
when property was sold during fiscal year 2000. - 308,134
Note payable to a third party, bearing interest at a
variable rate (6.875% per annum at March 31, 1999);
payable in monthly installments of $467, including
interest. Balance was paid in full when property was
sold during fiscal year 2000. - 60,345
F-27
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, continued
----------------------------------------------------------------
Note payable to a related party, bearing interest at
24% per annum; payable in monthly interest
installments with all unpaid principal
and interest due August 1, 2000. 50,000 50,000
Unsecured note payable to a related
party, bearing interest at 16% per
annum; payable in monthly
installments of $1,251, including
interest, through September 2006. 68,390 -
Unsecured note payable to a related
party, bearing interest at 16% per
annum; payable in monthly
installments of $1,540, including
interest, through September 2006. 77,424 -
Unsecured note payable to a related
party, bearing interest at 13.25% per
annum; payable in monthly
installments of $1,119, including
interest, through March 2030. 98,676 -
Note payable to a third party, bearing
interest at 8.375% per annum; payable
in monthly installments of $334,
including interest, through August
2028; secured by deed of trust. 43,446 43,805
Note payable to a related party,
bearing interest at 50% per annum;
payable in monthly interest installments
with all unpaid principal and interest due
August 1999. 30,000 30,000
Other - 3,536
--------- ---------
461,034 866,320
Less current position (126,316) (458,042)
--------- ---------
$ 334,718 $ 408,278
========= =========
F-28
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, continued
----------------------------------------------------------------
Aggregate long-term debt matures as follows:
Years Ending
March 31,
---------
2001 $ 126,316
2002 47,687
2003 51,313
2004 21,576
2005 25,237
Thereafter 188,905
----------
$ 461,034
==========
Interest expense incurred under long-term debt obligations amounted to $58,995,
$126,634 and $51,854 for the years ended March 31, 2000, 1999 and 1998,
respectively.
Interest expense incurred under related party debt obligations amounted to
$39,398, $2,750 and $0 for the years ended March 31, 2000, 1999 and 1998,
respectively.
Capital Leases
--------------
The Company leases certain equipment under capital leases which expire through
2003, with effective interest rates ranging from 14% to 18.37%. The assets and
related liabilities under the capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the related
assets. The assets are depreciated over their estimated useful lives.
Depreciation of the assets of $58,828, $16,770 and $11,000, respectively, was
included in other general and administrative expenses for the years ended March
31, 2000, 1999 and 1998. Accumulated depreciation of the assets of $98,286 and
$39,458 is included in accumulated depreciation and the amortization in the
accompanying balance sheet at March 31, 2000 and 1999, respectively.
Future minimum lease payments, by year and in the aggregate, under capital
leases with initial or remaining terms of one year or more, consist of the
following at March 31, 2000:
2001 $ 98,233
2002 73,579
2003 43,035
----------
214,847
F-29
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, continued
----------------------------------------------------------------
Less amount representing interest (35,114)
--------
Present value of net minimum lease payments 179,733
Less current portion (76,786)
--------
$102,947
========
Interest expense incurred under capital lease obligations amounted to $28,322,
$9,849 and $9,156 for the years ended March 31, 2000, 1999 and 1998,
respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
Operating Leases
----------------
The Company leases its facilities and certain equipment under non-cancelable
operating leases that expire through the year 2004. These agreements generally
provide that the Company pay operating costs such as taxes, insurance and
maintenance.
Future annual minimum payments under operating leases at March 31, 2000 are as
follows:
Years Ending
March 31,
---------
2001 $223,000
2002 218,000
2003 220,000
2004 149,000
--------
$810,000
========
Rental expense under operating leases for the years ended March 31, 2000, 1999
and 1998 was $292,215, $172,455 and $78,180, respectively.
Consulting Agreements
---------------------
The Company entered into a financial consulting agreement whereby the former
Series B preferred stockholder (see Note 11) was entitled to consulting fees of
$6,000 per month through November
F-30
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 8 - COMMITMENTS AND CONTINGENCIES, continued
-------------------------------------------------
25, 1998. Consulting fees charged to operations totaled $48,000 and $72,000 for
the years ended March 31, 1999 and 1998, respectively.
As part of the Series D preferred stock purchase agreement (see Notes 10 and
15), the Company entered into a financial consulting agreement whereby the
Series D preferred stockholder is entitled to consulting fees of $6,000 per
month. The agreement expires upon the redemption of the Series D preferred
stock. Consulting fees charged to operations totaled $72,000 for each of the
years ended March 31, 2000, 1999 and 1998.
Litigation
----------
In the normal course of business, the Company is involved in various legal
actions. It is the opinion of management that none of these legal actions will
have a material effect on the financial position or results of operations of the
Company.
During fiscal 2000, the Company was a defendant in a breach of contract lawsuit.
The Company filed a cross complaint against a loan broker and a real estate
appraiser. On March 17, 2000, the Company was ordered to pay the plaintiff
damages in the amount of $44,000 and attorney fees of $38,000. In addition, the
Company prevailed in its cross compliant and was awarded several damages of
$44,000 and attorney fees of approximately $29,000. The net result of these
lawsuits has been recorded in the accompanying balance sheet under accrued
expenses at March 31, 2000.
Employment Agreements
---------------------
On October 1, 1999, the Company entered into employment agreements with its
President and its Executive Vice President/CFO. These agreements provide for an
annual base salary of $300,000 each for a five-year term plus certain additional
benefits. The agreements call for the Company to create "deferred compensation
accounts" for each employee and to credit an amount equal to 20% of the
Company's net profit before taxes to the accounts for each employee for each
year or portion of year in the case of a termination of one of the employees.
The employees are entitled to receive such amounts annually or within 30 days of
termination. Upon termination by the Company except for just cause, as defined
in the agreements, or for liquidation of the Company, the Company is obligated
to pay all amounts owing under the agreements. At March 31, 2000, no amounts
are accrued for the deferred compensation accounts as the Company had no net
profit before taxes for the year ended March 31, 2000.
F-31
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 9 - COMMITTED STOCK
------------------------
During March 2000, the Company sold 480 shares of common stock for $120,000
($250 per share). However, the shares were not issued until subsequent to March
31, 2000. As the cash was received prior to year end, the Company has included
these sales of common stock as outstanding in the accompanying statement of
stockholders' (deficit) equity at March 31, 2000.
NOTE 10 - REDEEMABLE PREFERRED STOCK
------------------------------------
Preferred Stock, Series D
-------------------------
In 1997, the Board of Directors authorized the issuance of up to 1,500 shares of
Series D preferred stock at $400 per share. At March 31, 2000, 1999 and 1998,
1,500 shares of Series D preferred stock were outstanding. The Series D
preferred stock is non-voting and is redeemable by the Company commencing five
years from the date of issuance. The Company is limited, in each calendar year,
to repurchasing 20% of the number of shares originally issued. Subject to the
laws of the state of California, if the Company's common stockholders sell all
of their common stock of the Company, the Series D preferred stockholder may
elect to have the Company redeem all issued and outstanding Series D preferred
stock. The redemption price shall equal the issuance price. There are no fixed
or minimum redemption requirements related to this stock. If the Company
conducts an initial public offering ("IPO"), the Series D preferred stockholder
may elect to convert the preferred stock to common stock at the conversion rate
of $400 per share. The Series D preferred stock shall have a preference in
liquidation over the common stock of the Company but shall be subject to the
preference in liquidation of the Series C preferred stock. The Series D
preferred stock entitles the holder to receive, on a cumulative basis, dividends
at an annual rate of 3%, payable on a monthly basis. Dividends of $18,000 were
declared and paid for the years ended March 31, 2000, 1999 and 1998.
In connection with the purchase of the Series D preferred stock, the Company
entered into a financial consulting agreement whereby the Series D preferred
stockholder is entitled to $6,000 per month until such time that the Series D
preferred stock is redeemed by the Company (see Notes 8 and 15).
NOTE 11 - PREFERRED STOCK
-------------------------
In 1991, the Board of Directors authorized the issuance of up to 50,000 shares
of non-voting preferred stock. The Company may divide the preferred stock into
any number of series, and the Board of Directors shall fix the designation and
number of shares of each series.
Currently, the Company has established twelve series of preferred stock
designated "Series A, B, C, D, E, F, G, H, I, J, K and L" preferred stock as
follows (Series D is described in Note 10 above):
F-32
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 11 - PREFERRED STOCK, continued
------------------------------------
Preferred Stock, Series A
-------------------------
The Company redeemed all shares of Series A preferred stock prior to fiscal
1997.
Preferred Stock, Series B
-------------------------
In 1993, the Board of Directors authorized the issuance of up to 1,500 shares of
Series B preferred stock at $400 per share. The Series B preferred stock was
non-voting and entitled the holder to receive, on a cumulative basis, dividends
at an annual rate of 2%, payable on a monthly basis. The Series B preferred
stock was redeemable by the Company after one year from the date of issuance. On
November 26, 1996, the Company redeemed the Series B preferred stock for
$400,000 in cash, $200,000 in notes payable, and a guaranteed two (2) year
financial consulting agreement at $6,000 per month (see Note 8).
Preferred Stock, Series C
-------------------------
In 1993, the Board of Directors authorized the issuance of up to 1,000 shares of
Series C preferred stock at $100 per share. At March 31, 2000, 1999 and 1998,
1,000 shares of the Series C preferred stock were outstanding. The Series C
preferred stock is non-voting and is redeemable by the Company commencing one
year from the date of issuance. The redemption price will include an annual
rate of return of 12% on the original issuance price. The Series C preferred
stock shall have a preference over the common stock of the Company. The Company
has been paying a monthly dividend at an annual rate of 12% in lieu of the
increased redemption price. Dividends of $12,000 were declared and $11,000 was
paid for the year ended March 31, 2000. Dividends of $12,000 were declared and
paid for the years ended March 31, 1999 and 1998.
Preferred Stock, Series E
-------------------------
In 1997, the Board of Directors authorized the issuance of up to 1,200 shares of
Series E preferred stock at $250 per share. At March 31, 2000, 1999 and 1998,
1,200 shares of Series E preferred stock were outstanding. The Series E
preferred stock is non-voting and is redeemable at the Company's option. The
redemption price shall equal the issuance price. The Series E preferred stock
shall have a preference in liquidation over the common stock of the Company but
shall be subject to the preference in liquidation of the Series C and D
preferred stock. The Series E preferred stock entitles the holder to receive,
on a cumulative basis, dividends at an annual rate of 18%, payable on a monthly
basis. Dividends of $54,000 were declared and paid for the years ended March
31, 2000, 1999 and 1998.
F-33
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 11 - PREFERRED STOCK, continued
------------------------------------
Preferred Stock, Series F
-------------------------
In 1998, the Board of Directors authorized the issuance of up to 1,250 shares of
Series F preferred stock at $100 per share. At March 31, 2000, 1999 and 1998,
1,250 shares of Series F preferred stock were outstanding. The Series F
preferred stock is non-voting and is redeemable at the Company's option. The
redemption price shall equal the issuance price. The Series F preferred stock
shall have a preference in liquidation over the common stock of the Company but
shall be subject to the preference in liquidation of the Series C, D and E
preferred stock. The Series F preferred stock entitles the holder to receive,
on a cumulative basis, dividends at an annual rate of 14%, payable on a monthly
basis. Dividends of $17,500 were declared and paid for the years ended March 31,
2000 and 1999. The Company was not obligated to pay dividends for Series F
preferred stock in 1998.
Preferred Stock, Series G
-------------------------
In 1999, the Board of Directors authorized the issuance of up to 2,000 shares of
Series G preferred stock at $100 per share. At March 31, 2000 and 1999, 2,000
shares of Series G preferred stock were outstanding. The Series E preferred
stock is non-voting and is redeemable at the Company's option. The redemption
price shall equal the issuance price plus any unpaid dividends. The Series G
preferred stock shall have a preference in liquidation over the common stock of
the Company but shall be subject to the preference in liquidation of the Series
C, D, E and F preferred stock. The Series G preferred stock entitles the holder
to receive, on a cumulative basis, dividends at an annual rate of 24%, payable
on a monthly basis. Dividends of $48,000 were declared and paid for the year
ended March 31, 2000. Dividends of $20,833 were declared and paid for the year
ended March 31, 1999.
Preferred Stock, Series H
-------------------------
In 1999, the Board of Directors authorized the issuance of up to 1,000 shares of
Series H preferred stock at $35 per share. Subsequent to their issuance, the
Company redeemed all 1,000 shares issued for $35 per share and at March 31, 2000
and 1999, no shares of Series H preferred stock were outstanding.
Preferred Stock, Series I
-------------------------
In 1999, the Board of Directors authorized the issuance of up to 550 shares of
Series I preferred stock at $100 per share. At March 31, 2000 and 1999, 550
shares of Series I preferred stock were outstanding. The Series I preferred
stock is non-voting and is redeemable at the Company's option. The redemption
price shall equal the issuance price plus any unpaid dividends. The Series I
F-34
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 11 - PREFERRED STOCK, continued
------------------------------------
preferred stock shall have a preference in liquidation over the common stock of
the Company but shall be subject to the preference in liquidation of the Series
C, D, E, F and G preferred stock. The Series I preferred stock entitles the
holder to receive, on a cumulative basis, dividends at an annual rate of 15%,
payable on a monthly basis. Dividends of $8,250 were declared and paid for the
year ended March 31, 2000. Dividends of $4,950 were declared and paid for the
year ended March 31, 1999. If the Company conducts an IPO, the Series I
preferred stockholder may elect to convert the preferred stock, plus unpaid
dividends, to common stock at 50% of the Company's IPO price. The value of this
beneficial conversion feature of $55,000 will be recognized as a preferred stock
dividend when the Company has an IPO that is declared effective.
Preferred Stock, Series J
-------------------------
In 1999, the Board of Directors authorized the issuance of up to 1,000 shares of
Series J preferred stock at $160 per share. Subsequent to their issuance, the
Company redeemed all 1,000 shares issued for $160 per share and at March 31,
2000 and 1999, no shares of Series J preferred stock were outstanding.
Preferred Stock, Series K
-------------------------
In 1999, the Board of Directors authorized the issuance of up to 1,000 shares of
Series K preferred stock at $120 per share. At March 31, 2000 and 1999, 1,000
shares of Series K preferred stock were outstanding. The Series K preferred
stock is non-voting and is redeemable at the Company's option. The redemption
price shall equal the issuance price plus any unpaid dividends. The Series K
preferred stock shall have a preference in liquidation over the common stock of
the Company but shall be subject to the preference in liquidation of the Series
C, D, E, F, G and I preferred stock. The Series K preferred stock entitles the
holder to receive, on a cumulative basis, dividends at an annual rate of 5%,
payable on a monthly basis. Dividends of $6,000 were declared and no amount was
paid for the year ended March 31, 2000. The Company was not obligated to pay
dividends for Series K preferred stock in 1999.
Preferred Stock, Series L
-------------------------
In 1999, the Board of Directors authorized the issuance of up to 1,000 shares of
Series L preferred stock at $1,000 per share. During fiscal 2000, the Company
sold 241 shares of Series L preferred stock for $241,000 and subsequent to their
issuance, redeemed 58 shares of Series L preferred stock for $58,000. At March
31, 2000, 183 shares of Series L preferred stock were outstanding. The Series L
preferred stock is non-voting and is redeemable at the Company's option. The
redemption price shall equal the issuance price plus any unpaid dividends. The
Series L preferred stock shall
F-35
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 11 - PREFERRED STOCK, continued
------------------------------------
have a preference in liquidation over the common stock of the Company but shall
be subject to the preference in liquidation of the Series C, D, E, F, G, I and K
preferred stock. The Series L preferred stock entitles the holder to receive, on
a cumulative basis, dividends at an annual rate of 12%, payable on a monthly
basis. Dividends of $22,850 were declared and $4,600 was paid for the year ended
March 31, 2000. The Company was not obligated to pay dividends for Series L
preferred stock in 1999.
NOTE 12 - MORTGAGE LOAN SERVICING
---------------------------------
Mortgage loans serviced by the Company amounting to approximately $7.4 million,
$9.7 million and $9.4 million at March 31, 2000, 1999 and 1998, respectively,
are not included in the accompanying balance sheets. Funds held in trust on
behalf of the owners of such serviced loans are also not reflected in the
accompanying balance sheets. The Company subcontracts its servicing through a
third party sub-servicer. Either party may cancel the contract with 120 days
written notice. Loan sub-servicing fees are based on a fixed monthly fee per
outstanding loan being serviced.
NOTE 13 - GAIN ON SALE OF SERVICING RIGHTS
------------------------------------------
In fiscal 1998, the Company sold servicing rights in connection with $26,443,993
of loans which the Company had previously sold with "servicing retained," for
$326,194. The net carrying value of the servicing rights at the time of sale
was $170,754. As a result of the transaction, the Company recognized a gain of
$155,440 in the fiscal 1998 statement of operations.
NOTE 14 - PROVISION FOR INCOME TAXES
------------------------------------
The income tax provision for the years ended March 31, 2000, 1999 and 1998
differed from the amounts computed by applying the U.S. Federal tax rate of 34
percent to the income (loss) from operations before provision (benefit) for
income taxes as a result of the following:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- -----------
<S> <C> <C> <C>
Computed "expected" tax (benefit) provision $ (308,801) $ 24,682 $ (274,709)
Increase (decrease) in income taxes resulting from:
Non-deductible expenses 17,681 14,903 11,513
State taxes, net of Federal benefit (24,537) 4,151 (47,140)
(Decrease) increase in valuation allowance 559,371 (297,408) 297,408
Other - 12,238 13,728
---------- --------- -----------
$ 243,714 $(241,434) $ 800
========== ========= ===========
</TABLE>
F-36
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 14 - PROVISION FOR INCOME TAXES, continued
-----------------------------------------------
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at March 31, are presented below:
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards $612,048 $270,424
Other - 9,443
-------- --------
612,048 279,867
Less valuation allowance 559,371 -
-------- --------
Deferred tax assets 52,677 279,867
Deferred tax liabilities:
Other (52,677) (37,633)
-------- --------
Net deferred tax asset $ - $242,234
======== ========
The net change in the total valuation allowance for the years ended March 31,
2000 and 1999 was an increase of $559,371 and a decrease of $297,408,
respectively.
At March 31, 2000, the Company has net operating loss carryforwards ("NOLs") of
approximately $1,632,000 for Federal income tax reporting purposes and
approximately $640,000 for state reporting purposes, expiring in various years
through 2013.
NOTE 15 - RELATED PARTY TRANSACTIONS
------------------------------------
The Company paid consulting fees to stockholders of its Series B and D preferred
stock. Total consulting fees paid were $72,000, $120,000 and $144,000 during
the years ended March 31, 2000, 1999 and 1998, respectively (see Notes 8, 10 and
11).
During fiscal 2000, the Company sold property previously held for sale, with a
net book value of $345,000 for approximately $369,000. The Company incurred
approximately $40,000 in selling costs, resulting in a loss of approximately
$16,000, which the Company has recorded in the accompanying statement of
operations. In addition, the Company had debt outstanding on the property of
approximately $346,000, of which $17,429 was due to the President which was
forgiven. The Company recorded the forgiveness of debt as an extraordinary item
in the accompanying statement of operations.
F-37
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 16 - EARNINGS PER SHARE
----------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
2000 1999 1998
----------- --------- ---------
Numerator for basic and diluted earnings
per common share:
(Loss) income from operations $(1,169,457) $ 341,635 $(808,767)
Dividends on preferred shares (186,600) (128,610) (84,000)
----------- --------- ---------
(Loss) income from operations available
to common stockholders (1,356,057) 213,025 (892,767)
Extraordinary item-forgiveness of debt 17,429 - -
----------- --------- ---------
Net (loss) income applicable to common
stockholders $(1,338,628) $ 213,025 $(892,767)
=========== ========= =========
Denominator for basic and diluted earnings
per common share:
Weighted average shares 30,000 30,000 30,000
=========== ========= =========
(Loss) income from operations $ (45.20) $ 7.10 $ (29.76)
Extraordinary item .58 - -
----------- --------- ---------
Basic and diluted earnings
per common share $ (44.62) $ 7.10 $ (29.76)
=========== ========= =========
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------------
The following disclosure of the estimated fair value of financial instruments as
of March 31, 2000 and 1999 is made by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value.
F-38
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
--------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans and receivable from loans
sold $22,078,328 $21,797,458 $19,476,441 $19,473,441
Items included in other assets:
Advances to escrow 24,926 24,926 28,282 28,282
Principal and interest on advances
on loans sold 114,258 114,258 189,687 189,687
Employee advances 41,455 41,455 - -
Receivable from sale of loans services - - 14,230 14,230
Principal and interest advances on loans
serviced 26,429 26,429 27,094 27,094
Liabilities:
Notes payable $ 461,034 $ 461,034 $ 866,320 $ 873,032
</TABLE>
The fair value estimates as of March 31, 2000 and 1999 are based on pertinent
information that was available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans and Receivable From Loans Sold
---------------------------------------------
Fair value is estimated using the quoted market prices for similar loans and
dealer commitments to purchase loans.
Notes Payable
-------------
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Related party debt was not revalued due to the non-arms-length origin of these
instruments.
F-39
<PAGE>
OCEAN WEST ENTERPRISES, INC.
dba OCEAN WEST FUNDING
NOTES TO FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended March 31, 2000
________________________________________________________________________________
NOTE 18 - SUBSEQUENT EVENTS
---------------------------
Subsequent to March 31, 2000, the Company sold 860 shares of its common stock
for $215,000.
Subsequent to March 31, 2000, stockholders converted certain notes payable in
the amount of $241,000 into 241 shares of Series L preferred stock.
Had these events occurred at March 31, 2000, the Company's stockholders'
(deficit) equity would approximate the pro forma amounts below:
As Reported Pro forma
----------- -----------
Stockholders' (deficit) equity $ (808,529) $ (352,529)
=========== ===========
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
Ocean West Holding Corporation
15991 Redhill Avenue, Suite 110
Tustin, California 92780
We have audited the accompanying balance sheet of Ocean West Holding Corporation
as of September 30, 2000. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Ocean West Holding Corporation as
of September 30, 2000 in conformity with generally accepted accounting
principles.
Link, Murrel & Company
October 11, 2000
Irvine, California
F-41
<PAGE>
OCEAN WEST HOLDING CORPORATION
BALANCE SHEET
September 30, 2000
ASSETS
------
Assets $ 0
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Due to Ocean West Enterprises, Inc. $ 4,876
Stockholders' Equity:
Stock (note 2)
Accumulated Deficit (4,876)
-----------
Total Liabilities and Stockholders' Equity $ 0
===========
See accompanying notes.
F-42
<PAGE>
OCEAN WEST HOLDING CORPORATION
NOTES TO FINANCIAL STATEMENT
September 30, 2000
1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Business
------------------
Ocean West Holding Corporation (the "Company") was organized in the State
of Delaware on August 15, 2000, as a holding company to acquire all of the
issued and outstanding stock of Ocean West Enterprises, Inc. (dba Ocean
West Funding) in exchange for stock of Ocean West Holding Corporation.
Ocean West Enterprises, Inc. is involved in the process of originating,
packaging and funding of HUD and other government insured loans and non-
government insured loans in the Southern California region. Ocean West
Holding Corporation has not commenced operations as of October 11, 2000 and
the only activity to date has been solely in conjunction with the
incorporation and registration process.
Basis of Accounting
-------------------
The balance sheet of the Company has been prepared on the accrual basis.
Income Taxes
------------
The Company is a C-corporation for federal income tax purposes.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Year End
--------
The Company is in the process of selecting a year end for financial and tax
purposes.
2. Classes of Stock
----------------
The total number of shares, which the Corporation is authorized to issue is
45,600,000 shares, of which 30,000,000 shares shall be designated "Common
Shares"; 5,000,000 shall be designated "Class B Common Shares"; 6,000,000
shall be designated "Class D Common Shares"; and 10,000,000 shall be
designated "Preferred Shares", which shall initially have six series and
for which the Board of Directors may designate additional series. The
number of Class D Common Shares authorized shall not exceed 2% of the
number of Common Shares authorized. All shares of stock of the Corporation
shall have a par value of $0.01 per share. No holder of shares of any
class of stock of the Corporation, now or hereafter
F-43
<PAGE>
OCEAN WEST HOLDING CORPORATION
NOTES TO FINANCIAL STATEMENT
September 30, 2000
(continued)
authorized, shall have any preferential or preemptive rights to subscribe
for, purchase or receive any shares of the Corporation of any class now or
hereafter authorized, or any portions or warrants for such shares, or any
securities convertible into or exchangeable for such shares, which may at
any time be issued, sold or offered for sale by the Corporation; except
that, holders of Class B Common Shares shall have preemptive rights with
respect to the issuance of Class B Common Shares only. In addition, the
Corporation shall not sell or offer to sell any Class B Common Shares
without the prior approval of the holders of a majority of the issued and
outstanding Class B Common Shares.
No shares of any stock have been issued as of September 30, 2000.
3. Organization Costs
------------------
In accordance with the provisions of Statement of Position 98-5 "Reporting
on the Costs of Start-up Activities" all organization costs incurred to
date have been expensed.
4. Related Parties
---------------
Ocean West Holding Corporation will acquire all of the issued and
outstanding stock and all of the outstanding warrants of Ocean West
Enterprises, Inc., a California corporation, in exchange for stock of Ocean
West Holding Corporation upon the filed registration statement becoming
effective. Most of the management of Ocean West Holding Corporation will
also be executive officers and directors of Ocean West Enterprises, Inc.
F-44
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus. Any information or representation which is not included in the
Prospectus should not be relied upon and is not authorized by the issuer. The
delivery of this Prospectus at any time does not imply that the information in
the Prospectus is correct at any time subsequent to its date of issue. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of these securities.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary 4
Risk Factors 8
Plan of Distribution 18
Use of Proceeds 20
Capitalization 21
Business 23
Management's Discussion
and Analysis of Financial
Condition 36
Management 43
Principal and Selling 46
Shareholders
Securities 49
Dividends 53
Liability and Indemnification 53
of Directors
Available Information 55
Legal Matters 55
Experts 55
Financial Statements 57
</TABLE>
-------------------------
5,434,652 Common Shares
and
3,000,000 Common Stock
Purchase Warrants
of
Ocean West Holding Corporation
------------------------------
PROSPECTUS
------------------------------
______________, 2000
Dealer Prospectus Delivery Obligation
Until ________________, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
Part II - Information Not Required In Prospectus
------- --------------------------------------
Item 13. Other Expenses of Issuance and Distribution
-------------------------------------------
Expenses of the offering are estimated to be approximately $_______ which
amount includes the following items:
<TABLE>
<CAPTION>
<S> <C>
Registration fee - federal $ 2,178
Registration fees - state $ 0
Transfer Agent Fees* $
Printing and EDGAR Filing Costs* $
Legal Fees (including fees relating
to the reorganization)* $80,000
Accounting Fees $10,000
</TABLE>
--------------------------------------------------------------------------------
* estimates
The selling shareholders are not paying any expenses of the registration.
Item 14. Indemnification of Directors and Officers
-----------------------------------------
Ocean West Holding Corporation has provisions in its Certificate of
Incorporation which limit its directors' monetary liability to it or its
shareholders except: (a) for any breach of the director's duty of loyalty to
the corporation or its shareholders; (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing and culpable violation of
law; (c) for acts or omissions that a director believes to be contrary to the
best interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director; (d) for unlawful payment of
dividends or making of a distribution or unlawful repurchase or redemption of
its own stock; (e) for any transaction from which the director derived an
improper personal benefit; (f) for acts or omissions that show a reckless
disregard for the director's duty to the corporation or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing his duties of a risk of serious injury to the
corporation or its shareholders; or (g) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders.
Ocean West is required to indemnify its officers and directors for any
liability incurred by them in their capacity as such except in relation to
matters as to which any such director or officer or former director or officer
or person shall be adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of duty or for which the exclusive
of personal liability of directors for monetary damages described above is not
available.
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
On the effective date of this Registration Statement, Ocean West Holding
Corporation issued 5,926,448 Common Shares, 205,872 Class B Common Shares and
4,929 Preferred Shares to the shareholders of Ocean West Enterprises, Inc. in
exchange for all of the issued and outstanding stock of Ocean West Enterprises.
Ocean West claims exemption from registration under Section 4(2) of the
Securities Act of 1933.
<PAGE>
Of the Common Shares issued to shareholders of Ocean West Enterprises,
2,045,852 shares (in addition to the Common Shares sold to Monogenesis) will be
registered under this Registration Statement. The remaining securities issued
will bear a restrictive legend.
Item 16. Exhibits and Financial Statement Schedules
------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Exhibit Page
Table Number Number
------------ ------
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
I. Underwriting Agreement 1 +
---------------------------------------------------------------------------------------------------------
(i) See Stock Purchase Agreement and Plan of +
Reorganization
---------------------------------------------------------------------------------------------------------
II. Plan of Acquisition, Reorganization, Arrangement, Liquidation or 2
Succession
---------------------------------------------------------------------------------------------------------
(i) Amended Stock Purchase Agreement and Plan of 108
Reorganization (including all schedules)
---------------------------------------------------------------------------------------------------------
III. Articles of Incorporation and Bylaws 3
---------------------------------------------------------------------------------------------------------
(i) Certificate of Incorporation of Ocean West Holding +
Corporation
---------------------------------------------------------------------------------------------------------
(ii) Bylaws of Ocean West Holding Corporation +
---------------------------------------------------------------------------------------------------------
IV. Instruments Defining the Rights of Security Holders 4
---------------------------------------------------------------------------------------------------------
(i) Common Stock Purchase Warrant Agreement Between
Ocean West Holding Corporation and Registrar and Transfer
Company
---------------------------------------------------------------------------------------------------------
V. Opinion of Counsel - Legality of Securities Being Registered 5 +
---------------------------------------------------------------------------------------------------------
VI. Material Contracts 10
---------------------------------------------------------------------------------------------------------
(i) Employment Agreement - Marshall Stewart +
---------------------------------------------------------------------------------------------------------
(ii) Employment Agreement - Daryl Meddings +
---------------------------------------------------------------------------------------------------------
VII. Letter re Change in Certifying Accountants 16
---------------------------------------------------------------------------------------------------------
VIII. Subsidiaries of the Registrant 21 +
---------------------------------------------------------------------------------------------------------
IX. Consent of Experts 23
---------------------------------------------------------------------------------------------------------
(i) Consent of Corbin & Wertz, Independent Public Accountants 137
---------------------------------------------------------------------------------------------------------
(ii) Consent of Norman Jones Enlow & Co., Certified Public +
Accountants & Management Consultants
---------------------------------------------------------------------------------------------------------
(iii) Consent of Link, Murrell & Company, Independent Public 138
Accountants
---------------------------------------------------------------------------------------------------------
(iv) Consent of Counsel - See Exhibit 5
---------------------------------------------------------------------------------------------------------
X. Financial Data Schedule 27 139
---------------------------------------------------------------------------------------------------------
</TABLE>
+ Previously filed as an exhibit to the Registration Statement of Ocean West
Holding Corporation filed on February 1, 2000.
<PAGE>
Item 17. Undertakings
------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by 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 Act and will be governed by the final adjudication of
such issue.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this pre-effective amendment number 1 to its registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tustin, State of California, on November 6, 2000.
Ocean West Holding Corporation
By: /s/ Marshall L. Stewart
-----------------------------------------------------
Marshall L. Stewart, President, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Marshall L. Stewart on November 6, 2000
-------------------------------------------------
Marshall L. Stewart, President, Chief (principal) Executive Officer
/s/ Daryl Meddings on November 6, 2000
-------------------------------------------------
Daryl Meddings, Chief (principal) Financial Officer, Secretary/Treasurer
The following are at least a majority of the directors of Ocean West Holding
Corporation:
/s/ Marshall L. Stewart on November 6, 2000
-------------------------------------------------
Marshall L. Stewart, Director
/s/ Daryl Meddings on November 6, 2000
-------------------------------------------------
Daryl Meddings, Director
