<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration Number 333-56007
PROSPECTUS
1,750,000 SHARES
HAWTHORNE FINANCIAL CORPORATION LOGO
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------------------------
All of the 1,750,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being issued and sold by
Hawthorne Financial Corporation (the "Company"), a Delaware corporation, at a
price of $15.00 per share.
The Common Stock is quoted on the National Market of the Nasdaq Stock
Market under the symbol "HTHR." The last reported sale price of the Common Stock
as quoted through the Nasdaq Stock Market on July 7, 1998 was $15.625 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
---------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER DEBT
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY GOVERNMENTAL
AGENCY OR OTHERWISE.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------
<S> <C> <C> <C>
- ----------------------------------
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND
TO PUBLIC COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
- ----------------------------------
Per Share......................... $15.00 $0.90 $14.10
- ----------------------------------
Total(3).......................... $26,250,000 $1,575,000 $24,675,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $700,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an additional 262,500 shares of
Common Stock, on the same terms and conditions set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $30,187,500, $1,811,250 and $28,376,250, respectively.
---------------------------------------
The shares of Common Stock are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them, and subject to
their right to reject any order in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about July 10, 1998
against payment therefor in immediately available funds.
---------------------------------------
SANDLER O'NEILL & PARTNERS, L.P.
---------------------------------------
The date of this Prospectus is July 7, 1998.
<PAGE> 2
HAWTHORNE FINANCIAL CORPORATION
CORPORATE OFFICES
2381 Rosecrans Avenue
El Segundo, CA 90245
[HAWTHORNE FINANCIAL CORP. MAP]
The Bank operates 6 branch offices in Los Angeles and Ventura Counties
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY ENGAGE IN
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OFFERED HEREBY INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY
BID IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 3
AVAILABLE INFORMATION
The Company (which term shall include its subsidiaries, unless the context
otherwise requires) is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information concerning the Company can be inspected and
copied at prescribed rates at the Commission's Public Reference Room, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the following
Regional Offices of the Commission: 7 World Trade Center, 13th Floor, New York,
New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained by mail from
the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. If available, such reports and other
information also may be accessed through the Commission's electronic data
gathering, analysis and retrieval system ("EDGAR") via electronic means,
including the Commission's web site on the Internet (http://www.sec.gov). The
Common Stock is quoted on the Nasdaq Stock Market's National Market and,
consequently, such reports, proxy statements and other information also may be
inspected at the offices of the NASD, 1735 K Street, N.W., Washington, D.C.
20006.
This Prospectus constitutes a part of a Registration Statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act with respect to the Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Common Stock. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to Section 13 of the Exchange Act are incorporated by reference in this
Prospectus:
(a) Annual Report on Form 10-K for the year ended December 31, 1997,
as amended;
(b) Quarterly Report on Form 10-Q for the three months ended March 31,
1998; and
(c) Current Reports on Form 8-K dated January 28, 1998, February 23,
1998 and March 26, 1998.
This Prospectus is accompanied by a copy of the most recent Annual Report
on Form 10-K, as amended, and Quarterly Report on Form 10-Q filed by the Company
with the Commission prior to the delivery of this Prospectus.
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents referred to above which have been
incorporated by reference herein (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Hawthorne Financial Corporation,
2381 Rosecrans Avenue, 2nd Floor, El Segundo, California 90245, Attention:
Norman Morales. The Company's telephone number is (310) 725-5000.
3
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus or incorporated by reference
herein. Reference is made to the more detailed information and financial
statements, including the notes thereto, contained elsewhere in this Prospectus
or incorporated by reference herein. Unless otherwise indicated, the information
in this Prospectus assumes that the Underwriters' over-allotment option will not
be exercised and does not give effect to any change as a result of the Offering
in the exercise price of the warrants or the number of shares of Common Stock
which may be acquired upon the exercise of such warrants.
THE COMPANY
The Company is a financial services company specializing in making real
estate-secured loans in market niches which management believes generally
provide higher rates of return and greater growth potential than the traditional
mortgage products offered by competing mortgage lenders. The Company, through
Hawthorne Savings, F.S.B. (the "Bank"), its wholly-owned subsidiary, generally
seeks to originate real estate-secured loans in which it can earn a premium
yield for prompt, efficient execution and for tailoring the terms of the loans
to meet the objectives of both the Company and the borrower. The Company focuses
primarily on originating (1) loans secured by large homes and unique estates
("estate loans") with principal balances of $1.0 million or more, (2) loans for
the construction of individual and tracts of single-family residential homes and
the acquisition and development of land for such construction, and (3) permanent
and construction loans secured by multi-family residential and commercial real
estate. The Company funds its lending activities primarily with retail deposits
obtained through the Bank's branch system and, to a lesser extent, advances from
the Federal Home Loan Bank ("FHLB") of San Francisco. At March 31, 1998, the
Company had assets of $1.05 billion, liabilities of $1.00 billion, including
deposits of $848.9 million, and stockholders' equity of $44.5 million.
BACKGROUND
The Company reported net losses during 1993, 1994 and 1995 due to high
levels of nonperforming assets, which were attributable to loans originated
during the late 1980s and early 1990s by prior management of the Company. The
collectibility of such loans was adversely affected by the severe economic
recession experienced within California during the early 1990s and the resulting
decline in real estate values. In 1993, the Board of Directors replaced senior
management of the Company with a new management team which was, among other
things, more experienced with troubled asset management and resolution. New
management undertook an extensive restructuring of the Company which included
the following elements:
- Substantially reducing the Bank's sizeable portfolio of problem assets by
(i) promptly foreclosing on the collateral securing the Bank's
nonperforming loans, (ii) making additional post-foreclosure investments
in the Bank's residential development projects and apartment buildings,
(iii) disposing of the Bank's real estate owned, primarily through retail
sales, and (iv) to a much lesser extent, loan workouts. The foregoing
actions resulted in a reduction of nonperforming assets from $151.2
million at December 31, 1993 to $16.8 million at March 31, 1998.
- Increasing the Bank's regulatory capital through (i) the issuance by the
Company of an aggregate of $27 million of senior notes and cumulative
preferred stock in 1995, (ii) the issuance by the Company of an aggregate
of $40 million of senior notes due 2004 in 1997, the proceeds of which
were used, in part, to repay the senior notes and preferred stock issued
in 1995, and (iii) accumulated earnings since 1995.
- Developing and implementing revised lending strategies, including (i)
clearly defining targeted, niche lending products and markets, (ii)
making a substantial investment in the Bank's lending and operating
infrastructure, and (iii) enhancing the Bank's loan underwriting policies
and procedures and internal audit and credit risk management functions,
which, commencing in 1995, permitted the Company to resume substantial
lending activities.
4
<PAGE> 5
- Consolidating the Bank's branch system from 19 branch offices at December
31, 1993, with average deposits of $43.7 million per branch, to six
branch offices at March 31, 1998, with average deposits of $141.5 million
per branch.
CURRENT BUSINESS STRATEGIES
Beginning in 1995, the Company established itself as a provider of real
estate-secured financings to narrowly targeted segments of the Southern
California real estate markets. These real estate market segments, which include
estate homes, residential construction and multi-family and commercial real
estate, have provided the Company with opportunities to achieve higher loan
yields than is typical in more traditional mortgage financings. Generally, the
Company is able to realize higher yields on its financings because of the size
and complexity of individual loans, the high level of support services it offers
to builders, developers and other borrowers, the efficiency with which it can
process individual loan requests, and its willingness and competence in
tailoring the terms of individual loans to meet the objectives of the Company
and the borrower. In recent years, the Company has retained lending personnel
with significant loan origination experience, a full complement of loan
underwriting, processing and funding personnel, and skilled personnel
responsible for the Company's appraisal, servicing, internal audit and credit
risk management functions. The Company sources its loan originations through a
combination of established relationships with mortgage brokers and mortgage
bankers, and through expanding referrals from, and repeat business with,
existing customers of the Company. Since the Company's resumption of lending
activities in 1995, new loan commitments have increased from $197.4 million in
1995 to $332.3 million in 1996 to $495.0 million in 1997, and amounted to $193.0
million during the three months ended March 31, 1998. As a result of the
foregoing and the initiatives set forth below, the Company recognized net
earnings of $7.5 million, $9.6 million and $1.8 million during the years ended
December 31, 1996 and 1997 and the three months ended March 31, 1998,
respectively.
The Company believes that it can continue to expand its annual volume of
new loan originations, thereby increasing its market share within its existing
business lines, due to (1) the diversification of the market segments in which
it actively competes, (2) its willingness to originate loans across the full
spectrum of potential risk and return within each of its market segments, (3)
the experience and depth of its lending personnel, (4) its strategy of retaining
virtually all new loan originations for its own portfolio, (5) its unique
complement of execution efficiency and flexibility and high level of customer
service, complemented by its flat organizational structure, and (6) its access
to relatively low-cost funding from retail deposits and, to a lesser extent,
advances from the FHLB of San Francisco which have a wide variety of interest
rates and maturities.
Management believes that the combined effects of these attributes, coupled
with the Company's strategy of pricing its loans on an adjustable-rate basis,
will enable the Company to continue to successfully compete against much larger
providers of mortgage credit, while maintaining prudent levels of interest rate
and credit risk as its loan portfolio grows.
The Company is a registered savings and loan holding company under the Home
Owners' Loan Act ("HOLA") subject to regulation by the Office of Thrift
Supervision ("OTS"). The Bank is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund, which
insures the Bank's deposits up to the maximum extent permitted by law.
The Company's principal executive offices are located at 2381 Rosecrans
Avenue, 2nd Floor, El Segundo, California 90245. The Company's telephone number
is (310) 725-5000.
5
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered................................. 1,750,000 shares.
Purchase price....................................... $15.00 per share.
Common Stock outstanding prior to the Offering....... 3,170,296(1).
Common Stock outstanding after the Offering.......... 4,920,296 (5,182,796 shares assuming the
exercise of the Underwriters' over-allotment
option)(1).
Estimated net proceeds............................... $23,975,000 .
Use of proceeds...................................... Net proceeds retained by the Company will be
used for general corporate purposes,
including contributions to the Bank in order
to maintain and enhance internal loan growth
and expansion of its business. See "Use of
Proceeds."
Dividend policy...................................... The Company does not currently pay cash
dividends on the Common Stock and has no
current plans to do so in the future. See
"Market for Common Stock and Dividends."
Nasdaq National Market Symbol for the Common Stock... HTHR
Risk factors......................................... Prospective investors are urged to carefully
review the matters discussed under "Risk
Factors."
</TABLE>
- ---------------
(1) Does not reflect the exercise of outstanding (i) options to purchase an
aggregate of 634,100 shares of Common Stock pursuant to the Company's Stock
Option Plans and (ii) warrants to purchase an aggregate of 2,376,000 shares
of Common Stock which are exercisable in whole or in part on or after
December 11, 1998 and which expire December 11, 2005 (the "Warrants"), in
each case as of July 7, 1998. See "Description of Capital Stock." In
addition, does not give effect to an expected increase, as a result of the
Offering, of 123,282 shares of Common Stock which may be acquired upon
exercise of such Warrants. See "Capitalization"
6
<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company set forth below
should be read in conjunction with, and is qualified in its entirety by, the
Consolidated Financial Statements of the Company, including the related notes,
included in the documents incorporated herein by reference. See "Available
Information" and "Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $1,046,907 $928,197 $847,195 $753,583 $743,793 $881,641
Cash and cash equivalents(1)........... 60,636 51,620 93,978 14,015 18,063 42,901
Investment securities(2)............... 586 578 38,371 62,793 30,190 52,425
Mortgage-backed securities............. -- -- -- -- 57,395 28,891
Loans receivable, net.................. 950,589 838,251 672,401 617,328 537,020 623,450
Deposits............................... 848,870 799,501 717,809 698,008 649,382 829,809
Senior notes and other borrowings...... 145,000 80,000 62,307 12,006 47,141 --
Stockholders' equity................... 44,529 42,319 43,922 38,966 40,827 43,949
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest revenues............... $21,994 $17,007 $75,616 $65,354 $ 50,994 $ 49,571 $ 58,798
Interest costs.................. 12,918 10,155 43,825 39,960 34,486 30,443 36,692
------- ------- ------- ------- -------- -------- --------
Net interest income............. 9,076 6,852 31,791 25,394 16,508 19,128 22,106
Provision (recovery) for credit
losses(3)..................... 1,485 1,220 5,137 6,067 472 (24,449) (6,409)
------- ------- ------- ------- -------- -------- --------
Net interest income after
provision (recovery) for
credit losses................. 7,591 5,632 26,654 19,327 16,036 43,577 28,815
Noninterest revenues, net:
Gain (loss) on sales of
loans and securities...... -- -- (11) 248 2,954 -- --
Operating noninterest
revenues, net............. 709 732 3,599 1,927 1,311 1,973 3,295
Net gain (loss) from
disposition of deposits
and premises.............. -- -- -- 6,413 (117) 2,835 (4,066)
Other revenues (expenses)... 4 (13) 112 (3,366)(4) 864 -- --
------- ------- ------- ------- -------- -------- --------
Total noninterest revenues,
net....................... 713 719 3,700 5,222 5,012 4,808 (771)
------- ------- ------- ------- -------- -------- --------
Operating costs................. 6,280 5,424 22,009 21,046 20,339 23,911 21,162
(Income) loss from real estate
operations, net(3)............ (333) 260 (229) 2,378 14,309 27,314 43,840
------- ------- ------- ------- -------- -------- --------
Total noninterest expense....... 5,947 5,684 21,780 23,424 34,648 51,225 65,002
------- ------- ------- ------- -------- -------- --------
Earnings (loss) before income
tax benefit (expense) and
extraordinary item............ 2,357 667 8,574 1,125 (13,600) (2,840) (37,258)
Income tax benefit (expense).... (524) 692 2,577 6,382 (617) (123) 7,648
------- ------- ------- ------- -------- -------- --------
Earnings (loss) before
extraordinary item............ 1,833 1,359 11,151 7,507 (14,217) (2,963) (29,610)
Extraordinary item.............. -- -- (1,534)(5) -- -- -- --
------- ------- ------- ------- -------- -------- --------
Net earnings (loss)............. $ 1,833 $ 1,359 $ 9,617 $ 7,507 $(14,217) $ (2,963) $(29,610)
======= ======= ======= ======= ======== ======== ========
(Continued on following page)
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Basic earnings (loss) per share
before extraordinary item..... $ 0.58 $ 0.29 $ 3.02 $ 1.95 $ (5.52) $ (1.14) $ (11.39)
Basic earnings (loss) per share
after extraordinary item...... 0.58 0.29 2.49 1.95 (5.52) (1.14) (11.39)
Diluted earnings (loss) per
share before extraordinary
item.......................... 0.32 0.16 1.66 1.17 (5.52) (1.14) (11.39)
Diluted earnings (loss) per
share after extraordinary
item.......................... 0.32 0.16 1.37 1.17 (5.52) (1.14) (11.39)
Shares of Common Stock
outstanding at end of
period........................ 3,164 2,629 3,090 2,599 2,599 2,599 2,599
Average shares of Common Stock
outstanding during the
period........................ 3,157 2,617 2,883 2,599 2,599 2,599 2,599
</TABLE>
<TABLE>
<CAPTION>
AT AND FOR THE
THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS(6):
Return on average assets........... 0.75% 0.65% 1.11% 0.93% (1.96)% (0.36)% (3.09)%
Return on average stockholders'
equity........................... 16.90 12.38 19.83 17.75 (47.57) (6.99) (50.80)
Average stockholders' equity to
average assets................... 4.44 5.29 5.60 5.24 4.11 5.12 6.08
Interest rate spread(7)............ 3.56 3.16 3.56 3.14 2.61 2.72 2.32
Net interest margin(8)............. 3.81 3.43 3.78 3.28 2.47 2.56 2.42
Efficiency ratio(9)................ 64.18 71.52 62.19 77.03 114.14 113.32 83.31
CAPITAL RATIOS(10):
Tangible........................... 7.45 6.67 7.55 6.27 5.80 5.15 4.61
Core............................... 7.45 6.67 7.55 6.27 5.80 5.15 4.61
Risk-based......................... 11.45 11.11 11.48 11.11 10.27 9.36 8.18
ASSET QUALITY DATA:
Nonperforming loans(11)............ $10,223 $20,266 $10,793 $16,643 $ 11,298 $ 18,103 $ 78,949
Real estate owned, net............. 6,551 20,977 9,859 20,140 37,905 62,613 72,234
Gross nonperforming assets(11)..... 16,774 41,243 20,652 36,783 49,203 80,716 151,183
Gross classified assets(12)........ 59,968 95,732 61,100 93,852 116,663 165,772 243,913
Allowance for credit losses........ 14,092 13,657 13,274 13,515 15,192 21,461 46,629
Nonperforming assets to total
assets at end of period(11)...... 1.60% 4.92% 2.22% 4.34% 6.53% 10.85% 17.15%
Nonperforming loans to total loans
at end of period(11)............. 1.06 2.85 1.27 2.43 1.79 3.24 11.78
Allowance for credit losses to
loans at end of period........... 1.46 1.92 1.56 1.97 2.40 3.84 6.96
Allowance for credit losses to
nonperforming loans at end of
period(11)....................... 137.85 67.39 122.99 81.21 134.47 118.55 59.06
</TABLE>
(Footnotes on following page)
8
<PAGE> 9
- ------------------
(1) Cash and cash equivalents include cash, certificates of deposits in other
financial institutions and federal funds sold.
(2) Investment securities were classified as available for sale at March 31,
1998 and December 31, 1997, 1996 and 1995.
(3) For the years ended December 31, 1996, 1995, 1994 and 1993, the Company
reclassified $1.4 million, $13.9 million, $29.7 million and $17.2 million,
respectively, from the reserve for estimated credit losses to the reserve
for real estate owned.
(4) Includes a one-time charge on all deposits insured by the Savings
Association Insurance Fund ("SAIF") as of March 31, 1995 to recapitalize
the SAIF.
(5) Relates to the accelerated write-off of unamortized issue costs and
original issue discount (net of applicable taxes) associated with the
senior notes due 2000 which were issued by the Company in December 1995 and
repaid in full in December 1997.
(6) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods and are annualized where appropriate.
(7) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(8) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(9) Represents operating expenses divided by net interest income before
provision for credit losses plus operating noninterest revenues.
(10) The tangible and core capital ratios are calculated as a percent of
adjusted total assets and the risk-based capital ratio is calculated as a
percent of total risk-weighted assets.
(11) Nonperforming loans consist of loans delinquent 90 days or more and
nonperforming assets consist of nonperforming loans and real estate owned
acquired through foreclosure or deed-in-lieu thereof, net of writedowns and
reserves. Nonperforming loans do not include loans which are 30 to 89 days
delinquent, which the Company places on nonaccrual status as a matter of
policy, and other loans which are performing in accordance with their terms
but which the Company has placed on nonaccrual status due to one or more
defined weaknesses, which in the aggregate amounted to $9.0 million at
March 31, 1998.
At March 31, 1998, the Company's nonperforming assets plus nonaccrual loans
amounted to $25.8 million or 2.47% of total assets and nonperforming loans
plus nonaccrual loans amounted to 2.00% of total loans. Nonperforming
assets do not include troubled debt restructurings ("TDRs") which are
performing in accordance with their terms but classified as substandard for
regulatory purposes, which amounted to $6.1 million, $3.8 million, $12.9
million, $7.3 million, $3.7 million and $5.6 million at March 31, 1998 and
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(12) Classified assets consist of assets classified as substandard for
regulatory purposes for which the Company has established specific reserves
of $4.1 million, $2.9 million, $3.8 million, $2.2 million, $3.4 million,
$8.6 million and $23.3 million as of March 31, 1998 and 1997 and December
31, 1997, 1996, 1995, 1994 and 1993, respectively.
9
<PAGE> 10
RISK FACTORS
Prospective investors should carefully review the following factors, as
well as the other information contained in this Prospectus, in connection with
the Common Stock offered hereby. When used in this Prospectus, the words or
phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," "believe" or similar expressions are
intended to identify "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. The Company
wishes to caution readers that all forward-looking statements are necessarily
speculative and not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various risks and uncertainties, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected. The risks
highlighted herein should not be assumed to be the only factors that could
affect the future performance of the Company.
LIMITED HISTORY OF PROFITABILITY
The Company reported net losses of $14.2 million, $3.0 million and $29.6
million for the years ended December 31, 1995, 1994 and 1993, respectively.
These losses were attributable to the high levels of loans originated during the
late 1980s and early 1990s by prior management of the Company, which loans
became nonperforming and, in many instances, resulted in foreclosure with
respect to the underlying collateral. The high levels of nonperforming assets
resulted in significant provisions for loan losses, net loan charge-offs, loss
of interest income on nonperforming loans, write-downs of investments in real
estate and increases in operating expenses during 1993, 1994 and 1995. Continued
profitability in future periods will be dependent upon, among other things, the
quality of both the Company's existing assets and the assets to be originated or
acquired by the Company in the future. See "-- Asset Quality" below. Although
the Company reported net earnings of $1.8 million, $9.6 million and $7.5 million
during the three months ended March 31, 1998 and the years ended December 31,
1997 and 1996, respectively, there can be no assurance that the Company will
maintain profitable operations or that there will not be substantial
inter-period variations in its operating results.
RISKS ASSOCIATED WITH LENDING ACTIVITIES
Credit Risk. Since 1994, the Company's lending activities have emphasized
(i) estate loans, (ii) loans to local developers to construct individual,
detached single-family homes and small (two-to-four units) condominium projects
and loans to developers for the acquisition of land, lot development and
construction of tracts of homes and (iii) permanent and construction loans
secured by existing multi-family (over four units) residential real estate and
commercial real estate, such as office buildings, retail properties, industrial
properties and various special purpose properties. Residential construction
financing is generally considered to expose the lender to a greater risk of loss
than long-term lending on improved, occupied real estate. The risk of loss on a
residential construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development, the estimated cost (including interest) of construction, the
ability of the developer or builder to complete the project on a timely basis
and within the established budget parameters, as well as the availability of
permanent take-out financing. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the
loan, with a project which, when completed, has a value which is insufficient to
ensure full repayment. The Company's estate loans also entail certain risks not
typically associated with conventional loans, including the size of many of such
loans, the unique characteristics of certain of the properties securing the
estate loans, and the absence of demonstrated financial capacity with respect to
certain of the estate loan borrowers. Similarly, multi-family residential and
commercial real estate lending generally is considered to involve a higher
degree of risk than the single-family residential lending traditionally
emphasized by savings institutions because the payment experience on
multi-family residential and commercial real estate loans typically is dependent
on the successful operation of the project, and thus such loans may be adversely
affected to a greater extent by
10
<PAGE> 11
adverse conditions in the real estate markets or in the economy generally, as
well as the manner in which the borrower manages the property. Moreover, the
Company's income property loans generally are made with primary reliance on the
operation and/or sale of the property and without recourse to the borrower.
Finally, construction loans secured by multi-family residential and commercial
real estate combine the risks discussed above with respect to residential
construction lending as well as the risks discussed above with respect to
permanent loans secured by multi-family residential and commercial real estate.
Size of Loans. With the exception of its conventional single-family
residential loan programs, the Company seeks to originate relatively few,
high-dollar balance loans within each of its lending businesses. Except with
respect to single-family residential construction lending, the Company generally
emphasizes loans with individual commitments or multiple commitments to
affiliated borrowers of between $1.0 million and $6.0 million, although it may
make loans up to the Bank's loans-to-one borrower limitation under applicable
laws and regulations, which amounted to $13.2 million at March 31, 1998 and is
expected to increase as a result of the Offering. With respect to single-family
residential construction lending, the Company provides construction financing to
builders (and, to a lesser extent, owner-occupants) ranging from $500,000 to
$2.0 million for individual home construction projects, although the Company may
finance several home construction projects with any one builder. Larger balance
loans or multiple loans with affiliated borrowers (in each instance, relative to
the regulatory capital of the Bank), involve greater risk to the Company because
a small number of such loans could, during the period in which they become
nonperforming, have significant adverse effects on the amount of the Company's
nonperforming assets and the level of its interest income in the event of
default.
Terms of Loans. The Company generally offers a variety of loan terms and
conditions on all loan types, including fixed interest rates and interest rates
which adjust in accordance with various indices; payments which are
interest-only or payments which include the amortization of principal, either on
a partial or fully amortizing basis; varying adjustment frequencies for
adjustable-rate loans and interest rate payment floors and caps; and varying
maturity and extension options. Certain of these terms, which generally are
offered by the competition encountered by the Company in connection with its
lending activities, may increase the risk of default. For instance, loans which
are not fully amortizing over their maturity and which have a balloon payment
due at their stated maturity, as is the case with substantially all of the
Company's estate, multi-family residential and commercial real estate loans,
involve a greater risk of loss than fully amortizing loans because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to timely refinance the loan or to timely sell the security property. The
ability of a borrower to accomplish these results will be affected by a number
of factors, including the level of available mortgage rates at the time of sale
or refinancing, the financial condition and operating history of the borrower
and the property which secures the loan, tax laws, prevailing economic
conditions and the availability of financing for such loans generally.
Similarly, adjustable-rate loans, which comprised a substantial majority of all
of the loans originated by the Company during the three months ended March 31,
1998 and the years ended December 31, 1997, 1996 and 1995, may have an increased
risk of default thereon during periods of rising interest rates. Rising interest
rates could adversely affect a borrower's ability to make required payments
during the term of the loan or balloon payments at maturity due to the
accumulation of "negative amortization," which is the difference between the
interest rate on which payments are made during the term of the loan and the
accrual rate of interest thereon.
Limited Track Record of Performance for New Loan Originations. The Company
ceased loan origination activities during 1993 and 1994 in order to focus on
building a lending and operating infrastructure. The Company resumed significant
lending activities during 1995 and, as a result, $698.0 million or 71.8% of the
Company's loan portfolio as of March 31, 1998 was originated subsequent to 1994.
Although such loans have generally performed in accordance with their respective
terms, they have generally not been outstanding long enough to fully assess
their ability to perform under changing economic and market conditions.
RISKS ASSOCIATED WITH GROWTH IN LOAN ORIGINATIONS
The Company resumed significant lending activities in 1995. During the
period 1995 through 1997, the Company's annual volume of new loan commitments
increased substantially, reaching $494.9 million in 1997, as compared with
$332.3 million in 1996 and $197.3 million in 1995. During the three months ended
11
<PAGE> 12
March 31, 1998, the Company recorded $193.0 million of new loan commitments. An
integral component of the Company's business strategy consists of expanding its
market share in each of its principal lending businesses, including the
financing of estate homes, residential construction and multi-family residential
and commercial real estate. The Company's ability to meet this objective will be
dependent on market and economic conditions, particularly the general level of
interest rates, the competition for such lending activities, which management
believes has increased significantly in recent years, the Company's ability to
attract and retain cost-efficient sources of funds in order to fund its lending
activities, and other factors which are beyond the control of the Company. As a
result of the foregoing, there can be no assurance that the Company will be able
to engage in the desired level of lending activities in order to meet its loan
growth objectives.
ASSET QUALITY
The Company's results of operations are significantly dependent on the
quality of its assets, which is measured by the level of its nonperforming,
nonaccruing and classified assets. Nonperforming assets consist of loans which
are 90 days or more past due ("nonperforming loans") and real estate acquired by
foreclosure or deed-in-lieu thereof, net of writedowns and reserves ("real
estate owned"). In addition to its nonperforming assets, the Company has loans
which are delinquent 30 to 89 days, which the Company places on nonaccrual
status as a matter of policy, and loans which are performing in accordance with
their terms but which the Company has classified as substandard or lower in
accordance with OTS regulations because they were troubled debt restructurings
or contained one or more defined weaknesses, a portion of which also may be
placed on nonaccrual status. Management of the Company has devoted and continues
to devote substantial time and resources to the identification, collection and
workout of the Company's problem assets, which has resulted in a significant
decrease in the Company's nonperforming assets from a high of $151.2 million, or
17.15% of total assets at December 31, 1993 to $16.8 million, or 1.60% of total
assets at March 31, 1998. Notwithstanding the substantial decline in
nonperforming assets since 1993, at March 31, 1998, the Company's nonperforming
assets and other classified assets aggregated $60.0 million, or 5.73%, of total
assets.
Although management of the Company has successfully reduced its
nonperforming assets in recent years, the real estate markets and the overall
economy in its market area are likely to be significant determinants of the
quality of the Company's assets in future periods and, thus, its financial
condition and results of operations. The Company's financial condition and
results of operations may also be adversely affected to the extent the Company's
newly originated loans experience asset quality problems. In addition, in view
of the relatively large size of the Company's loans, the movement of even a few
loans into the nonperforming category could have a material impact on the
Company's asset quality ratios and adversely affect its results of operations.
See "-- Risks Associated with Lending Activities -- Size of Loans."
ADEQUACY OF ALLOWANCES FOR LOSSES
Management establishes general reserves against the Company's portfolio of
loans. Such general reserves are established for each segment of the Company's
loan portfolio. In establishing general reserves, management considers (1) the
recovery rate for similar properties previously sold by the Company, (2)
valuations of groups of similar assets, (3) the probability of future adverse
events (i.e., performing loans which are expected to become nonperforming and
loans in default which are expected to be foreclosed on) and (4) guidelines
published by the OTS.
At March 31, 1998, the Company's allowance for credit losses amounted to
1.46% of total loans and 137.85% of nonperforming loans. Although the Company
believes that it has established adequate allowances for losses on its loan
portfolio and real estate owned, material future additions to the allowance for
credit losses may be necessary due to changes in economic conditions, the
performance of the Company's loan portfolio and increases in loans. Future
additions to the allowance for losses on real estate owned may be necessary to
reflect changes in the economies and markets for real estate in which the
Company's real estate owned is located and other factors which may result in
adjustments which are necessary to ensure that the Company's real estate owned
is carried at the lower of cost or fair value, less estimated costs to dispose
of the properties. In addition, the OTS, as an integral part of its examination
process, periodically reviews the Company's
12
<PAGE> 13
allowance for credit losses and the carrying values of its assets. Increases in
the provisions for losses on loans and real estate owned would adversely affect
the Company's results of operations.
SOURCE OF PAYMENTS ON THE SENIOR NOTES DUE 2004
The Company is a holding company with no material business operations of
its own. The Company's only significant asset is all of the common stock of the
Bank. In connection with the 1995 recapitalization of the Bank, the Company
issued $27 million of senior notes and preferred stock. In December 1997, the
Company repaid such senior notes and preferred stock with the proceeds of a $40
million offering of senior notes due 2004. The senior notes due 2004 have an
annual debt service requirement of $5.0 million. The principal source of cash to
pay interest on and principal of the senior notes due 2004 consists of dividends
from the Bank. There can be no assurance that the earnings from the Bank will be
sufficient to pay dividends to the Company or that such dividends will be
permitted by applicable federal banking laws and regulations. Failure to pay
interest and/or principal on the senior notes due 2004 would constitute an event
of default with respect to such senior notes. For additional information
concerning limitations on the Bank paying dividends to the Company, see "-- No
Intention to Pay Dividends; Limited Sources for Dividends on the Common Stock
and Funding of Activities."
INTEREST RATE RISK
The Company's operating results depend almost entirely on its net interest
income, which is the difference between the interest income earned on
interest-earning assets and the interest expense incurred in connection with its
interest-bearing liabilities. Changes in the general level of interest rates can
affect the Company's net interest income by affecting the spread between the
Company's interest-earning assets and interest-bearing liabilities. This may be
due to the disparate maturities or period to repricing of the Company's
interest-earning assets and interest-bearing liabilities, as well as in the case
of an increase in the general level of interest rates and periodic caps which
limit the interest rate change on many of the Company's adjustable-rate mortgage
loans. Changes in the general level of interest rates also affect, among other
things, the ability of the Company to originate loans; the ability of borrowers
to make payments on loans; the value of the Company's interest-earning assets
and its ability to realize gains from the sale of such assets; the average life
of the Company's interest-earning assets; and the Company's ability to obtain
deposits in competition with other available investment alternatives. Interest
rates are highly sensitive to many factors, including governmental monetary
policies, domestic and international economic and political conditions and other
factors beyond the control of the Company.
The Company's interest rate risk strategy emphasizes the management of
asset and liability balances within repricing categories in order to limit the
Bank's exposure to earnings variations as well as variations in the value of
assets and liabilities due to changes in interest rates over time. The Company
does not currently utilize off-balance sheet hedging instruments in order to
hedge its interest rate exposure. Instead, the Company hedges such exposure
internally through the use of core deposit accounts and FHLB advances, together
with an emphasis on investing in shorter-term or adjustable-rate assets.
ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon general
economic conditions, particularly in the areas in Southern California in which
it conducts its business activities. Adverse changes in the economic conditions
of these areas may impair the ability of the Company to collect loans and would
otherwise have an adverse effect on its business, including the demand for new
loans, the ability of customers to repay loans and the value of both the real
estate which secures its loans and its real estate owned. Moreover, earthquakes
and other natural disasters could have similar effects. Although such disasters
have not significantly adversely affected the Company to date, the ability of
borrowers to acquire insurance for such disasters in California is severely
limited. The Company does not generally require individual borrowers to obtain
insurance coverage with respect to any damage to the collateral securing the
Bank's loans in the event of an earthquake. Instead, in June 1997, the Company
purchased a $10 million blanket insurance policy covering the collateral
securing the Bank's estate loans in the event of an earthquake. Pursuant to this
blanket
13
<PAGE> 14
insurance policy, the Company will be reimbursed for any losses suffered upon
the disposition of the collateral securing an estate loan (whether by
foreclosure or sale), including interest foregone with respect to the loan for
the period from the 91st day of the loan's delinquency until the ultimate
disposition of the collateral. Nevertheless, no assurance can be made that in
the event of an earthquake, the Bank will recover amounts pursuant to such
insurance policy sufficient to cover all of the losses suffered by the Bank.
COMPETITION
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for deposits
historically has come from other thrift institutions, commercial banks and
credit unions conducting business in its market areas in Southern California. In
addition, as with all banking organizations, the Company has experienced
increasing competition from nonbanking sources, such as full service and
discount broker-dealers and other investment alternatives, such as mutual funds.
The Company's competition for estate loans comes principally from larger
commercial banks, investment banks and other thrift institutions and the
Company's competition for residential construction loans comes principally from
smaller commercial banks. The Company's competition for multi-family residential
and commercial real estate loans comes principally from other thrift
institutions, commercial banks, insurance companies, mortgage real estate
investment trusts, mortgage conduits and other institutional lenders. A number
of institutions with which the Company competes for deposits and loans
(primarily with respect to estate loans and multi-family residential and
commercial real estate loans) have significantly greater assets, capital and
other resources than the Company. In addition, many of the Company's competitors
are not subject to the same extensive federal regulation that governs savings
and loan holding companies, such as the Company, and federally-chartered and
federally-insured savings institutions, such as the Bank. As a result, many of
the Company's competitors have advantages over the Company in conducting certain
businesses and providing certain services.
TECHNOLOGY
Data Processing Conversion. During 1998, the Company expects to complete a
conversion of substantially all of its computer-based systems and applications
to an in-house, client-server platform from an outsourced, host-based platform,
following over two years of planning, design, specification, hardware and
software acquisition and resource additions. The Company believes that the new
computer-based systems and applications will provide it with the information
processing, warehousing and reporting capabilities necessary to more efficiently
and reliably support its business activities in the future. Although management
believes that it has adequately planned for, and is prudently implementing its
established project plan with respect to, the conversion, there is a risk,
inherent in all conversions of computer-based systems, that the conversion will
not be implemented consistent with management's plan. This could result in the
inability of the new computer-based systems to accurately process and report
information on a timely basis, which could lead to the allocation of unplanned
resources and the expenditure of additional funds. In addition, significant
problems with the conversion could adversely affect the Company's ability to
successfully implement portions of its strategic plan on a timely basis.
Year 2000 Compliance. The Company has adopted, and is implementing, a plan
to address Year 2000 data processing issues. The plan includes the assessment of
all internal systems, programs and data processing applications (with respect to
the Company, including the new applications which are integral to the conversion
of its computer-based systems), as well as those provided to the Company by
third-party vendors. The expense incurred and to be incurred by the Company to
ensure Year 2000 compliance is substantially integrated and included with the
expense associated with the planned conversion of its computer-based systems.
Management continues to evaluate the Company's third party vendors' efforts with
respect to compliance with Year 2000 issues. No assurance can be given that such
third party vendors' efforts will be successful or that the Company's costs
associated therewith will be consistent with internal projections. However, the
Company does not believe that any Year 2000 issues will materially affect the
Company's products, services or competitive conditions. In addition, the Company
does not believe that the cost of addressing Year 2000 issues is a material
event or uncertainty which would cause reported financial information to not be
necessarily
14
<PAGE> 15
indicative of future operating results or financial conditions, and the costs or
the consequences of incomplete or untimely resolution of its Year 2000 issues do
not represent a known material event or uncertainty that is reasonably likely to
affect its future financial results, or cause its reported financial information
to not be necessarily indicative of future operating results or future financial
condition.
The Company anticipates incurring approximately $3.3 million in costs
related to the foregoing data processing conversion and the implementation of
the Company's Year 2000 plan. Approximately $1.2 million of such costs are
expected to be expensed during 1998 while approximately $2.1 million of such
costs are expected to be capitalized and expensed over a three-year period.
REGULATION
Both the Company, as a savings and loan holding company, and the Bank, as a
federally-chartered savings institution, are subject to significant governmental
supervision and regulation, which is intended primarily for the protection of
depositors. Statutes and regulations affecting the Company and the Bank may be
changed at any time, and the interpretation of these statutes and regulations by
examining authorities also is subject to change. There can be no assurance that
future changes in applicable statutes and regulations or in their interpretation
will not adversely affect the business of the Company. The Company is subject to
regulation and examination by the OTS and the Bank is subject to regulation and
examination by the OTS and the FDIC. There can be no assurance that the OTS or
the FDIC will not, as a result of such regulation and examination, impose
various requirements or regulatory sanctions upon the Company or the Bank, as
applicable. In addition to governmental supervision and regulation, each of the
Company and the Bank is subject to changes in federal and state laws, including
changes in tax laws, which could materially affect the real estate industry. For
information concerning limitations on the Bank paying dividends to the Company,
see "No Intention to Pay Dividends; Limited Sources for Dividends on the Common
Stock and Funding of Activities."
CONCENTRATION OF OWNERSHIP OF THE COMPANY
In December 1995, the Company issued in a private placement (the "Private
Offering") an aggregate of $27.0 million of investment units (the "Units"), each
of which consisted of $250,000 principal amount of the Company's Senior Notes
Due 2000 (the "Senior Notes"), five shares of the Company's Cumulative Preferred
Stock, Series A (the "Series A Preferred") and a Warrant to purchase 44,000
shares of Common Stock. On December 31, 1997, the Senior Notes and the Series A
Preferred were redeemed by the Company in accordance with their terms with a
portion of the proceeds from the issuance of the Company's senior notes due
2004. As of March 31, 1998, (i) Value Partners, Ltd. ("Value Partners"), (ii)
Lee M. Bass, Sid R. Bass Management Trust and the Bass Management Trust
(collectively "Bass") and (iii) Fort Pitt Fund, L.P. ("Fort Pitt") owned
135,726, 135,725 and 70,258 shares of Common Stock, respectively, and 748,000,
748,000 and 387,200 Warrants, respectively, which in the aggregate represented
15.9%, 15.9% and 8.2%, respectively, of the Company's issued and outstanding
Common Stock on a fully diluted basis (without giving effect to the possible
exercise of outstanding stock options). The number of shares of Common Stock and
Warrants beneficially owned as of March 31, 1998 does not give effect to an
expected increase, as a result of the Offering, in the number of shares of
Common Stock which may be acquired upon exercise of such Warrants. Value
Partners, Bass and Fort Pitt have advised the Company that they each intend to
purchase up to an additional 345,000, 345,000 and 133,333 shares of Common
Stock, respectively, in connection with the Offering which, together with the
shares of Common Stock and Warrants previously owned, would represent 16.8%,
16.8% and 8.1%, respectively, of the Company's to be issued and outstanding
Common Stock on a fully diluted basis (without giving effect to the possible
exercise of outstanding stock options). Furthermore, Scott A. Braly, President
and Chief Executive Officer of the Company, has advised the Company that he
intends to purchase up to 66,667 shares of Common Stock in connection with the
Offering. Moreover, pursuant to agreements entered into with the Company in
connection with the Private Offering, Value Partners, Bass and Fort Pitt are
each entitled to recommend one person for nomination by the Board of Directors
for election as a director of the Company as long as each such entity continues
to own Warrants to purchase 220,000 shares of Common Stock or 220,000 shares of
Common Stock acquired through the exercise of such Warrants, or any
15
<PAGE> 16
combination of such Warrants and shares of Common Stock. Pursuant to these
rights, each of Value Partners, Bass and Fort Pitt has recommended and/or
intends to recommend a person for election as a director of the Company. As a
result, Value Partners, Bass and Fort Pitt will be able to continue to influence
the election of the Company's Board of Directors, and thereby the policies of
the Company and its subsidiaries.
DEPENDENCE ON CHIEF EXECUTIVE OFFICER
Scott A. Braly, President and Chief Executive Officer of the Company, has
had, and will continue to have, a significant role in the development and
management of the Company's business, including in particular his active
involvement in the Bank's lending operations, whereby he functions as the Bank's
Chief Lending Officer. The loss of his services could have an adverse effect on
the Company. The Company and Mr. Braly are not parties to an employment
agreement, and the Company currently does not maintain key man life insurance
relating to Mr. Braly or any of its other officers.
NO INTENTION TO PAY DIVIDENDS; LIMITED SOURCES FOR DIVIDENDS
ON THE COMMON STOCK AND FUNDING OF ACTIVITIES
The Company does not currently pay cash dividends on the Common Stock and
has no current plans to do so in the future. See "Market for Common Stock and
Dividends." As a holding company whose only significant asset is all of the
common stock of the Bank, the ability of the Company to pay dividends on the
Common Stock and to conduct business activities directly or in non-banking
subsidiaries will depend significantly on the receipt of dividends or other
distributions from the Bank. Federal banking laws and regulations, including the
regulations of the OTS, limit the Bank's ability to pay dividends to the
Company. The Bank generally may not declare dividends or make any other capital
distribution to the Company if, after the payment of such dividend or other
distribution, it would fall within any of the three undercapitalized categories
under the prompt corrective action standards established by the OTS and the
other federal banking agencies pursuant to Section 38 of the Federal Deposit
Insurance Act. A regulation of the OTS also limits the Bank's ability to pay
dividends and make other capital distributions, dependent upon the extent to
which the Bank meets its regulatory capital requirements. In addition, HOLA
requires every savings association subsidiary of a savings and loan holding
company to give the OTS at least 30 days' advance notice of any proposed
dividends to be made on its guarantee, permanent or other non-withdrawable stock
or else such dividend will be invalid. Further, the OTS may prohibit any
dividend or other capital distribution that it determines would constitute an
unsafe or unsound practice. In addition to the regulation of dividends and other
capital distributions, there are various statutory and regulatory limitations on
the extent to which the Bank can finance or otherwise transfer funds to the
Company or non-banking subsidiaries of the Company, whether in the form of
loans, extensions of credit, investments or asset purchases. The Director of the
OTS may further restrict these transactions in the interest of safety and
soundness.
As of March 31, 1998, the Bank met the capital and other requirements of a
"well capitalized" institution under the OTS' prompt corrective action
standards. There can be no assurance that the Bank will remain "well
capitalized" in the future or that the OTS will not require the Bank to maintain
higher levels of capital in light of the risk profile of its lending activities.
LIMITED MARKET FOR THE COMMON STOCK
The Common Stock is traded on the National Market of the Nasdaq Stock
Market, although it is not an actively-traded stock. No assurance can be given
that a more active and widespread trading market for the Common Stock will
develop or if one develops, that it will continue.
DILUTION
Upon completion of the Offering, there will be an immediate dilution of the
net tangible basic book value per share of Common Stock purchased in the
Offering from the Price to Public. This dilution primarily results from the sale
by the Company of Common Stock in the Offering at a price above the current book
value per share. Without taking into account any changes in net tangible basic
book value after March 31, 1998, other
16
<PAGE> 17
than those resulting from the sale by the Company of the Common Stock offered
hereby (after deduction of underwriting discounts and commissions and estimated
Offering expenses), the pro forma net tangible basic book value at March 31,
1998 would have been $13.94 per share, representing an immediate dilution of
$1.06 per share to persons purchasing the Common Stock offered hereby at the
Price to Public.
SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering, including shares issuable upon exercise of the
Warrants or stock options, as discussed below, could adversely affect the market
price of the Common Stock and the ability of an investor in the Common Stock
offered hereby to sell such Common Stock for an amount which is equal to or
higher than its purchase price. The 1,750,000 shares of Common Stock offered
hereby (plus up to 262,500 shares which may be sold pursuant to the
Underwriters' overallotment option) will be freely transferable without further
restriction or further registration under the Securities Act, except that any
shares purchased by an "affiliate" of the Company, as that term is defined by
the Securities Act ("affiliate"), will be subject to certain of the resale
limitations of Rule 144 under the Securities Act. Of the 3,170,296 shares of
Common Stock outstanding at July 7, 1998, 2,739,175 shares are freely
transferable without restriction or registration under the Securities Act and
431,121 shares are "restricted securities" as that term is defined in Rule 144
and may only be sold pursuant to a registration statement under the Securities
Act or an applicable exemption from registration thereunder, including pursuant
to Rule 144.
Pursuant to a Registration Rights Agreement entered into by the Company and
certain investors in December 1995, the Company intends to file within 30 days a
Registration Statement under the Securities Act to register for resale from time
to time by the holders thereof (the "Selling Securityholders") (i) the 431,121
shares of outstanding restricted Common Stock, (ii) outstanding Warrants to
purchase an aggregate of 2,499,282 shares of Common Stock and (iii) 2,499,282
shares of Common Stock issuable upon exercise of such Warrants (2,129,018
Warrants and 2,129,018 shares of Common Stock issuable upon exercise of such
Warrants may be deemed to be held by affiliates of the Company). The Warrants
and shares of Common Stock covered by such Registration Statement are
collectively referred to herein as the "Securities" and the number of Securities
to be registered gives effect to an expected increase, as result of the
Offering, in the number of shares of Common Stock which may be acquired upon
exercise of the Warrants. The Warrants become exercisable in accordance with
their terms on December 11, 1998. See "Description of Capital
Stock -- Warrants." The sale or distribution of all or any portion of the
Securities may be effected from time to time by the Selling Securityholders
directly, or indirectly through brokers or dealers or in a distribution by one
or more underwriters on a firm commitment or best efforts basis, in the
over-the-counter market, on any national securities exchange or automated
inter-dealer quotation system on which the Securities are listed or traded, if
any, in privately-negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. In addition, any of the Securities that qualify
for sale pursuant to Rule 144 may be sold in transactions complying with such
rule.
As of July 7, 1998, (i) a total of 710,300 shares of Common Stock were
reserved for issuance under the Company's Stock Option Plan for employees who
may be deemed to be affiliates of the Company, and (ii) a total of 449,800
shares of Common Stock were reserved for issuance under the Company's Stock
Option Plan for employees who are not deemed to be affiliates of the Company.
Shares of Common Stock issued under the Stock Option Plans, other than shares
held by affiliates of the Company, which may be sold under Rule 144, will be
eligible for resale in the public market without restriction. For additional
information, see "Shares Available for Future Sale" and "Underwriting."
17
<PAGE> 18
USE OF PROCEEDS
Net proceeds of the Offering retained by the Company will be used for
general corporate purposes, including contributions to the Bank in order to
maintain and enhance internal loan growth and expansion of its business.
Initially, the net proceeds from the Offering will be invested primarily in U.S.
Government and agency securities.
The estimated net proceeds to be raised in the Offering depends on the
amount of the actual expenses incurred in the Offering, which may differ from
the estimates herein.
The following table shows estimated gross and net proceeds based upon the
sale of 1,750,000 shares of Common Stock in the Offering at the Price to Public.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from the Offering............................ $26,250
Less: estimated Offering expenses and discounts............. 2,275
-------
Net proceeds from the Offering(1)......................... $23,975
=======
</TABLE>
- ---------------
(1) Does not include the exercise of the option for 262,500 additional shares
granted to the Underwriters to cover over-allotments. If the option is
exercised in full, total net proceeds are estimated to be $27,676,250.
18
<PAGE> 19
MARKET PRICE FOR COMMON STOCK AND DIVIDENDS
MARKET PRICE FOR COMMON STOCK
The Common Stock is traded on the National Market of the Nasdaq Stock
Market under the symbol "HTHR." The following table sets forth the high and low
sales prices of the Common Stock as reported by the National Market of the
Nasdaq Stock Market during the periods indicated.
<TABLE>
<CAPTION>
SALES PRICE
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1996
- ------------------------------------------------------------
First Quarter............................................... $ 5.625 $ 4.375
Second Quarter.............................................. 9.00 4.875
Third Quarter............................................... 9.25 6.75
Fourth Quarter.............................................. 8.125 6.625
1997
- ------------------------------------------------------------
First Quarter............................................... 11.75 7.75
Second Quarter.............................................. 12.25 9.25
Third Quarter............................................... 18.00 12.25
Fourth Quarter.............................................. 24.00 17.50
1998
- ------------------------------------------------------------
First Quarter............................................... 21.50 19.125
Second Quarter.............................................. 21.75 16.75
Third Quarter (through July 7, 1998)........................ 17.75 15.625
</TABLE>
On July 7, 1998, the last trading day before the commencement of the
Offering, the closing sale price of a share of Common Stock on the Nasdaq Stock
Market was $15.625.
As of July 7, 1998, there were 3,170,296 shares of Common Stock
outstanding, which were held by approximately 475 holders of record. The number
of holders of record does not reflect the number of persons or entities who or
which hold their stock in nominee or "street" name through various brokerage
firms or other entities.
DIVIDENDS
The Company does not currently pay cash dividends on the Common Stock and
has no current plans to do so in the future. In the future, the timing and
amount of any dividends will be determined by the Board of Directors of the
Company and will depend, among other factors, upon the Company's earnings,
financial condition, cash requirements, the capital requirements of the Bank and
investment opportunities at the time any such payment is considered. See "Risk
Factors -- No Intention to Pay Dividends; Limited Sources for Dividends on the
Common Stock and Funding of Activities."
As a holding company, the payment of any dividends by the Company will be
significantly dependent on dividends received by the Company from the Bank. For
a description of limitations on the ability of the Bank to pay dividends on its
capital stock to the Company, see "Risk Factors -- No Intention to Pay
Dividends; Limited Sources for Dividends on the Common Stock and Funding of
Activities."
19
<PAGE> 20
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1998, and the pro forma consolidated capitalization of the
Company at such date after giving effect to (i) the sale of 1,750,000 shares of
Common Stock at the Price to Public and (ii) the Company's receipt of all of the
estimated proceeds from the sale of the Common Stock offered hereby, based on
the assumptions set forth under "Use of Proceeds" and in the notes below. The
table should be read in conjunction with the Consolidated Financial Statements
of the Company, including the related notes, included in the documents
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Deposits.................................................... $ 848,870 $ 848,870
Borrowings:
FHLB advances........................................... 105,000 105,000
Notes due 2004.......................................... 40,000 40,000
Accounts payable and other liabilities.................. 8,508 8,508
---------- ----------
Total liabilities.................................. 1,002,378 1,002,378
Stockholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares
authorized; none outstanding.............................. -- --
Common Stock, $0.01 par value; 20,000,000 shares authorized;
3,169,496 shares issued(1)................................ 32 49
Capital in excess of par value(1)........................... 10,770 34,728
Unrealized gain (loss) on available for sale securities..... 6 6
Retained earnings........................................... 33,853 33,853
---------- ----------
44,661 68,636
Less:
Treasury stock, at cost (5,400 shares of Common
Stock)................................................. (48) (48)
Loan to Employee Stock Ownership Plan................... (84) (84)
---------- ----------
Total stockholders' equity.............................. 44,529 68,504
---------- ----------
Total liabilities and stockholders' equity.............. $1,046,907 $1,070,882
========== ==========
Shares of Common Stock outstanding at end of period:
Basic................................................... 3,164 4,914
Warrants(2)............................................. 2,376 2,499
Options................................................. 655 655
Less Treasury shares(3)................................. (507) (507)
---------- ----------
Diluted................................................. 5,688 7,561
========== ==========
Stockholders' equity:
Basic................................................... 44,529 68,504
Warrants(2)............................................. 5,346 5,346
Options................................................. 4,704 4,704
Less Treasury shares(3)................................. (10,087) (10,087)
---------- ----------
Diluted................................................. $ 44,492 $ 68,467
========== ==========
Basic book value per share.................................. $ 14.07 $ 13.94
Diluted book value per share................................ $ 7.82 $ 9.06
</TABLE>
- ---------------
(1) Does not reflect the exercise of (i) options to purchase shares of Common
Stock which have been or may be granted pursuant to the Company's Stock
Option Plans and (ii) outstanding Warrants to purchase an aggregate of
2,499,282 shares of Common Stock. See "Shares Available for Future Sale."
(2) The Offering will result in a decrease in the exercise price of the Warrants
to $2.139 per share, which is greater than a 1% decrease from the original
exercise price of $2.25 per share. Consequently, the Warrants (as adjusted)
reflect an adjustment to the exercise price, as set forth above, and an
increase of 123,282 shares of Common Stock which may be acquired upon the
exercise of such Warrants. See "Description of Capital Stock -- Adjustments
of Exercise Price and Number of Shares of Common Stock."
(3) Under the diluted method, it is assumed that the Company will use proceeds
from the pro forma exercise of the Warrants and options to acquire actual
shares currently outstanding, thus increasing Treasury shares. Treasury
shares were assumed to be repurchased at the average closing stock price for
the respective period.
20
<PAGE> 21
REGULATORY CAPITAL
Under regulations adopted by the OTS, each savings institution is currently
required to maintain tangible and core capital equal to at least 1.5% and 3.0%,
respectively, of its adjusted total assets, and total capital equal to at least
8.0% of its risk-weighted assets.
The following table sets forth the actual regulatory capital ratios of the
Bank at March 31, 1998. Following consummation of the Offering, management
anticipates downstreaming the proceeds of the Offering to the Bank as necessary
in order to maintain the Bank's internally established minimum core and
risk-based capital ratios of 6.5% and 11.0% of its adjusted total assets and
risk-weighted assets, respectively.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------
CAPITAL EXCESS
CAPITAL REQUIREMENT CAPITAL
------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DOLLAR BASIS:
Tangible.................................................... $77,767 $15,667 $62,100
Core(1)..................................................... 77,767 31,334 46,433
Risk-based(2)............................................... 87,306 61,021 26,285
PERCENTAGE BASIS:
Tangible.................................................... 7.45% 1.50% 5.95%
Core(1)..................................................... 7.45 3.00 4.45
Risk-based(2)............................................... 11.45 8.00 3.45
</TABLE>
- ---------------
(1) Does not reflect the 4% and 5% requirements to be met in order for an
institution to be deemed "adequately capitalized" and "well capitalized,"
respectively, under applicable laws and regulations.
(2) Does not reflect the 10% requirement to be met in order for an institution
to be deemed to be "well capitalized" under applicable laws and regulations.
21
<PAGE> 22
BUSINESS OVERVIEW OF THE COMPANY
Set forth below is a brief overview of the Company, which should be read in
conjunction with, and is qualified in its entirety by reference to, the more
detailed information and other information contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as amended, and
Quarterly Report on Form 10-Q for the three months ended March 31, 1998.
GENERAL
The Company is a financial services company specializing in making real
estate-secured loans in market niches which management believes generally
provide higher rates of return and greater growth potential than the traditional
mortgage products offered by competing mortgage lenders. The Company, through
the Bank, generally seeks to originate real estate-secured loans in which it can
earn a premium yield for prompt, efficient execution and for tailoring the terms
of the loans to meet the objectives of both the Company and the borrower. The
Company focuses primarily on originating (1) loans secured by estate homes with
principal balances of $1.0 million or more; (2) loans for the construction of
individual and tracts of single-family residential homes and the acquisition and
development of land for such construction; and (3) permanent and construction
loans secured by multi-family residential and commercial real estate. The
Company funds its lending activities primarily with retail deposits obtained
through the Bank's branch system and, to a lesser extent, advances from the FHLB
of San Francisco. At March 31, 1998, the Company had assets of $1.05 billion,
liabilities of $1.00 billion, including deposits of $848.9 million, and
stockholders' equity of $44.5 million.
The Company reported net losses for 1993, 1994, and 1995 due to high levels
of nonperforming assets, which were attributable to loans originated during the
late 1980s and early 1990s by prior management of the Company. The
collectibility of such loans was adversely affected by the severe economic
recession experienced within California during the early 1990s and the resulting
decline in real estate values. In 1993, the Board of Directors replaced senior
management of the Company with a new management team which was, among other
things, more experienced with troubled asset management and resolution. New
management undertook an extensive restructuring of the Company which included
the following elements:
- Substantially reducing the Bank's sizeable portfolio of problem assets by
(i) promptly foreclosing on the collateral securing the Bank's
nonperforming loans, (ii) making additional post-foreclosure investments
in the Bank's residential development projects and apartment buildings,
(iii) disposing of the Bank's real estate owned, primarily through retail
sales, and (iv) to a much lesser extent, loan workouts. The foregoing
actions resulted in a reduction of nonperforming assets from $151.2
million at December 31, 1993 to $16.8 million at March 31, 1998.
- Increasing the Bank's regulatory capital through (i) the issuance by the
Company of an aggregate of $27 million of senior notes and cumulative
preferred stock in 1995, (ii) the issuance by the Company of an aggregate
of $40 million of senior notes due 2004 in 1997, the proceeds of which
were used, in part, to repay the senior notes and preferred stock issued
in 1995, and (iii) accumulated earnings since 1995.
- Developing and implementing revised lending strategies, including (i)
clearly defining targeted, niche lending products and markets, (ii)
making a substantial investment in the Bank's lending and operating
infrastructure, and (iii) enhancing the Bank's loan underwriting policies
and procedures and internal audit and credit risk management functions,
which, commencing in 1995, permitted the Company to resume substantial
lending activities.
- Consolidating the Bank's branch system from 19 branch offices at December
31, 1993, with average deposits of $43.7 million per branch, to six
branch offices at March 31, 1998, with average deposits of $141.5 million
per branch.
Beginning in 1995, the Company established itself as a provider of real
estate-secured financings to narrowly targeted segments of the Southern
California real estate markets. These real estate market segments, which include
estate homes, residential construction and multi-family and commercial real
estate, have
22
<PAGE> 23
provided the Company with opportunities to achieve higher loan yields than is
typical in more traditional mortgage financings. Generally, the Company is able
to realize higher yields on its financings because of the size and complexity of
individual loans, the high level of support services it offers to builders,
developers and other borrowers, the efficiency with which it can process
individual loan requests, and its willingness and competence in tailoring the
terms of individual loans to meet the objectives of the Company and the
borrower. In recent years, the Company has retained lending personnel with
significant loan origination experience, a full complement of loan underwriting,
processing and funding personnel, and skilled personnel responsible for the
Company's appraisal, servicing, internal audit and credit risk management
functions. The Company sources its loan originations through a combination of
established relationships with mortgage brokers and mortgage bankers, and
through expanding referrals from, and repeat business with, existing customers
of the Company. Since the Company's resumption of lending activities in 1995,
loan commitments have increased from $197.4 million in 1995 to $332.3 million in
1996 to $495.0 million in 1997, and amounted to $193.0 million during the three
months ended March 31, 1998. As a result of the foregoing and the initiatives
set forth below, the Company recognized net earnings of $7.5 million, $9.6
million and $1.8 million for the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, respectively.
The Company believes that it can continue to expand its annual volume of
new loan originations, thereby increasing its market share within its existing
business lines, due to (1) the number of market segments in which it actively
competes, (2) its willingness to originate loans across the full spectrum of
potential risk and return within each of its market segments, (3) the experience
and depth of its lending personnel, (4) its strategy of retaining virtually all
new loan originations for its own portfolio, (5) its unique complement of
execution efficiency and flexibility and high level of customer service,
complemented by its flat organizational structure, and (6) its access to
relatively low-cost funding from retail deposits and, to a lesser extent,
advances from the FHLB of San Francisco which have a wide variety of interest
rates and maturities.
Management believes that the combined effects of these attributes, coupled
with the Company's strategy of pricing its loans on an adjustable-rate basis,
will enable the Company to continue to successfully compete against much larger
providers of mortgage credit, while maintaining prudent levels of interest rate
and credit risk as its loan portfolio grows.
MARKET AREA
Because the Company conducts virtually all of its business within Southern
California, the success of its various business strategies and results of
operations are dependent upon the health and vibrancy of the Southern California
economy and, in particular, the real estate markets which the Company targets in
its lending businesses.
During the early 1990s, the Southern California economy experienced a
severe downturn in employment and economic activity, principally occasioned by a
national recession and exacerbated by the financial difficulties experienced
within the region's aerospace and defense industries, each of which accounted
for significant employment in the region. From 1991 to 1993, California's
unemployment rate rose from approximately 7% to nearly 10%, the number of
persons employed throughout the state declined, and the dollar amount of taxable
sales remained relatively flat (Source: UCLA Anderson Forecast, March 1998). The
resulting decline in the region's macroeconomic indicators adversely affected
virtually all of Southern California's real property markets. From 1991 to 1993,
(1) Los Angeles County home prices declined by approximately 20%, (2) building
permits issued for new residential units remained relatively flat, and (3)
construction employment declined by approximately 15% (Source: UCLA Anderson
Forecast, March 1998). Management believes that this combination of adverse
economic and real property market factors caused real estate values throughout
the region to decline significantly.
Since 1995, economic conditions throughout California have improved
significantly. Since 1995, (1) the state's unemployment rate has declined to
less than 6%, (2) the dollar amount of taxable sales has increased by
approximately 15%, (3) Los Angeles County median home prices have increased, (4)
the unit volume of new and existing home sales have increased significantly, and
(5) the value of nonresidential building permits has increased by over 55%
(Source: UCLA Anderson Forecast, March 1998). Management believes that
23
<PAGE> 24
these positive economic factors have contributed to the recent expansion of the
region's economy, and a significant rise in real property values since the
1993-1995 period. Management believes that the initial firming and recent rise
of real property values has created growing liquidity throughout the region's
real property markets, which has contributed to a surge in the availability of
credit from local, regional and national sources of mortgage financing.
LENDING ACTIVITIES
General. The Company's principal business activity involves the
origination of real estate-secured loans, with respect to which it can often
charge a premium price for highly efficient transaction execution and for
tailoring the terms of such loans to meet the transaction specific objectives of
both the Company and the borrower. Unlike most real estate-secured lenders, the
Company also seeks to originate loans across the full spectrum of identified
risk and potential return. Since the beginning of 1995, the Company has
emphasized the origination of (1) loans secured by single-family residences,
primarily very large homes and unique estates, (2) loans for the construction of
individual and tracts of single-family residential homes and the acquisition and
development of land for the construction of such homes, and (3) permanent loans
secured by multi-family residential and commercial real estate. The Board of
Directors of the Company has established maximum concentration targets with
respect to its principal lending groups (because the following percentages are
maximums, they are not additive), which currently amount to (as a percentage of
total loans) (i) 30% for estate loans, (ii) 40% for committed residential
construction loans (30% for disbursed residential construction loans) and (iii)
40% for multi-family residential real estate and 30% for commercial real estate
loans. As of March 31, 1998 the Company's estate loans, residential construction
loans and multi-family residential and commercial real estate loans did not
exceed the foregoing maximum concentration targets.
Although the types of collateral securing loans made by the Company since
1995 are generally similar to the types of collateral which secured loans made
by the Company prior to 1995, these older loans were underwritten under
significantly different criteria, and were made in much larger concentrations to
individual or affiliated borrowers, as compared to the loans made since 1995.
More specifically, the residential construction loans currently being originated
by the Company carry shorter terms (i.e., 12 months or, with respect to tract
development loans, 12 months per development phase), are underwritten pursuant
to more stringent loan underwriting criteria (including loan-to-value ratios),
and are subject to more stringent individual transaction restrictions and
loan-to-one borrower limitations. In addition, in recent years, the Company has
hired skilled personnel with experience in the areas of loan originations, loan
underwriting, processing and funding, appraisal review, loan servicing, internal
audit and credit risk management. Moreover, the Company adheres to a voucher
system in order to control disbursements to builders and developers. Further,
since 1994, the Company has not extended any new credit to any individuals or
entities with whom the Company's prior management conducted business.
The Company's current loan origination activities are governed by
established policies and procedures appropriate to the risks inherent to the
types of collateral and borrowers financed by the Company. The Company's primary
competitive advantages, which include (1) a willingness and competence to tailor
the terms and conditions of individual transactions to accommodate both the
borrower's and the Company's objectives, (2) a strategy of holding in portfolio
virtually all new loan originations, and (3) highly effective and efficient
transaction execution, are consistent with the Company's relatively flat
organizational and decision-making structure, and its reliance upon relatively
few, highly-skilled lending professionals. Management believes that this
combination of competitive, organizational and strategic distinctions contribute
to the Company's success in attracting new business and in its ability to
receive a return believed by management to be commensurate with the inherent and
transaction specific risks assumed and the value added to its customers.
The Company's principal lending groups (i.e., estate lending, residential
construction lending and multi-family residential and commercial real estate
lending) are headed by individuals with significant banking and mortgage-related
experience. Michael Cain, Senior Vice President in charge of income property
lending, has been employed by the Bank since July 1996 and has significant
experience analyzing and valuing a wide range of multi-family residential and
commercial real estate property. Mr. Cain has over 19 years of banking and
24
<PAGE> 25
mortgage-related experience and previously served in numerous positions with Sun
State Savings Bank, Phoenix, Arizona, Universal Savings, Scottsdale, Arizona,
and Citibank N.A., Dallas, Texas. Patrick Avison, Senior Vice President in
charge of residential construction lending, has been employed by the Bank since
December 1997 and has significant experience in residential and commercial
lending. Mr. Avison has over 19 years of banking and mortgage-related experience
and previously was employed as executive vice president and chief financial
officer of Coleman Homes, Inc., a home builder located in Bakersfield,
California, and senior director and unit head of the real estate department of
the Los Angeles representative office of the Bank of Montreal. Steven Gardner,
Senior Vice President in charge of estate lending, has been employed by the Bank
since December 1997 and has significant experience in originating and
underwriting both conventional and jumbo single-family residential loans. Mr.
Gardner has over 14 years of banking and mortgage-related experience and
previously served in numerous positions with American Savings Bank, FA,
California Federal Bank and Topa Savings Bank, all of which are located within
Southern California.
The Company's lending groups extend credit pursuant to a comprehensive
lending policy tailored to the particular attributes of the Company's lending
activities. The Company's lending policy establishes requirements and defines
parameters covering loan applications, borrower financial information and legal
and corollary agreements which support the vesting of title to the Company's
collateral, title policies, fire and extended liability coverage casualty
insurance, credit reports, and other necessary documents to support each
extension of credit. The real property collateral which secures the Company's
loans is appraised by either an independent fee appraiser approved by the
Company or by one of the Company's staff appraisers. All independent fee
appraisals are reviewed by the Company's Chief Appraiser prior to each extension
of credit.
The credit risk management policies of the Company are established and
periodically reviewed by the Company's Board of Directors and management. The
Company's credit risk management group is responsible for (1) conducting annual
reviews of loans with principal balances in excess of $1.0 million subsequent to
their funding in order to assess the borrower's compliance with applicable loan
covenants, the current condition and approximate valuation of the collateral
securing the Company's loans, the borrower's recent performance and changes, if
any, to the ownership of the collateral securing the Company's loans and (2)
assessing, generally using available data from independent sources, market
trends affecting the collateral securing the Company's loans, including
transaction volumes and pricing. Management utilizes the information acquired
and accumulated by the credit risk management group in establishing specific and
general reserves and in classifying individual assets and groups of similar
assets. The Company has enhanced its credit risk management functions in recent
years through the implementation of new computer-based systems and the hiring of
experienced risk management personnel.
The Company seeks to originate relatively few, high-dollar balance loans
within each of its lending businesses, with the exception of the Company's
conventional home financing group. Accordingly, the Company's internal "house
limit," applicable to individual transactions or to multiple loans with
affiliated borrowers (as defined in applicable federal regulations), is higher
than for many other regulated financial institutions. Since April 1998, the
Company's "house limit" amounted to 70% of the Bank's legal lending limit (or
$9.2 million as of March 31, 1998), except for special purpose commercial real
estate loans which are limited to $5.0 million per loan. Loans below such
amounts are generally collectively approved by the applicable loan officer, the
head of the appropriate lending group and the President of the Bank. Loan
requests in excess of such amounts and up to the Bank's legal lending limit
($13.2 million at March 31, 1998) require approval of the Credit Committee of
the Board of Directors prior to funding. All loan approvals are reported to the
full Board of Directors.
Each of the Company's principal lending groups is discussed below. In the
discussion below, the Company's effective yield is calculated by adding to the
weighted average coupon interest rate, loan fees collected at origination (net
of loan origination costs deferred) and loan discount, in each instance
annualized over the contractual term of the loan. With respect to residential
construction loans, the effective yield is calculated assuming that an average
of 60% of the committed amount is outstanding during the term of such loans. In
all cases, the effective yield excludes revenue to which the Company is entitled
upon the maturity of certain loans (e.g. exit and release fees), prepayment
penalties, modifications and extension fees.
25
<PAGE> 26
The following table sets forth information concerning the composition of
the Company's loan portfolio, and the percentage of the loan portfolio
represented by each type of loan, as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------------------------------------
1998 1997 1996 1995
-------------------- ------------------ ------------------ ------------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
---------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family:
Estate(1)................................ $ 216,575 19.6% $173,764 17.9% $107,891 14.6% $ 51,142 7.8%
Conventional............................. 218,721 19.8 224,006 23.1 231,306 31.2 318,703 48.5
Income property(2):
Multi-family............................. 241,147 21.9 225,738 23.3 220,707 29.7 219,015 33.4
Commercial real estate................... 143,266 13.0 114,293 11.8 60,388 8.2 31,258 4.8
Land....................................... 62,999 5.7 39,475 4.1 14,513 2.0 5,579 0.9
Single-family construction:
Individual residences.................... 143,960 13.0 112,899 11.7 56,306 7.6 21,987 3.4
Tract development........................ 61,774 5.6 68,653 7.1 33,791 4.6 6,800 1.0
Other...................................... 15,501 1.4 9,698 1.0 15,684 2.1 1,459 0.2
---------- ----- -------- ----- -------- ----- -------- -----
Gross Loans Receivable(3).................. 1,103,943 100.0% 968,526 100.0% 740,586 100.0% 655,943 100.0%
===== ===== ===== =====
Less:
Participants' share........................ (1,088) (1,141) (1,413) (2,219)
Undisbursed loan funds..................... (130,371) (108,683) (46,646) (15,208)
Deferred loan fees and credits, net........ (7,803) (7,177) (6,611) (5,996)
Reserves................................... (14,092) (13,274) (13,515) (15,192)
---------- -------- -------- --------
Net Loans Receivable....................... $ 950,589 $838,251 $672,401 $617,328
========== ======== ======== ========
<CAPTION>
DECEMBER 31,
---------------------------------------
1994 1993
------------------ ------------------
BALANCE PERCENT BALANCE PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family:
Estate(1)................................ $ -- --% $ -- --%
Conventional............................. 375,320 65.7 426,610 62.5
Income property(2):
Multi-family............................. 172,641 30.2 193,468 28.4
Commercial real estate................... 7,757 1.4 7,630 1.1
Land....................................... 3,797 0.7 22,179 3.3
Single-family construction:
Individual residences.................... 3,270 0.6 6,603 1.0
Tract development........................ 6,000 1.1 22,925 3.4
Other...................................... 1,654 0.3 2,013 0.3
-------- ----- -------- ------
Gross Loans Receivable(3).................. 570,439 100.0% 681,428 100.00%
===== ======
Less:
Participants' share........................ (3,072) (3,098)
Undisbursed loan funds..................... (2,795) (966)
Deferred loan fees and credits, net........ (6,091) (7,285)
Reserves................................... (21,461) (46,629)
-------- --------
Net Loans Receivable....................... $537,020 $623,450
======== ========
</TABLE>
- ---------------
(1) Consists solely of loans, generally in excess of $1.0 million, originated
subsequent to 1994. For periods prior to 1995, all loans secured by
single-family homes are included with Conventional loans, irrespective of
size.
(2) As of March 31, 1998, such amounts included $7.6 million and $11.1 million
of loans for the construction of multi-family residential and commercial
real estate, respectively.
(3) Gross loans receivable includes outstanding balances plus outstanding
construction commitments.
26
<PAGE> 27
The table below summarizes the Company's loan origination activity for the
three months ended March 31, 1998 and the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE THREE MONTHS DECEMBER 31,
ENDED -------------------------------
MARCH 31, 1998 1997 1996 1995
-------------------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross loans at beginning of period......... $ 968,526 $ 740,586 $655,943 $570,439
Originations of loans
Single-family:
Estate........................... 56,969 100,382 72,520 53,659
Conventional..................... 4,914 25,712 27,362 11,399
Income Property:
Multi-family..................... 15,496 51,726 70,688 66,081
Commercial real estate........... 23,500 105,076 46,001 31,664
Land.................................. 21,264 35,681 12,555 2,412
Single-family construction:
Individual residences............ 53,764 104,851 53,210 25,327
Tract development................ 10,217 61,754 32,262 6,800
Other................................. 6,852 9,749 17,725 --
---------- --------- -------- --------
Total loan originations.......... 192,976 494,931 332,323 197,342
---------- --------- -------- --------
Undisbursed portion of new lines of
credit................................... -- (50,412) (15,680) (5,250)
Repayments................................. (62,470) (202,999) (72,897) (27,760)
Principal amortization..................... (16,417) (30,134) (21,056) (16,494)
Total loans sold........................... -- (1,370) (130,413) (19,282)
Advances on lines of credit and other,
net...................................... 23,098 39,284 13,852 (4,777)
Transfers to real estate owned............. (1,770) (21,360) (21,486) (38,275)
---------- --------- -------- --------
Net change in gross loans.................. 135,417 227,940 84,643 85,504
---------- --------- -------- --------
Gross loans at end of period............... 1,103,943 968,526 740,586 655,943
========== ========= ======== ========
Less:
Loan participant's share.............. (1,088) (1,141) (1,413) (2,219)
Undisbursed loan funds................ (130,371) (108,683) (46,646) (15,208)
Deferred loan fees and credits, net... (7,803) (7,177) (6,611) (5,996)
Reserves.............................. (14,092) (13,274) (13,515) (15,192)
---------- --------- -------- --------
Net loans receivable....................... $ 950,589 $ 838,251 $672,401 $617,328
========== ========= ======== ========
</TABLE>
Estate Loans. Since 1994, the Company has provided financing to owners of
large homes and unique estates ("estate loans"). Generally, estate loans involve
financings of between $1.0 million and $5.0 million and are secured by
properties primarily located in the communities of Bel-Air, Beverly Hills,
Newport Beach, Santa Barbara, Malibu and La Jolla in California. During 1997, a
total of 3,762 homes within California were sold for $1.0 million or more, which
represented a 41.9% increase from the 2,651 homes sold for $1.0 million or more
during 1996. During 1997, there was an aggregate of approximately $2.66 billion
of single-family residential loan originations in excess of $1.0 million which
were secured by properties located within Los Angeles, Orange, San Diego and
Santa Barbara counties. Management believes that it is currently one of the
leading lenders with respect to the purchase or refinance of homes in excess of
$1.0 million within Southern California.
Generally, the Company's estate loans are originated in order to refinance
the borrower's existing mortgage debt, rather than financing the borrower's
purchase of a home. The Company generally provides estate financing to borrowers
who have substantial equity in the properties which secure the Company's loans
but who for a variety of reasons, principally related to the purpose of the
borrower's loan request, the size of the loan request, the characteristics of
the property which secure the Company's loan, and the credit profile of
27
<PAGE> 28
the borrower (which include such issues as the legal borrowing entity,
citizenship, previous credit history, loan purpose, or current employment income
or assets), are unacceptable to or inconsistent with the guidelines of the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation or national conduits which purchase conventional loans above the
loan limits of such government-sponsored enterprises ("conventional loans").
Because of the unique characteristics of estate loans, including the larger
principal balances, no significant, developed secondary market is known to exist
for the sale of such loans. Estate loans are generally retained in the Bank's
portfolio. Estate loans are principally originated through contact with, and
submissions by, independent mortgage brokers and generally carry yields which
are, on average, several hundred basis points in excess of the yields typically
obtained by lenders originating conventional loans. The Company typically limits
its advance to not more than 75% of the value of its collateral, with the
majority of such loans possessing loan-to-value ratios of less than 70%.
The Company's estate loans are secured by homes with a wide range of
characteristics, from large, conventional homes located within mature areas to
very large, multiple acre, one-of-a-kind estates. The Company's estate loans
also encompass a wide range of borrower profiles, those with the demonstrated
capacity to service the loan to others with no verifiable source of recurring
cash flow. Estate loans which meet the highest standards of collateral quality
and borrower capacity and creditworthiness ("Tier 1 loans") are similar to
conventional home loans except for their size, and generally have higher
loan-to-value ratios and the most favorable pricing to the borrower. Estate
loans with respect to which the borrower's resources are limited or cannot be
reliably measured, or with respect to which the Company's collateral possesses
such unique characteristics, including size, amenity or location, so as to make
its valuation difficult to measure ("Tier 3 loans"), have the lowest
loan-to-value ratios and the highest pricing to the borrower. Loans which fall
in between these two sets of parameters ("Tier 2 loans") involve advances and
pricing which are tailored to the particular attributes of the property, the
borrower, the reason underlying the borrower's loan request and other factors.
Commencing in early 1998, the Company expanded the scope of estate loans
which it is willing to originate to include a much higher proportion of such
loans with respect to which the size of the loan request is smaller (i.e., loans
of less than $2 million), the characteristics of the property securing the loan
are more conforming to local submarkets thereby increasing the marketability of
such properties, and the credit profile of the borrowers more clearly support
their ability to service the loan and to repay the loan upon maturity.
At March 31, 1998, the Company had $216.2 million of estate loans in its
portfolio. As of March 31, 1998, the Company's portfolio of estate loans
consisted of 78 loans with an average principal balance of $2.8 million (the
average principal balance of the estate loans originated during the three months
ended March 31, 1998 amounted to $2.3 million). As of such date, the Company's
estate loans had an effective yield of 9.37% (which is expected to increase as
certain estate loans reprice to their fully indexed rate), an average
loan-to-value ratio as of the date of origination of 62% and had been
outstanding for an average of 10 months. At March 31, 1998, $111.0 million of
the Company's estate loans were classified as Tier 1 loans, $42.8 million were
classified as Tier 2 loans and $62.4 million were classified as Tier 3 loans.
Loan-to-value ratios generally range from 65% to 75% for Tier 1 loans, 60% to
75% for Tier 2 loans and 50% to 65% for Tier 3 loans. At March 31, 1998, the
effective yield amounted to 8.58% for Tier 1 loans, 9.85% for Tier 2 loans and
10.50% for Tier 3 loans.
Because the Company's estate loans entail certain risks not typically
associated with conventional loans, including the size of many of such loans,
the unique characteristics of certain of the properties securing the Company's
estate loans, and the absence of demonstrated financial capacity with respect to
certain of the Company's estate loan borrowers, the Company believes that the
performance of its portfolio of estate loans, as measured by the level of
nonperforming, nonaccrual and classified assets, possesses a greater potential
for volatility when compared to originators of conventional loans, which may
adversely affect, even if temporarily, the Company's interest income. In
addition, because the Company's estate loans have not been outstanding long
enough to be considered mature, seasoned loans, the Company cannot predict
whether its experience to date in successfully resolving performance-related
problems with certain of its estate loan borrowers will continue into the
future.
28
<PAGE> 29
Construction Loans. The Company originates residential construction loans
out of two groups -- the single-family residence financing group and the tract
financing group. The single-family residence financing group provides financing,
principally to local developers, to construct individual, detached single-family
homes and, to a far lesser extent, small (two-to-four units) condominium
projects. The tract financing group provides financing to developers for the
acquisition of land, lot development and construction of tracts of homes.
The single-family residence financing group provides individual home
construction financing to local builders and homeowners operating out of the
beach cities of the South Bay and Malibu areas of Los Angeles County and the
Newport Coast area of Orange County, with occasional financing of home
construction in other affluent areas throughout Southern California. A majority
of the Company's residential construction business to date has been generated
through pre-existing relationships between the Company's loan officers and local
builders. At March 31, 1998, the Company had in the aggregate approximately 148
commitments amounting to $143.9 million to finance single-family residential
construction, of which $74.0 million had been disbursed. As of such date, the
Company's single-family residential construction loans had an average commitment
amount of $1.0 million, an effective yield of 13.29%, an average loan-to-value
ratio as of the date of origination of 65% and had been outstanding for an
average of five months.
The tract financing group provides construction financing to
small-to-medium sized builders of single-family residential developments in
Southern California. Within this business, the Company believes its competitive
advantage is focused upon its efficient response and execution and, more often
than not, a pre-existing relationship with the borrower or particular knowledge
of the specific submarket and/or product type. In addition, management believes
that by managing the builder's or developer's disbursements, it is able to
attract a substantial amount of business with smaller builders and developers
who often do not maintain the necessary resources to effectively manage such
disbursements on a cost-effective basis.
At March 31, 1998, the Company had in the aggregate 22 commitments
amounting to $61.8 million to finance tract development, of which $24.9 million
had been disbursed. As of such date, the Company's tract loans had an average
commitment amount of $2.8 million, an effective yield of 13.48%, an average
loan-to-value ratio as of the date of origination of 72% and had been
outstanding for an average of eight months.
Virtually all of the Company's construction lending, whether involving
developers or homeowners, is conducted without either a takeout loan commitment
(in the case of construction loans made to homeowners) or a purchase commitment
for the completed home(s) (in the case of construction loans made to
developers). Construction financing is generally considered to expose the lender
to a greater risk of loss than long-term lending on improved, owner-occupied
real estate. The risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction, as well as the availability of permanent take-out financing.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of value proves to be inaccurate, the Company may
be confronted, at or prior to the maturity of the loan, with a project which,
when completed, has a value which is insufficient to ensure full repayment.
The Company attempts to mitigate the foregoing risks by (1) utilization of
a voucher system in order to control disbursements and generally limiting its
advance to a percentage of expected development costs, and requiring the
borrower to fund the difference, (2) carefully evaluating the line item costs to
complete the development, utilizing its residential loan officers and staff (or,
where appropriate, third parties), (3) carefully evaluating the product type to
be built and the demand for the finished homes by reference to recent sales of
comparable homes, and (4) carefully evaluating the development experience of,
and the success or failure of, the Company's borrower with similar projects.
Multi-Family Residential and Commercial Real Estate Loans. Since 1994, the
Company's lending activities have emphasized loans secured by existing
multi-family (over four units) residential real estate and commercial real
estate, such as office buildings, retail properties, industrial properties and
various special purpose properties. The Company generates a significant majority
of its new multi-family and commercial financing opportunities through contact
with, and submissions by, independent mortgage loan brokers. However, a growing
proportion of the Company's new business is derived from existing customer
relationships
29
<PAGE> 30
or through referrals from existing customers. Management believes that the
Company is often able to obtain higher returns with respect to its multi-family
and commercial financings because significant opportunities exist in the
marketplace to provide financing which requires tailored terms and conditions,
efficient response and execution, and specialized real estate expertise.
At March 31, 1998, the Company had $383.7 million of permanent multi-family
residential and commercial real estate loans. As of such date, $237.3 million or
62% of such portfolio consisted of loans secured by multi-family residential
properties (i.e., apartment buildings) ($130.8 million of which were originated
since 1994) and $146.4 million or 38% consisted of loans secured by commercial
real estate ($139.4 million of which were originated since 1994). As of March
31, 1998, the Company's multi-family residential loan portfolio consisted of 396
loans with an average principal balance of $609,000, and such loans had an
effective yield of 8.29% (8.70% with respect to loans originated since 1994).
Similarly, as of such date, the Company's commercial real estate loan portfolio
consisted of 65 loans with an average principal balance of $2.3 million, and
such loans had an effective yield of 9.85%. As of March 31, 1998, the Company's
multi-family residential and commercial real estate loans had average
loan-to-value ratios as of the date of origination of 69% and 62%, respectively,
and had been outstanding for an average of 58 and 11 months, respectively.
The Company recently began originating construction loans secured by
multi-family residential and commercial real estate properties. As of March 31,
1998, the Company had aggregate commitments of $18.7 million to finance the
construction of multi-family residential and commercial properties, of which
$12.1 million had been disbursed, with an effective yield of 11.67%.
Multi-family residential and commercial real estate lending generally is
considered to involve a higher degree of risk than the single-family residential
lending traditionally emphasized by savings institutions because the payment
experience on multi-family residential and commercial real estate loans
typically is dependent on the successful operation of the project, and thus such
loans may be adversely affected to a greater extent by adverse conditions in the
real estate markets or in the economy generally, as well as the manner in which
the borrower manages the property. Moreover, the Company's income property loans
generally are made with primary reliance on the operation and/or sale of the
property and without recourse to the borrower. The Company attempts to mitigate
these risks by (1) requiring its borrowers to demonstrate their commitment to
the property through a significant cash equity investment, (2) generally
requiring minimum debt coverage ratios of 120% and 140% with respect to
multi-family residential and commercial real estate loans, respectively, (3)
evaluating the historical and current operations of the property, (4)
investigating the rental markets within the areas surrounding its collateral in
order to validate the revenue and expense assumptions which contribute to the
Company's assessment of the properties' current and potential cash flows, and
(5) evaluating the operating experience of the borrower with similar properties.
Management underwrites the proposed collateral which will secure income
property financings by reference to the historical, current and projected
operation of the property. In evaluating multi-family and commercial properties,
management requires that borrowers provide, at a minimum, current rent rolls,
recent operating statements and pro forma operating statements. As appropriate,
the Company's lending personnel adjust reported results to accommodate lease
expirations (from non-residential properties), tenant turnover, necessary
capital improvements and other relevant factors.
Conventional Single-Family Residential Loans. Although the Company has not
emphasized single-family residential conventional lending since the change in
management, the Company continues to provide conventional, permanent financing
secured by single-family homes, located principally in Los Angeles County. The
Company conducts this business both from its local retail banking offices and
from its corporate headquarters. This business is the most competitive and least
profitable of all of the Company's financing businesses. The Company lacks the
size and scale of operations to profitably penetrate this business, especially
in view of the significant capacity already in the marketplace in the form of
very large banking and non-banking companies whose principal business is to
originate conventional single-family-secured loans, many for
30
<PAGE> 31
resale in the secondary mortgage markets. The Company targets the origination of
a modest volume of this business each year, generally concentrated in and around
its local retail banking offices.
At March 31, 1998, the Company had $217.6 million of conventional
single-family residential loans, $57.1 million of which had been originated
since 1994. As of March 31, 1998, the Company's portfolio of conventional
single-family residential loans consisted of 1,472 loans with an average
principal balance of $149,000. As of such date, the Company's conventional
single-family residential loans had an effective yield of 7.72%, an average
loan-to-value ratio as of the date of origination of 70% and had been
outstanding for an average of 65 months.
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended (the "Certificate"),
authorizes the issuance of up to 20,000,000 shares of Common Stock and up to
10,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred
Stock"). At July 7, 1998, the Company had 3,170,296 shares of Common Stock
outstanding, Warrants to purchase an additional 2,376,000 shares of Common Stock
outstanding and no Preferred Stock outstanding. The number of shares of Common
Stock and Warrants outstanding as of July 7, 1998 does not give effect to an
expected increase, as a result of the Offering, of 123,282 shares of Common
Stock which may be acquired upon exercise of such Warrants. See
"Capitalization." In addition, at July 7, 1998, the Company had granted options
to purchase an aggregate of 634,100 shares of Common Stock pursuant to its two
Stock Option Plans.
The following description of the Company's capital stock is a summary which
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Certificate, the Bylaws
of the Company and the form of Warrant evidencing the outstanding Warrants,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part, as well as the applicable provisions of the Delaware
General Corporation Law.
COMMON STOCK
General. Each share of Common Stock has the same relative rights and is
identical in all respects with each other share of Common Stock. The Common
Stock is not subject to call for redemption and each outstanding share of Common
Stock as of the date hereof is fully paid and non-assessable and, upon receipt
of the purchase price payable upon exercise of the Warrants, the shares of
Common Stock issuable upon such exercise will be fully paid and non-assessable.
Voting Rights. Except as provided in any resolution or resolutions adopted
by the Board of Directors of the Company establishing any series of Preferred
Stock, the holders of Common Stock possess exclusive voting rights in the
Company. Each holder of Common Stock is entitled to one vote for each share held
on all matters voted upon by shareholders, and shareholders are permitted to
cumulate votes for the election of directors.
Dividends. Subject to the rights of the holders of any series of Preferred
Stock, the holders of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company out of funds
legally available therefor.
Preemptive Rights. Holders of Common Stock do not have any preemptive
rights with respect to any shares which may be issued by the Company in the
future; thus, the Company may sell shares of Common Stock without first offering
them to the then holders of Common Stock.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of Common Stock would be entitled to receive, after
payment of all debts and liabilities of the Company, all assets of the Company
available for distribution, subject to the rights of the holders of any
Preferred Stock which may be issued with a priority in liquidation or
dissolution over the holders of Common Stock.
31
<PAGE> 32
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue the Preferred
Stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. The Preferred Stock may be issued in distinctly designated
series, may be convertible into Common Stock and may rank prior to the Common
Stock as to dividend rights, liquidation preferences, or both.
The authorized but unissued shares of Preferred Stock (as well as the
authorized but unissued and unreserved shares of Common Stock) are available for
issuance in future mergers or acquisitions, in a future public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve the transaction in which the additional authorized shares of
Preferred Stock (as well as Common Stock) would be issued, shareholder approval
generally would not be required for the issuance of these shares. Depending on
the circumstances, however, shareholder approval may be required pursuant to the
requirements for continued quotation of the Common Stock on the Nasdaq Stock
Market's National Market or the requirements of any exchange on which the Common
Stock may then be listed.
WARRANTS
Exercise. The Warrants may be exercised on or after December 11, 1998 and
will expire at 5:00 p.m., Pacific Time, on December 11, 2005 (the "Expiration
Date"), provided that the Warrants may be exercised in whole or in part prior to
December 11, 1998 in connection with or following a Change in Control of the
Company, as defined in the Warrants. The registered holder of a Warrant (a
"Holder" and collectively the "Holders") has the right to purchase from the
Company the number of shares of Common Stock set forth on the face thereof (as
may be adjusted pursuant to the terms of the Warrant) at the price of $2.25 per
share (as may be adjusted pursuant to the terms of the Warrant, the "Exercise
Price"). The Offering will not result in a Change in Control of the Company, as
defined in the Warrants. However, the Offering will result in a decrease in the
exercise price of the Warrants to $2.139 per share and an aggregate increase of
123,282 shares of Common Stock which may be acquired upon the exercise of such
Warrants. Future issuances of Common Stock and other events (whether considered
on their own or in combination with the Offering) may result in an additional
adjustment to the exercise price and number of Warrants, under the terms and
conditions set forth below.
Adjustments of Exercise Price and Number of Shares of Common Stock. The
Exercise Price and the number and kind of shares of Common Stock issuable upon
the exercise of the Warrants will be subject to change or adjustment from time
to time as follows:
(a) Change in Common Stock. In the event the Company shall, at any time or
from time to time after the issuance of the Warrants, (i) issue any shares of
Common Stock as a stock dividend to the holders of Common Stock, (ii) subdivide
or combine the outstanding shares of Common Stock into a greater or lesser
number of shares or (iii) issue any shares of its capital stock in a
reclassification or reorganization of the Common Stock (any such issuance,
subdivision, combination, reclassification or reorganization being herein called
a "Change of Shares"), then (A) in the case of (i) or (ii) above, the number of
shares of Common Stock that may be purchased upon the exercise of a Warrant
shall be adjusted to the number of shares of Common Stock that the Holder would
have owned or have been entitled to receive after the happening of such event
had such Warrant been exercised immediately prior to the record date (or, if
there is no record date, the effective date) for such event, and the Exercise
Price shall be adjusted to the price (calculated to the nearest 1,000th of one
cent) determined by multiplying the Exercise Price immediately prior to such
event by a fraction, the numerator of which shall be the number of shares of
Common Stock purchasable with the Warrant immediately prior to such event and
the denominator of which shall be the number of shares of Common Stock
purchasable with the Warrant after the adjustment referred to above and (B) in
the case of clause (iii) above, paragraph (l) below shall apply. An adjustment
made pursuant to clause (A) of this paragraph (a) shall become effective
retroactively immediately after the record date in the case of such dividend and
shall become effective immediately after the effective date in other cases, but
any shares of
32
<PAGE> 33
Common Stock issuable solely as a result of such adjustment shall not be issued
prior to the effective date of such event.
(b) Common Stock Distribution. In the event the Company shall, at any time
or from time to time after the issuance of the Warrants, issue, sell or
otherwise distribute (including by way of deemed distributions pursuant to
paragraphs (c) and (d) below) any shares of Common Stock (other than pursuant to
(A) a Change of Shares or (B) the exercise or conversion, as the case may be, of
any Option, Convertible Security (each as defined in paragraph (c) below) or
Warrant) (any such event, including any deemed distributions described in
paragraphs (c) and (d), being herein called a "Common Stock Distribution"), for
a consideration per share less than the current market price per share of Common
Stock (as defined in paragraph (f) below), on the date of such Common Stock
Distribution, then, effective upon such Common Stock Distribution, the Exercise
Price shall be reduced to the price (calculated to the nearest 1,000th of one
cent) determined by multiplying the Exercise Price in effect immediately prior
to such Common Stock Distribution by a fraction, the numerator of which shall be
the sum of (i) the number of shares of Common Stock outstanding (exclusive of
any treasury shares) immediately prior to such Common Stock Distribution
multiplied by the current market price per share of Common Stock on the date of
such Common Stock Distribution, plus (ii) the consideration, if any, received by
the Company upon such Common Stock Distribution, and the denominator of which
shall be the product of (A) the total number of shares of Common Stock issued
and outstanding immediately after such Common Stock Distribution multiplied by
(B) the current market price per share of Common Stock on the date of such
Common Stock Distribution.
If any Common Stock Distribution shall require an adjustment to the
Exercise Price pursuant to the foregoing provisions of this paragraph (b),
including by operation of paragraph (c) or (d) below, then, effective at the
time such adjustment is made, the number of shares of Common Stock purchasable
upon the exercise of a Warrant shall be increased to a number determined by
multiplying the number of shares so purchasable immediately prior to such Common
Stock Distribution by a fraction, the numerator of which shall be the Exercise
Price in effect immediately prior to such adjustment and the denominator of
which shall be the Exercise Price in effect immediately after such adjustment.
In computing adjustments under this paragraph, fractional interests in Common
Stock shall be taken into account to the nearest 1,000th of a share.
The provisions of this paragraph (b), including by operation of paragraph
(c) or (d) below, shall not operate to increase the Exercise Price or reduce the
number of shares of Common Stock purchasable upon the exercise of a Warrant,
except by operation of paragraph (j) or (k) below.
(c) Issuance of Options. In the event the Company shall, at any time or
from time to time after issuance of the Warrants, issue, sell, distribute or
otherwise grant in any manner (including by assumption) any rights to subscribe
for or to purchase, or any warrants or options for the purchase of, Common Stock
or any stock or securities convertible into or exchangeable for Common Stock
(any such rights, warrants or options being herein called "Options" and any such
convertible or exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the right to convert or exchange
such Convertible Securities are immediately exercisable, and the price per share
at which Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the aggregate amount, if any, received or receivable by the Company as
consideration for the issuance, sale, distribution or granting of such Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Options, plus, in the case of
Options to acquire Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the conversion or exchange of all
such Convertible Securities, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of all such Options) shall be less than
the current market price per share of Common Stock on the date of the issuance,
sale, distribution or granting of such Options, then, for the purposes of
paragraph (b) above, the total maximum number of shares of Common Stock issuable
upon the exercise of all such Options or upon the conversion or exchange of the
total maximum amount of the Convertible Securities issuable upon the exercise of
all such Options shall be deemed to have been issued as of the date of the
issuance, sale, distribution or granting of such Options and thereafter shall be
deemed to be outstanding and the Company shall be deemed to have received as
33
<PAGE> 34
consideration such price per share, determined as provided above, therefor.
Except as otherwise provided in paragraphs (j) and (k) below, no additional
adjustment of the Exercise Price shall be made upon the actual exercise of such
Options or upon conversion or exchange of the Convertible Securities issuable
upon the exercise of such Options. If the minimum and maximum numbers or amounts
referred to in this paragraph (c) or in paragraph (d) below cannot be calculated
with certainty as of the date of the required adjustment, such numbers and
amounts shall be determined in good faith by the Board of Directors of the
Company.
(d) Issuance of Convertible Securities. In the event the Company shall, at
any time or from time to time after issuance of the Warrants, issue, sell or
otherwise distribute (including by assumption) any Convertible Securities (other
than upon the exercise of any Option), whether or not the right to convert or
exchange such Convertible Securities are immediately exercisable, and the price
per share at which Common Stock is issuable upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the aggregate amount, if
any, received or receivable by the Company as consideration for the issuance,
sale or distribution of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
conversion or exchange of all such Convertible Securities, by (ii) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the current
market price per share of Common Stock on the date of such issuance, sale or
distribution, then, for the purposes of paragraph (b) above, the total number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities shall be deemed to have been issued as of the date of the
issuance, sale or distribution of such Convertible Securities and thereafter
shall be deemed to be outstanding and the Company shall be deemed to have
received as consideration such price per share, determined as provided above,
therefor. Except as otherwise provided in paragraphs (j) and (k) below, no
additional adjustment of the Exercise Price shall be made upon the actual
conversion or exchange of such Convertible Securities.
(e) Dividends and Distributions. In the event the Company shall, at any
time or from time to time after issuance of the Warrants, distribute to the
holders of Common Stock any dividend or other distribution of cash, evidences of
its indebtedness, other securities or other properties or assets (in each case
other than (i) dividends payable in Common Stock, Options or Convertible
Securities and (ii) any cash dividend declared and paid pursuant to a regular
quarterly dividend policy of the Company), or any options, warrants or other
rights to subscribe for or purchase any of the foregoing, then (A) the Exercise
Price shall be decreased to a price determined by multiplying the Exercise Price
then in effect by a fraction, the numerator of which shall be the current market
price per share of Common Stock on the record date for such distribution less
the sum of (X) the cash portion, if any, of such distribution per share of
Common Stock outstanding (exclusive of any treasury shares) plus (Y) the then
fair market value (as determined in good faith by the Board of Directors of the
Company) per share of Common Stock issued and outstanding on the record date for
such distribution of that portion, if any, of such distribution consisting of
evidences of indebtedness, other securities, properties, assets, options,
warrants or subscription or purchase rights, and the denominator of which shall
be such current market price per share of Common Stock and (B) the number of
shares of Common Stock purchasable upon the exercise of a Warrant shall be
increased to a number determined by multiplying the number of shares of Common
Stock so purchasable immediately prior to the record date for such distribution
by a fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to the adjustment required by clause (A) of this sentence and
the denominator of which shall be the Exercise Price in effect immediately after
such adjustment. The adjustments required by this paragraph (e) shall be made
whenever any such distribution is made and shall be retroactive to the record
date for the determination of stockholders entitled to receive such
distribution.
(f) Current Market Price. For the purpose of any computation under
paragraphs (b), (c), (d) and (e) above, the current market price per share of
Common Stock at any date shall be the average of the daily closing prices for
the shorter of (i) the 20 consecutive trading days ending on the last full
trading day on the exchange or market specified in the second succeeding
sentence, prior to the Time of Determination and (ii) the period commencing on
the date next succeeding the first public announcement of the issuance, sale,
distribution or granting in question through such last full trading day prior to
the Time of Determination. The
34
<PAGE> 35
term "Time of Determination" as used herein shall be the time and date of the
earlier to occur of (A) the date as of which the current market price is to be
computed and (B) the last full trading day on such exchange or market before the
commencement of "ex-dividend" trading in the Common Stock relating to the event
giving rise to the adjustment required by paragraph (b), (c), (d) or (e). The
closing price for any day shall be the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in each case (1) on the
principal national securities exchange on which the shares of Common Stock are
listed or to which such shares are admitted to trading or (2) if the Common
Stock is not listed or admitted to trading on a national securities exchange, in
the over-the-counter market as reported by the Nasdaq Stock Market's National
Market or any comparable system or (3) if the Common Stock is not listed on the
Nasdaq Stock Market's National Market or a comparable system, as furnished by
two members of the National Association of Securities Dealers, Inc. ("NASD")
selected from time to time in good faith by the Board of Directors of the
Company for that purpose. In the absence of all of the foregoing, or if for any
other reason the current market price per share cannot be determined pursuant to
the foregoing provisions of this paragraph (f), the current market price per
share shall be the fair market value thereof as determined in good faith by the
Board of Directors of the Company.
(g) Certain Distributions. If the Company shall pay a dividend or make any
other distribution payable in Options or Convertible Securities, then, for
purposes of paragraph (b) above (including dividends or distributions by
operation of paragraph (c) or (d) above, as the case may be), such Options or
Convertible Securities shall be deemed to have been issued or sold without
consideration except for such amounts of consideration as shall have been deemed
to have been received by the Company pursuant to paragraphs (c) or (d) above, as
appropriate.
(h) Consideration Received. If any shares of Common Stock shall be issued
and sold in an underwritten public offering, the consideration received by the
Company for such shares of Common Stock shall be deemed to include the
underwriting discounts and commissions realized by the underwriters of such
public offering. If any shares of Common Stock, Options or Convertible
Securities shall be issued, sold or distributed for a consideration other than
cash, the amount of the consideration other than cash received by the Company in
respect thereof shall be deemed to be the then fair market value of such
consideration (as determined in good faith by the Board of Directors of the
Company). If any Options shall be issued in connection with the issuance and
sale of other securities of the Company, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued, sold or
distributed for such amount of consideration as shall be allocated to such
Options in good faith by the Board of Directors of the Company.
(i) Deferral of Certain Adjustments. No adjustments to the Exercise Price
(including the related adjustment to the number of shares of Common Stock
purchasable upon the exercise of a Warrant) shall be required hereunder unless
such adjustment, together with other adjustments carried forward as provided
below, would result in an increase or decrease of at least one percent of the
Exercise Price; provided, however, that any adjustment which by reason of this
paragraph (i) is not required to be made shall be carried forward and taken into
account in any subsequent adjustment.
(j) Changes in Options and Convertible Securities. If the exercise price
provided for in any Options referred to in paragraph (c) above, the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in paragraph (c) or (d) above, or the rate at
which any Convertible Securities referred to in paragraph (c) or (d) above are
convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution upon an event which results in a related adjustment pursuant to the
Warrants), the Exercise Price then in effect and the number of shares of Common
Stock purchasable upon the exercise of a Warrant shall forthwith be readjusted
(effective only with respect to any exercise of a Warrant after such
readjustment) to the Exercise Price and number of shares of Common Stock so
purchasable that would then be in effect had the adjustment made upon the
issuance, sale, distribution or granting of such Options or Convertible
Securities been made based upon such changed purchase price, additional
consideration or
35
<PAGE> 36
conversion rate, as the case may be, but only with respect to such Options and
Convertible Securities as then remain outstanding.
(k) Expiration of Options and Convertible Securities. If, at any time
after any adjustment to the number of shares of Common Stock purchasable upon
the exercise of a Warrant shall have been made pursuant to paragraph (c), (d) or
(j) above or this paragraph (k), any Options or Convertible Securities shall
have expired unexercised or, solely with respect to Options that are rights
("Rights"), are redeemed, the number of such shares so purchasable shall, upon
such expiration or such redemption, be readjusted and shall thereafter be such
as they would have been had they been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (i) the only shares of
Common Stock deemed to have been issued in connection with such Options or
Convertible Securities were the shares of Common Stock, if any, actually issued
or sold upon the exercise of such Options or Convertible Securities and (ii)
such shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance, sale,
distribution or granting of all such Options or Convertible Securities, whether
or not exercised; provided, however, that (x) no such readjustment shall have
the effect of decreasing the number of shares so purchasable by an amount
(calculated by adjusting such decrease to account for all other adjustments made
pursuant to this Section 7 following the date of the original adjustment
referred to above) in excess of the amount of the adjustment initially made in
respect of the issuance, sale, distribution or granting of such Options or
Convertible Securities and (y) in the case of the redemption of any Rights,
there shall be deemed (for the purposes of paragraph (c) above) to have been
issued as of the date of such redemption for no consideration a number of shares
of Common Stock equal to the aggregate consideration paid to effect such
redemption divided by the current market price of the Common Stock on the date
of such redemption.
(l) Other Adjustments. In the event that at any time a Holder shall become
entitled to receive any securities of the Company other than shares of Common
Stock as constituted on the date of issuance of the Holder's Warrant, the number
of such other securities so receivable upon exercise of such Warrant and the
Exercise Price applicable to such exercise shall be adjusted at such time, and
shall be subject to further adjustment from time to time thereafter, in a manner
and on terms as nearly equivalent as practicable to the provisions with respect
to the shares of Common Stock contained in the Warrants.
(m) Excluded Transactions. Notwithstanding any provision in the Warrants
to the contrary, no adjustment shall be made in respect of (i) any change in the
par value of the Common Stock, (ii) the granting of any Options or the issuance
of any shares of Common Stock, in either case, which would otherwise trigger an
adjustment under paragraph (b) above, that may be registered on Form S-8 or any
successor form under the Securities Act, to any directors, officers or employees
of the Company, provided that the granting of Options or the issuance of shares
of Common Stock pursuant to this clause (ii) is in the ordinary course of
business and is usual and customary, or (iii) the issuance of Common Stock
pursuant to any dividend reinvestment plan which provides that the price of the
Common Stock purchased for plan participants from the Company will be no less
than 95% of the average of the high and low sales prices of the Common Stock on
the investment date or, if no trading in the Common Stock occurs on such date,
the next preceding date on which trading occurred (1) on the principal national
securities exchange on which the shares of Common Stock are listed or to which
such shares are admitted to trading or (2) if the Common Stock is not listed or
admitted to trading on a national securities exchange, in the over-the-counter
market as reported by the Nasdaq Stock Market's National Market or any
comparable system or (3) if the Common Stock is not listed on the Nasdaq Stock
Market's National Market or a comparable system, as furnished by two members of
the NASD selected from time to time in good faith by the Board of Directors of
the Company for that purpose. In the absence of all of the foregoing, or if for
any other reason the current market price per share cannot be determined
pursuant to the foregoing provisions of this paragraph, the current market price
per share shall be the fair market value thereof as determined in good faith by
the Board of Directors of the Company.
Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another corporation, or the sale of all or substantially all
of its assets to another corporation shall be effected in such a way that
holders of Common
36
<PAGE> 37
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder of a Warrant shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in the Warrant and in lieu of the shares of Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of the Warrant to
the end that the provisions of the Warrant (including without limitation
provisions for adjustments of the Exercise Price and of the number of shares
purchasable upon the exercise of the Warrant) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise thereof. The Company shall not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed by first class mail, postage prepaid,
to each Holder at the last address of the Holder appearing on the register
maintained by the Company, the obligation to deliver to such Holder such shares
of stock, securities or assets as, in accordance with the provisions of the
Warrants such Holder may be entitled to purchase.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
FEDERAL LAWS AND REGULATIONS
Federal laws and regulations generally require any person who intends to
acquire control of a savings and loan holding company or savings institution to
give at least 60 days prior written notice to the OTS. "Control" is defined as
the power, directly or indirectly, to direct the management or policies of a
savings institution or to vote 25% or more of any class of voting securities of
the savings institution. In addition to the foregoing restrictions, a company
must secure the approval of the OTS before it can acquire control of a savings
institution. Under federal regulations, a person (including business entities)
is deemed conclusively to have acquired control if, among other things, such
person acquires: (i) 25% or more of any class of voting stock of the savings
institution; (ii) irrevocable proxies representing 25% or more of any class of
voting stock of the savings institution; (iii) any combination of voting stock
and irrevocable proxies representing 25% or more of any class of such
institution's voting stock; or (iv) control of the election of a majority of the
directors of the savings institution. In addition, a rebuttable presumption of
control arises in the event a person acquires more than 10% of any class of
voting stock (or more than 25% of any class of non-voting stock) and is subject
to one or more of eight enumerated control factors. Such regulations also set
forth rebuttable presumptions of concerted action and the procedures to follow
to rebut any such presumptions. The OTS is specifically empowered to disapprove
such an acquisition of control if it finds, among other reasons, that (i) the
acquisition would substantially lessen competition; (ii) the financial condition
of the acquiring person might jeopardize the institution or its depositors; or
(iii) the competency, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors, the institution or the
public to permit the acquisition of control by such person.
DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law generally provides that
a Delaware corporation shall not engage in any "business combination" with an
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder unless (i) prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at
37
<PAGE> 38
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for this purpose, shares owned by persons who
are directors and also officers and shares owned by employee stock ownership
plans in which employee participants do not have the right to determine
confidentially whether the shares held subject to the plan will be tendered in a
tender offer or exchange offer; or (3) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. The three-year prohibition on business combinations with an
interested stockholder does not apply under certain circumstances, including
business combinations with a corporation which does not have a class of voting
stock that is (i) listed on a national securities exchange, (ii) authorized for
quotation on an inter-dealer quotation system of a registered national
securities association, or (iii) held of record by more than 2,000 stockholders,
unless in each case this result was directly or indirectly caused by the
interested stockholder.
An "interested stockholder" generally means any person that (i) is the
owner of 15% or more of the outstanding voting stock of the corporation or (ii)
is an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the affiliates
and associates of such a person. The term "business combination" is broadly
defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various other
transactions which may benefit an interested stockholder.
SHARES AVAILABLE FOR FUTURE SALE
The 1,750,000 shares of Common Stock offered hereby (plus up to 262,500
shares which may be sold pursuant to the Underwriters' overallotment option)
will be freely transferable without further restriction or further registration
under the Securities Act, except that any shares purchased by an "affiliate" of
the Company, as that term is defined by the Securities Act, will be subject to
certain of the resale limitations of Rule 144 under the Securities Act. Of the
3,170,296 shares of Common Stock outstanding at July 7, 1998, 2,739,175 shares
are freely transferable without restriction or registration under the Securities
Act and 431,121 shares are "restricted securities" as that term is defined in
Rule 144 and may only be sold pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder,
including pursuant to Rule 144.
Pursuant to a Registration Rights Agreement entered into by the Company and
certain investors in December 1995, the Company intends to file within 30 days a
Registration Statement under the Securities Act to register for resale from time
to time by the Selling Securityholders (i) the 431,121 shares of outstanding
restricted Common Stock, (ii) outstanding Warrants to purchase an aggregate of
2,499,282 shares of Common Stock and (iii) 2,499,282 shares of Common Stock
issuable upon exercise of such Warrants (2,129,018 Warrants and 2,129,018 shares
of Common Stock issuable upon exercise of such Warrants may be deemed to be held
by affiliates of the Company). The number of Securities to be registered gives
effect to an expected increase, as a result of the Offering, in the number of
shares of Common Stock which may be acquired upon the exercise of the Warrants.
The Warrants become exercisable in accordance with their terms on December 11,
1998. See "Description of Capital Stock -- Warrants." The sale or distribution
of all or any portion of the Securities may be effected from time to time by the
Selling Securityholders directly, or indirectly through brokers or dealers or in
a distribution by one or more underwriters on a firm commitment or best efforts
basis, in the over-the-counter market, on any national securities exchange or
automated inter-dealer quotation system on which the Securities are listed or
traded, if any, in privately-negotiated transactions or otherwise, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. In addition, any of the Securities that
qualify for sale pursuant to Rule 144 may be sold in transactions complying with
such rule.
As of July 7, 1998, (i) a total of 710,300 shares of Common Stock were
reserved for issuance under the Company's Stock Option Plan for employees who
may be deemed to be affiliates of the Company, and (ii) a total of 449,800
shares of Common Stock were reserved for issuance under the Company's Stock
Option Plan
38
<PAGE> 39
for employees who are not deemed to be affiliates of the Company. Shares of
Common Stock issued under the Stock Option Plans, other than shares held by
affiliates of the Company, which may be sold under Rule 144, will be eligible
for resale in the public market without restriction.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year will be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of (i) 1% of the
then-outstanding shares of Common Stock (49,202 shares immediately after the
Offering) or (ii) the average weekly trading volume of the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 also
are subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale, and who has
beneficially owned shares, within the context of Rule 144, for at least two
years, is entitled to sell such shares under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information or notice
requirements.
39
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
among the Company, the Bank and Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill"), as Representative of the underwriters named herein (the
"Underwriters"), the Company has agreed to sell to the Underwriters, and the
Underwriters have severally agreed to purchase from the Company, the number of
shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Sandler O'Neill & Partners, L.P............................. 1,570,000
Corinthian Partners, L.L.C.................................. 30,000
Dain Rauscher Wessels....................................... 30,000
Everen Securities, Inc...................................... 30,000
Hoefer & Arnett Inc......................................... 30,000
Sutro & Co. Incorporated.................................... 30,000
Van Kasper & Company........................................ 30,000
---------
Total............................................. 1,750,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the shares of Common Stock
offered hereby, if any are taken.
The Underwriters propose initially to offer the Common Stock directly to
the public at the Price to Public, and to certain securities dealers at such
price less a concession of $0.54 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the Common Stock is released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the Representative.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 262,500
additional shares of Common Stock solely to cover over-allotments, if any.
The Company and the Bank have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
In connection with the Offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the shares of Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock than they are required to purchase from the
Company in the Offering. The Underwriters also may impose a penalty bid, whereby
selling concessions allowed to syndicate members or other broker-dealers in
respect of the securities sold in the Offering for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the shares of Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
Neither the Company nor the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Underwriters makes any representation that the Underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The Underwriters may reserve for sale shares of Common Stock which may be
sold at the initial public offering price to directors, officers and employees
of the Company. The number of shares of Common Stock
40
<PAGE> 41
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares of Common Stock not
to be purchased will be offered by the Underwriters on the same basis as the
other shares of Common Stock offered in the Offering.
Sandler O'Neill has provided from time to time, and expects to provide in
the future, investment banking services to the Company and its affiliates for
which Sandler O'Neill has received or will receive customary fees and
commissions.
Except for (i) Common Stock sold in the Offering and (ii) Common Stock
issued upon exercise of stock options granted pursuant to the Company's stock
option plans and the Warrants in accordance with their terms, the Company has
agreed in the Underwriting Agreement and its directors and executive officers
have otherwise agreed not to offer, sell, contract to sell or otherwise dispose
of any equity securities of the Company (or any securities exercisable for or
convertible into such equity securities) for a period of 120 days after the
consummation of the Offering without the prior written consent of Sandler
O'Neill.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., and for the
Underwriters by Sullivan & Cromwell, Los Angeles, California. As of the date of
this Prospectus, certain members of Elias, Matz, Tiernan & Herrick L.L.P. owned
in the aggregate approximately 23,165 shares of the Company's Common Stock and
79,200 Warrants (the number of shares of Common Stock and Warrants beneficially
owned as of the date of this Prospectus does not give effect to an expected
increase as a result of the Offering in the number of shares of Common Stock
which may be acquired upon exercise of such Warrants). In addition, certain
members of Elias, Matz, Tiernan & Herrick L.L.P. have advised the Company that
they intend to purchase in the aggregate up to an additional 11,500 shares of
Common Stock in connection with the Offering.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
41
<PAGE> 42
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 3
Summary............................... 4
Selected Consolidated Financial
Data................................ 7
Risk Factors.......................... 10
Use of Proceeds....................... 18
Market Price for Common Stock and
Dividends........................... 19
Capitalization........................ 20
Regulatory Capital.................... 21
Business Overview of the Company...... 22
Description of Capital Stock.......... 31
Restrictions on Acquisition of the
Company............................. 37
Shares Available for Future Sale...... 38
Underwriting.......................... 40
Validity of Common Stock.............. 41
Experts............................... 41
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,750,000 SHARES
[HAWTHORNE FINANCIAL LOGO]
HAWTHORNE FINANCIAL CORPORATION
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
JULY 7, 1998
SANDLER O'NEILL & PARTNERS, L.P.
- ------------------------------------------------------
- ------------------------------------------------------
