<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1996
REGISTRATION NO. 333-15263
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WILSHIRE FINANCIAL SERVICES GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6719 93-1223879
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S.
(STATE OR OTHER EMPLOYERIDENTIFICATION
JURISDICTION OF NUMBER)
INCORPORATION OR
ORGANIZATION)
1776 SW MADISON ST. PORTLAND, OR 97205 (503) 223-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LAWRENCE A. MENDELSOHN PRESIDENT 1776 SW MADISON ST. PORTLAND, OR 97205 (503)
223-5600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
JAMES M. WADDINGTON, ESQ. ROBERT E. DEAN, ESQ.
PROSKAUER ROSE GOETZ & MENDELSOHN LLP GIBSON, DUNN & CRUTCHER LLP
1585 BROADWAY 4 PARK PLAZA
NEW YORK, NEW YORK 10036-8299 IRVINE, CALIFORNIA 92614-8557
(212) 969-3000 (714) 451-3800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERINGPRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE OR NOTE(3) PRICE(3) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share.......................... 1,725,000 shares(1) $12.00 $20,700,000 $6,272.73
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Notes due 2003.................. $86,250,000(2) 100% $86,250,000 $26,136.36
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Total....................... $106,950,000 $32,409.09
</TABLE>
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(1) Includes 225,000 shares of Common Stock which the Common Stock
Underwriters have an option to purchase to cover over-allotments, if any.
(2) Includes $11,250,000 of Notes which the Notes Underwriter has an option to
purchase to cover over-allotments, if any.
(3) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement is being filed with respect to (i) 1,500,000
shares of common stock, par value $.01 per share (the "Common Stock"), of
Wilshire Financial Services Group Inc. (and an additional 225,000 shares of
Common Stock issuable upon exercise of the Common Stock Underwriters' over-
allotment option), and (ii) $75 million principal amount of % Notes due 2003
(the "Notes") of Wilshire Financial Services Group Inc. (and an additional
$11,250,000 of Notes issuable upon exercise of the Notes Underwriter's over-
allotment option).
This Registration Statement contains two forms of Prospectus. The first
Prospectus relates to the offering of the Common Stock and the second
Prospectus relates to the offering of the Notes.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1996
PROSPECTUS
------------------------
WILSHIRE
------------------------
FINANCIAL SERVICES GROUP
1,500,000 SHARES OF COMMON STOCK
This Prospectus relates to the offering by Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" and together with its subsidiaries, the
"Company"), of 1,500,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock") of WFSG (the "Common Stock Offering"). Prior to the Common
Stock Offering, there has been no public market for the Common Stock. It is
currently estimated that the initial public offering price for the shares of
Common Stock offered hereby will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market ("Nasdaq") under
the symbol "WFSG." Upon completion of the Common Stock Offering and assuming
the Underwriters' over-allotment option is not exercised, certain executive
officers and directors of the Company will have approximately 78% of the
combined voting power of all outstanding shares of the Common Stock.
The Underwriters have reserved 4.2% of the shares of Common Stock offered
hereby for sale at the initial public offering price to directors, officers and
employees of the Company and to certain other persons.
In addition, WFSG is concurrently offering $75 million aggregate principal
amount of % Notes due 2003 (the "Notes") of WFSG (the "Notes Offering"). See
"Description of Notes Offering." The Common Stock Offering and the Notes
Offering are each conditioned on the completion of the other offering.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING AT PAGE 11 FOR A DISCUSSION OF MATERIAL RISKS THAT SHOULD BE
CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE FDIC, THE OFFICE OF THRIFT SUPERVISION
("OTS") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, FDIC, OTS OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to the indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) WFSG has granted the Common Stock Underwriters an option, exercisable
within 30 days of the date hereof, to purchase from WFSG up to 225,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent the option is exercised, the Underwriters will offer the
additional shares of Common Stock at the Price to Public shown above. If
the option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the shares of Common Stock will be made
at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia,
the representative of the several Underwriters (the "Representative"), or in
book-entry form through the facilities of The Depository Trust Company on or
about , 1996.
-----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE COMMON STOCK OFFERING AND THE NOTES OFFERING, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF SUCH SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER THE COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
WFSG has filed with the Securities and Exchange Commission (the
"Commission") via the Electronic Data Gathering Analysis and Retrieval System
("EDGAR") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act") with respect to the Common Stock
Offering and the Notes Offering. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance where such contract or other
document is an exhibit to the Registration Statement, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each statement being qualified in all respects by such
reference. As a result of the filing of the Registration Statement with the
Commission, WFSG will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file reports and other information
with the Commission. WFSG intends to furnish its stockholders annual reports
containing audited financial statements and an opinion thereon expressed by
WFSG's independent auditors as well as quarterly reports for the first three
quarters of each fiscal year containing unaudited financial statements. Copies
of the Registration Statement, including all exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60601 upon payment of prescribed rates. The
Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including WFSG. The Company has applied for quotation of the
Common Stock on Nasdaq. If the Common Stock is quoted on Nasdaq, reports,
proxy and information statements and other information regarding the Company
will be available for inspection at the National Association of Securities
Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington, D.C. 20006.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option to purchase additional shares of Common
Stock. Unless the context otherwise requires, all references to the Company
herein shall be deemed to include the Company and its subsidiaries. Unless
otherwise indicated, all information in this Prospectus assumes that no
outstanding stock options are exercised. The information contained in this
Prospectus gives effect to certain transactions to be consummated prior to or
simultaneously with the closing of the Common Stock Offering and the Notes
Offering.
THE COMPANY
GENERAL
Wilshire Financial Services Group Inc. ("WFSG" and, together with its
subsidiaries, the "Company") is a newly formed financial services holding
company for certain companies and businesses previously held as a part of, and
operated by, the Wilshire group of companies (the "Wilshire Companies")
pursuant to a reorganization of the Wilshire Companies (the "Reorganization").
As part of the Reorganization, certain companies forming part of the Wilshire
Companies will become subsidiaries of WFSG and therefore will be part of the
publicly held group following the Common Stock Offering (the "Wilshire Public
Companies") and certain companies, notably Wilshire Credit Corporation ("WCC"),
will not become subsidiaries of WFSG and will remain privately held (the
"Wilshire Private Companies"). The Company will engage in a wide variety of
financial activities, including the acquisition, origination, ownership and
securitization of loan portfolios ("Loan Portfolios"), banking and non-
traditional bankcard processing.
HISTORICAL STRUCTURE
Prior to the Reorganization, the Wilshire Companies operated principally
through two separate companies: (i) WCC, which conducted a substantial portion
of the loan acquisition activities of and all of the loan servicing for the
Wilshire Companies; and (ii) Wilshire Acquisitions Corporation ("WAC"), the
holding company for two federally-chartered savings banks, First Bank of
Beverly Hills, F.S.B. ("First Bank"), and Girard Savings Bank, F.S.B. ("Girard"
and together with First Bank, the "Savings Banks"). The Wilshire Companies
commenced Loan Portfolio acquisitions in 1990 funded primarily by lines of
credit and joint ventures with institutional partners. Through October 21,
1996, the Wilshire Companies had purchased or committed to purchase
approximately 409 Loan Portfolios, aggregating $2.4 billion in principal
amount. In addition, at September 30, 1996 the Wilshire Companies serviced $1.4
billion of loans. The Wilshire Companies' income has been principally derived
from ownership and servicing of, and profit participations in, Loan Portfolios.
In the early 1990's, WCC acquired loans primarily from the Federal Deposit
Insurance Corporation ("FDIC") and the Resolution Trust Corporation (the
"RTC"), generally in auctions of pools of loans acquired from financial
institutions which failed during the late 1980's and early 1990's. Although
governmental agencies such as the FDIC and the Department of Housing and Urban
Development ("HUD") continue to be potential sources of loans, the amount of
loans sold by such agencies has substantially declined. In recent years, the
Wilshire Companies purchased loans primarily from various private sector
sellers, such as banks, savings institutions, mortgage companies and insurance
companies.
Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the principal owners of the
Wilshire Companies (the "Principals"), purchased First Bank and Girard through
WAC in October 1993 and November 1994, respectively, using funds loaned to them
by WCC (the "Shareholder Loans"). The Savings Banks were acquired to provide a
deposit-based funding source for the loan purchase activities of the Wilshire
Companies. Both Savings Banks were acquired at substantial discounts to their
respective book values, reflecting the poor quality of their assets and, in the
case of First Bank, an expected imminent regulatory takeover. WAC has increased
assets from $230.6 million at December 31, 1994 to $533.1 million at September
30, 1996 primarily through the acquisition of Loan Portfolios.
3
<PAGE>
The Principals have injected approximately $30 million into WAC since the
acquisition of the Savings Banks to fund substantial asset growth and to
maintain required capital levels given the substantial reserves taken on loans
acquired as part of the acquisition of the Savings Banks (the "Inherited
Loans") and approximately $24.5 million of sub-prime auto loans acquired in the
fourth quarter of 1995 and the first quarter of 1996 (the "Sub-Prime Auto
Loans"). As a result of the high level of loan loss reserves required in 1996,
and other regulatory concerns regarding the management of the Savings Banks and
the policies and procedures of the Savings Bank regarding internal asset
reviews, allowances for loan and lease losses, loan purchases, internal audits
and hedging transactions, the Office of Thrift Supervision (the "OTS"), on
October 31, 1996 increased the level of regulatory supervision and imposed
cease-and-desist orders (the "Orders") on and restricted further growth of
assets at both Savings Banks. The Company recently has hired additional
management for the Savings Banks and taken other steps to address these
regulatory concerns, but the Company will not be able to use the Savings Banks
for growth until the Orders are lifted or modified. See "Risk Factors--Risks
Related to Imposition of Cease and Desist Orders."
REORGANIZED STRUCTURE
Following the Reorganization, WFSG will be the holding company for WAC, the
Savings Banks, Wilshire Funding Corporation, a company formed to pursue loan
acquisition and loan origination businesses similar to WCC following the Common
Stock Offering and the Notes Offering ("WFC"), and Wilshire Servicing
Corporation, a company formed to engage in the loan servicing business
following the receipt of necessary licenses ("WSC"). As more fully described in
the following paragraph, the Wilshire Private Companies, including WCC, will
not become subsidiaries of WFSG or transfer assets and liabilities to the
Wilshire Public Companies as part of the Reorganization. The Company intends to
build on the expertise of the Wilshire Companies and aggressively pursue the
acquisition of Loan Portfolios. The Company evaluates Loan Portfolios based on
anticipated future cash flows, available funding sources and minimum expected
returns on equity. The Company will seek to identify niche areas primarily
within the real estate loan market where it believes its funding flexibility,
experienced personnel and its proprietary software and U.S. mortgage loan
database give it a competitive advantage in pricing and purchasing Loan
Portfolios. The aggregate principal amount of the loans acquired by the
Wilshire Companies during the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994 and 1993 was approximately $501.4 million,
$337.4 million, $388.5 million and $333.8 million, respectively, and the
aggregate principal amount of the loans acquired by the Wilshire Public
Companies during such period was approximately $242.6 million, $199.8 million,
$147.6 million, and $2.2 million, respectively. As of September 30, 1996, the
Company had $533.1 million of assets and stockholders' equity of $34.6 million.
After giving effect to the Reorganization, the organizational structure of
the Company will be as follows:
Wilshire Financial Services Group Inc.
Wilshire Funding Corporation
European Operations
Special Purpose Entities**
Wilshire Servicing Corporation*
Wilshire Acquisitions Corporation
First Bank of Beverly Hills, F.S.B.
Girard Savings Bank, F.S.B.
- --------
*Expected to commence servicing activities in 2-3 years following receipt of
necessary licenses.
**Entities to be formed for financings and to complete securitizations.
4
<PAGE>
In the Reorganization, the Wilshire Private Companies, including WCC, will
not become subsidiaries of WFSG or transfer any assets or liabilities to the
Company. WCC is not being included in the new public entity due to certain tax
considerations and to allow WCC to retain sufficient assets and servicing
rights to retire the Shareholder Loans. See "The Company--The Reorganization."
WCC will cease to acquire new product or servicing for its own account, but
will continue to service and liquidate its existing portfolio. New loan
acquisitions and originations will be conducted by WFC. For a period of two to
three years after the closing of the Common Stock Offering and Notes Offering
while WSC is in the process of obtaining the relevant licensing approvals for
its servicing activities, WCC will continue to service loans for the Company at
a market rate. Following such period, WSC will commence servicing loans for the
Company and WCC. See "Certain Relationships and Related Transactions." In
addition, WCC and the Principals have agreed not to compete with the Company
with respect to the acquisition of Loan Portfolios.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. Significant Growth in Loan Portfolio Investments. During the last four
years, the Wilshire Companies have developed expertise in the business
of acquiring Loan Portfolios, including residential mortgage loans,
manufactured housing loans, second lien loans, commercial real estate
loans, multi-family residential loans, commercial and business loans,
boat loans and other consumer loans, and Subordinate Securities (as
defined herein). The Company expects to utilize its available funding
sources to aggressively pursue Loan Portfolio acquisitions in the United
States and Western Europe, a substantial portion of which are expected
to be non-performing Loan Portfolios purchased at a discount
("Discounted Loans"). In addition, the Company expects to increase its
purchases of commercial real estate loans.
. Utilization of Varied Funding Sources. The Company, in addition to
deposits at the Savings Banks, will have extensive funding sources
available for investment and lending activities from investment banking
firms and institutional investors, including secured term loans,
warehouse lines of credit, and repurchase facilities. As of the closing
of the Common Stock Offering and the Notes Offering, certain existing
undrawn lines of credit ($416.0 million as of September 30, 1996) of the
Wilshire Private Companies will be transferred to the Company. Amounts
currently drawn under such lines of credit by the Wilshire Private
Companies ($84.0 million as of September 30, 1996) will be transferred
to the Company once such amounts are repaid by the Wilshire Private
Companies. Substantially all of the Company's Loan Portfolio investments
are expected to utilize borrowed funds, minimizing the Company's equity
investment to the extent possible. Since the Wilshire Companies' initial
use of securitization in 1995 through September 30, 1996, the Wilshire
Companies have issued $368.7 million of securities through two publicly
underwritten and three privately placed securitizations, including
securitizations of non-performing and sub-performing mortgage loans,
manufactured housing loans, consumer loans and conventional and non-
conforming mortgage loans. The Company expects to securitize its Loan
Portfolios when advantageous.
. Expansion into European Markets. The Company recently decided to expand
its loan acquisition and servicing activities to encompass the United
Kingdom and France with a view towards future expansion in Western
Europe. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for
conducting servicing activities in the United Kingdom. The Company is
also considering either establishing its own servicing operation,
acquiring an already existing entity or entering into a joint venture
with a company already active in France. Management believes that
conditions in the French real estate market and, to a lesser degree, in
the United Kingdom real estate market are similar to conditions in the
United States real estate market in
5
<PAGE>
the late 1980's and early 1990's and that there may be opportunities to
acquire Loan Portfolios at favorable prices. In addition, management
believes that there is a demand in the European market for U.S.-style
servicing with its automated systems, detailed investor reporting and
aggressive servicing and work-out approaches.
. Capitalize on Servicing Expertise. The Company believes that WCC's loan
servicing experience, its highly trained servicing personnel and its
investment in proprietary software have allowed the Wilshire Companies
to effectively value and price Loan Portfolios. As of September 30,
1996, WCC was servicing more than $1.4 billion principal amount of
loans, including $502.0 million for the Savings Banks. For a period of
two to three years after the closing of the Common Stock Offering and
the Notes Offering, while the Company is in the process of obtaining the
relevant licensing approvals for its servicing activities, WCC will
continue to service loans for the Company generally at a market rate.
Accordingly, the Company does not expect any significant servicing
income until it commences servicing loans for its own account in two to
three years.
. Growth of Non-Traditional Bankcard Processing Operations. The Company
plans to continue development of its non-traditional bankcard processing
operations, which generate revenues through merchant discounts and
processing fees for Visa (R) and Mastercard (R) transactions. The
Company's bankcard processing operations focus on certain high-risk
market niches, principally mail order/telephone order and audio-text
where the Company believes it obtains higher returns on processing
transactions. Revenues from the bankcard operation, which was commenced
in the third quarter of 1994, have demonstrated strong growth increasing
from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1 million
during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using the Company's
existing infrastructure.
. Development of Wholesale Origination Network. In late 1995, the Wilshire
Private Companies launched a mortgage conduit program for the purchase
of newly-originated residential mortgage and manufactured housing loans
on a nationwide basis through correspondents. Originations to date have
been modest. While the Company is obtaining necessary licensing, WCC
will continue to originate residential mortgage loans for the Company's
account through its correspondent relationships and will then transfer
the newly originated loans at acquisition cost to the Company.
Currently, this program focuses on the origination of in park
manufactured housing loans and conforming and non-conforming first and
second lien mortgage loans. The Company is in the process of launching
two new programs for loans to good-credit borrowers.
6
<PAGE>
THE COMMON STOCK OFFERING
Common Stock Offered.... 1,500,000 shares (plus up to 225,000 shares subject
to the Underwriters' over-allotment option).
Common Stock
outstanding (after the
Common Stock
Offering)............... 7,000,000 shares (plus up to 225,000 shares subject
to the Underwriters' over-allotment option).
Dividend Policy......... The Company intends to retain its earnings to support
its future growth strategy and does not anticipate
paying cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
Reserved Nasdaq WFSG.
symbol..................
Use of Proceeds......... The net proceeds from the Common Stock Offering and
the Notes Offering are expected to be used by the
Company to support leveraged acquisitions of Loan
Portfolios and for other general corporate purposes,
including expansion into Western Europe.
THE NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is separately
offering $75 million principal amount of Notes (plus up to $11.25 million of
Notes subject to the Notes Underwriters' over-allotment option), which will
mature on , 2003. The Notes will be general unsecured obligations of the
Company. Interest on the Notes will accrue at the rate of % per annum and
will be payable semi-annually in arrears on and of each year commencing
on , 1997. For information regarding the anticipated use of proceeds from
the Notes Offering by the Company and the Notes generally, see "Use of
Proceeds" and "Description of Notes Offering."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective investors of the Common Stock offered
hereby.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present Summary Consolidated Financial Information for
the Company at the dates and for the periods indicated. The historical income
statement and balance sheet data at and for the nine month period ended
September 30, 1996 and the years ended December 31, 1995 and 1994 have been
derived from the audited consolidated financial statements of the Company
included elsewhere in this Prospectus (the "Audited Financial Statements").
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in a
purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC-Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transactions.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995, WAC
and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated".
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the Audited
Financial Statements, the "Consolidated Financial Statements") and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for any other interim period of the entire year ending December 31,
1996. The Summary Consolidated Financial Information should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and related notes as set forth elsewhere
herein.
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------
1996 1995 1995 1994
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income........ $34,137 $17,052 $24,381 $ 9,569
Total interest expense....... 19,592 10,411 14,481 5,457
------- ------- ------- --------
Net interest income.......... 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans............. 15,751 3,221 4,266 2,173
------- ------- ------- --------
Net interest income (loss)
after provision for esti-
mated losses on loans....... (1,206) 3,420 5,634 1,939
Other income (loss):
Bankcard income(1)........... 5,078 3,202 4,694 635
Bankcard processing expense.. (3,865) (2,408) (3,462) (274)
Other, net................... 5,164 1,940 1,875 866
------- ------- ------- --------
Total other income (loss).. 6,377 2,734 3,107 1,227
Other expenses:
Other general and administra-
tive expenses............... 10,905 5,247 8,102 4,944
------- ------- ------- --------
(Loss) income before income
tax provision............... (5,734) 907 639 (1,778)
Income tax (benefit) provi-
sion........................ (4,652) 68 47 (526)
------- ------- ------- --------
Net (loss) income ........... $(1,082) $ 839 $ 592 $ (1,252)
======= ======= ======= ========
(Loss) earnings per share.... $(14.05) $ 35.56 $ 25.09 $(135.43)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $ 533,109 $ 341,454 $ 230,636
Loan portfolio, net(2).................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans.............................. 10,767 20,210 2,995
Unaccreted discount...................... (1,632) (3,008) (470)
Allowance for loan losses................ (5,716) (3,855) (431)
Discounted loans, net.................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost
or market(3)............................. 260,804 18,597 --
Real estate owned, net.................... 2,514 4,964 1,208
Deposits, net............................. 487,535 303,524 196,289
Borrowings................................ -- 13,000 21,500
Stockholders' equity(4)................... 34,554 7,039 6,793
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) Does not include Discounted Loans.
(3) Loans held for sale increased due to the Company's intent to sell
approximately $277.5 million of single-family residential loans in the
fourth quarter of 1996.
(4) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for Subordinated Debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
9
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets..................... (.22)% .24% (.92)%
Return on average equity..................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans......... 9.39% 9.57% 7.65%
Average equity to average assets............. 7.24% 2.72% 2.96%
Net interest spread(5)....................... 3.15% 3.08% 2.85%
Net interest margin(6)....................... 3.88% 3.72% 3.04%
Ratio of earnings to fixed charges(7):
Including interest on deposits.............. 1.04
Excluding interest on deposits.............. 2.19
Non-performing loans to loans at end of
period(2)................................... 9.11% 4.46% 5.95%
Allowance for loan losses to total loans at
end of period............................... 9.2% 7.6% 3.9%
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOAN ORIGINATIONS(8)......................... $ 2,280 $ 8,748 $4,345
LOAN ACQUISITION DATA(8):
Loans:
Single-family residential................... 221,581(9) 121,883 36,462
Multi-family residential.................... -- -- 61,247
Commercial and other mortgage loans......... -- 2,126 31,091
Consumer and other loans(10)................ 18,742 11,012 10,847
Discounted Loans............................. -- (11) 55,995 3,624
LOANS SOLD(8)................................ 27,965(9) 16,673 --
</TABLE>
- --------
(5) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by total average
earnings assets.
(7) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary gains
and cumulative effect of a change in accounting principle plus fixed
charges by (y) fixed charges. Fixed charges represent total interest
expense, including and excluding interest on deposits, as applicable, as
well as the interest component of rental expense. Earnings for the nine
months ended September 30, 1996 and the year ended December 31, 1994 were
inadequate to cover fixed charges by $5,734 and $1,778, respectively.
(8) Unpaid principal balances.
(9) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(10) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(11) Girard recently purchased or committed to purchase approximately $272
million unpaid principal amount of discounted residential mortgage loans.
See "Recent Developments."
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors before
deciding to make an investment in shares of Common Stock.
RECENT LOSSES
The Company reported a net loss of approximately $1.1 million for the nine
months ended September 30, 1996, principally due to provisions for estimated
losses on the Sub-Prime Auto Loans ($8.6 million) and the Inherited Loans
($4.8 million). A $1.4 million charge for the Savings Association Insurance
Fund (the "SAIF") special assessment also contributed to the year-to-date
loss. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Regulation--The Savings Banks--Recapitalization of
SAIF."
NO ASSURANCE AS TO CONSISTENCY OF RESULTS OF OPERATIONS
The results of operations of the Company may be significantly affected by
required provisions for estimated loan losses, the timing and size of such
provisions, variations in the volume of the Company's loan acquisitions, the
volume of loans resolved, the differences between the Company's cost of funds
and the average interest rates of the acquired loans, the effectiveness of the
Company's hedging strategies, the interest rate for Senior Securities (as
defined herein) issued in securitizations, and the timing and size of
securitizations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Since the Company is not acquiring the
assets and liabilities of WCC nor its servicing income, its result of
operations in the short term following the closing of the Common Stock
Offering in the Reorganization and the Notes Offering principally will be
determined by the results of operations of the Savings Banks. Additionally, it
is expected that the management of the Company will take approximately six
months or more to fully utilize (through leverage) the proceeds of the Common
Stock Offering and the Notes Offering.
RISKS RELATED TO RESULTS OF REGULATORY EXAMINATIONS
Following examinations of the Savings Banks and WAC by the OTS in 1994, 1995
and 1996, the OTS issued Reports of Examination that were critical of the
Savings Banks and WAC in a number of respects. These regulatory concerns
initially resulted in the OTS requiring First Bank to enter into a Supervisory
Agreement on June 8, 1995. The Supervisory Agreement required First Bank to
take actions to achieve compliance with certain laws and regulations and safe
and sound practices and to (a) develop plans and procedures concerning (i)
reduction of non-performing assets, (ii) internal asset review, (iii) asset
monitoring, (iv) appraisals, (v) loan underwriting, (vi) loan purchases; (b)
enhance recordkeeping; (c) develop requirements to ensure that the servicing
of loans by WCC is satisfactory; and (d) maintain its separate corporate
existence. In addition, the Supervisory Agreement required First Bank to
maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of the Assistant Regional Director of
the OTS-West Region.
RISKS RELATED TO IMPOSITION OF CEASE-AND-DESIST ORDERS
In July 1996, the OTS advised First Bank that it had not fully complied with
the terms of the Supervisory Agreement and that both Savings Banks had failed
in a number of respects to address regulatory concerns raised in the 1994 and
1995 examination reports. The OTS also expressed continuing concerns regarding
the adequacy of management of First Bank in light of its business activities.
As a result of these issues, the OTS replaced the Supervisory Agreement with a
Cease and Desist Order, effective October 31, 1996. Given the similar nature
of Girard's business activities, the OTS has also issued a Cease and Desist
Order to Girard similar to the Order issued to First Bank. The issuance of a
cease and desist order is generally evidence of an increased level of
regulatory concern regarding the subject institution.
11
<PAGE>
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well-capitalized" (as that term is
defined under the regulatory framework for prompt corrective action). The
Orders also require the Savings Banks to: (a) revise policies and procedures
concerning (i) internal asset reviews, (ii) the allowances for loan and lease
losses, (iii) loan purchases, (iv) internal audits and (v) hedging
transactions; (b) develop plans to augment the depth and expertise of the
management teams; (c) revise business plans; (d) modify certain policies
concerning the accounting for loan discounts; (e) improve monitoring of (i)
interest rate risk, (ii) asset classifications (e.g., as held for sale versus
held to maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and (h)
enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Savings Banks
submit to the OTS, by certain specified dates, various policies, plans and
reports on other actions to comply with the Orders. In some cases, OTS
approval of such information is required.
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging a "big six" accounting firm to review
management's implementation of corrective actions required by the OTS, (iii)
increasing the size of the internal asset review department, and (iv) revising
internal asset review policies. The Company is also in the process of hiring a
manager to complete the development and implementation of an effective asset
review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without
modifications. Additionally there can be no assurances that the OTS will not
impose further restrictions on the Savings Banks which could affect the
Savings Banks ability to expand their lending and loan acquisition activities.
NO ASSURANCES OF EXPANSION
A substantial amount of the net proceeds from the Common Stock Offering and
the Notes Offering will be invested by the Company to support future expansion
and growth of its lending activities and loan acquisition and servicing
activities. There can be no assurance that the Company will be able to
increase these activities in a manner which is consistent with management's
business strategy and objectives or otherwise successfully expand its
operations, which could have an adverse effect on the Company's results of
operations.
RISKS RELATED TO AGGRESSIVE EXPANSION STRATEGY
The Company, primarily through Girard, has had rapid growth during 1995 and
the first nine months of 1996. The Savings Banks' deposits increased from
$196.3 million at December 31, 1994 to $487.5 million at September 30, 1996.
More than 73% of Girard's total loan portfolio was acquired in the five
quarters ended September 30, 1996. Part of the Company's business strategy is
to continue to aggressively pursue the acquisition of Loan Portfolios, a
substantial portion of which are expected to be Loan Portfolios purchased at a
discount. Additionally, the Company may decide to purchase loans with respect
to which the Company does not have any prior loan acquisition experience. A
substantial increase in the Company's total loan portfolio or the purchase of
new categories of loans may increase the risk of loss on acquired loans and
could have an adverse affect on the Company's results of operations.
IMPACT OF OTS GROWTH RESTRICTIONS
Since June 30, 1995, First Bank has had limited ability to increase deposits
due to the provisions of an OTS Supervisory Agreement which prohibited First
Bank from increasing assets above specified levels. Accordingly,
12
<PAGE>
the Company's asset growth has principally been financed through the raising
of deposits at Girard. However, due to the issuance of the Orders, the Company
will not be able to utilize the Savings Banks as vehicles for growth until and
unless the Orders are lifted or modified. The Orders prohibit First Bank and
Girard from increasing their total assets, as measured at the end of each
calendar quarter, in excess of $145 million and $408 million, respectively,
plus total net interest credited on deposit liabilities.
IMPACT OF FAILURE TO COMPLY WITH OTS GROWTH RESTRICTIONS
Because the Orders prohibit the Savings Banks from increasing their total
assets above specified levels as measured at the end of each calendar quarter,
the Company may increase, and has currently increased total assets above such
specified levels and is obligated to reduce its total assets to such specified
levels at the end of the next calendar quarter. The increase of assets above
specified levels could place the Savings Banks at a competitive disadvantage
in the market place as they will have to dispose of certain assets prior to
the end of each calendar quarter. As a result, the Savings Banks may not be
able to obtain the best price or terms in connection with the disposition of
assets and may be required to dispose of assets at a loss. In addition,
failure to comply with the Orders at the end of any calendar quarter could
have significant adverse consequences to the Savings Banks, including
termination of FDIC insurance and civil money penalties.
RISK OF ADDITIONAL PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with the Company's acquisition of First Bank in 1993 and
Girard in 1994 the Company acquired a substantial volume of impaired loans
which required the Savings Banks to establish allowances for loan losses. For
the nine months ended September 30, 1996 and for each of the years ended
December 31, 1995, 1994, and 1993 First Bank was required to increase its
allowances for loan losses with respect to the Inherited Loans by $2.2
million, $2.6 million, $1.1 million and $1.1 million, respectively. For the
nine months ended September 30, 1996 and for each of the years ended December
31, 1995 and 1994, Girard was required to increase its allowances for loan
losses with respect to the Inherited Loans by $2.6 million, $0.9 million, $1.1
million, respectively.
In the fourth quarter of 1995 and the first quarter of 1996, the Savings
Banks acquired approximately $24.5 million of Sub-Prime Auto Loans. Under OTS
regulations, the Savings Banks have been required to write off as a loss all
auto loans in excess of 120 days delinquent, notwithstanding that the Savings
Banks retain rights in the cars as collateral. The aggregate portfolio of Sub-
Prime Auto Loans purchased is approximately 3,000 loans, approximately 50.7%
of which have become greater than 30 days delinquent. The Savings Banks
established reserves aggregating $8.6 million during the nine months ended
September 30, 1996, including a 10% reserve on such loans which are current.
As a result of the repossession of the collateral securing the loans, the
Savings Banks now hold approximately 317 cars as assets, which they plan to
sell as soon as practicable. The cars are not carried as assets on the
Company's balance sheet since the loans were written off in full.
Although the Company believes its allowances for loan losses are now
adequate, no assurance can be given that future events will not require
significant additional provisions for loan losses, for the Inherited Loans,
Sub-Prime Auto Loans or otherwise at the Savings Banks. Future additions to
these allowances may be required by the OTS, which periodically reviews the
Savings Banks' allowances for losses and the carrying value of assets.
Increases in the Company's or the Savings Banks' provisions for losses on
loans would adversely affect the Company's results of operations and could
result in losses in future periods. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
RISKS RELATED TO A FAILURE TO MAINTAIN REQUIRED CAPITAL LEVELS AT THE SAVINGS
BANKS
The Orders require both Savings Banks to maintain "well-capitalized" status
as measured at the end of each calendar quarter commencing December 31, 1996.
The Principals have injected approximately $30 million into WAC since the
acquisitions of the Savings Banks to fund the substantial asset growth and to
maintain required capital levels given reserves taken on the Inherited Loans
and the Sub-Prime Auto Loans.
13
<PAGE>
Failure to comply with the Orders could have significant adverse
consequences to the Savings Banks. To the extent that either or both of the
Savings Banks incur future losses, including losses as a result of required
additional loan loss provisions, the Company may be required to inject
additional capital into the Savings Banks to maintain compliance with the
Orders, whether or not such capital can more effectively be utilized for other
operations of the Company. Such additional capital contributions may have the
effect of reducing or eliminating the Company's overall net income or
requiring the Company to obtain additional debt or equity capital.
OTS regulations permit the OTS to impose higher capital requirements on a
savings bank if it determines that the capital level is or may become
inadequate in view of such bank's circumstances. In making such determination,
the OTS can take into account a number of factors, including the savings
bank's loan portfolio quality, recent operating losses or anticipated losses,
the condition of its holding company and whether the savings bank is receiving
special supervisory attention, among other matters. Should the OTS impose an
individual minimum capital requirement on either of the Savings Banks, the
Company would be required to inject additional capital into such Savings Bank,
whether or not such usage of capital is optimal for the Company.
RISKS RELATED TO EXTENSIVE USE OF FINANCIAL LEVERAGE
The Company's acquisitions of Loan Portfolios through WFC are expected to be
highly leveraged with full recourse to the Company. Performing Loan Portfolios
are currently expected to generally be financed approximately 95% with secured
borrowings and non-performing Loan Portfolios are currently expected to
generally be financed approximately 90% with secured borrowings. While the
highly leveraged nature of the Company's Loan Portfolios can offer the
opportunity for increased rates of return on equity, it involves a greater
degree of risk as relatively smaller declines in the value of a Loan Portfolio
can reduce or eliminate the Company's capital invested in such Loan Portfolio.
In addition, such declines can result in margin calls (i.e., demands by the
Company's lenders for additional cash or assets as security for their lending)
which can have an adverse impact on the Company's liquidity and capital
resources. The high degree of leverage on the Company's Loan Portfolios also
may make the Company more vulnerable to a downturn in business, real estate
values or the economy generally. An increase in market interest rates or a
decline in the value of the collateral may have an adverse effect on the
ability of the Company to satisfy its loan obligations and could therefore
have a material adverse effect on the Company's results of operations. The
Company's aggressive expansion strategy may result in the need for additional
debt and/or equity financing in the future. Any additional debt financing
could increase the Company's leverage over current levels.
UNCERTAINTIES AND RISKS OF DISCOUNTED LOAN ACQUISITION ACTIVITIES
Since 1993, WCC has aggressively sought to increase its discounted loan
portfolio. As of September 30, 1996, WCC's discounted loan portfolio included
$490.8 million gross unpaid principal balances of Discounted Loans. The
Company currently expects to continue to aggressively acquire non-performing
loan portfolios. Although management of the Company has been actively involved
in the acquisition of loans since 1991, the acquisition of non-performing
("discounted loans") and under-performing loans involves uncertainties and
risks, including without limitation the risk that the discount on the loans
acquired may not be sufficient to profitably resolve the loans.
Discounted Loans become real estate owned when the Company forecloses on the
collateral properties. The value of real estate owned properties can be
significantly affected by the economies and markets for real estate in which
they are located and require the establishment of provisions for losses to
ensure that they are carried at the lower of cost or fair value, less
estimated costs to dispose of the properties. In addition, there can be no
assurance that in the future the Company's real estate owned will not have
environmental problems which could materially adversely affect the Company's
financial condition or operations. See "Business--Asset Quality--Real Estate
Owned."
DEPENDENCE ON WILSHIRE CREDIT CORPORATION
Following the closing of the Common Stock Offering and the Notes Offering,
the Company will not have the necessary licenses to conduct loan origination
and loan servicing activities directly. Until necessary licenses
14
<PAGE>
are obtained, the Company will rely upon WCC to conduct loan origination and
loan servicing activities for the Company pursuant to certain agreements with
WCC. See "Certain Relationships and Related Transactions." Management expects
to obtain the necessary licenses within two to three years, however there can
be no assurances that management will obtain the licenses within such period,
which would extend the period of the Company's dependence on WCC.
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Andrew A. Wiederhorn, Chief Executive Officer of the
Company and Lawrence A. Mendelsohn, President of the Company. Although the
Company has been able to attract and retain other qualified management
personnel, the loss of either Andrew Wiederhorn's or Lawrence Mendelsohn's
services for any reason could have a material adverse effect on the Company.
The Company has entered into employment agreements with each of Messrs.
Wiederhorn and Mendelsohn, which contain non-competition agreements. See
"Management-- Employment Agreements." The Company also maintains "key man"
life insurance on the lives of Messrs. Wiederhorn and Mendelsohn.
RISKS RELATED TO MANAGEMENT OF GROWTH
The Company has undergone a period of significant growth, and further
expansion may significantly strain the Company's management, financial and
other resources. There is no assurance that the Company can manage its growth
effectively or that the Company will be able to attract and retain the
necessary personnel to meet its business objectives. If the Company is unable
to manage its growth effectively, the Company's business, operating results
and financial condition could be materially and adversely affected.
RISKS RELATED TO FUNDING SOURCES
The Company will fund the loans that it originates or purchases through
borrowings under warehouse and repurchase financing facilities with certain
national investment banking firms, brokered and wholesale deposits, secured
term loans and internally generated funds. To the extent that the Company is
not successful in maintaining or replacing its existing financing sources, it
would have to curtail its loan acquisition activities or sell loans, which may
have an adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RISKS RELATED TO RELIANCE ON WHOLESALE AND BROKERED DEPOSITS.
Though the Company as a whole has other sources of funding, the Savings
Banks currently use brokered and wholesale deposits as a significant source of
funds. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--Funding
Sources." The Savings Banks' funding strategy has been to offer deposit rates
above those customarily offered by banks and savings and loans in its market.
Because the Savings Banks compete for deposits primarily on the basis of
rates, the Savings Banks could experience difficulties in attracting deposits
to fund their operations if they could not continue to offer deposit rates at
levels above those of other banks and savings institutions. In addition, such
funding sources, when compared to retail deposits attracted through a branch
network, are generally more sensitive to changes in interest rates and
volatility in the capital markets and are more likely to be compared by the
investor to competing investments.
NO PRIOR EXPERIENCE WITH INTERNATIONAL OPERATIONS; START-UP PERIOD
The Company is expanding its activities internationally. Neither the Company
nor the Wilshire Private Companies has previously conducted operations outside
the United States. Risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
heightened risks of political and economic instability, difficulties in
managing international operations, potentially adverse tax consequences,
enhanced accounting and control expenses and the burden of complying with a
wide variety
15
<PAGE>
of foreign laws. There can be no assurance that one or more of these factors
will not have a materially adverse effect on the Company's European
operations. Since the Company's financial statements are stated in U.S.
Dollars, and since not all the Company's expenses are incurred in U.S.
Dollars, the Company's operations may be affected by fluctuations in currency
exchange rates.
The Company's international expansion will require significant capital which
will initially result in losses for such operations. As a result, the Company
does not expect its European operations to make a significant contribution to
revenues or income in the near term.
HIGH-RISK NON-TRADITIONAL BANKCARD PROCESSING ACTIVITIES
There is a higher risk of consumer charge-backs associated with non-
traditional mail order, telephone order and audiotext bankcard processing
activities because the consumer is not physically present at the time of the
transaction.
RISKS RELATED TO CHANGING ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon the general
economic conditions in the geographic areas in which it conducts substantial
business activities. Adverse changes in national economic conditions or in the
economic conditions of regions in which the Company conducts substantial
business or their real estate markets likely would 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 its collateral. Moreover, earthquakes and other
natural disasters could have similar effects.
RISKS RELATED TO CHANGES IN INTEREST RATES
The Company's operating results depend to a large extent on its net interest
income, which is the difference between the interest income earned on
interest-earning assets plus accreted purchase discount 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, as well as, among other things, the ability
of the Company to originate and purchase 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
Savings Banks' 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 actively monitors its assets and liabilities and employs a hedging
strategy which seeks to limit the effects of changes in interest rates on its
operations. An effective hedging strategy is complex and no hedging strategy
can completely insulate the Company from interest rate risks. The nature and
timing of and the counter-party to a hedging transaction may impact the
effectiveness of hedging strategies. Poorly designed strategies or improperly
executed transactions may increase rather than mitigate the risk. In addition,
hedging involves transaction and other costs, and such costs could increase as
the period covered by the hedging protection increases or in periods of rising
or fluctuating interest rates. Therefore, the Company may be prevented from
effectively hedging its interest rate risks, which could have a material
adverse effect on the Company's results of operations.
RISKS RELATED TO CONCENTRATION OF LOAN PORTFOLIO IN THE STATE OF CALIFORNIA
At September 30, 1996, approximately 54.9% of the Company's total loan
portfolio was in the state of California, which from time to time, including
recently, has experienced adverse economic conditions, including a decline in
real estate values. These factors have adversely affected borrowers' ability
to repay loans. Additional declines in the local economy, rising interest
rates and regulatory requirements could have a material adverse effect on the
Company's result of operations. The concentration of the Company's total loan
portfolio is expected to change in the near future. See "Recent Developments."
16
<PAGE>
REGULATION
The Company is currently classified as a multiple savings and loan holding
company under applicable law as a result of its ownership of the two Savings
Banks, First Bank and Girard. A savings and loan holding company which has
only one insured financial institution subsidiary (known as a "unitary"
savings and loan holding company) and which subsidiary qualifies as a
qualified thrift lender (as defined herein) generally has the broadest
authority to engage in various types of business activities with little to no
restrictions on its activities, except that historically savings and loan
holding companies have not been permitted to acquire or be acquired by an
entity engaged in securities underwriting or market making. Multiple savings
and loan holding companies are subject to activities limitations. In general,
a multiple savings and loan holding company (or subsidiary thereof that is not
an insured institution) may not commence or continue for more than a limited
period of time after becoming a multiple savings and loan holding company (or
a subsidiary thereof), any business activity other than (i) furnishing or
performing management services for a subsidiary insured institution; (ii)
conducting an insurance agency or an escrow business; (iii) holding, managing
or liquidating assets owned by or acquired from a subsidiary insured
institution; (iv) holding or managing properties used or occupied by a
subsidiary insured institution; (v) acting as trustee under deeds of trust;
(vi) those activities previously directly authorized by the OTS by regulation
as of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) subject to prior approval of the OTS, those activities
authorized by the Federal Reserve Board (the "FRB") as permissible investment
for bank holding companies. The Company is currently unable to merge First
Bank and Girard, thereby becoming a unitary savings and loan holding company
subject to fewer activities restrictions, until certain regulatory concerns
regarding the Savings Banks are resolved. There can be no assurance that the
Company will be able to merge the Savings Banks.
LIMITATIONS ON STOCK OWNERSHIP
With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be acting in concert from, directly or
indirectly, acquiring more than 10% of any class of voting stock of the
Company or obtaining the ability to control in any manner the election of the
directors or otherwise direct the management or policies of a savings and loan
holding company or a savings institution, without prior notice or application
to and approval of the OTS.
COMPETITION
The businesses in which the Company is engaged generally are highly
competitive. Many of the Company's competitors are significantly larger than
the Company and have access to greater capital and other resources. The
acquisition of loans is particularly capital-intensive and is typically based
on competitive bidding.
CONTROL OF CURRENT STOCKHOLDERS
Upon completion of the Common Stock Offering and assuming the Underwriters'
over-allotment option is not exercised, certain executive officers and
directors of the Company will have approximately 78% of the combined voting
power of all outstanding shares of Common Stock of the Company. As a result,
these stockholders, acting together, would be able to effectively control
virtually all matters requiring approval by the stockholders of the Company.
This voting control may have the effect of discouraging offers to acquire the
Company because the consummation of any such acquisition would require the
consent of Andrew A. Wiederhorn and Lawrence A. Mendelsohn.
ABSENCE OF A PRIOR MARKET FOR THE COMMON STOCK
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. The Company has applied for quotation of the Common Stock on
Nasdaq under the symbol "WFSG." Any approval of such application will be
subject to the Company's compliance with certain requirements of the NASD,
including, among other requirements, a requirement that there be at least two
market makers for the Common Stock and at least 400 stockholders of record.
Although the Company will use its best efforts to encourage and assist market
17
<PAGE>
makers in establishing and maintaining a market for the Common Stock in the
over-the-counter market, there can be no assurance that there will be one or
more other market makers for the Common Stock, or that the Company will be
able to comply with the number of stockholders and other requirements of the
NASD for quotation of the Common Stock on the Nasdaq National Market.
Moreover, even if such requirements are met, there can be no assurance that an
established and liquid trading market will develop or that, if developed, it
will be sustained, especially given the small size of the Common Stock
Offering.
The initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company and the Representative and may
not be indicative of the prices at which the Common Stock will trade after the
Common Stock Offering. See "Underwriting." Moreover, there may be significant
volatility in the market price for the Common Stock after the Common Stock
Offering. Quarterly operating results of the Company, changes in conditions in
the economy or the financial services industry or other developments affecting
the Company could cause the market price of the Common Stock to fluctuate
substantially.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of the
Common Stock or the availability of the Common Stock for future sales, will
have on the market price of the Common Stock prevailing from time to time.
Upon completion of the Common Stock Offering, 7,000,000 shares of Common Stock
will be issued and outstanding and 1,081,225 shares of Common Stock (assuming
the Underwriter's overallotment option is not exercised) will be issuable upon
the exercise of stock options that the Company has granted or agreed to grant.
Of such outstanding shares, 5,500,000 shares of Common Stock will be
"restricted" shares as defined in Rule 144 ("Rule 144") promulgated under the
Securities Act. Accordingly, such shares of Common Stock may not be sold
unless they are registered under the Securities Act or are sold pursuant to an
exemption from registration, including an exemption contained in Rule 144.
Under Rule 144, if at least three years have elapsed since the acquisition of
restricted shares from the Company or an affiliate of the Company (whichever
is later), a holder of such restricted shares that has not been an affiliate
of the Company for the three months preceding the sale will in general be
entitled to sell such shares in the public market, without restriction under
the Securities Act. The shares of Common Stock held by affiliates of the
Company as well as any restricted shares as to which the three-year period has
not yet elapsed, will be eligible for sale under Rule 144 if the minimum two-
year holding period thereunder for such shares has elapsed, subject to volume
and other restrictions. The Commission is considering shortening these
periods.
The Principals, who hold an aggregate of 5,425,457 shares have agreed not to
offer, sell, or otherwise dispose of any shares of Common Stock without the
prior written consent of the Representative for a period of 180 days after the
date of this Prospectus. Sales of substantial amounts of the Common Stock, or
the perception that such sales could occur, may affect the market price of the
Common Stock prevailing from time to time. See "Underwriting" and "Shares
Eligible for Future Sale." As of the date hereof, the Company had granted or
agreed to grant options to purchase an aggregate of approximately 1,081,225
shares of Common Stock, none of which are currently exercisable. Such
outstanding options will become exercisable 60 days after the closing of the
Common Stock Offering and the Notes Offering. Shortly after the date of this
Prospectus, the Company intends to file a registration statement on Form S-8
under the Securities Act registering approximately 1,750,000 shares of Common
Stock issuable upon the exercise of options granted under the Company's Stock
Incentive Plan pursuant to which the Company has granted or agreed to grant
options to purchase an aggregate of 1,050,000 shares of Common Stock, assuming
the Underwriters' overallotment option is not exercised. Upon effectiveness of
the registration statement, shares issued to nonaffiliates upon the exercise
of the options generally will be freely tradeable without restriction or
further registration under the Securities Act.
IMMEDIATE DILUTION
Purchasers of the Common Stock offered hereby will experience immediate
dilution in net tangible book value per share of Common Stock from the initial
public offering price. The initial public offering price is substantially
greater than the effective price at which the Company's existing stockholders
purchased their shares and the effective exercise price of the Company's
outstanding stock options. See "Dilution."
18
<PAGE>
THE COMPANY
GENERAL
WFSG was recently formed as a financial services holding company for a group
of companies previously held as a part of, and operated by, the Wilshire
Companies. As part of the Reorganization, the Wilshire Private Companies,
including WCC, will not become subsidiaries of WFSG and will remain privately
held. The Company will engage in a wide variety of financial activities,
including the acquisition, origination, ownership and securitization of Loan
Portfolios, banking and non-traditional bankcard processing. The Company, as a
savings and loan holding company, is subject to regulation by the OTS.
Prior to the Reorganization, the Wilshire Companies operated principally
through two separate companies: (i) WCC, which conducted the servicing and a
portion of the loan acquisition activities; and (ii) WAC, the holding company
for the Savings Banks. The Savings Banks are subject to regulation by the OTS,
as their chartering authority, and by the FDIC as a result of their membership
in the SAIF, which insures the Savings Banks' deposits up to the maximum
extent permitted by law. The Savings Banks are also members of the Federal
Home Loan Bank ("FHLB") of San Francisco, one of 12 regional banks which
comprise the FHLB system.
The Wilshire Companies began in 1987 as an equipment leasing company
primarily involved in leasing cellular phones. WCC was formed in May 1989 to
manage the Wilshire Companies' activities in the loan and lease servicing
business and to service a third party's heavy industrial equipment leasing
portfolio which consisted of leases of containers, railroad cars and other
similar equipment. During the early 1990s, the Wilshire Companies sought to
take advantage of the general decline in asset quality of financial
institutions in many areas of the country and the large number of failed
savings institutions during this period by acquiring Loan Portfolios from the
RTC, the FDIC and private sellers such as banks, thrifts, finance companies
and leasing companies and selling participations in such Loan Portfolios to
institutional investors while retaining the servicing rights and a
participation in the overall return on such Loan Portfolios. The Principals
purchased First Bank and Girard through WAC in October 1993 and November 1994,
respectively, using funds loaned to them by WCC. The Savings Banks were
acquired to provide a deposit-based funding source for the loan purchase
activities of the Wilshire Companies. Both of the Savings Banks were acquired
at substantial discounts to their respective book values, reflecting the poor
quality of their assets and, in the case of First Bank, an expected imminent
regulatory takeover. More recently, the Company decided to expand its loan
acquisitions and servicing activities to encompass the United Kingdom and
France with a view towards future expansion in Western Europe. See "Business--
European Operations."
THE REORGANIZATION
Following the Reorganization, the Company will be the holding company for
WAC and the Savings Banks and its other subsidiaries will include WFC, a
company formed to continue the loan acquisition and loan origination
businesses of the Wilshire Companies following the Common Stock Offering and
the Notes Offering, and WSC, a company formed to continue the loan servicing
business of the Wilshire Companies following the receipt of necessary
licenses. In the Reorganization, the Wilshire Private Companies, including WCC
will not become subsidiaries of the Company or transfer any assets or
liabilities to the Company. WCC is not being included in the new public entity
due to certain tax considerations and to allow WCC to retain sufficient assets
and servicing rights to retire the Shareholder Loans made to the Principals to
fund acquisitions of, and certain capital contributions to, the Savings Banks.
The Wilshire Private Companies are Subchapter S corporations under the Federal
tax code, and the taxable income of the corporations is passed through to the
shareholders (Messrs. Wiederhorn and Mendelsohn) and reported in the
shareholders' individual tax returns. Contribution of the Wilshire Private
Companies, or of certain of the assets of the Wilshire Private Companies, to
the new public entity, would have triggered taxable gains and have adverse tax
consequences to the shareholders. WCC will cease to acquire new product or
servicing for its own account, but will continue to service and liquidate its
existing portfolio of loans. New loan acquisitions and originations will be
conducted by WFC. For a period of two to three years after the closing of the
Common Stock Offering and the Notes Offering, while WSC is in the process of
obtaining the relevant licensing approvals for its servicing activities, WCC
will continue to service
19
<PAGE>
loans for the Company at market rates. Following such period, WSC will
commence servicing loans for the Company and WCC, until such time as WCC has
liquidated its existing portfolio of loans. See "Certain Relationships and
Related Transactions." In addition, WCC and the Principals have agreed not to
compete with the Company with respect to the acquisition of Loan Portfolios.
WCC will continue to operate its other businesses and may in the future enter
into other lines of business.
The Company's executive offices are located at 1776 SW Madison St.,
Portland, Oregon 97205, and the telephone number of its executive offices is
(503) 223-5600 and its facsimile number is (503) 223-8799.
RECENT DEVELOPMENTS
LOAN ACQUISITIONS
During October 1996, the Wilshire Private Companies acquired or committed to
acquire four Loan Portfolios aggregating $311.0 million principal amount, all
of which were or will be acquired by the Savings Banks.
In October 1996, Girard committed to purchase approximately $240.8 million
unpaid principal amount of discounted residential mortgage loans offered by
Citicorp North America Inc. and Citibank N.A. in a sealed bid auction (the
"Citicorp Portfolio"). Such transaction settled on November 1, 1996 (the
"Settlement Date"). Girard made a concurrent sale of approximately $38.8
million unpaid principal amount of the Citicorp Portfolio to an unaffiliated
third party on the Settlement Date resulting in a gain. The remainder of the
purchase price to Citicorp was financed by Girard under a master repurchase
agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC") pursuant to
which BSMCC has purchased certain performing and non-performing mortgage loans
and Girard has simultaneously agreed to repurchase such loans on a specified
date. The Company currently expects that Girard will repay such financing by
selling certain performing residential mortgage loans to WFC, which in turn is
expected to securitize such loans.
In October 1996, Girard acquired approximately $38.2 million in unpaid
principal amount of discounted residential mortgage loans from a successful
bidder in an auction conducted by HUD. Girard also agreed to acquire in
December 1996 approximately $31.9 million in unpaid principal amount of
discounted residential mortgage loans to be sold by a successful bidder in an
auction conducted by HUD.
As a result, on completion of such series of transactions, Girard will have
purchased approximately $272 million of unpaid principal balance discounted
residential mortgage loans and sold an equivalent market value of performing
residential mortgage loans. Although the Orders prohibit Girard from
increasing its total assets above $408 million, the amount of total assets is
only measured on a quarterly basis. Therefore, Girard may increase its assets
so long as at the end of a quarter the assets are not in excess of the amount
specified by the OTS. The Company had extensive negotiations with the OTS in
connection with the issuance of the Orders during which the Orders were
revised to apply an end-of-the-calendar-quarter test and to allow the Company
to increase total assets above specified limits provided that the Company
meets the test as of the end of the calendar quarter. The Company has
subsequently confirmed this practice in conversations with the OTS prior to
bidding and upon the acquisition of the Citicorp Portfolio.
WFC has also agreed to acquire approximately $106 million unpaid principal
amount of home equity loans, second lien mortgages, consumer loans and
Subordinate Securities (the "Institutional Portfolio") from a major
institutional investor (the "Institutional Investor") at a discount. The
settlement of this transaction is expected to occur in the first quarter of
1997. WCC receives a small percentage of the initial cash flow and a portion
of the profits as a servicing fee, which servicing fee will be assigned by WCC
to WSC prior to the sale of the Institutional Portfolio to WFC.
ACQUISITION OF SERVICING RIGHTS
In October 1996, the Company committed to acquire the servicing rights to a
portfolio of approximately $292 million unpaid principal amount of residential
mortgage loans offered by Merrill Lynch Credit Corporation through a
competitive bid (the "Merrill Portfolio") and the servicing transfer is
expected to be completed in the fourth quarter of 1996. The Company is
expected to retain WCC as a subservicer of the Merrill Portfolio at below-
market rates.
20
<PAGE>
EUROPEAN EXPANSION
The Company has agreed in principal with a major U.S. investment bank (the
"J.V. Partner") to form a joint venture to service residential mortgage loans
in the United Kingdom. Under the preliminary terms of the proposed joint
venture, the Company would acquire a 50% interest in a United Kingdom
servicing company (the "U.K. Servicer") for a nominal amount. The Company and
the J.V. Partner would each appoint three directors, and the Company would
manage the day-to-day operations of the U.K. Servicer. Each of the Company and
the J.V. Partner are expected to agree to use the U.K. Servicer to service any
U.K. residential mortgage loans acquired by such party or mortgage loans
included in securitizations placed by the J.V. Partner to the extent that
seller of such loans does not retain servicing. At September 30, 1996, the
U.K. Servicer serviced approximately (Pounds)500 million (as of September 30,
1996 approximately US$780 million (source: Bloomberg Symbol BPUS)) principal
amount of loans (or approximately 9,000 loans). The Company is currently
negotiating the definitive terms of the joint venture with the J.V. Partner
and expects that definitive documents will be executed in the fourth quarter
of 1996 or the first quarter of 1997. There can be no assurance, however, that
this joint venture will be completed, or as to the terms on which it may be
completed.
21
<PAGE>
USE OF PROCEEDS
Net proceeds to be received by the Company from the Common Stock Offering
currently are estimated to be $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($
million, if the Common Stock Underwriters' over-allotment option is exercised
in full). Net proceeds to be received by the Company from the Notes Offering
currently are estimated to be $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($ million,
if the Notes Underwriters' over-allotment is exercised in full).
Substantially all of the net proceeds of the Common Stock Offering and Notes
Offering will be used for leveraged acquisitions of Performing and Discounted
Loan Portfolios (primarily single-family and multi-family residential secured
by real estate) in the U.S. and Western Europe. Performing Loan Portfolios are
expected to generally be financed approximately 95% with secured borrowings
and Discounted Loan Portfolios are expected to generally be financed
approximately 90% with secured borrowings. Although the Company expects to
utilize the net proceeds to acquire approximately equal amounts of Performing
and Discounted Loan Portfolios, market conditions may impact the composition
of the Company's loan acquisitions. In addition, the Company expects that
approximately $5 million of the net proceeds from the Common Stock Offering
and the Notes Offering will be for general corporate purposes, including
expansion into Western Europe. Such net proceeds will give the Company
increased flexibility in conducting the businesses in which it is engaged,
including the acquisition and resolution of Discounted Loans and other loans.
The Company expects that it will take approximately six months or more to
fully utilize the net proceeds of the Common Stock Offering and Notes
Offering.
DIVIDEND POLICY
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate paying any dividends on the Common
Stock in the foreseeable future. As a holding company, the ability of the
Company to pay dividends is dependent upon the receipt of dividends or other
payments from its subsidiaries. There are various regulatory restrictions on
the ability of the Savings Banks to pay dividends or make other distributions
to the Company. See "Regulation--The Savings Banks--Restrictions on Capital
Distributions" and "--Affiliate Transactions." In addition, the Company is
subject to certain restrictions on distributions to stockholders under the
indenture relating to the Notes. Pursuant to the Indenture the Company may not
make any Restricted Payments (which term includes dividends on the Common
Stock) upon the occurrence of a Default or Event of Default or the failure of
the Company to comply with certain other covenants. See "Description of Notes
Offering." Any determination to pay dividends in the future will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition, contractual
restrictions, and other factors deemed relevant at that time by the Company's
Board of Directors.
22
<PAGE>
DILUTION
The net book value of the Company's Common Stock as of September 30, 1996
was $34.6 million or approximately $6.28 per share. Net tangible book value
per share represents the amount of the Company's stockholders' equity, less
intangible assets, divided by shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Common
Stock Offering and the pro forma net tangible book value per share of Common
Stock immediately after the completion of the Common Stock Offering. Shares
used in the computation of per share amounts below include 5,500,000 shares
outstanding as of September 30, 1996 and 1,500,000 shares of Common Stock
issued in the Common Stock Offering. After giving effect to the sale by the
Company of 1,500,000 shares of Common Stock in the Common Stock Offering and
$75 million principal amount of Notes in the Notes Offering and the
application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
$50.7 million or $7.24 per share. This represents an immediate increase in net
tangible book value of $.96 per share to existing stockholders and an
immediate dilution in net tangible book value of $4.76 per share to purchasers
of Common Stock in the Common Stock Offering, as illustrated in the following
table:
<TABLE>
<S> <C>
Assumed Common Stock Offering price per share(1)....................... $12.00
Pro-forma net tangible book value per share as of September 30,
1996(2)............................................................. $ 6.28
Increase per share attributable to new investors..................... $ .96
Pro forma net tangible book value per share after the Common Stock Of-
fering and Notes Offering(3).......................................... $ 7.24
Dilution per share to new investors.................................... $ 4.76
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and estimated expenses
of the Common Stock Offering payable by the Company.
(2) Outstanding shares as of September 30, 1996 are based on Common Stock
issued, at the date when WFSG was formed, to existing shareholders of WAC
and the Savings Banks in exchange for their Common Stock of those
entities. WFSG was actually formed subsequent to September 30, 1996.
(3) Excludes 1,050,000 shares of Common Stock issuable upon the exercise of
options to be granted at the Closing of the Common Stock Offering and
Notes Offering pursuant to the Incentive Stock Plan and 31,225 shares of
Common Stock issuable upon the exercise of options. See "Management--
Incentive Stock Plan--Options to be Granted at Closing."
The following table summarizes on a pro forma as adjusted basis as of
September 30, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share of the Common Stock paid by the existing stockholders and the new
investors in the Common Stock Offering.
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE PUBLIC
OFFERING TOTAL CONSIDERATION AVERAGE
----------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).... 5,500,000 78.57% 34,554 65.75% $ 6.28
New Investors............... 1,500,000 21.43% 18,000 34.25% $12.00
--------- ----- ---------- --------- ------
Total..................... 7,000,000 100% 52,554 100%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted as of that date to give effect to (i) the
Common Stock Offering and the Notes Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds"; (ii) no exercise of
any over-allotment option; and (iii) the Reorganization pursuant to which
certain of the Wilshire Companies became subsidiaries of the Company. This
information below should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto which are included elsewhere
herein. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Use of Proceeds" and "Management--Executive
Compensation" and "--Incentive Stock Plan."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Repurchase agreements.............................. $ -- $ --
Long-term debt:
% Notes due 2003.................................. -- 75,000
---------- -----------
Total.......................................... -- 75,000
---------- -----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; no shares outstand-
ing............................................... -- --
Common Stock, par value $0.01 per share; 50,000,000
shares authorized; 5,500,000 shares issued and
outstanding (actual); 7,000,000 shares issued and
outstanding (as adjusted) for the Common Stock Of-
fering(1)......................................... 35,550 50,690
Retained earnings (accumulated deficit)............ (827) (827)
Unrealized gain on available for sale securities... (169) (169)
---------- -----------
Total stockholders' equity..................... 34,554 50,694
---------- -----------
Total capitalization........................... $ 34,554 $ 125,694
========== ===========
Savings Banks' Regulatory Capital:
Regulatory capital ratios of First Bank
Tangible capital................................. 6.0% 6.0%
Core capital..................................... 5.9% 5.9%
Total capital to risk-weighted assets............ 10.0% 10.0%
Regulatory capital ratios of Girard
Tangible capital................................. 6.8% 6.8%
Core capital..................................... 7.0% 7.0%
Total capital to risk-weighted assets............ 11.0% 11.0%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
24
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables present Selected Financial Information for the Company
at the dates and for the periods indicated. The historical income statement
and balance sheet data at and for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994 have been derived from the Audited
Consolidated Financial Statements included elsewhere in this Prospectus.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in
a purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC, Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated."
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the
Audited Financial Statements, the "Consolidated Financial Statements") and
include all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentations to the Company's
results of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending
December 31, 1996. The Summary Consolidated Financial Information should be
read in conjunction with, and is qualified in its entirety by reference to,
the Consolidated Financial Statements and related notes as set forth elsewhere
herein.
25
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1996 1995 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income:
Loans..................... $ 31,686 $ 15,224 $ 21,821 $ 7,923
Mortgage-backed
securities............... 1,280 1,099 1,359 1,361
Investments and federal
funds sold............... 1,171 729 1,201 285
-------- -------- -------- --------
Total interest income..... 34,137 17,052 24,381 9,569
-------- -------- -------- --------
Interest expense:
Deposits.................. 17,448 9,979 13,944 5,017
Borrowings................ 2,144 432 537 440
-------- -------- -------- --------
Total interest expense.... 19,592 10,411 14,481 5,457
-------- -------- -------- --------
Net interest income........ 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans........... 15,751 3,221 4,266 2,173
-------- -------- -------- --------
Net interest (loss) income
after provision for
estimated losses on
loans..................... (1,206) 3,420 5,634 1,939
-------- -------- -------- --------
Other Income:
Bankcard income(1)........ 5,078 3,202 4,694 635
Bankcard processing
expense.................. (3,865) (2,408) (3,462) (274)
Gain on sale of loans..... 1,983 981 642 --
Loan fees and charges..... 1,217 522 610 43
Trading account--
unrealized gain.......... 1,601 -- -- --
Gain on sale of mortgage-
backed securities
available for sale....... -- -- 14 54
Amortization of deferred
credits.................. 346 346 460 388
Other, net................ 17 91 149 381
-------- -------- -------- --------
Total other income........ 6,377 2,734 3,107 1,227
-------- -------- -------- --------
Other Expenses:
Compensation and employee
benefits................. 2,955 1,716 2,516 1,922
FDIC insurance premiums... 2,066 444 721 261
Occupancy................. 218 221 385 319
Professional services..... 572 461 1,028 507
Data processing and
equipment rentals........ 189 146 232 162
Real estate owned, net.... 231 46 170 241
Loan service fees and
expenses................. 3,522 1,015 1,958 242
Other general and
administrative expenses.. 1,152 1,198 1,092 1,290
-------- -------- -------- --------
Total other expenses...... 10,905 5,247 8,102 4,944
-------- -------- -------- --------
(Loss) income before income
tax (benefit) provision... (5,734) 907 639 (1,778)
Income tax (benefit)
provision................. (4,652) 68 47 (526)
-------- -------- -------- --------
Net (loss) income.......... $ (1,082) $ 839 $ 592 $ (1,252)
======== ======== ======== ========
(Loss) earnings per
share(2).................. $ (14.05) $ 35.56 $ 25.09 $(135.43)
======== ======== ======== ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $533,109 $341,454 $230,636
Cash and due from banks...................... 11,231 3,382 4,880
Federal funds sold........................... 9,300 1,100 3,950
Trading account securities................... 7,092 -- --
Investment securities held to maturity, at
amortized cost.............................. 7,425 6,470 4,505
Mortgage-backed securities available for
sale, at fair value......................... 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost........................... 22,380 13,119 14,439
Loan portfolio, net(3)....................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans................................. 10,767 20,210 2,995
Unaccreted discount......................... (1,632) (3,008) (470)
Allowance for loan losses................... (5,716) (3,855) (431)
Discounted loans, net....................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost or
market...................................... 260,804 18,597 --
Stock in FHLB of San Francisco, at cost...... 2,911 1,421 1,612
Real estate owned, net....................... 2,514 4,964 1,208
Leasehold improvements and equipment......... 336 275 167
Due from affiliate(4)........................ 8,357 4,514 4,062
Accrued interest receivable.................. 4,268 3,042 1,599
Prepaid expenses and other assets............ 3,887 1,724 1,026
Income taxes receivable, net................. 5,422 1,589 774
Deposits..................................... 487,535 303,524 196,289
Borrowings................................... -- 13,000 21,500
Due to affiliates(5)......................... 2,286 759 652
Deferred credits(6).......................... 832 1,134 1,772
Subordinated debt(7)......................... -- 11,000 --
Minority interest............................ 277 600 574
Preferred stock in subsidiary held by oth-
ers......................................... -- -- 1,000
Accounts payable and other liabilities....... 7,625 4,398 2,056
Stockholders' equity(7)...................... 34,554 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1995 1994
------------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets....................... (.22)% .24% (.92)%
Return on average equity....................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans........... 9.39 % 9.57% 7.65 %
Average equity to average assets............... 7.24 % 2.72% 2.96 %
Net interest spread(8)......................... 3.15 % 3.08% 2.85 %
Net interest margin(9)......................... 3.88 % 3.72% 3.04 %
Ratio of earnings to fixed charges(10)(11):
Including interest on deposits................ 1.04
Excluding interest on deposits................ 2.19
Non-performing loans to loans at end of
period(3)..................................... 9.11 % 4.46% 5.95 %
Allowance for loan losses to total loans at end
of period..................................... 9.2 % 7.6% 3.9 %
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
LOAN ORIGINATIONS............................... $ 2,280 $ 8,748 $ 4,345
LOAN ACQUISITION DATA:
Loan Portfolio:
Single-family residential...................... 221,581(12) 121,883 36,462
Multi-family residential....................... -- -- 61,247
Commercial and other mortgage loans............ -- 2,126 31,091
Consumer and other loans(13)................... 18,742 11,012 10,847
Discounted Loans:
Single-family residential...................... -- (14) 49,662 1,542
Multi-family residential....................... -- (14) 96 --
Commercial and other mortgage loans............ -- 869 1,843
Consumer and other loans....................... -- 5,368 239
LOANS SOLD...................................... 27,965 16,673 --
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) (Loss) earnings per share amounts are based on weighted average number of
shares outstanding of WAC during the applicable periods. See Note 1 in
the Company's Consolidated Financial Statements. The capital structure of
WAC is substantially different from that of WFSG, which did not exist at
or prior to September 30, 1996. There were no dividend payments on common
stock by WAC during any periods presented.
(3) This item does not include Discounted Loans.
(4) Due from affiliate consists of amounts received by WCC from mortgagors on
loans it is servicing for the Company and has not yet transferred to the
Company.
(5) Due to affiliates primarily consists of amounts owed to WCC for WAC
operating expenses paid by WCC.
(6) Deferred credits represent negative goodwill--the excess of the net fair
values of the Savings Banks' assets and liabilities over the purchases
prices paid by WAC for the Savings Banks.
(7) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
(8) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(9) Net interest margin represents net interest income divided by total
average earning assets.
(10) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary
gains and cumulative effect of a change in accounting principle plus
fixed charges by (y) fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense. Earnings
for the nine months ended September 30, 1996 and the year ended December
31, 1994 were inadequate to cover fixed charges by $5,734 and $1,778,
respectively.
(11) Pro forma ratio of earnings to fixed charges for the nine months ended
September 30, 1996 and the year ended December 31, 1995 were less than
1:1.
(12) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(13) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(14) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Financial Information and the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company's net interest income has increased substantially during the
last three years primarily due to the growth in the Company's total loan
portfolio resulting from the Company's strategy of aggressively acquiring Loan
Portfolios and by the acquisition of First Bank in 1993 and Girard in 1994.
The Company's total loan portfolio, net as of September 30, 1996 and December
31, 1995 and 1994 was $441.5 million, $290.8 million and $181.5 million,
respectively. Net interest income for the nine month period ended September
30, 1996 and for the years ended December 31, 1995 and 1994 was $14.5 million,
$9.9 million and $4.1 million, respectively.
The Company has reported net losses and reduced net income in recent periods
primarily as a result of significant additions to the Company's provision for
estimated losses on loans, primarily Inherited Loans and Sub-Prime Auto Loans.
The Company reported a net loss of approximately $1.1 million for the nine
months ended September 30, 1996, compared to net income in the similar prior
year period of $0.8 million. The Company reported net income of $0.6 million
for the fiscal year ended December 31, 1995 compared to a loss in calendar
1994 of $1.3 million.
The Company's net losses during the first nine months of fiscal year 1996
and the fiscal year 1994 and lower net income in fiscal year 1995 resulted
primarily from provisions for losses on loans. Provisions for loan losses
totaled approximately $15.8 million in the first nine months of 1996, $4.3
million for the year ended December 31, 1995 and $2.2 million in 1994. These
loss provisions resulted primarily from deterioration in the Company's
Inherited Loans and Sub-Prime Auto Loans. These loss provisions reflect the
poor quality of the assets of the Savings Banks at the time they were acquired
by the Company and loan loss provisions taken with respect to Sub-Prime Auto
Loans. Following the addition of approximately $4.5 million of reserves taken
in the third quarter of 1996, allowances for Sub-Prime Auto Loans as a
percentage of the unpaid principal balances were 52.3% at September 30, 1996.
PRINCIPAL SOURCES OF REVENUE
The principal component of the Company's revenues is interest income, with
lesser contributions from gains on securitizations and income from bankcard
processing operations. The following table sets forth the components of the
Company's revenues for the periods indicated:
SOURCES OF REVENUE
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------
1996 1995 1995 1994
-------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.......................... $34,137 $17,052 $24,381 $ 9,569
Gains on sale of loans................... 1,983 981 642 --
Bankcard income.......................... 5,078 3,202 4,694 635
Other, net(1)............................ 3,181 959 1,233 866
-------- -------- ------- -------
Total revenue.......................... $44,379 $22,194 $30,950 $11,070
======== ======== ======= =======
</TABLE>
- --------
(1) Other consists primarily of loan fees and charges, the amortization of
negative goodwill and unrealized gain on trading securities.
Net Interest Income. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received plus accreted purchase discount from its assets and
29
<PAGE>
the interest expense paid on its interest-bearing liabilities. Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities, the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities and timing of receipt of purchased principal discount. With
respect to the Company's Discounted Loan portfolio, the Company treats
accreted discount on Discounted Loans as interest for accounting purposes.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-
bearing liabilities, expressed in dollars and rates, and the net interest
spread and net interest margin. Information is based on quarterly balances
during the indicated periods.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994
-------------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ------------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 28,934 $ 1,280 5.90% $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79%
Loan portfolio(2)....... 449,947 31,686 9.39 227,970 21,821 9.57 103,583 7,923 7.65
Investment securities
and other.............. 21,242 1,171 7.35 14,216 1,201 8.45 7,969 285 3.58
-------- ------- -------- ------- -------- ------
Total interest-earning
assets, interest
income................. 500,123 34,137 9.10 266,240 24,381 9.16 135,067 9,569 7.08
Non-interest earning
cash................... 5,218 -- -- 1,868 -- -- 2,053 -- --
Allowance for loan
losses and unaccreted
discount............... (50,732) -- -- (31,845) -- -- (8,595) -- --
Other assets............ 29,225 -- -- 15,277 -- -- 7,646 -- --
-------- ------- -------- ------- -------- ------
Total assets........... $483,834 $34,137 $251,540 $24,381 $136,171 $9,569
======== ======= ======== ======= ======== ======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $405,549 $17,448 5.74 $231,555 $13,944 6.02 $118,277 $5,017 4.24
FHLB advances........... 1,778 105 7.87 1,381 104 7.53 5,916 228 3.85
Subordinated debentures
and other interest-
bearing obligations.... 31,697 2,039 8.58 5,383 433 8.04 4,757 212 4.46
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities, interest
expense............... 439,024 19,592 5.95 238,319 14,481 6.08 128,950 5,457 4.23
Non-interest bearing
deposits............... 2,202 -- -- 2,196 -- -- 1,537 -- --
Escrow deposits......... 225 -- -- 106 -- -- 74 -- --
Other liabilities....... 7,364 -- -- 4,077 -- -- 1,582 -- --
-------- ------- -------- ------- -------- ------
Total liabilities...... 448,815 19,592 244,698 14,481 132,143 5,457
Stockholders' equity.... 35,019 -- -- 6,842 -- -- 4,028 -- --
-------- ------- -------- ------- -------- ------
Total liabilities and
stockholders' equity.. $483,834 $19,592 $251,540 $14,481 $136,171 $5,457
======== ======= ======== ======= ======== ======
Net interest income..... $14,545 $ 9,900 $4,112
Net interest spread..... 3.15 3.08 2.85
Net interest margin..... 3.88 3.72 3.04
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 113.9% 111.7% 104.7%
======== ======== ========
</TABLE>
- --------
(1) Presented on an annualized basis.
(2) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
30
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS. YEAR ENDED DECEMBER 31,
YEAR ENDED ------------------------------------------------
DECEMBER 31, 1995 1995 VS. 1994 1994 VS. 1993
------------------------- ----------------------- -----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------------- ----------------------- -----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
------ -------- ------- ------ ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed
securities............ $ (14) $ (65) $ (79) $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... (197) 10,062 9,865 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other............. 11 (41) (30) 581 335 916 (112) 344 232
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-earning
assets................ (200) 9,956 9,756 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing Liabil-
ities:
Interest-bearing depos-
its................... (236) 3,740 3,504 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... -- 1 1 (626) 502 (124) -- 228 228
Other interest-bearing
obligations........... 22 1,584 1,606 191 30 221 146 (19) 127
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-bearing
liabilities........... (214) 5,325 5,111 2,288 6,736 9,024 1,514 3,094 4,608
------ -------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income.... $ 14 $ 4,631 $ 4,645 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
====== ======== ======= ====== ======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996
VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $7.9 million or
118.9% during the nine months ended September 30, 1996, as compared to the
same period in the prior year. This increase resulted from an approximately
$17.1 million or 100.2% increase to interest income due to an approximately
$239.1 million or 91.6% increase in average interest-earning assets from
period to period. The increase in interest income was offset in part by an
approximately $9.2 million or 88.2% increase in interest expense due to an
approximately $216.8 million or 97.6% increase in average interest-bearing
liabilities, primarily certificates of deposit, and, to a lesser extent, a 21
basis point increase in the weighted average rate paid on interest-bearing
liabilities.
The increase in interest income during the nine months ended September 30,
1996, as compared to the same period in the prior year, reflects substantial
increases in the average balances of the loan portfolio. The Company's
business strategy currently contemplates continued strong growth in its total
loan portfolio, with a particular emphasis on increasing its Discounted Loan
portfolio. For information on the growth in the Company's total loan
portfolio, including its Discounted Loan portfolio, see "--Changes in
Financial Condition" below.
The average balance of the Company's interest-bearing liabilities increased
$216.8 million or 97.6% during the nine months ended September 30, 1996, as
compared to the same period in the prior year, as a result of the Savings
Banks' financing of growth of interest-bearing assets. As of the closing of
the Common Stock Offering, the Company will have extensive funding sources
available for investment and lending activities. See "Business--Funding
Sources."
31
<PAGE>
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provisions for losses on loans are charged to operations to maintain an
allowance for losses on each of the loan portfolio and the Discounted Loan
portfolio at a level which management considers adequate based upon an
evaluation of known and inherent risks in such loan portfolio and the
Discounted Loan portfolio, historical loss experience, current economic
conditions and other relevant factors. See "Business--Asset Quality--
Allowances for Loan Losses" for a discussion of management's methods of
estimating loan loss provisions.
The Company recorded provisions for estimated losses on loans totalling
approximately $15.8 million for the nine months ended September 30, 1996, as
compared to approximately $3.2 million for the comparable period in the prior
year, an increase of 389.0%. The following table sets forth the Company's
provision for estimated losses on loans for the nine months ended September
30, 1996:
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Inherited Loans.......................................... $ 4,774 30.3%
Sub-Prime Auto Loans..................................... 8,583 54.5%
Other Purchased Loans.................................... 2,394 15.2%
------- ------
Total provision for estimated losses on loans............ $15,751 100.0%
======= ======
</TABLE>
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and the Savings Banks
concerning the appropriate provision for the Sub-Prime Auto Loans acquired by
the Savings Banks in the fourth quarter of 1995 and the first quarter of 1996.
The Company also made a provision of approximately $4.8 million in the nine
months ended September 30, 1996 related to Inherited Loans owned by First Bank
or Girard at the time the Savings Banks were acquired by the Company. Both
Savings Banks were acquired at substantial discounts to their respective book
values, reflecting the poor quality of their assets.
Although management attempts to utilize its best judgment in providing for
possible loan losses, changing economic and business conditions, fluctuations
in local markets for real estate, future changes in non-performing asset
trends, large movements in market interest rates or other factors could affect
the Company's future provisions for loan losses. In addition, the OTS, as an
integral part of its examination process, periodically reviews the adequacy of
the Bank's allowances for losses on loans and Discounted Loans and such agency
may require the Company to recognize changes to such allowances for losses
based on its judgment about information available to it at the time of
examination.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income (loss) after provision for estimated
losses on loans decreased 135.3% to a loss of approximately $(1.2) million for
the nine months ended September 30, 1996 from income of approximately $3.4
million for the same period in 1995. This decrease was due to the substantial
increase in provisions for estimated losses on loans.
32
<PAGE>
OTHER INCOME
The Company's other income was approximately $6.4 million for the nine
months ended September 30, 1996 compared to approximately $2.7 million for the
same period in the prior year, an increase of 133.3%. This increase was
primarily attributable to revenue growth in the Company's bankcard operation
and from gains on the sale of loans. The components of the Company's non-
interest income are reflected in the following table:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income................................ $ 5,078 $ 3,202
Bankcard processing expense.................... (3,865) (2,408)
Gain on sale of loans.......................... 1,983 981
Loan fees and charges.......................... 1,217 522
Amortization of deferred credits............... 346 346
Trading account-unrealized gain................ 1,601 --
Other, net..................................... 17 91
----------- -----------
Total other income........................... $ 6,377 $ 2,734
=========== ===========
</TABLE>
Bankcard Income and Processing Expense. The increase in other income for the
nine months ended September 30, 1996 was due in part to an increase of
approximately $1.9 million in bankcard income, from approximately $3.2 million
for the nine months ended September 30, 1995 to approximately $5.1 million for
the nine months ended September 30, 1996. The large increase in income from
the Company's bankcard operations was primarily due to the development of a
number of new accounts. Bankcard processing expense increased by approximately
$1.5 million from approximately $2.4 million for the nine months ended
September 30, 1995 to approximately $3.9 million for the nine months ended
September 30, 1996. This increase resulted primarily from an increase in
bankcard processing due to growth in merchant transactions evidenced by the
growth in bankcard income.
Gains on Sale of Loans. The increase in other income in 1996 was also due in
part to an increase of approximately $1.0 million in gains on sales of loans,
from $1.0 million for the nine months ended September 30, 1995 to
approximately $2.0 million for the nine months ended September 30, 1996. This
increase was due to gains from the securitization of approximately $33.1
million of non-performing and sub-performing mortgage loans and real estate
owned.
Gains or losses on Loan Portfolios sold through securitization transactions
are based on the difference between the cash proceeds received on the
certificates sold to outside investors (the "Senior Securities") and the
Company's cost basis allocated to the Senior Securities. The Company's cost
basis in Loan Portfolios sold is allocated between the Senior Securities and
the Subordinate Securities retained by the Company based on the relative fair
values of the two types of securities. The cost basis of the loans securitized
is determined by their acquisition cost (for purchased loans) or net carrying
value (for originated loans). The Company carries Subordinate Securities at
fair value. As such, the carrying value of these securities is impacted by
changes in market interest rates and prepayment and loss experiences of these
and similar securities. The Company determines the fair value of the
Subordinate Securities utilizing prepayment and credit loss assumptions
appropriate for each particular securitization. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
Other income also includes loan fees and charges (e.g. late fees, commitment
fees). Loan fees and charges increased approximately $0.7 million, from
approximately $0.5 million for the nine months ended September 30, 1995 to
approximately $1.2 million for the nine months ended September 30, 1996. The
increase was primarily due to an increase in loan volume.
33
<PAGE>
OTHER EXPENSE
The Company's other expenses totalled approximately $10.9 million for the
nine months ended September 30, 1996 compared to approximately $5.2 million
for the nine months ended September 30, 1995, an increase of 107.8%.
Loan Service Fees and Expenses. The largest component of other expenses in
1996 was loan service fees and expense which increased by approximately $2.5
million from approximately $1.0 million for the nine months ended September
30, 1995 to approximately $3.5 million for the nine months ended September 30,
1996. Loan servicing fees and charges are paid to WCC and include (a) "normal"
servicing fees, and (b) collection-related expenses incurred directly by WCC
and reimbursed by the Company. Servicing fees for Discounted Loans have been
based on a percentage of cash flows collected. Therefore, when Discounted
Loans are sold, servicing fees increase substantially. The Savings Banks'
volume of loans being serviced by WCC, and particularly the volume of
Discounted Loans, increased substantially during 1996 compared to 1995
resulting from substantial growth in the Savings Banks' total loan portfolio.
Also, due to a securitization of non-performing loans (primarily Discounted
Loans) in March 1996, higher fees associated with the accelerated cash flows
to the Savings Banks were paid to WCC in the first quarter. These factors
accounted for the increase in servicing fees and charges in the nine months
ended September 30, 1996 compared to the same period in 1995.
Compensation and Employee Benefits. Other expense relating to compensation
and employee benefits also increased from approximately $1.7 million for the
nine months ended September 30, 1995 to approximately $3.0 million for the
nine months ended September 30, 1996, an increase of approximately $1.3
million (or 72.2%). The increase in compensation and employee benefits during
this period reflected normal salary adjustments and an increase in the average
number of full-time equivalent employees from 37 for the nine months ended
September 30, 1995 to 48 for the nine months ended September 30, 1996,
reflecting the expansion of business activities, particularly loan acquisition
activities and the growth of non-traditional bankcard activities. In addition,
the Savings Banks' administrative offices were relocated to Portland, Oregon
in August 1996 which resulted in approximately $0.7 million of additional
employee compensation.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.4 million for the nine months ended September 30, 1995 to
approximately $2.1 million for the nine months ended September 30, 1996, an
increase of approximately $1.7 million (or 365.3%), as a result of growth in
deposits outstanding and the SAIF special assessment.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $4.7
million during the nine months ended September 30, 1996 compared to a
provision of less than $0.1 million during the nine months ended September 30,
1995. This increase was due primarily to assessment of the valuation
allowances against deferred tax assets. The Company's effective tax rate
amounted to (81.1%) and 7.5% during the nine months ended September 30, 1996
and 1995, respectively. Differences in the Company's effective tax rates in
recent periods compared to combined Federal and State statutory rates were
primarily attributable to changes in assessments of the realization of
deferred tax assets. Exclusive of such amounts, the Company's effective tax
rate amounted to (41%) and 41% during the nine months ended September 30, 1996
and 1995, respectively.
34
<PAGE>
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
NET INTEREST INCOME
The Company's net interest income was $9.9 million for fiscal year 1995
compared to $4.1 million for the fiscal year 1994, an increase of 140.8%. The
components of the Company's net interest income for these fiscal years are
discussed below.
Interest Income. The Company's interest income was approximately $24.4
million for fiscal year 1995 compared to $9.6 million for fiscal year 1994, an
increase of 154.8%. The increase in the Company's interest income from 1994 to
1995 was due primarily to an increase in interest received on loans from $7.9
million in 1994 to $21.8 million in 1995. The increase in interest received on
loans was a result of an increase in the gross principal amount of the
Company's total loan portfolio from $198.6 million in 1994 to $337.5 million
in 1995, an increase of 69.9%. The Savings Banks made substantial acquisitions
of Discounted Loans in June 1995 and performing single-family loans in the
fourth quarter of 1995. In addition, the Company acquired Girard in November
1994 and, as a result, the Company's 1994 results of operations only reflect
two months of Girard's operations while 1995 results reflect a full year of
operations by Girard. In addition, the average rate earned by the Company on
its interest-bearing assets increased from 7.08% in 1994 to 9.16% in 1995.
Interest Expense. The Company's interest expense was approximately $14.5
million for fiscal year 1995 compared to approximately $5.5 million in fiscal
year 1994, an increase of 165.4%. The increase in interest expense from 1994
to 1995 was due primarily to an increase in average certificates of deposit
outstanding from approximately $118.3 million in 1994 to approximately $231.6
million in 1995 (an increase of 104.4%), which occurred in order to fund the
growth of the loan portfolio noted above. In addition, interest expense
increased due to the inclusion of Girard's results of operations for the full
year ending December 31, 1995, compared to fiscal year 1994 which only
reflected two months of Girard's operations. In addition, the average interest
rate on the Company's borrowings increased from 4.23% to 6.08% from 1994 to
1995.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with its provision for estimated losses on loans the Company
recorded an expense totalling approximately $4.3 million for fiscal year 1995
compared to approximately $2.2 million for fiscal year 1994, an increase of
96.3%.
The increase in the provisions from 1994 to 1995 was primarily attributable
to higher provisions related to the Inherited Loans and having a full year of
Girard's operations presented in 1995. The increase in the provisions from
1994 to 1995 was also to a lesser degree attributable to the earthquake in
Southern California in January 1994, which affected delinquency and collateral
values in 1995. For a discussion of the Company's methods for establishing
provisions for loan losses, see "Business--Asset Quality--Allowances for Loan
Losses."
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased 190.6% to approximately $5.6 million for fiscal year 1995 from
approximately $1.9 million for fiscal year 1994.
35
<PAGE>
OTHER INCOME
The Company's other income was approximately $3.1 million for fiscal year
1995 compared to approximately $1.2 million for fiscal year 1994, an increase
of 153.2%. This increase was primarily attributable to growth in the Company's
bankcard operation and gains from the sale of loans. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other Income:
Bankcard income.................................... $ 4,694 $ 635
Bankcard processing expense........................ (3,462) (274)
Gain on sale of loans.............................. 642 --
Loan fees and charges.............................. 610 43
Gain on sale of mortgage-backed securities avail-
able for sale..................................... 14 54
Amortization of deferred credits................... 460 388
Other, net......................................... 149 381
----------- -----------
Total other income............................... $ 3,107 $ 1,227
=========== ===========
</TABLE>
The increase in other income in 1995 was due primarily to an increase of
approximately $4.1 million in bankcard income, from approximately $0.6 million
for fiscal year 1994 to approximately $4.7 million for fiscal year 1995. The
large increase in income from the Company's bankcard operations reflects a
full year of Bankcard operations in 1995 compared to a partial year for 1994,
since bankcard operations commenced in mid-1994. bankcard processing expense
increased by approximately $3.2 million from approximately $0.3 million for
fiscal year 1994 to approximately $3.5 million for fiscal year 1995. The
increase in bankcard processing expense was primarily the result of the same
factors. The increase in other income in 1995 was also due in part to
approximately $0.6 million in gains on sales of loans in fiscal year 1995 from
no gains on sales of loans for fiscal 1994. This increase was due to gains
from the 1995 sale of approximately $7.9 million of mortgage loans into a
securitization. The increase in other income in 1995 was also due in part to
an increase of approximately $0.6 million in loan fees and charges, from less
than $0.1 million in 1994 to approximately $0.6 million in 1995. The increases
in loan fees and charges are primarily attributable to an increase in the
average Loan Portfolio from $103.6 million in 1994 to $228.0 million in 1995,
an increase of 120.1%.
OTHER EXPENSE
The Company's other expense totalled approximately $8.1 million for fiscal
year 1995 compared to approximately $4.9 million for fiscal year 1994, an
increase of 63.9%. The largest component of other expense was loan service
fees and expenses which increased by approximately $1.8 million from
approximately $0.2 million in fiscal year 1994 to $2.0 million in fiscal year
1995. This increase resulted from the substantially higher volume of loans
being serviced in 1995, including a full year of operations of Girard, and the
purchase of a portfolio of Discounted Loans in June 1995 which was serviced at
higher fees. All of the key items of other expense (including loan service
fees and expenses, compensation and employee benefits, FDIC insurance premiums
and professional services) showed an increase from 1994 to 1995 except for
real estate owned (net) and other general and administrative expenses. This
increase was primarily attributable to growth in the Savings Banks.
Other expense relating to compensation and employee benefits increased from
approximately $1.9 million in 1994 to approximately $2.5 million in 1995, an
increase of $0.6 million (or 30.9%), primarily as a result of an increase in
the average number of full-time equivalent employees from 31 in 1994 to 44 in
1995 (including an entire year's compensation expenses for Girard in 1995).
FDIC insurance premiums increased from $0.3 million in 1994 to $0.7 million
in 1995, an increase of approximately $0.4 million (or 176.2%), as a result of
growth in certificates of deposit outstanding. Other
36
<PAGE>
expense relating to professional services also increased from approximately
$0.5 million in 1994 to approximately $1.0 million in 1995 primarily as a
result of legal and accounting expenses incurred in connection with a proposed
acquisition of another savings bank in 1995, which was not completed due to a
failure of the principals ultimately to agree on terms.
These increases in other expense were partially offset by a small decrease
in expenses related to real estate owned (net). Other expenses related to real
estate owned (net) were approximately $0.2 million in fiscal year 1994 and
$0.2 million in fiscal year 1995. Other general and administrative expenses
decreased from approximately $1.3 million in 1994 to approximately $1.1
million in 1995, a decrease of 15.3%.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to an expense of less than $0.1
million in 1995 compared to a benefit of approximately $0.5 million for 1994.
The Company's effective tax rate amounted to 7.4% and (29.6)% during 1995 and
1994, respectively. Differences in the Company's effective tax rates in recent
periods compared to combined Federal and State statutory rates were primarily
attributable to changes in assessments of the realization of deferred tax
assets. Exclusive of such amounts, the Company's effective tax rate amounted
to 41% and (41)% during 1995 and 1994, respectively. For additional
information regarding the Company's income tax provisions and tax rates and
information regarding net operating loss carryforwards of the Company, see
Note 8 to the Consolidated Financial Statements.
37
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 20,531 $ 4,482 $ 8,830
Trading account securities.................... 7,092 -- --
Securities held to maturity, at amortized
cost......................................... 7,425 6,470 4,505
Mortgage-backed securities available for sale,
at fair value................................ 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost............................ 22,380 13,119 14,439
Loans receivable, net......................... 177,280 258,827 181,471
Discounted loans net.......................... 3,419 13,347 --
Loans held for sale, at lower of cost or mar-
ket.......................................... 260,804 18,597 --
Stock in Federal Home Loan Bank of San Fran-
cisco, at cost............................... 2,911 1,421 1,612
Real estate owned, net........................ 2,514 4,964 1,208
Leasehold improvements and equipment, net..... 336 275 167
Due from affiliate............................ 8,357 4,514 4,062
Accrued interest receivable................... 4,268 3,042 1,599
Prepaid expenses and other assets............. 3,887 1,724 1,026
Income taxes receivable, net.................. 5,422 1,589 774
-------- -------- --------
Total Assets................................ $533,109 $341,454 $230,636
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits...................................... $487,535 $303,524 $196,289
Borrowings.................................... -- 13,000 21,500
Accounts payable and other liabilities........ 7,625 4,398 2,056
Subordinated debt............................. -- 11,000 --
Preferred stock in subsidiary held by others.. -- -- 1,000
Deferred credits.............................. 832 1,134 1,772
Minority interest in subsidiaries............. 277 600 574
Due from affiliates........................... 2,286 759 652
-------- -------- --------
Total liabilities........................... 498,555 334,415 223,843
Stockholders' Equity.......................... 34,554 7,039 6,793
-------- -------- --------
Total Liabilities and Stockholders' Equity.. $533,109 $341,454 $230,636
======== ======== ========
</TABLE>
Mortgage-Backed and Other Securities. The Company's mortgage-backed
securities available for sale and trading account securities increased $4.4
million during the nine months ended September 30, 1996 primarily as a result
of purchasing certain subordinated bonds associated with the sale of
Discounted Loans. Investment securities and mortgage-backed securities held to
maturity increased by approximately $1.0 million and $9.3 million,
respectively, during the nine months ended September 30, 1996. United States
Treasury securities are generally held for the purpose of meeting regulatory
liquidity requirements. As the amount of deposits and borrowings increases,
the regulatory liquidity requirement increases proportionately. The increase
in mortgage-backed securities held to maturity resulted primarily from
purchases of GNMA adjustable-rate mortgage securities to secure certain
representations and warranties under a mortgage loan securitization and for
collateral securing an interest-rate swap contract.
38
<PAGE>
Loans Receivable, Net. Since 1994, the Company has emphasized the
acquisition of traditional performing mortgage loans as well as under-
performing and non-performing loans which generally are purchased at a
discount to both unpaid principal amount of the loan and the estimated value
of the property securing the loan. As a result, the average balance of the
Company's Total Loan Portfolio has increased significantly since 1993 as
illustrated by the following table:
AVERAGE BALANCE OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994 1993
----------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residen-
tial..................... $288,243 $ 93,350 $ 31,414 $20,254
Multi-family residential.. 74,131 70,631 36,089 25,567
Commercial and other mort-
gage loans............... 57,899 53,852 33,163 26,396
Consumer and other........ 29,675 10,137 2,917 383
-------- -------- -------- -------
Total loans............. 449,947 227,970 103,583 72,600
Unaccreted discount....... (17,281) (10,254) (4,086) (988)
Allowance for loan loss-
es....................... (33,451) (21,591) (4,509) (4,314)
-------- -------- -------- -------
$399,215 $196,125 $ 94,988 $67,298
======== ======== ======== =======
</TABLE>
The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $150.7 million during the nine months ended
September 30, 1996 primarily as a result of the Company's business strategy of
aggressively acquiring loan portfolios of Discounted Loans and other mortgage
loans. The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $109.3 million during 1995 primarily as a result of
the Company's loan purchase strategy. Included in the amount of increases in
the Company's total loan portfolio in the nine months ended September 30, 1996
and the year ended December 31, 1995 are a decrease of $26.9 million and an
increase of $29.3 million, respectively, in the net carrying amount of
Discounted Loans. The increase in 1995 reflected the initial implementation of
the Discounted Loan acquisition strategy. The decrease in the first six months
of 1996 reflected paydowns and other resolutions of some of the loans, and the
sale of most of the Discounted Loans in a securitization transaction completed
in March 1996.
Loans Held For Sale. The Company's loans held for sale increased by $243.3
million during the nine months ended September 30,1996 due to the Company's
intent to sell approximately $277.5 million of single-family residential loans
in the fourth quarter of 1996.
Real Estate Owned, Net. Real estate owned, net consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's total loan portfolio. Real estate owned decreased by approximately
$2.5 million or 49.4% during the nine months ended September 30, 1996 as a
result of the securitization of certain real estate owned and other resolution
activities. The approximately $3.8 million increase in the Company's net real
estate owned during 1995 primarily reflects increases in real estate owned
related to the Company's Discounted Loan portfolio, which reflects the growth
in the Company's Discounted Loan acquisition and resolution activities in
recent periods.
The Company actively manages its real estate owned. During the nine months
ended September 30, 1996, the Company sold 57 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$6.6 million. During 1995, the Company sold 17 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$5.5 million, as compared to the sale of properties of real estate owned
related to its total loan portfolio with carrying values of approximately $3.3
million during 1994.
39
<PAGE>
Due from Affiliate. Due from affiliate increased by approximately $3.8
million or 85.1% during the nine months ended September 30, 1996 primarily as
a result of growth in loan portfolios. The balance in the account as of any
month-end reflects the lag between receipts of loan payments by WCC, as
servicer, and payment to the Company. Due from affiliate increased by
approximately $0.5 million during 1995 for the same reason.
Deposits. Deposits increased by approximately $184.0 million or 60.6% during
the nine months ended September 30, 1996 primarily as a result of the
Company's strategy to increase deposits to permit the Savings Banks to acquire
loan portfolios. Deposits increased by approximately $107.2 million during
1995 primarily for the same reason.
Borrowings. Borrowings decreased by approximately $13.0 million during 1996
as a result of replacing short-term borrowings with longer term deposits.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the nine months ended September 30, 1996 because on January 1,
1996, the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $27.5 million during
the nine months ended September 30, 1996 primarily as a result of the exchange
of $11.0 million of outstanding subordinated debt for common stock and the
infusion of approximately $17.8 million to support growth and maintain
required regulatory capital ratios at the Savings Banks. Stockholders' equity
increased during 1995 primarily as a result of the Company's net income during
the period.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the asset and liability committees for the
Company and the Savings Banks (the "Asset and Liability Committees") which
meet regularly to review, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes the book and market values of
assets and liabilities, unrealized gains and losses, including those
attributable to hedging transactions, purchase and securitization activity,
and maturities of investments and borrowings. The Asset and Liability
Committees coordinate with the Savings Banks' boards of directors and the
Company's investment committees with respect to overall asset and liability
composition.
Since most of the Company's assets and liabilities reprice relatively
frequently, the Company's gap tends to be relatively easy to manage and the
Company's interest rate risk analysis focuses less on managing the overall gap
and more on ensuring that individual Loan Portfolios are properly hedged. In
hedging the interest rate exposure of a fixed-rate or lagging-index asset that
is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, U.S. agency mortgage-backed securities or interest rate futures
contracts. This results in market gains or losses on hedging instruments, in
response to interest rate increases or decreases, respectively, which
approximate the amount of the corresponding market losses or gains,
respectively, on loans being hedged. The Company evaluates the interest rate
sensitivity of each Loan Portfolio and decides whether to hedge the interest
rate exposure of a particular portfolio. In general, the Company tends to
hedge its fixed-rate Loan Portfolios. The Company generally does not hedge the
interest rate risk associated with holding non-lagging index adjustable-rate
mortgages pending their sale or securitization due to the decreased
significance of such risk. Though the Company's loan portfolio changes
relatively frequently as a result of Loan Portfolio acquisitions and the sale
of Loan Portfolios through securitization, the Company to date has not
experienced any significant costs or problems in hedging its portfolio. In
general, as a new Loan Portfolio is acquired, the Company will determine
whether or not to hedge and, with respect to any sale or financing of Loan
Portfolios through securitization, the Company will determine whether or not
to discontinue its duration-matched hedging activities with respect to the
relevant loans. In connection with the acquisition of the Citicorp Portfolio,
the Company does not currently anticipate entering into any hedging
transactions.
40
<PAGE>
The Asset and Liability Committees are authorized to utilize a wide variety
of off-balance sheet financial techniques to assist them in the management of
interest rate risk. These techniques include interest rate swap agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to
as the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate swap agreements are utilized by the
Company to protect against the narrowing of the interest spread between fixed
rate loans and associated liabilities funding those loans. The Company had
approximately $65.6 million notional principal amount of interest rate swap
agreements outstanding at September 30, 1996, which had the effect of
decreasing the Company's net interest income by approximately $0.1 million
during the nine months ended September 30, 1996. For additional information
see Note 7 to the Consolidated Financial Statements. There was no significant
hedging activity in 1995.
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value
of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the Boards of Directors
of the Savings Banks. In addition, at June 30, 1996, management estimates
based upon the MVPE analysis prepared by the OTS that the estimated percentage
change in the Company's MVPE over the ensuing four-quarter period as a result
of a 200 basis point increase or decrease in interest rates would be an
approximate 15% decrease or 6% increase, respectively. The following table
highlights the interest rate sensitivity of MVPE of a change in rates from 0
to 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
AT JUNE 30, 1996
Net Portfolio Value
Change in --------------------------
Rates Amount $ Change % Change
+400bp $42,628 $(22,944) -35%
+300bp 49,563 (16,009) -24%
+200bp 55,986 (9,586) -15%
+100bp 61,464 (4,108) -6%
0bp 65,572 --
-100bp 68,312 2,740 4%
-200bp 69,521 3,949 6%
-300bp 69,923 4,351 7%
-400bp 70,738 5,166 8%
Management of the Company believes that the assumptions (including pre-
payment assumptions) used by it to evaluate the vulnerability of the Company's
operations to changes in interest rates approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities and the estimated effects of changes in
interest rates on the Company's net interest income and MVPE could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase loans, purchase Discounted Loans, fund lending
activities and for general business purposes. The Company's sources of cash
flow include certificates of deposit, securitizations, net interest income and
borrowings under its warehouse and repurchase financing facilities and from
institutional investors and other lenders. In addition, the Savings Banks
obtain funding through FHLB advances.
41
<PAGE>
The Company's liquidity is actively managed on a daily basis, monitored
regularly by the Asset and Liability Committees and reviewed periodically by
the Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company, including adequate cash
flows for off-balance sheet instruments.
Sources of liquidity include wholesale and brokered certificates of deposit.
As of September 30, 1996, the Company had approximately $480.3 million of
certificates of deposit. As of September 30, 1996, scheduled maturities of
certificates of deposit during the 12 months ending September 30, 1997 and
thereafter amounted to approximately $425.1 million and approximately $55.2
million, respectively. Brokered and other wholesale deposits generally are
more responsive to changes in interest rates than core deposits and, thus, are
more likely to be withdrawn by the investor upon maturity as changes in
interest rates and other factors are perceived by investors to make other
investments more attractive. However, management of the Company believes that
it can adjust the rates paid on certificates of deposit to retain deposits in
changing interest rate environments and that brokered and other wholesale
deposits can be both a relatively cost-effective and stable source of funds.
As of September 30, 1996, the Company's sources of borrowing included Master
Repurchase Agreements between each of the Savings Banks and Bear Stearns
Mortgage Capital Corporation as to which the parties have orally agreed that
approximately $210 million in aggregate would be available for the purchase of
loans. On closing of the Common Stock Offering and Notes Offering, the amounts
available to the Wilshire Private Companies under a $100 million warehouse
lending agreement (the "Warehouse Financing Facility") with Prudential
Securities Realty Funding Corp. and certain repurchase arrangements will be
made available to the Company or one of its subsidiaries, including $150
million under a repurchase agreement with First Boston Mortgage Capital
Corporation. Such Repurchase Agreement will be increased to $250 million upon
transfer to WFC. See "Business--Funding Sources."
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of September 30,
1996, the Company had no FHLB advances outstanding, and was eligible to borrow
up to an aggregate of $11.6 million from the FHLB of San Francisco and had
$2.0 million of single-family residential loans, approximately $16.6 million
of multi-family residential loans and $2.6 million of commercial loans which
were pledged as security for such advances. At the same date, the Company had
a contractual relationship with the FHLB of San Francisco pursuant to which it
could obtain funds from reverse repurchase agreements and had $7.6 million of
unencumbered investment securities and mortgage-backed and related securities
which could be used to secure such borrowings.
The Company's uses of cash include the funding of loan purchases and
origination, payment of interest expenses, repayment of loans, funding of
initial over-collateralization requirements for securitizations, operating and
administrative expenses, income taxes and capital expenditures. Capital
expenditures were immaterial for the nine months ended September 30, 1996 and
the years ended December 31, 1995, and 1994. In addition to commitments to
extend credit, the Company is party to various off-balance sheet financial
instruments in the normal course of business to manage its interest rate risk.
See "--Asset and Liability Management" above and Note 7 to the Consolidated
Financial Statements.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through
financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase and originate loans, and acquire
Subordinate Securities. During the first nine months of 1996, and fiscal years
1995 and 1994, the Company used cash in the approximate amounts of $227.6
million, $186.9 million, and $41.6 million, respectively, for new loan
purchases. During the first nine months of 1996 and fiscal year 1995, the
Company received cash from the securitization of loans of approximately, $26.3
million and $16.7 million, respectively.
42
<PAGE>
After utilizing available working capital, deposits and any securitization
proceeds, the Company borrows money to fund its loan purchases and
originations. During the first nine months of 1996, and fiscal years 1995 and
1994, the Company used borrowings under various repurchase arrangements and
FHLB advances in the approximate amounts of $308.1 million, $77.4 million and
$41.7 million, respectively, for new loan purchases and origination. The
Company's business plan generally calls for using a high degree of leverage in
acquiring Loan Portfolios. With respect to Loan Portfolios of Discounted Loans
and performing loans, the Company generally seeks to fund 90% and 95%,
respectively, of the market value of such Loan Portfolios with borrowed money.
See "Risk Factors--Risks Related to Extensive Use of Financial Leverage." The
Company draws on a number of sources to obtain such funds including
certificates of deposit and repurchase arrangements with Wall Street
investment banks. As of the closing of the Common Stock Offering and the Notes
Offering, certain existing lines of credit will be transferred to the Company.
See "Business--Funding Sources."
The Company believes that cash flow from operations, the net proceeds of the
Common Stock Offering and the Notes Offering, the proceeds of certificates of
deposit, the availability under the warehouse financing facility and other
borrowings, and the net proceeds from securitizations will be sufficient to
fund operating needs, commitments and capital expenditures.
The Savings Banks are required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five
years or less. Current OTS regulations require that a savings association
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity
requirements. First Bank's liquidity, as measured for regulatory purposes,
amounted to 9.0% as of September 30, 1996 and averaged 11.4%, 9.1%, and 8.0%
during the nine months ended September 30, 1996 and the years ended December
31, 1995 and 1994, respectively. Girard's liquidity, as measured for
regulatory purposes, amounted to 6.4% as of September 30, 1996 and averaged
6.4%, 11.2%, and 8.5% during the nine months ended September 30, 1996, the
year ended December 31, 1995, and the quarter ended December 31, 1994,
respectively.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Savings Banks are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed
on national banks. The OTS also is authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case
basis. Under the Orders, the Savings Banks are required to be "well-
capitalized" as of December 31, 1996. See "Regulation--Imposition of Cease and
Desist Orders."
43
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at September 30, 1996.
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE
CATEGORIZED
AS "WELL
CAPITALIZED"
OTS MINIMUM UNDER OTS
ACTUAL REQUIREMENTS EXCESS REGULATIONS EXCESS
------------- ------------ ------------- ------------ ------------
AMOUNT RATIO RATIO AMOUNT RATIO RATIO AMOUNT RATIO
------- ----- ------------ ------- ----- ------------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital:
First Bank............. $ 8,434 6.0% 1.5% $ 6,314 4.5% N.A. N.A. N.A.
Girard................. 26,739 6.8% 1.5% 20,884 5.3% N.A. N.A. N.A.
Tier 1 Capital to Aver-
age Assets:
First Bank............. 8,434 5.9% 4.0% 2,728 1.9% 5.0% $1,302 0.9%
Girard................. 26,739 7.0% 4.0% 11,419 3.0% 5.0% 7,589 2.0%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 8,434 8.7% N.A. N.A. N.A. 6.0% 2,614 2.7%
Girard................. 26,739 9.7% N.A. N.A. N.A. 6.0% 10,231 3.7%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
First Bank............. 9,711 10.0% 8.0% 1,951 2.0% 10% 10 0.0%
Girard................. 30,297 11.0% 8.0% 8,287 3.0% 10% 2,784 1.0%
</TABLE>
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements,
and in August 1995 the OTS postponed the effectiveness of this regulation
after having previously deferred the effective date several times. Because
only institutions whose measured interest rate risk exceeds certain parameters
will be subject to the interest rate risk capital requirement, management of
the Company does not believe that this regulation will increase the Savings
Banks' risk-based regulatory capital requirement if it becomes effective in
its current form. For additional information relating to regulatory capital
requirements, see "Regulation--The Savings Banks--Regulatory Capital
Requirements" and Note 10 to the Consolidated Financial Statements.
44
<PAGE>
BUSINESS
GENERAL
WFSG is a newly formed financial services holding company for certain
companies and businesses previously held as part of, and operated by, the
Wilshire Companies. As part of the Reorganization, the Wilshire Private
Companies, including WCC, will not become subsidiaries of WFSG and will remain
privately held. The Company will engage in a wide variety of financial
activities, including the acquisition, origination, ownership and
securitization of Loan Portfolios, banking and non-traditional merchant credit
card processing.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. significant growth in Loan Portfolio investments;
. utilize varied funding sources;
. expansion into European markets;
. utilize servicing expertise;
. growth of non-traditional bankcard processing operations; and
. develop wholesale origination network.
LOAN ACQUISITIONS
General. During the last four years, the Wilshire Companies have developed
expertise in the business of acquiring Loan Portfolios, including residential
mortgage loans, manufactured housing loans, second lien loans, commercial real
estate loans, multi-family residential loans, commercial and business loans,
boat loans, other consumer loans and Subordinate Securities.
In the early 1990's, the Wilshire Companies acquired loans primarily from
the FDIC and the RTC, primarily in auctions of pools of loans acquired from
financial institutions which failed during the late 1980s and early 1990s.
Although governmental agencies, such as the FDIC and HUD, continue to be
potential sources of loans, the amount of loans sold by such agencies has
substantially declined. In recent years, the Wilshire Companies purchased
loans from various private sector sellers, such as banks, savings
institutions, mortgage companies and insurance companies. Whether because a
financial institution desires to reduce overhead costs, is not staffed to
handle large volumes of Loan Portfolios or simply does not want to distract
management and personnel with the intensive and time-consuming job of
servicing Loan Portfolios, many financial institutions now recognize that
outside contractors often are better staffed to manage and service Loan
Portfolios. These financial institutions include multi-national, money center,
super-regional and regional banking institutions as well as mortgage companies
and insurance companies. Moreover, many financial institutions have embraced
the concept of packaging and selling Loan Portfolios to investors as a means
of disposing of non-performing and under-performing loans and improving a
financial institution's balance sheet. Consolidations within the banking
industry have reinforced this trend. Additionally, management believes that
there is a market for management and resolution services for delinquent, sub-
performing and non-performing loans.
The Company intends to build on its expertise in loan acquisitions and
aggressively pursue Loan Portfolio acquisitions in the United States and
Europe, a substantial portion of which are expected to be Discounted Loans. In
addition, the Company expects to increase its purchases of commercial real
estate loans above existing levels. The Company believes it can significantly
increase its acquisition activities without a commensurate increase in
operating costs.
45
<PAGE>
The Company will seek to identify niche areas primarily within the real
estate loan market where it believes its funding flexibility, experienced
personnel and its proprietary software and U.S. mortgage loan database give it
a competitive advantage in pricing and purchasing Loan Portfolios. Areas in
which the Company views itself as having a competitive advantage include (i)
under-performing, non-performing and charged-off loans which generally are
purchased at substantial discount to both the unpaid principal amount of the
loan and the estimated value of the properties securing the loans; (ii) single
family and multi-family loan portfolios which do not comply with Federal
National Mortgage Association (the "FNMA") or Federal Home Loan Mortgage
Corporation (the "FHLMC") guidelines or may not meet preset securitization
guidelines for certain mortgage loan conduit programs; (iii) manufactured
housing loans; (iv) home equity or second lien loans; and (v) to a lesser
degree, consumer and other loans.
Loan Acquisition Procedures. Loans generally are acquired in pools ("Loan
Portfolios") from a wide variety of sources, including private sellers such as
banks, thrifts, finance companies, leasing companies, mortgage companies and
governmental agencies. The Company expects to obtain information on available
Loan Portfolios from several sources, such as referrals from Loan Portfolio
sellers with whom the Wilshire Companies have transacted business in the past
and from co-investors who seek the Company's participation in Loan Portfolio
purchases. Management of the Company has developed relationships with banks,
finance companies, mortgage companies and institutional investment banks which
management believes will be a continuing source of information on available
Loan Portfolios.
Loan Portfolios generally are acquired through competitive bids in which
there is often substantial competition or negotiated transactions. The
competition for larger Loan Portfolios is generally more intense. In addition
to bidding on and often acquiring large Loan Portfolios, the Company has often
acquired small Loan Portfolios where competition is less. The average size of
the Loan Portfolios acquired by the Company was $9.3 million for the first
nine months of 1996 and $3.8 million for the year ended December 31, 1995. The
Company believes that its funding flexibility, experienced personnel,
proprietary software and mortgage loan database provide the Company with a
competitive advantage in pricing and ultimately purchasing Loan Portfolios.
Prior to making an offer to purchase a Loan Portfolio, the Company's
employees who specialize in the analysis of loans will conduct an extensive
investigation and evaluation of the individual loans in the Loan Portfolio.
This examination typically consists of analyzing the information made
available by the Loan Portfolio seller (generally, the respective credit and
collateral files for the loans), reviewing other relevant material that may be
available (including tax records), and analyzing the underlying collateral
(including consulting the Company's United States mortgage loan database which
contains among other things, listings of property values and loan loss
experience in local markets for similar assets, obtaining value opinions from
third parties and, in some cases, conducting site inspections). The Company
also will review information on the local economy and real estate markets
(including the amount of time required to foreclose on real property) in the
area in which the loan collateral is located.
The Company's senior acquisition personnel who conduct the due diligence on
the Loan Portfolio will determine the amount to be offered by the Company to
acquire the Loan Portfolio by using a proprietary modeling system which
focuses on, among other things, the anticipated recovery amount, timing, type
and quality of the servicing transfer and cost of the resolution of the loans.
With respect to Discounted Loans and with certain other loans as well, the
amount that will be offered by the Company will generally be at a discount
from both the stated value of the loan and the value of the underlying
collateral which the Company estimates is sufficient to generate an acceptable
return on its investment. The Company's Investment Committee which consists of
senior management and the senior acquisition personnel that conducted the due
diligence on the Loan Portfolio will review the due diligence file and make a
final determination as to the amount of the offer. Loan acquisition decisions
at the Savings Banks are made by their respective boards of directors.
LOAN PORTFOLIO
General. The Company's total loan portfolio currently includes residential
mortgage loans, multi-family residential loans, commercial real estate loans,
manufactured housing loans, commercial and business loans, auto
46
<PAGE>
loans, boat loans and other consumer loans. As of September 30, 1996, the
Company's total loan portfolio, net of unaccreted discount and allowance for
loan losses amounted to $441.5 million. The Company expects to utilize its
available funding sources to continue to aggressively expand its loan
portfolio through the acquisition of Loan Portfolios from government agencies
and private sector entities and through its mortgage conduit program. As part
of the Reorganization, WCC will continue to originate mortgage loans for the
Company, during the period of time that the Company is obtaining the necessary
licenses to conduct the mortgage conduit program. See "--Loan Origination."
The Company expects to securitize its Loan Portfolios when advantageous. The
Company may also from time to time engage in whole loan sales or determine to
hold loans until maturity. Loans not presented as held for sale in the Audited
Consolidated Financial Statements are expected to be held to maturity.
Activity in the Company's Loan Portfolio.
The following table sets forth the activity in the gross principal amount of
the Company's total loan portfolio during the periods indicated, excluding
activity in the allowance for loan losses, deferred fees and unaccreted
discount on purchased loans.
ACTIVITY IN THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994(1)
---------------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..... $337,455 $198,588 $ 74,045
Originations:
Single-family residential........ 1,906 3,508 1,478
Multi-family residential......... 374 1,180 252
Commercial and other mortgage
loans........................... -- 4,060 2,615
Consumer and other loans......... -- -- --
-------- -------- --------
Total loans originated......... 2,280 8,748 4,345
Loan Purchases(3):
Single-family residential........ 221,581 121,883 36,462
Multi-family residential......... -- -- 61,247
Commercial and other mortgage
loans........................... -- 2,126 31,091
Consumer and other loans(2)...... 18,742 11,012 10,847
-------- -------- --------
Total loans purchased.......... 240,323 135,021 139,647
Discounted Loan Purchases:
Single-family residential........ -- 49,662 1,542
Multi-family residential......... -- 96 --
Commercial and other mortgage
loans........................... -- 869 1,843
Consumer and other loans......... -- 5,368 239
-------- -------- --------
Total Discounted Loans pur-
chased........................ -- 55,995 3,624
Sales.............................. (27,965) (16,673) --
Principal repayments, net of capi-
talized interest.................. (37,789) (27,464) (14,813)
Transfer to real estate owned and
other............................. (12,350) (16,760) (8,260)
-------- -------- --------
Net increase (decrease) in loans... 164,499 138,867 124,543
-------- -------- --------
Balance at end of period........... $501,954 $337,455 $198,588
======== ======== ========
</TABLE>
- --------
(1) Includes as purchases $90.6 million aggregate principal amount of loans
held by Girard on the date that it was acquired by WACII.
(2) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(3) Excludes Discounted Loans.
47
<PAGE>
Composition of Total Loan Portfolio. As of September 30, 1996, the Company's
total loan portfolio, net of unaccreted discount, deferred fees and allowance
for loan losses, amounted to $441.5 million or 83.6% of the Company's total
assets. The following table sets forth the composition of the Company's total
loan portfolio by type of loan at the dates indicated.
COMPOSITION OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ---------------------------
1996 1995 1994 1993
------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN PORTFOLIO:
Single-family residential....... $324,910(2) $139,566 $ 53,095 $20,657
Multi-family residential........ 72,717 71,239 77,884 26,076
Commercial real estate.......... 61,235 53,458 57,881 26,921
Consumer and other.............. 30,698 19,753 6,733 391
-------- -------- -------- -------
Loan portfolio.................... 489,560 284,016 195,593 74,045
Unaccreted discount and deferred
fees............................. (12,400) (14,362) (8,946) (988)
Valuation allowance............... (40,086) (10,237) (7,270) (4,314)
-------- -------- -------- -------
Loan portfolio, net............... $437,074 $259,417 $179,377 $68,743
======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residential....... $ 11,188(3) $ 50,937 $ 348 $ --
Multi-family residential........ -- (3) -- -- --
Commercial real estate.......... 482 1,523 432 --
Consumer and other.............. 724 979 2,215 --
-------- -------- -------- -------
Discounted Loan portfolio......... 12,394 53,439 2,995 --
Unaccreted discount and deferred
fees............................. (1,747) (6,671) (470) --
Valuation allowance(1)............ (6,218) (15,414) (431) --
-------- -------- -------- -------
Discounted Loan portfolio, net.... $ 4,429 $ 31,354 $ 2,094 $ --
======== ======== ======== =======
</TABLE>
- --------
(1) For discussion of the valuation allowance allocation for purchase
discount, see "--Asset Quality--Allowances for Losses."
(2) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(3) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
The real properties which secure the Company's mortgage loans are located
throughout the United States. As of September 30, 1996, the five states with
the greatest concentration of properties securing the Company's loans were
California, New York, New Jersey, Florida and Texas, which had $274.2 million,
$32.8 million, $21.9 million, $17.4 million and $10.8 million principal amount
of loans, respectively. The real properties which secure the Company's
Discounted Loans are located throughout the United States. As of September 30,
1996, the five states with the greatest concentration of properties securing
the Company's Discounted Loans were Massachusetts, Connecticut, California,
Texas and New Jersey, which had $3.8 million, $3.1 million, $1.2 million, $1.1
million and $.9 million principal amount of loans, respectively. The Company
believes that the broad distribution of the real property in its Discounted
Loan portfolio reduces the risks associated with concentrating such loans in
limited geographic areas. The geographic concentration of the Company's
Discounted Loan portfolio is expected to change with the acquisition of the
Citicorp Portfolio, which is concentrated in New York and New Jersey. See
"Recent Developments."
48
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information as of September 30, 1996 regarding the dollar amount of loans
maturing in the Company's loan portfolio (excluding Discounted Loans) based on
their contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the dollar amount of loans which have fixed
or adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances have not been reduced for undisbursed loan
proceeds, unearned discounts and the allowance for loan losses.
MATURITY OF THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
MATURING IN
-------------------------------------------------------
ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS AFTER
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TEN YEARS
-------- ------------------ ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residen-
tial................... $ 6,999 $23,385 $15,681 $278,845
Multi-family residen-
tial................... 16,226 26,205 15,943 14,343
Commercial and other
mortgage loans......... 18,025 25,288 14,130 3,792
Consumer and other
loans.................. 6,019 23,589 370 720
Interest rate terms on
amounts due after one
year:
Fixed................. -- 47,317 12,415 98,277
Adjustable............ -- 51,150 33,709 199,423
</TABLE>
- --------
(1) Excludes Discounted Loans.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
LOAN ORIGINATION
General. In late 1995, WCC launched a mortgage conduit program for the
purchase of newly-originated residential mortgage loans on a nationwide basis
through correspondents. From the launch of the program in the fourth quarter
of 1995 through September 30, 1996, WCC purchased or committed to purchase
under its mortgage conduit program approximately $5.9 million principal amount
of manufactured housing loans and $18.0 million principal amount of first and
second lien mortgage loans. While the Company is obtaining necessary
regulatory approvals, WCC will continue to originate residential mortgage
loans for the Company's account through its correspondent relationships and
will then transfer the newly originated loans to the Company. The Company will
simultaneously provide the funding for the newly originated residential
mortgage loans. Although WCC will be originating mortgage loans for the
Company's account while the Company obtains necessary licenses, the mortgage
conduit program will be conducted by the Company.
The mortgage conduit program currently focuses on the origination of
manufactured housing loans, and conforming and non-conforming first and
related second lien mortgage loans. All borrowers and the collateral must meet
the Company's credit underwriting guidelines. The Company believes that the
higher risk generally associated with non-agency borrowers is partially offset
by the Company's strong credit underwriting guidelines and the better pricing
associated with these loans. The Company is in the process of launching two
new programs for loans to good credit borrowers. The Company expects to
further expand the mortgage conduit program as it identifies market niches in
the mortgage lending market where the Company believes it has a competitive
advantage.
49
<PAGE>
The Company expects to securitize loans that it originates when
advantageous. The Company may also from time to time sell whole loans or
determine to hold loans until maturity. Loans not presented as held for sale
in the Audited Consolidated Financial Statements are expected to be held to
maturity.
Correspondent Relationships. Mortgage loans are currently acquired by WCC
through its correspondent relationships with mortgage banking firms and other
financial services companies. WCC has entered into mortgage loan purchase
agreements with each such correspondent which require specified minimum levels
of experience in origination of non-conventional mortgage loans and provide
representations, warranties and buy-back provisions identical to the
representations and warranties required of the Wilshire Companies for the
securitization of their own loans. Correspondent institutions originate loans
based on guidelines provided by the Company and currently sell the loans to
WCC on a servicing-released basis. As of October 1996, WCC had approximately
seventy-eight approved correspondents. The Company's current strategy is to
continue to solidify and expand the correspondent relationships, which are
subject to a thorough due diligence and approval process to ensure quality
sources of new business.
Underwriting. The Company has adopted guidelines that set forth the specific
lending requirements of the Company as they relate to the processing,
underwriting, property appraisal, closing, funding and delivery of loans to
borrowers. While the Company is in the process of obtaining necessary
licenses, WCC will conduct the underwriting process for the Company. Once a
correspondent has completed its underwriting process it will submit the
initial loan application to WCC. Upon receipt of an application, WCC's
underwriting department will review the application and perform its own
underwriting. Evaluations of initial loan applications will be conducted by
WCC's employees who specialize in the analysis of loans, often with further
specialization based on geographic or collateral specific factors. Initial
loan applications are reviewed for completeness, accuracy, and compliance with
the Company's underwriting criteria and governmental regulations. The
Company's underwriting criteria focuses on debt-to-income ratios, loan-to-
value ratios, current credit reports of potential borrowers, property
appraisals and a potential borrower's job history. As part of the underwriting
process the Company requires an additional field review appraisal of the
collateral to be conducted by an approved third party at the correspondent's
expense.
Loans which clearly conform to the Company's underwriting guidelines are
approved by the underwriting department. Loans which clearly do not conform
are rejected and returned to the correspondent. Loans that present certain
underwriting issues may be returned to correspondents requesting changes or
may be forward to underwriting managers for approval. Variations from the
Company's underwriting guidelines must be approved by an appropriate officer
of the Company.
EUROPEAN OPERATIONS
The Company recently decided to expand its loan acquisition and servicing
activities to encompass the United Kingdom and France with a view towards
future expansion in Western Europe. The Company's expansion strategy involves
understanding each new market's regulatory requirements and tailoring the
Company's acquisitions and servicing to comply with such requirements and
identifying and training management and employees to run the Company's
European operations. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for continuing and
expanding the servicing activities of a company located in the United Kingdom.
See "Recent Developments." The Company is also considering either establishing
its own servicing operation, acquiring an already existing entity or entering
into a joint venture with a company already active in France. Management
believes that conditions in the French real estate market and, to a lesser
degree, in the United Kingdom real estate market are similar to conditions in
the United States real estate market in the late 1980's and early 1990's. The
decline in the real estate market which began in the United States in 1987 and
continued through the early 1990's occurred in the United Kingdom in late 1989
and France in 1992. Since the decline began in France in 1992 the value of
real estate has fallen further than it did in the United States. In addition,
there are currently only a few purchasers of distressed assets in the United
Kingdom and France, which is similar to the way the market for distressed
assets
50
<PAGE>
was in the United States when the RTC first began selling loans in the late
1980s. Based on these facts management believes that there may be
opportunities to acquire Loan Portfolios at favorable prices. In addition,
management believes that there is a demand in the European market for U.S.-
style servicing with its automated systems and detailed investor reporting and
aggressive servicing and work-out approaches. Most of the purchasers of
distressed assets in the United Kingdom and France are U.S. based companies,
which have utilized U.S.-style servicing and investor reporting in connection
with the purchase of distressed assets in the United States and with the
exception of recently originated loans, the servicing and reporting system in
the United Kingdom and France for loans is generally less technologically
developed and more labor intensive.
FUNDING SOURCES
General. The Company, in addition to deposits at the Savings Bank, will have
extensive funding sources available for investment and lending activities from
investment banking firms and institutional investors, including secured term
loans, warehouse lines of credit, repurchase facilities and sales of
participation interests in Loan Portfolios. Substantially all of the Company's
Loan Portfolio investments are expected to utilize borrowed funds, minimizing
the Company's equity investment to the extent possible. Management of the
Company closely monitors rates and terms of competing sources of funds on a
regular basis and generally utilizes the source which is the most cost
effective. Following the Common Stock Offering and Notes Offering, the Company
will continue to rely on these sources of capital, in addition to the proceeds
of the Common Stock Offering and Notes Offering, to finance its operations. As
of the closing of the Common Stock Offering and Notes Offering, certain
existing undrawn lines of credit ($416.0 million as of September 30, 1996)
will be transferred to the Company. Amounts currently drawn under the lines of
credit by the Wilshire Private Companies ($84.0 million as of September 30,
1996) will be transferred to the Company as such amounts are repaid by the
Wilshire Private Companies.
Deposits. The primary source of deposits for the Savings Banks currently is
"wholesale" certificates of deposit. To a lesser extent the Savings Banks
obtain brokered certificates of deposit from national investment banking firms
which pursuant to agreements with the Savings Banks, solicit funds from their
customers for deposit with the banks. As of September 30, 1996, $154.6 million
or 31% of the Savings Banks' total deposits were brokered and $325.6 million
or 67% were wholesale deposits. Wholesale deposits generally are obtained on
more economically attractive terms to the Savings Banks than brokered
deposits.
The Savings Banks' funding strategy has been to offer deposit rates above
those customarily offered by banks and savings and loans in its markets. The
Savings Banks have been able to pursue this strategy because the general and
administrative costs associated with operating the Savings Banks is
significantly lower than traditional banks and savings institutions with
branch office networks. The Savings Banks have generally accumulated deposits
by participating in deposit rate surveys which list the Savings Banks among
the higher rate paying insured institutions, and periodically advertising in
various local market newspapers and other media. However, because the Savings
Banks compete for deposits primarily on the basis of rates, the Savings Banks
could experience difficulties in attracting deposits if they could not
continue to offer deposit rates at levels above those of other banks and
savings institutions. The Orders issued by the OTS currently prohibit the
Savings Banks from increasing their total assets above specified levels. See
"Risk Factors--Risks Related to imposition of Cease and Desist Orders."
51
<PAGE>
The following table sets forth information relating to the Company's
deposits at the dates indicated.
THE COMPANY'S DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ -----------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
checking accounts...... $ 5,192 0.00% $ 3,532 0.00% $ 3,045 0.00% $ -- -- %
NOW and money market
checking accounts...... 1,706 1.82 2,846 2.99 3,170 3.28 3,633 2.96
Saving accounts......... 371 2.10 304 2.38 215 2.25 194 2.50
Certificates of depos-
it..................... 480,266 5.89 296,842 6.15 189,859 5.48 80,994 3.86
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits......... $487,535 5.81% $303,524 6.04% $196,298 5.35% $84,821 3.83%
======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at September 30, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 1,070
3.51-4.50.......................................... 46
4.51-5.50.......................................... 50,126
5.51-6.50.......................................... 409,925
6.51-7.50.......................................... 16,232
7.51-8.50.......................................... 2,867
--------
Total............................................ $480,266
========
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of September 30, 1996.
MATURITIES OF THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
ORIGINAL MATURITY IN MONTHS
-------------------------------
12 OR LESS 13 TO 26 37 OR MORE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balances Maturing in 3
Months or Less.......... $145,202 $ 6,394 $ 0
Weighted Avg............ 5.74% 6.57% 0.0%
Balances Maturing in 4 to
12 Months............... $236,176 $36,866 $446
Weighted Avg............ 5.89% 6.32% 6.67%
Balances Maturing in 13
to 36 Months............ -- $54,637 $497
Weighted Avg............ 6.07% 6.98%
Balances Maturing in 37
or More Months.......... -- -- $ 48
Weighted Avg............ 2.76%
</TABLE>
As of September 30, 1996, the Company had $13.2 million of certificates of
deposit in amounts greater than $100,000 maturing as follows: $4.6 million
within three months; $2.5 million over three months through six months; $4.1
million over six months through 12 months; and $2.0 million thereafter.
52
<PAGE>
Borrowings. The following table sets forth information relating to the
Company's borrowings and other interest-bearing obligations at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances............................. $ 0 $ -- $13,000 $ --
Reverse Repurchase Agreements............. 0 13,000 8,500 6,608
--- ------- ------- ------
Total................................... $0 $13,000 $21,500 $6,608
=== ======= ======= ======
</TABLE>
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater
than 30% of stockholders' equity at the end of the period. During each
reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS OF THE COMPANY
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
AT OR FOR THE DECEMBER 31,
NINE MONTHS ENDED ------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:....................
Average amount outstanding dur-
ing the period................. $ 2,396 $ 1,381 $ 5,916 $ --
Maximum month-end balance out-
standing during the period..... $11,000 $ 8,000 $13,000 $ --
Weighted average rate:
During the period............. 5.80% 7.53% 3.85% --
At end of period.............. -- -- 4.33% --
Repurchase agreements:
Average amount outstanding dur-
ing the period................. $35,721 $ 4,122 $ 4,757 $4,507
Maximum month-end balance out-
standing during the period..... $97,000 $14,950 $11,377 $6,654
Weighted average rate:
During the period............. 6.83% 5.62% 4.44% 7.54%
At end of period.............. 0.0% 6.70% 5.81% 3.35%
</TABLE>
The Company, in addition to deposits at the Savings Banks, will have
extensive funding sources available for investment and lending activities. The
following table sets forth the Company's post-Reorganization lending
arrangements and amounts utilized by the Company and the Wilshire Private
Companies as of September 30, 1996.
<TABLE>
<CAPTION>
CURRENT BORROWER AFTER
LENDER BORROWER REORGANIZATION AMOUNT UTILIZED(2)
------ ----------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
COMMITTED FACILITIES:
CS First Boston
Mortgage Capital
Corporation........... Wilshire Private Companies(1) WFC $250 million(5) $67,012
Prudential Securities
Realty Funding
Corp. ................ Wilshire Private Companies(1) WFC(4) $100 million $12,374
UNCOMMITTED FACILI-
TIES(3):
Bear Stearns Mortgage
Capital Corporation... First Bank First Bank $ 10 million --
Bear Stearns Mortgage
Capital
Corporation........... Girard Girard $200 million --
Bear, Stearns Interna-
tional (U.K.)......... Wilshire Private Companies(1) WFC(4) $100 million $ 1,673
CS First Boston Corpo-
ration
(Hong Kong) Limited... Wilshire Private Companies(1) WFC(4) $ 50 million $ 2,912
------------
TOTAL AMOUNT............ $710 million
============
</TABLE>
53
<PAGE>
- --------
(1) On the closing of the Common Stock Offering and the Notes Offering,
existing lines of credit will be transferred to the Company or a wholly
owned Subsidiary of the Company.
(2) Amounts currently drawn under the lines of credit by the Wilshire Private
Companies will be transferred to the Company as they become available.
(3) Though agreements governing such commitments do not specify a minimum or
maximum amount available, the parties have agreed that such agreements may
be used up to the specified amount. Any such agreement may be modified at
any time.
(4) These facilities will be transferred to a wholly owned subsidiary of WFC.
(5) Amount will be increased to $250 million upon transfer to WFC.
Repurchase Facilities. Each of First Bank and Girard entered into a Master
Repurchase Agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC").
Pursuant to these agreements, the parties may enter into transactions in which
First Bank or Girard agrees to transfer to BSMCC mortgage loans or other
financial instruments against the transfer of funds by BSMCC, with a
simultaneous agreement by BSMCC to retransfer such assets at a date certain or
on demand, against the transfer of the borrowed funds by First Bank and
Girard, as the case may be. Though such master repurchase agreements do not
specify a maximum amount available under such agreements, the parties have
currently agreed that such agreement may be used for up to $210 million of
acquisitions in the aggregate. These agreements enable First Bank and/or
Girard to purchase Loan Portfolios with immediate financing from BSMCC which
can then be repaid as First Bank and/or Girard increases its deposits. See "--
Deposits" for a discussion of certain limitations on the ability of the
Savings Banks to increase deposits.
In 1996, the Wilshire Private Companies entered into a master repurchase
agreement with CS First Boston Mortgage Capital Corporation ("FBMCC") pursuant
to which FBMCC has agreed to lend up to $150 million to the Private Companies
for the purchase of portfolios of performing and non-performing mortgage
loans. Pursuant to the agreement, The First Boston Corporation may generally
participate in the securitization of any loans acquired with any funds lent by
FBMCC and will be repaid out of the proceeds of any such structured
transaction. This facility will be increased to $250 million as part of the
transfer to WFC.
In 1996, the Wilshire Private Companies entered into a master repurchase
agreement with an affiliate of Bear, Stearns & Co., Inc. pursuant to which
such affiliate may lend money to the Wilshire Private Companies for the
purchase of portfolios of Subordinate Securities. Though such master
repurchase agreement does not specify a maximum amount available under such
agreement, the parties have currently agreed that such agreement may be used
for up to $100 million of acquisitions. Pursuant to the agreement, Bear,
Stearns & Co., Inc. may generally participate in the securitization of any
portfolio of Subordinate Securities acquired with any funds lent by such
affiliate and will be repaid out of the proceeds of any such structured
transaction.
In 1996, the Wilshire Private Companies entered into a master repurchase
agreement with CS First Boston (Hong Kong) Limited pursuant to which such
affiliate may lend money to the Wilshire Private Companies for the purchase of
portfolios of Subordinate Securities. Though such master repurchase agreement
does not specify a maximum amount available under such agreement, the parties
have currently agreed that such agreement may be used for up to $50 million of
acquisitions. Pursuant to the agreement, The First Boston Corporation may
generally participate in the securitization of any portfolio of Subordinate
Securities acquired with any funds lent by CS First Boston (Hong Kong) Limited
and will be repaid out of the proceeds of any such structured transaction.
Warehouse Facilities. The Wilshire Private Companies have a secured
warehouse financing facility (the "Warehouse Financing Facility") with
Prudential Securities Realty Funding Corp. ("Prudential Securities") of up to
$100 million for the origination or purchase of residential first and second
lien mortgage loans. Pursuant to the agreement, Prudential Securities may
generally participate in the securitization of the mortgage loans acquired
with any funds lent by Prudential Securities and will be repaid out of the
proceeds of any such structured transaction.
FHLB Advances. The Savings Banks obtain advances from the FHLB of San
Francisco upon the security of certain of its assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Savings
Banks have been met. FHLB advances are available to member financial
institutions such as the Savings Banks for investment and lending activities
and other general business purposes. FHLB advances are made
54
<PAGE>
pursuant to several different credit programs, each of which has its own
interest rate, which may be fixed or adjustable, and a range of maturities.
Securitizations. Since the Wilshire Companies's initial use of
securitization in 1995 through September 1996, the Wilshire Companies have
issued $368.7 million of securities through two publicly underwritten and
three privately placed securitizations, including non-performing and sub-
performing mortgage loans, manufactured housing loans, consumer loans and
conventional and non-conforming loans. Securitizations are expected to allow
the Company to increase its loan acquisition and origination volume, reduce
the risks associated with interest rate fluctuations and provide access to
longer term funding sources. The Company currently intends to complete
securitizations either through private placements or in public offerings when
advantageous. The Company is currently in the process of securitizing a pool
of consumer receivables and expects to securitize a portfolio of non-
performing and under-performing assets in the near future.
In a securitization, a company will generally transfer a pool of loans to a
separate entity (a "Special Purpose Entity") in exchange for subordinate
securities ("Subordinate Securities") in the Special Purpose Entity and cash,
which constitutes the proceeds of Senior Securities issued by the Special
Purpose Entity. The cash generally will be used to repay borrowings used to
finance the pool of loans that were acquired by the company. Generally, the
holders of the Senior Securities are entitled to receive scheduled principal
collected on the pool of securitized loans and interest at the pass-through
interest rate on the certificate balance. The Subordinate Securities represent
the subordinated right to receive cash flows from the pool of securitized
loans after payment of the required amounts to the holders of the Senior
Securities and the costs associated with the securitization.
The Company may arrange for credit enhancement for a transaction to achieve
an improved credit rating on the Senior Securities issued if this improves the
level of profitability for such transaction. This credit enhancement may take
the form of an insurance and indemnity policy, insuring the holders of the
Senior Securities of timely payment of the scheduled pass-through interest and
principal. In addition, the pooling and servicing agreements that govern the
distribution of cash flows from the loan pool included in the transaction
typically require over-collateralization as an additional means of credit
enhancement. Over-collateralization may in some cases also require an initial
deposit, the sale of loans at less than par or retention in the Special
Purpose Entity of collections from the pool until a specified over-
collateralization amount has been attained. This retention of excess cash flow
creates a faster amortization of the scheduled balance of the Senior
Securities than the amortization of the principal balance of the securitized
loan pool. The purpose of the over-collateralization is to provide a source of
payment in the event of higher than anticipated credit losses. Losses
resulting from defaults by borrowers on the payment of principal or interest
on the loans in a securitized loan pool will reduce the over-collateralization
to the extent that funds are available and may result in a reduction in the
value of the Subordinate Securities.
The Company intends to retain the servicing rights to the loans it
securitizes and WCC will initially service such loans on the Company's behalf.
See "--Servicing Relationships." In addition, the Company may, in the future,
consider using Subordinated Securities that it purchases or acquires pursuant
to a securitization in a structured transaction, including a securitization.
SERVICING RELATIONSHIPS
The Company believes that WCC's loan servicing experience, its highly
trained servicing personnel and its proprietary software and U.S. mortgage
loan database has allowed the Wilshire Companies to more effectively value and
price Loan Portfolios. As of September 30, 1996, WCC was servicing
approximately $1.4 billion principal amount of loans, including approximately
$502.0 million for the Savings Banks.
The Company, WFC and WCC will enter into a non-exclusive loan servicing
agreement (the "Loan Servicing Agreement") pursuant to which WCC will provide
loan portfolio management services, including billing, portfolio
administration and collection services for all loans owned, acquired or made
by the Company or its affiliates (including new third party servicing) (the
"Loans"). Pursuant to the Loan Servicing Agreement, the Company shall be
required to pay a servicing fee equal to a market rate based on comparable
fees charged by unaffiliated third parties in arm's length transactions for
similar types of loans at the time of acquisition. WCC
55
<PAGE>
has also agreed to license its proprietary computer software to the Company
and WFC. WCC has agreed for a period of twenty years not to compete with or be
engaged in the same business and in the same areas as currently conducted by
the Company, including purchasing and servicing loans.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans and assume certain assets and liabilities of WCC relating thereto
(the "Servicing Transfer"), provided that, the Company or one of its
subsidiaries has obtained the appropriate regulatory approvals.
Notwithstanding the foregoing, the Company may request that the Servicing
Transfer occur on an earlier date, provided that the foregoing conditions are
met. WCC, in its sole discretion may refuse to effect the Servicing Transfer
prior to the end of the second year. The Servicing Transfer will occur
automatically on the third anniversary of the closing of the Common Stock
Offering, unless prohibited by applicable law. After the Servicing Transfer
WCC will permit the Company, subject to certain conditions, to have access to
its books, records and forms to ensure the orderly transfer of the servicing.
The fees and costs to be paid by WCC for the servicing of its loans shall be
the Company's average costs for such collection as specified in the Loan
Servicing Agreement.
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC pursuant to which WCC provides loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Savings
Banks. WCC receives a fee equal to ten dollars per month for each performing
loan serviced (which the Company believes is a below-market rate). The loan
servicing agreements are year-to-year and may be terminated by the Savings
Banks or WCC by giving notice at least sixty days prior to renewal date. It is
anticipated that the Savings Banks will terminate their agreements with WCC
once WCC's servicing operations have been transferred to WSC. At such time the
Savings Banks would enter into an agreement with WSC pursuant to which WSC
would service the mortgage loans and other assets of the Savings Banks.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific Discounted Loan portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Discounted Loan portfolios. To date each of these loan
servicing agreements provides that WCC shall be entitled to an amount equal to
(i) all costs and expenses incurred by WCC for providing loan portfolio
management services, and (ii) an amount equal to twenty-five percent of the
amount collected on the specified Discounted Loan portfolios (other than
escrow payments, if any) which is excess of the initial payments made by the
Savings Banks to acquire the Discounted Loan portfolios. Due to the OTS
requirements, servicing fees for new Discounted Loan portfolios will be chosen
by the board of directors of the Savings Banks based upon fees charged by WCC
in any other appropriate third party servicing agreement on a portfolio basis.
WCC's servicing staff has extensive experience in servicing all types of
financial assets and over the years the WCC has developed clear cut servicing
procedures designed to effectively service and if necessary liquidate a loan.
The system, which is able to service a variety of loans, provides WCC with,
among other things, payment-processing, cashiering, collection and reporting
functions.
In addition, the servicing system and procedures are structured to deal
specifically with problem assets and discounted loans and to maximize in a
timely manner cash recovery on each loan in a Loan Portfolio. If a loan
becomes delinquent or once a non-performing loan is acquired, WCC enters
information with respect to each loan that is acquired in its computer system.
WCC then attempts to resolve each loan in accordance with specified procedures
as expeditiously as possible. The various resolution alternatives generally
include the following: (i) the borrower brings the loan current in accordance
with original or modified terms, (ii) the borrower repays the loan or a
negotiated amount of the loan, (iii) the borrower agrees to deed the property
to WCC in lieu of foreclosure, and (iv) WCC forecloses on the loan and the
property is acquired at the foreclosure sale either by a third party or by the
WCC. The general goal of WCC's asset resolution process is to maximize in a
timely manner cash recovery on each loan.
56
<PAGE>
Under the Orders, the Savings Banks can terminate WCC's servicing agreement
if WCC fails to complete a comprehensive audit of the Savings Banks'
adjustable rate mortgages serviced by WCC, fails to correct certain
information system items, or fails to deliver certain statements to borrowers.
NON-TRADITIONAL BANKCARD PROCESSING OPERATIONS
The Company plans to continue development of its non-traditional bankcard
processing operations, which generate revenues through merchant discounts and
processing fees for Visa and Mastercard transactions. The Company's bankcard
processing operations focus on certain high-risk market niches, principally
mail order/telephone order and audio-text where the Company believes it
obtains higher returns on processing transactions. Revenues from the bankcard
operation which commenced in the third quarter have demonstrated strong growth
increasing from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1
million during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using its existing
infrastructure.
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the
Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio (excluding
discounted loans) which are past due 90 days or more and to place such loans
on non-accrual status. The Company does not accrue interest on Discounted
Loans (unless such loan later becomes performing). Loans also may be placed on
non-accrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated.
NON-PERFORMING LOANS IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential........... $31,112 $10,996 $ 5,554 $1,285
Multi-family residential............ 1,583 270 1,471 379
Commercial real estate and land..... 7,301 910 4,207 5,354
Consumer and other loans............ 4,586 503 400 175
------- ------- ------- ------
Total............................. $44,582 $12,679 $11,632 $7,193
======= ======= ======= ======
Non-performing loans as a percentage
of:
Total loans(2)...................... 9.11% 4.46% 5.95% 9.71%
Total assets........................ 8.36% 3.71% 5.04% 7.27%
Allowance for loan losses as a per-
centage of:
Total loans(2)...................... 8.19% 3.60% 3.72% 5.83%
Non-performing loans................ 89.92% 80.74% 62.50% 59.97%
</TABLE>
- --------
(1) This table does not include Discounted Loans although a substantial
portion of such loans are non-performing.
(2) Total loans is exclusive of Discounted Loans, undisbursed loan proceeds,
unaccreted discount and allowance for loan losses. For information
relating to the Company's Discounted Loan portfolio, see "--Loan
Portfolio."
57
<PAGE>
Real Estate Owned. Properties acquired through foreclosure or by deed-in-
lieu thereof are valued at the lower of cost or fair value. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to sell. Holding and maintenance costs related to properties
are recorded as expenses in the period incurred. Deficiencies resulting from
valuation adjustments to real estate owned subsequent to acquisition are
recognized as a valuation allowance. Subsequent increases related to the
valuation of real estate owned are reflected as a reduction in the valuation
allowance, but not below zero. Increases and decreases in the valuation
allowance are charged or credited to income, respectively.
The following table sets forth certain information relating to the Company's
real estate owned (by source of acquisition) at the dates indicated.
REAL ESTATE OWNED BY THE COMPANY
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1996 1995 1994 1993
------------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential.............. $ 663(1) $ 3,226 $ -- $ --
Multi-family residential............... -- -- -- --
Commercial and other mortgage loans.... 290 66 -- --
------ ------- ------ ------
Total................................ 953 3,292 -- --
Loan portfolio:
Singe-family residential............... 787 1,676 613 764
Multi-family residential............... 275 611 254 --
Commercial and other mortgage loans.... 855 578 464 328
------ ------- ------ ------
Total Portfolio...................... 1,917 2,865 1,331 1,092
Total................................ 2,870 6,157 1,331 1.092
Allowance for total losses............... (356) (1,193) (123) (55)
------ ------- ------ ------
Real estate owned, net................... $2,514 $ 4,964 $1,208 $1,037
====== ======= ====== ======
</TABLE>
- --------
(1) The differences between the balance at December 31, 1995 and September 30,
1996 reflects the securitization of certain single-family residential
loans and properties.
The following table sets forth certain geographical information as of
September 30, 1996 related to the Company's real estate owned attributable to
the Company's total loan portfolio.
REAL ESTATE OWNED ATTRIBUTABLE TO THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL AND
SINGLE FAMILY RESIDENTIAL COMMERCIAL REAL ESTATE
----------------------------- --------------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
-------------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California............. $399 10 $1,130 4
Connecticut............ 366 5 91 1
Texas.................. 325 10 29 5
New Jersey............. -- -- 170 1
New York............... 101 1 -- --
Other.................. 259 18 -- --
-------------- ----------- ------------ ---------
Total................ $1,450 44 $1,420 11
============== =========== ============ =========
</TABLE>
58
<PAGE>
Classified Assets. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is
not warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
Excluding assets which have been classified loss and fully reserved by the
Savings Banks, the Savings Banks' classified assets as of September 30, 1996
consisted of $63.5 million of assets classified as substandard and $3.1
million of assets classified as doubtful. The substandard and doubtful asset
classifications include $2.8 million and $3.1 million of Discounted Loans,
respectively. In addition, at the same date, $41.6 million of assets were
designated as special mention, which includes $10.9 million of Sub-Prime Auto
Loans.
Allowances for Losses. The Company maintains an allowance for loan losses at
a level believed adequate by management to absorb potential losses in the loan
portfolio. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible, or in the case
of automobile and other consumer loans, when payments are delinquent by more
than 120 days.
The Company uses its internal asset review system to identify and evaluate
impaired loans and to classify loans as special mention, substandard,
doubtful, loss. These terms correspond to varying degrees of risk that the
loans will not be collected in part or in full. The Company's policy is to
evaluate smaller-balance, homogenous pools of loans for impairment on a pooled
basis. These are primarily single-family residential and automobile and other
consumer loans. All other loans, whether Discounted Loans or other loans, are
evaluated for impairment on a loan-by-loan basis. All loans are subject to
potential classification as special mention, substandard, doubtful, or loss.
The frequency at which a specific loan is subjected to internal asset review
depends on the type and size of the loan and the presence or absence of other
risk factors, such as delinquency and changes in collateral values.
The allowance for loan losses comprises specific valuation allowances
established for impaired loans and for certain other classified loans, and
general valuation allowances. Specific valuation allowances are based on the
estimated fair value of the collateral for impaired or troubled collateral
dependent loans, in most cases. General valuation allowances are based on
management's periodic analyses of the composition of the loan portfolio,
delinquencies, loan classifications, historical loss experience, peer group
data, OTS guidelines, economic factors and other relevant information. These
estimation techniques apply to allowances established for both loans and
Discounted Loans.
When the Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by
59
<PAGE>
allocating a portion of the purchase discount deemed to be associated with
measurable credit risk. The allocation is based on the analyses of specific
and general valuation allowances discussed above. Amounts allocated to the
allowance for loan losses from purchase discounts do not increase the
provision for loan losses recorded in the statement of operations; rather they
decrease the amounts of the purchase discounts that are accreted into the
interest income over the lives of the loans. If, after the initial allocation
of the purchase discount to the allowance for loan losses, management
subsequently identifies the need for additional allowances against Discounted
Loans, the additional allowances are established through charges to the
provision for loan losses.
Accretion of purchase discounts (excluding amounts allocated to the
allowance for loan losses) and interest income on Discounted Loans are
recorded based on cash receipts. The same income recognition policies apply to
loans other than Discounted Loans when they are deemed to be non-performing,
generally when they are 90 days or more delinquent.
The Savings Banks were acquired at substantial discounts to their respective
book values, reflecting the poor quality of their assets and in the case of
First Bank, an expected imminent regulatory takeover. As part of the
acquisition, the Company acquired a substantial volume of impaired loans,
which required the Savings Banks to establish allowances for loan losses. In
addition, the OTS, as part of its examination process, periodically reviews
the Savings Banks' allowances for losses and the carrying values of assets.
First Bank and Girard increased their allowances for loan losses with
respect to the Inherited Loans by $4.8 million through September 30, 1996. In
the fourth quarter of 1995 and the first quarter of 1996, the Savings Banks
acquired approximately $24.5 million of Sub-Prime Auto Loans. Under OTS
regulations the Savings Banks have been required to write-off all auto loans
in excess of 120 days delinquent, notwithstanding that the Savings Banks
retain the cars as collateral. The aggregate portfolio of Sub-Prime Auto Loans
purchased is approximately 3,000 loans, approximately 65.9% of which have
become delinquent. The Savings Banks have established reserves aggregating
$8.6 million through the third quarter of 1996, including a 10% reserve on
such loans which are current.
In the third quarter of 1996, the Company established $4.5 million of
reserves for the Sub-Prime Auto Loans so that as of September 30, 1996
reserves have been provided for all loans in excess of 60 days delinquent.
Although the Company believes its allowances for loan losses are now adequate,
future additions to these allowances, in the form of provisions for losses on
loans, may be necessary due to changes in economic conditions, increases in
the size of the Company's loan portfolio and the performance of the loan
portfolio. The following table sets forth the Company's provision for
estimated losses on loans, net of recoveries, for the nine months ended
September 30, 1996.
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
------------- ----------
(DOLLARS IN THOUSANDS)
------------------------
<S> <C> <C>
Inherited Loans.................................. $ 4,774 30.3%
Sub-Prime Auto Loans............................. 8,583 54.5%
Other Purchased Loans............................ 2,394 15.2%
----------- ----------
Total provision for estimated losses on loans.... $ 15,751 100.0%
=========== ==========
</TABLE>
60
<PAGE>
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's loan portfolio and Discounted Loan portfolio by
category of loan and the percentage of loans in each category to total loans
in the respective portfolios at the dates indicated. The Company's allowances
for losses includes purchased discount.
COMPANY'S TOTAL ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan portfolio:
Real estate.......................... $34,825 $ 9,830 $ 6,948
Non-real estate...................... 5,261 407 322
Discounted Loan portfolio............ 6,218(1) 15,414 431
------- ------------ -----------
Total Allowances................... $46,304 $ 25,651 $ 7,701
======= ============ ===========
</TABLE>
- --------
(1)The difference between the balance at December 31, 1995 and September 30,
1996 reflects a securitization.
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's total loan portfolio during the periods
indicated.
ACTIVITY IN COMPANY'S ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period... $25,651 $ 7,701 $ 4,314
Provision for loan losses...... 15,751 4,266 2,173
Allocation from purchased loan
discounts..................... 15,972 19,007 2,809
Charge-offs:
Real estate.................. 10,394 5,096 1,620
Non-real estate.............. 2,100 308 46
------- ------------ -----------
Total charge-offs............ 12,494 5,404 1,666
Recoveries:
Real estate.................. 1,361 81 71
Non-real estate.............. 63 -- --
------- ------------ -----------
Total Recoveries............. 1,424 81 71
------- ------------ -----------
Net (charge-offs) recoveries... (11,070) (5,323) (1,595)
------- ------------ -----------
Balance, end of period......... $46,304 $ 25,651 $ 7,701
======= ============ ===========
Net (charge-offs) recoveries as
a percentage of average loan
portfolio..................... (2.5)% (2.2)% (1.4)%
</TABLE>
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<PAGE>
Delinquency. The table below sets forth the delinquency status of the
Company's loan portfolio (excluding Discounted Loans) at each of the dates
indicated.
DELINQUENCY IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
NINE MONTHS ENDED -------------------------------------
SEPTEMBER 30, 1996 1995 1994
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of Delinquency:
30-59 days............ $17,956 3.7% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 10,577 2.2 3,037 1.1 2,202 1.1
90 days or more(2).... 44,582 9.1 12,679 4.5 11,632 6.1
------- ---- ------- --- ------- ---
Total loans delin-
quent.............. $73,115 15.0% $19,442 6.9% $18,347 9.6%
======= ======= =======
</TABLE>
- --------
(1) This table excludes Discounted Loans.
(2) All loans delinquent 90 days or more were on nonaccrual status.
(3) Increase is primarily due to Inherited Loans, Sub-Prime Auto Loans and
purchased sub-performing residential loans.
INVESTMENT ACTIVITIES
Investment Securities. Investment securities consist primarily of U.S.
Government securities and required investment in FHLB stock.
The following table sets forth the Company's investment securities available
for sale and held for investment at the dates indicated:
THE COMPANY'S INVESTMENT SECURITIES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------
1996 1995 1994 1993
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.......... $ 6,483 $ 9,083 $10,943 $ 6,632
Held to maturity
U.S. Government securities.......... 7,425 6,470 4,505 --
Mortgage-backed securities.......... 22,380 13,119 14,439 14,787
FHLB stock(1)....................... 2,911 1,421 1,612 564
------- ------- ------- -------
Total............................. 32,716 21,010 20,556 15,351
------- ------- ------- -------
Total investment securities......... $39,199 $30,093 $31,499 $21,983
======= ======= ======= =======
</TABLE>
- --------
(1) As a member of the FHLB of San Francisco, the Savings Banks are required
to purchase and maintain stock in the FHLB of San Francisco in an amount
equal to at least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
year or 3% of borrowings, whichever is greater.
PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 5,000 square feet of office space from a
corporation which is beneficially owned by Andrew A. Wiederhorn and Lawrence
A. Mendelsohn. See "Certain Relationships and Related Transactions." The
Savings Banks also rent approximately 8,000 sq. ft. of office space in two
locations in Portland, Oregon from a corporation which is beneficially owned
by Messrs. Wiederhorn and Mendelsohn. See "Certain Relationships and Related
Transactions." Girard leases its branch office in La Jolla, California
pursuant to a lease expiring May 31, 1997. First Bank leases its branch office
in Beverly Hills, California and office space for its merchant bankcard
operations in Calabasas, California pursuant to leases expiring February 29,
2000 and November 30,
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<PAGE>
1999, respectively. The Company also leases office space in London, England
pursuant to a month-to-month lease. The Company believes its facilities are
both suitable and adequate for its current business purposes.
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving a competitive advantage in acquiring Loan Portfolios, minimizing
operating costs and increasing overall profitability. The Company uses
proprietary software which was developed over a period of years by the
Wilshire Companies. In addition to standard industry software applications,
the Wilshire Companies have internally developed fully integrated proprietary
applications designed to provide decision support and automation of portfolio
tracking and reporting. The Company's systems have significant additional
capacity for expansion without commensurate cost increases.
The proprietary software packages developed for asset resolution use
advanced financial models to support the resolution strategy, as well as track
performance against specified timeliness for each procedure. The system
permits immediate access to pertinent loan information and the automatic
preparation of letters and notices to borrowers. The Company also maintains a
centralized data warehouse.
EMPLOYEES
As of September 30, 1996, the Savings Banks had 46 employees. As of the
closing of the Common Stock Offering and the Notes Offering the Company and
its subsidiaries are expected to have approximately 80 full-time and shared
employees in the United States and 6 employees in the United Kingdom. The
employees are not represented by a collective bargaining agreement, and
management believes that it has good relations with its employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean-up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future.
In the course of its business, the Company has acquired and may acquire in
the future, properties securing loans that are in default. Although to date
the Company primarily lends to owners of and purchases loans secured by
residential properties, there is a risk that the Company could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury
and investigation and clean-up costs incurred by such parties in connection
with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
such property.
COMPETITION
The Company's competition in the financial services business includes
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. Competition in loan
markets can take many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees, and interest rates. The Company believes that it
is able to compete on the basis of providing
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<PAGE>
prompt and responsive service and its ability to analyze and purchase
performing, sub-performing and discounted loans secured by varied collateral.
The Company also faces competition in its discounted loan acquisition
activities. Discounted loans are generally acquired in auctions or competitive
bid circumstances. Although many of the Company's competitors have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage relative to many of its competitors as a result of its
experience in servicing and resolving troubled loans, its large investment in
proprietary software, technology and other resources which are necessary to
conduct its business, and the strategic relationships and contacts which it
has developed in connection with these activities.
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<PAGE>
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition
and prospects of the Savings Banks and the Company can be materially affected
not only by management decisions and general economic conditions, but also by
applicable statutes and regulations and other regulatory pronouncements and
policies promulgated by regulatory agencies with jurisdiction over the Savings
Banks and the Company, such as the OTS and the FDIC. The effect of such
statutes, regulations and other pronouncements and policies can be
significant, cannot be predicted with a high degree of certainty and can
change over time. Moreover, such statutes, regulations and other
pronouncements and policies are intended to protect depositors and the
insurance funds administered by the FDIC, and not stockholders or holders of
indebtedness which is not insured by the FDIC.
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-
affiliated parties, as defined. In general, these enforcement actions must be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief
summaries thereof as in effect on the date of this Prospectus. This discussion
is not intended to constitute and does not purport to be a complete statement
of all legal restrictions and requirements applicable to the Company and the
Savings Banks and all such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and other regulatory
pronouncements.
Recent Regulatory Examinations. Following examinations of the Savings Banks
and WAC by the OTS in 1994, 1995 and 1996, the OTS issued Reports of
Examination that were critical of the Savings Banks and WAC in a number of
respects. These regulatory concerns initially resulted in the OTS requiring
First Bank to enter into a Supervisory Agreement on June 8, 1995. The
Supervisory Agreement required First Bank to (a) develop plans and procedures
concerning (i) reduction of non-performing assets, (ii) internal asset review,
(iii) asset monitoring, (iv) appraisals, (v) loan underwriting, (vi) loan
purchases; (b) enhance recordkeeping; (c) develop requirements to ensure that
the servicing of loans by WCC is satisfactory; and (d) maintain its separate
corporate existence. In addition, the Supervisory Agreement required First
Bank to maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of the Assistant Regional Director of
the OTS--West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised First
Bank that it had not fully complied with the terms of the Supervisory
Agreement and that both Savings Banks had failed in a number of respects to
address regulatory concerns raised in the 1994 and 1995 examination reports.
The OTS also expressed continuing concerns regarding the adequacy of
management of First Bank in light of its business activities. As a result of
these issues, the OTS replaced the Supervisory Agreement with a Cease and
Desist Order, effective October 31, 1996. Given the similar nature of Girard's
business activities, the OTS has also issued a Cease and Desist Order to
Girard similar to the Order issued to First Bank, also effective October 31,
1996. The issuance of a cease and desist order is generally evidence of an
increased level of regulatory concern regarding the subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well- capitalized" under OTS
regulations. The Orders further require that the Savings Banks appropriately
risk-weight their assets and off-balance sheet items pursuant to OTS
regulations and establish and thereafter maintain internal controls sufficient
to ensure the accuracy and integrity of the calculation of their regulatory
capital ratios. The Orders also require the Savings Banks to: (a) revise
policies and procedures concerning (i) internal asset reviews, (ii) the
allowances for loan and lease losses, (iii) loan purchases, (iv) internal
audits and (v) hedging transactions;
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<PAGE>
(b) develop plans to augment the depth and expertise of the management teams;
(c) revise business plans; (d) modify certain policies concerning the
accounting for loan discounts; (e) improve monitoring of (i) interest rate
risk, (ii) asset classifications (e.g., as held for sale versus held to
maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and
(h) enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Savings Banks
submit to the OTS, by certain specified dates, various policies, plans and
reports on other actions to comply with the Orders. In some cases, OTS
approval of such information is required.
Specifically, among other things, the Orders require that the Savings Banks
revise and submit to the OTS their internal asset review policies and
procedures (the "IAR Policies") to provide guidance on identifying and
classifying troubled, collateral dependent loans under OTS regulatory guidance
and, for purposes of ensuring the independence of the internal asset review
process, to require that loan underwriting, servicing and purchasing functions
be generally segregated from the credit review function. In addition, the
Orders require the Savings Banks to develop, implement and maintain an
effective internal asset review system that provides for adequate internal
controls to ensure that management timely reviews and classifies assets under
the IAR Policies.
The Orders also require the Savings Banks to revise and submit to the OTS
their policies and procedures for allowances for loan and lease losses (the
"ALLL Policies") regarding the factors considered in setting loan loss
allowances and to provide adequate internal controls to ensure that management
and the Savings Banks comply with the revised ALLL Policies. Under the Orders,
when the Savings Banks report quarterly to the OTS on their progress in
implementing the ALLL Policies, the Savings Banks must also submit their
reserve analyses for the preceding calendar quarter.
The Orders also require that the Savings Banks revise and submit to the OTS
their loan purchase policies and procedures (the "Loan Purchase Policies") to
provide specific guidance on due diligence scope and sampling, assign
personnel to oversee due diligence activities and require such personnel to
ensure that all diligence is completed in accordance with the Loan Purchase
Policies and to provide specific guidance regarding the use and reliance on
broker price opinions. Under the Orders, the Savings Banks are directed to
establish and maintain sufficient internal controls to confirm that loan data
for all purchased loans meet certain minimum standards set by the Savings
Banks and to identify loan documentation deficiencies prior to purchase.
The Orders require that the Savings Banks submit to the OTS an amended
accounting policy that requires management to establish and adhere to
appropriate guidance and procedures for the amortization of discounts on
Discounted Loans, to establish appropriate reserves on Discounted Loans prior
to recognizing the yield adjustment on such loans into income and to
demonstrate the accuracy of the yield adjustment component of the discount.
In connection with the requirements of the Orders regarding asset liability
management, the Savings Banks are required to submit to the OTS a hedging
policy that fully complies with relevant accounting guidance and that
establishes written guidelines to ensure the Savings Banks document their
hedging strategy. In addition, the Savings Banks are required to submit to the
OTS a plan to develop or obtain internal expertise and resources necessary to
measure, monitor and model the Savings Banks' interest rate risk.
The Orders provide that the Savings Banks must submit a plan detailing how
WCC will complete a comprehensive audit of certain of its servicing activities
for the Savings Banks and take such action to ensure that WCC fully implements
the results of such audit. Further, the Orders require that the Savings Banks
take corrective actions specified, and adhere to the controls developed, in
the audit.
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<PAGE>
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging Arthur Andersen LLP to review
management's implementation of corrective actions required by the OTS,
(iii) increasing the size of the internal asset review department, and (iv)
revising the internal asset review policy. The Company is also in the process
of hiring a manager to complete the development and implementation of an
effective internal asset review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without further
modification or will not impose further restrictions on the Savings Banks.
OTS Growth Restrictions. Since June 30, 1995, First Bank has had limited
ability to increase deposits due to the provisions of an OTS Supervisory
Agreement which prohibited First Bank from increasing assets above specified
levels. Accordingly, the Company's asset growth has principally been financed
through the raising of deposits at Girard. However, due to the issuance of the
Orders, the Company will not be able to utilize the Savings Banks as vehicles
for growth until and unless the Orders are lifted or modified. The Orders
prohibit First Bank and Girard from increasing their total assets, as measured
at the end of each calendar quarter, above $145 million and $408 million,
respectively, unless such increase is an amount that represents the total net
interest credited on deposit liabilities earned during that quarter plus any
increase permitted under the Orders in prior quarters.
SAVINGS AND LOAN HOLDING COMPANIES
The Company is a savings and loan holding company that is regulated and
subject to examination by the OTS. The activities of savings and loan holding
companies are governed by the provisions of the Home Owners' Loan Act, as
amended (the "HOLA"). Pursuant to the HOLA, a savings and loan holding company
may not (i) acquire control of a savings association or savings and loan
holding company without prior OTS approval; (ii) acquire, except with prior
OTS approval, by process of merger, consolidation, or purchase of assets of
another savings association or savings and loan holding company, all or
substantially all of the assets of any such association or holding company; or
(iii) acquire, by purchase or otherwise, more than 5% of the voting shares of
a savings association that is not a subsidiary, or of a savings and loan
holding company that is not a subsidiary. In considering whether to grant
approval for any such transaction, the OTS will take into consideration a
number of factors, including the competitive effects of the transaction, the
financial and managerial resources and future prospects of the holding company
and the institution involved, and the compliance records of such subsidiaries
with the Community Reinvestment Act ("CRA").
Federal law empowers the Director of the OTS to take substantive action when
he determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of a savings and
loan holding company's subsidiary savings institutions. In addition, the
Director of the OTS has oversight authority with respect to all holding
company affiliates. Specifically, the Director of the OTS may, as necessary
(i) limit the payment of dividends by the savings institutions; (ii) limit
transactions between the savings institutions, the holding company and the
subsidiaries or affiliates of either; or (iii) limit any activities of the
savings institutions that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institutions. Any such limits would be issued in the form of a directive
having the legal effect of a cease and desist order.
Activities Limitations--The Company is currently classified as a multiple
savings and loan holding company under applicable law as a result of its
ownership of the two Savings Banks, First Bank and Girard. A savings and loan
holding company which has only one insured institution subsidiary (known as a
"unitary" savings and loan holding company) and which subsidiary qualifies as
a qualified thrift lender ("QTL"), described below,
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<PAGE>
generally has the broadest authority to engage in various types of business
activities with few restrictions on its activities, except that historically
savings and loan holding companies have not been permitted to acquire or be
acquired by an entity engaged in securities underwriting or market making. A
holding company that owns two or more financial institutions, such as the
Company, or whose sole subsidiary fails to meet the QTL test is subject to the
activities limitations applicable to multiple savings and loan holding
companies. In general, a multiple savings and loan holding company (or
subsidiary thereof that is not an insured institution) may not commence or
continue for more than a limited period of time after becoming a multiple
savings and loan holding company (or a subsidiary thereof), any business
activity other than (i) furnishing or performing management services for a
subsidiary insured institution; (ii) conducting an insurance agency or an
escrow business; (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary insured institution; (iv) holding or managing
properties used or occupied by a subsidiary insured institution; (v) acting as
trustee under deeds of trust; (vi) those activities previously directly
authorized by the OTS by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) subject to prior
approval of the OTS, those activities authorized by the FRB as permissible
investment for bank holding companies.
Restrictions on Transactions with the Savings Banks--The Savings Banks are
subject to restrictions in their dealings with the Company and the Company's
non-bank subsidiaries under HOLA and certain provisions of the Federal Reserve
Act ("FRA") that are made applicable to savings institutions by HOLA and OTS
regulations.
A savings institution's transactions with its affiliates are subject to
limitations set forth in the HOLA and OTS regulations, which incorporate
Sections 23A, 23B, 22(g) and 22(h) of the FRA and Regulation O adopted by the
FRB. Under Section 23A, an "affiliate" of an institution is defined generally
as (i) any company that controls the institution and any other company that is
controlled by the company that controls the institution, (ii) any company that
is controlled by the shareholders who control the institution or any company
that controls the institution or (iii) any company that is determined by
regulation or order to have a relationship with the institution (or any
subsidiary or affiliate of the institution) such that "covered transactions"
with the company may be affected by the relationship to the detriment of the
institution. "Control" is determined to exist if a percentage stock ownership
test is met or if there is control over the election of directors or the
management or policies of the company or institution. "Covered transactions"
generally include loans or extensions of credit to an affiliate, purchases of
securities issued by an affiliate, purchases of assets from an affiliate
(except as may be exempted by order or regulation), and certain other
transactions.
THE SAVINGS BANKS
General. The Savings Banks are federally-chartered savings banks organized
under HOLA. As such, the Savings Banks are subject to regulation, supervision
and examination by the OTS. The deposit accounts of the Savings Banks are
insured up to applicable limits by the FDIC through the SAIF and, as a result,
the Savings Banks also are subject to regulation, supervision and examination
by the FDIC.
The business and affairs of the Savings Banks are regulated in a variety of
ways. Regulations apply to, among other things, insurance of deposit accounts,
capital ratios, payment of dividends, liquidity requirements, the nature and
amount of the investments that the Savings Banks may make, transactions with
affiliates, community and consumer lending laws, internal policies and
controls, reporting by and examination of the Savings Banks and changes in
control of the Savings Banks.
Regulatory Capital Requirements. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed
on national banks. The OTS also is authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case
basis. The Orders require that both Savings Banks maintain minimum capital
ratios required of institutions to be deemed "well-capitalized" commencing
December 31, 1996.
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<PAGE>
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of
adjusted total assets (as defined in the regulations), core capital equal to
3% of adjusted total assets and total capital (a combination of core and
supplementary capital) equal to 8% of risk-weighted assets. For these
purposes, tangible capital is core capital less all intangibles other than
qualifying mortgage servicing rights. Since neither Savings Bank had
intangibles at September 30, 1996, tangible Capital was the same as core
Capital for both Savings Banks. Core capital includes common stockholders'
equity, non-cumulative perpetual preferred stock and related surplus' minority
interests in the equity accounts of fully consolidated subsidiaries and
certain non-withdrawable accounts and pledged deposits.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements, subject to certain limitations, and loan and lease loss general
valuation allowances. General valuation allowances can generally be included
up to 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items,
are multiplied by a risk weight based on the risks inherent in the type of
assets. The risk weights assigned by the OTS for principal categories of
assets currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred
tax assets represent deferred tax assets, reduced by any valuation allowances,
in excess of deferred tax liabilities.) Application of the limit depends on
the possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited to taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and
carryforwards), or its tax-planning strategies, such deferred tax assets are
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year of the quarter-end report date or 10% of core
capital. The foregoing considerations did not affect the calculation of the
Savings Banks' regulatory capital as of September 30, 1996.
The OTS promulgated a regulation that requires that an interest-rate ("IRR")
risk component be included in the risk-based capital regulation. However, the
effective date of the interest-rate risk component has been delayed. Under the
rule, an institution with a greater than specified level of interest rate risk
is subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution would be required to maintain additional capital
in order to comply with the risk-based capital requirement. Had the interest-
rate risk component been in effect at June 30, 1996, the Savings Banks'
capital ratios would not have been affected by this rule.
Insurance of Accounts. As an FDIC-insured institution, the Savings Banks are
required to pay deposit insurance premiums to the SAIF as administered by the
FDIC. The SAIF maintains a fund to insure deposits of savings institutions,
including the Savings Banks. The SAIF also maintains a fund to insure the
deposits of institutions, such as the Savings Banks, that were previously
insured by the Federal Savings and Loan Insurance Corporation ("FSLIC"). The
SAIF historically has had three major obligations: to fund losses associated
with the failure of institutions with SAIF-insured deposits; to increase the
SAIF's reserves to 1.25% of insured deposits; and to make interest payments on
debt incurred to provide funds to the FSLIC (the "FICO debt"). Under current
FDIC regulations, institutions are assigned to one of three capital groups
based on the level of an institution's capital, "well-capitalized,"
"adequately capitalized," or "undercapitalized," which are defined in the same
manner as in the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the
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institution's primary federal banking regulator, resulting in nine assessment
classifications. Deposit insurance premium assessment rates currently range
from .23% for well capitalized institutions with only a few supervisory
concerns to .31% for undercapitalized institutions with substantial
supervisory concerns.
Recently proposed FDIC regulations would reduce future semi-annual SAIF
assessments for savings institutions such as the Savings Banks. The proposed
reduced assessment schedule would reduce rates to .18% for well capitalized
with only a few minor supervisory concerns to .27% for undercapitalized
institutions with substantial supervisory concerns for the period October 1,
1996 through December 31, 1996 and thereafter to .0% to .27%, respectively. In
addition, savings institutions such as the Savings Banks will pay an
additional .0645% in semi-annual premiums to cover costs of the FICO debt.
Recapitalization of SAIF. The SAIF, due to the large number of failed
savings institutions in the late 1980's and early 1990's, has been unable to
attain the statutorily-required reserve ratio of 1.25% of insured deposits.
Legislation enacted on September 30, 1996, provides for a special assessment
to be collected no later than 60 days after the date of enactment based on
deposits held as of March 31, 1995, at a rate sufficient to provide the SAIF
with reserves equal to 1.25% of total deposits. The FDIC currently estimates
that the special assessment rate will be 65.7 basis points. Based on the
Savings Banks' deposits as of March 31, 1995, the one-time special assessment
at 67.5 basis points resulted in the Savings Banks' incurring a pre-tax charge
of approximately $1.4 million.
The law also provides that the SAIF and the Bank Insurance Fund ("BIF") BIF
shall be merged on January 1, 1999, provided that all savings associations
have converted to banks by that date, but does not provide legislation to
implement such a conversion. The law further provides that between January 1,
1997, and December 31, 1999 (or the date the last savings association ceases
to exist, whichever is earlier), the interest costs for FICO debt will be
shared by SAIF and BIF assessments, with SAIF institutions paying about 60% of
the dollar amount and BIF institutions paying about 40% of the dollar amount.
If the BIF and SAIF have not merged by January 1, 2000, these FICO interest
costs will be assessed pro rata, with all insured institutions paying the same
rate. The law also includes a provision intended to limit "deposit shifting"
from a SAIF-insured institution to a BIF-insured affiliate.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Banks, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed by an
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Savings Banks' deposit
insurance.
Prompt Corrective Action. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii)
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"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier
I leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total risk-
based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio
that is less than 3.0% or a Tier I leverage capital ratio that is less than
3.00%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to adjusted total assets that is equal to or less than 2.0.% The
regulations also permit the appropriate federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. As of September 30,
1996, the Savings Banks were "well capitalized" institutions under the prompt
corrective action regulations of the OTS.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of
a capital restoration plan; placing limits on asset growth; limiting
acquisitions, branching or new lines of business; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rates that the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.
Brokered Deposits. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions or the business of placing deposits with insured
depository institutions for the purpose of selling interests in those deposits
to third parties. Under FDIC regulations, well-capitalized institutions are
not subject to any brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit which exceeds by more than (a)
75 basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) by 120% for retail deposits and 130% for wholesale
deposits, respectively, of the current yield on comparable maturity U.S.
treasury obligations for deposits accepted outside the institution's normal
market area. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market
area or in the market area in which such deposits are being solicited.
Restrictions on Capital Distributions. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a savings association as a capital distribution. The
regulations establish a tiered system of regulation with the greatest
flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year, without prior
OTS approval, of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half its
"surplus capital ratio" at the beginning of the calendar year (the amount by
which the institution's actual capital exceeded its fully phased-in capital
requirement at that date) or (ii) 75% of its net income over the most recent
four-quarter period. An
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institution that meets its current minimum capital requirements but not its
fully phased-in capital requirements may make capital distributions, without
prior OTS approval, of up to 75% of its net income over the most recent four-
quarter period, as reduced by the amounts of any capital distributions
previously made during such period. An institution that does not meet its
minimum regulatory capital requirements prior to, or on a pro forma basis
after giving effect to, a proposed capital distribution, or that the OTS has
notified as needing more than normal supervision, is not authorized to make
any capital distributions unless it receives prior written approval from the
OTS or the distributions are in accordance with the express terms of an
approved capital plan.
The OTS has proposed an amendment to its capital distribution regulation to
conform to its PCA regulations by replacing the current "tiered" approach
summarized above with one that would allow institutions to make capital
distributions that would not result in the institution falling below the PCA
"adequately capitalized" capital category. Under this proposal, an institution
would be able to make a capital distribution (i) without notice or
application, if the institution is not held by a savings and loan holding
company and received a sufficiently favorable regulatory rating of 1 or 2,
(ii) by providing notice to the OTS if, after the capital distribution, the
institution would remain at least "adequately capitalized," or (iii) by
submitting an application to the OTS.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporation reorganizations.
Affiliate Transactions. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative
and qualitative restrictions. Affiliates of a savings association include,
among other entities, companies that control, are controlled by or are under
common control with the savings association. As a result, the Company and its
non-bank subsidiaries are affiliates of the Savings Banks.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between
a savings association and an affiliate, as well as certain other transactions
with or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations
are required to make and retain detailed records of transactions with
affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the FRB has determined to be permissible for bank
holding companies. Savings associations are prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally
executive officers, directors or 10% stockholders of the institution) or their
"related interests" be made on substantially the same terms (including
interest rates and collateral) as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with the general public and not involve more than the normal risk of repayment
or present other unfavorable features.
Qualified Thrift Lender Test. All savings associations are required to meet
a QTL Test set forth in the HOLA and regulations of the OTS thereunder to
avoid certain restrictions on their operations. A savings association that
does not meet the QTL Test set forth in the HOLA and implementing regulations
must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the association may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall be restricted to those of a national bank;
(iii) the association shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank.
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Upon the expiration of three years from the date the association ceases to be
a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Historically, the QTL test has required that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-
related assets on a monthly basis in at least nine out of every 12 months. As
of September 30, 1996, the qualified thrift investments of the First Bank and
Girard were approximately 83.2% and 85.7%, respectively, of their portfolio
assets. Recently enacted legislation provides that certain education, small
business and consumer loans may be included as qualified thrift investments
for purposes of the QTL test.
Loans-to-One Borrower. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Savings Banks to any one borrower, including related entities,
generally may not exceed the greater of $500,000 or 15% of the unimpaired
capital and unimpaired surplus of the institution. Loans in an amount equal to
an additional 10% of unimpaired capital and unimpaired surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. An institution's "unimpaired capital and unimpaired surplus"
includes, among other things, the amount of its core capital and supplementary
capital included in its total capital under OTS regulations.
As of September 30, 1996, First Bank's and Girard's unimpaired capital and
surplus amounted to $11.1 million and $26.7 million, respectively, resulting
in a general loans-to-one borrower limitation of $1.7 million and $4.0
million, respectively under applicable laws and regulations. See "Business--
Loan Portfolio."
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS
Truth in Lending. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them
the ability to compare credit terms. TILA also guarantees consumers a three
day right to cancel certain credit transactions including loans of the type
originated by the Company and the Savings Banks. Management of the Company and
the Savings Banks believes that they are in compliance with TILA in all
material respects. If the Company and the Savings Banks were found not to be
in compliance with TILA, aggrieved borrowers could have the right to rescind
their loans and to demand, among other things, the return of finance charges
and fees paid to the Company.
Other Lending Laws. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation
B promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Company is subject to the Fair Housing Act and regulations thereunder,
which broadly prohibit certain discriminatory practices in connection with the
Company's business. The Company is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and services, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
Community Reinvestment Act. Under the CRA, as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit
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needs of its entire community, including low- and moderate- income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings
institutions, to assess the institution's CRA rating and requires that the OTS
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The four ratings are "outstanding
record of meeting community credit needs," "satisfactory record of meeting
community credit needs," "needs to improve record of meeting community credit
needs" and "substantial non-compliance in meeting community credit needs." An
institution's CRA rating is taken into account in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers,
consolidations and acquisitions. Poor CRA performance maybe the basis for
denying an application. First Bank and Girard each received a "needs to
improve record of meeting community credit needs" rating during their
respective most recent OTS examinations.
TAXATION
FEDERAL TAXATION
The Company and its subsidiaries will file a consolidated federal income tax
return based on a calendar year. Consolidated returns have the effect of
eliminating inter-company transactions, including dividends, from the
computation of taxable income.
Savings institutions such as the Savings Banks, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Savings Banks' taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to non-
qualifying loans must be computed under the experience method, while a
deduction with respect to qualifying loans may be computed using a percentage
based on actual loss experience or a percentage of taxable income.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income
method has permitted a qualifying savings institution to be taxed at a lower
maximum effective federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 32.2% exclusive
of any minimum tax or environmental tax (as compared to 35% for corporations
generally). Any savings institution at least 60% of whose assets are
qualifying assets, as described in Section 7701(a)(19)(c) of the Code,
generally will be eligible for the full deduction of 8% of taxable income. As
of December 31, 1995, approximately 84.5% of Girard's and 82.0% of First
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code. Girard and First Bank anticipate that at least 75% and 80%,
respectively of Girard's and First Bank's assets, respectively will continue
to be qualifying assets in the immediate future. If this ceases to be the
case, the Savings Banks may be required to restore their bad debt reserve to
taxable income in the future.
The amount of the bad debt deduction that a savings association may claim
with respect to additions to its reserve for bad debts under the percentage of
income method is subject to certain limitations. These limitations are not
expected to restrict the Bank from taking maximum advantage of the percentage
of taxable income method in the future, although there can be no assurances in
this regard. As of December 31, 1995, the Savings Banks' total bad debt
reserve was approximately $6.1 million.
To the extent (i) a savings association's reserve for losses on real
property loans under the percentage of taxable income method exceeds the
amount that would have been allowed under the experience method and (ii)
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a savings association makes distributions to stockholders (including
distributions in redemption, dissolution or liquidation) that are considered
to result in withdrawals from that excess bad debt reserve, the amounts
considered withdrawn will be included in the savings association's taxable
income. The amount that would be deemed withdrawn from such reserves upon such
distribution and which would be subject to taxation at the savings association
level at the normal corporate tax rate would be an amount equal to the amount
distributed plus the amount necessary to pay the corporate income tax with
respect to the withdrawal. Dividends will not be considered to result in
withdrawals from an association's bad debt reserves to the extent of current
or accumulated earnings and profits as calculated for federal income tax
purposes. Dividends in excess of a savings association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation will be considered to come
first from its bad debt reserve. The Savings Banks have no intention of paying
dividends or taking any other action which would result in recapture of its
bad debt reserves for tax purposes.
Recently enacted legislation repealed the special bad debt rules applicable
to savings associations for taxable years beginning after December 31, 1995.
Under the new provisions, savings associations will follow the same rules for
purposes of computing allowable bad debt deductions as banks. To the extent
the bad debt reserve of the savings association exceeds the allowable reserve
as computed under the rules applicable to banks, such excess will be subject
to recapture. Such amount, for the Savings Banks, is approximately $6.0
million as of December 31, 1995. There is an exception that, in general,
grandfathers the balance of the savings associations reserve balance as of
December 31, 1987. Under the newly enacted law, if a savings association
converts to a bank or is merged into a bank, the associations bad debt reserve
will not be automatically subject to recapture. Recapture of the grandfathered
bad debt reserve would still occur in the event of certain distributions as
previously discussed. Such amount, for the Savings Banks, is approximately
$0.1 million.
In addition to regular income taxes, corporations may be subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items generally applicable to
savings associations include (i) 100% of the excess of a savings association's
bad debt deduction computed under the percentage of taxable income method over
the amount that would have been allowable under the experience method and (ii)
an amount equal to 75% of the amount by which a savings association's adjusted
current earnings (alternative minimum taxable income computed without regard
to this preference, adjusted for certain items) exceeds its alternative
minimum taxable income without regard to this preference. Alternative minimum
tax paid can be credited against regular tax due in later years.
STATE TAXATION
For additional information regarding taxation, see Note 8 to the
Consolidated Financial Statements.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of October 28, 1996.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Andrew A. Wiederhorn....... 30 Chairman of the Board, Chief Executive Officer,
Secretary and Treasurer
Lawrence A. Mendelsohn..... 35 President and Director
Bo G. Aberg................ 48 Senior Vice President, European Operations
Donald J. Berchtold........ 51 Senior Vice President, Administration
Kenneth R. Kepp............ 41 Senior Vice President, Operations
Sheryl Anne Morehead....... 48 Senior Vice President, S&L Group and Chief
Executive Officer of the Savings Banks
Chris Tassos............... 39 Senior Vice President and Chief Financial
Officer
Phillip D. Vincent......... 42 Senior Vice President, Loan Servicing
Don H. Coleman............. 58 Director
Philip G. Forte............ 32 Director
David Dale-Johnson......... 49 Director
</TABLE>
All of the executive officers of the Company were elected at a meeting of
the Board of Directors held in October 1996. Their terms of office continue
until the next annual meeting of the Board of Directors and until their
successors shall have been elected and qualified.
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded the Wilshire
Companies in 1987 and continues to serve as the Chief Executive Officer of the
Wilshire Private Companies. Mr. Wiederhorn received his B.S. degree in
Business Administration from the University of Southern California.
Lawrence A. Mendelsohn is a director and the President of the Company. Since
February 1993 Mr. Mendelsohn has been the Executive Vice President of the
Wilshire Companies. From January 1992 until February 1993 Mr. Mendelsohn was
Vice President, Principal and Head of Capital Markets for Emerging Markets of
Bankers Trust New York Corporation/BT Securities Corporation. From August 1987
until January 1992 Mr. Mendelsohn was the Vice President, Senior Options
Principal and Head of Proprietary Trading for Equities, Equity Options and
Distressed Debt for JP Morgan and Co./JP Morgan Securities. Mr. Mendelsohn
received an A.B. degree in Economics from the University of Chicago, an M.A.
degree in International Politics from the University of Texas, an M.S. degree
in Business Research from the University of Southern California and is a
Ph.D./ABD in Finance from the University of Southern California.
Bo G. Aberg is the Senior Vice President, European Operations of the
Company. From November 1994 to September 1996, Mr. Aberg was Chief Executive
Officer of Securum Holding B.V., a Kingdom of Sweden owned work-out company in
Europe. From September 1992 to November 1994, Mr. Aberg was Chief Executive
Officer of Securum Real Estate Group, Malmo, Sweden. From January 1982 to
September 1992 Mr. Aberg held several positions within the PK Group (a Swedish
banking group), and from September 1974 to January 1982 he was a Chartered
Accountant for Hagstroms Revisions Byra AB Sweden (now Ernst & Young). Mr.
Aberg received the equivalent of a B.S. degree in Economics (Ekonomexanon) and
an academic degree in Law (Jurkandexamen) both from the University of
Stockholm, Sweden.
Donald J. Berchtold is the Senior Vice President, Administration. From March
1992 until October 1996 Mr. Berchtold was the Senior Vice President,
Administration of the Wilshire Companies. From February 1991
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until November 1992 he was a consultant to Entertainment Publications Inc.--
CUC International Inc. Mr. Berchtold received a BSc. degree in
Business/Finance and Marketing from Santa Clara University. Mr. Berchtold is
Mr. Wiederhorn's father-in-law by marriage.
Kenneth R. Kepp is the Senior Vice President, Operations. From November 1991
until October 1996 Mr. Kepp was the Senior Vice President--Operations of the
Wilshire Companies. From June 1990 until November 1991 Mr. Kepp was the
Managing Director of Network Associates International, a consulting company to
the leasing industry. Mr. Kepp received a B.S. degree in Finance from Northern
Illinois University.
Sheryl Anne Morehead is the Senior Vice President, S&L Group of the Company
and Chief Executive Officer of the Savings Banks. From December 1993 until
October 1996, Ms. Morehead was the Chief Credit Officer/Chief Operating
Officer of First Los Angeles Bank/San Paulo Bank Group, a savings bank. From
August 1990 until December 1993, Ms. Morehead was the Chief Credit
Officer/Executive Vice President of First Federal Bank, a savings bank. Ms.
Morehead received a B.S. degree from Boston University and an M.B.A. degree
from Harvard Graduate School of Business.
Chris Tassos is the Senior Vice President and Chief Financial Officer of the
Company. Since August 1995 Mr. Tassos has been the Senior Vice President of
Finance of the Wilshire Companies. From March 1992 until February 1995 he was
the Chief Financial Officer and/or Senior Vice President of Finance of Long
Beach Mortgage Company (formerly Long Beach Bank). Mr. Tassos received a B.A.
degree from California State University, Fullerton. From July 1979 until April
1984 and May 1985 until September 1990 Mr. Tassos was an auditor for Deloitte
& Touche LLP.
Phillip D. Vincent is Senior Vice President, Loan Servicing of the Company.
Mr. Vincent was Senior Vice President and Chief Administrative Officer of The
J.E. Robert Company, Inc., one of the largest real estate and mortgage
investment managers in the U.S. from April 1995 until July 1996, Senior Vice
President and Managing Officer of The J.E. Robert Company, Inc. from June 1992
until September 1995, and Vice President and Division Manager of The J.E.
Robert Company, Inc. from 1991 until May 1992. Mr. Vincent is a member of the
American Institute of Certified Public Accountants. Mr. Vincent received a
B.S. degree in Finance from Oklahoma State University.
Don H. Coleman is a director of the Company. Since March 1994 Mr. Coleman
has been the President of International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone equipment
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. From 1984
to 1986, Mr. Coleman was President of Clarion Corporation of America, a major
supplier of automotive sound systems and electronics. Mr. Coleman is a
director of ICT Group, Inc., and Fabricated Metals, Inc., a materials handling
equipment manufacturer. Mr. Coleman received a B.A. degree in Economics and an
M.B.A. degree from Stanford University.
Philip G. Forte is a director of the Company. Mr. Forte has been the
President of Wilshire Cellular, Inc., a cellular phone leasing company, since
June 1994. Wilshire Cellular, Inc. is not part of the Wilshire Private
Companies, nor is it an affiliate of the Company. From March 1992 until June
1994, Mr. Forte was the Vice President, Sales and Marketing of Vinyl Chem
International, Inc., a textile chemical repair manufacturer. From September
1989 until March 1992 Mr. Forte was the Vice President, Sales and Marketing of
Pacific Western University. Mr. Forte received a B.S. degree in Business
Administration from the University of Southern California.
David Dale-Johnson is a director of the Company. Since 1988 Mr. Dale-Johnson
has been the Director, Program in Real Estate, School of Business
Administration, University of Southern California. Mr. Dale-Johnson is also a
consultant for several public and private companies and government agencies.
Mr. Dale-Johnson received his B.A. degree in Art History from the University
of British Columbia, M. Sc. degree in Business Administration from the
University of British Columbia and a Ph.D. degree in Business Administration
from the University of California, Berkeley.
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CERTAIN KEY EMPLOYEES
Stuart Adair is the Vice President, European Loan Acquisitions of WFC. From
1993 until September 1996 Mr. Adair was the Vice President, Loan Acquisitions
of the Wilshire Companies. From 1989 until 1993 Mr. Adair was an asset manager
of the Federal Deposit Insurance Corporation. Mr. Adair received a B.A. degree
from the University of Washington.
Glenn J. Ohl is the Chief Financial Officer of WFC. From August 1995 until
October 1996 Mr. Ohl was the Senior Vice President and Corporate Treasurer of
CWM Mortgage Holdings, Inc., an affiliate of Countrywide Credit Industries
Inc., a residential financing company. From September 1992 until August 1995
Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS
Mortgage, Inc., a financing company. Mr. Ohl received a B.A. degree from
Franklin and Marshall College and an M.B.A. degree from New York University.
Peter O'Kane is the Vice President, Loan Acquisitions. From May 1994 until
October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions of the
Wilshire Companies. From September 1992 until April 1994 Mr. O'Kane was an
Asset Manager, Investment Division of J.E. Robert Company, Inc. From September
1991 until September 1992 Mr. O'Kane was a staff consultant with Arthur
Andersen & Company. From March 1990 until August 1991 Mr. O'Kane was an
analyst for GranCorp, Inc., a real estate investment company. Mr. O'Kane
received a B.A. degree from the University of Washington.
Richard A. Papworth is the Chief Financial Officer of Girard and First Bank.
From May 1996 until August 1996 Mr. Papworth was the Chief Financial Officer
of Girard. From October 1995 until May 1996 Mr. Papworth was the Director of
Finance for Maintenance Warehouse America Corp., a national building
maintenance supply company. From October 1994 until October 1995 Mr. Papworth
was an Independent Financial Consultant. From July 1993 until October 1994 Mr.
Papworth was the Acting Chief Financial Officer and Treasurer of George Wimpey
Inc. and the Assistant Treasurer from April 1989 until July 1993. Mr. Papworth
received a B.S. degree in Accounting and a M.Acc. degree in Taxation from
Brigham Young University.
R. Scott Stevenson is the President of the Girard and First Bank. From June
1991 until October 1996 he was the President and Chief Executive Officer of
Girard. From January 1986 until June 1991 he held various positions at Girard
including Chief Operating Officer, Chief Financial Officer and a Loan Officer.
Mr. Stevenson received a B.S. degree in Accounting and an M.S. degree in
Taxation from Brigham Young University.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee, which consists of a majority of
independent directors who are not affiliated with the Principals ("Independent
Directors"), makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided
by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting controls.
Messrs. Wiederhorn, Coleman and Dale-Johnson are the members of the Audit
Committee.
ELECTION OF DIRECTORS
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not employees of the
Company a per meeting fee of $1,000 for each Directors' meeting and a per hour
fee for each committee meeting attended which is not on a regularly scheduled
meeting date. Under the Company's Stock Incentive Plan, each non-employee
director has been granted, effective as of the date on which the initial
public offering price is determined, a non-qualified option to purchase at the
initial public offering price a number of shares of Common Stock equal to
6,250 divided
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<PAGE>
by the initial public offering price, and each new non-employee director upon
the date of his or her election or appointment will be granted a non-qualified
option to purchase at the fair market value on the date of grant a number of
shares of Common Stock equal to 6,250 divided by the fair market value on the
date of grant.
EXECUTIVE COMPENSATION
The following table shows compensation received from the Wilshire Private
Companies by the Company's Chief Executive Officer and the three other most
highly paid executive officers for the fiscal years ended December 31, 1995.
The Company's Chief Executive Officer and such other officers received no
compensation from the Wilshire Public Companies in 1995. There were no other
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(1)
------------------ ---- ------------ -----------
<S> <C> <C> <C>
Andrew A. Wiederhorn........................... 1995 51,992(2) --
Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer
Lawrence A. Mendelsohn ........................ 1995 68,293(2) --
President
Donald J. Berchtold ........................... 1995 146,451 44,260
Senior Vice President, Corporate
Development
Kenneth R. Kepp ............................... 1995 150,012 50,000
Senior Vice President, Operations
</TABLE>
- --------
(1) For the year ended December 31, 1995 the Chief Executive Officer and the
three other most highly paid executive officers derived their salaries
from the Wilshire Private Companies taken as a whole and therefore
salaries and bonuses paid for the year do not necessarily reflect the
amount of salary and bonus attributable to work performed for WAC and the
Savings Banks, if any.
(2) Mr. Wiederhorn and Mr. Mendelsohn elected in the past to receive minimal
compensation from the Wilshire Private Companies to maintain capital in
the Wilshire Private Companies and have received shareholder loans from
the Wilshire Private Companies to fund their investment in WAC and certain
other expenses.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially similar employment agreements,
effective November 1, 1996, with Andrew A. Wiederhorn ("Mr. Wiederhorn") (as
Chief Executive Officer) and Lawrence A. Mendelsohn ("Mr. Mendelsohn") (as
President) (each individually, an "Executive" and collectively, the
"Executives"). Each agreement provides for an initial three-year term which is
automatically renewable for successive two-year terms (the "Employment Term")
unless either party gives written notice to the other at least ninety days
prior to the expiration of the then Employment Term. During the Employment
Term, each Executive will be obligated to devote a significant portion of his
business time, energy, skill and efforts to the performance of his duties
under the agreement and shall faithfully serve the Company, subject to his
right to serve as an employee and/or board member of certain companies and to
manage his personal financial and legal affairs.
The agreement provides for an annual base salary of $300,000 for Mr.
Wiederhorn and $300,000 for Mr. Mendelsohn (which may be increased, but not
decreased, by the Compensation Committee of the Board of Directors) and an
annual bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be
determined by the Compensation Committee of the Board of Directors and may not
exceed in the aggregate 20% of the pre-tax profits of the Company. Mr.
Wiederhorn and Mr. Mendelsohn share will share equally in the first $400,000
of any such bonus and thereafter their respective bonus will be two-thirds and
one-third. The agreement also provides that Mr. Wiederhorn and Mr. Mendelsohn
may participate in the Company's Incentive Stock Plan. See "--Stock Incentive
Plan."
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify the Executive to the fullest extent permitted by
law, in connection with any claim against the Executive as a result of the
Executive serving as an officer or director of the Company or in any capacity
at the request of the Company in or with regard to any other entity, employee
benefit plan or enterprise. Following the Executive's
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<PAGE>
termination of employment, the Company will continue to cover the Executive
even if the Executive has ceased to serve in such capacity.
If any payment to the Executive together with certain other amounts paid to
the Executive, exceeds certain threshold amounts and results from a change in
ownership as defined in Section 280G(b)(2) of the Code, the agreements provide
that the Executive will receive an additional amount to cover the federal
excise tax and any interest, penalties or additions to tax with respect
thereto on a "grossed up" basis.
The agreement may be terminated at any time by the Executive for Good Reason
or with or without Good Reason during the Change in Control Protection Period
(if a Change in Control occurs) or by the Company with or without Cause (as
each capitalized term is defined in the agreement).
If the Executive terminates his employment with the Company for Good Reason,
with or without Good Reason during the Change in Control Protection Period (if
a Change in Control occurs), the Executive is terminated without Cause, or the
Executive's employment terminates as a result of the Company giving notice of
nonextention of the Employment Term, he will receive severance pay (i) in an
amount equal to three times Base Salary in effect at termination and three
times the highest annual bonus paid or payable for any of the previous three
years, (ii) accelerated full vesting under all outstanding equity-based and
long-term incentive plans, (iii) any other amounts or benefits due under then
applicable employee benefit plans of the Company (in accordance with such
plan, policy or practice), (iv) three years of additional service credit that
the Executive would otherwise have been credited under any pension type
qualified or nonqualified pension plan, (v) three years of the maximum Company
contribution under any qualified or nonqualified 401(k) type plan and (vi)
continued medical benefits for three years. The agreement provides that
Executive will have no obligation to mitigate the Company's financial
obligations in the event of his termination due to death, disability,
termination for Good Reason, termination with or without Good Reason during
the Change in Control Protection Period or termination without Cause, and
there will be no offset against the Company's financial obligations for other
amounts earned by the Executive.
If termination is the result of Executive's death, the Company will pay to
the Executive (or his estate), an amount equal (i) any earned but not yet paid
compensation, (ii) a pro-rated bonus, (iii) any other amounts or benefits due
under then applicable employee benefit plans of the Company (in accordance
with such plan, policy or practice), (iv) payment on a monthly basis of 6
months of base salary to Executive's spouse or dependents and (v) continued
medical coverage for the Executive's spouse and dependents for three years. In
addition, the Executive will receive accelerated full vesting under all
outstanding equity-based and long-term incentive plans. If Executive's
employment is terminated by reason of disability, the Executive will be
entitled to receive payments and benefits to which his representatives would
be entitled in the event of his termination by reason of death, provided that
the payment of base salary will be reduced by any long-term disability
payments under any policy maintained by the Company.
INCENTIVE STOCK PLAN
The following is a summary of certain features of the Company's Incentive
Stock Plan (the "Stock Plan"). This summary is qualified by reference to the
Stock Plan itself. A copy of the Stock Plan is an exhibit to the Registration
Statement.
The Company's Board of Directors adopted the Stock Plan on October 28, 1996.
The Company's stockholders approved it on October 28, 1996. The purpose of the
Stock Plan is to enable the Company to attract, retain and motivate key
employees, directors and, on occasion, consultants, by providing them with
equity participation in the Company. Accordingly, the Stock Plan permits the
company to grant incentive stock options ("ISOs"), non-statutory stock options
("NSOs"), restricted stock and stock appreciation rights (collectively
"Awards") to employees, directors and consultants of the Company and
subsidiaries of the Company. The Stock Plan will terminate on October 28, 2006
unless terminated earlier by the Board of Directors.
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<PAGE>
Administration of the Plan. The Stock Plan will be administered by the
Company's Board of Directors, a committee appointed by the board (the
"Committee") or a combination of the two. References below to the
"Administrator" are to the body that administers the plan. For the present,
the Board of Directors has delegated administration of the Stock Plan to a
committee consisting of David Dale-Johnson and Don Coleman, two of the
Company's non-employee directors.
Securities Subject to the Plan. During the ten-year term of the Stock Plan,
the Company may grant Awards for a maximum of 1,750,000 shares of Common Stock
subject to adjustment in the case of stock splits and similar events. No one
person may receive Awards covering more than a cumulative total of 900,000
shares of Common Stock under the Stock Plan.
Employee Options. Under the Stock Plan, the Company may grant ISOs (under
Section 422 of the Code) and NSOs. The option exercise price of both ISOs and
NSOs may not be less than the fair market value of the shares covered by the
option on the date the option is granted. However, the exercise price of ISOs
granted to holders of more than 10% of the Company's outstanding stock may not
be less than 110% of that fair market value. Options will not be transferable
other than by will or the laws of descent and distribution or, in the case of
NSOs, under qualified domestic relations orders.
The Administrator will select the persons to whom options will be granted,
the number of shares subject to each option and the other terms and conditions
of each option, but in all cases consistent with the Stock Plan. The Option
Agreement evidencing each option will specify whether the option is intended
to be an ISO or an NSO. The Administrator may provide that options will be
exercisable in full at grant or become exercisable over time in accordance
with a vesting schedule. Options must expire no later than ten years after
they are granted (five years in the case of ISOs granted to holders of more
than 10% of the Company's outstanding stock). The exercise price of options
will be payable in cash or, if the Administrator permits, by the optionee's
full recourse promissory note, the surrender of shares of the Common Stock
already owned by the optionee or the "netting" of stock covered by the option
(the surrender of a portion of the option in payment of the exercise price).
Options granted as ISOs will be intended to qualify for special tax status
under Section 422 of the Code. An optionee will not have taxable income upon
the grant or exercise of an ISO (although exercise will result in income for
purposes of the alternative minimum tax), and the Company will receive no
income tax deduction at grant or exercise. The optionee will be entitled to
long-term capital gain treatment upon the sale of the option shares if the
shares are held more than two years after the grant date and more than one
year after the shares are transferred to the optionee. If the shares are sold
within either period, the difference between the exercise price and the market
value at the exercise date (but not more than the actual gain on sale) may be
taxable as ordinary income. Any additional gain would be a capital gain. Any
capital gain would be long-term if the optionee held the shares more than one
year. The Company will receive no deduction in connection with ISOs, except to
the extent an employee recognizes taxable ordinary income upon disposition of
option shares.
Upon the grant of an NSO, an optionee will not recognize taxable income for
federal income tax purposes and the Company will not be entitled to any
federal income tax deduction. Upon the exercise of an NSO, the optionee
generally will recognize ordinary income in an amount equal to the excess of
the fair market value of the shares acquired at the time of exercise over the
exercise price. The Company will be entitled to a corresponding deduction.
Special rules may govern the timing of the recognition of income by optionees
subject to Section 16 of the Exchange Act.
Director Options. On the last trading day of each calendar quarter beginning
March 31, 1997, the Company will automatically grant each director who is not
also an employee of the Company or a subsidiary of the Company (a "non-
employee director") an NSO to purchase that number of shares of Common Stock
that equals $6,250 divided by the fair market value per share of Common Stock
(its market price) on the date of grant. The exercise price of these options
will be that fair market value. Each of these director options will be fully
exercisable beginning six months after the date of grant and will terminate
(unless sooner terminated under
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<PAGE>
the terms of the Stock Plan) ten years after the date of grant. If such a
director ceases to be a member of the board for any reason other than death or
disability, these options will terminate on the first anniversary of the date
the director ceases to be a board member. If such a director dies or becomes
disabled while a member of the board, these options will terminate on the
second anniversary of the date the director dies or becomes disabled. Under
the Stock Plan, the Company could grant Awards to non-employee directors in
addition to these "automatic" quarterly option grants.
Restricted Stock. Under the Stock Plan, the Administrator may also grant
Awards of restricted shares of Common Stock. Each restricted stock Award would
specify the number of shares of Common Stock to be issued to the recipient,
the date of issuance, any consideration for such shares and the restrictions
imposed on the shares (including the conditions of release or lapse of such
restrictions). In general, shares subject to a restricted stock Award may not
be sold, assigned, transferred or pledged until the restrictions have lapsed
and rights to the shares have vested.
Stock Appreciation Rights. The Administrator may also grant Awards of stock
appreciation rights. A stock appreciation right entitles the holder to receive
from the Company, in cash or (if the Administrator so permits) Common Stock,
at the time of exercise, the excess of the fair market value at the date of
exercise of a share of Common Stock over a specified price fixed by the
Administrator in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Administrator will
not be less than the fair market value of shares of Common Stock at the date
the stock appreciation right was granted.
Terms and Conditions to Which All Awards Are Subject. If there is a stock
dividend, stock split, reverse stock split or reclassification of Common
Stock, appropriate adjustments will be made in the number and class of shares
of stock subject to the Stock Plan and each outstanding Award, and the
exercise price of each outstanding Award. Each such adjustment will be
determined by the Administrator in its sole discretion.
In addition, new Awards may be substituted for Awards previously granted, or
the Company's obligations respecting outstanding Awards may be assumed by an
employer corporation other than the Company, in connection with any merger,
consolidation or sale of substantial assets (but not a merger or consolidation
in which the Company is the continuing corporation which does not result in
any reclassification or exchange of the Common Stock). Further, in the event
of such a merger, consolidation or sale, the Administrator may decide to pay
cash to plan participants and terminate their Awards, or terminate their
Awards after giving them notice of the merger or other event to give them an
opportunity to exercise their Awards before the event.
Subject to the special rules described previously regarding the options to
be granted quarterly to non-employee directors, the Administrator will
establish the effect of employment termination on vested Awards.
Amendment and Termination. The Board of Directors at any time may amend or
terminate the Stock Plan. However, in general, amendments and termination
would not affect Awards previously granted. Certain amendments would be
subject to stockholder approval.
Initial Awards. As of the date of this preliminary Prospectus, the Company
had not granted any Awards. The day before the Commission declares the
Registration Statement effective, the Company will grant options under the
Stock Plan to Messrs. Wiederhorn and Mendelsohn. If, by that date, the
underwriters have not notified the Company that the underwriters will exercise
their over-allotment option, those options will cover 1,050,000 shares of
Common Stock for Messrs. Wiederhorn and Mendelsohn combined. If the
underwriters by that date have notified the Company that they will exercise
their over-allotment option in full, those options will cover a total of
1,083,750 shares of Common Stock. A partial exercise of the over-allotment
option will result in option amounts between 1,050,000 and 1,083,750 shares. A
portion of these options are intended to be ISOs. The balance will be NSOs.
The exercise price of the ISOs will be $ per share (110% of the initial
offering price to the public in the Common Stock Offering). The exercise price
for a portion of the NSOs will be $ per share (100% of the initial offering
price to the public in the Common Stock Offering). The remainder of the NSOs
will be at an exercise price of $ per share (125% of the initial offering
price to the public in the Common Stock Offering). Approximately 65.6% of the
NSOs will be priced at 100% of the initial offering price. All of these
options will be fully vested by January 2, 1997. The ISOs will have a five-
year term and the NSOs will have a ten-year term. The options will not
terminate earlier if the optionee ceases to be employed by the Company.
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The following table sets forth information concerning the options to be
granted to Messrs. Wiederhorn and Mendelsohn before the Registration Statement
becomes effective.
OPTIONS TO BE GRANTED AT CLOSING
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION
SHARES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM (3)
OPTIONS EMPLOYEES IN PRICES PER EXPIRATION ---------------------
NAME GRANTED FISCAL 1996 SHARE DATES 5% 10%
---- ---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 700,000(1) 67% $-- (2)
Lawrence A. Mendelsohn.. 350,000(4) 33% -- (2)
</TABLE>
- --------
(1) This figure will be 722,536 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
(2) Five years after the closing of the Common Stock Offering for the ISOs
( shares for Mr. Wiederhorn and shares for Mr. Mendelsohn) and
ten years for the NSOs ( shares for Mr. Wiederhorn and shares
for Mr. Mendelsohn). If the options are increased as indicated in notes
(1) above and (4) below, the ISO figures become shares for Mr.
Wiederhorn and shares for Mr. Mendelsohn and the NSO figures become
shares for Mr. Wiederhorn and shares for Mr. Mendelsohn.
(3) These amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of their terms. The assumed 5%
and 10% rates of stock price appreciation are mandated by rules of the
Commission. They do not represent the Company's estimate or projection of
future prices of the Common Stock.
(4) This figure will be 361,214 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
The following table contains additional information regarding cumulative
activity under the Stock Plan based on the same assumptions used for the
previous table.
CUMULATIVE OPTION STATUS
<TABLE>
<CAPTION>
TOTAL OPTION VALUES
------------------------------------------------------
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE ---------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 0 $ 0 700,000(2) 0 $ 0 --
Lawrence A. Mendelsohn.. 0 0 350,000(3) 0 0 --
</TABLE>
- --------
(1) By January 2, 1997.
(2) See note (1) to the previous table.
(3) See note (4) to the previous table.
Deductibility of Executive Compensation. Under Section 162(a) of the Code, a
corporation may deduct "a reasonable allowance for salaries or other
compensation for personal services actually rendered." However, Section 162(m)
generally limits the deduction for compensation paid to the chief executive
officer and certain other officers of a publicly-held corporation to $1
million in any taxable year. The corporation cannot deduct the compensation
paid to a covered officer in excess of $1 million.
In general, the excess of the fair market value of stock received on
exercise of Awards (other than ISOs) over the option exercise price is treated
as compensation for this purpose. Accordingly, the deduction for that excess
may be disallowed. However, this principle does not apply to "qualified
performance-based compensation." In addition, a special rule applies to
compensation paid under a plan that existed before the corporation became
publicly held. Options granted under the Stock Plan for a period of
approximately three and one-half years after the closing of the Common Stock
Offering will be intended to qualify under this special rule. In addition, the
Company may choose to cause options and other Awards granted after the Company
becomes publicly-held and which do not qualify under this special rule to
qualify for exemption from Section 162(m) as "qualified performance-based
compensation." However, there are no assurances that any or all Awards will
not be subject to the limitation of Section 162(m).
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of Common Stock as of the date of this Prospectus by (a) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock, (b) each director, (c) each
executive officer, and (d) all directors and executive officers as a group.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING
------------------------------ ---------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS(1) OWNERSHIP CLASS OWNERSHIP CLASS(2)
-------------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 3,617,127 65.77% 3,617,127 51.67%
Lawrence A. Mendelsohn.. 1,808,330 32.88% 1,808,330 25.83%
Bo G. Aberg............. -- -- -- --
Donald J. Berchtold..... -- -- -- --
Sheryl Anne Morehead.... -- -- -- --
Kenneth E. Kepp......... -- -- -- --
Chris Tassos............ -- -- -- --
Phillip D. Vincent...... -- -- -- --
Don H. Coleman.......... 11,222 .2% 11,222 .16%
Philip G. Forte......... -- -- -- --
David Dale-Johnson...... 11,222 .2% 11,222 .16%
All directors and execu-
tive officers as a
group (11 persons)..... 5,447,901 99.05% 5,447,901 77.82%
</TABLE>
- --------
(1) The address for each of the named officers and directors is c/o Wilshire
Financial Services Group Inc., 1776 SW Madison, Portland, Oregon 97205.
(2) Assumes no exercise of the Common Stock Underwriters' over-allotment
option.
Except as noted in the footnotes above (i) none of such shares is known by
the Company to be shares with respect to which such beneficial ownership and
(ii) the Company believes the beneficial holders listed above have sole voting
and investment power regarding the shares shown as being beneficially owned by
them.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
The Company leases office space for its corporate headquarters from Wilshire
Properties I, Incorporated, an Oregon corporation ("WPI"). Andrew A.
Wiederhorn and Lawrence A. Mendelsohn are the beneficial owners of WPI. The
lease agreement provides for an aggregate annual rent payment in 1997 of
approximately $90,000 and expires December 31, 2001. In addition to base rent
the Company is required to pay its proportionate share of operating expenses
incurred by WPI in connection with the operations of the building. The Savings
Banks lease approximately 8,000 sq. ft. of office space in two locations
pursuant to lease which provides for an aggregate annual rental payment in
1997 of approximately $96,000 and expires December 31, 1997.
STOCK TRANSACTIONS
Upon the closing of the Common Stock Offering and Notes Offering, certain
executive officers and directors will exchange 5.1% of the capital stock of
Girard, 5.1% of the capital stock of First Bank, and approximately 99% of the
capital stock of WAC (which itself owns 94.9% of the capital stock of Girard
and First Bank), for 5,447,901 shares of Common Stock of WFSG.
LOAN SERVICING AGREEMENT BETWEEN THE COMPANY, WFC, WSC AND WCC
The Company, WFC, WSC and WCC (Messrs. Wiederhorn and Mendelsohn are the
principal owners of WCC) entered into a non-exclusive loan servicing agreement
(the "Loan Servicing Agreement") pursuant to which WCC will provide loan
portfolio management services, including billing, portfolio administration and
collection services for all Loans. WCC has also agreed to license its
proprietary computer software to the Company, WSC and WFC. Pursuant to the
Loan Servicing Agreement, the Company shall be required to pay a servicing fee
equal to a market rate based on comparable fees charged by unaffiliated third
parties in arm's length transactions for similar types of loans at the time of
acquisition. WCC has agreed for a period of twenty years not to compete with
or be engaged in the same business in the same areas as currently conducted by
the Company, including purchasing and servicing loans.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans (the "Servicing Transfer"), provided that the Company or one of
its subsidiaries has obtained the appropriate licenses. Notwithstanding the
foregoing, the Company may request that the Servicing Transfer occur on an
earlier date, provided that the foregoing conditions are met. WCC, in its sole
discretion may refuse to effect the Servicing Transfer prior to the end of the
second year. The Servicing Transfer will occur automatically on the third
anniversary of the closing of the Common Stock Offering and Notes Offering.
After the Servicing Transfer WCC will permit the Company, subject to certain
conditions, to have access to its books, records and forms to ensure the
orderly transfer of the servicing. Following the Servicing Transfer, the fees
and costs to be paid by WCC for the servicing of its loans and the loans of
persons other than the Company shall be the Company's average costs for such
collection as specified in the Loan Servicing Agreement.
LOAN SERVICING AGREEMENT BETWEEN THE SAVINGS BANKS AND WCC
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC (Messrs. Wiederhorn and Mendelsohn are the principal
owners of WCC) pursuant to which WCC provides loan portfolio management
services, including billing, portfolio administration and collection services
for all loans owned, acquired or made by the Savings Banks. WCC receives a fee
equal to ten dollars per month for each loan serviced. The loan servicing
agreements are year-to-year and may be terminated by the Savings Banks or WCC
by giving notice at least sixty days prior to renewal date.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific discounted Loan Portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Loan Portfolios. To date, each of these loan servicing
agreements provides that WCC shall be entitled to an amount equal to (i) all
costs and expenses incurred by WCC for providing loan portfolio management
services, and (ii) an amount equal to twenty-five percent of the amount
collected on the specified Discounted
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Loan Portfolios (other than escrow payments, if any) which is in excess of the
initial payments made by the Savings Banks to acquire the Discounted Loan
Portfolios. Servicing fees for new Discounted Loan portfolio servicing
agreements will be chosen by the boards of directors of the Savings Banks
based upon fees charged by WCC in any other appropriate third-party servicing
agreement.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, WCC and its private
affiliates (Messrs. Wiederhorn and Mendelsohn are the principal owners of WCC
and its private affiliates) and the Company have agreed to provide, commencing
with the completion of the Common Stock Offering and the Notes Offering,
certain services to each other, including, among other things, certain
financial reporting functions, legal compliance, banking, risk management and
operational and strategic matters. The Administrative Services Agreement will
provide for the payment of a market rate plus reimbursement of any third party
expenses for any services rendered by one party for another. The term "market
rate" means the rate determined by the parties as being the rate charged by
independent third parties for providing similar services in an arm's-length
transaction. The initial term of the Administrative Services Agreement will
expire on December 31, 1997; it will continue for successive one year renewal
periods unless terminated by either of the parties on not less than 90 days
notice prior to the end of any period. The parties to the Administrative
Service Agreement have agreed to indemnify each other against liability
arising out of the willful misconduct or gross negligence of the indemnifying
party.
EMPLOYMENT WITH WCC
Messrs. Wiederhorn and Mendelsohn are the principal owners of WCC. Messr.
Wiederhorn is also the sole director of WCC. For a period of two to three
years after the closing of the Common Stock Offering and Notes Offering while
the Company is in the process of obtaining the necessary licensing approvals
for its servicing operations certain executive officers of the Company,
including Messrs. Wiederhorn, Mendelsohn, Kepp, Berchtold, Tassos and Vincent,
will also continue to be executive officers of WCC. Such executive officers
will receive minimal compensation from WCC. Following receipt of the necessary
licensing approvals only Messrs. Wiederhorn and Mendelsohn, the shareholders
of WCC will continue to be executive officers of WCC.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Company's employees are made by
the Compensation Committee of the Board of Directors. David Dale-Johnson and
Don H. Coleman are the members of the Compensation Committee.
STOCK TRANSACTIONS
Upon the closing of the Common Stock Offering and the Notes Offering,
certain executive officers and directors, including Messrs. Dale-Johnson and
Coleman will exchange 5.1% of the capital stock of Girard, 5.1% of the capital
stock of First Bank, and approximately 99% of the capital of WAC (which itself
owns 94.9% of the capital of Girard and First Bank), for 5,447,901 shares of
Common Stock of WFSG.
86
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of the Company's capital stock does not purport to
be complete and is qualified in its entirety by reference to (i) applicable
provisions of Delaware law, and (ii) the provisions of the Company's
Certificate of Incorporation and By-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is part.
The authorized capital stock of the Company consists of (i) 10,000,000
shares of Preferred Stock, (ii) 50,000,000 shares of Common Stock. Upon
consummation of the Common Stock Offering and Notes Offering, 7,000,000 shares
of Common Stock and no shares of Preferred Stock will be outstanding. The
issued and outstanding shares of Common Stock assuming no exercise of the
Underwriter's overallotment option have been, and the shares of Common Stock
offered hereby will be, duly authorized, validly issued, fully paid and
nonassessable. In addition, 31,225 shares of Common Stock have been reserved
for issuance upon exercise of outstanding options and an additional 1,750,000
have been reserved for options eligible to be granted under the Stock
Incentive Plan. The following summary description of the Company's capital
stock is qualified in its entirety by reference to the Certificate of
Incorporation and Bylaws of the Company, copies of which have been filed as
Exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of shares of Common Stock shall be entitled to one vote per share on
all matters to be voted upon by the stockholders of the Company. Holders of
Common Stock casting a plurality of the votes of stockholders entitled to vote
in an election of directors may elect all of the directors. Shares of Common
Stock do not have cumulative voting rights with respect to the election of
directors. Immediately after the Common Stock Offering, certain executive
officers and directors will hold shares of Common Stock constituting
approximately 78% of the voting power of the outstanding Common Stock, which
will allow them to control all actions to be taken by the stockholders,
including the election of all directors to the Board of Directors. While such
executive officers and directors will have the voting power to control the
votes on any matter requiring stockholder approval, the Company intends to
submit all such matters to a vote of all stockholders, and to hold an Annual
Meeting of Stockholders. However, because the Company's Bylaws provide that
any action that can be taken at a meeting of the stockholders may be by
written consent in lieu of the meeting if the Company receives consents signed
by stockholders having a minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present, such executive officers and directors may take all
actions required to be taken by the stockholders without providing the other
stockholders the opportunity to make nominations or raise other matters at a
meeting. See "Principal Stockholders" and "Risk Factors--Control of Current
Stockholders."
Holders of shares of Common Stock are entitled, in the event of liquidation,
dissolution or winding up of the affairs of the Company, to share ratably in
all assets remaining after payment of liabilities and preference applicable to
the Preferred Stock outstanding at the time. Holders of Common Stock do not
have any preemptive rights or rights to subscribe for additional securities of
the Company. Shares of Common Stock are not redeemable and there are no
sinking fund provisions.
Subject to preferences applicable to the Preferred Stock outstanding at the
time, holders of shares of Common stock are entitled to dividends if, when and
as declared by the Board of Directors from funds legally available therefor.
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate paying dividends foreseeable future.
See "Dividend Policy." Under the Indenture, dividends on the Common Stock can
be paid only in certain circumstances and up to a maximum amount.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is The Bank of New
York. Its address is 101 Barclay St., New York, NY 10286, attn: Investor
Relations, 11E. Its telephone number is 800-524-4458 and its facsimile number
is 212-815-3201.
87
<PAGE>
UNDESIGNATED PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Board of Directors is
authorized (subject to any limitations prescribed by law and the Company's
Certificate of Incorporation or by the rules of Nasdaq or any stock exchange
on which the Common Stock may then be listed) to issue the Preferred Stock
from time to time in one or more series, which Preferred Stock shall be
preferred to the Common Stock as to dividends and distributions of assets of
the Company upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company and shall have such designations, preferences,
rights, qualifications, limitations and restrictions as shall be provided by
the Board of Directors.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
an adverse effect on holders of Common Stock, depending upon the rights of
such Preferred Stock, by delaying or preventing a change in control of the
Company, making removal of the present management of the Company more
difficult, or resulting in restrictions upon the payment of dividends or other
distributions to holders of Common Stock.
DESCRIPTION OF NOTES OFFERING
The following summary of the principal terms of the Notes does not purport
to be complete and is qualified in its entirety by reference to all of the
provisions of the Indenture governing the Notes and the Notes, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Capitalized terms not otherwise defined herein have the
meanings specified in the Indenture.
The Notes will be limited in aggregate principal amount to $75 million
($86.25 million if the Notes Underwriter's over-allotment option is exercised
in full) and will mature on , 2003. The Notes will be unsecured obligations
of the Company. Interest on the Notes will accrue at a rate of % per annum
and will be payable in cash semi-annually in arrears on and of each
year, commencing , 1997.
On and after , 2001, the Notes will be redeemable at any time
at the option of the Company, in whole or in part, at specified redemption
prices together with accrued and unpaid interest to the date of redemption.
The Notes are not otherwise redeemable prior to , 2001 except that until
, 2001, the Company may redeem, at its option, up to 35% of the original
aggregate principal amount of the Notes at a redemption price equal to % of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date, from the net proceeds of one or more private or public sales
of Qualified Capital Stock (as defined) if at least 65% of the original
aggregate principal amount of the Notes remains outstanding after such
redemption. Upon the occurrence of a Change in Control Event (as defined),
holders of the Notes will have the right to require the Company to repurchase
their Notes, in whole or in part, at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any,
to the repurchase date.
The Indenture governing the Notes will contain certain covenants, including
net worth and liquidity maintenance requirements, limitations on the
incurrence of indebtedness, transfers and issuances of stock of the banks, the
making of restricted payments (including restrictions on the payment of
dividends on the Common Stock), the imposition of certain payment restrictions
on subsidiaries, transactions with affiliates, the existence of liens, the
making of guarantees by subsidiaries, and on mergers and sales of assets.
The Common Stock Offering is conditioned upon the consummation of the Notes
Offering.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock. Upon completion of the Common Stock
Offering, there will be outstanding 7,000,000 shares of Common Stock (assuming
no exercise of the Underwriters' over-allotment option).
88
<PAGE>
The 1,500,000 shares of Common Stock to be sold in the Common Stock Offering
(1,725,000 shares if the Underwriters' over-allotment option is exercised in
full) will be available for resale in the public market without restriction or
further registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144. 5,500,000 presently outstanding shares of Common
Stock and the 1,081,225 shares of Common Stock issuable upon the exercise of
options that the Company has granted or agreed to grant will be "restricted
securities" within the meaning of Rule 144, and are eligible for sale in the
public market in compliance with Rule 144. Shortly after the date of this
Prospectus, the Company intends to file a registration statement on Form S-8
under the Securities Act registering approximately 1,750,000 shares of Common
Stock issuable upon the exercise of options granted or to be granted pursuant
to the Company's Stock Incentive Plan. Upon effectiveness of the registration
statement, shares issued to nonaffiliates upon the exercise of the options
generally will be freely tradeable without restriction or further registration
under the Securities Act. All officers and directors of the Company have
agreed, subject to certain exceptions, that they will not offer, sell or
otherwise dispose of any shares of Common Stock owned by them for a period of
180 days after the date of this Prospectus without the prior written consent
of the Representative of the Underwriters. The Company has agreed, subject to
certain exceptions, that it will not offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representative of the
Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
is entitled to sell, within any three-month period, a number of restricted
shares as to which at least two years have elapsed from the later of the
acquisition of such shares from the Company or an affiliate of the Company in
an amount that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (70,000 shares based upon 7,000,000 shares
to be outstanding immediately after the Common Stock Offering), or (ii) if the
Common Stock is quoted on Nasdaq or a stock exchange, the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice, and the availability of current public information
about the Company. However, a person who is not deemed to have been an
affiliate of the Company during the 90 days preceding a sale by such person
and who has beneficially owned shares as to which at least three years has
elapsed form the later of the acquisition of such shares form the Company or
an affiliate of the Company is entitled to sell them without regard to the
volume, manner of sale, or notice requirements of Rule 144.
89
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement with
respect to the Common Stock Offering (the "Common Stock Underwriting
Agreement") among the Company and each of the underwriters named below (the
"Common Stock Underwriters"), for whom Friedman, Billings, Ramsey, & Co., Inc.
is acting as representative (the "Representative"), has severally agreed to
purchase from WFSG the aggregate number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.......................
---------
Total..................................................... 1,500,000
=========
</TABLE>
The Common Stock Underwriting Agreement provides that the obligations of the
Common Stock Underwriters are subject to certain conditions precedent,
including the completion of the Notes Offering, and that the Common Stock
Underwriters will purchase all of the Common Stock offered hereby if any such
Common Stock are purchased.
WFSG has been advised by the Representative that the Common Stock
Underwriters propose initially to offer the Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Common Stock Underwriters may allow, and such dealers may re-
allow, a discount not in excess of $ per share to certain other dealers.
The offering of the Common Stock is made for delivery when, as and if accepted
by the Common Stock Underwriters and is subject to prior sale and to the
Common Stock Underwriters' right to reject any order in whole or in part and
to withdraw, cancel, or modify the offer without notice. After the initial
public offering of the Common Stock, the offering price and other selling
terms may be changed by the Common Stock Underwriters.
WFSG has granted the Common Stock Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of 225,000 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. The Common Stock Underwriters may exercise such option only
to cover over-allotments, if any, made in connection with the sale of shares
of Common Stock offered hereby. If purchased, the Common Stock Underwriters
will offer such additional shares of Common Stock on the same terms as the
1,500,000 shares of Common Stock are being offered. To the extent that the
Common Stock Underwriters exercise such option, each of the Common Stock
Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to 1,500,000 and
WFSG will be obligated, pursuant to the option, to sell such shares of Common
Stock to the Common Stock Underwriters.
The Company has agreed to indemnify the Common Stock Underwriters against
certain liabilities including liabilities under the federal securities laws,
or to contribute to payments the Common Stock Underwriters' may be required to
make in respect thereof.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock was determined by negotiations between the Company and the
Representative. Among the factors considered in such negotiations were the
history of, and prospects for the Company and the industry in which it
competes, an assessment of management, the Company's past and present
operations, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the general condition of the
securities markets at the time of the Common Stock Offering and the market
prices of publicly-traded common stocks of comparable companies in recent
periods.
The Common Stock Underwriters do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
90
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will is being passed on for
the Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York.
Certain legal matters in connection with the Common Stock offered hereby will
be passed upon for the Common Stock Underwriters by Gibson, Dunn & Crutcher
LLP, Orange County, California.
EXPERTS
The audited consolidated financial statements of the Company and its
subsidiaries at and for the nine months ended September 30, 1996, and at
December 31, 1995 and 1994 and for the two years then ended, the audited
consolidated financial statements of Girard Savings Bank, F.S.B. and
Subsidiary for the period from January 1 through November 8, 1994, and the
audited combined financial statements of Wilshire Credit Corporation and
Affiliates at and for the nine months ended September 30, 1996 and at December
31, 1995 and 1994 and for the two years then ended, have been included herein
in reliance upon the reports of Deloitte & Touche LLP, independent auditors,
upon the authority of said firm as experts in auditing and accounting.
91
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION
WCC'S LOAN ACTIVITY
Since the Company has and will be engaged in the loan acquisition and
origination businesses similar to those conducted by WCC, this section
contains certain information with respect to loans serviced, acquired or
originated by WCC to assist investors in evaluating the Company's ability to
engage in these activities on an ongoing basis. These loans (including
servicing rights) are not owned by the Company and investors in the Common
Stock or the Notes will have no right or claim to such assets. The financial
statements of WCC are included as an appendix since the Company will carry on
certain similar business operations with some of the same management as WCC.
However, the Company does not believe that the historical results of
operations of WCC are representative of future results of operations of the
Company or WFC. In addition, there can be no assurance that the results of
operations of WCC will be indicative of future performance or that the Company
will be able to acquire, originate and service mortgage loans to the same
extent as WCC.
ACTIVITY IN WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN ACQUISITION AND ORIGINATION
DATA:
Loan purchases and originations:
Single-family residential.......... $ 143,581 $ 5,742 $ 57,832 $ 1,059
Multi-family residential........... -- 983 667 --
Commercial and other mortgage
loans............................. 3,915 2,671 39,002 1,964
Consumer and other................. 45 14,223 101,890 39,330
---------- -------- -------- --------
Total............................ 147,541 23,619 199,391 42,353
Discounted loan purchases:
Single-family residential.......... 92,444 36,653 26,342 95
Multi-family residential........... 1,158 4,773 1,392 191
Commercial and other mortgage
loans............................. 16,598 22,252 8,087 4,322
Consumer and other................. 1,030 50,345 5,669 284,663
---------- -------- -------- --------
Total............................ 111,230 114,023 41,490 289,271
---------- -------- -------- --------
Total loan acquisitions and
originations........................ $ 258,771 $137,642 $240,881 $331,624
========== ======== ======== ========
LOANS SOLD........................... $ 138,429 $133,500 $ 9,000 $ --
LOANS SERVICED-END OF PERIOD......... $1,418,507 $894,649 $889,585 $606,122
</TABLE>
92
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
The following table sets forth the composition of WCC's total gross loan
portfolio at the end of the periods indicated.
COMPOSITION OF WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------
1996 1995 1994 1993
------------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residential...... $ 72,425 $ 60,951 $ 138,063 $ 197
Multi-family residential....... 1,838 2,196 721 --
Commercial and other mortgage
loans......................... 26,079 25,277 36,276 242
Consumer and other............. 30,841 51,848 96,980 50,563
--------- --------- --------- --------
Loan Portfolio............... 131,183 140,272 272,040 51,002
Discounted Loan Portfolio:
Single-family residential...... 112,972 79,636 19,939 68
Multi-family residential....... 6,265 8,835 699 135
Commercial and other mortgage
loans......................... 58,027 60,736 8,905 2,008
Consumer and other............. 313,496 261,880 324,358 453,693
--------- --------- --------- --------
Discounted Loan Portfolio.... 490,760 411,087 353,901 455,904
Accrued Interest................. 266,617 238,021 210,050 210,667
Unaccreted discount (1).......... (601,840) (615,341) (583,870) (658,946)
--------- --------- --------- --------
Total Loan Portfolio, net ....... $ 286,720 $ 174,039 $ 252,121 $ 58,627
========= ========= ========= ========
</TABLE>
- --------
(1) Includes unaccreted discount for principal and accrued interest.
WCC'S FINANCIAL INFORMATION
General. The following tables present Summary Combined Financial Information
for WCC and affiliates at the dates and for the periods indicated. The
historical income statement and balance sheet data at and for the nine months
ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993
have been derived from the audited combined financial statements of WCC and
affiliates included elsewhere in this Prospectus (the "WCC Audited Financial
Statements").
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1996. The Summary
Consolidated Financial Information should be read in conjunction with, and is
qualified in its entirety by reference to, the WCC Financial Statements and
related notes as set forth elsewhere herein.
Management believes that WCC's historical financial statements are only
relevant to the extent that such financial statements give an indication of
the ability of management to acquire Loan Portfolios and that such historical
financial information is not directly relevant in evaluating the Company's
results of operations because (i) the servicing revenues of WCC--its primary
source of revenues--are significantly different from the servicing revenues
that the Company may generate in the future, (ii) the public investors will
acquire no interest in the historical assets or liabilities of WCC and the
earnings on such assets are substantially different from that which might be
expected for the Company, and (iii) the Company is not expected to generate
significant servicing revenues for at least two years.
93
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
Significant Differences in Servicing Revenues. The servicing revenues
expected to be derived by the Company in the future are expected to be a fixed
rate per performing loan on the principal amount of such loan or a specified
dollar amount per month and a fixed rate as a percentage of the principal
amount or cash flow for a non-performing loan, in each case consistent with
standard industry practice. Servicing revenues generated by WCC in the past
are very different from those expected to be generated by the Company since a
substantial percentage of loans owned and serviced by WCC were participated
out to third party investors pursuant to participation agreements. These
participation agreements provided that WCC would generally receive 5-10% of
cash flow from each asset until the investors had received their capital and
thereafter WCC was generally entitled to receive 15-35% of the cash flow.
Accordingly, WCC's servicing revenues included an element of profit
participation which is not expected to be present in a typical servicing
arrangement for the Company and WCC's servicing revenues would be expected to
be higher than the servicing revenues expected to be generated by the Company
in the future.
No Transfer of Historical Assets and Liabilities. As part of the
Reorganization, the public investors will acquire no interest in the
historical assets or liabilities of WCC, nor in any income to be derived from
those assets or expense associated with those liabilities. As mentioned above,
the most significant assets on the WCC balance sheet are the loans subject to
participation agreements, which agreements have a significant impact on WCC's
rights to such assets and the income stream generated by such assets. It is
currently anticipated that the Company will seek to acquire assets outright
and not engage in participation agreements (in order to obtain all of the
benefit (and risk) of such assets).
Timing of Servicing Revenues. Following the completion of the Common Stock
Offering and the Notes Offering, WCC would service at market rates any loans
acquired by the Company for at least two years following the offering and
possibly longer (up to three years). Accordingly, the Company would have a
servicing expense (the fee payable to WCC) during such period and WCC would
generate the profits associated with such servicing (the servicing fee less
the cost of servicing).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
WCC SELECTED FINANCIAL 1996 1995 1994 1993
INFORMATION ------------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing fees.................. $ 6,041 $ 9,739 $ 3,339 $1,356
Interest and dividend income.... 6,718 5,124 1,667 560
Other revenues.................. 1,542 668 657 4,509
Compensation and other general
and administrative expenses.... (9,278) (11,029) (5,964) (4,509)
Interest expense................ (9,116) (3,789) (894) (339)
Other........................... 72 (194) 133 --
-------- -------- -------- ------
Net income (loss)............... $ (4,021) $ 519 $ (1,062) $1,577
======== ======== ======== ======
BALANCE SHEET DATA:
Total assets.................... $353,168 $206,373 $288,004
Loan portfolio, net............. -- 121,420 125,942
Discounted Loan portfolio, net.. 4,824 19,352 17,188
Loans held for sale, at lower of
cost or market................. 281,896 33,267 108,991
Participation liabilities....... 143,424 150,298 205,331
Borrowings...................... 243,239 70,165 60,941
Stockholders' equity (deficit).. (50,963) (23,801) (11,099)
</TABLE>
94
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
Servicing Fees and Income from Investments in Loans and Securities. WCC's
servicing fees decreased by $1.7 million, and income from investments in loans
and securities increased by $3.8 million, during the nine months ended
September 30, 1996 (annualized basis) compared to the year ended December 31,
1995. These changes are related to a shift between mid-1995 and mid-1996 to a
strategy of acquiring more loan portfolios for WCC's own account rather than
acquiring loans with participation funding. Participation arrangements entail
greater servicing income, whereas direct ownership in loans entails more
interest income.
Other Revenues. Other revenues are derived from various sources including
rental income from commercial properties and gains on sales of loans. Total
other revenues increased during the first nine months of 1996 compared to the
year ended December 31, 1995 due to the sale of loans which resulted in a gain
of approximately $0.9 million.
General and Administrative Expense. WCC's general and administrative expense
increased by approximately $1.3 million during the nine months ended September
30, 1996 (annualized basis) compared to the year ended December 31, 1995 as a
result of the increased cost in acquiring and servicing a greater number of
loan portfolios.
Interest Expense. WCC's interest expense increased by approximately $8.4
million during the nine months ended September 30, 1996 (annualized basis)
compared to the year ended December 31, 1995 as a result of increased
borrowings to acquire loan portfolios and to fund shareholder loans to
capitalize the Savings Banks.
Performing and Discounted Loans. WCC's loans increased by approximately
$112.7 million during the nine months ended September 30, 1996 as a result of
the Company's business strategy of aggressively acquiring loan portfolios of
discounted loans and performing mortgage loans.
Participations. Participations decreased by approximately $6.9 million
during the nine months ended September 30, 1996 primarily as a result of
securitization of portfolios or the resolution of outstanding loans and
decreased reliance on participation funding for acquiring loan portfolios.
Borrowings. Borrowings increased by approximately $173.1 million during the
nine months ended September 30, 1996 as a result of WCC securitizing certain
loans (accounted for as a financing), acquiring more loan portfolios for WCC's
own account rather than acquiring loans with participation funding, and
distributions to shareholders.
Stockholders' Equity. Stockholders' equity decreased by approximately $27.2
million during the nine months ended September 30, 1996 primarily as a result
of distributions to shareholders, primarily for the purpose of adding capital
to affiliated banks to fund growth and for other purposes.
95
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-3
Consolidated Statements of Operations--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994 ................................ F-4
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994................................. F-5
Consolidated Statements of Stockholders' Equity--Nine Months Ended
September 30, 1996
and Years Ended December 31, 1995 and 1994............................. F-7
Notes to Consolidated Financial Statements.............................. F-8
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report............................................ F-27
Consolidated Financial Statements:
Consolidated Statements of Operations for the Period from January 1,
1994 through
November 8, 1994....................................................... F-28
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through
November 8, 1994....................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
WILSHIRE CREDIT CORPORATION AND AFFILIATES
Independent Auditors' Report............................................ F-33
Combined Financial Statements:
Combined Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-34
Combined Statements of Operations--Nine Months Ended September 30, 1996
and the
Years Ended December 31, 1995 and 1994 ................................ F-35
Combined Statements of Stockholders' Equity--Nine Months Ended September
30, 1996
and the Years Ended December 31, 1995 and 1994......................... F-36
Combined Statements of Cash Flows--Nine Months Ended September 30, 1996
and
the Years Ended December 31, 1995 and 1994............................. F-37
Notes to Combined Financial Statements.................................. F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Wilshire Financial Services Group Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of September 30, 1996 and December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1996 and for the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Wilshire Financial Services Group
Inc. and Subsidiaries as of September 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiaries, First Bank of Beverly Hills, F.S.B. and Girard Savings
Bank, F.S.B., are operating under regulatory agreements with the Office of
Thrift Supervision that require them to meet certain prescribed requirements.
/s/ Deloitte & Touche LLP
November 13, 1996
Los Angeles, California
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 11,231 $ 3,382
Federal funds sold................................ 9,300 1,100
-------- --------
Total cash and cash equivalents................. 20,531 4,482
Mortgage-backed securities held to maturity, at
amortized cost (fair values: September 30, 1996,
$21,778; December 31, 1995, $12,873)............. 22,380 13,119
Mortgage-backed securities available for sale, at
fair value (amortized cost: September 30, 1996,
$6,652; December 31, 1995, $9,099)............... 6,483 9,083
Securities held to maturity, at amortized cost
(fair values:
September 30, 1996, $7,452; December 31, 1995,
$6,488).......................................... 7,425 6,470
Trading account securities........................ 7,092 --
Loans, net........................................ 177,280 258,827
Discounted loans, net............................. 3,419 13,347
Loans held for sale, net, at lower of cost or
market........................................... 260,804 18,597
Stock in Federal Home Loan Bank of San Francisco,
at cost.......................................... 2,911 1,421
Real estate owned, net............................ 2,514 4,964
Leasehold improvements and equipment, net......... 336 275
Due from affiliate................................ 8,357 4,514
Accrued interest receivable....................... 4,268 3,042
Prepaid expenses and other assets................. 3,887 1,724
Income taxes receivable, net...................... 5,422 1,589
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits.......................................... $487,535 $303,524
Borrowings........................................ -- 13,000
Accounts payable and other liabilities............ 7,625 4,398
Subordinated debt................................. -- 11,000
Deferred credits.................................. 832 1,134
Minority interest in subsidiaries................. 277 600
Due to affiliates................................. 2,286 759
-------- --------
Total liabilities............................... 498,555 334,415
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock................................... -- --
Common stock...................................... 35,550 6,800
Retained earnings (accumulated deficit)........... (827) 255
Unrealized loss on available-for-sale securities,
net of tax....................................... (169) (16)
-------- --------
Total stockholders' equity...................... 34,554 7,039
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C> <C>
INTEREST INCOME:
Loans...................................... $31,686 $21,821 $ 7,923
Mortgage-backed securities................. 1,280 1,359 1,361
Securities and federal funds sold.......... 1,171 1,201 285
------- ------- --------
Total interest income.................... 34,137 24,381 9,569
------- ------- --------
INTEREST EXPENSE:
Deposits................................... 17,448 13,944 5,017
Borrowings................................. 2,144 537 440
------- ------- --------
Total interest expense................... 19,592 14,481 5,457
------- ------- --------
NET INTEREST INCOME.......................... 14,545 9,900 4,112
PROVISION FOR ESTIMATED LOSSES ON LOANS...... 15,751 4,266 2,173
------- ------- --------
NET INTEREST (LOSS) INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS............... (1,206) 5,634 1,939
------- ------- --------
OTHER INCOME (LOSS):
Bankcard income............................ 5,078 4,694 635
Bankcard processing expense................ (3,865) (3,462) (274)
Gain on sale of loans...................... 1,983 642 --
Loan fees and charges...................... 1,217 610 43
Trading account--unrealized gain........... 1,601 -- --
Gain on sale of mortgage-backed securities
available for sale........................ -- 14 54
Amortization of deferred credits........... 346 460 388
Other, net................................. 17 149 381
------- ------- --------
Total other income (loss)................ 6,377 3,107 1,227
------- ------- --------
OTHER EXPENSES:
Compensation and employee benefits......... 2,955 2,516 1,922
FDIC insurance premiums.................... 2,066 721 261
Occupancy.................................. 218 385 319
Professional services...................... 572 1,028 507
Data processing and equipment rentals...... 189 232 162
Real estate owned, net..................... 231 170 241
Loan service fees and expenses paid to
affiliate................................. 3,522 1,958 242
Other general and administrative expenses.. 1,152 1,092 1,290
------- ------- --------
Total other expenses..................... 10,905 8,102 4,944
------- ------- --------
(LOSS) INCOME BEFORE INCOME TAX PROVISION.... (5,734) 639 (1,778)
INCOME TAX (BENEFIT) PROVISION............... (4,652) 47 (526)
------- ------- --------
NET (LOSS) INCOME............................ $(1,082) $ 592 $ (1,252)
======= ======= ========
(LOSS) EARNINGS PER SHARE.................... $(14.05) $ 25.09 $(135.43)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $ (1,082) $ 592 $(1,252)
Reconciliation of net (loss) income to net
cash (used in) provided by operating
activities:
Provision for estimated losses on loans... 15,751 4,266 2,173
Provision for real estate owned losses.... -- 598 100
Depreciation and amortization............. 116 241 121
Loss (gain) on sale of real estate owned.. 164 (97) 406
Gain from sale of mortgage-backed
securities available
for sale ................................ -- (14) (54)
Gain on sale of loans..................... (1,983) (642) --
Amortization of discounts and deferred
fees..................................... (2,126) (1,246) (600)
Amortization of deferred credits.......... (346) (460) (388)
FHLB stock dividend....................... (64) (40) (39)
Change in:
Trading account......................... (6,526) -- 489
Accrued interest receivable............. (1,226) (1,443) (238)
Prepaid expenses and other assets....... (2,163) (698) 483
Due from affiliates..................... (3,843) (452) (2,833)
Due to affiliates....................... 1,527 107 (210)
Current income taxes receivable......... 728 (396) 591
Deferred income taxes................... (4,561) (419) 111
Accounts payable and other liabilities.. 3,227 1,846 (474)
Minority interest....................... (323) 26 --
Other................................... 43 (180) --
-------- -------- -------
Net cash (used in) provided by
operating activities................. (2,687) 1,589 (1,614)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans........................... (227,632) (186,895) (41,561)
Loan repayments, net of originations........ 35,521 49,035 16,836
Proceeds from sale of loans................. 26,335 16,673 --
Purchase of mortgage-backed securities
available for sale......................... -- -- (10,655)
Proceeds from maturity of securities held to
maturity................................... 5,000 1,000 --
Purchase of mortgage-backed securities held
to maturity................................ (11,182) -- (4,198)
Repayments of mortgage-backed securities
held to maturity........................... 1,820 824 643
Proceeds from sale of mortgage-backed
securities available for sale.............. -- 1,496 3,963
Repayments of mortgage-backed securities
available for sale......................... 1,871 1,528 --
Purchases of securities and FHLB stock...... (7,344) (2,965) (105)
Proceeds from sale of FHLB stock............ -- 231 --
Proceeds from sale of real estate owned..... 5,763 5,254 569
Purchase of subsidiary net of cash and cash
equivalents................................ -- -- (346)
Purchases of leasehold improvements and
equipment.................................. (177) (349) (184)
-------- -------- -------
Net cash used in investing
activities........................... (170,025) (114,168) (35,038)
</TABLE>
(continued)
See notes to consolidated financial statements.
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits...................... $ 184,011 $107,731 $ 26,181
Proceeds from issuance of common stock...... 17,750 -- 3,750
Issuance of subordinated debt............... -- 9,000 --
Proceeds from other borrowings.............. 308,109 77,419 41,677
Repayments of other borrowings.............. (321,109) (85,919) (30,285)
Issuance of preferred stock................. -- -- 1,000
--------- -------- --------
Net cash provided by (used in) financing
activities............................... 188,761 108,231 42,323
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 16,049 (4,348) 5,671
CASH AND CASH EQUIVALENTS:
Beginning of year........................... 4,482 8,830 3,159
--------- -------- --------
End of year................................. $ 20,531 $ 4,482 $ 8,830
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Interest.................................... $ 18,772 $ 13,833 $ 5,479
Income taxes................................ 216 365 110
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans........................ 4,377 9,878 3,122
Loans to facilitate the sale of real estate
owned...................................... -- 367 2,352
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for common
stock...................................... 11,000 -- --
Exchange of preferred stock for subordinated
debt....................................... -- 2,000 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK EARNINGS FOR-SALE
------------------- -------------- (ACCUMULATED SECURITIES
SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------- ------ ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 6,644 $ 3,050 $ 915 $(159) $ 3,806
Net loss............... (1,252) (1,252)
Unrealized loss on
available-for-sale
securities--net of
tax................... (511) (511)
Issuance of stock...... 1,000,000 1,000 16,952 3,750 4,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1994................... 1,000,000 1,000 23,596 6,800 (337) (670) 6,793
Net income............. 592 592
Unrealized gain on
available-for-sale
securities--net of
tax................... 654 654
Exchange of preferred
stock for
subordinated debt..... (1,000,000) (1,000) (1,000)
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1995................... 23,596 6,800 255 (16) 7,039
Net loss............... (1,082) (1,082)
Unrealized loss on
available-for-sale
securities--net of tax
...................... (153) (153)
Exchange of
subordinated debt for
common stock.......... 29,142 11,000 11,000
Issuance of common
stock ................ 47,025 17,750 17,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, September 30,
1996................... -- $ -- 99,763 $35,550 $ (827) $(169) $34,554
========== ======= ====== ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Wilshire Financial Services Group Inc. and
subsidiaries (the "Company") operate two savings banks (the "Banks") located
in Southern California and have administrative headquarters in Portland,
Oregon. The Banks are federally chartered savings institutions regulated by
the Office of Thrift Supervision ("OTS"). The Company's primary sources of
revenue are real estate and consumer loans acquired in purchase transactions,
mortgage-backed securities, loan securitization transactions, and merchant
bankcard operations.
Principles of Consolidation and Combination--Wilshire Financial Services
Group Inc. ("WFSG") was incorporated in 1996 to be the holding company for
Wilshire Acquisitions Corporation ("WAC"), which is the holding company for
the Banks. WFSG has had no historical operations other than those of WAC and
its subsidiaries, but has formed other subsidiaries that will conduct other
operations in the future.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank of
Beverly Hills, F.S.B. ("FBBH") in a purchase accounting transaction. On
November 9, 1994, a newly-formed entity with ownership and management common
to WAC-Wilshire Acquisitions Corporation II ("WACII")--acquired 94.9% of the
common stock of Girard Savings Bank, F.S.B. and subsidiary ("GSB") in a
purchase accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated or
combined basis and includes the accounts of WAC, FBBH and GSB. With respect to
all consolidated and combined financial information, intercompany transactions
and balances have been eliminated. For convenience, all the accompanying
financial statements are referred to as "consolidated".
The purchase prices of the Banks were less than the fair values of the net
assets acquired. As a result, the Company recorded deferred credits, or
negative goodwill, totaling $2,156. These credits are being amortized over
five years on a straight-line basis. The other material purchase accounting
adjustment relates to the carrying value of GSB loans; the difference between
the carrying value and the estimated fair value of the loans at the date of
acquisition is being amortized over the expected lives of the related loans.
Use of Estimates in the Preparation of the Consolidated Financial
Statements--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amount of
income and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include valuation allowances for
loans and real estate owned, merchant bankcard charge-back reserves and fair
values of certain financial instruments for which there is not an active
market.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Securities and Mortgage-Backed Securities--The Company's securities
portfolios consist of mortgage-backed and other securities that are classified
as held-to-maturity, trading account and available-for-sale securities.
Securities are classified as held-to-maturity when management believes the
Company has the ability and the positive intent to hold the securities to
maturity. Securities classified as held-to-maturity are carried on
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an historical cost basis, adjusted for the amortization of premiums and
accretion of discounts using a method that approximates the interest method.
Securities classified as trading account securities are residual interests in
loan securitization transactions initiated by the Company. Trading account
securities are carried at estimated fair value, and unrealized gains and
losses are recorded in current operations. Securities are classified as
available-for-sale when the Company intends to hold the securities for an
indefinite period of time, but not necessarily to maturity. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of stockholders' equity. Realized gains and
losses from the sales of available-for-sale securities are reported separately
in the consolidated statements of operations and are calculated using the
specific identification method.
Loans, Discounted Loans, Loans Held for Sale and Allowance for Loan Losses--
The Company's principal business involves acquiring loans, including loans
that are nonperforming when acquired. Acquired loans are generally purchased
in pools, or portfolios, for prices at or below face value (i.e., unpaid
principal balances plus accrued interest). Nonperforming loans are generally
acquired at deep discounts to face value and are classified as discounted
loans in the consolidated statements of financial condition. Loans that have
been identified as likely to be sold are classified as held-for-sale in the
consolidated statements of financial condition. Loans other than discounted
loans and loans held for sale are classified simply as loans.
Discounted loans are presented in the consolidated statements of financial
condition net of unamortized discount and the portion of the allowance for
loan losses established for those loans. When discounted loans are purchased,
discounts are segregated into (a) valuation allowances for estimated losses on
specific loans ("specific valuation allowances"), (b) valuation allowances for
the inherent risk of losses in the loan portfolio that have yet to be
specifically identified ("general valuation allowances") and (c) portions of
the discounts regarded as yield adjustments. The allocated specific and
general valuation allowances are included in the allowance for loan losses.
The allowance for loan losses is also increased by additional provisions for
losses that are recorded in current operations. The portion of purchase
discounts regarded as yield adjustments is accreted into income in proportion
to cash receipts of principal. Accrued interest on discounted loans is
recognized in income only when collected in cash.
Loans other than discounted loans are presented in the consolidated
statements of financial condition in substantially the same manner as
discounted loans except that discounts associated with purchased loans are
accreted into income using a method approximating the interest method, and
interest income is recognized on an accrual basis. That portion of the total
loan portfolio representing originated loans is carried net of unamortized
deferred origination fees. Deferred fees are recognized in interest income
over the terms of the loans using a method that approximates the interest
method.
Loans held for sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held for sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value. Gains or losses
on loans sold through securitization transactions are based on the difference
between the cash proceeds received on the certificates sold to outside
investors and the Company's cost basis allocated to such interests in the
loans. The percentage allocation of the loan pools' cost basis between the
portions sold and subordinated interests retained is based on the relative
fair values of those portions.
The Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans)
for impairment under SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures. Commercial and multi-family real
estate loans are considered to be impaired, for financial reporting purposes,
when it is probable that the Company will be unable to collect all
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal or interest when due. Specific valuation allowances are established,
either through allocations of purchase discount or through provisions for
losses, as described above, for impaired loans with estimated fair values that
are less than the face value of the loans. Fair values of impaired loans are
estimated based on the fair value of the real estate collateral.
The Company evaluates single-family real estate, consumer and other loans
for impairment on a pooled basis. These loans are considered to be smaller-
balance, homogeneous loans, and are evaluated on a portfolio basis considering
the projected net realizable value of the portfolio compared to the net
carrying value of the portfolio.
All specific and general valuation allowances established for loans and
discounted loans are recorded in the allowance for loan losses. The allowance
is decreased by the amount of loans charged off and is increased by recoveries
of previously charged-off loans. The allowance is maintained at a level
believed adequate by management to absorb potential losses in the total loan
portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, previous loan loss experience,
current economic conditions, volume, growth and composition of the portfolio
and other relevant factors.
Derivative Financial Instruments--Beginning in 1996, the Company utilizes
interest-rate swaps as a component of its interest-rate risk hedging strategy.
Swaps are matched against fixed-rate loans, effectively converting them to
variable-rate loans. Settlements with the counterparty to the swaps increase
or reduce loan interest income reported in the statements of operations.
Real Estate Owned--Real estate acquired in settlement of loans is originally
recorded at fair value less estimated costs to sell. Loan balances in excess
of fair value of the real estate acquired are charged against the allowance
for loan losses at the date of acquisition. Allowances are recorded to provide
for estimated declines in fair value subsequent to the date of acquisition.
Any subsequent operating expenses or income, as well as gains or losses on
disposition of such properties, are charged to current operations.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Income Taxes--The Company files consolidated federal income tax returns with
its subsidiaries. Deferred tax assets and liabilities represent the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements.
A valuation allowance is recorded against deferred tax assets when there is
not presumptive evidence that it is more likely than not that the deferred tax
assets will be realized.
Bankcard Operations--Bankcard income includes merchant discounts and
transaction fees for processing Visa and Mastercard transactions. Bankcard
expense consists primarily of fees paid to the Company's third-party
processors and interchange fees paid to card-issuing banks. Other direct and
indirect costs of Bankcard operations are included in various other categories
of expenses and are not specifically allocated separately from other operating
expenses of the Company.
Capital Structure--In the accompanying consolidated statements of
stockholders' equity, shares of common stock issued and outstanding are
presented based on the actual number of shares issued by WAC, and the number
of shares issued by WACII adjusted to their WAC equivalents as determined when
the two entities merged in
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995. As of September 30, 1996 and December 31, 1995, WAC has the following
types of authorized shares of stock:
50,000,000 shares of common, $0.01 par value
200,000,000 shares of preferred, $0.01 par value
Of the 200,000,000 shares of preferred stock authorized, 100,000,000 has
been designated as Series A. The Series A preferred stock has a $1 per share
liquidation preference and a dividend rate of $.14 per share per annum,
noncumulative. No cash dividends have been declared or paid on such stock at
any point when it has been outstanding.
Preferred stock issued and outstanding at December 31, 1994 consisted of
Series A preferred stock of WACII, which was exchanged for Series A preferred
stock of WAC in 1995, pursuant to the merger of the two companies. All common
stock of WACII was also exchanged in the merger. The preferred stock of a
subsidiary (FBBH) held by the majority stockholders of WAC as of December 31,
1994 was also exchanged for WAC Series A preferred in 1995. All of the WAC
Series A preferred was then exchanged for subordinated debt issued by the
majority stockholders. Effective January 1, 1996, all subordinated debt was
exchanged for WAC's common stock.
Subsequent to September 30, 1996, all outstanding common stock of WAC was
exchanged by WAC stockholders for common stock of WFSG, and all minority
interests in common stock of FBBH and GSB were exchanged for common stock of
WFSG. Outstanding shares of WFSG, prior to an initial public offering of
common stock (see Note 17), total 5,500,000.
Earnings Per Share is calculated based on the weighted average number of
shares of WAC common stock outstanding during the year giving effect to the
exercise of stock options using the treasury stock method if such effect is
not anti-dilutive. The weighted average number of shares outstanding for the
nine months ended September 30, 1996 and for the years ended 1995 and 1994 was
77,024, 23,596 and 9,245, respectively.
Recent Accounting Standards--In 1996, the Company adopted SFAS Nos. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, SFAS No. 122, Accounting for Mortgage Servicing Rights, and
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 121 and 122
did not have a material effect on the Company's financial statements.
As permitted by SFAS No. 123, the Company did not adopt the provisions of
that statement relating to the accounting method used for stock options. The
Company will continue to use the intrinsic value method of accounting for its
stock options rather than the fair value method, and will make the disclosures
required by the statement (see Note 12).
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Financial Liabilities, is generally effective for relevant
transactions occurring after December 31, 1996, and must be applied
prospectively. Earlier application is not permitted. Based on the types of
transactions the Company has engaged in historically, the pronouncement is
expected to be relevant to similar future transactions and may affect both the
accounting for, and disclosures about, such transactions. Transactions
affected may include sales of loans, particularly sales affected through
securitization transactions, and repurchase agreements. The Company does not
currently service financial assets and does not expect to be immediately
affected by the provisions of SFAS No. 125 related to servicing. The Company
does not believe that the pronouncement would have had a material effect on
any transactions reflected in the accompanying financial statements, if its
provisions had been previously adopted.
Reclassifications--Certain amounts in the consolidated financial statements
for 1995 and 1994 have been reclassified to conform to the 1996 presentation.
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities as of September 30, 1996 and
December 31, 1995 are shown below. Fair value estimates were obtained from an
independent pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1996 COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 6,652 $ -- $169 $ 6,483
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 7,425 27 -- 7,452
Mortgage-backed securities....... 22,380 -- 602 21,778
------- ----- ---- -------
Total held-to-maturity......... $29,805 $ 27 $602 $29,230
======= ===== ==== =======
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 9,099 $ -- $ 16 $ 9,083
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 6,470 22 4 6,488
Mortgage-backed securities....... 13,119 -- 246 12,873
------- ----- ---- -------
Total held-to-maturity......... $19,589 $ 22 $250 $19,361
======= ===== ==== =======
</TABLE>
The amortized cost and estimated fair value of securities held to maturity
other than mortgage-backed securities at September 30, 1996, and December 31,
1995 by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
SEPTEMBER 30, 1996 COST VALUE
------------------ --------- ------
<S> <C> <C>
Due in one to five years................................... $7,425 $7,452
====== ======
DECEMBER 31, 1995
-----------------
Due in less than one year.................................. $4,970 $4,966
Due in one to five years................................... 1,500 1,522
------ ------
$6,470 $6,488
====== ======
</TABLE>
The Company receives payments on all mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 6 to 30 years.
At September 30, 1996, mortgage-backed securities with carrying values of
$22,779 and market values of approximately $22,247 were pledged to secure FHLB
borrowings, merchant bankcard transactions, certain guarantees related to a
loan securitization transaction and an interest-rate swap. There were no sales
of securities in the nine months ended September 30, 1996. Gross gains from
the sale of securities available for sale were $14 and $54 in the years ended
December 31, 1995, and 1994, respectively, and there were no gross losses in
these years. Of the total securities pledged, securities with fair values of
approximately $20,110 were delivered to, and are held in custody of, Bankers
Trust and the Federal Reserve Bank.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans comprise loans, discounted loans and loans held for
sale. Following is a summary of each loan category by type:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
LOANS
Real estate loans:
One to four units.............................. $ 49,047 $138,547
Over four units................................ 72,717 71,239
Commercial..................................... 58,361 50,749
Land........................................... 2,874 2,709
-------- --------
Total loans secured by real estate........... 182,999 263,244
Other loans...................................... 30,698 19,832
-------- --------
213,697 283,076
Less:
Allowance for loan losses...................... (32,519) (10,016)
Deferred loan fees............................. (196) (245)
Discount on purchased loans not included
in allowance for loan losses.................. (3,702) (13,988)
-------- --------
$177,280 $258,827
======== ========
DISCOUNTED LOANS
Real estate loans:
One to four units.............................. $ 9,561 $ 18,380
Commercial..................................... 482 863
-------- --------
Total loans secured by real estate........... 10,043 19,243
Other loans...................................... 724 967
-------- --------
10,767 20,210
Less:
Allowance for loan losses...................... (5,716) (3,855)
Discount on purchased loans not included in
allowance
for loan losses............................... (1,632) (3,008)
-------- --------
$ 3,419 $ 13,347
======== ========
LOANS HELD FOR SALE
Real estate loans:
One to four units.............................. $277,490 $ 33,497
Commercial..................................... 466
Land........................................... 194
-------- --------
Total loans secured by real estate........... 277,490 34,157
Other loans...................................... 12
-------- --------
277,490 34,169
Less allowances, discounts and deferred fees..... (16,686) (15,572)
-------- --------
$260,804 $ 18,597
======== ========
</TABLE>
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1996 and December 31, 1995, loans with adjustable rates
of interest were $317,087 and $265,702, respectively, and loans with fixed
rates of interest were $184,867 and $71,753, respectively. Adjustable-rate
loans are generally indexed to the FHLB's Eleventh District Cost of Funds
Index, LIBOR or Prime and are subject to limitations on the timing and extent
of adjustment. Most loans adjust within six months of changes in the index.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year.................. $ 25,651 $ 7,701 $ 4,314
Loans charged off........................... (12,494) (5,404) (1,666)
Recoveries.................................. 1,424 81 71
Provision for loan losses................... 15,751 4,266 2,173
Allocations from purchased loan discounts... 15,972 19,007 2,809
-------- ------- -------
Balance, end of year........................ $ 46,304 $25,651 $ 7,701
======== ======= =======
</TABLE>
At September 30, 1996 and December 31, 1995, the Company had classified
loans totaling $18,811 and $14,241, respectively, as impaired and had recorded
specific valuation allowances to measure the impairments of those loans
totaling $5,445 and $4,155, respectively. At the same dates, the Company had
classified loans totaling $2,499 and $9,593, respectively, as impaired with no
recorded specific valuation allowances. The average unpaid principal balances
of impaired loans during the nine months ended September 30, 1996 and the year
ended December 31, 1995 were $21,254 and $24,204, respectively. Interest
income recognized on impaired loans during the same periods was $1,135 and
$1,631, respectively, based on cash payments. These amounts exclude
consideration of single-family residential and consumer loan pools evaluated
for impairment on a pooled basis. Consumer loan pools include portfolios of
sub-prime automobile loans purchased at par in 1995 and 1996. As of September
30, 1996, the Company had charged off all such loans that were more than 60
days delinquent. The remaining portfolio consists of loans that have performed
over a period of approximately one year. Management considers the performing
loans to be unimpaired, and interest on them is recognized on an accrual
basis.
Management estimates are required to determine the allowance for loan
losses. Estimation is also involved in determining the ultimate recoverability
of purchased loans and, consequently, the pricing of purchased loans and the
adequacy of purchased discounts to provide allowances for credit risk. These
estimates are inherently uncertain and depend on the outcome of future events.
Regulatory authorities have required substantial increases in the allowances
maintained by many banks in recognition of the inherent risk in the existing
economic environment. Although management believes the levels of the allowance
as of September 30, 1996 and December 31, 1995 are adequate to absorb losses
inherent in the loan portfolio, rising interest rates, various other economic
factors and regulatory requirements may result in increasing losses that
cannot reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Banks' capital.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in recent years. Substantially all
loans originated or acquired by FBBH and GSB prior to their acquisition by the
Company were collateralized by Southern California real estate. Performing
mortgage loans acquired subsequently have also been concentrated in Southern
California, but to a lesser degree, and the geographic diversification of the
portfolio is generally widening through loan acquisitions.
F-14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REAL ESTATE OWNED
Real estate owned consists of property obtained through foreclosure. In the
accompanying consolidated statements of financial condition, real estate owned
is presented net of allowances for estimated losses. Activity in the allowance
for estimated losses on real estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
Allowance for losses on real estate owned,
beginning of year.......................... $ 1,193 $ 123 $ 55
Charge-offs................................. (1,599) (82) (32)
Allocation of purchase discount............. 762 554
Provision for the year...................... 598 100
------- ------- -----
Allowance for losses on real estate owned,
end of year................................ $ 356 $ 1,193 $ 123
======= ======= =====
</TABLE>
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Leasehold improvements............................ $ 258 $ 299
Furniture and equipment........................... 877 718
------ ------
Total cost........................................ 1,135 1,017
Accumulated depreciation and amortization......... (799) (742)
------ ------
$ 336 $ 275
====== ======
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Passbook accounts................................. $ 371 $ 304
Money market accounts............................. 795 1,267
NOW/checking...................................... 6,103 5,111
Time deposits:
Less than $100.................................. 386,264 247,814
$100 or more.................................... 94,002 49,028
-------- --------
Total deposits.................................. $487,535 $303,524
======== ========
</TABLE>
A summary of time deposits by maturity at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)........................... $381,378
1998.............................................................. 97,897
1999.............................................................. 991
--------
$480,266
========
</TABLE>
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWINGS AND SUBORDINATED DEBT
Borrowings at December 31, 1995 are repurchase agreements issued under a
master repurchase agreement with Bear Stearns Mortgage Capital Corp. Proceeds
from the agreements were used to acquire loan pools. The assets purchased by
Bear Stearns include the loans acquired by the Banks with the proceeds as well
as other assets. At December 31, 1995, the outstanding agreements were secured
by loans with unpaid principal balances of $54,210. Loans purchased by Bear
Stearns under the repurchase agreements are held in custody by a third party.
Following is information about borrowings under repurchase agreements:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
Average balance during the period.......... $35,721 $ 4,122 $ 4,757
Highest amount outstanding during the peri-
od........................................ 97,000 14,950 11,377
Average interest rate during the period.... 6.8% 5.6% 4.4%
Average interest rate--end of period....... -- 6.7% 5.8%
</TABLE>
WAC's capitalization includes subordinated debt with majority
stockholders in amounts up to $50,000. Subordinated debt pays interest at
14% per annum, compounded quarterly, has no stated maturity, and represents
an unsecured general obligation of the Company. As of December 31, 1995,
borrowings under the subordinated debt agreement were $11,000. As stated in
Note 1, the Company's common stock was exchanged for the subordinated debt
effective January 1, 1996.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal..................................... $ (93) $ 434 $ (656)
State....................................... 2 32 19
------- ------ ------
(91) 466 (637)
------- ------ ------
Deferred tax expense (benefit):
Federal..................................... (3,081) (250) 90
State....................................... (1,480) (169) 21
------- ------ ------
(4,561) (419) 111
------- ------ ------
Total income tax provision (benefit).......... $(4,652) $ 47 $ (526)
======= ====== ======
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate....................................... (34.0)% 35.0% (35.0)%
State taxes (benefit), net of federal tax
effect..................................... (11.1) 4.0
Valuation allowance......................... (29.2) (25.1) 8.8
Change in prior year estimate............... (5.2) (7.8)
Other....................................... (1.6) 1.3 (3.4)
----- ------ ------
Effective income tax rate................... (81.1)% 7.4% (29.6)%
===== ====== ======
</TABLE>
Deferred income taxes receivable (payable), which are included in income
taxes receivable, net in the consolidated statements of financial condition,
are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Purchase discounts.............................. $ 2,378 $ 1,349
Purchase accounting............................. 549 629
Depreciation.................................... 82 65
Provision for loan loss......................... 1,232 408
Net operating loss.............................. 2,661 170
Other........................................... 140 10
------- -------
Gross deferred tax assets..................... 7,042 2,631
------- -------
Deferred tax liabilities:
Partnership income.............................. (44) (44)
Deferred loan fees.............................. (207) (351)
FHLB stock dividends............................ (285) (242)
State taxes..................................... (620)
Unrealized gains on securities.................. (694)
Installment sales gain.......................... (344)
Other........................................... (118) (98)
------- -------
Gross deferred tax liability.................. (2,312) (735)
------- -------
Total deferred tax asset.......................... 4,730 1,896
Valuation allowance............................... -- (1,726)
------- -------
Net deferred tax asset............................ $ 4,730 $ 170
======= =======
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $761, $1,391 and $4,758 expiring
in the years 1997, 1998 and 1999, respectively, and net operating loss
carryforwards for state income tax purposes of $1,617 and $1,143 expiring in
2000 and 2001, respectively.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
Profit Sharing Plan--The Banks' employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Company's "control group." At the discretion of the Banks' Boards of
Directors, the Banks may elect to contribute to the plan based on profits of
the Banks or based on matching participants' contributions. For the year ended
December 31, 1995, the Banks contributed $28 to the plan. There have been no
contributions in 1996.
Lease Commitments--The following is a schedule by year of future minimum
rental payments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)............................... $281
1998.................................................................. 166
1999.................................................................. 157
2000.................................................................. 52
2001.................................................................. 30
----
Total............................................................... $686
====
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $52 through 2001.
Hedging Activity--The Banks are a party to an interest-rate swap agreement
with off-balance-sheet risk in the normal course of business. There is a risk
of loss (credit risk) if the counterparty fails to perform in the periodic
settlement of amounts owed to the Banks, if any, under the terms of the swap.
The swap is used to hedge interest-rate risk associated with fixed-rate loans.
Changes in market value of the swap correlate with changes in the market value
of the hedged loans. In April 1996, the Banks entered into an interest-rate
swap with a $70,000 notional amount with Bear Stearns. The swap effectively
converts $70,000 of purchased fixed-rate loans to variable-rate loans. The
Banks pay 6.25% and receive a variable rate based on the one-month USD LIBOR
plus .225%. The swap matures in April 2001 and has a cancellation trigger when
the two-year constant maturity treasury equals or exceeds 9%. The notional
principal amount amortizes at a rate of 1.2532% each month. At September 30,
1996, the notional principal is $65,614.
Lending Commitments--At December 31, 1995, the Company had commitments to
extend credit of $793. The Company did not have any commitments to extend
credit at September 30, 1996. These commitments expose the Company to credit
risk in excess of amounts reflected in the consolidated financial statements.
The Company receives collateral to support loans and commitments to extend
credit for which collateral is deemed necessary. The most significant category
of collateral is certificates of deposit.
Litigation--The Company is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's financial
position.
Securitization Contingencies--A loan securitization in March 1996 involved
the sale of discounted nonperforming loans with carrying amounts of
approximately $18,600. The Banks are contingently liable for losses, if any,
that could arise if the collectibility of any securitized loan is
unenforceable solely due to the absence of original notes. In addition, the
Banks are contingently liable to pay the interest due on the senior securities
if the liquidation of the assets underlying the securities results in a
shortfall on any due date; any such shortfall paid by the Banks would be
reimbursable if liquidation proceeds were ultimately sufficient to cover the
interest. Management believes that it is not probable that any losses will be
incurred for these or other reasons involving the securitization.
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. REGULATORY MATTERS
Regulatory Agreement--On October 31, 1996, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Order issued to FBBH superseded a previously existing Supervisory
Agreement between FBBH and the OTS issued June 8, 1995.
The Orders require of both Banks that they not engage in unsafe and unsound
practices and that they maintain minimum capital ratios required of
institutions to be deemed "well-capitalized" (as that term is defined under
the regulatory framework for prompt corrective action). In addition, the
Orders require the Banks to (I) revise policies and procedures concerning (i)
internal asset reviews, (ii) the allowances for loan and lease losses, (iii)
loan purchases, (iv) internal audits and (v) hedging transactions; (II)
develop plans to augment the depth and expertise of the management teams;
(III) revise business plans; (IV) modify certain policies concerning the
accounting for loan discounts; (V) improve monitoring of (i) interest rate
risk, (ii) balance sheet classifications of certain assets (e.g., as held for
sale versus held to maturity) and (iii) compliance with laws and regulations
concerning transactions with affiliates; (VI) ensure compliance with the
proper servicing of adjustable rate mortgages and escrow accounts; and (VII)
enhance recordkeeping. In addition, the Banks may not increase their total
assets beyond certain specified levels. Also, FBBH will be required to correct
OTS-identified deficiencies in merchant bankcard operations. These
requirements will be accompanied by related requirements that the Banks submit
to the OTS, by certain specified dates, various policies, plans and reports on
other actions to comply with the Orders. In some cases, OTS approval of such
information will be required. The Banks are currently in process of addressing
these requirements. Management believes that the Banks are complying with
those requirements that have taken effect.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Banks and their directors and
officers to further enforcement actions, including termination of Federal
Deposit Insurance Corporation insurance or civil money penalties.
Capital Requirements--The Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by the regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total tangible
capital, core capital and total capital to risk-weighted assets as those terms
are defined in OTS regulation. Under the regulatory framework for prompt
corrective action, quantitative and qualitative measures are used by the OTS
to determine whether an institution is categorized as "well capitalized,"
"adequately capitalized," "undercapitalized," or "significantly
undercapitalized." Certain regulatory actions are mandated by law, depending
on an institution's category. Quantitative measures include total capital to
risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1
capital to average assets, as those terms are defined in OTS regulation.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Banks' actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS "WELL-
CAPITALIZED", UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Total Capital to Risk-
Weighted Assets:
FBBH.................. $ 9,711 10.0% $ 7,760 . 8.0% $ 9,701 . 10.0%
GSB................... 30,297 11.0% 22,010 . 8.0% 27,513 . 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,434 8.7% Not Applicable 5,820 . 6.0%
GSB................... 26,739 9.7% Not Applicable 16,508 . 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,434 5.9% 5,706 . 4.0% 7,132 . 5.0%
GSB................... 26,739 7.0% 15,320 . 4.0% 19,150 . 5.0%
Tangible Capital:
FBBH.................. 8,434 6.0% 2,120 . 1.5% Not Applicable
GSB................... 26,739 6.8% 5,855 . 1.5% Not Applicable
DECEMBER 31, 1995
Total Capital to Risk-
Weighted
Assets:
FBBH.................. $ 9,820 9.8% $ 7,999 . 8.0% $ 9,998 . 10.0%
GSB................... 15,523 10.4% 11,973 . 8.0% 14,967 . 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,549 8.6% Not Applicable 5,999 . 6.0%
GSB................... 13,852 9.3% Not Applicable 8,980 . 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,549 6.4% 5,326 . 4.0% 6,657 . 5.0%
GSB................... 13,852 10.3% 5,398 . 4.0% 6,748 . 5.0%
Tangible Capital:
FBBH.................. 8,549 6.8% 3,075 . 1.5% Not Applicable
GSB................... 13,852 6.2% 2,066 . 1.5% Not Applicable
</TABLE>
As of September 30, 1996, the Banks' capital ratios were sufficient for them
to be categorized as "well capitalized" based solely on quantitative measures.
However, because of the Orders discussed above, each Bank can be categorized
by the OTS as no higher than "adequately capitalized." Because the Banks have
minimum regulatory capital requirements and the additional requirements under
the Orders discussed above, substantially all retained earnings of the Banks
are restricted as to distribution to stockholders.
At June 30, 1996, as a result of new legislation enacted to recapitalize the
SAIF deposit insurance fund, the Company accrued approximately $1.4 million
for a special assessment to be paid in the fourth quarter.
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by Wilshire Credit Corporation ("WCC"),
which is affiliated with the Company by common ownership. Management believes
that the terms of the servicing agreement are no less favorable to the Banks
than terms offered by other servicers. Due from affiliate in the accompanying
consolidated statements of financial condition represents the amount of loan
payments collected by WCC but not yet remitted to the Banks at that date. Loan
servicing fees and expenses shown in the consolidated statements of operations
were paid to WCC, and include reimbursements for direct expenses borne by WCC
on behalf of the Banks. Due to affiliates in the consolidated statements of
financial condition primarily comprises amounts owed to WCC for WAC operating
expenses paid by WCC. At September 30, 1996, due to affiliates also includes a
liability to WCC for a servicing fee with deferred payment terms.
12. STOCK OPTIONS
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. FBBH granted 19,447 and 23,161 options
in 1994 and 1995, respectively. GSB granted 69,724 options in 1995. All grants
were made with exercise prices at least equal to the book value of the
relevant bank's shares on the grant dates. Subsequent to September 30, 1996,
these stock options were converted into 31,225 options to purchase the stock
of WFSG. The options are exercisable at prices ranging from $5.58 to $14.90
per share no earlier than 60 days after the effective date of the initial
public offering of WFSG stock discussed in Note 17, and have remaining terms
of from two to three years. Their estimated fair value as of November 1, 1996
was $162; an amount no greater than this would have been reported as
compensation expense during 1994 and 1995 if the fair value method of
accounting discussed in SFAS No. 123 had been used to measure compensation
expense. Assuming that all grants were made in 1995, 1995 net income reported
in the consolidated statements of operations would have been $430 and earnings
per share would have been $18.22 if the fair value method of accounting for
the options had been used.
Pursuant to the initial public offering, the Company adopted a new Stock
Plan on November 1, 1996. Under the Stock Plan, the Company may grant options
and other awards not to exceed 1,750,000 shares of common stock over a ten-
year term. The options may be either incentive stock options or nonstatutory
stock options granted at exercise prices not less than 100% of the fair value
of WFSG common stock at the grant date (110% of fair value for incentive stock
options granted to persons holding over 10% of the Company's shares).
Restricted stock and stock appreciation rights may also be granted under the
Stock Plan.
The initial awards under the new Stock Plan are expected to be granted at
the date of the initial public offering. Options for approximately 1,050,000
to 1,083,750 will be granted to the Company's two largest stockholders. The
Stock Plan also provides that nonemployee Company directors will receive
automatic nonstatutory stock option grants. The number of shares granted to
nonemployee directors each quarter will be determined under a formula ($6
divided by the fair market value per share of WFSG common stock on each grant
date).
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 11,231 $ 11,231
Federal funds sold...... 9,300 9,300
Mortgage-backed
securities held to
maturity............... 22,380 21,778
Mortgage-backed
securities available
for sale............... 6,483 6,483
Securities held to
maturity............... 7,425 7,452
Trading account
securities............. 7,092 7,092
Loans, net.............. 177,280 173,938
Discounted loans, net... 3,419 3,419
Loans held for sale,
net.................... 260,804 264,180
Federal Home Loan Bank
stock.................. 2,911 2,911
Liabilities:
Deposits................ 487,535 487,821
Borrowings.............. -- --
Off-Balance Sheet
Liabilities:
Interest-rate swap...... -- 714
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 3,382 $ 3,382
Federal funds sold...... 1,100 1,100
Mortgage-backed
securities held to
maturity............... 13,119 12,873
Mortgage-backed
securities available-
for-sale............... 9,083 9,083
Securities held to
maturity............... 6,470 6,488
Loans, discounted loans
and loans held for
sale, net.............. 290,771 295,747
Federal Home Loan Bank
stock.................. 1,421 1,421
Liabilities:
Deposits................ 304,020 307,177
Borrowings.............. 13,000 13,000
Subordinated debt....... 11,000 11,000
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Due From Banks and Federal Funds Sold--The carrying amounts
approximate fair values, due to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities
are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans, Discounted Loans and Loans Held for Sale--It is not practicable to
estimate the fair value of discounted loans, which are predominately
nonperforming loans, due to uncertainties as to the nature, timing and
extent to which the loans will be either collected according to original
terms, restructured, or foreclosed upon. For other loans, fair values are
estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type, such as fixed and adjustable rate interest
terms. The fair values of fixed-rate mortgage loans are based on discounted
cash flows utilizing applicable risk-adjusted spreads relative to the
current pricing of similar fixed-rate loans as well as anticipated
prepayment schedules. The fair values of
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adjustable-rate mortgage loans are based on discounted cash flows utilizing
discount rates that approximate the pricing of available mortgage-backed
securities having similar rate and repricing characteristics, as well as
anticipated prepayment schedules. No value adjustments have been made for
changes in credit within the loan portfolio. It is management's opinion
that the allowance for estimated loan losses pertaining to loans results in
a fair value adjustment of the credit risk of such loans.
Federal Home Loan Bank Stock--The carrying amounts approximate fair
values because the stock may be sold back to the Federal Home Loan Bank at
carrying value.
Deposits--The fair values of deposits are estimated based on the type of
deposit products. Demand accounts, which include passbook and transaction
accounts, are presumed to have equal book and fair values, since the
interest rates paid on these accounts are based on prevailing market rates.
The estimated fair values of time deposits are determined by discounting
the cash flows of settlements of deposits having similar maturities and
rates, utilizing a yield curve that approximates the prevailing rates
offered to depositors as of the reporting date.
Borrowings--The carrying amounts of repurchase agreements approximates
fair value due to the short-term nature of these instruments.
Subordinated Debt--The fair value of subordinated debt issued to
shareholders by WAC is assumed to be equal to carrying value because the
debt terms were negotiated with related parties and there is no market for
the debt at such terms with unrelated parties.
Off-Balance-Sheet Liabilities--The fair value of an interest-rate swap
(1996 only) is estimated at the net present value of the future payable,
based on the current spread, discounted at a current rate. Fair values of
off-balance sheet commitments to lend (1995 only) are estimated based on
deferred fees associated with such commitments, which are immaterial as of
the reporting date, and are therefore not presented.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996(1)
------------- -------- ---------
<S> <C> <C> <C>
Interest income.......................... $12,186 $12,407 $9,544
Interest expense......................... 7,572 7,046 4,974
Provision for estimated losses on loans.. 4,883 5,483 5,385
------- ------- ------
Net interest loss after provision for es-
timated losses on loans................. (269) (122) (815)
Non-interest income...................... 1,240 917 4,220
Non-interest expense..................... 5,398 2,625 2,882
------- ------- ------
(Loss) income before income taxes........ (4,427) (1,830) 523
Income tax benefit....................... 3,373 805 474
------- ------- ------
Net (loss) income........................ $(1,054) $(1,025) $ 997
======= ======= ======
(Loss) earnings per share................ $(10.57) $(13.05) $18.90
======= ======= ======
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 7,329 $ 6,173 $ 5,776 $5,103
Interest expense............ 4,070 3,704 3,573 3,134
Provision for estimated
losses on loans............ 1,045 1,020 1,028 1,173
------- ------- ------- ------
Net interest income (loss)
after provision for
estimated losses on loans.. 2,215 1,449 1,175 796
Non-interest income......... 373 1,684 556 494
Non-interest expense........ 2,855 2,096 1,664 1,487
------- ------- ------- ------
Income (loss) before income
taxes...................... (268) 1,037 67 (197)
Income tax (expense)
benefit.................... 21 (78) (4) 14
------- ------- ------- ------
Net income (loss)........... $ (247) $ 959 $ 63 $ (183)
======= ======= ======= ======
Earnings (loss) per share... $(10.47) $ 40.66 $ 2.63 $(7.73)
======= ======= ======= ======
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 3,861 $ 2,108 $ 1,669 $1,931
Interest expense............ 2,315 1,317 970 855
Provision for estimated
losses on loans............ 2,173 -- -- --
------- ------- ------- ------
Net interest (loss) income
after provision for
estimated losses on loans.. (627) 791 699 1,076
Non-interest income......... 641 336 78 172
Non-interest expense........ 1,929 1,255 1,017 743
------- ------- ------- ------
(Loss) income before income
taxes...................... (1,915) (128) (240) 505
Income tax benefit.......... 566 38 71 (149)
------- ------- ------- ------
Net (loss) income........... $(1,349) $ (90) $ (169) $ 356
======= ======= ======= ======
(Loss) earnings per share... $(79.41) $(13.57) $(25.43) $53.55
======= ======= ======= ======
</TABLE>
- --------
(1) The financial information for the quarter ended March 31, 1996 was
restated to account for residual interests in loans sold as securitization
transactions as trading account securities. The effect on quarterly earnings
was an increase of $1,601 or $30.36 per share.
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash.............................................. $ -- $ 1
Investments in Banks.............................. 35,310 18,777
Prepaid expenses and other assets................. 715 153
------- -------
$36,025 $18,931
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities............ $ 764 $ 317
Due to affiliates................................. 707 575
Subordinated debt to majority stockholders........ -- 11,000
------- -------
Total liabilities............................... 1,471 11,892
------- -------
Contributed and retained equity................... 34,554 7,039
------- -------
$36,025 $18,931
======= =======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
Interest income............................. $ 2 $ 9 $ 24
Interest expense............................ 67 243 31
------- ------ -------
Net interest expense........................ (65) (234) (7)
Noninterest income.......................... 563 1,155 611
Noninterest expense......................... 125 363 156
------- ------ -------
Income before equity in earnings (loss) of
subsidiaries............................... 373 558 448
Equity in (loss) earnings of subsidiaries... (1,455) 34 (1,700)
------- ------ -------
Net (loss) income........................... $(1,082) $ 592 $(1,252)
======= ====== =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income.......................... $(1,082) $ 592 $(1,252)
Adjustments to reconcile net income (loss)
to
net cash (used in) provided by operating
activities:
Amortization of purchase accounting
adjustments.............................. (783) (1,045) (488)
Equity in loss (earnings) of
subsidiaries............................. 1,455 (34) 1,700
Change in:
Prepaid expenses and other assets........ (562) 51 495
Accounts payable and other liabilities... 447 90 (111)
Due to affiliates........................ 132 (71) (29)
Other.................................... -- 33 --
------- ------ -------
Net cash (used in) provided by operating
activities............................. (393) (384) 315
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in subsidiaries............. (17,358) (9,000) (4,746)
------- ------ -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of capital stock.................. 17,750 -- 4,750
Issuance of subordinated debt.............. -- 9,000 --
Dividends from subsidiary.................. -- 65 --
------- ------ -------
Net cash provided by financing
activities............................. 17,750 9,065 4,750
------- ------ -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS........................... (1) (319) 319
CASH:
Beginning of year.......................... 1 320 1
------- ------ -------
End of year................................ $ -- $ 1 $ 320
======= ====== =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to subordinated
debt...................................... $2,000
Conversion of subordinated debt to capital
stock..................................... $11,000
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PROFORMA INFORMATION CONCERNING ACQUISITIONS
As discussed in Note 1, during 1994 WACII acquired GSB in a purchase
accounting transaction. The results of GSB's operations are included in the
Company's consolidated financial statements subsequent to the date of
acquisition. The following proforma financial information shows the estimated
results of the Company's operations for the year ended December 31, 1994 as
though the GSB purchase had occurred as of the beginning of the year. The
proforma amounts are not necessarily indicative of what would have actually
occurred if the acquisition had occurred as of the beginning of the year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net interest income and non-interest revenue.................... $7,222
Net loss........................................................ (920)
Loss per share.................................................. (38.99)
</TABLE>
17. INITIAL PUBLIC OFFERINGS
WFSG is making initial public offerings (the "IPOs") of common stock and
debt, and has formed certain new subsidiaries to undertake the loan
acquisition and servicing businesses currently being conducted by WCC and
certain other affiliates of the Company. The loan acquisition activity, and
any other business activity, that may be conducted by WFSG's new subsidiaries
will be in addition to the activity already being performed by the Banks and
reflected in these consolidated financial statements on an historical basis.
The Company currently expects that the IPOs will be completed during 1996.
Certain business developments related to the IPOs that may be significant to
the operations of the Company are disclosed in other footnotes to these
consolidated financial statements.
18. SUBSEQUENT EVENTS--LOAN ACQUISITIONS AND SALES
In October and November 1996, GSB acquired approximately $279,000 in unpaid
principal amount of discounted residential mortgage loans, and committed to
acquire approximately $31,900 of additional discounted residential mortgage
loans in December. Management expects to sell, prior to December 31, 1996,
performing residential mortgage loans held for sale with market values
approximately equivalent to the purchase prices of the discounted loans.
Completion of the sales transactions by December 31, 1996 is necessary in
order for GSB to meet the growth restrictions imposed by its Order (see Note
10).
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Girard Savings Bank F.S.B.
San Diego, California
We have audited the accompanying consolidated statements of operations and
of cash flows of Girard Savings Bank F.S.B. and Subsidiary (the "Bank") for
the period from January 1, 1994 through November 8, 1994, the date of the
Bank's acquisition by Wilshire Acquisitions Corporation II. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated statements of operations and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Girard Savings Bank F.S.B. and Subsidiary for the period from January
1, 1994 through November 8, 1994, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
March 10, 1995
Los Angeles, California
F-27
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
INTEREST INCOME:
Loans................................................................ $5,577
Mortgage-backed securities........................................... 337
------
Total interest income.............................................. 5,914
------
INTEREST EXPENSE:
Deposits............................................................. 3,006
Borrowings........................................................... 292
------
Total interest expense............................................. 3,298
------
NET INTEREST INCOME.................................................... 2,616
PROVISION FOR ESTIMATED LOAN LOSSES.................................... 827
------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES.......... 1,789
------
OTHER LOSS, Service charges and other fees............................. (3)
------
OTHER EXPENSES:
Compensation and other employee benefits............................. 512
FDIC insurance premiums.............................................. 262
Depreciation and amortization........................................ 14
Amortization of excess of cost over net assets acquired.............. 993
Occupancy............................................................ 57
Professional services................................................ 338
Data processing...................................................... 54
Real estate owned, net............................................... 194
Other general and administrative..................................... 143
------
Total other expenses............................................... 2,567
------
LOSS BEFORE INCOME TAX PROVISION....................................... (781)
INCOME TAX PROVISION................................................... 156
------
NET LOSS............................................................... $ (937)
======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation....................................................... 14
Amortization of excess of cost over net assets acquired............ 993
Amortization of deferred interest and fees......................... (56)
Provision for loan losses.......................................... 827
Provision for real estate losses................................... 97
Change in:
Accrued interest receivable....................................... (109)
Prepaid expenses and other assets................................. (52)
Income taxes receivable........................................... 921
Other liabilities................................................. 468
Deferred taxes.................................................... 212
--------
Net cash provided by operating activities........................ 2,378
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments, net................................................ 5,503
Proceeds from the maturity of investments securities................ 3,497
Purchases of investment securities and FHLB stock................... (2,046)
Investment in real estate........................................... (107)
Proceeds from real estate sold...................................... 2,850
--------
Net cash provided by investing activities........................ 9,697
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.............................................. (2,402)
Issuance of common stock............................................ 13
Proceeds from FHLB advances......................................... 12,000
Payments of FHLB advances........................................... (21,000)
--------
Net cash used in financing activities............................ (11,389)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ 686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 2,903
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 3,589
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Payments during the period for:
Interest........................................................... $ 3,300
NONCASH INVESTING ACTIVITIES:
Loans originated to finance the sale of foreclosed real estate...... 1,190
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Girard Savings Bank F.S.B. and
subsidiary (the "Bank") are in accordance with generally accepted accounting
principles and conform to practices within the banking industry. A summary of
the significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of Girard Savings Bank F.S.B. and its wholly-owned subsidiary,
Girard Financial Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the accompanying consolidated financial
statements include provisions for losses on loans and real estate owned.
Investment Securities--As of January 1, 1994, the Bank adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This
statement address the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments are classified into three categories and
accounted for as follows: (i) debt securities which the enterprise has the
positive intent and ability to hold to maturity are classified as held-to-
maturity securities and reported at amortized cost; (ii) debt and equity
securities that are brought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value
with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and
reported at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of income
taxes. Prior to the adoption of SFAS No. 115, all investment securities were
classified as held for investment and valued at cost, adjusted for the
accretion of discounts and amortization of premiums which were recognized as
an adjustment to income. Subsequent to adoption, the Bank has classified all
of its investment securities as held to maturity and accounts for them in the
same manner.
Loans Receivable--Loans are reported at the principal amounts outstanding,
net of unearned income, net deferred loan origination fees and the allowance
for loan losses. Interest income is calculated using the simple interest
method. The recognition of interest income is discontinued when, in
management's judgment, the collection of interest is deemed to be unlikely.
Nonrefundable fees and direct costs associated with the origination of loans
are deferred and netted against outstanding loan balances. The net deferred
fees and costs recognized in interest income over the term of the loan using a
method that approximates the interest method. When recognized as interest
income, loan origination fees are included in revenues as interest on loans.
Discounts or premiums on acquired loans are accreted or amortized to
operations over the lives of the loans using a method that approximates the
level-yield method unless the loans are nonaccrual loans.
Provision and Allowance for Loan Losses--The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential
losses in the loan portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, previous loan loss
experience, current economic conditions, volume, growth and composition of the
loan portfolio and other relevant factors. The
F-30
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
allowance is increased by provisions for loan losses charged against
operations and recoveries of previously charged off credits.
The accompanying financial statements require the use of management
estimates to calculate the allowance for loan losses. These estimates are
inherently uncertain and depend on the outcome of future events. Regulatory
authorities have required substantial increases in the allowance maintained by
many banks in recognition of the inherent risk in the existing economic
environment. The Bank's lending is concentrated in the Southern California
area and specifically on loans collateralized by income-producing properties
in that area. The area has recently experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
borrower's ability to repay loans. Additional decline in the local economy
and/or rising interest rates may result in increasing losses that cannot
reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Bank's capital.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Real Estate Owned--Real estate acquired in settlement of loans is stated at
the lower of cost of fair value less estimated cost to sell. Loan balances in
excess of fair value of the real estate acquired are charged against the
allowance for loan losses at the date of acquisition. Any subsequent operating
expense or income, reduction in estimated values, and gains or losses on
disposition of such properties are charged to current operations.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, federal funds sold and
certificates of deposit with original maturities of three months or less.
2. SUBSEQUENT EVENT
Acquisition and Recapitalization--On November 9, 1994, pursuant to a stock
purchase agreement between Wilshire Acquisitions Corporation II ("WACII"),
Girard Savings Bank F.S.B., (the "Bank"), Girard Financial Corporation, the
stockholders of the Bank, and RT Holdings, Inc., WACII purchased 4,218,210
shares of the Bank's common stock held by the stockholders for $3,559. In
addition, the Bank issued and sold to WACII nonvoting preferred stock for
$1,000. WACII now owns 94.9% of the Bank's outstanding shares of common stock
and 100% of the Bank's outstanding preferred stock.
Prior to acquisition, the Bank wrote off $920 in goodwill associated with a
prior acquisition that otherwise would have been amortized over the next 14
years. Such goodwill was deemed to be impaired due to the cessation of
significant activity of the acquired business and disposition of its assets.
In addition, the Bank incurred additional legal and professional expenses of
approximately $256 related to its sale.
3. INCOME TAX PROVISION
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
Federal income tax benefit.......................................... $(61)
State income taxes.................................................. 5
----
Total current benefit............................................. (56)
----
Deferred:
Federal income taxes................................................ 212
----
Total income tax provisions....................................... $156
====
</TABLE>
F-31
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The principal temporary differences creating deferred taxes are related to
FHLB stock dividends, discounts on purchased loans, the allowance for loan
losses, deferred loan fees, and partnership income, which are taxable or
deductible in different years for tax and financial reporting purposes.
The difference between the effective tax rate implicit in the consolidated
statements of operations and the statutory income tax rate can be attributed
to the following:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate............................ (35.0%)
Nondeductible goodwill.................................................. 41.2
Valuation allowance..................................................... 7.6
Other................................................................... 6.2
-----
Effective income tax benefit rate....................................... 20.0%
=====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Profit Sharing Plan--Subsequent to the acquisition by WACII, the Bank's
employees began to participate in a defined contribution profit sharing and
401(k) plan sponsored by companies in the Wilshire Financial Services Group
"control group". At the discretion of the Bank's Board of Directors, the Bank
may elect to contribute to the plan based on profits of the Bank or based on
matching participants' contributions.
Lease Commitments--At November 8, 1994, there are no operating leases with
initial or remaining noncancellable lease terms in excess of one year.
Total rent expense from an operating lease was approximately $59 in 1994.
The lease provides that the Bank pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased premises in excess of a
predetermined base, in addition to the minimum monthly payments.
Lending Commitments--At November 8, 1994, the Bank had no outstanding
commitments to fund loans and no obligations under standby letters of credit
or other off-balance-sheet items with credit risk.
Litigation--The Bank is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Bank's financial
position.
F-32
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Wilshire Credit Corporation and Affiliates
Portland, Oregon:
We have audited the accompanying combined statements of financial condition
of Wilshire Credit Corporation and Affiliates (the "Corporations") as of
September 30, 1996 and December 31, 1995, and the related combined statements
of operations, stockholders' equity and cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994. These
combined financial statements are the responsibility of the Corporations'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Wilshire Credit
Corporation and Affiliates as of September 30, 1996 and December 31, 1995, and
the combined results of their operations and their cash flows for the nine
months ended September 30, 1996 and for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
November 13, 1996
Los Angeles, California
F-33
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................... $ 6,638 $ 3,577
SECURITIES:
Trading account................................... 11,818 --
Available for sale, at fair value (cost: $7,039
and $2,486 in 1996
and 1995, respectively).......................... 7,049 2,486
Held to maturity, at amortized cost (fair value:
$12,785 and $4,643 in 1996
and 1995, respectively).......................... 12,771 4,643
LOANS:
Loans, net........................................ -- 121,420
Discounted loans, net............................. 4,824 19,352
Loans held for sale, net, at lower of cost or
market........................................... 112,939 --
Discounted loans held for sale, net, at lower of
cost or market................................... 168,957 33,267
Commercial notes receivable....................... 10,811 9,261
OTHER RECEIVABLES................................... 2,935 1,769
DUE FROM AFFILIATES, Net............................ 2,473 759
PROPERTY, Net....................................... 8,953 6,717
OTHER ASSETS........................................ 3,000 3,122
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Participating interests in loans and securities... $143,424 $150,298
Borrowings........................................ 243,239 70,165
Capital lease obligations......................... 1,445 1,126
Due to affiliates................................. 8,431 3,698
Accounts payable and accrued liabilities.......... 7,592 4,887
-------- --------
Total liabilities............................... 404,131 230,174
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................................... 524 524
Retained earnings (accumulated deficit)........... (3,943) 78
Distributions to stockholders..................... (47,554) (24,403)
Unrealized gains on available-for-sale
securities....................................... 10 --
-------- --------
Total stockholders' equity (deficit)............ (50,963) (23,801)
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Servicing fees............................... $ 6,041 $ 9,739 $ 3,339
Interest and dividend income................. 6,718 5,124 1,667
Gain on sale of loans........................ 935 43 465
Rent and finance lease income................ 607 625 192
Other revenues (expense)..................... 72 (194) 133
------- ------- -------
Total revenues............................. 14,373 15,337 5,796
------- ------- -------
EXPENSES:
Compensation and benefits.................... 5,090 6,605 3,834
Interest expense............................. 9,116 3,789 894
Travel....................................... 1,032 1,233 177
Depreciation and amortization................ 766 504 208
Professional services........................ 537 898 311
Portfolio servicing expense.................. 281 52 32
Rent......................................... 105 254 217
Telephone.................................... 189 349 262
Postage...................................... 120 143 206
Advertising.................................. 150 82 33
Other general and administrative............. 1,008 909 684
------- ------- -------
Total expense.............................. 18,394 14,818 6,858
------- ------- -------
NET (LOSS) INCOME.............................. $(4,021) $ 519 $(1,062)
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAINS
ON AVAILABLE-
COMMON RETAINED DISTRIBUTIONS TO FOR-SALE
STOCK EARNINGS SHAREHOLDERS SECURITIES TOTAL
------ -------- ---------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $524 $ 1,599 $ (4,584) $-- $ (2,461)
Net loss.............. -- (1,062) -- -- (1,062)
Distributions to
shareholders......... -- -- (7,576) -- (7,576)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1994................... 524 537 (12,160) -- (11,099)
Net income............ -- 519 -- -- 519
Distributions to
shareholders......... -- -- (12,243) -- (12,243)
Dividends............. -- (978) -- -- (978)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1995................... 524 78 (24,403) -- (23,801)
Net loss.............. -- (4,021) -- -- (4,021)
Distributions to
shareholders......... -- -- (23,151) -- (23,151)
Unrealized gain on se-
curities
available-for-sale... -- -- -- 10 10
---- ------- -------- ---- --------
BALANCE, SEPTEMBER 30,
1996................... $524 $(3,943) $(47,554) $ 10 $(50,963)
==== ======= ======== ==== ========
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (4,021) $ 519 $ (1,061)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on sale of loans..................... (935) (43) (465)
Valuation adjustment--loans held for
sale..................................... -- -- 254
Interest capitalized on commercial notes.. (1,550) (581) --
Depreciation and amortization............. 524 343 179
Change in:
Trading securities...................... (11,818) -- --
Security purchased under agreement to
resell................................. -- 24,938 (24,938)
Other receivables....................... (1,166) 530 (756)
Due from affiliates..................... (1,714) (386) (373)
Other assets............................ 122 (1,912) (1,126)
Due to affiliates....................... 4,733 185 2,770
Accounts payable and accrued
liabilities............................ 2,705 1,931 1,926
Security sold but not yet purchased..... -- (24,738) 24,738
Other................................... -- 38 --
-------- -------- --------
Net cash provided by (used in)
operating activities................. (13,130) 345 1,148
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities.... (8,371) (4,160) (851)
Proceeds from maturities of held-to-maturity
securities................................. 243 368 --
Purchase of available-for-sale securities... (5,377) (2,602) --
Proceeds from maturities of available-for-
sale securities............................ 824 116 --
Acquisitions and originations of loans...... (258,771) (168,558) (240,881)
Proceeds from sale of loans................. 120,707 109,034 8,420
Receipts of principal on loans.............. 26,330 137,642 39,179
Origination of commercial notes receivable.. -- (7,680) (1,000)
Purchase of property........................ (2,248) (5,339) (219)
-------- -------- --------
Net cash provided by (used in)
investing activities................. (126,663) 58,828 (195,352)
-------- -------- --------
</TABLE>
See notes to combined financial statements.
F-37
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -------------------
1996 1995 1994
------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from participating interests..... $ -- $ 47,261 $179,938
Payments of principal to participating
interests................................ (6,874) (102,234) (36,564)
Proceeds from borrowings.................. 224,968 73,091 63,278
Principal payments of borrowings.......... (51,894) (63,867) (3,050)
Principal payments on capital leases...... (195) (125) (59)
Cash dividends paid ...................... -- (978) --
Other distributions to stockholders....... (23,151) (12,243) (7,576)
--------- --------- --------
Net cash provided by (used in) financing
activities............................. 142,854 (59,155) 195,967
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 3,061 18 1,763
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 3,577 3,559 1,796
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 6,638 $ 3,577 $ 3,559
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid............................. $ 8,734 $ 3,121 $ 359
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchases of property through capital
leases................................... $ 514 $ -- $ 101
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination--The combined financial statements of Wilshire Credit
Corporation and Affiliates (the "Corporations") include the accounts of the
following companies:
<TABLE>
<CAPTION>
COMPANY IDENTIFIER
------- ----------
<S> <C>
Wilshire Credit Corporation....................................... WCC
Wilshire Leasing Limited.......................................... WLL
Wilshire Properties I, Inc. ...................................... WP-I
Wilshire Properties II, Inc. ..................................... WP-II
Portland Servicing Corporation.................................... PSC
Wilshire Securities Corporation................................... WS
Wilshire Funding Corporation 1994-1............................... WF-4-1
Wilshire Funding Corporation 1995-1............................... WF-5-1
Wilshire Funding Corporation 1995-2............................... WF-5-2
Wilshire Funding Corporation 1995-3 .............................. WF-5-3
Wilshire Funding Corporation 1996-1............................... WF-6-1
Wilshire Consumer Receivables Funding Corporation, LLC............ WCRFC
Wilshire Manufactured Housing Funding Company, LLC................ WMHFC
Wilshire Mortgage Funding Company, LLC............................ WMF
WMFC, LLC......................................................... WMFC
Wilshire Funding Company, LLC..................................... WF
</TABLE>
All of the above companies are under common ownership and management. All
significant intercompany balances and transactions have been eliminated in
combination.
Nature of the Business--The Corporations acquire and service performing and
nonperforming (discounted) loan portfolios and mortgage-backed securities.
Funding for loan portfolio and mortgage-backed securities acquisitions is
provided principally by third-party investors who hold participating interests
in cash flows from specified portfolios and securities, generally on a
nonrecourse basis, or who lend to the Corporations with specified portfolios
and securities as collateral.
WLL operates under the name of Portland Cellular, providing cellular
telephone transmission for its customer base. Portland Cellular also provides
phones to certain of its customers under operating leases.
WP-I operates the Corporations' headquarters facilities, which were acquired
under a capital lease with a bargain purchase option.
WP-II owns and manages two commercial real estate properties located in
Oregon.
WS was formed for the purpose of engaging in broker/dealer activities, but
has had no significant activity.
WF-4-1, WF-5-1, WF-5-2, WF-5-3 and WF-6-1 were formed primarily for the
purpose of acquiring and securitizing various loan portfolios.
WCRFC, WMHFC and WMF were formed for the purpose of funding three
securitizations during 1995: a $25,464 consumer loan-backed bond, a $30,757
manufactured housing-backed bond, and a $64,753 mortgage-backed bond,
respectively.
F-39
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
WMFC is the holding company for WF which, was formed for the purpose of
acquiring and originating residential home mortgages.
Cash and Cash Equivalents--The Corporations consider all highly liquid
investments with maturities of three months or less, when purchased, to be
cash equivalents. Cash and cash equivalents consist primarily of cash in
accounts with banks and brokers and in money market funds.
Use of Estimates in the Preparation of the Combined Financial Statements--
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Securities--Securities consist primarily of B-class pass-through mortgage
and other asset-backed securities which were either purchased at discounts or
represent residual interests in loans previously securitized by the
Corporations, and U.S. Treasury securities. Until the third quarter of 1996,
all securities were classified as held-to-maturity based on management's
intent and the Corporations' ability to hold them to maturity, and differences
between cost and fair value of the securities were immaterial. In the third
quarter of 1996, purchases of B-class mortgage-backed securities were
increased significantly. In connection with that activity, management
reevaluated its intentions with respect to the various types of securities
held, and the securities portfolio was segregated into three components, as
follows:
Held-to-Maturity--U.S. Treasury securities are pledged for certain
borrowings and are classified as held-to-maturity based on the ability and
intent to hold them to maturity for that purpose. These securities are
carried at amortized cost.
Trading--B-class and other securities representing retained interests in
loans securitized by the Corporations are classified as trading securities.
These securities are carried at fair value, and changes in unrealized gains
or losses are recorded in the combined statements of operations.
Available-for-Sale--B-class mortgage-backed securities purchased from
third parties are classified as available-for-sale. These securities are
carried at fair value, and changes in unrealized gains or losses are
recorded in a separate stockholders' equity account in the combined balance
sheets. The available-for-sale classification also includes an equity
security-preferred stock of a privately-held company that does not have a
readily determinable fair value, and for which fair value is assumed to
approximate cost.
When the securities held prior to the third quarter of 1996 were transferred
from the held-to-maturity portfolio to the available-for-sale and trading
portfolios during the third quarter, they were transferred at their fair
values, which were not materially different than amortized cost.
Loans--The Corporations' principal business involves acquiring loans, and to
a significantly lesser extent, originating them. Acquired loans are generally
purchased in pools, or portfolios, for prices at or below face value (i.e.,
unpaid principal balances plus accrued interest). Nonperforming and
underperforming loan portfolios are generally acquired at deep discounts to
face value and are classified as discounted loans in the combined statements
of financial condition. Loans that have been identified as likely to be sold
are classified as held-for-sale in the combined statements of financial
condition. Loans other than discounted loans and loans held-for-sale are
classified simply as loans.
F-40
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Discounted loans are presented in the combined statements of financial
condition inclusive of accrued interest (purchased interest and subsequently
accrued interest) and net of unamortized discount. Discounted loans are
accounted for on a portfolio basis, generally using the cost recovery method.
The full extent of cash that will ultimately be collected on a specific
discounted loan portfolio is subject to substantial uncertainty. Collections
may be realized in various ways, such as negotiations with debtors resulting
in resumption of payments under original or restructured terms, significant
collections on one or a relatively few loans in a portfolio of many loans,
legal judgments against debtors, or repossession and sale of collateral.
Discounts are not accreted into income until the Corporations' initial net
investment in the portfolio is fully recovered, except in the case of certain
portfolios for which collections are more certain. For most portfolios,
accretion is determined in proportion to cash receipts of principal relative
to the total principal in the portfolios. .
Loans other than discounted loans are presented in the combined statements
of financial condition in the same manner as discounted loans except that
discounts associated with purchased loans are accreted into income using a
method approximating the interest method, and interest is recognized on an
accrual basis.
Loans held-for-sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held-for-sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value.
Commercial notes receivable comprise three originated loans to an
unaffiliated corporation and its operating subsidiary. The loans are presented
at cost, plus accrued compound interest capitalized in accordance with the
terms of the loans. Interest on the loans is collectible in cash based on a
formula relating to the earnings of the borrowers. The loans mature in August
2000.
The Corporations do not evaluate individual loans, except for commercial
notes receivable, for impairment under SFAS No. 114, "Accounting for
Impairment of a Loan," because acquisition decisions and certain other loan
management decisions are made on the basis of the value of each portfolio as a
unit rather than on the basis of the value of specific loans. Also, a
substantial majority of the loans purchased have small balances relative to
the total portfolio and are homogeneous by type within each portfolio.
Impairment is evaluated on a portfolio basis considering the projected net
realizable value of the portfolio compared to the net carrying value of the
portfolio. Credit risk related to each portfolio as a whole is one factor
considered by management in determining the purchase price for the portfolio;
therefore unaccreted discounts are assumed to provide a sufficient valuation
allowance for credit risk unless management's analysis indicates otherwise. As
of September 30, 1996 and December 31, 1995, no allowance for loan losses has
been provided in the financial statements. Specific loans are charged off,
with corresponding charges to loan discounts, when management determines they
are uncollectible. A substantial portion of the total discounted loan
portfolio consists of nonperforming and restructured loans. It is not
practicable to estimate the additional income that might have been recognized
had these loans performed under their original terms.
Interest Income Recognition--Interest is accrued on both loans and
discounted loans in accordance with their legal terms. However, to the extent
there is a participation agreement associated with a loan portfolio, the
liability to the participant is increased by the amount of interest accrued.
To the extent that the Corporations have a nonparticipated interest in a
discounted loan portfolio, interest income recognition is deferred and the
loan discount account is increased by the amount of interest accrued. To the
extent that the Corporations have a nonparticipated interest in commercial
notes receivable and in a loan portfolio other than a discounted loan
portfolio, interest income is recognized as the interest is accrued.
F-41
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Other Receivables--Other receivables consist primarily of certain direct
costs associated with collections of specific loans. The costs are generally
reimbursable by participants in the loan portfolios, or are charged to the
borrowers.
Due from and Due to Affiliates--Due from affiliates primarily consists of
amounts advanced for certain operating expenses to a savings and loan holding
company affiliated with the Corporations by common ownership and control. At
September 30, 1996, due from affiliates includes servicing fees, for which
payment was deferred, owed to the Corporations from one of the subsidiaries of
the savings and loan holding company. Due to affiliates primarily consists of
loan payments collected by the Corporations as servicer but not yet remitted
to the two subsidiaries of the bank holding company affiliate. These assets
and liabilities are reflected at cost, and do not bear interest.
Rental Income and Finance Lease Income--Rental income and finance lease
income is derived from operating leases on commercial real estate and from
cellular and portable telephone rentals.
Property--Property is stated at cost less accumulated depreciation.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets.
Participating Interests in Loans and Securities--Participation liabilities
represent amounts invested by third parties for an interest in cash flows from
loan portfolios and mortgage-backed securities, net of the cash flows already
remitted to the participants. Participants share credit risks and certain
other risks associated with the assets that provide the source of repayment
and potential income to the participants. If cash flows from specific assets
proved to be insufficient to provide participants recovery of their initial
investments or expected income on such investments, the Corporations'
liability would be reduced without recourse. Included in participation
liabilities as of September 30, 1996 and December 31, 1995 are $6,520 and
$5,605, respectively, representing amounts collected from borrowers but not
yet remitted to participants.
Agreements with participants generally provide that, in exchange for the
Corporations' servicing of assets, the Corporations retain a specified portion
of portfolio cash flows allocable to the participants' investment in addition
to cash flows relating to the Corporations' direct investment, if any. The
Corporations' retained portion of cash flows allocable to participants'
interests is recognized when received as servicing fee income. The
Corporations' retained portion generally increases after the point at which
participants have recouped their initial investments.
Financial Instruments--The Corporations enter into transactions involving
financial instruments both for speculative trading purposes and for hedging
purposes.
Premiums received or paid for writing or purchasing puts and calls for
trading purposes are recorded as liabilities or assets representing the market
value of the options. The liabilities or assets are subsequently marked to
market at each balance sheet date, and unrealized as well as realized gains
and losses are recorded in periodic income.
Forward sales and short sales of securities and certain options and futures
contracts are designated as hedges against future fluctuations in the market
value of loans held for sale resulting from changes in interest rates. Changes
in the market value of these instruments are deferred as adjustments to the
cost basis of the hedged loans and thus are recognized in connection with the
ultimate sale of such loans.
F-42
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes--Each of the companies whose operations are reflected in these
combined financial statements are Subchapter S corporations for income tax
purposes. Taxable income of the companies is passed through directly to the
stockholders and is not taxed at the corporate level.
Earnings per Share--Earnings per share data is omitted because each company
in the combined group has an independent capital structure, and varying
numbers of outstanding shares of stock.
Reclassification--Certain amounts in the combined financial statements and
related footnote disclosures for 1995 and 1994 were reclassified to conform to
the 1996 presentation. These reclassifications do not materially affect the
presentation.
2.SECURITIES
Securities consist of the following at September 30, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1996
Available-for-sale securities:
Mortgage-backed securities........ $ 4,553 $ 30 $ 20 $ 4,563
Equity securities................. 2,486 -- -- 2,486
------- ---- ---- -------
Total available-for-sale........ $ 7,039 $ 30 $ 20 $ 7,049
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $12,771 $-- $-- $12,785
======= ==== ==== =======
1995
Available-for-sale--
Equity securities................. $ 2,486 $-- $-- $ 2,486
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $ 4,643 $-- $-- $ 4,643
======= ==== ==== =======
</TABLE>
The Company receives payments on mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 13 to 30 years. U.S. Treasury maturities held at
September 30, 1996 mature within one year.
There were no sales of securities in the nine months ended September 30,
1996 or the years ended December 31, 1995 and 1994.
At September 30, 1996, all U.S. Treasury securities are pledged for certain
borrowings. Substantially all other securities collateralize other borrowings
and participating interests reflected as liabilities in the combined
statements of financial condition.
F-43
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3.LOANS
Loans, discounted loans and loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans at amortized cost:
Gross unpaid principal........................ $ 140,272
Gross accrued interest........................ 3,054
Discount...................................... (21,906)
---------
Loans, net.................................... $ 121,420
=========
Discounted loans, at cost:
Gross unpaid principal........................ $ 280,104 $ 341,269
Gross accrued interest........................ 234,562 221,394
Discount...................................... (509,842) (543,311)
--------- ---------
Discounted loans, net......................... $ 4,824 $ 19,352
========= =========
Loans held for sale, at cost which is lower than
market:
Gross unpaid principal........................ $ 131,182
Gross accrued interest........................ 4,719
Discounts and deferred hedging gains, or
losses net of premiums....................... (22,962)
---------
Loans held for sale, net...................... $ 112,939
=========
Discounted loans held for sale, at cost which is
lower than market:
Gross unpaid principal........................ $ 210,657 $ 69,818
Gross accrued interest........................ 27,336 13,573
Discount and deferred hedging gains, or losses
net of premiums.............................. (69,036) (50,124)
--------- ---------
Discounted loans held for sale, net........... $ 168,957 $ 33,267
========= =========
</TABLE>
Loans other than discounted loans consist primarily of loans secured by real
estate, of which approximately 50% are single family residential properties.
Discounted loans and discounted loans held for sale comprised both real estate
secured (approximately 35%) and consumer loans (approximately 65% based on
gross unpaid principal balances at September 30, 1996). Approximately 20% of
loans are to borrowers in the northeastern U.S. and approximately 15% of loans
are to borrowers in California. The remainder are to borrowers in diverse
geographical areas.
Substantially all loans collateralize participating interests and
borrowings.
F-44
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4.PROPERTY
Property consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Land.............................................. $2,550 $1,763
Buildings......................................... 5,971 4,701
Vehicles.......................................... 48 48
Furniture and equipment........................... 1,223 812
------ ------
Total........................................... 9,792 7,324
Less accumulated depreciation..................... 839 607
------ ------
Property, net..................................... $8,953 $6,717
====== ======
</TABLE>
Land and buildings comprise the Corporations' headquarters, which secure a
capital lease obligation (see Note 6), and two commercial real estate
projects, which collateralize certain borrowings (see Note 5).
The following table summarizes future minimum rental income under
noncancelable operating leases as of September 30, 1996:
<TABLE>
<S> <C>
1996.................................................................... $127
1997.................................................................... 322
1998.................................................................... 110
1999.................................................................... 116
2000.................................................................... 117
Thereafter.............................................................. 25
----
$817
====
</TABLE>
F-45
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. BORROWINGS
The Corporations have various borrowing agreements, most of which are
collateralized by loans and securities. These borrowings have either (a)
repayment terms tied to cash receipts of the related collateral or (b)
borrowing bases tied to the relative value of the collateral. Except certain
borrowings (mortgages) secured by investment real estate, the borrowings do
not have fixed repayment schedules. Following is a summary of borrowings by
major type, showing their outstanding balances, interest rates and final
maturity dates. Unless otherwise noted, the borrowings are secured by
substantially all of the Corporations' unparticipated interest in loans and
securities and/or the agreed-upon value of the servicing income to be derived
from participated interests. Interest is payable at least monthly on
substantially all borrowings.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Reverse repurchase agreements with rates ranging
from 5.6% to LIBOR plus .75-2.5%, maturing
October 1996................................... $ 85,795 $ 5,918
Borrowings with fixed rates of 12-12.5%,
maturing beginning in 1998, renewable at the
Corporations' option until 2005-6.............. 81,085 38,996
Mortgage-backed bonds issued to third parties
with rates ranging from LIBOR plus .5-5.5% (11%
cap), maturing in 2001......................... 50,381
Warehouse line for loan originations at LIBOR
plus 1.5%...................................... 12,374
Borrowings with rates of prime plus 5% and LIBOR
plus 4%, maturing in 1998-1999................. 3,542 13,447
Borrowings due on demand, interest at prime
plus........................................... 3,500 3,500
Other loan-secured borrowings................... 2,750
Borrowings secured by investment real estate
with fixed rates from 9.75-10.63%, payable
monthly and maturing in 1998 and 2005.......... 5,345 4,477
Related-party borrowings........................ 1,217 1,077
-------- -------
Total borrowings................................ $243,239 $70,165
======== =======
</TABLE>
The mortgage-backed bonds shown above were issued in a securitization
involving the Corporations' loans which was accounted for as a financing
transaction rather than as a sale of loans due to the extent of the
Corporations' residual interests in the transaction.
Maturities of long-term borrowings (mortgages on investment real estate) are
as follows:
<TABLE>
<S> <C>
1997 (including fourth quarter of 1996).............................. $ 110
1998................................................................. 80
1999................................................................. 1,195
2000................................................................. 95
2001................................................................. 940
Thereafter........................................................... 2,925
------
$5,345
======
</TABLE>
F-46
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is information about the Corporations' borrowings under reverse
repurchase agreements during the nine months ended September 30, 1996:
<TABLE>
<S> <C>
Average balance outstanding during the period.......................... $19,397
Highest balance outstanding during the period.......................... 85,685
Average interest rate during the period................................ 5,68%
Average interest rate at the end of the period......................... 7.36%
</TABLE>
Related party borrowings are borrowings from a trust managed on behalf of
the Corporations' majority stockholder and a relative of the majority
shareholder. During the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, the Corporations recognized interest expense
of $129, $153 and $200, respectively.
As of September 30, 1996, the Corporations have written borrowing
commitments from various third parties totaling $350 million, of which
approximately $82 million has been drawn and is included in borrowings above.
In addition, the Corporations have unwritten commitments totaling an
additional $150 million, of which approximately $5 million has been drawn and
is included in borrowings above. Of the total commitments, $300 million is in
the form of repurchase facilities, $100 million is in the form of a warehouse
facility, and $100 million is in the form of a term loan. Pursuant to a
reorganization of the Corporations and other commonly controlled entities (see
Note 14), management expects that undrawn amounts of these borrowing
commitments will be transferred to subsidiaries of Wilshire Financial Services
Group, Inc. ("WFSG") upon the effective date of WFSG's initial public offering
of common stock and debt.
6. CAPITAL LEASE OBLIGATIONS
The Corporations have purchased various assets, including its headquarters
facility and certain automobiles and equipment, under capital leases. Future
minimum lease payments for capital leases as of September 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996................................................................. $ 962
1997................................................................. 156
1998................................................................. 121
1999................................................................. 113
2000................................................................. 109
Thereafter........................................................... 62
------
Total.............................................................. 1,523
Less amount representing interest.................................. 78
------
Capital lease obligation.......................................... $1,445
======
</TABLE>
F-47
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. FINANCIAL INSTRUMENTS
The Corporations are parties to financial instruments with off-balance-sheet
risk in the normal course of business, primarily for the purposes of reducing
exposure to fluctuations in interest rates and changes in the market value of
loans held for sale ("hedging activities") and, prior to 1996, for purposes of
realizing short-term profits ("trading activities"). These financial
instruments include short sales and forward sales of U.S. Treasury securities
and short and long positions in option contracts and interest rate futures
contracts of durations similar to the fixed rate loans held for sale that are
being hedged. These instruments involve, to varying degrees, interest-rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The contract or notional amounts of these instruments
reflect the extent of the Corporations' involvement in particular classes of
financial instruments. The counterparties to these instruments are well-known
international broker-dealers and the Corporations do not believe there is
significant credit risk associated with the instruments.
Substantially all activities in the aforementioned financial instruments
during the nine months ended September 30, 1996 were hedging activities. At
September 30, 1996, the Corporations had futures and options positions
(primarily short positions) with notional amounts totalling $26,400 and
$12,400, respectively, and net deferred hedging losses totalling $193.
Substantially all activities in the aforementioned financial instruments
during the year ended December 31, 1995 were trading activities. At December
31, 1995, the Corporations had futures and options positions (primarily short
positions) with notional amounts totalling $3,122 and $10,603, respectively,
and fair market values of $57. During the year ended December 31, 1995, the
average fair values of these financial instruments were not material. Trading
gains and losses are included in other revenues in the combined statements of
operations
The purchase or sale of options and futures contracts bears a high degree of
market risk, subject to fluctuations in market values, rates or currencies in
the instruments underlying the contracts. The potential market loss on options
and futures are generally substantially in excess of the premium paid or
received. The options and futures transactions entered into by the
Corporations require cash margin deposits with the broker. As of September 30,
1996 and December 31, 1995, such margin requirements were $326 and $96,
respectively.
8. OPERATING LEASES
The Corporations maintain certain noncancelable operating leases on real
property and other assets, which expire through 1999. Future minimum lease
payments on such noncancelable operating leases as of September 30, 1996 are
as follows:
<TABLE>
<S> <C>
1996.................................................................. $ 362
1997.................................................................. 1,448
1998.................................................................. 1,415
1999.................................................................. 1,357
2000.................................................................. 113
------
$4,695
======
</TABLE>
The management fee portion of the annual lease payment for a corporate jet
of $401 is subject to escalation on January 1 of each year based on the
percentage change in the Consumer Price Index during the immediately preceding
year.
F-48
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. LOAN SERVICING
Loans serviced for others, except for participated loans acquired in the
name of WCC, are not included in the combined statements of financial
condition. The Corporations perform servicing for two affiliated savings banks
as well as other unrelated parties. The unpaid principal balances of loans
serviced for others are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Related parties................................... $501,954 $337,455
Others............................................ 13,537 18,417
-------- --------
Total........................................... $515,491 $355,872
======== ========
</TABLE>
At September 30, 1996 and December 31, 1995, WCC, in connection with the
foregoing loan servicing and in connection with WCC-owned and participated
loans, had made escrow payments in excess of amounts collected, which are
included in other receivables.
10. COMMITMENTS AND CONTINGENCIES
Profit-Sharing Plan--The Corporations' employees participate in a defined
contribution profit-sharing and 401(k) plan. At the discretion of the
Corporations' Boards of Directors, they may elect to contribute to the plan
based on profits of the Corporations or based on matching participants'
contributions. During 1996 and 1995, the Corporations contributed $97 and $46,
respectively, to the plan.
Litigation--The Corporations are defendants in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Corporations'
financial position.
Loan Purchase Commitments--At September 30, 1996, the Corporations were
committed to purchase $9,323 of loans for $9,323. The Corporations also had a
commitment from a participating investor to provide funding for the purchases.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimates
presented herein are not necessarily indicative of the amounts the
Corporations could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The methods and assumptions used to
estimate the fair value of each class of financial instrument for which it is
practicable to estimate that value are explained below:
Cash and Cash Equivalents--The carrying amounts reported in the combined
statements of financial condition for cash and cash equivalents approximate
their fair values.
Securities--Fair values of U.S. Treasury securities included in the held-to-
maturity classification are based on quoted market prices. Fair values of B-
class mortgage-backed securities included in the trading account and the
available-for-sale classification, including both purchased securities and
residual interests in loan
F-49
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
securitization transactions initiated by the Corporations, are estimated by
management based on data provided by an independent pricing service,
considering current interest rates, prepayments and other relevant factors. It
is not practicable to estimate the fair value of preferred stock of a closely-
held corporation included in the available-for-sale classification.
Loans--It is not practicable to estimate the fair value of discounted loans
(including discounted loans held for sale), which are predominantly non
performing loans, due to uncertainties as to the nature, timing and extent to
which the loans will be either collected according to original terms,
restructured, or foreclosed upon. The fair values of loans and loans held for
sale other than discounted loans and commercial notes using applicable risk-
adjusted spreads relative to the current pricing of similar loans as well as
anticipated prepayments. No value adjustments have been made for changes in
credit risk within the loan portfolios. It is management's opinion that the
allowance for estimated loan losses pertaining to loans results in a fair
value adjustment of the credit risk of such loans. It is not practicable to
estimate the fair value of commercial notes receivable. These loans were
extended in a leveraged buyout transaction and bear interest at rates from 15-
20%. The loans are repayable based on formulas tied to the earnings of the
borrower, and mature in 2001.
Participating Interests in Loans and Securities--It is not practicable to
estimate the fair values of participating interests in loans and securities.
These liabilities are payable from the cash flows generated by the related
loans and securities, less the Corporations' retained servicing fees, which
include a profit participation element. The fair values of the liabilities are
therefore linked to the fair values of the related securities and loans,
including discounted loans for which fair values are not reasonably estimable.
Borrowings--Information pertinent to an evaluation of the fair value of
borrowings is included in Note 5. Fair value is assumed to approximate the
face amount outstanding because the principal borrowings have variable
interest rates and generally mature as the loan collateral is collected or are
repayable on demand.
Off-Balance-Sheet Items--The fair value of options and futures used for
hedging purposes are based on quoted market prices.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 6,638 $ 6,638
Securities:
Trading securities................................... 11,818 11,818
Available for sale securities........................ 7,039 7,049
Held to maturity securities.......................... 12,771 12,785
Loans:
Discounted loans, net................................ 4,824 4,824
Loans held for sale, net............................. 112,939 131,763
Discounted loans held for sale, net.................. 168,957 168,957
Commercial notes..................................... 10,811 10,811
Liabilities:
Participating interests in loans and securities........ 143,424 143,424
Borrowings............................................. 243,239 243,239
Off-balance-sheet items:
Options................................................ -- (39)
Futures................................................ -- (152)
</TABLE>
F-50
<PAGE>
PURCHASERS OF THE COMPANY'S COMMON STOCK WILL NOT ACQUIRE ANY INTEREST IN
WILSHIRE CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 3,577 $ 3,577
Securities:
Available for sale securities........................ 2,486 2,486
Held to maturity securities.......................... 4,643 4,643
Loans:
Loans, net........................................... 121,420 121,420
Discounted loans, net................................ 19,352 19,352
Discount loans held for sale, net.................... 33,267 33,267
Commercial notes..................................... 9,261 9,261
Liabilities:
Participating interests in loans and securities........ 150,298 150,298
Borrowings............................................. 70,165 70,165
Off-balance-sheet items:
Options................................................ -- 8
Futures................................................ -- 46
</TABLE>
12. SUBSEQUENT EVENTS--REORGANIZATION OF THE CORPORATIONS
WFSG is affiliated with the Corporations by common ownership and control,
and owns the two banks for which the Corporations service loans. WFSG is
making an initial public offering ("IPO") of common stock and debt, and has
formed certain new subsidiaries to undertake the loan acquisition and
servicing businesses currently being conducted by the Corporations. At the
effective date of WFSG's IPO, the Corporations will cease to acquire loans or
otherwise to compete with WFSG. The Corporations will continue to hold their
existing assets, and will continue to service loans for their own account and
for WFSG and its subsidiaries for a period of approximately two to three
years, when it is expected that WFSG's servicing subsidiary will have obtained
the necessary licenses to assume the servicing business from the Corporations.
Pursuant to the IPO and reorganization of the Corporations, and subsequent
to September 30, 1996, the Corporations will transfer certain rights they have
to future servicing income from a participation agreement with a third party.
The servicing rights, which have no recorded basis in the statements of
financial condition of the Corporations as of September 30, 1996, are the
rights to varying percentages of cash flows from the collection or liquidation
of loans and B-class mortgage-backed securities with principal balances
totalling approximately $269,862 as of September 30, 1996.
Management expects that support for existing commitments of the Corporations
subsequent to the reorganization will be derived from a combination of the
following: continued collection and liquidation of existing loans and
securities; servicing income for the period during which the Corporations
continue to conduct the servicing business; operating income from properties
leased to WFSG and its subsidiaries and to third parties; stockholder loans,
which are indirectly supported by the stockholders' interests in WFSG; and,
potentially, other transactions or businesses that the Corporations might
elect to pursue.
F-51
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO 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 UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFOR-
MATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH
SUCH INFORMATION IS GIVEN.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
The Company.............................................................. 19
Recent Developments...................................................... 20
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Dilution................................................................. 23
Capitalization........................................................... 24
Selected Financial Information........................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 45
Regulation............................................................... 65
Taxation................................................................. 74
Management............................................................... 76
Principal Stockholders................................................... 84
Certain Relationships and Related Transactions........................... 85
Description of Capital Stock............................................. 87
Description of Notes Offering............................................ 88
Shares Eligible for Future Sale.......................................... 89
Underwriting............................................................. 90
Legal Matters............................................................ 91
Experts.................................................................. 91
Wilshire Credit Corporation.............................................. 92
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 SHARES OF COMMON STOCK
------------------------
WILSHIRE
------------------------
FINANCIAL SERVICES GROUP
----------------
PROSPECTUS
----------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1996
PROSPECTUS
$75,000,000
------------------------
WILSHIRE
------------------------
Financial Services Group
% NOTES DUE 2003
-----------
This Prospectus relates to the offering by Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" and together with its subsidiaries, the
"Company") of $75 million principal amount of its % Notes due 2003 (the
"Notes") of WFSG (the "Notes Offering"). Interest on the Notes will be payable
semiannually in arrears on and of each year, commencing
. On and after , 2001, the Notes will be
redeemable at any time at the option of the Company, in whole or in part, at
the redemption prices set forth herein. The Notes are not otherwise redeemable
prior to , 2001 except that until , 2001, the Company may redeem, at
its option, up to 35% of the original aggregate principal amount of the Notes
at a redemption price equal to % of the principal amount thereof, plus
accrued and unpaid interest to the redemption date, from the net proceeds of
one or more private or public sales of Qualified Capital Stock (as defined
herein) if at least 65% of the original aggregate principal amount of the Notes
remains outstanding after such redemption. Upon the occurrence of a Change in
Control Event (as defined herein), holders of the Notes will have the right to
require the Company to repurchase their Notes, in whole or in part, at a
purchase price equal to % of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the repurchase date. See "Description
of Notes."
The Notes will be general unsecured obligations of WFSG. Because WFSG is a
holding company that currently conducts substantially all of its operations
through its subsidiaries, the Notes will be effectively subordinate to the
claims of creditors of the subsidiaries. There is no established trading market
for the Notes and WFSG does not intend to apply for a listing of the Notes on
any national securities exchange or on Nasdaq.
In addition, WFSG is concurrently offering 1,500,000 shares of common stock,
par value $.01 per share (the "Common Stock") of WFSG (the "Common Stock
Offering"). The Common Stock Offering and the Notes Offering are each
conditioned on the completion of the other offering.
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING AT PAGE 12 FOR A DISCUSSION OF MATERIAL RISKS THAT SHOULD BE
CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
-----------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC"), ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), FDIC, THE OFFICE OF THRIFT SUPERVISION ("OTS") OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, FDIC, OTS 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>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) THE COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................. % % %
Total (4)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)Plus accrued interest, if any, from the date of issuance.
(2) See "Underwriting" for information relating to the indemnification of the
Underwriter.
(3) Before deducting expenses payable by the Company estimated to be
$ .
(4) WFSG has granted the Notes Underwriter an option, exercisable within 30
days of the date hereof, to purchase from WFSG up to $11,250,000 of
additional Notes solely to cover over-allotments, if any. To the extent the
option is exercised, WFSG will offer additional Notes to the public at the
Price to Public shown above. If the option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Company will be
$ , $ , and $ , respectively. See "Underwriting."
The Notes are offered subject to receipt and acceptance by the Underwriter,
to prior sale and to the Underwriter's right to reject any order in whole or
in part and to withdraw, cancel or modify the offer without notice. It is
expected that delivery of the Notes will be made at the offices of Friedman,
Billings, Ramsey & Co., Inc., Arlington, Virginia, the Underwriter, or in
book-entry form through the facilities of The Depository Trust Company on or
about , 1996.
-----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE COMMON STOCK OFFERING AND THE NOTES OFFERING, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF SUCH SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER THE COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
WFSG has filed with the Securities and Exchange Commission (the
"Commission") via the Electronic Data Gathering Analysis and Retrieval System
("EDGAR") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act") with respect to the Common Stock
Offering and the Notes Offering. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance where such contract or other
document is an exhibit to the Registration Statement, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each statement being qualified in all respects by such
reference. As a result of the filing of the Registration Statement with the
Commission, WFSG will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file reports and other information
with the Commission. WFSG intends to furnish its stockholders annual reports
containing audited financial statements and an opinion thereon expressed by
WFSG's independent auditors as well as quarterly reports for the first three
quarters of each fiscal year containing unaudited financial statements. Copies
of the Registration Statement, including all exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60601 upon payment of prescribed rates. The
Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including WFSG. The Company has applied for quotation of the
Common Stock on Nasdaq. If the Common Stock is quoted on Nasdaq, reports,
proxy and information statements and other information regarding the Company
will be available for inspection at the National Association of Securities
Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington, D.C. 20006.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option to purchase additional shares of Common
Stock. Unless the context otherwise requires, all references to the Company
herein shall be deemed to include the Company and its subsidiaries. Unless
otherwise indicated, all information in this Prospectus assumes that no
outstanding stock options are exercised. The information contained in this
Prospectus gives effect to certain transactions to be consummated prior to or
simultaneously with the closing of the Common Stock Offering and the Notes
Offering.
THE COMPANY
GENERAL
Wilshire Financial Services Group Inc. ("WFSG" and, together with its
subsidiaries, the "Company") is a newly formed financial services holding
company for certain companies and businesses previously held as a part of, and
operated by, the Wilshire group of companies (the "Wilshire Companies")
pursuant to a reorganization of the Wilshire Companies (the "Reorganization").
As part of the Reorganization, certain companies forming part of the Wilshire
Companies will become subsidiaries of WFSG and therefore will be part of the
publicly held group following the Common Stock Offering (the "Wilshire Public
Companies") and certain companies, notably Wilshire Credit Corporation ("WCC"),
will not become subsidiaries of WFSG and will remain privately held (the
"Wilshire Private Companies"). The Company will engage in a wide variety of
financial activities, including the acquisition, origination, ownership and
securitization of loan portfolios ("Loan Portfolios"), banking and non-
traditional bankcard processing.
HISTORICAL STRUCTURE
Prior to the Reorganization, the Wilshire Companies operated principally
through two separate companies: (i) WCC, which conducted a substantial portion
of the loan acquisition activities of and all of the loan servicing for the
Wilshire Companies; and (ii) Wilshire Acquisitions Corporation ("WAC"), the
holding company for two federally-chartered savings banks, First Bank of
Beverly Hills, F.S.B. ("First Bank"), and Girard Savings Bank, F.S.B. ("Girard"
and together with First Bank, the "Savings Banks"). The Wilshire Companies
commenced Loan Portfolio acquisitions in 1990 funded primarily by lines of
credit and joint ventures with institutional partners. Through October 21,
1996, the Wilshire Companies had purchased or committed to purchase
approximately 409 Loan Portfolios, aggregating $2.4 billion in principal
amount. In addition, at September 30, 1996 the Wilshire Companies serviced $1.4
billion of loans. The Wilshire Companies' income has been principally derived
from ownership and servicing of, and profit participations in, Loan Portfolios.
In the early 1990's, WCC acquired loans primarily from the Federal Deposit
Insurance Corporation ("FDIC") and the Resolution Trust Corporation (the
"RTC"), generally in auctions of pools of loans acquired from financial
institutions which failed during the late 1980's and early 1990's. Although
governmental agencies such as the FDIC and the Department of Housing and Urban
Development ("HUD") continue to be potential sources of loans, the amount of
loans sold by such agencies has substantially declined. In recent years, the
Wilshire Companies purchased loans primarily from various private sector
sellers, such as banks, savings institutions, mortgage companies and insurance
companies.
Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the principal owners of the
Wilshire Companies (the "Principals"), purchased First Bank and Girard through
WAC in October 1993 and November 1994, respectively, using funds loaned to them
by WCC (the "Shareholder Loans"). The Savings Banks were acquired to provide a
deposit-based funding source for the loan purchase activities of the Wilshire
Companies. Both Savings Banks were acquired at substantial discounts to their
respective book values, reflecting the poor quality of their assets and, in the
case of First Bank, an expected imminent regulatory takeover. WAC has increased
assets from $230.6 million at December 31, 1994 to $533.1 million at September
30, 1996 primarily through the acquisition of Loan Portfolios.
3
<PAGE>
The Principals have injected approximately $30 million into WAC since the
acquisition of the Savings Banks to fund substantial asset growth and to
maintain required capital levels given the substantial reserves taken on loans
acquired as part of the acquisition of the Savings Banks (the "Inherited
Loans") and approximately $24.5 million of sub-prime auto loans acquired in the
fourth quarter of 1995 and the first quarter of 1996 (the "Sub-Prime Auto
Loans"). As a result of the high level of loan loss reserves required in 1996,
and other regulatory concerns regarding the management of the Savings Banks and
the policies and procedures of the Savings Bank regarding internal asset
reviews, allowances for loan and lease losses, loan purchases, internal audits
and hedging transactions, the Office of Thrift Supervision (the "OTS"), on
October 31, 1996 increased the level of regulatory supervision and imposed
cease-and-desist orders (the "Orders") on and restricted further growth of
assets at both Savings Banks. The Company recently has hired additional
management for the Savings Banks and taken other steps to address these
regulatory concerns, but the Company will not be able to use the Savings Banks
for growth until the Orders are lifted or modified. See "Risk Factors--Risks
Related to Imposition of Cease and Desist Orders."
REORGANIZED STRUCTURE
Following the Reorganization, WFSG will be the holding company for WAC, the
Savings Banks, Wilshire Funding Corporation, a company formed to pursue loan
acquisition and loan origination businesses similar to WCC following the Common
Stock Offering and the Notes Offering ("WFC"), and Wilshire Servicing
Corporation, a company formed to engage in the loan servicing business
following the receipt of necessary licenses ("WSC"). As more fully described in
the following paragraph, the Wilshire Private Companies, including WCC, will
not become subsidiaries of WFSG or transfer assets and liabilities to the
Wilshire Public Companies as part of the Reorganization. The Company intends to
build on the expertise of the Wilshire Companies and aggressively pursue the
acquisition of Loan Portfolios. The Company evaluates Loan Portfolios based on
anticipated future cash flows, available funding sources and minimum expected
returns on equity. The Company will seek to identify niche areas primarily
within the real estate loan market where it believes its funding flexibility,
experienced personnel and its proprietary software and U.S. mortgage loan
database give it a competitive advantage in pricing and purchasing Loan
Portfolios. The aggregate principal amount of the loans acquired by the
Wilshire Companies during the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994 and 1993 was approximately $501.4 million,
$337.4 million, $388.5 million and $333.8 million, respectively, and the
aggregate principal amount of the loans acquired by the Wilshire Public
Companies during such period was approximately $242.6 million, $199.8 million,
$147.6 million, and $2.2 million, respectively. As of September 30, 1996, the
Company had $533.1 million of assets and stockholders' equity of $34.6 million.
After giving effect to the Reorganization, the organizational structure of
the Company will be as follows:
Wilshire Financial Services Group Inc.
- --------------------------------------------------------------------------------
Wilshire Funding Wilshire Servicing Wilshire Acquisitions
Corporation Corporation* Corporation
- ----------------------- ------------------ ----------------------------
European Special First Bank of Girard
Operations Purpose Beverly Savings
Entities** Hills F.S.B. Bank, F.S.B.
- --------
*Expected to commence servicing activities in 2-3 years following receipt of
necessary licenses.
**Entities to be formed for financings and to complete securitizations.
4
<PAGE>
In the Reorganization, the Wilshire Private Companies, including WCC, will
not become subsidiaries of WFSG or transfer any assets or liabilities to the
Company. WCC is not being included in the new public entity due to certain tax
considerations and to allow WCC to retain sufficient assets and servicing
rights to retire the Shareholder Loans. See "The Company--The Reorganization."
WCC will cease to acquire new product or servicing for its own account, but
will continue to service and liquidate its existing portfolio. New loan
acquisitions and originations will be conducted by WFC. For a period of two to
three years after the closing of the Common Stock Offering and Notes Offering
while WSC is in the process of obtaining the relevant licensing approvals for
its servicing activities, WCC will continue to service loans for the Company at
a market rate. Following such period, WSC will commence servicing loans for the
Company and WCC. See "Certain Relationships and Related Transactions." In
addition, WCC and the Principals have agreed not to compete with the Company
with respect to the acquisition of Loan Portfolios.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. Significant Growth in Loan Portfolio Investments. During the last four
years, the Wilshire Companies have developed expertise in the business
of acquiring Loan Portfolios, including residential mortgage loans,
manufactured housing loans, second lien loans, commercial real estate
loans, multi-family residential loans, commercial and business loans,
boat loans and other consumer loans, and Subordinate Securities (as
defined herein). The Company expects to utilize its available funding
sources to aggressively pursue Loan Portfolio acquisitions in the United
States and Western Europe, a substantial portion of which are expected
to be non-performing Loan Portfolios purchased at a discount
("Discounted Loans"). In addition, the Company expects to increase its
purchases of commercial real estate loans.
. Utilization of Varied Funding Sources. The Company, in addition to
deposits at the Savings Banks, will have extensive funding sources
available for investment and lending activities from investment banking
firms and institutional investors, including secured term loans,
warehouse lines of credit, and repurchase facilities. As of the closing
of the Common Stock Offering and the Notes Offering, certain existing
undrawn lines of credit ($416.0 million as of September 30, 1996) of the
Wilshire Private Companies will be transferred to the Company. Amounts
currently drawn under such lines of credit by the Wilshire Private
Companies ($84.0 million as of September 30, 1996) will be transferred
to the Company once such amounts are repaid by the Wilshire Private
Companies. Substantially all of the Company's Loan Portfolio investments
are expected to utilize borrowed funds, minimizing the Company's equity
investment to the extent possible. Since the Wilshire Companies' initial
use of securitization in 1995 through September 30, 1996, the Wilshire
Companies have issued $368.7 million of securities through two publicly
underwritten and three privately placed securitizations, including
securitizations of non-performing and sub-performing mortgage loans,
manufactured housing loans, consumer loans and conventional and non-
conforming mortgage loans. The Company expects to securitize its Loan
Portfolios when advantageous.
. Expansion into European Markets. The Company recently decided to expand
its loan acquisition and servicing activities to encompass the United
Kingdom and France with a view towards future expansion in Western
Europe. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for
conducting servicing activities in the United Kingdom. The Company is
also considering either establishing its own servicing operation,
acquiring an already existing entity or entering into a joint venture
with a company already active in France. Management believes that
conditions in the French real estate market and, to a lesser degree, in
the United Kingdom real estate market are similar to conditions in the
United States real estate market in
5
<PAGE>
the late 1980's and early 1990's and that there may be opportunities to
acquire Loan Portfolios at favorable prices. In addition, management
believes that there is a demand in the European market for U.S.-style
servicing with its automated systems, detailed investor reporting and
aggressive servicing and work-out approaches.
. Capitalize on Servicing Expertise. The Company believes that WCC's loan
servicing experience, its highly trained servicing personnel and its
investment in proprietary software have allowed the Wilshire Companies
to effectively value and price Loan Portfolios. As of September 30,
1996, WCC was servicing more than $1.4 billion principal amount of
loans, including $502.0 million for the Savings Banks. For a period of
two to three years after the closing of the Common Stock Offering and
the Notes Offering, while the Company is in the process of obtaining the
relevant licensing approvals for its servicing activities, WCC will
continue to service loans for the Company generally at a market rate.
Accordingly, the Company does not expect any significant servicing
income until it commences servicing loans for its own account in two to
three years.
. Growth of Non-Traditional Bankcard Processing Operations. The Company
plans to continue development of its non-traditional bankcard processing
operations, which generate revenues through merchant discounts and
processing fees for Visa (R) and Mastercard (R) transactions. The
Company's bankcard processing operations focus on certain high-risk
market niches, principally mail order/telephone order and audio-text
where the Company believes it obtains higher returns on processing
transactions. Revenues from the bankcard operation, which was commenced
in the third quarter of 1994, have demonstrated strong growth increasing
from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1 million
during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using the Company's
existing infrastructure.
. Development of Wholesale Origination Network. In late 1995, the Wilshire
Private Companies launched a mortgage conduit program for the purchase
of newly-originated residential mortgage and manufactured housing loans
on a nationwide basis through correspondents. Originations to date have
been modest. While the Company is obtaining necessary licensing, WCC
will continue to originate residential mortgage loans for the Company's
account through its correspondent relationships and will then transfer
the newly originated loans at acquisition cost to the Company.
Currently, this program focuses on the origination of in park
manufactured housing loans and conforming and non-conforming first and
second lien mortgage loans. The Company is in the process of launching
two new programs for loans to good-credit borrowers.
6
<PAGE>
THE NOTES OFFERING
Amount offered.............. $75 million aggregate principal amount (plus up
to $11.25 million subject to an over-allotment
option).
Maturity date............... , 2003.
Interest payment dates...... and of each year
commencing , 1997.
Optional redemption......... The Notes will be redeemable at the option of
WFSG, in whole or in part, at any time on or
after , 2001 at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the redemption date.
Capital stock redemption.... Until , 2001, the Company may redeem, as
its option, up to 35% of the original aggregate
principal amount of the Notes at % of the
principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, from
the net proceeds of one or more public or private
sales of Qualified Capital Stock (as defined
herein) if at least 65% of the original aggregate
principal amount of the Notes remains outstanding
after such redemption and if such redemption
occurs within 60 days after the closing of any
such public or private sale. See "Description of
Notes--Optional Redemption."
Mandatory redemption........ None.
Ranking..................... The Notes will be general unsecured obligations
of WFSG. Because WFSG is a holding company that
currently conducts substantially all of its
operations through its subsidiaries, including
the Savings Banks, the right of WFSG (and
therefore the right of WFSG's creditors and
stockholders) to participate in any distribution
of the assets or earnings of any subsidiary is
subject to the prior claims of creditors of such
subsidiaries, including any claims of WFSG as a
creditor to the extent such claims may be
recognized. As a result, the Notes will be
effectively subordinate to the claims of
creditors of WFSG's subsidiaries.
Change of control........... Upon a Change of Control Event (as defined
herein), holders of the Notes will have the
option to require the Company to repurchase all
outstanding Notes at 101% of their principal
amount, plus accrued interest to the date of
repurchase. A "Change of Control Event," as
defined in the Indenture pursuant to which the
Notes will be issued, includes the following
events, among others: the acquisition by any
person or group (other than the Existing
Principal Stockholders (as defined) of the
Company) of more than 40% of the Company's voting
stock; a merger, consolidation or other business
combination between the Company and another
person in which more than 40% of the voting stock
of the surviving or transferee company is owned
by persons other than the Existing Principal
Stockholders (as
7
<PAGE>
defined) of the Company or a change in a majority
of the directors on the Board of Directors of the
Company within a two-year period which is not
approved by the incumbent directors. There can be
no assurance that the Company will have the funds
available to repurchase the Notes in the event of
a Change of Control Event.
Certain covenants........... The Indenture pursuant to which the Notes will be
issued will contain certain covenants that, among
other things, require the Company to maintain
certain levels of Consolidated Net Worth and
liquid assets, limit the ability of the Company
and its subsidiaries to incur certain
indebtedness (not including secured indebtedness
used to acquire or refinance the acquisition of
loans or other financial assets), pay dividends
or make other distributions, engage in
transactions with affiliates, dispose of
subsidiaries, create certain liens and guarantees
with respect to pari passu or junior indebtedness
and enter into any arrangement that would impose
certain restrictions on the ability of
subsidiaries to make dividend and other payments
to the Company. The Indenture also will restrict
the Company's ability to merge, consolidate or
sell all of its assets. See "Description of
Notes--Certain Covenants."
Use of proceeds............. The net proceeds from the Notes Offering and the
Common Stock Offering are expected to be used by
the Company to support leveraged acquisitions of
Loan Portfolios and for other general corporate
purposes, including expansion into Western
Europe.
THE COMMON STOCK OFFERING
Concurrently with the Notes Offering, the Company is separately offering an
aggregate of 1,500,000 shares of Common Stock (plus up to 225,000 shares
pursuant to the Common Stock underwriters' over-allotment option) in the Common
Stock Offering. The Notes Offering and the Common Stock Offering are each
conditioned on the completion of the other.
In connection with the Common Stock Offering, the Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "WFSG."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective purchasers of the Notes offered hereby.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present Summary Consolidated Financial Information for
the Company at the dates and for the periods indicated. The historical income
statement and balance sheet data at and for the nine month period ended
September 30, 1996 and the years ended December 31, 1995 and 1994 have been
derived from the audited consolidated financial statements of the Company
included elsewhere in this Prospectus (the "Audited Financial Statements").
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in a
purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC-Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transactions.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995, WAC
and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated".
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the Audited
Financial Statements, the "Consolidated Financial Statements") and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for any other interim period of the entire year ending December 31,
1996. The Summary Consolidated Financial Information should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and related notes as set forth elsewhere
herein.
9
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------
1996 1995 1995 1994
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income........ $34,137 $17,052 $24,381 $ 9,569
Total interest expense....... 19,592 10,411 14,481 5,457
------- ------- ------- --------
Net interest income.......... 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans............. 15,751 3,221 4,266 2,173
------- ------- ------- --------
Net interest income (loss)
after provision for esti-
mated losses on loans....... (1,206) 3,420 5,634 1,939
Other income (loss):
Bankcard income(1)........... 5,078 3,202 4,694 635
Bankcard processing expense.. (3,865) (2,408) (3,462) (274)
Other, net................... 5,164 1,940 1,875 866
------- ------- ------- --------
Total other income (loss).. 6,377 2,734 3,107 1,227
Other expenses:
Other general and administra-
tive expenses............... 10,905 5,247 8,102 4,944
------- ------- ------- --------
(Loss) income before income
tax provision............... (5,734) 907 639 (1,778)
Income tax (benefit) provi-
sion........................ (4,652) 68 47 (526)
------- ------- ------- --------
Net (loss) income ........... $(1,082) $ 839 $ 592 $ (1,252)
======= ======= ======= ========
(Loss) earnings per share.... $(14.05) $ 35.56 $ 25.09 $(135.43)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $ 533,109 $ 341,454 $ 230,636
Loan portfolio, net(2).................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans.............................. 10,767 20,210 2,995
Unaccreted discount...................... (1,632) (3,008) (470)
Allowance for loan losses................ (5,716) (3,855) (431)
Discounted loans, net.................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost
or market(3)............................. 260,804 18,597 --
Real estate owned, net.................... 2,514 4,964 1,208
Deposits, net............................. 487,535 303,524 196,289
Borrowings................................ -- 13,000 21,500
Stockholders' equity(4)................... 34,554 7,039 6,793
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) Does not include Discounted Loans.
(3) Loans held for sale increased due to the Company's intent to sell
approximately $277.5 million of single-family residential loans in the
fourth quarter of 1996.
(4) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for Subordinated Debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets..................... (.22)% .24% (.92)%
Return on average equity..................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans......... 9.39% 9.57% 7.65%
Average equity to average assets............. 7.24% 2.72% 2.96%
Net interest spread(5)....................... 3.15% 3.08% 2.85%
Net interest margin(6)....................... 3.88% 3.72% 3.04%
Ratio of earnings to fixed charges(7):
Including interest on deposits.............. 1.04
Excluding interest on deposits.............. 2.19
Non-performing loans to loans at end of
period(2)................................... 9.11% 4.46% 5.95%
Allowance for loan losses to total loans at
end of period............................... 9.2% 7.6% 3.9%
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOAN ORIGINATIONS(8)......................... $ 2,280 $ 8,748 $4,345
LOAN ACQUISITION DATA(8):
Loans:
Single-family residential................... 221,581(9) 121,883 36,462
Multi-family residential.................... -- -- 61,247
Commercial and other mortgage loans......... -- 2,126 31,091
Consumer and other loans(10)................ 18,742 11,012 10,847
Discounted Loans............................. -- (11) 55,995 3,624
LOANS SOLD(8)................................ 27,965(9) 16,673 --
</TABLE>
- --------
(5) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by total average
earnings assets.
(7) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary gains
and cumulative effect of a change in accounting principle plus fixed
charges by (y) fixed charges. Fixed charges represent total interest
expense, including and excluding interest on deposits, as applicable, as
well as the interest component of rental expense. Earnings for the nine
months ended September 30, 1996 and the year ended December 31, 1994 were
inadequate to cover fixed charges by $5,734 and $1,778, respectively.
(8) Unpaid principal balances.
(9) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(10) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(11) Girard recently purchased or committed to purchase approximately $272
million unpaid principal amount of discounted residential mortgage loans.
See "Recent Developments."
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RISK FACTORS
Prospective investors should carefully consider the following factors before
deciding to make an investment in the Notes.
LIMITED SOURCES FOR PAYMENTS ON NOTES
As a holding company, the ability of the WFSG to make payments of interest
and principal on the Notes will depend primarily on the receipt of dividends
or other distributions from its subsidiaries as well as any cash reserves and
other liquid assets held by WFSG and any proceeds from any subsequent
securities offering or other financing. There are various regulatory
restrictions on the ability of the Savings Banks to pay dividends or make
other distributions. See "Regulations--The Savings Banks--Restrictions on
Capital Distributions" and "Affiliate Transactions." In light of the
foregoing, there can be no assurance that WFSG would have sufficient funds
available to repurchase any Notes that Noteholders may elect to tender upon
the occurrence of a Change of Control Event, or to repay the principal and
accrued interest of the Notes if the maturity of the Notes were to be
accelerated upon the occurrence of an Event of Default under the Indenture.
AMOUNT OF SECURED DEBT; STRUCTURAL SUBORDINATION
The Notes will be unsecured obligations of WFSG and will rank pari passu in
right of payment with all existing and future unsecured indebtedness that is
not by its terms, expressly subordinated in right of payment to the Notes. Any
current and future secured indebtedness of WFSG will have priority over the
Notes with respect to assets pledged as collateral therefor. The Indenture
permits WFSG to grant liens to secure additional indebtedness permitted by the
Indenture so long as such indebtedness is pari passu or junior in right to the
Notes and permits subsidiaries of WFSG to grant liens to secure pari passu or
junior indebtedness of the subsidiaries in certain circumstances. The Company
and its Subsidiaries will be able to grant security interests in Loan
Portfolios to the parties providing financing for such acquisitions. See
"Description of the Notes--Certain Covenants--Limitations on Indebtedness" and
"--Limitations on Liens."
In addition, substantially all of the operations of the Company are
conducted through subsidiaries and therefore the Company is dependent on the
cash flow of its subsidiaries to meet its debt obligations, including its
obligations under the Notes. Because WFSG is a holding company that currently
conducts substantially all of its operations through its subsidiaries, the
right of WFSG to participate in any distribution of assets of the
subsidiaries, including the Savings Banks, upon their liquidation or
reorganization or otherwise (and thus the ability of Holders of the Notes to
benefit indirectly from such distribution) are subject to the prior claims of
creditors of the subsidiaries, including, in the case of the Savings Banks, to
the claims of depositors of the Savings Banks. Claims on WFSG's subsidiaries
by creditors, other than WFSG, include substantial obligations with respect to
deposit liabilities and other borrowings. At September 30, 1996, the Company's
subsidiaries had liabilities aggregating $496.0 million (primarily consisting
of $487.5 million of deposit liabilities), all of which constituted
indebtedness permitted under the Indenture.
ABSENCE OF A PRIOR MARKET FOR THE NOTES
The Company does not intend to apply for listing of the Notes on any
national securities exchange or for quotation of the Notes through Nasdaq.
Although the Underwriter for the Notes Offering has indicated its intention to
make a market in the Notes following consummation of the Notes Offering, it is
not obligated to do so and any market-making activities with respect to the
Notes may be discontinued at any time without prior notice. There can be no
assurance as to liquidity of the trading markets for the Notes or as to the
prices at which the Notes may trade in such market or that an active public
market for the Notes will develop or be maintained.
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RECENT LOSSES
The Company reported a net loss of approximately $1.1 million for the nine
months ended September 30, 1996, principally due to provisions for estimated
losses on the Sub-Prime Auto Loans ($8.6 million) and the Inherited Loans
($4.8 million). A $1.4 million charge for the Savings Association Insurance
Fund (the "SAIF") special assessment also contributed to the year-to-date
loss. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Regulation--The Savings Banks--Recapitalization of
SAIF."
NO ASSURANCE AS TO CONSISTENCY OF RESULTS OF OPERATIONS
The results of operations of the Company may be significantly affected by
required provisions for estimated loan losses, the timing and size of such
provisions, variations in the volume of the Company's loan acquisitions, the
volume of loans resolved, the differences between the Company's cost of funds
and the average interest rates of the acquired loans, the effectiveness of the
Company's hedging strategies, the interest rate for Senior Securities (as
defined herein) issued in securitizations, and the timing and size of
securitizations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Since the Company is not acquiring the
assets and liabilities of WCC nor its servicing income, its result of
operations in the short term following the closing of the Common Stock
Offering in the Reorganization and the Notes Offering principally will be
determined by the results of operations of the Savings Banks. Additionally, it
is expected that the management of the Company will take approximately six
months or more to fully utilize (through leverage) the proceeds of the Common
Stock Offering and the Notes Offering.
RISKS RELATED TO RESULTS OF REGULATORY EXAMINATIONS
Following examinations of the Savings Banks and WAC by the OTS in 1994, 1995
and 1996, the OTS issued Reports of Examination that were critical of the
Savings Banks and WAC in a number of respects. These regulatory concerns
initially resulted in the OTS requiring First Bank to enter into a Supervisory
Agreement on June 8, 1995. The Supervisory Agreement required First Bank to
take actions to achieve compliance with certain laws and regulations and safe
and sound practices and to (a) develop plans and procedures concerning (i)
reduction of non-performing assets, (ii) internal asset review, (iii) asset
monitoring, (iv) appraisals, (v) loan underwriting, (vi) loan purchases; (b)
enhance recordkeeping; (c) develop requirements to ensure that the servicing
of loans by WCC is satisfactory; and (d) maintain its separate corporate
existence. In addition, the Supervisory Agreement required First Bank to
maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of the Assistant Regional Director of
the OTS-West Region.
RISKS RELATED TO IMPOSITION OF CEASE-AND-DESIST ORDERS
In July 1996, the OTS advised First Bank that it had not fully complied with
the terms of the Supervisory Agreement and that both Savings Banks had failed
in a number of respects to address regulatory concerns raised in the 1994 and
1995 examination reports. The OTS also expressed continuing concerns regarding
the adequacy of management of First Bank in light of its business activities.
As a result of these issues, the OTS replaced the Supervisory Agreement with a
Cease and Desist Order, effective October 31, 1996. Given the similar nature
of Girard's business activities, the OTS has also issued a Cease and Desist
Order to Girard similar to the Order issued to First Bank. The issuance of a
cease and desist order is generally evidence of an increased level of
regulatory concern regarding the subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well-capitalized" (as that term is
defined under the regulatory framework for prompt corrective action). The
Orders also require the Savings Banks to: (a) revise policies and procedures
concerning (i) internal asset reviews, (ii) the allowances for loan and lease
losses, (iii) loan purchases, (iv) internal audits and (v) hedging
transactions; (b) develop plans to augment the depth and expertise of the
management teams; (c) revise business plans; (d)
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modify certain policies concerning the accounting for loan discounts; (e)
improve monitoring of (i) interest rate risk, (ii) asset classifications
(e.g., as held for sale versus held to maturity) and (iii) compliance with
laws and regulations concerning transactions with affiliates; (f) ensure
compliance with the proper servicing of adjustable-rate mortgages and escrow
accounts; (g) ensure servicer correction of OTS-identified deficiencies in
information systems; and (h) enhance recordkeeping. In addition, First Bank is
required to correct OTS-identified deficiencies in its merchant bankcard
processing operations. These requirements are accompanied by related
requirements that the Savings Banks submit to the OTS, by certain specified
dates, various policies, plans and reports on other actions to comply with the
Orders. In some cases, OTS approval of such information is required.
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging a "big six" accounting firm to review
management's implementation of corrective actions required by the OTS, (iii)
increasing the size of the internal asset review department, and (iv) revising
internal asset review policies. The Company is also in the process of hiring a
manager to complete the development and implementation of an effective asset
review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without
modifications. Additionally there can be no assurances that the OTS will not
impose further restrictions on the Savings Banks which could affect the
Savings Banks ability to expand their lending and loan acquisition activities.
NO ASSURANCES OF EXPANSION
A substantial amount of the net proceeds from the Common Stock Offering and
the Notes Offering will be invested by the Company to support future expansion
and growth of its lending activities and loan acquisition and servicing
activities. There can be no assurance that the Company will be able to
increase these activities in a manner which is consistent with management's
business strategy and objectives or otherwise successfully expand its
operations, which could have an adverse effect on the Company's results of
operations.
RISKS RELATED TO AGGRESSIVE EXPANSION STRATEGY
The Company, primarily through Girard, has had rapid growth during 1995 and
the first nine months of 1996. The Savings Banks' deposits increased from
$196.3 million at December 31, 1994 to $487.5 million at September 30, 1996.
More than 73% of Girard's total loan portfolio was acquired in the five
quarters ended September 30, 1996. Part of the Company's business strategy is
to continue to aggressively pursue the acquisition of Loan Portfolios, a
substantial portion of which are expected to be Loan Portfolios purchased at a
discount. Additionally, the Company may decide to purchase loans with respect
to which the Company does not have any prior loan acquisition experience. A
substantial increase in the Company's total loan portfolio or the purchase of
new categories of loans may increase the risk of loss on acquired loans and
could have an adverse affect on the Company's results of operations.
IMPACT OF OTS GROWTH RESTRICTIONS
Since June 30, 1995, First Bank has had limited ability to increase deposits
due to the provisions of an OTS Supervisory Agreement which prohibited First
Bank from increasing assets above specified levels. Accordingly, the Company's
asset growth has principally been financed through the raising of deposits at
Girard. However, due to the issuance of the Orders, the Company will not be
able to utilize the Savings Banks as vehicles for growth until and unless the
Orders are lifted or modified. The Orders prohibit First Bank and Girard from
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increasing their total assets, as measured at the end of each calendar
quarter, in excess of $145 million and $408 million, respectively, plus total
net interest credited on deposit liabilities.
IMPACT OF FAILURE TO COMPLY WITH OTS GROWTH RESTRICTIONS
Because the Orders prohibit the Savings Banks from increasing their total
assets above specified levels as measured at the end of each calendar quarter,
the Company may increase, and has currently increased total assets above such
specified levels and is obligated to reduce its total assets to such specified
levels at the end of the next calendar quarter. The increase of assets above
specified levels could place the Savings Banks at a competitive disadvantage
in the market place as they will have to dispose of certain assets prior to
the end of each calendar quarter. As a result, the Savings Banks may not be
able to obtain the best price or terms in connection with the disposition of
assets and may be required to dispose of assets at a loss. In addition,
failure to comply with the Orders at the end of any calendar quarter could
have significant adverse consequences to the Savings Banks, including
termination of FDIC insurance and civil money penalties.
RISK OF ADDITIONAL PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with the Company's acquisition of First Bank in 1993 and
Girard in 1994 the Company acquired a substantial volume of impaired loans
which required the Savings Banks to establish allowances for loan losses. For
the nine months ended September 30, 1996 and for each of the years ended
December 31, 1995, 1994, and 1993 First Bank was required to increase its
allowances for loan losses with respect to the Inherited Loans by $2.2
million, $2.6 million, $1.1 million and $1.1 million, respectively. For the
nine months ended September 30, 1996 and for each of the years ended December
31, 1995 and 1994, Girard was required to increase its allowances for loan
losses with respect to the Inherited Loans by $2.6 million, $0.9 million, $1.1
million, respectively.
In the fourth quarter of 1995 and the first quarter of 1996, the Savings
Banks acquired approximately $24.5 million of Sub-Prime Auto Loans. Under OTS
regulations, the Savings Banks have been required to write off as a loss all
auto loans in excess of 120 days delinquent, notwithstanding that the Savings
Banks retain rights in the cars as collateral. The aggregate portfolio of Sub-
Prime Auto Loans purchased is approximately 3,000 loans, approximately 50.7%
of which have become greater than 30 days delinquent. The Savings Banks
established reserves aggregating $8.6 million during the nine months ended
September 30, 1996, including a 10% reserve on such loans which are current.
As a result of the repossession of the collateral securing the loans, the
Savings Banks now hold approximately 317 cars as assets, which they plan to
sell as soon as practicable. The cars are not carried as assets on the
Company's balance sheet since the loans were written off in full.
Although the Company believes its allowances for loan losses are now
adequate, no assurance can be given that future events will not require
significant additional provisions for loan losses, for the Inherited Loans,
Sub-Prime Auto Loans or otherwise at the Savings Banks. Future additions to
these allowances may be required by the OTS, which periodically reviews the
Savings Banks' allowances for losses and the carrying value of assets.
Increases in the Company's or the Savings Banks' provisions for losses on
loans would adversely affect the Company's results of operations and could
result in losses in future periods. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
RISKS RELATED TO A FAILURE TO MAINTAIN REQUIRED CAPITAL LEVELS AT THE SAVINGS
BANKS
The Orders require both Savings Banks to maintain "well-capitalized" status
as measured at the end of each calendar quarter commencing December 31, 1996.
The Principals have injected approximately $30 million into WAC since the
acquisitions of the Savings Banks to fund the substantial asset growth and to
maintain required capital levels given reserves taken on the Inherited Loans
and the Sub-Prime Auto Loans.
Failure to comply with the Orders could have significant adverse
consequences to the Savings Banks. To the extent that either or both of the
Savings Banks incur future losses, including losses as a result of required
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additional loan loss provisions, the Company may be required to inject
additional capital into the Savings Banks to maintain compliance with the
Orders, whether or not such capital can more effectively be utilized for other
operations of the Company. Such additional capital contributions may have the
effect of reducing or eliminating the Company's overall net income or
requiring the Company to obtain additional debt or equity capital.
OTS regulations permit the OTS to impose higher capital requirements on a
savings bank if it determines that the capital level is or may become
inadequate in view of such bank's circumstances. In making such determination,
the OTS can take into account a number of factors, including the savings
bank's loan portfolio quality, recent operating losses or anticipated losses,
the condition of its holding company and whether the savings bank is receiving
special supervisory attention, among other matters. Should the OTS impose an
individual minimum capital requirement on either of the Savings Banks, the
Company would be required to inject additional capital into such Savings Bank,
whether or not such usage of capital is optimal for the Company.
RISKS RELATED TO EXTENSIVE USE OF FINANCIAL LEVERAGE
The Company's acquisitions of Loan Portfolios through WFC are expected to be
highly leveraged with full recourse to the Company. Performing Loan Portfolios
are currently expected to generally be financed approximately 95% with secured
borrowings and non-performing Loan Portfolios are currently expected to
generally be financed approximately 90% with secured borrowings. While the
highly leveraged nature of the Company's Loan Portfolios can offer the
opportunity for increased rates of return on equity, it involves a greater
degree of risk as relatively smaller declines in the value of a Loan Portfolio
can reduce or eliminate the Company's capital invested in such Loan Portfolio.
In addition, such declines can result in margin calls (i.e., demands by the
Company's lenders for additional cash or assets as security for their lending)
which can have an adverse impact on the Company's liquidity and capital
resources. The high degree of leverage on the Company's Loan Portfolios also
may make the Company more vulnerable to a downturn in business, real estate
values or the economy generally. An increase in market interest rates or a
decline in the value of the collateral may have an adverse effect on the
ability of the Company to satisfy its loan obligations and could therefore
have a material adverse effect on the Company's results of operations. The
Company's aggressive expansion strategy may result in the need for additional
debt and/or equity financing in the future. Any additional debt financing
could increase the Company's leverage over current levels.
UNCERTAINTIES AND RISKS OF DISCOUNTED LOAN ACQUISITION ACTIVITIES
Since 1993, WCC has aggressively sought to increase its discounted loan
portfolio. As of September 30, 1996, WCC's discounted loan portfolio included
$490.8 million gross unpaid principal balances of Discounted Loans. The
Company currently expects to continue to aggressively acquire non-performing
loan portfolios. Although management of the Company has been actively involved
in the acquisition of loans since 1991, the acquisition of non-performing
("discounted loans") and under-performing loans involves uncertainties and
risks, including without limitation the risk that the discount on the loans
acquired may not be sufficient to profitably resolve the loans.
Discounted Loans become real estate owned when the Company forecloses on the
collateral properties. The value of real estate owned properties can be
significantly affected by the economies and markets for real estate in which
they are located and require the establishment of provisions for losses to
ensure that they are carried at the lower of cost or fair value, less
estimated costs to dispose of the properties. In addition, there can be no
assurance that in the future the Company's real estate owned will not have
environmental problems which could materially adversely affect the Company's
financial condition or operations. See "Business--Asset Quality--Real Estate
Owned."
DEPENDENCE ON WILSHIRE CREDIT CORPORATION
Following the closing of the Common Stock Offering and the Notes Offering,
the Company will not have the necessary licenses to conduct loan origination
and loan servicing activities directly. Until necessary licenses
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are obtained, the Company will rely upon WCC to conduct loan origination and
loan servicing activities for the Company pursuant to certain agreements with
WCC. See "Certain Relationships and Related Transactions." Management expects
to obtain the necessary licenses within two to three years, however there can
be no assurances that management will obtain the licenses within such period,
which would extend the period of the Company's dependence on WCC.
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Andrew A. Wiederhorn, Chief Executive Officer of the
Company and Lawrence A. Mendelsohn, President of the Company. Although the
Company has been able to attract and retain other qualified management
personnel, the loss of either Andrew Wiederhorn's or Lawrence Mendelsohn's
services for any reason could have a material adverse effect on the Company.
The Company has entered into employment agreements with each of Messrs.
Wiederhorn and Mendelsohn, which contain non-competition agreements. See
"Management-- Employment Agreements." The Company also maintains "key man"
life insurance on the lives of Messrs. Wiederhorn and Mendelsohn.
RISKS RELATED TO MANAGEMENT OF GROWTH
The Company has undergone a period of significant growth, and further
expansion may significantly strain the Company's management, financial and
other resources. There is no assurance that the Company can manage its growth
effectively or that the Company will be able to attract and retain the
necessary personnel to meet its business objectives. If the Company is unable
to manage its growth effectively, the Company's business, operating results
and financial condition could be materially and adversely affected.
RISKS RELATED TO FUNDING SOURCES
The Company will fund the loans that it originates or purchases through
borrowings under warehouse and repurchase financing facilities with certain
national investment banking firms, brokered and wholesale deposits, secured
term loans and internally generated funds. To the extent that the Company is
not successful in maintaining or replacing its existing financing sources, it
would have to curtail its loan acquisition activities or sell loans, which may
have an adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RISKS RELATED TO RELIANCE ON WHOLESALE AND BROKERED DEPOSITS.
Though the Company as a whole has other sources of funding, the Savings
Banks currently use brokered and wholesale deposits as a significant source of
funds. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--Funding
Sources." The Savings Banks' funding strategy has been to offer deposit rates
above those customarily offered by banks and savings and loans in its market.
Because the Savings Banks compete for deposits primarily on the basis of
rates, the Savings Banks could experience difficulties in attracting deposits
to fund their operations if they could not continue to offer deposit rates at
levels above those of other banks and savings institutions. In addition, such
funding sources, when compared to retail deposits attracted through a branch
network, are generally more sensitive to changes in interest rates and
volatility in the capital markets and are more likely to be compared by the
investor to competing investments.
NO PRIOR EXPERIENCE WITH INTERNATIONAL OPERATIONS; START-UP PERIOD
The Company is expanding its activities internationally. Neither the Company
nor the Wilshire Private Companies has previously conducted operations outside
the United States. Risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
heightened
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risks of political and economic instability, difficulties in managing
international operations, potentially adverse tax consequences, enhanced
accounting and control expenses and the burden of complying with a wide
variety of foreign laws. There can be no assurance that one or more of these
factors will not have a materially adverse effect on the Company's European
operations. Since the Company's financial statements are stated in U.S.
Dollars, and since not all the Company's expenses are incurred in U.S.
Dollars, the Company's operations may be affected by fluctuations in currency
exchange rates.
The Company's international expansion will require significant capital which
will initially result in losses for such operations. As a result, the Company
does not expect its European operations to make a significant contribution to
revenues or income in the near term.
HIGH-RISK NON-TRADITIONAL BANKCARD PROCESSING ACTIVITIES
There is a higher risk of consumer charge-backs associated with non-
traditional mail order, telephone order and audiotext bankcard processing
activities because the consumer is not physically present at the time of the
transaction.
RISKS RELATED TO CHANGING ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon the general
economic conditions in the geographic areas in which it conducts substantial
business activities. Adverse changes in national economic conditions or in the
economic conditions of regions in which the Company conducts substantial
business or their real estate markets likely would 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 its collateral. Moreover, earthquakes and other
natural disasters could have similar effects.
RISKS RELATED TO CHANGES IN INTEREST RATES
The Company's operating results depend to a large extent on its net interest
income, which is the difference between the interest income earned on
interest-earning assets plus accreted purchase discount 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, as well as, among other things, the ability
of the Company to originate and purchase 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
Savings Banks' 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 actively monitors its assets and liabilities and employs a hedging
strategy which seeks to limit the effects of changes in interest rates on its
operations. An effective hedging strategy is complex and no hedging strategy
can completely insulate the Company from interest rate risks. The nature and
timing of and the counter-party to a hedging transaction may impact the
effectiveness of hedging strategies. Poorly designed strategies or improperly
executed transactions may increase rather than mitigate the risk. In addition,
hedging involves transaction and other costs, and such costs could increase as
the period covered by the hedging protection increases or in periods of rising
or fluctuating interest rates. Therefore, the Company may be prevented from
effectively hedging its interest rate risks, which could have a material
adverse effect on the Company's results of operations.
RISKS RELATED TO CONCENTRATION OF LOAN PORTFOLIO IN THE STATE OF CALIFORNIA
At September 30, 1996, approximately 54.9% of the Company's total loan
portfolio was in the state of California, which from time to time, including
recently, has experienced adverse economic conditions, including a decline in
real estate values. These factors have adversely affected borrowers' ability
to repay loans. Additional declines in the local economy, rising interest
rates and regulatory requirements could have a material adverse effect on the
Company's result of operations. The concentration of the Company's total loan
portfolio is expected to change in the near future. See "Recent Developments."
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REGULATION
The Company is currently classified as a multiple savings and loan holding
company under applicable law as a result of its ownership of the two Savings
Banks, First Bank and Girard. A savings and loan holding company which has
only one insured financial institution subsidiary (known as a "unitary"
savings and loan holding company) and which subsidiary qualifies as a
qualified thrift lender (as defined herein) generally has the broadest
authority to engage in various types of business activities with little to no
restrictions on its activities, except that historically savings and loan
holding companies have not been permitted to acquire or be acquired by an
entity engaged in securities underwriting or market making. Multiple savings
and loan holding companies are subject to activities limitations. In general,
a multiple savings and loan holding company (or subsidiary thereof that is not
an insured institution) may not commence or continue for more than a limited
period of time after becoming a multiple savings and loan holding company (or
a subsidiary thereof), any business activity other than (i) furnishing or
performing management services for a subsidiary insured institution; (ii)
conducting an insurance agency or an escrow business; (iii) holding, managing
or liquidating assets owned by or acquired from a subsidiary insured
institution; (iv) holding or managing properties used or occupied by a
subsidiary insured institution; (v) acting as trustee under deeds of trust;
(vi) those activities previously directly authorized by the OTS by regulation
as of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) subject to prior approval of the OTS, those activities
authorized by the Federal Reserve Board (the "FRB") as permissible investment
for bank holding companies. The Company is currently unable to merge First
Bank and Girard, thereby becoming a unitary savings and loan holding company
subject to fewer activities restrictions, until certain regulatory concerns
regarding the Savings Banks are resolved. There can be no assurance that the
Company will be able to merge the Savings Banks.
LIMITATIONS ON STOCK OWNERSHIP
With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be acting in concert from, directly or
indirectly, acquiring more than 10% of any class of voting stock of the
Company or obtaining the ability to control in any manner the election of the
directors or otherwise direct the management or policies of a savings and loan
holding company or a savings institution, without prior notice or application
to and approval of the OTS.
COMPETITION
The businesses in which the Company is engaged generally are highly
competitive. Many of the Company's competitors are significantly larger than
the Company and have access to greater capital and other resources. The
acquisition of loans is particularly capital-intensive and is typically based
on competitive bidding.
CONTROL OF CURRENT STOCKHOLDERS
Upon completion of the Common Stock Offering and assuming the Underwriters'
over-allotment option is not exercised, certain executive officers and
directors of the Company will have approximately 78% of the combined voting
power of all outstanding shares of Common Stock of the Company. As a result,
these stockholders, acting together, would be able to effectively control
virtually all matters requiring approval by the stockholders of the Company.
This voting control may have the effect of discouraging offers to acquire the
Company because the consummation of any such acquisition would require the
consent of Andrew A. Wiederhorn and Lawrence A. Mendelsohn.
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THE COMPANY
GENERAL
WFSG was recently formed as a financial services holding company for a group
of companies previously held as a part of, and operated by, the Wilshire
Companies. As part of the Reorganization, the Wilshire Private Companies,
including WCC, will not become subsidiaries of WFSG and will remain privately
held. The Company will engage in a wide variety of financial activities,
including the acquisition, origination, ownership and securitization of Loan
Portfolios, banking and non-traditional bankcard processing. The Company, as a
savings and loan holding company, is subject to regulation by the OTS.
Prior to the Reorganization, the Wilshire Companies operated principally
through two separate companies: (i) WCC, which conducted the servicing and a
portion of the loan acquisition activities; and (ii) WAC, the holding company
for the Savings Banks. The Savings Banks are subject to regulation by the OTS,
as their chartering authority, and by the FDIC as a result of their membership
in the SAIF, which insures the Savings Banks' deposits up to the maximum
extent permitted by law. The Savings Banks are also members of the Federal
Home Loan Bank ("FHLB") of San Francisco, one of 12 regional banks which
comprise the FHLB system.
The Wilshire Companies began in 1987 as an equipment leasing company
primarily involved in leasing cellular phones. WCC was formed in May 1989 to
manage the Wilshire Companies' activities in the loan and lease servicing
business and to service a third party's heavy industrial equipment leasing
portfolio which consisted of leases of containers, railroad cars and other
similar equipment. During the early 1990s, the Wilshire Companies sought to
take advantage of the general decline in asset quality of financial
institutions in many areas of the country and the large number of failed
savings institutions during this period by acquiring Loan Portfolios from the
RTC, the FDIC and private sellers such as banks, thrifts, finance companies
and leasing companies and selling participations in such Loan Portfolios to
institutional investors while retaining the servicing rights and a
participation in the overall return on such Loan Portfolios. The Principals
purchased First Bank and Girard through WAC in October 1993 and November 1994,
respectively, using funds loaned to them by WCC. The Savings Banks were
acquired to provide a deposit-based funding source for the loan purchase
activities of the Wilshire Companies. Both of the Savings Banks were acquired
at substantial discounts to their respective book values, reflecting the poor
quality of their assets and, in the case of First Bank, an expected imminent
regulatory takeover. More recently, the Company decided to expand its loan
acquisitions and servicing activities to encompass the United Kingdom and
France with a view towards future expansion in Western Europe. See "Business--
European Operations."
THE REORGANIZATION
Following the Reorganization, the Company will be the holding company for
WAC and the Savings Banks and its other subsidiaries will include WFC, a
company formed to continue the loan acquisition and loan origination
businesses of the Wilshire Companies following the Common Stock Offering and
the Notes Offering, and WSC, a company formed to continue the loan servicing
business of the Wilshire Companies following the receipt of necessary
licenses. In the Reorganization, the Wilshire Private Companies, including WCC
will not become subsidiaries of the Company or transfer any assets or
liabilities to the Company. WCC is not being included in the new public entity
due to certain tax considerations and to allow WCC to retain sufficient assets
and servicing rights to retire the Shareholder Loans made to the Principals to
fund acquisitions of, and certain capital contributions to, the Savings Banks.
The Wilshire Private Companies are Subchapter S corporations under the Federal
tax code, and the taxable income of the corporations is passed through to the
shareholders (Messrs. Wiederhorn and Mendelsohn) and reported in the
shareholders' individual tax returns. Contribution of the Wilshire Private
Companies, or of certain of the assets of the Wilshire Private Companies, to
the new public entity, would have triggered taxable gains and have adverse tax
consequences to the shareholders. WCC will cease to acquire new product or
servicing for its own account, but will continue to service and liquidate its
existing portfolio of loans. New loan acquisitions and originations will be
conducted by WFC. For a period of two to three years after the closing of the
Common Stock Offering and the Notes Offering, while WSC is in the
20
<PAGE>
process of obtaining the relevant licensing approvals for its servicing
activities, WCC will continue to service loans for the Company at market
rates. Following such period, WSC will commence servicing loans for the
Company and WCC, until such time as WCC has liquidated its existing portfolio
of loans. See "Certain Relationships and Related Transactions." In addition,
WCC and the Principals have agreed not to compete with the Company with
respect to the acquisition of Loan Portfolios. WCC will continue to operate
its other businesses and may in the future enter into other lines of business.
The Company's executive offices are located at 1776 SW Madison St.,
Portland, Oregon 97205, and the telephone number of its executive offices is
(503) 223-5600 and its facsimile number is (503) 223-8799.
RECENT DEVELOPMENTS
LOAN ACQUISITIONS
During October 1996, the Wilshire Private Companies acquired or committed to
acquire four Loan Portfolios aggregating $311.0 million principal amount, all
of which were or will be acquired by the Savings Banks.
In October 1996, Girard committed to purchase approximately $240.8 million
unpaid principal amount of discounted residential mortgage loans offered by
Citicorp North America Inc. and Citibank N.A. in a sealed bid auction (the
"Citicorp Portfolio"). Such transaction settled on November 1, 1996 (the
"Settlement Date"). Girard made a concurrent sale of approximately $38.8
million unpaid principal amount of the Citicorp Portfolio to an unaffiliated
third party on the Settlement Date resulting in a gain. The remainder of the
purchase price to Citicorp was financed by Girard under a master repurchase
agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC") pursuant to
which BSMCC has purchased certain performing and non-performing mortgage loans
and Girard has simultaneously agreed to repurchase such loans on a specified
date. The Company currently expects that Girard will repay such financing by
selling certain performing residential mortgage loans to WFC, which in turn is
expected to securitize such loans.
In October 1996, Girard acquired approximately $38.2 million in unpaid
principal amount of discounted residential mortgage loans from a successful
bidder in an auction conducted by HUD. Girard also agreed to acquire in
December 1996 approximately $31.9 million in unpaid principal amount of
discounted residential mortgage loans to be sold by a successful bidder in an
auction conducted by HUD.
As a result, on completion of such series of transactions, Girard will have
purchased approximately $272 million of unpaid principal balance discounted
residential mortgage loans and sold an equivalent market value of performing
residential mortgage loans. Although the Orders prohibit Girard from
increasing its total assets above $408 million, the amount of total assets is
only measured on a quarterly basis. Therefore, Girard may increase its assets
so long as at the end of a quarter the assets are not in excess of the amount
specified by the OTS. The Company had extensive negotiations with the OTS in
connection with the issuance of the Orders during which the Orders were
revised to apply an end-of-the-calendar-quarter test and to allow the Company
to increase total assets above specified limits provided that the Company
meets the test as of the end of the calendar quarter. The Company has
subsequently confirmed this practice in conversations with the OTS prior to
bidding and upon the acquisition of the Citicorp Portfolio.
WFC has also agreed to acquire approximately $106 million unpaid principal
amount of home equity loans, second lien mortgages, consumer loans and
Subordinate Securities (the "Institutional Portfolio") from a major
institutional investor (the "Institutional Investor") at a discount. The
settlement of this transaction is expected to occur in the first quarter of
1997. WCC receives a small percentage of the initial cash flow and a portion
of the profits as a servicing fee, which servicing fee will be assigned by WCC
to WSC prior to the sale of the Institutional Portfolio to WFC.
21
<PAGE>
ACQUISITION OF SERVICING RIGHTS
In October 1996, the Company committed to acquire the servicing rights to a
portfolio of approximately $292 million unpaid principal amount of residential
mortgage loans offered by Merrill Lynch Credit Corporation through a
competitive bid (the "Merrill Portfolio") and the servicing transfer is
expected to be completed in the fourth quarter of 1996. The Company is
expected to retain WCC as a subservicer of the Merrill Portfolio at below-
market rates.
EUROPEAN EXPANSION
The Company has agreed in principal with a major U.S. investment bank (the
"J.V. Partner") to form a joint venture to service residential mortgage loans
in the United Kingdom. Under the preliminary terms of the proposed joint
venture, the Company would acquire a 50% interest in a United Kingdom
servicing company (the "U.K. Servicer") for a nominal amount. The Company and
the J.V. Partner would each appoint three directors, and the Company would
manage the day-to-day operations of the U.K. Servicer. Each of the Company and
the J.V. Partner are expected to agree to use the U.K. Servicer to service any
U.K. residential mortgage loans acquired by such party or mortgage loans
included in securitizations placed by the J.V. Partner to the extent that
seller of such loans does not retain servicing. At September 30, 1996, the
U.K. Servicer serviced approximately (Pounds)500 million (as of September 30,
1996 approximately US$780 million (source: Bloomberg Symbol BPUS)) principal
amount of loans (or approximately 9,000 loans). The Company is currently
negotiating the definitive terms of the joint venture with the J.V. Partner
and expects that definitive documents will be executed in the fourth quarter
of 1996 or the first quarter of 1997. There can be no assurance, however, that
this joint venture will be completed, or as to the terms on which it may be
completed.
22
<PAGE>
USE OF PROCEEDS
Net proceeds to be received by the Company from the Common Stock Offering
currently are estimated to be $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($
million, if the Common Stock Underwriters' over-allotment option is exercised
in full). Net proceeds to be received by the Company from the Notes Offering
currently are estimated to be $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($ million,
if the Notes Underwriters' over-allotment is exercised in full).
Substantially all of the net proceeds of the Common Stock Offering and Notes
Offering will be used for leveraged acquisitions of Performing and Discounted
Loan Portfolios (primarily single-family and multi-family residential secured
by real estate) in the U.S. and Western Europe. Performing Loan Portfolios are
expected to generally be financed approximately 95% with secured borrowings
and Discounted Loan Portfolios are expected to generally be financed
approximately 90% with secured borrowings. Although the Company expects to
utilize the net proceeds to acquire approximately equal amounts of Performing
and Discounted Loan Portfolios, market conditions may impact the composition
of the Company's loan acquisitions. In addition, the Company expects that
approximately $5 million of the net proceeds from the Common Stock Offering
and the Notes Offering will be for general corporate purposes, including
expansion into Western Europe. Such net proceeds will give the Company
increased flexibility in conducting the businesses in which it is engaged,
including the acquisition and resolution of Discounted Loans and other loans.
The Company expects that it will take approximately six months or more to
fully utilize the net proceeds of the Common Stock Offering and Notes
Offering.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted as of that date to give effect to (i) the
Common Stock Offering and the Notes Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds"; (ii) no exercise of
any over-allotment option; and (iii) the Reorganization pursuant to which
certain of the Wilshire Companies became subsidiaries of the Company. This
information below should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto which are included elsewhere
herein. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Use of Proceeds" and "Management--Executive
Compensation" and "--Incentive Stock Plan."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Repurchase agreements.............................. $ -- $ --
Long-term debt:
% Notes due 2003.................................. -- 75,000
---------- -----------
Total.......................................... -- 75,000
---------- -----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; no shares outstand-
ing............................................... -- --
Common Stock, par value $0.01 per share; 50,000,000
shares authorized; 5,500,000 shares issued and
outstanding (actual); 7,000,000 shares issued and
outstanding (as adjusted) for the Common Stock Of-
fering(1)......................................... 35,550 50,690
Retained earnings (accumulated deficit)............ (827) (827)
Unrealized gain on available for sale securities... (169) (169)
---------- -----------
Total stockholders' equity..................... 34,554 50,694
---------- -----------
Total capitalization........................... $ 34,554 $ 125,694
========== ===========
Savings Banks' Regulatory Capital:
Regulatory capital ratios of First Bank
Tangible capital................................. 6.0% 6.0%
Core capital..................................... 5.9% 5.9%
Total capital to risk-weighted assets............ 10.0% 10.0%
Regulatory capital ratios of Girard
Tangible capital................................. 6.8% 6.8%
Core capital..................................... 7.0% 7.0%
Total capital to risk-weighted assets............ 11.0% 11.0%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
24
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables present Selected Financial Information for the Company
at the dates and for the periods indicated. The historical income statement
and balance sheet data at and for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994 have been derived from the Audited
Consolidated Financial Statements included elsewhere in this Prospectus.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in
a purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC, Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated."
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the
Audited Financial Statements, the "Consolidated Financial Statements") and
include all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentations to the Company's
results of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending
December 31, 1996. The Summary Consolidated Financial Information should be
read in conjunction with, and is qualified in its entirety by reference to,
the Consolidated Financial Statements and related notes as set forth elsewhere
herein.
25
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1996 1995 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income:
Loans..................... $ 31,686 $ 15,224 $ 21,821 $ 7,923
Mortgage-backed
securities............... 1,280 1,099 1,359 1,361
Investments and federal
funds sold............... 1,171 729 1,201 285
-------- -------- -------- --------
Total interest income..... 34,137 17,052 24,381 9,569
-------- -------- -------- --------
Interest expense:
Deposits.................. 17,448 9,979 13,944 5,017
Borrowings................ 2,144 432 537 440
-------- -------- -------- --------
Total interest expense.... 19,592 10,411 14,481 5,457
-------- -------- -------- --------
Net interest income........ 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans........... 15,751 3,221 4,266 2,173
-------- -------- -------- --------
Net interest (loss) income
after provision for
estimated losses on
loans..................... (1,206) 3,420 5,634 1,939
-------- -------- -------- --------
Other Income:
Bankcard income(1)........ 5,078 3,202 4,694 635
Bankcard processing
expense.................. (3,865) (2,408) (3,462) (274)
Gain on sale of loans..... 1,983 981 642 --
Loan fees and charges..... 1,217 522 610 43
Trading account--
unrealized gain.......... 1,601 -- -- --
Gain on sale of mortgage-
backed securities
available for sale....... -- -- 14 54
Amortization of deferred
credits.................. 346 346 460 388
Other, net................ 17 91 149 381
-------- -------- -------- --------
Total other income........ 6,377 2,734 3,107 1,227
-------- -------- -------- --------
Other Expenses:
Compensation and employee
benefits................. 2,955 1,716 2,516 1,922
FDIC insurance premiums... 2,066 444 721 261
Occupancy................. 218 221 385 319
Professional services..... 572 461 1,028 507
Data processing and
equipment rentals........ 189 146 232 162
Real estate owned, net.... 231 46 170 241
Loan service fees and
expenses................. 3,522 1,015 1,958 242
Other general and
administrative expenses.. 1,152 1,198 1,092 1,290
-------- -------- -------- --------
Total other expenses...... 10,905 5,247 8,102 4,944
-------- -------- -------- --------
(Loss) income before income
tax (benefit) provision... (5,734) 907 639 (1,778)
Income tax (benefit)
provision................. (4,652) 68 47 (526)
-------- -------- -------- --------
Net (loss) income.......... $ (1,082) $ 839 $ 592 $ (1,252)
======== ======== ======== ========
(Loss) earnings per
share(2).................. $ (14.05) $ 35.56 $ 25.09 $(135.43)
======== ======== ======== ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $533,109 $341,454 $230,636
Cash and due from banks...................... 11,231 3,382 4,880
Federal funds sold........................... 9,300 1,100 3,950
Trading account securities................... 7,092 -- --
Investment securities held to maturity, at
amortized cost.............................. 7,425 6,470 4,505
Mortgage-backed securities available for
sale, at fair value......................... 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost........................... 22,380 13,119 14,439
Loan portfolio, net(3)....................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans................................. 10,767 20,210 2,995
Unaccreted discount......................... (1,632) (3,008) (470)
Allowance for loan losses................... (5,716) (3,855) (431)
Discounted loans, net....................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost or
market...................................... 260,804 18,597 --
Stock in FHLB of San Francisco, at cost...... 2,911 1,421 1,612
Real estate owned, net....................... 2,514 4,964 1,208
Leasehold improvements and equipment......... 336 275 167
Due from affiliate(4)........................ 8,357 4,514 4,062
Accrued interest receivable.................. 4,268 3,042 1,599
Prepaid expenses and other assets............ 3,887 1,724 1,026
Income taxes receivable, net................. 5,422 1,589 774
Deposits..................................... 487,535 303,524 196,289
Borrowings................................... -- 13,000 21,500
Due to affiliates(5)......................... 2,286 759 652
Deferred credits(6).......................... 832 1,134 1,772
Subordinated debt(7)......................... -- 11,000 --
Minority interest............................ 277 600 574
Preferred stock in subsidiary held by oth-
ers......................................... -- -- 1,000
Accounts payable and other liabilities....... 7,625 4,398 2,056
Stockholders' equity(7)...................... 34,554 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1995 1994
------------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets....................... (.22)% .24% (.92)%
Return on average equity....................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans........... 9.39 % 9.57% 7.65 %
Average equity to average assets............... 7.24 % 2.72% 2.96 %
Net interest spread(8)......................... 3.15 % 3.08% 2.85 %
Net interest margin(9)......................... 3.88 % 3.72% 3.04 %
Ratio of earnings to fixed charges(10)(11):
Including interest on deposits................ 1.04
Excluding interest on deposits................ 2.19
Non-performing loans to loans at end of
period(3)..................................... 9.11 % 4.46% 5.95 %
Allowance for loan losses to total loans at end
of period..................................... 9.2 % 7.6% 3.9 %
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
LOAN ORIGINATIONS............................... $ 2,280 $ 8,748 $ 4,345
LOAN ACQUISITION DATA:
Loan Portfolio:
Single-family residential...................... 221,581(12) 121,883 36,462
Multi-family residential....................... -- -- 61,247
Commercial and other mortgage loans............ -- 2,126 31,091
Consumer and other loans(13)................... 18,742 11,012 10,847
Discounted Loans:
Single-family residential...................... -- (14) 49,662 1,542
Multi-family residential....................... -- (14) 96 --
Commercial and other mortgage loans............ -- 869 1,843
Consumer and other loans....................... -- 5,368 239
LOANS SOLD...................................... 27,965 16,673 --
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) (Loss) earnings per share amounts are based on weighted average number of
shares outstanding of WAC during the applicable periods. See Note 1 in
the Company's Consolidated Financial Statements. The capital structure of
WAC is substantially different from that of WFSG, which did not exist at
or prior to September 30, 1996. There were no dividend payments on common
stock by WAC during any periods presented.
(3) This item does not include Discounted Loans.
(4) Due from affiliate consists of amounts received by WCC from mortgagors on
loans it is servicing for the Company and has not yet transferred to the
Company.
(5) Due to affiliates primarily consists of amounts owed to WCC for WAC
operating expenses paid by WCC.
(6) Deferred credits represent negative goodwill--the excess of the net fair
values of the Savings Banks' assets and liabilities over the purchases
prices paid by WAC for the Savings Banks.
(7) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
(8) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(9) Net interest margin represents net interest income divided by total
average earning assets.
(10) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary
gains and cumulative effect of a change in accounting principle plus
fixed charges by (y) fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense. Earnings
for the nine months ended September 30, 1996 and the year ended December
31, 1994 were inadequate to cover fixed charges by $5,734 and $1,778,
respectively.
(11) Pro forma ratio of earnings to fixed charges for the nine months ended
September 30, 1996 and the year ended December 31, 1995 were less than
1:1.
(12) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(13) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(14) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Financial Information and the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company's net interest income has increased substantially during the
last three years primarily due to the growth in the Company's total loan
portfolio resulting from the Company's strategy of aggressively acquiring Loan
Portfolios and by the acquisition of First Bank in 1993 and Girard in 1994.
The Company's total loan portfolio, net as of September 30, 1996 and December
31, 1995 and 1994 was $441.5 million, $290.8 million and $181.5 million,
respectively. Net interest income for the nine month period ended September
30, 1996 and for the years ended December 31, 1995 and 1994 was $14.5 million,
$9.9 million and $4.1 million, respectively.
The Company has reported net losses and reduced net income in recent periods
primarily as a result of significant additions to the Company's provision for
estimated losses on loans, primarily Inherited Loans and Sub-Prime Auto Loans.
The Company reported a net loss of approximately $1.1 million for the nine
months ended September 30, 1996, compared to net income in the similar prior
year period of $0.8 million. The Company reported net income of $0.6 million
for the fiscal year ended December 31, 1995 compared to a loss in calendar
1994 of $1.3 million.
The Company's net losses during the first nine months of fiscal year 1996
and the fiscal year 1994 and lower net income in fiscal year 1995 resulted
primarily from provisions for losses on loans. Provisions for loan losses
totaled approximately $15.8 million in the first nine months of 1996, $4.3
million for the year ended December 31, 1995 and $2.2 million in 1994. These
loss provisions resulted primarily from deterioration in the Company's
Inherited Loans and Sub-Prime Auto Loans. These loss provisions reflect the
poor quality of the assets of the Savings Banks at the time they were acquired
by the Company and loan loss provisions taken with respect to Sub-Prime Auto
Loans. Following the addition of approximately $4.5 million of reserves taken
in the third quarter of 1996, allowances for Sub-Prime Auto Loans as a
percentage of the unpaid principal balances were 52.3% at September 30, 1996.
PRINCIPAL SOURCES OF REVENUE
The principal component of the Company's revenues is interest income, with
lesser contributions from gains on securitizations and income from bankcard
processing operations. The following table sets forth the components of the
Company's revenues for the periods indicated:
SOURCES OF REVENUE
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------
1996 1995 1995 1994
-------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.......................... $34,137 $17,052 $24,381 $ 9,569
Gains on sale of loans................... 1,983 981 642 --
Bankcard income.......................... 5,078 3,202 4,694 635
Other, net(1)............................ 3,181 959 1,233 866
-------- -------- ------- -------
Total revenue.......................... $44,379 $22,194 $30,950 $11,070
======== ======== ======= =======
</TABLE>
- --------
(1) Other consists primarily of loan fees and charges, the amortization of
negative goodwill and unrealized gain on trading securities.
Net Interest Income. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received plus accreted purchase discount from its assets and
29
<PAGE>
the interest expense paid on its interest-bearing liabilities. Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities, the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities and timing of receipt of purchased principal discount. With
respect to the Company's Discounted Loan portfolio, the Company treats
accreted discount on Discounted Loans as interest for accounting purposes.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-
bearing liabilities, expressed in dollars and rates, and the net interest
spread and net interest margin. Information is based on quarterly balances
during the indicated periods.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994
-------------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ------------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 28,934 $ 1,280 5.90% $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79%
Loan portfolio(2)....... 449,947 31,686 9.39 227,970 21,821 9.57 103,583 7,923 7.65
Investment securities
and other.............. 21,242 1,171 7.35 14,216 1,201 8.45 7,969 285 3.58
-------- ------- -------- ------- -------- ------
Total interest-earning
assets, interest
income................. 500,123 34,137 9.10 266,240 24,381 9.16 135,067 9,569 7.08
Non-interest earning
cash................... 5,218 -- -- 1,868 -- -- 2,053 -- --
Allowance for loan
losses and unaccreted
discount............... (50,732) -- -- (31,845) -- -- (8,595) -- --
Other assets............ 29,225 -- -- 15,277 -- -- 7,646 -- --
-------- ------- -------- ------- -------- ------
Total assets........... $483,834 $34,137 $251,540 $24,381 $136,171 $9,569
======== ======= ======== ======= ======== ======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $405,549 $17,448 5.74 $231,555 $13,944 6.02 $118,277 $5,017 4.24
FHLB advances........... 1,778 105 7.87 1,381 104 7.53 5,916 228 3.85
Subordinated debentures
and other interest-
bearing obligations.... 31,697 2,039 8.58 5,383 433 8.04 4,757 212 4.46
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities, interest
expense............... 439,024 19,592 5.95 238,319 14,481 6.08 128,950 5,457 4.23
Non-interest bearing
deposits............... 2,202 -- -- 2,196 -- -- 1,537 -- --
Escrow deposits......... 225 -- -- 106 -- -- 74 -- --
Other liabilities....... 7,364 -- -- 4,077 -- -- 1,582 -- --
-------- ------- -------- ------- -------- ------
Total liabilities...... 448,815 19,592 244,698 14,481 132,143 5,457
Stockholders' equity.... 35,019 -- -- 6,842 -- -- 4,028 -- --
-------- ------- -------- ------- -------- ------
Total liabilities and
stockholders' equity.. $483,834 $19,592 $251,540 $14,481 $136,171 $5,457
======== ======= ======== ======= ======== ======
Net interest income..... $14,545 $ 9,900 $4,112
Net interest spread..... 3.15 3.08 2.85
Net interest margin..... 3.88 3.72 3.04
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 113.9% 111.7% 104.7%
======== ======== ========
</TABLE>
- --------
(1) Presented on an annualized basis.
(2) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
30
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS. YEAR ENDED DECEMBER 31,
YEAR ENDED ------------------------------------------------
DECEMBER 31, 1995 1995 VS. 1994 1994 VS. 1993
------------------------- ----------------------- -----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------------- ----------------------- -----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
------ -------- ------- ------ ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed
securities............ $ (14) $ (65) $ (79) $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... (197) 10,062 9,865 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other............. 11 (41) (30) 581 335 916 (112) 344 232
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-earning
assets................ (200) 9,956 9,756 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing Liabil-
ities:
Interest-bearing depos-
its................... (236) 3,740 3,504 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... -- 1 1 (626) 502 (124) -- 228 228
Other interest-bearing
obligations........... 22 1,584 1,606 191 30 221 146 (19) 127
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-bearing
liabilities........... (214) 5,325 5,111 2,288 6,736 9,024 1,514 3,094 4,608
------ -------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income.... $ 14 $ 4,631 $ 4,645 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
====== ======== ======= ====== ======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996
VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $7.9 million or
118.9% during the nine months ended September 30, 1996, as compared to the
same period in the prior year. This increase resulted from an approximately
$17.1 million or 100.2% increase to interest income due to an approximately
$239.1 million or 91.6% increase in average interest-earning assets from
period to period. The increase in interest income was offset in part by an
approximately $9.2 million or 88.2% increase in interest expense due to an
approximately $216.8 million or 97.6% increase in average interest-bearing
liabilities, primarily certificates of deposit, and, to a lesser extent, a 21
basis point increase in the weighted average rate paid on interest-bearing
liabilities.
The increase in interest income during the nine months ended September 30,
1996, as compared to the same period in the prior year, reflects substantial
increases in the average balances of the loan portfolio. The Company's
business strategy currently contemplates continued strong growth in its total
loan portfolio, with a particular emphasis on increasing its Discounted Loan
portfolio. For information on the growth in the Company's total loan
portfolio, including its Discounted Loan portfolio, see "--Changes in
Financial Condition" below.
The average balance of the Company's interest-bearing liabilities increased
$216.8 million or 97.6% during the nine months ended September 30, 1996, as
compared to the same period in the prior year, as a result of the Savings
Banks' financing of growth of interest-bearing assets. As of the closing of
the Common Stock Offering, the Company will have extensive funding sources
available for investment and lending activities. See "Business--Funding
Sources."
31
<PAGE>
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provisions for losses on loans are charged to operations to maintain an
allowance for losses on each of the loan portfolio and the Discounted Loan
portfolio at a level which management considers adequate based upon an
evaluation of known and inherent risks in such loan portfolio and the
Discounted Loan portfolio, historical loss experience, current economic
conditions and other relevant factors. See "Business--Asset Quality--
Allowances for Loan Losses" for a discussion of management's methods of
estimating loan loss provisions.
The Company recorded provisions for estimated losses on loans totalling
approximately $15.8 million for the nine months ended September 30, 1996, as
compared to approximately $3.2 million for the comparable period in the prior
year, an increase of 389.0%. The following table sets forth the Company's
provision for estimated losses on loans for the nine months ended September
30, 1996:
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Inherited Loans.......................................... $ 4,774 30.3%
Sub-Prime Auto Loans..................................... 8,583 54.5%
Other Purchased Loans.................................... 2,394 15.2%
------- ------
Total provision for estimated losses on loans............ $15,751 100.0%
======= ======
</TABLE>
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and the Savings Banks
concerning the appropriate provision for the Sub-Prime Auto Loans acquired by
the Savings Banks in the fourth quarter of 1995 and the first quarter of 1996.
The Company also made a provision of approximately $4.8 million in the nine
months ended September 30, 1996 related to Inherited Loans owned by First Bank
or Girard at the time the Savings Banks were acquired by the Company. Both
Savings Banks were acquired at substantial discounts to their respective book
values, reflecting the poor quality of their assets.
Although management attempts to utilize its best judgment in providing for
possible loan losses, changing economic and business conditions, fluctuations
in local markets for real estate, future changes in non-performing asset
trends, large movements in market interest rates or other factors could affect
the Company's future provisions for loan losses. In addition, the OTS, as an
integral part of its examination process, periodically reviews the adequacy of
the Bank's allowances for losses on loans and Discounted Loans and such agency
may require the Company to recognize changes to such allowances for losses
based on its judgment about information available to it at the time of
examination.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income (loss) after provision for estimated
losses on loans decreased 135.3% to a loss of approximately $(1.2) million for
the nine months ended September 30, 1996 from income of approximately $3.4
million for the same period in 1995. This decrease was due to the substantial
increase in provisions for estimated losses on loans.
32
<PAGE>
OTHER INCOME
The Company's other income was approximately $6.4 million for the nine
months ended September 30, 1996 compared to approximately $2.7 million for the
same period in the prior year, an increase of 133.3%. This increase was
primarily attributable to revenue growth in the Company's bankcard operation
and from gains on the sale of loans. The components of the Company's non-
interest income are reflected in the following table:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income................................ $ 5,078 $ 3,202
Bankcard processing expense.................... (3,865) (2,408)
Gain on sale of loans.......................... 1,983 981
Loan fees and charges.......................... 1,217 522
Amortization of deferred credits............... 346 346
Trading account-unrealized gain................ 1,601 --
Other, net..................................... 17 91
----------- -----------
Total other income........................... $ 6,377 $ 2,734
=========== ===========
</TABLE>
Bankcard Income and Processing Expense. The increase in other income for the
nine months ended September 30, 1996 was due in part to an increase of
approximately $1.9 million in bankcard income, from approximately $3.2 million
for the nine months ended September 30, 1995 to approximately $5.1 million for
the nine months ended September 30, 1996. The large increase in income from
the Company's bankcard operations was primarily due to the development of a
number of new accounts. Bankcard processing expense increased by approximately
$1.5 million from approximately $2.4 million for the nine months ended
September 30, 1995 to approximately $3.9 million for the nine months ended
September 30, 1996. This increase resulted primarily from an increase in
bankcard processing due to growth in merchant transactions evidenced by the
growth in bankcard income.
Gains on Sale of Loans. The increase in other income in 1996 was also due in
part to an increase of approximately $1.0 million in gains on sales of loans,
from $1.0 million for the nine months ended September 30, 1995 to
approximately $2.0 million for the nine months ended September 30, 1996. This
increase was due to gains from the securitization of approximately $33.1
million of non-performing and sub-performing mortgage loans and real estate
owned.
Gains or losses on Loan Portfolios sold through securitization transactions
are based on the difference between the cash proceeds received on the
certificates sold to outside investors (the "Senior Securities") and the
Company's cost basis allocated to the Senior Securities. The Company's cost
basis in Loan Portfolios sold is allocated between the Senior Securities and
the Subordinate Securities retained by the Company based on the relative fair
values of the two types of securities. The cost basis of the loans securitized
is determined by their acquisition cost (for purchased loans) or net carrying
value (for originated loans). The Company carries Subordinate Securities at
fair value. As such, the carrying value of these securities is impacted by
changes in market interest rates and prepayment and loss experiences of these
and similar securities. The Company determines the fair value of the
Subordinate Securities utilizing prepayment and credit loss assumptions
appropriate for each particular securitization. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
Other income also includes loan fees and charges (e.g. late fees, commitment
fees). Loan fees and charges increased approximately $0.7 million, from
approximately $0.5 million for the nine months ended September 30, 1995 to
approximately $1.2 million for the nine months ended September 30, 1996. The
increase was primarily due to an increase in loan volume.
33
<PAGE>
OTHER EXPENSE
The Company's other expenses totalled approximately $10.9 million for the
nine months ended September 30, 1996 compared to approximately $5.2 million
for the nine months ended September 30, 1995, an increase of 107.8%.
Loan Service Fees and Expenses. The largest component of other expenses in
1996 was loan service fees and expense which increased by approximately $2.5
million from approximately $1.0 million for the nine months ended September
30, 1995 to approximately $3.5 million for the nine months ended September 30,
1996. Loan servicing fees and charges are paid to WCC and include (a) "normal"
servicing fees, and (b) collection-related expenses incurred directly by WCC
and reimbursed by the Company. Servicing fees for Discounted Loans have been
based on a percentage of cash flows collected. Therefore, when Discounted
Loans are sold, servicing fees increase substantially. The Savings Banks'
volume of loans being serviced by WCC, and particularly the volume of
Discounted Loans, increased substantially during 1996 compared to 1995
resulting from substantial growth in the Savings Banks' total loan portfolio.
Also, due to a securitization of non-performing loans (primarily Discounted
Loans) in March 1996, higher fees associated with the accelerated cash flows
to the Savings Banks were paid to WCC in the first quarter. These factors
accounted for the increase in servicing fees and charges in the nine months
ended September 30, 1996 compared to the same period in 1995.
Compensation and Employee Benefits. Other expense relating to compensation
and employee benefits also increased from approximately $1.7 million for the
nine months ended September 30, 1995 to approximately $3.0 million for the
nine months ended September 30, 1996, an increase of approximately $1.3
million (or 72.2%). The increase in compensation and employee benefits during
this period reflected normal salary adjustments and an increase in the average
number of full-time equivalent employees from 37 for the nine months ended
September 30, 1995 to 48 for the nine months ended September 30, 1996,
reflecting the expansion of business activities, particularly loan acquisition
activities and the growth of non-traditional bankcard activities. In addition,
the Savings Banks' administrative offices were relocated to Portland, Oregon
in August 1996 which resulted in approximately $0.7 million of additional
employee compensation.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.4 million for the nine months ended September 30, 1995 to
approximately $2.1 million for the nine months ended September 30, 1996, an
increase of approximately $1.7 million (or 365.3%), as a result of growth in
deposits outstanding and the SAIF special assessment.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $4.7
million during the nine months ended September 30, 1996 compared to a
provision of less than $0.1 million during the nine months ended September 30,
1995. This increase was due primarily to assessment of the valuation
allowances against deferred tax assets. The Company's effective tax rate
amounted to (81.1%) and 7.5% during the nine months ended September 30, 1996
and 1995, respectively. Differences in the Company's effective tax rates in
recent periods compared to combined Federal and State statutory rates were
primarily attributable to changes in assessments of the realization of
deferred tax assets. Exclusive of such amounts, the Company's effective tax
rate amounted to (41%) and 41% during the nine months ended September 30, 1996
and 1995, respectively.
34
<PAGE>
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
NET INTEREST INCOME
The Company's net interest income was $9.9 million for fiscal year 1995
compared to $4.1 million for the fiscal year 1994, an increase of 140.8%. The
components of the Company's net interest income for these fiscal years are
discussed below.
Interest Income. The Company's interest income was approximately $24.4
million for fiscal year 1995 compared to $9.6 million for fiscal year 1994, an
increase of 154.8%. The increase in the Company's interest income from 1994 to
1995 was due primarily to an increase in interest received on loans from $7.9
million in 1994 to $21.8 million in 1995. The increase in interest received on
loans was a result of an increase in the gross principal amount of the
Company's total loan portfolio from $198.6 million in 1994 to $337.5 million
in 1995, an increase of 69.9%. The Savings Banks made substantial acquisitions
of Discounted Loans in June 1995 and performing single-family loans in the
fourth quarter of 1995. In addition, the Company acquired Girard in November
1994 and, as a result, the Company's 1994 results of operations only reflect
two months of Girard's operations while 1995 results reflect a full year of
operations by Girard. In addition, the average rate earned by the Company on
its interest-bearing assets increased from 7.08% in 1994 to 9.16% in 1995.
Interest Expense. The Company's interest expense was approximately $14.5
million for fiscal year 1995 compared to approximately $5.5 million in fiscal
year 1994, an increase of 165.4%. The increase in interest expense from 1994
to 1995 was due primarily to an increase in average certificates of deposit
outstanding from approximately $118.3 million in 1994 to approximately $231.6
million in 1995 (an increase of 104.4%), which occurred in order to fund the
growth of the loan portfolio noted above. In addition, interest expense
increased due to the inclusion of Girard's results of operations for the full
year ending December 31, 1995, compared to fiscal year 1994 which only
reflected two months of Girard's operations. In addition, the average interest
rate on the Company's borrowings increased from 4.23% to 6.08% from 1994 to
1995.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with its provision for estimated losses on loans the Company
recorded an expense totalling approximately $4.3 million for fiscal year 1995
compared to approximately $2.2 million for fiscal year 1994, an increase of
96.3%.
The increase in the provisions from 1994 to 1995 was primarily attributable
to higher provisions related to the Inherited Loans and having a full year of
Girard's operations presented in 1995. The increase in the provisions from
1994 to 1995 was also to a lesser degree attributable to the earthquake in
Southern California in January 1994, which affected delinquency and collateral
values in 1995. For a discussion of the Company's methods for establishing
provisions for loan losses, see "Business--Asset Quality--Allowances for Loan
Losses."
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased 190.6% to approximately $5.6 million for fiscal year 1995 from
approximately $1.9 million for fiscal year 1994.
35
<PAGE>
OTHER INCOME
The Company's other income was approximately $3.1 million for fiscal year
1995 compared to approximately $1.2 million for fiscal year 1994, an increase
of 153.2%. This increase was primarily attributable to growth in the Company's
bankcard operation and gains from the sale of loans. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other Income:
Bankcard income.................................... $ 4,694 $ 635
Bankcard processing expense........................ (3,462) (274)
Gain on sale of loans.............................. 642 --
Loan fees and charges.............................. 610 43
Gain on sale of mortgage-backed securities avail-
able for sale..................................... 14 54
Amortization of deferred credits................... 460 388
Other, net......................................... 149 381
----------- -----------
Total other income............................... $ 3,107 $ 1,227
=========== ===========
</TABLE>
The increase in other income in 1995 was due primarily to an increase of
approximately $4.1 million in bankcard income, from approximately $0.6 million
for fiscal year 1994 to approximately $4.7 million for fiscal year 1995. The
large increase in income from the Company's bankcard operations reflects a
full year of Bankcard operations in 1995 compared to a partial year for 1994,
since bankcard operations commenced in mid-1994. bankcard processing expense
increased by approximately $3.2 million from approximately $0.3 million for
fiscal year 1994 to approximately $3.5 million for fiscal year 1995. The
increase in bankcard processing expense was primarily the result of the same
factors. The increase in other income in 1995 was also due in part to
approximately $0.6 million in gains on sales of loans in fiscal year 1995 from
no gains on sales of loans for fiscal 1994. This increase was due to gains
from the 1995 sale of approximately $7.9 million of mortgage loans into a
securitization. The increase in other income in 1995 was also due in part to
an increase of approximately $0.6 million in loan fees and charges, from less
than $0.1 million in 1994 to approximately $0.6 million in 1995. The increases
in loan fees and charges are primarily attributable to an increase in the
average Loan Portfolio from $103.6 million in 1994 to $228.0 million in 1995,
an increase of 120.1%.
OTHER EXPENSE
The Company's other expense totalled approximately $8.1 million for fiscal
year 1995 compared to approximately $4.9 million for fiscal year 1994, an
increase of 63.9%. The largest component of other expense was loan service
fees and expenses which increased by approximately $1.8 million from
approximately $0.2 million in fiscal year 1994 to $2.0 million in fiscal year
1995. This increase resulted from the substantially higher volume of loans
being serviced in 1995, including a full year of operations of Girard, and the
purchase of a portfolio of Discounted Loans in June 1995 which was serviced at
higher fees. All of the key items of other expense (including loan service
fees and expenses, compensation and employee benefits, FDIC insurance premiums
and professional services) showed an increase from 1994 to 1995 except for
real estate owned (net) and other general and administrative expenses. This
increase was primarily attributable to growth in the Savings Banks.
Other expense relating to compensation and employee benefits increased from
approximately $1.9 million in 1994 to approximately $2.5 million in 1995, an
increase of $0.6 million (or 30.9%), primarily as a result of an increase in
the average number of full-time equivalent employees from 31 in 1994 to 44 in
1995 (including an entire year's compensation expenses for Girard in 1995).
FDIC insurance premiums increased from $0.3 million in 1994 to $0.7 million
in 1995, an increase of approximately $0.4 million (or 176.2%), as a result of
growth in certificates of deposit outstanding. Other
36
<PAGE>
expense relating to professional services also increased from approximately
$0.5 million in 1994 to approximately $1.0 million in 1995 primarily as a
result of legal and accounting expenses incurred in connection with a proposed
acquisition of another savings bank in 1995, which was not completed due to a
failure of the principals ultimately to agree on terms.
These increases in other expense were partially offset by a small decrease
in expenses related to real estate owned (net). Other expenses related to real
estate owned (net) were approximately $0.2 million in fiscal year 1994 and
$0.2 million in fiscal year 1995. Other general and administrative expenses
decreased from approximately $1.3 million in 1994 to approximately $1.1
million in 1995, a decrease of 15.3%.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to an expense of less than $0.1
million in 1995 compared to a benefit of approximately $0.5 million for 1994.
The Company's effective tax rate amounted to 7.4% and (29.6)% during 1995 and
1994, respectively. Differences in the Company's effective tax rates in recent
periods compared to combined Federal and State statutory rates were primarily
attributable to changes in assessments of the realization of deferred tax
assets. Exclusive of such amounts, the Company's effective tax rate amounted
to 41% and (41)% during 1995 and 1994, respectively. For additional
information regarding the Company's income tax provisions and tax rates and
information regarding net operating loss carryforwards of the Company, see
Note 8 to the Consolidated Financial Statements.
37
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 20,531 $ 4,482 $ 8,830
Trading account securities.................... 7,092 -- --
Securities held to maturity, at amortized
cost......................................... 7,425 6,470 4,505
Mortgage-backed securities available for sale,
at fair value................................ 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost............................ 22,380 13,119 14,439
Loans receivable, net......................... 177,280 258,827 181,471
Discounted loans net.......................... 3,419 13,347 --
Loans held for sale, at lower of cost or mar-
ket.......................................... 260,804 18,597 --
Stock in Federal Home Loan Bank of San Fran-
cisco, at cost............................... 2,911 1,421 1,612
Real estate owned, net........................ 2,514 4,964 1,208
Leasehold improvements and equipment, net..... 336 275 167
Due from affiliate............................ 8,357 4,514 4,062
Accrued interest receivable................... 4,268 3,042 1,599
Prepaid expenses and other assets............. 3,887 1,724 1,026
Income taxes receivable, net.................. 5,422 1,589 774
-------- -------- --------
Total Assets................................ $533,109 $341,454 $230,636
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits...................................... $487,535 $303,524 $196,289
Borrowings.................................... -- 13,000 21,500
Accounts payable and other liabilities........ 7,625 4,398 2,056
Subordinated debt............................. -- 11,000 --
Preferred stock in subsidiary held by others.. -- -- 1,000
Deferred credits.............................. 832 1,134 1,772
Minority interest in subsidiaries............. 277 600 574
Due from affiliates........................... 2,286 759 652
-------- -------- --------
Total liabilities........................... 498,555 334,415 223,843
Stockholders' Equity.......................... 34,554 7,039 6,793
-------- -------- --------
Total Liabilities and Stockholders' Equity.. $533,109 $341,454 $230,636
======== ======== ========
</TABLE>
Mortgage-Backed and Other Securities. The Company's mortgage-backed
securities available for sale and trading account securities increased $4.4
million during the nine months ended September 30, 1996 primarily as a result
of purchasing certain subordinated bonds associated with the sale of
Discounted Loans. Investment securities and mortgage-backed securities held to
maturity increased by approximately $1.0 million and $9.3 million,
respectively, during the nine months ended September 30, 1996. United States
Treasury securities are generally held for the purpose of meeting regulatory
liquidity requirements. As the amount of deposits and borrowings increases,
the regulatory liquidity requirement increases proportionately. The increase
in mortgage-backed securities held to maturity resulted primarily from
purchases of GNMA adjustable-rate mortgage securities to secure certain
representations and warranties under a mortgage loan securitization and for
collateral securing an interest-rate swap contract.
38
<PAGE>
Loans Receivable, Net. Since 1994, the Company has emphasized the
acquisition of traditional performing mortgage loans as well as under-
performing and non-performing loans which generally are purchased at a
discount to both unpaid principal amount of the loan and the estimated value
of the property securing the loan. As a result, the average balance of the
Company's Total Loan Portfolio has increased significantly since 1993 as
illustrated by the following table:
AVERAGE BALANCE OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994 1993
----------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residen-
tial..................... $288,243 $ 93,350 $ 31,414 $20,254
Multi-family residential.. 74,131 70,631 36,089 25,567
Commercial and other mort-
gage loans............... 57,899 53,852 33,163 26,396
Consumer and other........ 29,675 10,137 2,917 383
-------- -------- -------- -------
Total loans............. 449,947 227,970 103,583 72,600
Unaccreted discount....... (17,281) (10,254) (4,086) (988)
Allowance for loan loss-
es....................... (33,451) (21,591) (4,509) (4,314)
-------- -------- -------- -------
$399,215 $196,125 $ 94,988 $67,298
======== ======== ======== =======
</TABLE>
The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $150.7 million during the nine months ended
September 30, 1996 primarily as a result of the Company's business strategy of
aggressively acquiring loan portfolios of Discounted Loans and other mortgage
loans. The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $109.3 million during 1995 primarily as a result of
the Company's loan purchase strategy. Included in the amount of increases in
the Company's total loan portfolio in the nine months ended September 30, 1996
and the year ended December 31, 1995 are a decrease of $26.9 million and an
increase of $29.3 million, respectively, in the net carrying amount of
Discounted Loans. The increase in 1995 reflected the initial implementation of
the Discounted Loan acquisition strategy. The decrease in the first six months
of 1996 reflected paydowns and other resolutions of some of the loans, and the
sale of most of the Discounted Loans in a securitization transaction completed
in March 1996.
Loans Held For Sale. The Company's loans held for sale increased by $243.3
million during the nine months ended September 30,1996 due to the Company's
intent to sell approximately $277.5 million of single-family residential loans
in the fourth quarter of 1996.
Real Estate Owned, Net. Real estate owned, net consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's total loan portfolio. Real estate owned decreased by approximately
$2.5 million or 49.4% during the nine months ended September 30, 1996 as a
result of the securitization of certain real estate owned and other resolution
activities. The approximately $3.8 million increase in the Company's net real
estate owned during 1995 primarily reflects increases in real estate owned
related to the Company's Discounted Loan portfolio, which reflects the growth
in the Company's Discounted Loan acquisition and resolution activities in
recent periods.
The Company actively manages its real estate owned. During the nine months
ended September 30, 1996, the Company sold 57 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$6.6 million. During 1995, the Company sold 17 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$5.5 million, as compared to the sale of properties of real estate owned
related to its total loan portfolio with carrying values of approximately $3.3
million during 1994.
39
<PAGE>
Due from Affiliate. Due from affiliate increased by approximately $3.8
million or 85.1% during the nine months ended September 30, 1996 primarily as
a result of growth in loan portfolios. The balance in the account as of any
month-end reflects the lag between receipts of loan payments by WCC, as
servicer, and payment to the Company. Due from affiliate increased by
approximately $0.5 million during 1995 for the same reason.
Deposits. Deposits increased by approximately $184.0 million or 60.6% during
the nine months ended September 30, 1996 primarily as a result of the
Company's strategy to increase deposits to permit the Savings Banks to acquire
loan portfolios. Deposits increased by approximately $107.2 million during
1995 primarily for the same reason.
Borrowings. Borrowings decreased by approximately $13.0 million during 1996
as a result of replacing short-term borrowings with longer term deposits.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the nine months ended September 30, 1996 because on January 1,
1996, the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $27.5 million during
the nine months ended September 30, 1996 primarily as a result of the exchange
of $11.0 million of outstanding subordinated debt for common stock and the
infusion of approximately $17.8 million to support growth and maintain
required regulatory capital ratios at the Savings Banks. Stockholders' equity
increased during 1995 primarily as a result of the Company's net income during
the period.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the asset and liability committees for the
Company and the Savings Banks (the "Asset and Liability Committees") which
meet regularly to review, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes the book and market values of
assets and liabilities, unrealized gains and losses, including those
attributable to hedging transactions, purchase and securitization activity,
and maturities of investments and borrowings. The Asset and Liability
Committees coordinate with the Savings Banks' boards of directors and the
Company's investment committees with respect to overall asset and liability
composition.
Since most of the Company's assets and liabilities reprice relatively
frequently, the Company's gap tends to be relatively easy to manage and the
Company's interest rate risk analysis focuses less on managing the overall gap
and more on ensuring that individual Loan Portfolios are properly hedged. In
hedging the interest rate exposure of a fixed-rate or lagging-index asset that
is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, U.S. agency mortgage-backed securities or interest rate futures
contracts. This results in market gains or losses on hedging instruments, in
response to interest rate increases or decreases, respectively, which
approximate the amount of the corresponding market losses or gains,
respectively, on loans being hedged. The Company evaluates the interest rate
sensitivity of each Loan Portfolio and decides whether to hedge the interest
rate exposure of a particular portfolio. In general, the Company tends to
hedge its fixed-rate Loan Portfolios. The Company generally does not hedge the
interest rate risk associated with holding non-lagging index adjustable-rate
mortgages pending their sale or securitization due to the decreased
significance of such risk. Though the Company's loan portfolio changes
relatively frequently as a result of Loan Portfolio acquisitions and the sale
of Loan Portfolios through securitization, the Company to date has not
experienced any significant costs or problems in hedging its portfolio. In
general, as a new Loan Portfolio is acquired, the Company will determine
whether or not to hedge and, with respect to any sale or financing of Loan
Portfolios through securitization, the Company will determine whether or not
to discontinue its duration-matched hedging activities with respect to the
relevant loans. In connection with the acquisition of the Citicorp Portfolio,
the Company does not currently anticipate entering into any hedging
transactions.
40
<PAGE>
The Asset and Liability Committees are authorized to utilize a wide variety
of off-balance sheet financial techniques to assist them in the management of
interest rate risk. These techniques include interest rate swap agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to
as the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate swap agreements are utilized by the
Company to protect against the narrowing of the interest spread between fixed
rate loans and associated liabilities funding those loans. The Company had
approximately $65.6 million notional principal amount of interest rate swap
agreements outstanding at September 30, 1996, which had the effect of
decreasing the Company's net interest income by approximately $0.1 million
during the nine months ended September 30, 1996. For additional information
see Note 7 to the Consolidated Financial Statements. There was no significant
hedging activity in 1995.
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value
of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the Boards of Directors
of the Savings Banks. In addition, at June 30, 1996, management estimates
based upon the MVPE analysis prepared by the OTS that the estimated percentage
change in the Company's MVPE over the ensuing four-quarter period as a result
of a 200 basis point increase or decrease in interest rates would be an
approximate 15% decrease or 6% increase, respectively. The following table
highlights the interest rate sensitivity of MVPE of a change in rates from 0
to 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
AT JUNE 30, 1996
<S> <C> <C> <C>
Net Portfolio Value
Change in --------------------------
Rates Amount $ Change % Change
+400bp $42,628 $(22,944) -35%
+300bp 49,563 (16,009) -24%
+200bp 55,986 (9,586) -15%
+100bp 61,464 (4,108) -6%
0bp 65,572 --
-100bp 68,312 2,740 4%
-200bp 69,521 3,949 6%
-300bp 69,923 4,351 7%
-400bp 70,738 5,166 8%
</TABLE>
Management of the Company believes that the assumptions (including pre-
payment assumptions) used by it to evaluate the vulnerability of the Company's
operations to changes in interest rates approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities and the estimated effects of changes in
interest rates on the Company's net interest income and MVPE could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase loans, purchase Discounted Loans, fund lending
activities and for general business purposes. The Company's sources of cash
flow include certificates of deposit, securitizations, net interest income and
borrowings under its warehouse and repurchase financing facilities and from
institutional investors and other lenders. In addition, the Savings Banks
obtain funding through FHLB advances.
41
<PAGE>
The Company's liquidity is actively managed on a daily basis, monitored
regularly by the Asset and Liability Committees and reviewed periodically by
the Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company, including adequate cash
flows for off-balance sheet instruments.
Sources of liquidity include wholesale and brokered certificates of deposit.
As of September 30, 1996, the Company had approximately $480.3 million of
certificates of deposit. As of September 30, 1996, scheduled maturities of
certificates of deposit during the 12 months ending September 30, 1997 and
thereafter amounted to approximately $425.1 million and approximately $55.2
million, respectively. Brokered and other wholesale deposits generally are
more responsive to changes in interest rates than core deposits and, thus, are
more likely to be withdrawn by the investor upon maturity as changes in
interest rates and other factors are perceived by investors to make other
investments more attractive. However, management of the Company believes that
it can adjust the rates paid on certificates of deposit to retain deposits in
changing interest rate environments and that brokered and other wholesale
deposits can be both a relatively cost-effective and stable source of funds.
As of September 30, 1996, the Company's sources of borrowing included Master
Repurchase Agreements between each of the Savings Banks and Bear Stearns
Mortgage Capital Corporation as to which the parties have orally agreed that
approximately $210 million in aggregate would be available for the purchase of
loans. On closing of the Common Stock Offering and Notes Offering, the amounts
available to the Wilshire Private Companies under a $100 million warehouse
lending agreement (the "Warehouse Financing Facility") with Prudential
Securities Realty Funding Corp. and certain repurchase arrangements will be
made available to the Company or one of its subsidiaries, including $150
million under a repurchase agreement with First Boston Mortgage Capital
Corporation. Such Repurchase Agreement will be increased to $250 million upon
transfer to WFC. See "Business--Funding Sources."
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of September 30,
1996, the Company had no FHLB advances outstanding, and was eligible to borrow
up to an aggregate of $11.6 million from the FHLB of San Francisco and had
$2.0 million of single-family residential loans, approximately $16.6 million
of multi-family residential loans and $2.6 million of commercial loans which
were pledged as security for such advances. At the same date, the Company had
a contractual relationship with the FHLB of San Francisco pursuant to which it
could obtain funds from reverse repurchase agreements and had $7.6 million of
unencumbered investment securities and mortgage-backed and related securities
which could be used to secure such borrowings.
The Company's uses of cash include the funding of loan purchases and
origination, payment of interest expenses, repayment of loans, funding of
initial over-collateralization requirements for securitizations, operating and
administrative expenses, income taxes and capital expenditures. Capital
expenditures were immaterial for the nine months ended September 30, 1996 and
the years ended December 31, 1995, and 1994. In addition to commitments to
extend credit, the Company is party to various off-balance sheet financial
instruments in the normal course of business to manage its interest rate risk.
See "--Asset and Liability Management" above and Note 7 to the Consolidated
Financial Statements.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through
financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase and originate loans, and acquire
Subordinate Securities. During the first nine months of 1996, and fiscal years
1995 and 1994, the Company used cash in the approximate amounts of $227.6
million, $186.9 million, and $41.6 million, respectively, for new loan
purchases. During the first nine months of 1996 and fiscal year 1995, the
Company received cash from the securitization of loans of approximately, $26.3
million and $16.7 million, respectively.
42
<PAGE>
After utilizing available working capital, deposits and any securitization
proceeds, the Company borrows money to fund its loan purchases and
originations. During the first nine months of 1996, and fiscal years 1995 and
1994, the Company used borrowings under various repurchase arrangements and
FHLB advances in the approximate amounts of $308.1 million, $77.4 million and
$41.7 million, respectively, for new loan purchases and origination. The
Company's business plan generally calls for using a high degree of leverage in
acquiring Loan Portfolios. With respect to Loan Portfolios of Discounted Loans
and performing loans, the Company generally seeks to fund 90% and 95%,
respectively, of the market value of such Loan Portfolios with borrowed money.
See "Risk Factors--Risks Related to Extensive Use of Financial Leverage." The
Company draws on a number of sources to obtain such funds including
certificates of deposit and repurchase arrangements with Wall Street
investment banks. As of the closing of the Common Stock Offering and the Notes
Offering, certain existing lines of credit will be transferred to the Company.
See "Business--Funding Sources."
The Company believes that cash flow from operations, the net proceeds of the
Common Stock Offering and the Notes Offering, the proceeds of certificates of
deposit, the availability under the warehouse financing facility and other
borrowings, and the net proceeds from securitizations will be sufficient to
fund operating needs, commitments and capital expenditures.
The Savings Banks are required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five
years or less. Current OTS regulations require that a savings association
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity
requirements. First Bank's liquidity, as measured for regulatory purposes,
amounted to 9.0% as of September 30, 1996 and averaged 11.4%, 9.1%, and 8.0%
during the nine months ended September 30, 1996 and the years ended December
31, 1995 and 1994, respectively. Girard's liquidity, as measured for
regulatory purposes, amounted to 6.4% as of September 30, 1996 and averaged
6.4%, 11.2%, and 8.5% during the nine months ended September 30, 1996, the
year ended December 31, 1995, and the quarter ended December 31, 1994,
respectively.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Savings Banks are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed
on national banks. The OTS also is authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case
basis. Under the Orders, the Savings Banks are required to be "well-
capitalized" as of December 31, 1996. See "Regulation--Imposition of Cease and
Desist Orders."
43
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at September 30, 1996.
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE
CATEGORIZED
AS "WELL
CAPITALIZED"
OTS MINIMUM UNDER OTS
ACTUAL REQUIREMENTS EXCESS REGULATIONS EXCESS
------------- ------------ ------------- ------------ ------------
AMOUNT RATIO RATIO AMOUNT RATIO RATIO AMOUNT RATIO
------- ----- ------------ ------- ----- ------------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital:
First Bank............. $ 8,434 6.0% 1.5% $ 6,314 4.5% N.A. N.A. N.A.
Girard................. 26,739 6.8% 1.5% 20,884 5.3% N.A. N.A. N.A.
Tier 1 Capital to Aver-
age Assets:
First Bank............. 8,434 5.9% 4.0% 2,728 1.9% 5.0% $1,302 0.9%
Girard................. 26,739 7.0% 4.0% 11,419 3.0% 5.0% 7,589 2.0%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 8,434 8.7% N.A. N.A. N.A. 6.0% 2,614 2.7%
Girard................. 26,739 9.7% N.A. N.A. N.A. 6.0% 10,231 3.7%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
First Bank............. 9,711 10.0% 8.0% 1,951 2.0% 10% 10 0.0%
Girard................. 30,297 11.0% 8.0% 8,287 3.0% 10% 2,784 1.0%
</TABLE>
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements,
and in August 1995 the OTS postponed the effectiveness of this regulation
after having previously deferred the effective date several times. Because
only institutions whose measured interest rate risk exceeds certain parameters
will be subject to the interest rate risk capital requirement, management of
the Company does not believe that this regulation will increase the Savings
Banks' risk-based regulatory capital requirement if it becomes effective in
its current form. For additional information relating to regulatory capital
requirements, see "Regulation--The Savings Banks--Regulatory Capital
Requirements" and Note 10 to the Consolidated Financial Statements.
44
<PAGE>
BUSINESS
GENERAL
WFSG is a newly formed financial services holding company for certain
companies and businesses previously held as part of, and operated by, the
Wilshire Companies. As part of the Reorganization, the Wilshire Private
Companies, including WCC, will not become subsidiaries of WFSG and will remain
privately held. The Company will engage in a wide variety of financial
activities, including the acquisition, origination, ownership and
securitization of Loan Portfolios, banking and non-traditional merchant credit
card processing.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. significant growth in Loan Portfolio investments;
. utilize varied funding sources;
. expansion into European markets;
. utilize servicing expertise;
. growth of non-traditional bankcard processing operations; and
. develop wholesale origination network.
LOAN ACQUISITIONS
General. During the last four years, the Wilshire Companies have developed
expertise in the business of acquiring Loan Portfolios, including residential
mortgage loans, manufactured housing loans, second lien loans, commercial real
estate loans, multi-family residential loans, commercial and business loans,
boat loans, other consumer loans and Subordinate Securities.
In the early 1990's, the Wilshire Companies acquired loans primarily from
the FDIC and the RTC, primarily in auctions of pools of loans acquired from
financial institutions which failed during the late 1980s and early 1990s.
Although governmental agencies, such as the FDIC and HUD, continue to be
potential sources of loans, the amount of loans sold by such agencies has
substantially declined. In recent years, the Wilshire Companies purchased
loans from various private sector sellers, such as banks, savings
institutions, mortgage companies and insurance companies. Whether because a
financial institution desires to reduce overhead costs, is not staffed to
handle large volumes of Loan Portfolios or simply does not want to distract
management and personnel with the intensive and time-consuming job of
servicing Loan Portfolios, many financial institutions now recognize that
outside contractors often are better staffed to manage and service Loan
Portfolios. These financial institutions include multi-national, money center,
super-regional and regional banking institutions as well as mortgage companies
and insurance companies. Moreover, many financial institutions have embraced
the concept of packaging and selling Loan Portfolios to investors as a means
of disposing of non-performing and under-performing loans and improving a
financial institution's balance sheet. Consolidations within the banking
industry have reinforced this trend. Additionally, management believes that
there is a market for management and resolution services for delinquent, sub-
performing and non-performing loans.
The Company intends to build on its expertise in loan acquisitions and
aggressively pursue Loan Portfolio acquisitions in the United States and
Europe, a substantial portion of which are expected to be Discounted Loans. In
addition, the Company expects to increase its purchases of commercial real
estate loans above existing levels. The Company believes it can significantly
increase its acquisition activities without a commensurate increase in
operating costs.
45
<PAGE>
The Company will seek to identify niche areas primarily within the real
estate loan market where it believes its funding flexibility, experienced
personnel and its proprietary software and U.S. mortgage loan database give it
a competitive advantage in pricing and purchasing Loan Portfolios. Areas in
which the Company views itself as having a competitive advantage include (i)
under-performing, non-performing and charged-off loans which generally are
purchased at substantial discount to both the unpaid principal amount of the
loan and the estimated value of the properties securing the loans; (ii) single
family and multi-family loan portfolios which do not comply with Federal
National Mortgage Association (the "FNMA") or Federal Home Loan Mortgage
Corporation (the "FHLMC") guidelines or may not meet preset securitization
guidelines for certain mortgage loan conduit programs; (iii) manufactured
housing loans; (iv) home equity or second lien loans; and (v) to a lesser
degree, consumer and other loans.
Loan Acquisition Procedures. Loans generally are acquired in pools ("Loan
Portfolios") from a wide variety of sources, including private sellers such as
banks, thrifts, finance companies, leasing companies, mortgage companies and
governmental agencies. The Company expects to obtain information on available
Loan Portfolios from several sources, such as referrals from Loan Portfolio
sellers with whom the Wilshire Companies have transacted business in the past
and from co-investors who seek the Company's participation in Loan Portfolio
purchases. Management of the Company has developed relationships with banks,
finance companies, mortgage companies and institutional investment banks which
management believes will be a continuing source of information on available
Loan Portfolios.
Loan Portfolios generally are acquired through competitive bids in which
there is often substantial competition or negotiated transactions. The
competition for larger Loan Portfolios is generally more intense. In addition
to bidding on and often acquiring large Loan Portfolios, the Company has often
acquired small Loan Portfolios where competition is less. The average size of
the Loan Portfolios acquired by the Company was $9.3 million for the first
nine months of 1996 and $3.8 million for the year ended December 31, 1995. The
Company believes that its funding flexibility, experienced personnel,
proprietary software and mortgage loan database provide the Company with a
competitive advantage in pricing and ultimately purchasing Loan Portfolios.
Prior to making an offer to purchase a Loan Portfolio, the Company's
employees who specialize in the analysis of loans will conduct an extensive
investigation and evaluation of the individual loans in the Loan Portfolio.
This examination typically consists of analyzing the information made
available by the Loan Portfolio seller (generally, the respective credit and
collateral files for the loans), reviewing other relevant material that may be
available (including tax records), and analyzing the underlying collateral
(including consulting the Company's United States mortgage loan database which
contains among other things, listings of property values and loan loss
experience in local markets for similar assets, obtaining value opinions from
third parties and, in some cases, conducting site inspections). The Company
also will review information on the local economy and real estate markets
(including the amount of time required to foreclose on real property) in the
area in which the loan collateral is located.
The Company's senior acquisition personnel who conduct the due diligence on
the Loan Portfolio will determine the amount to be offered by the Company to
acquire the Loan Portfolio by using a proprietary modeling system which
focuses on, among other things, the anticipated recovery amount, timing, type
and quality of the servicing transfer and cost of the resolution of the loans.
With respect to Discounted Loans and with certain other loans as well, the
amount that will be offered by the Company will generally be at a discount
from both the stated value of the loan and the value of the underlying
collateral which the Company estimates is sufficient to generate an acceptable
return on its investment. The Company's Investment Committee which consists of
senior management and the senior acquisition personnel that conducted the due
diligence on the Loan Portfolio will review the due diligence file and make a
final determination as to the amount of the offer. Loan acquisition decisions
at the Savings Banks are made by their respective boards of directors.
LOAN PORTFOLIO
General. The Company's total loan portfolio currently includes residential
mortgage loans, multi-family residential loans, commercial real estate loans,
manufactured housing loans, commercial and business loans, auto
46
<PAGE>
loans, boat loans and other consumer loans. As of September 30, 1996, the
Company's total loan portfolio, net of unaccreted discount and allowance for
loan losses amounted to $441.5 million. The Company expects to utilize its
available funding sources to continue to aggressively expand its loan
portfolio through the acquisition of Loan Portfolios from government agencies
and private sector entities and through its mortgage conduit program. As part
of the Reorganization, WCC will continue to originate mortgage loans for the
Company, during the period of time that the Company is obtaining the necessary
licenses to conduct the mortgage conduit program. See "--Loan Origination."
The Company expects to securitize its Loan Portfolios when advantageous. The
Company may also from time to time engage in whole loan sales or determine to
hold loans until maturity. Loans not presented as held for sale in the Audited
Consolidated Financial Statements are expected to be held to maturity.
Activity in the Company's Loan Portfolio.
The following table sets forth the activity in the gross principal amount of
the Company's total loan portfolio during the periods indicated, excluding
activity in the allowance for loan losses, deferred fees and unaccreted
discount on purchased loans.
ACTIVITY IN THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994(1)
---------------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..... $337,455 $198,588 $ 74,045
Originations:
Single-family residential........ 1,906 3,508 1,478
Multi-family residential......... 374 1,180 252
Commercial and other mortgage
loans........................... -- 4,060 2,615
Consumer and other loans......... -- -- --
-------- -------- --------
Total loans originated......... 2,280 8,748 4,345
Loan Purchases(3):
Single-family residential........ 221,581 121,883 36,462
Multi-family residential......... -- -- 61,247
Commercial and other mortgage
loans........................... -- 2,126 31,091
Consumer and other loans(2)...... 18,742 11,012 10,847
-------- -------- --------
Total loans purchased.......... 240,323 135,021 139,647
Discounted Loan Purchases:
Single-family residential........ -- 49,662 1,542
Multi-family residential......... -- 96 --
Commercial and other mortgage
loans........................... -- 869 1,843
Consumer and other loans......... -- 5,368 239
-------- -------- --------
Total Discounted Loans pur-
chased........................ -- 55,995 3,624
Sales.............................. (27,965) (16,673) --
Principal repayments, net of capi-
talized interest.................. (37,789) (27,464) (14,813)
Transfer to real estate owned and
other............................. (12,350) (16,760) (8,260)
-------- -------- --------
Net increase (decrease) in loans... 164,499 138,867 124,543
-------- -------- --------
Balance at end of period........... $501,954 $337,455 $198,588
======== ======== ========
</TABLE>
- --------
(1) Includes as purchases $90.6 million aggregate principal amount of loans
held by Girard on the date that it was acquired by WACII.
(2) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(3) Excludes Discounted Loans.
47
<PAGE>
Composition of Total Loan Portfolio. As of September 30, 1996, the Company's
total loan portfolio, net of unaccreted discount, deferred fees and allowance
for loan losses, amounted to $441.5 million or 83.6% of the Company's total
assets. The following table sets forth the composition of the Company's total
loan portfolio by type of loan at the dates indicated.
COMPOSITION OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ---------------------------
1996 1995 1994 1993
------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN PORTFOLIO:
Single-family residential....... $324,910(2) $139,566 $ 53,095 $20,657
Multi-family residential........ 72,717 71,239 77,884 26,076
Commercial real estate.......... 61,235 53,458 57,881 26,921
Consumer and other.............. 30,698 19,753 6,733 391
-------- -------- -------- -------
Loan portfolio.................... 489,560 284,016 195,593 74,045
Unaccreted discount and deferred
fees............................. (12,400) (14,362) (8,946) (988)
Valuation allowance............... (40,086) (10,237) (7,270) (4,314)
-------- -------- -------- -------
Loan portfolio, net............... $437,074 $259,417 $179,377 $68,743
======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residential....... $ 11,188(3) $ 50,937 $ 348 $ --
Multi-family residential........ -- (3) -- -- --
Commercial real estate.......... 482 1,523 432 --
Consumer and other.............. 724 979 2,215 --
-------- -------- -------- -------
Discounted Loan portfolio......... 12,394 53,439 2,995 --
Unaccreted discount and deferred
fees............................. (1,747) (6,671) (470) --
Valuation allowance(1)............ (6,218) (15,414) (431) --
-------- -------- -------- -------
Discounted Loan portfolio, net.... $ 4,429 $ 31,354 $ 2,094 $ --
======== ======== ======== =======
</TABLE>
- --------
(1) For discussion of the valuation allowance allocation for purchase
discount, see "--Asset Quality--Allowances for Losses."
(2) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(3) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
The real properties which secure the Company's mortgage loans are located
throughout the United States. As of September 30, 1996, the five states with
the greatest concentration of properties securing the Company's loans were
California, New York, New Jersey, Florida and Texas, which had $274.2 million,
$32.8 million, $21.9 million, $17.4 million and $10.8 million principal amount
of loans, respectively. The real properties which secure the Company's
Discounted Loans are located throughout the United States. As of September 30,
1996, the five states with the greatest concentration of properties securing
the Company's Discounted Loans were Massachusetts, Connecticut, California,
Texas and New Jersey, which had $3.8 million, $3.1 million, $1.2 million, $1.1
million and $.9 million principal amount of loans, respectively. The Company
believes that the broad distribution of the real property in its Discounted
Loan portfolio reduces the risks associated with concentrating such loans in
limited geographic areas. The geographic concentration of the Company's
Discounted Loan portfolio is expected to change with the acquisition of the
Citicorp Portfolio, which is concentrated in New York and New Jersey. See
"Recent Developments."
48
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information as of September 30, 1996 regarding the dollar amount of loans
maturing in the Company's loan portfolio (excluding Discounted Loans) based on
their contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the dollar amount of loans which have fixed
or adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances have not been reduced for undisbursed loan
proceeds, unearned discounts and the allowance for loan losses.
MATURITY OF THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
MATURING IN
-------------------------------------------------------
ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS AFTER
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TEN YEARS
-------- ------------------ ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residen-
tial................... $ 6,999 $23,385 $15,681 $278,845
Multi-family residen-
tial................... 16,226 26,205 15,943 14,343
Commercial and other
mortgage loans......... 18,025 25,288 14,130 3,792
Consumer and other
loans.................. 6,019 23,589 370 720
Interest rate terms on
amounts due after one
year:
Fixed................. -- 47,317 12,415 98,277
Adjustable............ -- 51,150 33,709 199,423
</TABLE>
- --------
(1) Excludes Discounted Loans.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
LOAN ORIGINATION
General. In late 1995, WCC launched a mortgage conduit program for the
purchase of newly-originated residential mortgage loans on a nationwide basis
through correspondents. From the launch of the program in the fourth quarter
of 1995 through September 30, 1996, WCC purchased or committed to purchase
under its mortgage conduit program approximately $5.9 million principal amount
of manufactured housing loans and $18.0 million principal amount of first and
second lien mortgage loans. While the Company is obtaining necessary
regulatory approvals, WCC will continue to originate residential mortgage
loans for the Company's account through its correspondent relationships and
will then transfer the newly originated loans to the Company. The Company will
simultaneously provide the funding for the newly originated residential
mortgage loans. Although WCC will be originating mortgage loans for the
Company's account while the Company obtains necessary licenses, the mortgage
conduit program will be conducted by the Company.
The mortgage conduit program currently focuses on the origination of
manufactured housing loans, and conforming and non-conforming first and
related second lien mortgage loans. All borrowers and the collateral must meet
the Company's credit underwriting guidelines. The Company believes that the
higher risk generally associated with non-agency borrowers is partially offset
by the Company's strong credit underwriting guidelines and the better pricing
associated with these loans. The Company is in the process of launching two
new programs for loans to good credit borrowers. The Company expects to
further expand the mortgage conduit program as it identifies market niches in
the mortgage lending market where the Company believes it has a competitive
advantage.
49
<PAGE>
The Company expects to securitize loans that it originates when
advantageous. The Company may also from time to time sell whole loans or
determine to hold loans until maturity. Loans not presented as held for sale
in the Audited Consolidated Financial Statements are expected to be held to
maturity.
Correspondent Relationships. Mortgage loans are currently acquired by WCC
through its correspondent relationships with mortgage banking firms and other
financial services companies. WCC has entered into mortgage loan purchase
agreements with each such correspondent which require specified minimum levels
of experience in origination of non-conventional mortgage loans and provide
representations, warranties and buy-back provisions identical to the
representations and warranties required of the Wilshire Companies for the
securitization of their own loans. Correspondent institutions originate loans
based on guidelines provided by the Company and currently sell the loans to
WCC on a servicing-released basis. As of October 1996, WCC had approximately
seventy-eight approved correspondents. The Company's current strategy is to
continue to solidify and expand the correspondent relationships, which are
subject to a thorough due diligence and approval process to ensure quality
sources of new business.
Underwriting. The Company has adopted guidelines that set forth the specific
lending requirements of the Company as they relate to the processing,
underwriting, property appraisal, closing, funding and delivery of loans to
borrowers. While the Company is in the process of obtaining necessary
licenses, WCC will conduct the underwriting process for the Company. Once a
correspondent has completed its underwriting process it will submit the
initial loan application to WCC. Upon receipt of an application, WCC's
underwriting department will review the application and perform its own
underwriting. Evaluations of initial loan applications will be conducted by
WCC's employees who specialize in the analysis of loans, often with further
specialization based on geographic or collateral specific factors. Initial
loan applications are reviewed for completeness, accuracy, and compliance with
the Company's underwriting criteria and governmental regulations. The
Company's underwriting criteria focuses on debt-to-income ratios, loan-to-
value ratios, current credit reports of potential borrowers, property
appraisals and a potential borrower's job history. As part of the underwriting
process the Company requires an additional field review appraisal of the
collateral to be conducted by an approved third party at the correspondent's
expense.
Loans which clearly conform to the Company's underwriting guidelines are
approved by the underwriting department. Loans which clearly do not conform
are rejected and returned to the correspondent. Loans that present certain
underwriting issues may be returned to correspondents requesting changes or
may be forward to underwriting managers for approval. Variations from the
Company's underwriting guidelines must be approved by an appropriate officer
of the Company.
EUROPEAN OPERATIONS
The Company recently decided to expand its loan acquisition and servicing
activities to encompass the United Kingdom and France with a view towards
future expansion in Western Europe. The Company's expansion strategy involves
understanding each new market's regulatory requirements and tailoring the
Company's acquisitions and servicing to comply with such requirements and
identifying and training management and employees to run the Company's
European operations. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for continuing and
expanding the servicing activities of a company located in the United Kingdom.
See "Recent Developments." The Company is also considering either establishing
its own servicing operation, acquiring an already existing entity or entering
into a joint venture with a company already active in France. Management
believes that conditions in the French real estate market and, to a lesser
degree, in the United Kingdom real estate market are similar to conditions in
the United States real estate market in the late 1980's and early 1990's. The
decline in the real estate market which began in the United States in 1987 and
continued through the early 1990's occurred in the United Kingdom in late 1989
and France in 1992. Since the decline began in France in 1992 the value of
real estate has fallen further than it did in the United States. In addition,
there are currently only a few purchasers of distressed assets in the United
Kingdom and France, which is similar to the way the market for distressed
assets
50
<PAGE>
was in the United States when the RTC first began selling loans in the late
1980s. Based on these facts management believes that there may be
opportunities to acquire Loan Portfolios at favorable prices. In addition,
management believes that there is a demand in the European market for U.S.-
style servicing with its automated systems and detailed investor reporting and
aggressive servicing and work-out approaches. Most of the purchasers of
distressed assets in the United Kingdom and France are U.S. based companies,
which have utilized U.S.-style servicing and investor reporting in connection
with the purchase of distressed assets in the United States and with the
exception of recently originated loans, the servicing and reporting system in
the United Kingdom and France for loans is generally less technologically
developed and more labor intensive.
FUNDING SOURCES
General. The Company, in addition to deposits at the Savings Bank, will have
extensive funding sources available for investment and lending activities from
investment banking firms and institutional investors, including secured term
loans, warehouse lines of credit, repurchase facilities and sales of
participation interests in Loan Portfolios. Substantially all of the Company's
Loan Portfolio investments are expected to utilize borrowed funds, minimizing
the Company's equity investment to the extent possible. Management of the
Company closely monitors rates and terms of competing sources of funds on a
regular basis and generally utilizes the source which is the most cost
effective. Following the Common Stock Offering and Notes Offering, the Company
will continue to rely on these sources of capital, in addition to the proceeds
of the Common Stock Offering and Notes Offering, to finance its operations. As
of the closing of the Common Stock Offering and Notes Offering, certain
existing undrawn lines of credit ($416.0 million as of September 30, 1996)
will be transferred to the Company. Amounts currently drawn under the lines of
credit by the Wilshire Private Companies ($84.0 million as of September 30,
1996) will be transferred to the Company as such amounts are repaid by the
Wilshire Private Companies.
Deposits. The primary source of deposits for the Savings Banks currently is
"wholesale" certificates of deposit. To a lesser extent the Savings Banks
obtain brokered certificates of deposit from national investment banking firms
which pursuant to agreements with the Savings Banks, solicit funds from their
customers for deposit with the banks. As of September 30, 1996, $154.6 million
or 31% of the Savings Banks' total deposits were brokered and $325.6 million
or 67% were wholesale deposits. Wholesale deposits generally are obtained on
more economically attractive terms to the Savings Banks than brokered
deposits.
The Savings Banks' funding strategy has been to offer deposit rates above
those customarily offered by banks and savings and loans in its markets. The
Savings Banks have been able to pursue this strategy because the general and
administrative costs associated with operating the Savings Banks is
significantly lower than traditional banks and savings institutions with
branch office networks. The Savings Banks have generally accumulated deposits
by participating in deposit rate surveys which list the Savings Banks among
the higher rate paying insured institutions, and periodically advertising in
various local market newspapers and other media. However, because the Savings
Banks compete for deposits primarily on the basis of rates, the Savings Banks
could experience difficulties in attracting deposits if they could not
continue to offer deposit rates at levels above those of other banks and
savings institutions. The Orders issued by the OTS currently prohibit the
Savings Banks from increasing their total assets above specified levels. See
"Risk Factors--Risks Related to imposition of Cease and Desist Orders."
51
<PAGE>
The following table sets forth information relating to the Company's
deposits at the dates indicated.
THE COMPANY'S DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ -----------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
checking accounts...... $ 5,192 0.00% $ 3,532 0.00% $ 3,045 0.00% $ -- -- %
NOW and money market
checking accounts...... 1,706 1.82 2,846 2.99 3,170 3.28 3,633 2.96
Saving accounts......... 371 2.10 304 2.38 215 2.25 194 2.50
Certificates of depos-
it..................... 480,266 5.89 296,842 6.15 189,859 5.48 80,994 3.86
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits......... $487,535 5.81% $303,524 6.04% $196,298 5.35% $84,821 3.83%
======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at September 30, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 1,070
3.51-4.50.......................................... 46
4.51-5.50.......................................... 50,126
5.51-6.50.......................................... 409,925
6.51-7.50.......................................... 16,232
7.51-8.50.......................................... 2,867
--------
Total............................................ $480,266
========
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of September 30, 1996.
MATURITIES OF THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
ORIGINAL MATURITY IN MONTHS
-------------------------------
12 OR LESS 13 TO 26 37 OR MORE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances Maturing in 3
Months or Less.......... $145,202 $ 6,394 $ 0
Weighted Avg............ 5.74% 6.57% 0.0%
Balances Maturing in 4 to
12 Months............... $236,176 $36,866 $446
Weighted Avg............ 5.89% 6.32% 6.67%
Balances Maturing in 13
to 36 Months............ -- $54,637 $497
Weighted Avg............ 6.07% 6.98%
Balances Maturing in 37
or More Months.......... -- -- $ 48
Weighted Avg............ 2.76%
</TABLE>
As of September 30, 1996, the Company had $13.2 million of certificates of
deposit in amounts greater than $100,000 maturing as follows: $4.6 million
within three months; $2.5 million over three months through six months; $4.1
million over six months through 12 months; and $2.0 million thereafter.
52
<PAGE>
Borrowings. The following table sets forth information relating to the
Company's borrowings and other interest-bearing obligations at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances............................. $ 0 $ -- $13,000 $ --
Reverse Repurchase Agreements............. 0 13,000 8,500 6,608
--- ------- ------- ------
Total................................... $0 $13,000 $21,500 $6,608
=== ======= ======= ======
</TABLE>
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater
than 30% of stockholders' equity at the end of the period. During each
reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS OF THE COMPANY
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
AT OR FOR THE DECEMBER 31,
NINE MONTHS ENDED ------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:....................
Average amount outstanding dur-
ing the period................. $ 2,396 $ 1,381 $ 5,916 $ --
Maximum month-end balance out-
standing during the period..... $11,000 $ 8,000 $13,000 $ --
Weighted average rate:
During the period............. 5.80% 7.53% 3.85% --
At end of period.............. -- -- 4.33% --
Repurchase agreements:
Average amount outstanding dur-
ing the period................. $35,721 $ 4,122 $ 4,757 $4,507
Maximum month-end balance out-
standing during the period..... $97,000 $14,950 $11,377 $6,654
Weighted average rate:
During the period............. 6.83% 5.62% 4.44% 7.54%
At end of period.............. 0.0% 6.70% 5.81% 3.35%
</TABLE>
The Company, in addition to deposits at the Savings Banks, will have
extensive funding sources available for investment and lending activities. The
following table sets forth the Company's post-Reorganization lending
arrangements and amounts utilized by the Company and the Wilshire Private
Companies as of September 30, 1996.
<TABLE>
<CAPTION>
CURRENT BORROWER AFTER
LENDER BORROWER REORGANIZATION AMOUNT UTILIZED(2)
------ ----------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
COMMITTED FACILITIES:
CS First Boston
Mortgage Capital
Corporation........... Wilshire Private Companies(1) WFC $250 million(5) $67,012
Prudential Securities
Realty Funding
Corp. ................ Wilshire Private Companies(1) WFC(4) $100 million $12,374
UNCOMMITTED FACILI-
TIES(3):
Bear Stearns Mortgage
Capital Corporation... First Bank First Bank $ 10 million --
Bear Stearns Mortgage
Capital
Corporation........... Girard Girard $200 million --
Bear, Stearns Interna-
tional (U.K.)......... Wilshire Private Companies(1) WFC(4) $100 million $ 1,673
CS First Boston Corpo-
ration
(Hong Kong) Limited... Wilshire Private Companies(1) WFC(4) $ 50 million $ 2,912
------------
TOTAL AMOUNT............ $710 million
============
</TABLE>
53
<PAGE>
- --------
(1) On the closing of the Common Stock Offering and the Notes Offering,
existing lines of credit will be transferred to the Company or a wholly
owned Subsidiary of the Company.
(2) Amounts currently drawn under the lines of credit by the Wilshire Private
Companies will be transferred to the Company as they become available.
(3) Though agreements governing such commitments do not specify a minimum or
maximum amount available, the parties have agreed that such agreements may
be used up to the specified amount. Any such agreement may be modified at
any time.
(4) These facilities will be transferred to a wholly owned subsidiary of WFC.
(5) Amount will be increased to $250 million upon transfer to WFC.
Repurchase Facilities. Each of First Bank and Girard entered into a Master
Repurchase Agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC").
Pursuant to these agreements, the parties may enter into transactions in which
First Bank or Girard agrees to transfer to BSMCC mortgage loans or other
financial instruments against the transfer of funds by BSMCC, with a
simultaneous agreement by BSMCC to retransfer such assets at a date certain or
on demand, against the transfer of the borrowed funds by First Bank and
Girard, as the case may be. Though such master repurchase agreements do not
specify a maximum amount available under such agreements, the parties have
currently agreed that such agreement may be used for up to $210 million of
acquisitions in the aggregate. These agreements enable First Bank and/or
Girard to purchase Loan Portfolios with immediate financing from BSMCC which
can then be repaid as First Bank and/or Girard increases its deposits. See "--
Deposits" for a discussion of certain limitations on the ability of the
Savings Banks to increase deposits.
In 1996, the Wilshire Private Companies entered into a master repurchase
agreement with CS First Boston Mortgage Capital Corporation ("FBMCC") pursuant
to which FBMCC has agreed to lend up to $150 million to the Private Companies
for the purchase of portfolios of performing and non-performing mortgage
loans. Pursuant to the agreement, The First Boston Corporation may generally
participate in the securitization of any loans acquired with any funds lent by
FBMCC and will be repaid out of the proceeds of any such structured
transaction. This facility will be increased to $250 million as part of the
transfer to WFC.
In 1996, the Wilshire Private Companies entered into a master repurchase
agreement with an affiliate of Bear, Stearns & Co., Inc. pursuant to which
such affiliate may lend money to the Wilshire Private Companies for the
purchase of portfolios of Subordinate Securities. Though such master
repurchase agreement does not specify a maximum amount available under such
agreement, the parties have currently agreed that such agreement may be used
for up to $100 million of acquisitions. Pursuant to the agreement, Bear,
Stearns & Co., Inc. may generally participate in the securitization of any
portfolio of Subordinate Securities acquired with any funds lent by such
affiliate and will be repaid out of the proceeds of any such structured
transaction.
In 1996, the Wilshire Private Companies entered into a master repurchase
agreement with CS First Boston (Hong Kong) Limited pursuant to which such
affiliate may lend money to the Wilshire Private Companies for the purchase of
portfolios of Subordinate Securities. Though such master repurchase agreement
does not specify a maximum amount available under such agreement, the parties
have currently agreed that such agreement may be used for up to $50 million of
acquisitions. Pursuant to the agreement, The First Boston Corporation may
generally participate in the securitization of any portfolio of Subordinate
Securities acquired with any funds lent by CS First Boston (Hong Kong) Limited
and will be repaid out of the proceeds of any such structured transaction.
Warehouse Facilities. The Wilshire Private Companies have a secured
warehouse financing facility (the "Warehouse Financing Facility") with
Prudential Securities Realty Funding Corp. ("Prudential Securities") of up to
$100 million for the origination or purchase of residential first and second
lien mortgage loans. Pursuant to the agreement, Prudential Securities may
generally participate in the securitization of the mortgage loans acquired
with any funds lent by Prudential Securities and will be repaid out of the
proceeds of any such structured transaction.
FHLB Advances. The Savings Banks obtain advances from the FHLB of San
Francisco upon the security of certain of its assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Savings
Banks have been met. FHLB advances are available to member financial
institutions such as the Savings Banks for investment and lending activities
and other general business purposes. FHLB advances are made
54
<PAGE>
pursuant to several different credit programs, each of which has its own
interest rate, which may be fixed or adjustable, and a range of maturities.
Securitizations. Since the Wilshire Companies's initial use of
securitization in 1995 through September 1996, the Wilshire Companies have
issued $368.7 million of securities through two publicly underwritten and
three privately placed securitizations, including non-performing and sub-
performing mortgage loans, manufactured housing loans, consumer loans and
conventional and non-conforming loans. Securitizations are expected to allow
the Company to increase its loan acquisition and origination volume, reduce
the risks associated with interest rate fluctuations and provide access to
longer term funding sources. The Company currently intends to complete
securitizations either through private placements or in public offerings when
advantageous. The Company is currently in the process of securitizing a pool
of consumer receivables and expects to securitize a portfolio of non-
performing and under-performing assets in the near future.
In a securitization, a company will generally transfer a pool of loans to a
separate entity (a "Special Purpose Entity") in exchange for subordinate
securities ("Subordinate Securities") in the Special Purpose Entity and cash,
which constitutes the proceeds of Senior Securities issued by the Special
Purpose Entity. The cash generally will be used to repay borrowings used to
finance the pool of loans that were acquired by the company. Generally, the
holders of the Senior Securities are entitled to receive scheduled principal
collected on the pool of securitized loans and interest at the pass-through
interest rate on the certificate balance. The Subordinate Securities represent
the subordinated right to receive cash flows from the pool of securitized
loans after payment of the required amounts to the holders of the Senior
Securities and the costs associated with the securitization.
The Company may arrange for credit enhancement for a transaction to achieve
an improved credit rating on the Senior Securities issued if this improves the
level of profitability for such transaction. This credit enhancement may take
the form of an insurance and indemnity policy, insuring the holders of the
Senior Securities of timely payment of the scheduled pass-through interest and
principal. In addition, the pooling and servicing agreements that govern the
distribution of cash flows from the loan pool included in the transaction
typically require over-collateralization as an additional means of credit
enhancement. Over-collateralization may in some cases also require an initial
deposit, the sale of loans at less than par or retention in the Special
Purpose Entity of collections from the pool until a specified over-
collateralization amount has been attained. This retention of excess cash flow
creates a faster amortization of the scheduled balance of the Senior
Securities than the amortization of the principal balance of the securitized
loan pool. The purpose of the over-collateralization is to provide a source of
payment in the event of higher than anticipated credit losses. Losses
resulting from defaults by borrowers on the payment of principal or interest
on the loans in a securitized loan pool will reduce the over-collateralization
to the extent that funds are available and may result in a reduction in the
value of the Subordinate Securities.
The Company intends to retain the servicing rights to the loans it
securitizes and WCC will initially service such loans on the Company's behalf.
See "--Servicing Relationships." In addition, the Company may, in the future,
consider using Subordinated Securities that it purchases or acquires pursuant
to a securitization in a structured transaction, including a securitization.
SERVICING RELATIONSHIPS
The Company believes that WCC's loan servicing experience, its highly
trained servicing personnel and its proprietary software and U.S. mortgage
loan database has allowed the Wilshire Companies to more effectively value and
price Loan Portfolios. As of September 30, 1996, WCC was servicing
approximately $1.4 billion principal amount of loans, including approximately
$502.0 million for the Savings Banks.
The Company, WFC and WCC will enter into a non-exclusive loan servicing
agreement (the "Loan Servicing Agreement") pursuant to which WCC will provide
loan portfolio management services, including billing, portfolio
administration and collection services for all loans owned, acquired or made
by the Company or its affiliates (including new third party servicing) (the
"Loans"). Pursuant to the Loan Servicing Agreement, the Company shall be
required to pay a servicing fee equal to a market rate based on comparable
fees charged by unaffiliated third parties in arm's length transactions for
similar types of loans at the time of acquisition. WCC
55
<PAGE>
has also agreed to license its proprietary computer software to the Company
and WFC. WCC has agreed for a period of twenty years not to compete with or be
engaged in the same business and in the same areas as currently conducted by
the Company, including purchasing and servicing loans.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans and assume certain assets and liabilities of WCC relating thereto
(the "Servicing Transfer"), provided that, the Company or one of its
subsidiaries has obtained the appropriate regulatory approvals.
Notwithstanding the foregoing, the Company may request that the Servicing
Transfer occur on an earlier date, provided that the foregoing conditions are
met. WCC, in its sole discretion may refuse to effect the Servicing Transfer
prior to the end of the second year. The Servicing Transfer will occur
automatically on the third anniversary of the closing of the Common Stock
Offering, unless prohibited by applicable law. After the Servicing Transfer
WCC will permit the Company, subject to certain conditions, to have access to
its books, records and forms to ensure the orderly transfer of the servicing.
The fees and costs to be paid by WCC for the servicing of its loans shall be
the Company's average costs for such collection as specified in the Loan
Servicing Agreement.
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC pursuant to which WCC provides loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Savings
Banks. WCC receives a fee equal to ten dollars per month for each performing
loan serviced (which the Company believes is a below-market rate). The loan
servicing agreements are year-to-year and may be terminated by the Savings
Banks or WCC by giving notice at least sixty days prior to renewal date. It is
anticipated that the Savings Banks will terminate their agreements with WCC
once WCC's servicing operations have been transferred to WSC. At such time the
Savings Banks would enter into an agreement with WSC pursuant to which WSC
would service the mortgage loans and other assets of the Savings Banks.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific Discounted Loan portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Discounted Loan portfolios. To date each of these loan
servicing agreements provides that WCC shall be entitled to an amount equal to
(i) all costs and expenses incurred by WCC for providing loan portfolio
management services, and (ii) an amount equal to twenty-five percent of the
amount collected on the specified Discounted Loan portfolios (other than
escrow payments, if any) which is excess of the initial payments made by the
Savings Banks to acquire the Discounted Loan portfolios. Due to the OTS
requirements, servicing fees for new Discounted Loan portfolios will be chosen
by the board of directors of the Savings Banks based upon fees charged by WCC
in any other appropriate third party servicing agreement on a portfolio basis.
WCC's servicing staff has extensive experience in servicing all types of
financial assets and over the years the WCC has developed clear cut servicing
procedures designed to effectively service and if necessary liquidate a loan.
The system, which is able to service a variety of loans, provides WCC with,
among other things, payment-processing, cashiering, collection and reporting
functions.
In addition, the servicing system and procedures are structured to deal
specifically with problem assets and discounted loans and to maximize in a
timely manner cash recovery on each loan in a Loan Portfolio. If a loan
becomes delinquent or once a non-performing loan is acquired, WCC enters
information with respect to each loan that is acquired in its computer system.
WCC then attempts to resolve each loan in accordance with specified procedures
as expeditiously as possible. The various resolution alternatives generally
include the following: (i) the borrower brings the loan current in accordance
with original or modified terms, (ii) the borrower repays the loan or a
negotiated amount of the loan, (iii) the borrower agrees to deed the property
to WCC in lieu of foreclosure, and (iv) WCC forecloses on the loan and the
property is acquired at the foreclosure sale either by a third party or by the
WCC. The general goal of WCC's asset resolution process is to maximize in a
timely manner cash recovery on each loan.
56
<PAGE>
Under the Orders, the Savings Banks can terminate WCC's servicing agreement
if WCC fails to complete a comprehensive audit of the Savings Banks'
adjustable rate mortgages serviced by WCC, fails to correct certain
information system items, or fails to deliver certain statements to borrowers.
NON-TRADITIONAL BANKCARD PROCESSING OPERATIONS
The Company plans to continue development of its non-traditional bankcard
processing operations, which generate revenues through merchant discounts and
processing fees for Visa and Mastercard transactions. The Company's bankcard
processing operations focus on certain high-risk market niches, principally
mail order/telephone order and audio-text where the Company believes it
obtains higher returns on processing transactions. Revenues from the bankcard
operation which commenced in the third quarter have demonstrated strong growth
increasing from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1
million during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using its existing
infrastructure.
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the
Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio (excluding
discounted loans) which are past due 90 days or more and to place such loans
on non-accrual status. The Company does not accrue interest on Discounted
Loans (unless such loan later becomes performing). Loans also may be placed on
non-accrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated.
NON-PERFORMING LOANS IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential........... $31,112 $10,996 $ 5,554 $1,285
Multi-family residential............ 1,583 270 1,471 379
Commercial real estate and land..... 7,301 910 4,207 5,354
Consumer and other loans............ 4,586 503 400 175
------- ------- ------- ------
Total............................. $44,582 $12,679 $11,632 $7,193
======= ======= ======= ======
Non-performing loans as a percentage
of:
Total loans(2)...................... 9.11% 4.46% 5.95% 9.71%
Total assets........................ 8.36% 3.71% 5.04% 7.27%
Allowance for loan losses as a per-
centage of:
Total loans(2)...................... 8.19% 3.60% 3.72% 5.83%
Non-performing loans................ 89.92% 80.74% 62.50% 59.97%
</TABLE>
- --------
(1) This table does not include Discounted Loans although a substantial
portion of such loans are non-performing.
(2) Total loans is exclusive of Discounted Loans, undisbursed loan proceeds,
unaccreted discount and allowance for loan losses. For information
relating to the Company's Discounted Loan portfolio, see "--Loan
Portfolio."
57
<PAGE>
Real Estate Owned. Properties acquired through foreclosure or by deed-in-
lieu thereof are valued at the lower of cost or fair value. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to sell. Holding and maintenance costs related to properties
are recorded as expenses in the period incurred. Deficiencies resulting from
valuation adjustments to real estate owned subsequent to acquisition are
recognized as a valuation allowance. Subsequent increases related to the
valuation of real estate owned are reflected as a reduction in the valuation
allowance, but not below zero. Increases and decreases in the valuation
allowance are charged or credited to income, respectively.
The following table sets forth certain information relating to the Company's
real estate owned (by source of acquisition) at the dates indicated.
REAL ESTATE OWNED BY THE COMPANY
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1996 1995 1994 1993
------------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential.............. $ 663(1) $ 3,226 $ -- $ --
Multi-family residential............... -- -- -- --
Commercial and other mortgage loans.... 290 66 -- --
------ ------- ------ ------
Total................................ 953 3,292 -- --
Loan portfolio:
Singe-family residential............... 787 1,676 613 764
Multi-family residential............... 275 611 254 --
Commercial and other mortgage loans.... 855 578 464 328
------ ------- ------ ------
Total Portfolio...................... 1,917 2,865 1,331 1,092
Total................................ 2,870 6,157 1,331 1.092
Allowance for total losses............... (356) (1,193) (123) (55)
------ ------- ------ ------
Real estate owned, net................... $2,514 $ 4,964 $1,208 $1,037
====== ======= ====== ======
</TABLE>
- --------
(1) The differences between the balance at December 31, 1995 and September 30,
1996 reflects the securitization of certain single-family residential
loans and properties.
The following table sets forth certain geographical information as of
September 30, 1996 related to the Company's real estate owned attributable to
the Company's total loan portfolio.
REAL ESTATE OWNED ATTRIBUTABLE TO THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL AND
SINGLE FAMILY RESIDENTIAL COMMERCIAL REAL ESTATE
----------------------------- --------------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
-------------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California............. $399 10 $1,130 4
Connecticut............ 366 5 91 1
Texas.................. 325 10 29 5
New Jersey............. -- -- 170 1
New York............... 101 1 -- --
Other.................. 259 18 -- --
-------------- ----------- ------------ ---------
Total................ $1,450 44 $1,420 11
============== =========== ============ =========
</TABLE>
58
<PAGE>
Classified Assets. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is
not warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
Excluding assets which have been classified loss and fully reserved by the
Savings Banks, the Savings Banks' classified assets as of September 30, 1996
consisted of $63.5 million of assets classified as substandard and $3.1
million of assets classified as doubtful. The substandard and doubtful asset
classifications include $2.8 million and $3.1 million of Discounted Loans,
respectively. In addition, at the same date, $41.6 million of assets were
designated as special mention, which includes $10.9 million of Sub-Prime Auto
Loans.
Allowances for Losses. The Company maintains an allowance for loan losses at
a level believed adequate by management to absorb potential losses in the loan
portfolio. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible, or in the case
of automobile and other consumer loans, when payments are delinquent by more
than 120 days.
The Company uses its internal asset review system to identify and evaluate
impaired loans and to classify loans as special mention, substandard,
doubtful, loss. These terms correspond to varying degrees of risk that the
loans will not be collected in part or in full. The Company's policy is to
evaluate smaller-balance, homogenous pools of loans for impairment on a pooled
basis. These are primarily single-family residential and automobile and other
consumer loans. All other loans, whether Discounted Loans or other loans, are
evaluated for impairment on a loan-by-loan basis. All loans are subject to
potential classification as special mention, substandard, doubtful, or loss.
The frequency at which a specific loan is subjected to internal asset review
depends on the type and size of the loan and the presence or absence of other
risk factors, such as delinquency and changes in collateral values.
The allowance for loan losses comprises specific valuation allowances
established for impaired loans and for certain other classified loans, and
general valuation allowances. Specific valuation allowances are based on the
estimated fair value of the collateral for impaired or troubled collateral
dependent loans, in most cases. General valuation allowances are based on
management's periodic analyses of the composition of the loan portfolio,
delinquencies, loan classifications, historical loss experience, peer group
data, OTS guidelines, economic factors and other relevant information. These
estimation techniques apply to allowances established for both loans and
Discounted Loans.
When the Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by
59
<PAGE>
allocating a portion of the purchase discount deemed to be associated with
measurable credit risk. The allocation is based on the analyses of specific
and general valuation allowances discussed above. Amounts allocated to the
allowance for loan losses from purchase discounts do not increase the
provision for loan losses recorded in the statement of operations; rather they
decrease the amounts of the purchase discounts that are accreted into the
interest income over the lives of the loans. If, after the initial allocation
of the purchase discount to the allowance for loan losses, management
subsequently identifies the need for additional allowances against Discounted
Loans, the additional allowances are established through charges to the
provision for loan losses.
Accretion of purchase discounts (excluding amounts allocated to the
allowance for loan losses) and interest income on Discounted Loans are
recorded based on cash receipts. The same income recognition policies apply to
loans other than Discounted Loans when they are deemed to be non-performing,
generally when they are 90 days or more delinquent.
The Savings Banks were acquired at substantial discounts to their respective
book values, reflecting the poor quality of their assets and in the case of
First Bank, an expected imminent regulatory takeover. As part of the
acquisition, the Company acquired a substantial volume of impaired loans,
which required the Savings Banks to establish allowances for loan losses. In
addition, the OTS, as part of its examination process, periodically reviews
the Savings Banks' allowances for losses and the carrying values of assets.
First Bank and Girard increased their allowances for loan losses with
respect to the Inherited Loans by $4.8 million through September 30, 1996. In
the fourth quarter of 1995 and the first quarter of 1996, the Savings Banks
acquired approximately $24.5 million of Sub-Prime Auto Loans. Under OTS
regulations the Savings Banks have been required to write-off all auto loans
in excess of 120 days delinquent, notwithstanding that the Savings Banks
retain the cars as collateral. The aggregate portfolio of Sub-Prime Auto Loans
purchased is approximately 3,000 loans, approximately 65.9% of which have
become delinquent. The Savings Banks have established reserves aggregating
$8.6 million through the third quarter of 1996, including a 10% reserve on
such loans which are current.
In the third quarter of 1996, the Company established $4.5 million of
reserves for the Sub-Prime Auto Loans so that as of September 30, 1996
reserves have been provided for all loans in excess of 60 days delinquent.
Although the Company believes its allowances for loan losses are now adequate,
future additions to these allowances, in the form of provisions for losses on
loans, may be necessary due to changes in economic conditions, increases in
the size of the Company's loan portfolio and the performance of the loan
portfolio. The following table sets forth the Company's provision for
estimated losses on loans, net of recoveries, for the nine months ended
September 30, 1996.
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
------------- ----------
(DOLLARS IN THOUSANDS)
------------------------
<S> <C> <C>
Inherited Loans.................................. $ 4,774 30.3%
Sub-Prime Auto Loans............................. 8,583 54.5%
Other Purchased Loans............................ 2,394 15.2%
----------- ----------
Total provision for estimated losses on loans.... $ 15,751 100.0%
=========== ==========
</TABLE>
60
<PAGE>
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's loan portfolio and Discounted Loan portfolio by
category of loan and the percentage of loans in each category to total loans
in the respective portfolios at the dates indicated. The Company's allowances
for losses includes purchased discount.
COMPANY'S TOTAL ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan portfolio:
Real estate.......................... $34,825 $ 9,830 $ 6,948
Non-real estate...................... 5,261 407 322
Discounted Loan portfolio............ 6,218(1) 15,414 431
------- ------------ -----------
Total Allowances................... $46,304 $ 25,651 $ 7,701
======= ============ ===========
</TABLE>
- --------
(1)The difference between the balance at December 31, 1995 and September 30,
1996 reflects a securitization.
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's total loan portfolio during the periods
indicated.
ACTIVITY IN COMPANY'S ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period... $25,651 $ 7,701 $ 4,314
Provision for loan losses...... 15,751 4,266 2,173
Allocation from purchased loan
discounts..................... 15,972 19,007 2,809
Charge-offs:
Real estate.................. 10,394 5,096 1,620
Non-real estate.............. 2,100 308 46
------- ------------ -----------
Total charge-offs............ 12,494 5,404 1,666
Recoveries:
Real estate.................. 1,361 81 71
Non-real estate.............. 63 -- --
------- ------------ -----------
Total Recoveries............. 1,424 81 71
------- ------------ -----------
Net (charge-offs) recoveries... (11,070) (5,323) (1,595)
------- ------------ -----------
Balance, end of period......... $46,304 $ 25,651 $ 7,701
======= ============ ===========
Net (charge-offs) recoveries as
a percentage of average loan
portfolio..................... (2.5)% (2.2)% (1.4)%
</TABLE>
61
<PAGE>
Delinquency. The table below sets forth the delinquency status of the
Company's loan portfolio (excluding Discounted Loans) at each of the dates
indicated.
DELINQUENCY IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
NINE MONTHS ENDED -------------------------------------
SEPTEMBER 30, 1996 1995 1994
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of Delinquency:
30-59 days............ $17,956 3.7% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 10,577 2.2 3,037 1.1 2,202 1.1
90 days or more(2).... 44,582 9.1 12,679 4.5 11,632 6.1
------- ---- ------- --- ------- ---
Total loans delin-
quent.............. $73,115 15.0% $19,442 6.9% $18,347 9.6%
======= ======= =======
</TABLE>
- --------
(1) This table excludes Discounted Loans.
(2) All loans delinquent 90 days or more were on nonaccrual status.
(3) Increase is primarily due to Inherited Loans, Sub-Prime Auto Loans and
purchased sub-performing residential loans.
INVESTMENT ACTIVITIES
Investment Securities. Investment securities consist primarily of U.S.
Government securities and required investment in FHLB stock.
The following table sets forth the Company's investment securities available
for sale and held for investment at the dates indicated:
THE COMPANY'S INVESTMENT SECURITIES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------
1996 1995 1994 1993
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.......... $ 6,483 $ 9,083 $10,943 $ 6,632
Held to maturity
U.S. Government securities.......... 7,425 6,470 4,505 --
Mortgage-backed securities.......... 22,380 13,119 14,439 14,787
FHLB stock(1)....................... 2,911 1,421 1,612 564
------- ------- ------- -------
Total............................. 32,716 21,010 20,556 15,351
------- ------- ------- -------
Total investment securities......... $39,199 $30,093 $31,499 $21,983
======= ======= ======= =======
</TABLE>
- --------
(1) As a member of the FHLB of San Francisco, the Savings Banks are required
to purchase and maintain stock in the FHLB of San Francisco in an amount
equal to at least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
year or 3% of borrowings, whichever is greater.
PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 5,000 square feet of office space from a
corporation which is beneficially owned by Andrew A. Wiederhorn and Lawrence
A. Mendelsohn. See "Certain Relationships and Related Transactions." The
Savings Banks also rent approximately 8,000 sq. ft. of office space in two
locations in Portland, Oregon from a corporation which is beneficially owned
by Messrs. Wiederhorn and Mendelsohn. See "Certain Relationships and Related
Transactions." Girard leases its branch office in La Jolla, California
pursuant to a lease expiring May 31, 1997. First Bank leases its branch office
in Beverly Hills, California and office space for its merchant bankcard
operations in Calabasas, California pursuant to leases expiring February 29,
2000 and November 30,
62
<PAGE>
1999, respectively. The Company also leases office space in London, England
pursuant to a month-to-month lease. The Company believes its facilities are
both suitable and adequate for its current business purposes.
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving a competitive advantage in acquiring Loan Portfolios, minimizing
operating costs and increasing overall profitability. The Company uses
proprietary software which was developed over a period of years by the
Wilshire Companies. In addition to standard industry software applications,
the Wilshire Companies have internally developed fully integrated proprietary
applications designed to provide decision support and automation of portfolio
tracking and reporting. The Company's systems have significant additional
capacity for expansion without commensurate cost increases.
The proprietary software packages developed for asset resolution use
advanced financial models to support the resolution strategy, as well as track
performance against specified timeliness for each procedure. The system
permits immediate access to pertinent loan information and the automatic
preparation of letters and notices to borrowers. The Company also maintains a
centralized data warehouse.
EMPLOYEES
As of September 30, 1996, the Savings Banks had 46 employees. As of the
closing of the Common Stock Offering and the Notes Offering the Company and
its subsidiaries are expected to have approximately 80 full-time and shared
employees in the United States and 6 employees in the United Kingdom. The
employees are not represented by a collective bargaining agreement, and
management believes that it has good relations with its employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean-up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future.
In the course of its business, the Company has acquired and may acquire in
the future, properties securing loans that are in default. Although to date
the Company primarily lends to owners of and purchases loans secured by
residential properties, there is a risk that the Company could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury
and investigation and clean-up costs incurred by such parties in connection
with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
such property.
COMPETITION
The Company's competition in the financial services business includes
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. Competition in loan
markets can take many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees, and interest rates. The Company believes that it
is able to compete on the basis of providing
63
<PAGE>
prompt and responsive service and its ability to analyze and purchase
performing, sub-performing and discounted loans secured by varied collateral.
The Company also faces competition in its discounted loan acquisition
activities. Discounted loans are generally acquired in auctions or competitive
bid circumstances. Although many of the Company's competitors have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage relative to many of its competitors as a result of its
experience in servicing and resolving troubled loans, its large investment in
proprietary software, technology and other resources which are necessary to
conduct its business, and the strategic relationships and contacts which it
has developed in connection with these activities.
64
<PAGE>
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition
and prospects of the Savings Banks and the Company can be materially affected
not only by management decisions and general economic conditions, but also by
applicable statutes and regulations and other regulatory pronouncements and
policies promulgated by regulatory agencies with jurisdiction over the Savings
Banks and the Company, such as the OTS and the FDIC. The effect of such
statutes, regulations and other pronouncements and policies can be
significant, cannot be predicted with a high degree of certainty and can
change over time. Moreover, such statutes, regulations and other
pronouncements and policies are intended to protect depositors and the
insurance funds administered by the FDIC, and not stockholders or holders of
indebtedness which is not insured by the FDIC.
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-
affiliated parties, as defined. In general, these enforcement actions must be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief
summaries thereof as in effect on the date of this Prospectus. This discussion
is not intended to constitute and does not purport to be a complete statement
of all legal restrictions and requirements applicable to the Company and the
Savings Banks and all such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and other regulatory
pronouncements.
Recent Regulatory Examinations. Following examinations of the Savings Banks
and WAC by the OTS in 1994, 1995 and 1996, the OTS issued Reports of
Examination that were critical of the Savings Banks and WAC in a number of
respects. These regulatory concerns initially resulted in the OTS requiring
First Bank to enter into a Supervisory Agreement on June 8, 1995. The
Supervisory Agreement required First Bank to (a) develop plans and procedures
concerning (i) reduction of non-performing assets, (ii) internal asset review,
(iii) asset monitoring, (iv) appraisals, (v) loan underwriting, (vi) loan
purchases; (b) enhance recordkeeping; (c) develop requirements to ensure that
the servicing of loans by WCC is satisfactory; and (d) maintain its separate
corporate existence. In addition, the Supervisory Agreement required First
Bank to maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of the Assistant Regional Director of
the OTS--West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised First
Bank that it had not fully complied with the terms of the Supervisory
Agreement and that both Savings Banks had failed in a number of respects to
address regulatory concerns raised in the 1994 and 1995 examination reports.
The OTS also expressed continuing concerns regarding the adequacy of
management of First Bank in light of its business activities. As a result of
these issues, the OTS replaced the Supervisory Agreement with a Cease and
Desist Order, effective October 31, 1996. Given the similar nature of Girard's
business activities, the OTS has also issued a Cease and Desist Order to
Girard similar to the Order issued to First Bank, also effective October 31,
1996. The issuance of a cease and desist order is generally evidence of an
increased level of regulatory concern regarding the subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well- capitalized" under OTS
regulations. The Orders further require that the Savings Banks appropriately
risk-weight their assets and off-balance sheet items pursuant to OTS
regulations and establish and thereafter maintain internal controls sufficient
to ensure the accuracy and integrity of the calculation of their regulatory
capital ratios. The Orders also require the Savings Banks to: (a) revise
policies and procedures concerning (i) internal asset reviews, (ii) the
allowances for loan and lease losses, (iii) loan purchases, (iv) internal
audits and (v) hedging transactions;
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(b) develop plans to augment the depth and expertise of the management teams;
(c) revise business plans; (d) modify certain policies concerning the
accounting for loan discounts; (e) improve monitoring of (i) interest rate
risk, (ii) asset classifications (e.g., as held for sale versus held to
maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and
(h) enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Savings Banks
submit to the OTS, by certain specified dates, various policies, plans and
reports on other actions to comply with the Orders. In some cases, OTS
approval of such information is required.
Specifically, among other things, the Orders require that the Savings Banks
revise and submit to the OTS their internal asset review policies and
procedures (the "IAR Policies") to provide guidance on identifying and
classifying troubled, collateral dependent loans under OTS regulatory guidance
and, for purposes of ensuring the independence of the internal asset review
process, to require that loan underwriting, servicing and purchasing functions
be generally segregated from the credit review function. In addition, the
Orders require the Savings Banks to develop, implement and maintain an
effective internal asset review system that provides for adequate internal
controls to ensure that management timely reviews and classifies assets under
the IAR Policies.
The Orders also require the Savings Banks to revise and submit to the OTS
their policies and procedures for allowances for loan and lease losses (the
"ALLL Policies") regarding the factors considered in setting loan loss
allowances and to provide adequate internal controls to ensure that management
and the Savings Banks comply with the revised ALLL Policies. Under the Orders,
when the Savings Banks report quarterly to the OTS on their progress in
implementing the ALLL Policies, the Savings Banks must also submit their
reserve analyses for the preceding calendar quarter.
The Orders also require that the Savings Banks revise and submit to the OTS
their loan purchase policies and procedures (the "Loan Purchase Policies") to
provide specific guidance on due diligence scope and sampling, assign
personnel to oversee due diligence activities and require such personnel to
ensure that all diligence is completed in accordance with the Loan Purchase
Policies and to provide specific guidance regarding the use and reliance on
broker price opinions. Under the Orders, the Savings Banks are directed to
establish and maintain sufficient internal controls to confirm that loan data
for all purchased loans meet certain minimum standards set by the Savings
Banks and to identify loan documentation deficiencies prior to purchase.
The Orders require that the Savings Banks submit to the OTS an amended
accounting policy that requires management to establish and adhere to
appropriate guidance and procedures for the amortization of discounts on
Discounted Loans, to establish appropriate reserves on Discounted Loans prior
to recognizing the yield adjustment on such loans into income and to
demonstrate the accuracy of the yield adjustment component of the discount.
In connection with the requirements of the Orders regarding asset liability
management, the Savings Banks are required to submit to the OTS a hedging
policy that fully complies with relevant accounting guidance and that
establishes written guidelines to ensure the Savings Banks document their
hedging strategy. In addition, the Savings Banks are required to submit to the
OTS a plan to develop or obtain internal expertise and resources necessary to
measure, monitor and model the Savings Banks' interest rate risk.
The Orders provide that the Savings Banks must submit a plan detailing how
WCC will complete a comprehensive audit of certain of its servicing activities
for the Savings Banks and take such action to ensure that WCC fully implements
the results of such audit. Further, the Orders require that the Savings Banks
take corrective actions specified, and adhere to the controls developed, in
the audit.
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Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging Arthur Andersen LLP to review
management's implementation of corrective actions required by the OTS,
(iii) increasing the size of the internal asset review department, and (iv)
revising the internal asset review policy. The Company is also in the process
of hiring a manager to complete the development and implementation of an
effective internal asset review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without further
modification or will not impose further restrictions on the Savings Banks.
OTS Growth Restrictions. Since June 30, 1995, First Bank has had limited
ability to increase deposits due to the provisions of an OTS Supervisory
Agreement which prohibited First Bank from increasing assets above specified
levels. Accordingly, the Company's asset growth has principally been financed
through the raising of deposits at Girard. However, due to the issuance of the
Orders, the Company will not be able to utilize the Savings Banks as vehicles
for growth until and unless the Orders are lifted or modified. The Orders
prohibit First Bank and Girard from increasing their total assets, as measured
at the end of each calendar quarter, above $145 million and $408 million,
respectively, unless such increase is an amount that represents the total net
interest credited on deposit liabilities earned during that quarter plus any
increase permitted under the Orders in prior quarters.
SAVINGS AND LOAN HOLDING COMPANIES
The Company is a savings and loan holding company that is regulated and
subject to examination by the OTS. The activities of savings and loan holding
companies are governed by the provisions of the Home Owners' Loan Act, as
amended (the "HOLA"). Pursuant to the HOLA, a savings and loan holding company
may not (i) acquire control of a savings association or savings and loan
holding company without prior OTS approval; (ii) acquire, except with prior
OTS approval, by process of merger, consolidation, or purchase of assets of
another savings association or savings and loan holding company, all or
substantially all of the assets of any such association or holding company; or
(iii) acquire, by purchase or otherwise, more than 5% of the voting shares of
a savings association that is not a subsidiary, or of a savings and loan
holding company that is not a subsidiary. In considering whether to grant
approval for any such transaction, the OTS will take into consideration a
number of factors, including the competitive effects of the transaction, the
financial and managerial resources and future prospects of the holding company
and the institution involved, and the compliance records of such subsidiaries
with the Community Reinvestment Act ("CRA").
Federal law empowers the Director of the OTS to take substantive action when
he determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of a savings and
loan holding company's subsidiary savings institutions. In addition, the
Director of the OTS has oversight authority with respect to all holding
company affiliates. Specifically, the Director of the OTS may, as necessary
(i) limit the payment of dividends by the savings institutions; (ii) limit
transactions between the savings institutions, the holding company and the
subsidiaries or affiliates of either; or (iii) limit any activities of the
savings institutions that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institutions. Any such limits would be issued in the form of a directive
having the legal effect of a cease and desist order.
Activities Limitations--The Company is currently classified as a multiple
savings and loan holding company under applicable law as a result of its
ownership of the two Savings Banks, First Bank and Girard. A savings and loan
holding company which has only one insured institution subsidiary (known as a
"unitary" savings and loan holding company) and which subsidiary qualifies as
a qualified thrift lender ("QTL"), described below,
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generally has the broadest authority to engage in various types of business
activities with few restrictions on its activities, except that historically
savings and loan holding companies have not been permitted to acquire or be
acquired by an entity engaged in securities underwriting or market making. A
holding company that owns two or more financial institutions, such as the
Company, or whose sole subsidiary fails to meet the QTL test is subject to the
activities limitations applicable to multiple savings and loan holding
companies. In general, a multiple savings and loan holding company (or
subsidiary thereof that is not an insured institution) may not commence or
continue for more than a limited period of time after becoming a multiple
savings and loan holding company (or a subsidiary thereof), any business
activity other than (i) furnishing or performing management services for a
subsidiary insured institution; (ii) conducting an insurance agency or an
escrow business; (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary insured institution; (iv) holding or managing
properties used or occupied by a subsidiary insured institution; (v) acting as
trustee under deeds of trust; (vi) those activities previously directly
authorized by the OTS by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) subject to prior
approval of the OTS, those activities authorized by the FRB as permissible
investment for bank holding companies.
Restrictions on Transactions with the Savings Banks--The Savings Banks are
subject to restrictions in their dealings with the Company and the Company's
non-bank subsidiaries under HOLA and certain provisions of the Federal Reserve
Act ("FRA") that are made applicable to savings institutions by HOLA and OTS
regulations.
A savings institution's transactions with its affiliates are subject to
limitations set forth in the HOLA and OTS regulations, which incorporate
Sections 23A, 23B, 22(g) and 22(h) of the FRA and Regulation O adopted by the
FRB. Under Section 23A, an "affiliate" of an institution is defined generally
as (i) any company that controls the institution and any other company that is
controlled by the company that controls the institution, (ii) any company that
is controlled by the shareholders who control the institution or any company
that controls the institution or (iii) any company that is determined by
regulation or order to have a relationship with the institution (or any
subsidiary or affiliate of the institution) such that "covered transactions"
with the company may be affected by the relationship to the detriment of the
institution. "Control" is determined to exist if a percentage stock ownership
test is met or if there is control over the election of directors or the
management or policies of the company or institution. "Covered transactions"
generally include loans or extensions of credit to an affiliate, purchases of
securities issued by an affiliate, purchases of assets from an affiliate
(except as may be exempted by order or regulation), and certain other
transactions.
THE SAVINGS BANKS
General. The Savings Banks are federally-chartered savings banks organized
under HOLA. As such, the Savings Banks are subject to regulation, supervision
and examination by the OTS. The deposit accounts of the Savings Banks are
insured up to applicable limits by the FDIC through the SAIF and, as a result,
the Savings Banks also are subject to regulation, supervision and examination
by the FDIC.
The business and affairs of the Savings Banks are regulated in a variety of
ways. Regulations apply to, among other things, insurance of deposit accounts,
capital ratios, payment of dividends, liquidity requirements, the nature and
amount of the investments that the Savings Banks may make, transactions with
affiliates, community and consumer lending laws, internal policies and
controls, reporting by and examination of the Savings Banks and changes in
control of the Savings Banks.
Regulatory Capital Requirements. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed
on national banks. The OTS also is authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case
basis. The Orders require that both Savings Banks maintain minimum capital
ratios required of institutions to be deemed "well-capitalized" commencing
December 31, 1996.
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Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of
adjusted total assets (as defined in the regulations), core capital equal to
3% of adjusted total assets and total capital (a combination of core and
supplementary capital) equal to 8% of risk-weighted assets. For these
purposes, tangible capital is core capital less all intangibles other than
qualifying mortgage servicing rights. Since neither Savings Bank had
intangibles at September 30, 1996, tangible Capital was the same as core
Capital for both Savings Banks. Core capital includes common stockholders'
equity, non-cumulative perpetual preferred stock and related surplus' minority
interests in the equity accounts of fully consolidated subsidiaries and
certain non-withdrawable accounts and pledged deposits.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements, subject to certain limitations, and loan and lease loss general
valuation allowances. General valuation allowances can generally be included
up to 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items,
are multiplied by a risk weight based on the risks inherent in the type of
assets. The risk weights assigned by the OTS for principal categories of
assets currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred
tax assets represent deferred tax assets, reduced by any valuation allowances,
in excess of deferred tax liabilities.) Application of the limit depends on
the possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited to taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and
carryforwards), or its tax-planning strategies, such deferred tax assets are
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year of the quarter-end report date or 10% of core
capital. The foregoing considerations did not affect the calculation of the
Savings Banks' regulatory capital as of September 30, 1996.
The OTS promulgated a regulation that requires that an interest-rate ("IRR")
risk component be included in the risk-based capital regulation. However, the
effective date of the interest-rate risk component has been delayed. Under the
rule, an institution with a greater than specified level of interest rate risk
is subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution would be required to maintain additional capital
in order to comply with the risk-based capital requirement. Had the interest-
rate risk component been in effect at June 30, 1996, the Savings Banks'
capital ratios would not have been affected by this rule.
Insurance of Accounts. As an FDIC-insured institution, the Savings Banks are
required to pay deposit insurance premiums to the SAIF as administered by the
FDIC. The SAIF maintains a fund to insure deposits of savings institutions,
including the Savings Banks. The SAIF also maintains a fund to insure the
deposits of institutions, such as the Savings Banks, that were previously
insured by the Federal Savings and Loan Insurance Corporation ("FSLIC"). The
SAIF historically has had three major obligations: to fund losses associated
with the failure of institutions with SAIF-insured deposits; to increase the
SAIF's reserves to 1.25% of insured deposits; and to make interest payments on
debt incurred to provide funds to the FSLIC (the "FICO debt"). Under current
FDIC regulations, institutions are assigned to one of three capital groups
based on the level of an institution's capital, "well-capitalized,"
"adequately capitalized," or "undercapitalized," which are defined in the same
manner as in the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the
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institution's primary federal banking regulator, resulting in nine assessment
classifications. Deposit insurance premium assessment rates currently range
from .23% for well capitalized institutions with only a few supervisory
concerns to .31% for undercapitalized institutions with substantial
supervisory concerns.
Recently proposed FDIC regulations would reduce future semi-annual SAIF
assessments for savings institutions such as the Savings Banks. The proposed
reduced assessment schedule would reduce rates to .18% for well capitalized
with only a few minor supervisory concerns to .27% for undercapitalized
institutions with substantial supervisory concerns for the period October 1,
1996 through December 31, 1996 and thereafter to .0% to .27%, respectively. In
addition, savings institutions such as the Savings Banks will pay an
additional .0645% in semi-annual premiums to cover costs of the FICO debt.
Recapitalization of SAIF. The SAIF, due to the large number of failed
savings institutions in the late 1980's and early 1990's, has been unable to
attain the statutorily-required reserve ratio of 1.25% of insured deposits.
Legislation enacted on September 30, 1996, provides for a special assessment
to be collected no later than 60 days after the date of enactment based on
deposits held as of March 31, 1995, at a rate sufficient to provide the SAIF
with reserves equal to 1.25% of total deposits. The FDIC currently estimates
that the special assessment rate will be 65.7 basis points. Based on the
Savings Banks' deposits as of March 31, 1995, the one-time special assessment
at 67.5 basis points resulted in the Savings Banks' incurring a pre-tax charge
of approximately $1.4 million.
The law also provides that the SAIF and the Bank Insurance Fund ("BIF") BIF
shall be merged on January 1, 1999, provided that all savings associations
have converted to banks by that date, but does not provide legislation to
implement such a conversion. The law further provides that between January 1,
1997, and December 31, 1999 (or the date the last savings association ceases
to exist, whichever is earlier), the interest costs for FICO debt will be
shared by SAIF and BIF assessments, with SAIF institutions paying about 60% of
the dollar amount and BIF institutions paying about 40% of the dollar amount.
If the BIF and SAIF have not merged by January 1, 2000, these FICO interest
costs will be assessed pro rata, with all insured institutions paying the same
rate. The law also includes a provision intended to limit "deposit shifting"
from a SAIF-insured institution to a BIF-insured affiliate.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Banks, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed by an
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Savings Banks' deposit
insurance.
Prompt Corrective Action. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii)
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"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier
I leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total risk-
based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio
that is less than 3.0% or a Tier I leverage capital ratio that is less than
3.00%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to adjusted total assets that is equal to or less than 2.0.% The
regulations also permit the appropriate federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. As of September 30,
1996, the Savings Banks were "well capitalized" institutions under the prompt
corrective action regulations of the OTS.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of
a capital restoration plan; placing limits on asset growth; limiting
acquisitions, branching or new lines of business; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rates that the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.
Brokered Deposits. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions or the business of placing deposits with insured
depository institutions for the purpose of selling interests in those deposits
to third parties. Under FDIC regulations, well-capitalized institutions are
not subject to any brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit which exceeds by more than (a)
75 basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) by 120% for retail deposits and 130% for wholesale
deposits, respectively, of the current yield on comparable maturity U.S.
treasury obligations for deposits accepted outside the institution's normal
market area. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market
area or in the market area in which such deposits are being solicited.
Restrictions on Capital Distributions. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a savings association as a capital distribution. The
regulations establish a tiered system of regulation with the greatest
flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year, without prior
OTS approval, of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half its
"surplus capital ratio" at the beginning of the calendar year (the amount by
which the institution's actual capital exceeded its fully phased-in capital
requirement at that date) or (ii) 75% of its net income over the most recent
four-quarter period. An
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institution that meets its current minimum capital requirements but not its
fully phased-in capital requirements may make capital distributions, without
prior OTS approval, of up to 75% of its net income over the most recent four-
quarter period, as reduced by the amounts of any capital distributions
previously made during such period. An institution that does not meet its
minimum regulatory capital requirements prior to, or on a pro forma basis
after giving effect to, a proposed capital distribution, or that the OTS has
notified as needing more than normal supervision, is not authorized to make
any capital distributions unless it receives prior written approval from the
OTS or the distributions are in accordance with the express terms of an
approved capital plan.
The OTS has proposed an amendment to its capital distribution regulation to
conform to its PCA regulations by replacing the current "tiered" approach
summarized above with one that would allow institutions to make capital
distributions that would not result in the institution falling below the PCA
"adequately capitalized" capital category. Under this proposal, an institution
would be able to make a capital distribution (i) without notice or
application, if the institution is not held by a savings and loan holding
company and received a sufficiently favorable regulatory rating of 1 or 2,
(ii) by providing notice to the OTS if, after the capital distribution, the
institution would remain at least "adequately capitalized," or (iii) by
submitting an application to the OTS.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporation reorganizations.
Affiliate Transactions. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative
and qualitative restrictions. Affiliates of a savings association include,
among other entities, companies that control, are controlled by or are under
common control with the savings association. As a result, the Company and its
non-bank subsidiaries are affiliates of the Savings Banks.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between
a savings association and an affiliate, as well as certain other transactions
with or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations
are required to make and retain detailed records of transactions with
affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the FRB has determined to be permissible for bank
holding companies. Savings associations are prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally
executive officers, directors or 10% stockholders of the institution) or their
"related interests" be made on substantially the same terms (including
interest rates and collateral) as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with the general public and not involve more than the normal risk of repayment
or present other unfavorable features.
Qualified Thrift Lender Test. All savings associations are required to meet
a QTL Test set forth in the HOLA and regulations of the OTS thereunder to
avoid certain restrictions on their operations. A savings association that
does not meet the QTL Test set forth in the HOLA and implementing regulations
must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the association may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall be restricted to those of a national bank;
(iii) the association shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank.
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Upon the expiration of three years from the date the association ceases to be
a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Historically, the QTL test has required that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-
related assets on a monthly basis in at least nine out of every 12 months. As
of September 30, 1996, the qualified thrift investments of the First Bank and
Girard were approximately 83.2% and 85.7%, respectively, of their portfolio
assets. Recently enacted legislation provides that certain education, small
business and consumer loans may be included as qualified thrift investments
for purposes of the QTL test.
Loans-to-One Borrower. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Savings Banks to any one borrower, including related entities,
generally may not exceed the greater of $500,000 or 15% of the unimpaired
capital and unimpaired surplus of the institution. Loans in an amount equal to
an additional 10% of unimpaired capital and unimpaired surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. An institution's "unimpaired capital and unimpaired surplus"
includes, among other things, the amount of its core capital and supplementary
capital included in its total capital under OTS regulations.
As of September 30, 1996, First Bank's and Girard's unimpaired capital and
surplus amounted to $11.1 million and $26.7 million, respectively, resulting
in a general loans-to-one borrower limitation of $1.7 million and $4.0
million, respectively under applicable laws and regulations. See "Business--
Loan Portfolio."
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS
Truth in Lending. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them
the ability to compare credit terms. TILA also guarantees consumers a three
day right to cancel certain credit transactions including loans of the type
originated by the Company and the Savings Banks. Management of the Company and
the Savings Banks believes that they are in compliance with TILA in all
material respects. If the Company and the Savings Banks were found not to be
in compliance with TILA, aggrieved borrowers could have the right to rescind
their loans and to demand, among other things, the return of finance charges
and fees paid to the Company.
Other Lending Laws. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation
B promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Company is subject to the Fair Housing Act and regulations thereunder,
which broadly prohibit certain discriminatory practices in connection with the
Company's business. The Company is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and services, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
Community Reinvestment Act. Under the CRA, as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit
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needs of its entire community, including low- and moderate- income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings
institutions, to assess the institution's CRA rating and requires that the OTS
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The four ratings are "outstanding
record of meeting community credit needs," "satisfactory record of meeting
community credit needs," "needs to improve record of meeting community credit
needs" and "substantial non-compliance in meeting community credit needs." An
institution's CRA rating is taken into account in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers,
consolidations and acquisitions. Poor CRA performance maybe the basis for
denying an application. First Bank and Girard each received a "needs to
improve record of meeting community credit needs" rating during their
respective most recent OTS examinations.
TAXATION
FEDERAL TAXATION
The Company and its subsidiaries will file a consolidated federal income tax
return based on a calendar year. Consolidated returns have the effect of
eliminating inter-company transactions, including dividends, from the
computation of taxable income.
Savings institutions such as the Savings Banks, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Savings Banks' taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to non-
qualifying loans must be computed under the experience method, while a
deduction with respect to qualifying loans may be computed using a percentage
based on actual loss experience or a percentage of taxable income.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income
method has permitted a qualifying savings institution to be taxed at a lower
maximum effective federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 32.2% exclusive
of any minimum tax or environmental tax (as compared to 35% for corporations
generally). Any savings institution at least 60% of whose assets are
qualifying assets, as described in Section 7701(a)(19)(c) of the Code,
generally will be eligible for the full deduction of 8% of taxable income. As
of December 31, 1995, approximately 84.5% of Girard's and 82.0% of First
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code. Girard and First Bank anticipate that at least 75% and 80%,
respectively of Girard's and First Bank's assets, respectively will continue
to be qualifying assets in the immediate future. If this ceases to be the
case, the Savings Banks may be required to restore their bad debt reserve to
taxable income in the future.
The amount of the bad debt deduction that a savings association may claim
with respect to additions to its reserve for bad debts under the percentage of
income method is subject to certain limitations. These limitations are not
expected to restrict the Bank from taking maximum advantage of the percentage
of taxable income method in the future, although there can be no assurances in
this regard. As of December 31, 1995, the Savings Banks' total bad debt
reserve was approximately $6.1 million.
To the extent (i) a savings association's reserve for losses on real
property loans under the percentage of taxable income method exceeds the
amount that would have been allowed under the experience method and (ii)
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a savings association makes distributions to stockholders (including
distributions in redemption, dissolution or liquidation) that are considered
to result in withdrawals from that excess bad debt reserve, the amounts
considered withdrawn will be included in the savings association's taxable
income. The amount that would be deemed withdrawn from such reserves upon such
distribution and which would be subject to taxation at the savings association
level at the normal corporate tax rate would be an amount equal to the amount
distributed plus the amount necessary to pay the corporate income tax with
respect to the withdrawal. Dividends will not be considered to result in
withdrawals from an association's bad debt reserves to the extent of current
or accumulated earnings and profits as calculated for federal income tax
purposes. Dividends in excess of a savings association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation will be considered to come
first from its bad debt reserve. The Savings Banks have no intention of paying
dividends or taking any other action which would result in recapture of its
bad debt reserves for tax purposes.
Recently enacted legislation repealed the special bad debt rules applicable
to savings associations for taxable years beginning after December 31, 1995.
Under the new provisions, savings associations will follow the same rules for
purposes of computing allowable bad debt deductions as banks. To the extent
the bad debt reserve of the savings association exceeds the allowable reserve
as computed under the rules applicable to banks, such excess will be subject
to recapture. Such amount, for the Savings Banks, is approximately $6.0
million as of December 31, 1995. There is an exception that, in general,
grandfathers the balance of the savings associations reserve balance as of
December 31, 1987. Under the newly enacted law, if a savings association
converts to a bank or is merged into a bank, the associations bad debt reserve
will not be automatically subject to recapture. Recapture of the grandfathered
bad debt reserve would still occur in the event of certain distributions as
previously discussed. Such amount, for the Savings Banks, is approximately
$0.1 million.
In addition to regular income taxes, corporations may be subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items generally applicable to
savings associations include (i) 100% of the excess of a savings association's
bad debt deduction computed under the percentage of taxable income method over
the amount that would have been allowable under the experience method and (ii)
an amount equal to 75% of the amount by which a savings association's adjusted
current earnings (alternative minimum taxable income computed without regard
to this preference, adjusted for certain items) exceeds its alternative
minimum taxable income without regard to this preference. Alternative minimum
tax paid can be credited against regular tax due in later years.
STATE TAXATION
For additional information regarding taxation, see Note 8 to the
Consolidated Financial Statements.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of October 28, 1996.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Andrew A. Wiederhorn....... 30 Chairman of the Board, Chief Executive Officer,
Secretary and Treasurer
Lawrence A. Mendelsohn..... 35 President and Director
Bo G. Aberg................ 48 Senior Vice President, European Operations
Donald J. Berchtold........ 51 Senior Vice President, Administration
Kenneth R. Kepp............ 41 Senior Vice President, Operations
Sheryl Anne Morehead....... 48 Senior Vice President, S&L Group and Chief
Executive Officer of the Savings Banks
Chris Tassos............... 39 Senior Vice President and Chief Financial
Officer
Phillip D. Vincent......... 42 Senior Vice President, Loan Servicing
Don H. Coleman............. 58 Director
Philip G. Forte............ 32 Director
David Dale-Johnson......... 49 Director
</TABLE>
All of the executive officers of the Company were elected at a meeting of
the Board of Directors held in October 1996. Their terms of office continue
until the next annual meeting of the Board of Directors and until their
successors shall have been elected and qualified.
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded the Wilshire
Companies in 1987 and continues to serve as the Chief Executive Officer of the
Wilshire Private Companies. Mr. Wiederhorn received his B.S. degree in
Business Administration from the University of Southern California.
Lawrence A. Mendelsohn is a director and the President of the Company. Since
February 1993 Mr. Mendelsohn has been the Executive Vice President of the
Wilshire Companies. From January 1992 until February 1993 Mr. Mendelsohn was
Vice President, Principal and Head of Capital Markets for Emerging Markets of
Bankers Trust New York Corporation/BT Securities Corporation. From August 1987
until January 1992 Mr. Mendelsohn was the Vice President, Senior Options
Principal and Head of Proprietary Trading for Equities, Equity Options and
Distressed Debt for JP Morgan and Co./JP Morgan Securities. Mr. Mendelsohn
received an A.B. degree in Economics from the University of Chicago, an M.A.
degree in International Politics from the University of Texas, an M.S. degree
in Business Research from the University of Southern California and is a
Ph.D./ABD in Finance from the University of Southern California.
Bo G. Aberg is the Senior Vice President, European Operations of the
Company. From November 1994 to September 1996, Mr. Aberg was Chief Executive
Officer of Securum Holding B.V., a Kingdom of Sweden owned work-out company in
Europe. From September 1992 to November 1994, Mr. Aberg was Chief Executive
Officer of Securum Real Estate Group, Malmo, Sweden. From January 1982 to
September 1992 Mr. Aberg held several positions within the PK Group (a Swedish
banking group), and from September 1974 to January 1982 he was a Chartered
Accountant for Hagstroms Revisions Byra AB Sweden (now Ernst & Young). Mr.
Aberg received the equivalent of a B.S. degree in Economics (Ekonomexanon) and
an academic degree in Law (Jurkandexamen) both from the University of
Stockholm, Sweden.
Donald J. Berchtold is the Senior Vice President, Administration. From March
1992 until October 1996 Mr. Berchtold was the Senior Vice President,
Administration of the Wilshire Companies. From February 1991
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until November 1992 he was a consultant to Entertainment Publications Inc.--
CUC International Inc. Mr. Berchtold received a BSc. degree in
Business/Finance and Marketing from Santa Clara University. Mr. Berchtold is
Mr. Wiederhorn's father-in-law by marriage.
Kenneth R. Kepp is the Senior Vice President, Operations. From November 1991
until October 1996 Mr. Kepp was the Senior Vice President--Operations of the
Wilshire Companies. From June 1990 until November 1991 Mr. Kepp was the
Managing Director of Network Associates International, a consulting company to
the leasing industry. Mr. Kepp received a B.S. degree in Finance from Northern
Illinois University.
Sheryl Anne Morehead is the Senior Vice President, S&L Group of the Company
and Chief Executive Officer of the Savings Banks. From December 1993 until
October 1996, Ms. Morehead was the Chief Credit Officer/Chief Operating
Officer of First Los Angeles Bank/San Paulo Bank Group, a savings bank. From
August 1990 until December 1993, Ms. Morehead was the Chief Credit
Officer/Executive Vice President of First Federal Bank, a savings bank. Ms.
Morehead received a B.S. degree from Boston University and an M.B.A. degree
from Harvard Graduate School of Business.
Chris Tassos is the Senior Vice President and Chief Financial Officer of the
Company. Since August 1995 Mr. Tassos has been the Senior Vice President of
Finance of the Wilshire Companies. From March 1992 until February 1995 he was
the Chief Financial Officer and/or Senior Vice President of Finance of Long
Beach Mortgage Company (formerly Long Beach Bank). Mr. Tassos received a B.A.
degree from California State University, Fullerton. From July 1979 until April
1984 and May 1985 until September 1990 Mr. Tassos was an auditor for Deloitte
& Touche LLP.
Phillip D. Vincent is Senior Vice President, Loan Servicing of the Company.
Mr. Vincent was Senior Vice President and Chief Administrative Officer of The
J.E. Robert Company, Inc., one of the largest real estate and mortgage
investment managers in the U.S. from April 1995 until July 1996, Senior Vice
President and Managing Officer of The J.E. Robert Company, Inc. from June 1992
until September 1995, and Vice President and Division Manager of The J.E.
Robert Company, Inc. from 1991 until May 1992. Mr. Vincent is a member of the
American Institute of Certified Public Accountants. Mr. Vincent received a
B.S. degree in Finance from Oklahoma State University.
Don H. Coleman is a director of the Company. Since March 1994 Mr. Coleman
has been the President of International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone equipment
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. From 1984
to 1986, Mr. Coleman was President of Clarion Corporation of America, a major
supplier of automotive sound systems and electronics. Mr. Coleman is a
director of ICT Group, Inc., and Fabricated Metals, Inc., a materials handling
equipment manufacturer. Mr. Coleman received a B.A. degree in Economics and an
M.B.A. degree from Stanford University.
Philip G. Forte is a director of the Company. Mr. Forte has been the
President of Wilshire Cellular, Inc., a cellular phone leasing company, since
June 1994. Wilshire Cellular, Inc. is not part of the Wilshire Private
Companies, nor is it an affiliate of the Company. From March 1992 until June
1994, Mr. Forte was the Vice President, Sales and Marketing of Vinyl Chem
International, Inc., a textile chemical repair manufacturer. From September
1989 until March 1992 Mr. Forte was the Vice President, Sales and Marketing of
Pacific Western University. Mr. Forte received a B.S. degree in Business
Administration from the University of Southern California.
David Dale-Johnson is a director of the Company. Since 1988 Mr. Dale-Johnson
has been the Director, Program in Real Estate, School of Business
Administration, University of Southern California. Mr. Dale-Johnson is also a
consultant for several public and private companies and government agencies.
Mr. Dale-Johnson received his B.A. degree in Art History from the University
of British Columbia, M. Sc. degree in Business Administration from the
University of British Columbia and a Ph.D. degree in Business Administration
from the University of California, Berkeley.
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CERTAIN KEY EMPLOYEES
Stuart Adair is the Vice President, European Loan Acquisitions of WFC. From
1993 until September 1996 Mr. Adair was the Vice President, Loan Acquisitions
of the Wilshire Companies. From 1989 until 1993 Mr. Adair was an asset manager
of the Federal Deposit Insurance Corporation. Mr. Adair received a B.A. degree
from the University of Washington.
Glenn J. Ohl is the Chief Financial Officer of WFC. From August 1995 until
October 1996 Mr. Ohl was the Senior Vice President and Corporate Treasurer of
CWM Mortgage Holdings, Inc., an affiliate of Countrywide Credit Industries
Inc., a residential financing company. From September 1992 until August 1995
Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS
Mortgage, Inc., a financing company. Mr. Ohl received a B.A. degree from
Franklin and Marshall College and an M.B.A. degree from New York University.
Peter O'Kane is the Vice President, Loan Acquisitions. From May 1994 until
October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions of the
Wilshire Companies. From September 1992 until April 1994 Mr. O'Kane was an
Asset Manager, Investment Division of J.E. Robert Company, Inc. From September
1991 until September 1992 Mr. O'Kane was a staff consultant with Arthur
Andersen & Company. From March 1990 until August 1991 Mr. O'Kane was an
analyst for GranCorp, Inc., a real estate investment company. Mr. O'Kane
received a B.A. degree from the University of Washington.
Richard A. Papworth is the Chief Financial Officer of Girard and First Bank.
From May 1996 until August 1996 Mr. Papworth was the Chief Financial Officer
of Girard. From October 1995 until May 1996 Mr. Papworth was the Director of
Finance for Maintenance Warehouse America Corp., a national building
maintenance supply company. From October 1994 until October 1995 Mr. Papworth
was an Independent Financial Consultant. From July 1993 until October 1994 Mr.
Papworth was the Acting Chief Financial Officer and Treasurer of George Wimpey
Inc. and the Assistant Treasurer from April 1989 until July 1993. Mr. Papworth
received a B.S. degree in Accounting and a M.Acc. degree in Taxation from
Brigham Young University.
R. Scott Stevenson is the President of the Girard and First Bank. From June
1991 until October 1996 he was the President and Chief Executive Officer of
Girard. From January 1986 until June 1991 he held various positions at Girard
including Chief Operating Officer, Chief Financial Officer and a Loan Officer.
Mr. Stevenson received a B.S. degree in Accounting and an M.S. degree in
Taxation from Brigham Young University.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee, which consists of a majority of
independent directors who are not affiliated with the Principals ("Independent
Directors"), makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided
by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting controls.
Messrs. Wiederhorn, Coleman and Dale-Johnson are the members of the Audit
Committee.
ELECTION OF DIRECTORS
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not employees of the
Company a per meeting fee of $1,000 for each Directors' meeting and a per hour
fee for each committee meeting attended which is not on a regularly scheduled
meeting date. Under the Company's Stock Incentive Plan, each non-employee
director has been granted, effective as of the date on which the initial
public offering price is determined, a non-qualified option to purchase at the
initial public offering price a number of shares of Common Stock equal to
6,250 divided
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by the initial public offering price, and each new non-employee director upon
the date of his or her election or appointment will be granted a non-qualified
option to purchase at the fair market value on the date of grant a number of
shares of Common Stock equal to 6,250 divided by the fair market value on the
date of grant.
EXECUTIVE COMPENSATION
The following table shows compensation received from the Wilshire Private
Companies by the Company's Chief Executive Officer and the three other most
highly paid executive officers for the fiscal years ended December 31, 1995.
The Company's Chief Executive Officer and such other officers received no
compensation from the Wilshire Public Companies in 1995. There were no other
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(1)
------------------ ---- ------------ -----------
<S> <C> <C> <C>
Andrew A. Wiederhorn........................... 1995 51,992(2) --
Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer
Lawrence A. Mendelsohn ........................ 1995 68,293(2) --
President
Donald J. Berchtold ........................... 1995 146,451 44,260
Senior Vice President, Corporate
Development
Kenneth R. Kepp ............................... 1995 150,012 50,000
Senior Vice President, Operations
</TABLE>
- --------
(1) For the year ended December 31, 1995 the Chief Executive Officer and the
three other most highly paid executive officers derived their salaries
from the Wilshire Private Companies taken as a whole and therefore
salaries and bonuses paid for the year do not necessarily reflect the
amount of salary and bonus attributable to work performed for WAC and the
Savings Banks, if any.
(2) Mr. Wiederhorn and Mr. Mendelsohn elected in the past to receive minimal
compensation from the Wilshire Private Companies to maintain capital in
the Wilshire Private Companies and have received shareholder loans from
the Wilshire Private Companies to fund their investment in WAC and certain
other expenses.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially similar employment agreements,
effective November 1, 1996, with Andrew A. Wiederhorn ("Mr. Wiederhorn") (as
Chief Executive Officer) and Lawrence A. Mendelsohn ("Mr. Mendelsohn") (as
President) (each individually, an "Executive" and collectively, the
"Executives"). Each agreement provides for an initial three-year term which is
automatically renewable for successive two-year terms (the "Employment Term")
unless either party gives written notice to the other at least ninety days
prior to the expiration of the then Employment Term. During the Employment
Term, each Executive will be obligated to devote a significant portion of his
business time, energy, skill and efforts to the performance of his duties
under the agreement and shall faithfully serve the Company, subject to his
right to serve as an employee and/or board member of certain companies and to
manage his personal financial and legal affairs.
The agreement provides for an annual base salary of $300,000 for Mr.
Wiederhorn and $300,000 for Mr. Mendelsohn (which may be increased, but not
decreased, by the Compensation Committee of the Board of Directors) and an
annual bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be
determined by the Compensation Committee of the Board of Directors and may not
exceed in the aggregate 20% of the pre-tax profits of the Company. Mr.
Wiederhorn and Mr. Mendelsohn share will share equally in the first $400,000
of any such bonus and thereafter their respective bonus will be two-thirds and
one-third. The agreement also provides that Mr. Wiederhorn and Mr. Mendelsohn
may participate in the Company's Incentive Stock Plan. See "--Stock Incentive
Plan."
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify the Executive to the fullest extent permitted by
law, in connection with any claim against the Executive as a
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result of the Executive serving as an officer or director of the Company or in
any capacity at the request of the Company in or with regard to any other
entity, employee benefit plan or enterprise. Following the Executive's
termination of employment, the Company will continue to cover the Executive
even if the Executive has ceased to serve in such capacity.
If any payment to the Executive together with certain other amounts paid to
the Executive, exceeds certain threshold amounts and results from a change in
ownership as defined in Section 280G(b)(2) of the Code, the agreements provide
that the Executive will receive an additional amount to cover the federal
excise tax and any interest, penalties or additions to tax with respect
thereto on a "grossed up" basis.
The agreement may be terminated at any time by the Executive for Good Reason
or with or without Good Reason during the Change in Control Protection Period
(if a Change in Control occurs) or by the Company with or without Cause (as
each capitalized term is defined in the agreement).
If the Executive terminates his employment with the Company for Good Reason,
with or without Good Reason during the Change in Control Protection Period (if
a Change in Control occurs), the Executive is terminated without Cause, or the
Executive's employment terminates as a result of the Company giving notice of
nonextention of the Employment Term, he will receive severance pay (i) in an
amount equal to three times Base Salary in effect at termination and three
times the highest annual bonus paid or payable for any of the previous three
years, (ii) accelerated full vesting under all outstanding equity-based and
long-term incentive plans, (iii) any other amounts or benefits due under then
applicable employee benefit plans of the Company (in accordance with such
plan, policy or practice), (iv) three years of additional service credit that
the Executive would otherwise have been credited under any pension type
qualified or nonqualified pension plan, (v) three years of the maximum Company
contribution under any qualified or nonqualified 401(k) type plan and (vi)
continued medical benefits for three years. The agreement provides that
Executive will have no obligation to mitigate the Company's financial
obligations in the event of his termination due to death, disability,
termination for Good Reason, termination with or without Good Reason during
the Change in Control Protection Period or termination without Cause, and
there will be no offset against the Company's financial obligations for other
amounts earned by the Executive.
If termination is the result of Executive's death, the Company will pay to
the Executive (or his estate), an amount equal (i) any earned but not yet paid
compensation, (ii) a pro-rated bonus, (iii) any other amounts or benefits due
under then applicable employee benefit plans of the Company (in accordance
with such plan, policy or practice), (iv) payment on a monthly basis of 6
months of base salary to Executive's spouse or dependents and (v) continued
medical coverage for the Executive's spouse and dependents for three years. In
addition, the Executive will receive accelerated full vesting under all
outstanding equity-based and long-term incentive plans. If Executive's
employment is terminated by reason of disability, the Executive will be
entitled to receive payments and benefits to which his representatives would
be entitled in the event of his termination by reason of death, provided that
the payment of base salary will be reduced by any long-term disability
payments under any policy maintained by the Company.
INCENTIVE STOCK PLAN
The following is a summary of certain features of the Company's Incentive
Stock Plan (the "Stock Plan"). This summary is qualified by reference to the
Stock Plan itself. A copy of the Stock Plan is an exhibit to the Registration
Statement.
The Company's Board of Directors adopted the Stock Plan on October 28, 1996.
The Company's stockholders approved it on October 28, 1996. The purpose of the
Stock Plan is to enable the Company to attract, retain and motivate key
employees, directors and, on occasion, consultants, by providing them with
equity participation in the Company. Accordingly, the Stock Plan permits the
company to grant incentive stock options ("ISOs"), non-statutory stock options
("NSOs"), restricted stock and stock appreciation rights (collectively
"Awards") to employees, directors and consultants of the Company and
subsidiaries of the Company. The Stock Plan will terminate on October 28, 2006
unless terminated earlier by the Board of Directors.
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Administration of the Plan. The Stock Plan will be administered by the
Company's Board of Directors, a committee appointed by the board (the
"Committee") or a combination of the two. References below to the
"Administrator" are to the body that administers the plan. For the present,
the Board of Directors has delegated administration of the Stock Plan to a
committee consisting of David Dale-Johnson and Don Coleman, two of the
Company's non-employee directors.
Securities Subject to the Plan. During the ten-year term of the Stock Plan,
the Company may grant Awards for a maximum of 1,750,000 shares of Common Stock
subject to adjustment in the case of stock splits and similar events. No one
person may receive Awards covering more than a cumulative total of 900,000
shares of Common Stock under the Stock Plan.
Employee Options. Under the Stock Plan, the Company may grant ISOs (under
Section 422 of the Code) and NSOs. The option exercise price of both ISOs and
NSOs may not be less than the fair market value of the shares covered by the
option on the date the option is granted. However, the exercise price of ISOs
granted to holders of more than 10% of the Company's outstanding stock may not
be less than 110% of that fair market value. Options will not be transferable
other than by will or the laws of descent and distribution or, in the case of
NSOs, under qualified domestic relations orders.
The Administrator will select the persons to whom options will be granted,
the number of shares subject to each option and the other terms and conditions
of each option, but in all cases consistent with the Stock Plan. The Option
Agreement evidencing each option will specify whether the option is intended
to be an ISO or an NSO. The Administrator may provide that options will be
exercisable in full at grant or become exercisable over time in accordance
with a vesting schedule. Options must expire no later than ten years after
they are granted (five years in the case of ISOs granted to holders of more
than 10% of the Company's outstanding stock). The exercise price of options
will be payable in cash or, if the Administrator permits, by the optionee's
full recourse promissory note, the surrender of shares of the Common Stock
already owned by the optionee or the "netting" of stock covered by the option
(the surrender of a portion of the option in payment of the exercise price).
Options granted as ISOs will be intended to qualify for special tax status
under Section 422 of the Code. An optionee will not have taxable income upon
the grant or exercise of an ISO (although exercise will result in income for
purposes of the alternative minimum tax), and the Company will receive no
income tax deduction at grant or exercise. The optionee will be entitled to
long-term capital gain treatment upon the sale of the option shares if the
shares are held more than two years after the grant date and more than one
year after the shares are transferred to the optionee. If the shares are sold
within either period, the difference between the exercise price and the market
value at the exercise date (but not more than the actual gain on sale) may be
taxable as ordinary income. Any additional gain would be a capital gain. Any
capital gain would be long-term if the optionee held the shares more than one
year. The Company will receive no deduction in connection with ISOs, except to
the extent an employee recognizes taxable ordinary income upon disposition of
option shares.
Upon the grant of an NSO, an optionee will not recognize taxable income for
federal income tax purposes and the Company will not be entitled to any
federal income tax deduction. Upon the exercise of an NSO, the optionee
generally will recognize ordinary income in an amount equal to the excess of
the fair market value of the shares acquired at the time of exercise over the
exercise price. The Company will be entitled to a corresponding deduction.
Special rules may govern the timing of the recognition of income by optionees
subject to Section 16 of the Exchange Act.
Director Options. On the last trading day of each calendar quarter beginning
March 31, 1997, the Company will automatically grant each director who is not
also an employee of the Company or a subsidiary of the Company (a "non-
employee director") an NSO to purchase that number of shares of Common Stock
that equals $6,250 divided by the fair market value per share of Common Stock
(its market price) on the date of grant. The exercise price of these options
will be that fair market value. Each of these director options will be fully
exercisable beginning six months after the date of grant and will terminate
(unless sooner terminated under
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<PAGE>
the terms of the Stock Plan) ten years after the date of grant. If such a
director ceases to be a member of the board for any reason other than death or
disability, these options will terminate on the first anniversary of the date
the director ceases to be a board member. If such a director dies or becomes
disabled while a member of the board, these options will terminate on the
second anniversary of the date the director dies or becomes disabled. Under
the Stock Plan, the Company could grant Awards to non-employee directors in
addition to these "automatic" quarterly option grants.
Restricted Stock. Under the Stock Plan, the Administrator may also grant
Awards of restricted shares of Common Stock. Each restricted stock Award would
specify the number of shares of Common Stock to be issued to the recipient,
the date of issuance, any consideration for such shares and the restrictions
imposed on the shares (including the conditions of release or lapse of such
restrictions). In general, shares subject to a restricted stock Award may not
be sold, assigned, transferred or pledged until the restrictions have lapsed
and rights to the shares have vested.
Stock Appreciation Rights. The Administrator may also grant Awards of stock
appreciation rights. A stock appreciation right entitles the holder to receive
from the Company, in cash or (if the Administrator so permits) Common Stock,
at the time of exercise, the excess of the fair market value at the date of
exercise of a share of Common Stock over a specified price fixed by the
Administrator in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Administrator will
not be less than the fair market value of shares of Common Stock at the date
the stock appreciation right was granted.
Terms and Conditions to Which All Awards Are Subject. If there is a stock
dividend, stock split, reverse stock split or reclassification of Common
Stock, appropriate adjustments will be made in the number and class of shares
of stock subject to the Stock Plan and each outstanding Award, and the
exercise price of each outstanding Award. Each such adjustment will be
determined by the Administrator in its sole discretion.
In addition, new Awards may be substituted for Awards previously granted, or
the Company's obligations respecting outstanding Awards may be assumed by an
employer corporation other than the Company, in connection with any merger,
consolidation or sale of substantial assets (but not a merger or consolidation
in which the Company is the continuing corporation which does not result in
any reclassification or exchange of the Common Stock). Further, in the event
of such a merger, consolidation or sale, the Administrator may decide to pay
cash to plan participants and terminate their Awards, or terminate their
Awards after giving them notice of the merger or other event to give them an
opportunity to exercise their Awards before the event.
Subject to the special rules described previously regarding the options to
be granted quarterly to non-employee directors, the Administrator will
establish the effect of employment termination on vested Awards.
Amendment and Termination. The Board of Directors at any time may amend or
terminate the Stock Plan. However, in general, amendments and termination
would not affect Awards previously granted. Certain amendments would be
subject to stockholder approval.
Initial Awards. As of the date of this preliminary Prospectus, the Company
had not granted any Awards. The day before the Commission declares the
Registration Statement effective, the Company will grant options under the
Stock Plan to Messrs. Wiederhorn and Mendelsohn. If, by that date, the
underwriters have not notified the Company that the underwriters will exercise
their over-allotment option, those options will cover 1,050,000 shares of
Common Stock for Messrs. Wiederhorn and Mendelsohn combined. If the
underwriters by that date have notified the Company that they will exercise
their over-allotment option in full, those options will cover a total of
1,083,750 shares of Common Stock. A partial exercise of the over-allotment
option will result in option amounts between 1,050,000 and 1,083,750 shares. A
portion of these options are intended to be ISOs. The balance will be NSOs.
The exercise price of the ISOs will be $ per share (110% of the initial
offering price to the public in the Common Stock Offering). The exercise price
for a portion of the NSOs will be $ per share (100% of the initial offering
price to the public in the Common Stock Offering). The remainder of the NSOs
will be at an exercise price of $ per share (125% of the initial offering
price to the public in the Common Stock Offering). Approximately 65.6% of the
NSOs will be priced at 100% of the initial offering price. All of these
options will be fully vested by January 2, 1997. The ISOs will have a five-
year term and the NSOs will have a ten-year term. The options will not
terminate earlier if the optionee ceases to be employed by the Company.
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<PAGE>
The following table sets forth information concerning the options to be
granted to Messrs. Wiederhorn and Mendelsohn before the Registration Statement
becomes effective.
OPTIONS TO BE GRANTED AT CLOSING
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION
SHARES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM (3)
OPTIONS EMPLOYEES IN PRICES PER EXPIRATION ---------------------
NAME GRANTED FISCAL 1996 SHARE DATES 5% 10%
---- ---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 700,000(1) 67% $-- (2)
Lawrence A. Mendelsohn.. 350,000(4) 33% -- (2)
</TABLE>
- --------
(1) This figure will be 722,536 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
(2) Five years after the closing of the Common Stock Offering for the ISOs
( shares for Mr. Wiederhorn and shares for Mr. Mendelsohn) and
ten years for the NSOs ( shares for Mr. Wiederhorn and shares
for Mr. Mendelsohn). If the options are increased as indicated in notes
(1) above and (4) below, the ISO figures become shares for Mr.
Wiederhorn and shares for Mr. Mendelsohn and the NSO figures become
shares for Mr. Wiederhorn and shares for Mr. Mendelsohn.
(3) These amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of their terms. The assumed 5%
and 10% rates of stock price appreciation are mandated by rules of the
Commission. They do not represent the Company's estimate or projection of
future prices of the Common Stock.
(4) This figure will be 361,214 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
The following table contains additional information regarding cumulative
activity under the Stock Plan based on the same assumptions used for the
previous table.
CUMULATIVE OPTION STATUS
<TABLE>
<CAPTION>
TOTAL OPTION VALUES
------------------------------------------------------
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE ---------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 0 $ 0 700,000(2) 0 $ 0 --
Lawrence A. Mendelsohn.. 0 0 350,000(3) 0 0 --
</TABLE>
- --------
(1) By January 2, 1997.
(2) See note (1) to the previous table.
(3) See note (4) to the previous table.
Deductibility of Executive Compensation. Under Section 162(a) of the Code, a
corporation may deduct "a reasonable allowance for salaries or other
compensation for personal services actually rendered." However, Section 162(m)
generally limits the deduction for compensation paid to the chief executive
officer and certain other officers of a publicly-held corporation to $1
million in any taxable year. The corporation cannot deduct the compensation
paid to a covered officer in excess of $1 million.
In general, the excess of the fair market value of stock received on
exercise of Awards (other than ISOs) over the option exercise price is treated
as compensation for this purpose. Accordingly, the deduction for that excess
may be disallowed. However, this principle does not apply to "qualified
performance-based compensation." In addition, a special rule applies to
compensation paid under a plan that existed before the corporation became
publicly held. Options granted under the Stock Plan for a period of
approximately three and one-half years after the closing of the Common Stock
Offering will be intended to qualify under this special rule. In addition, the
Company may choose to cause options and other Awards granted after the Company
becomes publicly-held and which do not qualify under this special rule to
qualify for exemption from Section 162(m) as "qualified performance-based
compensation." However, there are no assurances that any or all Awards will
not be subject to the limitation of Section 162(m).
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of Common Stock as of the date of this Prospectus by (a) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock, (b) each director, (c) each
executive officer, and (d) all directors and executive officers as a group.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING
------------------------------ ---------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS(1) OWNERSHIP CLASS OWNERSHIP CLASS(2)
-------------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 3,617,127 65.77% 3,617,127 51.67%
Lawrence A. Mendelsohn.. 1,808,330 32.88% 1,808,330 25.83%
Bo G. Aberg............. -- -- -- --
Donald J. Berchtold..... -- -- -- --
Sheryl Anne Morehead.... -- -- -- --
Kenneth E. Kepp......... -- -- -- --
Chris Tassos............ -- -- -- --
Phillip D. Vincent...... -- -- -- --
Don H. Coleman.......... 11,222 .2% 11,222 .16%
Philip G. Forte......... -- -- -- --
David Dale-Johnson...... 11,222 .2% 11,222 .16%
All directors and execu-
tive officers as a
group (11 persons)..... 5,447,901 99.05% 5,447,901 77.82%
</TABLE>
- --------
(1) The address for each of the named officers and directors is c/o Wilshire
Financial Services Group Inc., 1776 SW Madison, Portland, Oregon 97205.
(2) Assumes no exercise of the Common Stock Underwriters' over-allotment
option.
Except as noted in the footnotes above (i) none of such shares is known by
the Company to be shares with respect to which such beneficial ownership and
(ii) the Company believes the beneficial holders listed above have sole voting
and investment power regarding the shares shown as being beneficially owned by
them.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
The Company leases office space for its corporate headquarters from Wilshire
Properties I, Incorporated, an Oregon corporation ("WPI"). Andrew A.
Wiederhorn and Lawrence A. Mendelsohn are the beneficial owners of WPI. The
lease agreement provides for an aggregate annual rent payment in 1997 of
approximately $90,000 and expires December 31, 2001. In addition to base rent
the Company is required to pay its proportionate share of operating expenses
incurred by WPI in connection with the operations of the building. The Savings
Banks lease approximately 8,000 sq. ft. of office space in two locations
pursuant to lease which provides for an aggregate annual rental payment in
1997 of approximately $96,000 and expires December 31, 1997.
STOCK TRANSACTIONS
Upon the closing of the Common Stock Offering and Notes Offering, certain
executive officers and directors will exchange 5.1% of the capital stock of
Girard, 5.1% of the capital stock of First Bank, and approximately 99% of the
capital stock of WAC (which itself owns 94.9% of the capital stock of Girard
and First Bank), for 5,447,901 shares of Common Stock of WFSG.
LOAN SERVICING AGREEMENT BETWEEN THE COMPANY, WFC, WSC AND WCC
The Company, WFC, WSC and WCC (Messrs. Wiederhorn and Mendelsohn are the
principal owners of WCC) entered into a non-exclusive loan servicing agreement
(the "Loan Servicing Agreement") pursuant to which WCC will provide loan
portfolio management services, including billing, portfolio administration and
collection services for all Loans. WCC has also agreed to license its
proprietary computer software to the Company, WSC and WFC. Pursuant to the
Loan Servicing Agreement, the Company shall be required to pay a servicing fee
equal to a market rate based on comparable fees charged by unaffiliated third
parties in arm's length transactions for similar types of loans at the time of
acquisition. WCC has agreed for a period of twenty years not to compete with
or be engaged in the same business in the same areas as currently conducted by
the Company, including purchasing and servicing loans.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans (the "Servicing Transfer"), provided that the Company or one of
its subsidiaries has obtained the appropriate licenses. Notwithstanding the
foregoing, the Company may request that the Servicing Transfer occur on an
earlier date, provided that the foregoing conditions are met. WCC, in its sole
discretion may refuse to effect the Servicing Transfer prior to the end of the
second year. The Servicing Transfer will occur automatically on the third
anniversary of the closing of the Common Stock Offering and Notes Offering.
After the Servicing Transfer WCC will permit the Company, subject to certain
conditions, to have access to its books, records and forms to ensure the
orderly transfer of the servicing. Following the Servicing Transfer, the fees
and costs to be paid by WCC for the servicing of its loans and the loans of
persons other than the Company shall be the Company's average costs for such
collection as specified in the Loan Servicing Agreement.
LOAN SERVICING AGREEMENT BETWEEN THE SAVINGS BANKS AND WCC
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC (Messrs. Wiederhorn and Mendelsohn are the principal
owners of WCC) pursuant to which WCC provides loan portfolio management
services, including billing, portfolio administration and collection services
for all loans owned, acquired or made by the Savings Banks. WCC receives a fee
equal to ten dollars per month for each loan serviced. The loan servicing
agreements are year-to-year and may be terminated by the Savings Banks or WCC
by giving notice at least sixty days prior to renewal date.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific discounted Loan Portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Loan Portfolios. To date, each of these loan servicing
agreements provides that WCC shall be entitled to an amount equal to (i) all
costs and expenses incurred by WCC for providing loan portfolio management
services, and (ii) an amount equal to twenty-five percent of the amount
collected on the specified Discounted
85
<PAGE>
Loan Portfolios (other than escrow payments, if any) which is in excess of the
initial payments made by the Savings Banks to acquire the Discounted Loan
Portfolios. Servicing fees for new Discounted Loan portfolio servicing
agreements will be chosen by the boards of directors of the Savings Banks
based upon fees charged by WCC in any other appropriate third-party servicing
agreement.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, WCC and its private
affiliates (Messrs. Wiederhorn and Mendelsohn are the principal owners of WCC
and its private affiliates) and the Company have agreed to provide, commencing
with the completion of the Common Stock Offering and the Notes Offering,
certain services to each other, including, among other things, certain
financial reporting functions, legal compliance, banking, risk management and
operational and strategic matters. The Administrative Services Agreement will
provide for the payment of a market rate plus reimbursement of any third party
expenses for any services rendered by one party for another. The term "market
rate" means the rate determined by the parties as being the rate charged by
independent third parties for providing similar services in an arm's-length
transaction. The initial term of the Administrative Services Agreement will
expire on December 31, 1997; it will continue for successive one year renewal
periods unless terminated by either of the parties on not less than 90 days
notice prior to the end of any period. The parties to the Administrative
Service Agreement have agreed to indemnify each other against liability
arising out of the willful misconduct or gross negligence of the indemnifying
party.
EMPLOYMENT WITH WCC
Messrs. Wiederhorn and Mendelsohn are the principal owners of WCC. Messr.
Wiederhorn is also the sole director of WCC. For a period of two to three
years after the closing of the Common Stock Offering and Notes Offering while
the Company is in the process of obtaining the necessary licensing approvals
for its servicing operations certain executive officers of the Company,
including Messrs. Wiederhorn, Mendelsohn, Kepp, Berchtold, Tassos and Vincent,
will also continue to be executive officers of WCC. Such executive officers
will receive minimal compensation from WCC. Following receipt of the necessary
licensing approvals only Messrs. Wiederhorn and Mendelsohn, the shareholders
of WCC will continue to be executive officers of WCC.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Company's employees are made by
the Compensation Committee of the Board of Directors. David Dale-Johnson and
Don H. Coleman are the members of the Compensation Committee.
STOCK TRANSACTIONS
Upon the closing of the Common Stock Offering and the Notes Offering,
certain executive officers and directors, including Messrs. Dale-Johnson and
Coleman will exchange 5.1% of the capital stock of Girard, 5.1% of the capital
stock of First Bank, and approximately 99% of the capital of WAC (which itself
owns 94.9% of the capital of Girard and First Bank), for 5,447,901 shares of
Common Stock of WFSG.
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<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
WFSG and Bankers Trust Company, as trustee (the "Trustee"), a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The summary of all material provisions of the Indenture
set forth below are qualified in their entirety by reference to all of the
provisions of the Indenture and the Notes. Capitalized terms not otherwise
defined herein have the meanings specified in the Indenture. Whenever sections
or defined terms of the Indenture are referred to, such sections or defined
terms are hereby incorporated herein by such reference.
The Notes will be limited in aggregate original principal amount to $75
million (plus up to $11,250,000 subject to the Notes Underwriter's over-
allotment option). The Notes will mature on , 2003 (the "Stated
Maturity"). The Notes will rank pari passu with all other general unsecured
obligations of the Company and will be issued in book-entry form only in
denominations of $1,000 and integral multiples in excess thereof.
The Notes will bear interest from the date of their initial issuance, at the
rate per annum set forth on the cover page of this Prospectus, payable semi-
annually in arrears on and of each year (each an
"Interest Payment Date"), commencing , 1997, to the holders of
record at the close of business on the or
(whether or not a business day), as the case may be, next preceding such
Interest Payment Date (each, a "Regular Record Date"). Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
The Notes are not savings accounts or deposits and are not insured by the
FDIC or by the United States or any agency or fund thereof. The Notes will not
be secured by the assets of WFSG or any of its Subsidiaries, including the
Savings Banks, or otherwise and will not have the benefit of a sinking fund
for the retirement of principal or interest. Because WFSG is a holding company
that currently conducts substantially all of its operations through its
Subsidiaries, the right of WFSG to participate in any distribution of assets
of the Subsidiaries, including the Savings Banks, upon their liquidation or
reorganization or otherwise (and thus the ability of Holders of the Notes to
benefit indirectly from such distribution) are subject to the prior claims of
creditors of the Subsidiaries, including, in the case of the Savings Banks, to
the claims of depositors of the Savings Banks. Claims on WFSG's Subsidiaries
by creditors, other than WFSG, include substantial obligations with respect to
deposit liabilities and other borrowings. Additionally, distributions to WFSG
by the Savings Banks, whether in liquidation, reorganization or otherwise,
will be subject to regulatory restrictions and, under certain circumstances,
may be prohibited. See "Regulation--The Savings Banks--Restrictions on Capital
Distributions" and "--Affiliate Transactions."
GLOBAL NOTES, DELIVERY AND FORM
The Notes offered hereby will be represented by one or more Global Notes
deposited with the Depositary, and will trade in the Depositary's Same-Day
Funds Settlement System ("SDFS System") until maturity. The Notes will not be
exchangeable for certificated notes, except in the circumstances described
below.
The Depository Trust Company, New York, New York ("DTC"), will be the
initial Depositary with respect to the Notes. DTC has advised the Company and
the Underwriters that it is a limited-purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations and certain other organizations, some of whom
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<PAGE>
(and/or their representatives) own DTC. Access to DTC's book-entry system is
also available to others, such as banks, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly. Persons who are not participants may beneficially own
securities held by DTC only through participants.
Upon the issuance of the Notes represented by the Global Notes, the
Depositary will credit, on its book-entry registration and transfer system,
the principal amount of the Notes represented by the Global Notes to the
accounts of participants. Ownership of beneficial interests in the Global
Notes will be limited to participants or persons that hold interests through
participants. Ownership of beneficial interests in the Notes will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by the Depositary (with respect to interests of participants in the
Depositary), or by participants in the Depositary or persons that may hold
interests through such participants (with respect to persons other than
participants in the Depositary). The laws of some states require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limitations and such laws may impair the ability of
holders of the Notes to transfer beneficial interests in the Global Notes.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the
case may be, will be considered the sole owner or holder of the Notes
represented by the Global Notes for all purposes under the Indenture. Except
as provided below, owners of beneficial interests in the Notes represented by
the Global Notes will not receive or be entitled to receive physical delivery
of such Notes in definitive form and will not be considered the owners or
holders thereof under the Indenture.
So long as the Notes are represented by a Global Note, payments of principal
and interest on the Notes will be made by the Company through the Trustee to
the Depositary or its nominee, as the case may be, as the registered owner of
the Global Notes representing the Notes. Neither the Company nor the Trustee
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
such Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. The Company expects that the
Depositary, upon receipt of any payment of principal or interest in respect of
the Global Notes representing the Notes, will credit the accounts of the
related participants with payment in amounts proportionate to their respective
holdings in principal amount of beneficial interests in such Global Notes as
shown on the records of the Depositary. The Company also expects that payments
by participants to owners of beneficial interests in such Global Notes will be
governed by standing customer instructions and customary practices, as is now
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
If the Depositary is at any time unwilling, ineligible or unable to continue
as Depositary under the Indenture and a successor Depositary is not appointed
in respect thereof within 90 days, the Company will issue definitive Notes in
exchange for the Notes represented by the Global Notes. In addition, the
Company may at any time and in its sole discretion determine to discontinue
use of the Global Notes and, in such event, will issue definitive securities
in exchange for the securities represented by the Global Notes. Notes so
issued will be issued in registered form only, in denominations of $1,000 and
integral multiples thereof, without coupons.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest on the Notes will be made by WFSG in
immediately available funds. The Notes will trade in the Depositary's SDFS
System until maturity, and, therefore, the Depositary will require secondary
trading activity in the Notes to be settled in immediately available funds.
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to , 2001 except as described
below. On or after such date, the Notes may be redeemed, in whole or in part,
at the following redemption prices (expressed as a percentage
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<PAGE>
of the principal amount) plus accrued and unpaid interest to (but excluding)
the redemption date, if redeemed during the 12-month period beginning
, of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001 %
2002 %
</TABLE>
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Notes at any time and from time to
time until , 2001, with the Net Cash Proceeds received by the Company
from one or more public or private sales of Qualified Capital Stock at a
redemption price of % of the principal amount of the Notes redeemed,
plus accrued and unpaid interest thereon; provided, however, that at least 65%
of the original aggregate principal amount of Notes must remain outstanding
after each such redemption, and provided further, that such redemption must
occur within 60 days after the closing date of any such public or private sale
of Qualified Capital Stock.
If at any time fewer than all of the Notes then outstanding are to be
redeemed, the Trustee shall select the Notes or portions thereof to be
redeemed by any method the Trustee shall deem fair and reasonable. Notes in
denominations larger than $1,000 may be redeemed in part in integral multiples
of $1,000. Notice of redemption will be mailed to each Holder of Notes to be
redeemed at such Holder's registered address at least 30, but not more than
60, days before the redemption date. On or after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption.
In addition to permitted redemptions, the Company may from time to time
purchase the Notes in the open market, in private transactions or otherwise,
as permitted by applicable law.
NO SINKING FUND OR MANDATORY REDEMPTION
The Notes will not be entitled to the benefit of any sinking fund or
mandatory redemption.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Net Worth Maintenance. On the Issue Date and at all times thereafter,
determined at the end of each fiscal quarter, the Company shall maintain
Consolidated Net Worth, equal to (i) $40 million plus (ii) the cumulative
amount equal to twenty-five percent (25%) of the Consolidated Net Income (but
not loss), if any, of the Company and its Subsidiaries for each fiscal quarter
commencing with the quarter ending March 31, 1997.
Limitations on Indebtedness.
(a) WFSG shall not incur, directly or indirectly, any Indebtedness or
issue any Disqualified Capital Stock; provided, however, that WFSG may
incur Indebtedness or Disqualified Capital Stock if, on the date of such
incurrence and after giving effect thereto, (i) no Default or Event of
Default has occurred and is continuing or would result therefrom and (ii)
the Leverage Ratio does not exceed 2.0 to 1.0.
(b) The Company will not create, incur, issue, assume, guarantee or
otherwise in any manner become directly or indirectly liable for or with
respect to, or otherwise permit to exist, any Junior Indebtedness (other
than Acquired Indebtedness) unless the Stated Maturity of principal (or any
required repurchase, redemption, defeasance or sinking fund payments) of
such Junior Indebtedness is after the final Stated Maturity of principal of
the Notes.
(c) The Savings Banks will not, and will not permit any of their
Subsidiaries to, create or incur any Indebtedness or issue any Preferred
Stock that in either case would qualify as regulatory capital for the
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Savings Banks under 12 C.F.R. Part 567 or any successor regulation, except
to WFSG or its Subsidiaries or to the extent that after giving effect to
the creation or incurrence of such Indebtedness or the issuance of such
Preferred Stock the total of the Savings Banks' aggregate Indebtedness and
Preferred Stock that qualifies as capital under 12 C.F.R. Part 567 does not
exceed 65% of the Savings Banks' aggregate tangible common equity.
(d) The Company will not permit any Subsidiary to, directly or
indirectly, incur any Indebtedness or issue any Disqualified Capital Stock.
(e) The foregoing provisions shall not apply to:
(1) Permitted Acquisition Indebtedness of the Company and its
Subsidiaries;
(2) Permitted Repurchase Facilities of the Company and its
Subsidiaries;
(3) Guarantees by the Company of (1) and (2);
(4) Intercompany Indebtedness between the Company and any of its
Subsidiaries;
(5) Incurrence by the Company of its obligations under the Notes;
(6) Non-Recourse Indebtedness of the Company and its Subsidiaries;
(7) Securities issued in a securitization by a Securitization Entity
formed by or on behalf of the Company or its Subsidiaries, regardless
of whether such securities are treated as indebtedness for tax
purposes, provided that neither the Company nor any Subsidiary (other
than the Securitization Entity formed solely for the purpose of such
securitization) is directly or indirectly liable as a guarantor or
otherwise (excluding the provision of Credit Support) for such
securities or obligations of the Securitization Entity;
(8) Deposit liabilities of any insured depository Subsidiary;
(9) Unsecured Indebtedness of the Savings Banks having an initial
term to maturity in excess of one year, provided, however, that such
Indebtedness shall be considered to be Indebtedness of WFSG for the
purpose of the Leverage Ratio;
(10) Unsecured working capital loans of Subsidiaries, not to exceed
$5.0 million in the aggregate, provided, however, that such
Indebtedness shall be considered to be Indebtedness of WFSG for the
purpose of the Leverage Ratio;
(11) Acquired Indebtedness of Subsidiaries, provided, however, that
such Acquired Indebtedness shall be considered to be Indebtedness of
WFSG for the purpose of the Leverage Ratio;
(12) Indebtedness secured by Permitted Liens; or
(13) Hedging Obligations directly related to: (i) Indebtedness
permitted to be incurred by the Company or its Subsidiaries pursuant to
the Indenture; (ii) loans held by the Company or its Subsidiaries
pending sale; or (iii) loans with respect to which the Company or any
Subsidiary has an outstanding purchase offer or commitment, financing
commitment or security interest.
(f) For purposes of determining compliance with the foregoing covenant:
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in good
faith, will classify such item of Indebtedness and be required to include
the amount and type of such Indebtedness in one of the above clauses; and
(ii) an item of Indebtedness may be divided and classified in more than one
of the types of Indebtedness described above.
Liquidity Maintenance. WFSG shall, at all times when the Notes are not rated
in an investment grade category by one or more nationally recognized
statistical rating organizations, maintain Liquid Assets with a value equal to
at least 100% of the required interest payments due on the Notes on the next
two succeeding semi-annual Interest Payment Dates. Liquid Assets of a
Subsidiary (other than the Savings Banks or other depository institution
Subsidiary) may be included in such calculation only to the extent that such
Liquid Assets may at such time be distributed to WFSG without restriction or
notice to any Person. Such Liquid Assets shall not be the subject of any
pledge, Lien, encumbrance or charge of any kind and shall not be used as
collateral or security for Indebtedness for borrowed money or otherwise of the
Company or its Subsidiaries nor may such Liquid Assets be used as reserves for
any self-insurance maintained by the Company.
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Limitations on Restricted Payments. The Company will not, and will not
permit any Subsidiary to, directly or indirectly, make any Restricted Payment
if, at the time of such Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be continuing; or
(b) either Savings Bank would fail to meet any of the Regulatory Capital
Requirements; or
(c) the Company would fail to maintain sufficient Liquid Assets to comply
with the terms of the covenant described above under "Liquidity Maintenance";
or
(d) the aggregate amount of all Restricted Payments (the amount of such
payments, if other than in cash, having been determined in good faith by the
relevant Board of Directors, whose determination shall be conclusive and
evidenced by a Board resolution filed with the Trustee) declared and made
after the issue date of the Notes would exceed the sum of
(i) 25% of the aggregate Consolidated Net Income (or, if such
Consolidated Net Income is a deficit, 100% of such deficit) of the Company
accrued on a cumulative basis during the period beginning on the first day
of the fiscal quarter during which the issue date of the Notes occurred and
ending on the last day of the Company's last fiscal quarter ending prior to
the date of such proposed Restricted Payment; plus
(ii) the aggregate Net Cash Proceeds received by the Company as capital
contributions (other than from a Subsidiary) after the issue date of the
Notes; plus
(iii) the aggregate Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company from
the issuance or sale (other than to a Subsidiary) of Qualified Capital
Stock after the issue date of the Notes; plus
(iv) 100% of the amount of any Indebtedness of the Company or a
Subsidiary that is issued after the issue date of the Notes that is
thereafter converted into or exchanged for Qualified Capital Stock of the
Company; or
(e) the Unsecured Debt Coverage Ratio for the Company for the most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such Restricted Payment is less
than 2.00 to 1.00, determined after giving effect to such Restricted Payment;
provided, however, that the foregoing provisions will not prevent (x) the
payment of a dividend within 60 days after the date of its declaration if at
the date of declaration such payment was permitted by the foregoing
provisions, or (y) any Permitted Payment, or (z) tax sharing payments by the
Company or any of its Subsidiaries pursuant to the existing tax sharing
agreement among the Company and its Subsidiaries (or any subsequently adopted
tax sharing agreement the terms of which are not materially less favorable in
the aggregate to the Company than the terms of such existing tax sharing
agreement).
Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its
Subsidiaries (other than a Securitization Entity) to, create, assume or
otherwise cause or suffer to exist or to become effective any consensual
encumbrance or restriction on the ability of any such Subsidiary to
(a) pay any dividends or make any other distribution on its Capital Stock;
(b) make payments in respect of any Indebtedness owed to the Company or any
other Subsidiary; or
(c) make loans or advances to the Company or any Subsidiary or to guarantee
Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions imposed by applicable law or regulation or by the OTS or
FDIC;
(2) restrictions existing under agreements in effect on the date of the
Indenture;
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(3) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions with respect to a Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially
all the assets (which term may include the Capital Stock) of such
Subsidiary;
(5) restrictions on the transfer of assets which are subject to Liens;
(6) restrictions existing under agreements evidencing Permitted
Acquisition Indebtedness or Permitted Repurchase Facilities of any
Subsidiary that is formed for the sole purpose of acquiring or holding a
portfolio of assets, if such Indebtedness (i) is made without recourse to,
and with no cross-collateralization (which shall not include Guarantees),
against the assets of, the Company or any other Subsidiary, and (ii) upon
complete or partial liquidation of which the Indebtedness must be
correspondingly repaid in whole or in part, as the case may be; and
(7) restrictions existing under any agreement that refinances or replaces
any of the agreements containing the restrictions in clauses (2), (3) and
(6); provided that the terms and conditions of any such restrictions are
not less favorable to the Holders than those under the agreement evidencing
or relating to the Indebtedness refinanced.
Limitations on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including without limitation,
the sale, purchase, exchange or lease of assets, property or services) with
any Affiliate of the Company (except that the Company and any of its
Subsidiaries may enter into any transaction or series of related transactions
with any Subsidiary of the Company without limitation under this covenant)
unless: (i) such transactions or series of related transactions is on terms
that are no less favorable to the Company or such Subsidiary, as the case may
be, than would be available in a comparable transaction in an arm's length
dealing with a Person that is not such an Affiliate or, in the absence of such
a comparable transaction, on terms that the relevant Board of Directors
determines in good faith would be offered to a Person that is not an
Affiliate; (ii) with respect to any transaction or series of related
transactions involving aggregate payments in excess of $500,000, the Company
delivers an officers' certificate to the Trustee certifying that such
transaction or series of transactions complies with clause (i) above and has
been approved by a majority of the Disinterested Directors of the relevant
Board of Directors of the Company or such Subsidiary, as the case may be; and
(iii) with respect to any transaction or series of related transaction
involving aggregate payments in excess of $2,500,000, or in the event that no
members of the Board of Directors are Disinterested Directors with respect to
any transaction or series of transactions included in clause (ii), (x) in the
case of a transaction involving real property, the aggregate rental or sale
price of such real property shall be the fair market sale or rental value of
such real property as determined in a written opinion by a nationally
recognized expert with experience in appraising the terms and conditions of
the type of transaction or series of transactions for which approval is
required and (y) in all other cases, the Company delivers to the Trustee a
written opinion of a nationally recognized expert with experience in
appraising the terms and conditions of the type of transaction or series of
transactions for which approval is required to the effect that the transaction
or series of transactions are fair to the Company or such Subsidiary from a
financial point of view. The limitations set forth in this paragraph will not
apply to (i) transactions entered into pursuant to any agreement already in
effect on the date of the Indenture and any renewals or extensions thereof not
involving modifications materially adverse to the Company or any Subsidiary,
(ii) normal banking relationships with an Affiliate on an arms' length basis,
(iii) any employment agreement, stock option, employee benefit,
indemnification, compensation, business expense reimbursement or other
employment-related agreement, arrangement or plan entered into by the Company
or any of its Subsidiaries which agreement, arrangement or plan was adopted by
the Board of Directors of the Company or such Subsidiary (including a majority
of the Disinterested Directors), as the case may be, (iv) residential
mortgage, credit card and other consumer loans to an Affiliate who is an
officer, director or employee of the Company or any of its Subsidiaries and
which comply with the applicable provisions of 12 U.S.C. Section 1468(b) and
any rules and regulations of the OTS thereunder, (v) any Restricted Payment or
Permitted Payment, (vi) any transaction or
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series of transactions in which the total amount involved does not exceed
$125,000, (vii) purchases on or before March 31, 1997 of loan portfolios
acquired by an Affiliate after July 31, 1996 where the purchase price does not
exceed the lower of two current independent bids for the loan portfolios or
(viii) services rendered and obligations incurred by the Company or any of its
Subsidiaries pursuant to existing agreements or agreements between the Company
and/or any of its Subsidiaries and WCC and/or Affiliates of WCC entered into
in connection with the closing of the Common Stock Offering and the Notes
Offering.
Limitations on Liens and Guarantees. WFSG will not create, assume, incur or
suffer to exist any Lien (other than a Permitted Lien) upon any of the
Company's assets (including the Capital Stock of any Subsidiary) as security
for Indebtedness, without effectively providing that the Notes will be equally
and ratably secured with (or prior to) such Indebtedness.
In addition, the Company will not permit any Subsidiary of the Company,
directly or indirectly, to guarantee or assume, or subject any of its assets
to a Lien (other than a Permitted Lien) to secure, any Pari Passu Indebtedness
or Junior Indebtedness unless (i) such Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a guarantee
of, or pledge of assets to secure, the Notes by such Subsidiary on terms at
least as favorable to the Holders of the Notes as such guarantee or security
interest in such assets is to the holders of such Pari Passu Indebtedness or
Junior Indebtedness, except that in the event of a guarantee or security
interest in such assets with respect to (x) Pari Passu Indebtedness, the
guarantee or security interest in such assets under the supplemental indenture
shall be made pari passu to the guarantee or security interest in such assets
with respect to such Pari Passu Indebtedness or (y) Junior Indebtedness, any
such guarantee or security interest in such assets with respect to such Junior
Indebtedness shall be subordinated to such Subsidiary's guarantee or security
interest in such assets with respect to the Notes to the same extent as such
Junior Indebtedness is subordinated to the Notes and (ii) such Subsidiary
waives and will not in any manner whatsoever claim, or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Subsidiary of the Company as a
result of any payment by such Subsidiary under its guarantees.
Offer to Purchase upon a Change of Control. If a Change of Control Event
shall occur at any time, then each Holder will have the right to require the
Company to repurchase such Holder's Notes (pursuant to an offer made to all
Holders), in whole or in part, in integral multiples of $1,000 at a purchase
price in cash equal to 101% of the principal amount of such Notes, plus
accrued and unpaid interest, if any, to the date of repurchase. There can be
no assurance that the Company will have the funds available to repurchase the
Notes in the event of a Change of Control Event.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the
repurchase of the Notes upon the occurrence of a Change of Control Event. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the Indenture, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described in the Indenture by virtue thereof.
Additional Covenants. The Indenture will also contain covenants with respect
to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment
of taxes and other claims; (iv) maintenance of properties; and (v) maintenance
of insurance.
MERGER AND CONSOLIDATION
The Indenture will provide that the Company may not, in a single transaction
or a series of transactions, consolidate with or merge into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its assets to any Person or group of affiliated Persons
unless (a) either (i) the Company shall be the continuing entity, or (ii) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all
of the assets of the Company (the "Surviving Entity") is organized
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under the laws of the United States or a state thereof or the District of
Columbia and such Surviving Entity assumes by supplemental indenture, executed
and delivered to the Trustee in form reasonably satisfactory to the Trustee,
all obligations of the Company on the Notes and under the Indenture, (b)
immediately after giving effect to such transaction or series of transactions,
no Default or Event of Default shall have occurred and be continuing, (c) the
Company or the Surviving Entity, as applicable, could incur at least $1.00 of
additional Indebtedness without violating the Leverage Ratio described above
under "Limitation on Indebtedness" and (d) the Company or the Surviving
Entity, as applicable, shall have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each to the effect that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
disposition and the supplemental indenture in respect thereto comply with the
Indenture and that all conditions precedent provided for relating to such
transaction have been complied with.
MODIFICATION OF THE INDENTURE; WAIVER OF COVENANTS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of greater than 50% in aggregate
principal amount of the Notes then outstanding; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Note or
reduce the principal amount thereof, premium, if any, or the rate of interest
thereon, or change the coin or currency in which any Note or any premium or
the interest thereon is payable or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof; (ii) reduce
the percentage in principal amount of the outstanding Notes, the consent of
whose Holders is required for any such amendment or modification, or the
consent of whose Holders is required for any waiver; (iii) modify any of the
provisions relating to supplemental indentures requiring the consent of
Holders or relating to the waiver of past defaults or relating to the waiver
of certain covenants, except to increase the percentage in principal amount of
outstanding Notes required for such action or to provide that certain other
provisions of the Indenture may not be modified or waived without the consent
of the Holder of each Note affected thereby; or (iv) waive a default in
payment with respect to any Note (other than a default in payment that is due
solely because of acceleration of the maturity of the Notes).
Notwithstanding the foregoing, without the consent of any Holders of the
Notes, the Company and the Trustee may modify or amend the Indenture (i) to
evidence the succession of another Person to the Company and the assumption by
any such successor of the covenants of the Company in the Indenture and in the
Notes in accordance with the "Merger and Consolidation" provisions of the
Indenture; (ii) to add any additional Events of Default, to add to the
covenants of the Company for the benefit of the Holders of the Notes, or to
surrender any right or power herein conferred upon the Company in the
Indenture or in the Notes; (iii) to cure any ambiguity, to correct or
supplement any provision in the Indenture which may be defective or
inconsistent with any other provision in the Indenture or in the Notes,
provided that any such action shall not adversely affect in any material
respect the interests of any Holder of any Note; (iv) to secure the Notes or
add a guarantor under the Indenture pursuant to the provisions of the covenant
on "Limitations on Liens and Guarantees" described above; (v) to evidence and
provide the acceptance of the appointment of a successor Trustee under the
Indenture; or (vi) to make any other provisions with respect to matters or
questions arising under the Indenture or the Notes, provided that such
provisions shall not adversely affect in any material respect the interests of
any Holder of any Note.
The Holders of greater than 50% in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
EVENTS OF DEFAULT
An Event of Default will be defined in the Indenture to include:
(i) failure by the Company to pay interest on any Note when due and
payable, if such failure continues for a period of 30 days;
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(ii) failure by the Company to pay the principal on any Note when due and
payable at maturity or upon redemption, acceleration or otherwise;
(iii) failure by the Company to comply with any other agreement or
covenant contained in the Indenture if such failure continues for a period
of 30 days after notice to the Company by the Trustee or to the Company and
the Trustee by the Holders of at least 25% in principal amount of the Notes
then outstanding;
(iv) indebtedness of the Company or any Subsidiary of the Company is not
paid within any applicable grace period after final maturity or in the
event that final maturity is accelerated because of a default and, in
either case, the total amount of such indebtedness unpaid or accelerated is
equal to or greater than 5% of the Company's Consolidated Net Worth at the
quarter end preceding the end of such grace period of such acceleration;
(v) failure by, as the case may be, either or both of the Savings Banks
to comply with any of their Regulatory Capital Requirements; provided, that
an Event of Default under this clause (v) shall not be deemed to have
occurred (a) during the 60 day period following the first day on which
either or both of the Savings Banks, as the case may be, fails or fail to
comply with any of their Regulatory Capital Requirements, if within such 60
day period the Savings Bank or the Savings Banks files or file a capital
plan with the OTS, (b) during the 90 day period following the initial
submission of a capital plan to the OTS by either or both of the Savings
Banks, as the case may be (or, if the OTS notifies the Savings Bank or
Savings Banks in writing that it needs a longer period of time to determine
whether to approve such capital plan or plans, such longer period as is so
specified by the OTS), unless prior to such date the OTS shall have
notified the Savings Bank or Savings Banks of its determination not to
approve such capital plan or plans, or (c) during the period that the
Savings Bank is, or the Savings Banks are, as the case may be, operating in
material compliance with a capital plan or plans approved by the OTS;
(vi) occurrence of certain events of bankruptcy or insolvency of the
Company or any Significant Subsidiary; and
(vii) existence of one or more judgments against the Company or either of
the Savings Banks or any of their Subsidiaries in excess of 5% of the
Company's Consolidated Net Worth, either individually or in the aggregate,
which remain undischarged 60 days after all rights to directly review such
judgment, whether by appeal or writ, have been exhausted or have expired in
excess, either individually or in the aggregate of 5% of the Company's
Consolidated Net Worth as of the quarter end preceding the end of such 60-
day period.
The Company will covenant in the Indenture to file annually with the Trustee
a statement regarding compliance by the Company with the terms of the
Indenture and specifying any defaults of which the signers may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of not less than 25% in principal amount of the Notes then outstanding may
declare all the Notes to be immediately due and payable by notice to the
Company (and to the Trustee if given by the Holders). Under certain
circumstances, the Holders of a majority in principal amount of the Notes then
outstanding may rescind such a declaration.
PROVISION OF REPORTS
The Company will furnish to the Holders of Notes, upon request, whether or
not required by the rules and regulations of the Commission, (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the Commission on Form 10-Q and Form 10-K if the Company was
required to file such forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes the financial
condition and results of operations of the Company and its Subsidiaries, and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants, and (ii) all reports that would be required
to be filed with the Commission on Form 8-K if the Company were required to
file such reports.
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DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any of its Subsidiaries with respect to the
outstanding Notes discharged ("defeasance"). Such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due and certain
provisions of the Indenture with respect to the registration and transfer of
the Notes. In addition, the Company may, at its option and at any time, elect
to have its obligations and the obligations of any of its Subsidiaries with
respect to certain covenants described in the Indenture released ("covenant
defeasance") and thereafter any failure to comply with such covenants shall
not constitute a Default or an Event of Default. In the event of a covenant
defeasance, certain other events (not including prepayment, bankruptcy,
receivership or insolvency events) described under "Events of Default" will no
longer constitute a Default or an Event of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of Notes, cash in United States Dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof
(collectively, the "trust fund"), in such amounts as will be sufficient
(without considering any reinvestment of amounts earned on such U.S.
Government Obligations), in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge interest on the
outstanding Notes as it becomes due and to pay and discharge the principal of
and premium, if any, on the outstanding Notes at redemption or maturity; (ii)
in the case of defeasance, the Company must deliver to the Trustee an opinion
of independent counsel in the United States stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel in the United States shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred; (iii) in the case of covenant defeasance, the Company must deliver
to the Trustee an opinion of independent counsel in the United States to the
effect that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such covenant
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
covenant defeasance had not occurred; (iv) no Default or Event of Default may
have occurred and be continuing on the date of such deposit and after giving
effect thereto; (v) such defeasance or covenant defeasance may not cause the
Trustee for the Notes to have a conflicting interest with respect to any
securities of the Company; (vi) such defeasance or covenant defeasance may not
result in a breach or violation of, or constitute a Default under, the
Indenture or any material agreement or instrument to which the Company is a
party or by which it is bound; (vii) the Company must deliver to the Trustee
an opinion of independent counsel in the United States to the effect that the
trust fund will not be subject to the effect of any applicable bankruptcy,
insolvency, receivership, conservatorship, reorganization or similar laws
affecting creditors' rights generally (including, without limitation,
fraudulent and avoidable transfers); (viii) the Company must deliver to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of the Notes over the other
creditors of the Company or with the intent of defeating, hindering, delaying
or defrauding creditors of the Company; (ix) no event or condition may exist
that would prevent the Company from making payments of the principal of,
premium, if any, and interest on the Notes, on the date of such deposit; and
(x) the Company must deliver to the Trustee an officers' certificate and an
opinion of independent counsel in the United States, each stating that all
conditions precedent relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been
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replaced or paid) have been delivered to the Trustee for cancellation or (b)
all Notes not theretofore delivered to the Trustee for cancellation have
become due and payable, or will become due and payable or are to be called for
redemption within one year, and the Company has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay
and discharge the entire Indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation, for principal of, and premium, if any, and
interest on the Notes to the date of deposit together with irrevocable
instructions to the Trustee from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of
the Indenture have been complied with.
TRUSTEE
Bankers Trust Company, the Trustee under the Indenture, may from time to
time enter into ordinary correspondent and other banking relationships with
the Company. The address of the principal corporate trust office of the
Trustee is 4 Albany Street, New York, NY 10006.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (i) existing at the
time such Person becomes a Subsidiary of or is merged with or into any other
Person or (ii) assumed in connection with the acquisition of assets from such
Person, in each case, other than Indebtedness incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary of such other Person or
such acquisition. Acquired Indebtedness shall be deemed to be incurred on the
date of the related acquisition of assets from such Person or the date such
Person becomes a Subsidiary of or is merged with or into such other Person.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly Controlling or Controlled by or under direct or
indirect common Control with such specified Person and any legal or beneficial
owner, directly or indirectly, of 20% or more of the Voting Stock of such
specified Person. Notwithstanding the foregoing, no Securitization Entity
shall be deemed an Affiliate of the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents or interests
in (however designated) capital stock in such Person, including, with respect
to a corporation, common stock, Preferred Stock and other corporate stock and,
with respect to a partnership, partnership interests, whether general or
limited, and any rights (other than debt securities convertible into corporate
stock, partnership interests or other capital stock), warrants or options
exchangeable for or convertible into such corporate stock, partnership
interests or other capital stock.
"Change of Control Event" means an event or series of events by which
(a) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Existing Principal Stockholders,
is or becomes after the date of issuance of the Notes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act as in
effect on the date of the Indenture), of more than 40% of the total voting
power of all Voting Stock of the Company then outstanding;
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(b) (1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or
(2) the Company conveys, transfers or leases all or substantially all its
assets to any person or group, in one transaction or a series of
transactions other than any conveyance, transfer or lease between the
Company and a Wholly-Owned Subsidiary of the Company,
in each case, with the effect that a person or group, other than the Existing
Principal Stockholders, is or becomes the beneficial owner of more than 40% of
the total voting power of all Voting Stock of the surviving or transferee
corporation of such transaction or series of transactions;
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors, or
whose nomination for election by the Company's shareholders was approved by
a vote of a majority of the Directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority of the Directors then in office; or
(d) the shareholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company.
"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person for such period on a consolidated basis and otherwise
determined in accordance with GAAP.
"Consolidated EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income (Loss) of such Person for such period plus (a)
provision for taxes based on income or profits of such Person for such period
deducted in computing Consolidated Net Income (Loss) plus (b) Consolidated
Interest Expense of such Person for such period, plus (c) Consolidated
Depreciation and Amortization Expense of such Person for such period to the
extent such depreciation and amortization were deducted in computing
Consolidated Net Income (Loss), plus (d) without duplication, any other non-
cash charges reducing Consolidated Net Income (Loss) of such Person for such
period less (e) without duplication, non-cash items increasing Consolidated
Net Income (Loss) of such Person for such period in each case, on a
consolidated basis for such Person in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, the sum
of: (a) consolidated interest expense of such Person for such period, other
than interest expense on deposits, Permitted Acquisition Indebtedness and
Permitted Repurchase Facilities, whether paid or accrued (except to the extent
accrued in a prior period), to the extent such expense was deducted in
computing Consolidated Net Income (Loss) (including amortization of original
issue discount, non-cash interest payments and the interest component of
Capitalized Lease Obligations, excluding amortization of deferred financing
fees) and (b) consolidated capitalized interest of such Person for such
period, whether paid or accrued, to the extent such expense was deducted in
computing Consolidated Net Income (Loss).
"Consolidated Net Income (Loss)" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (loss), by excluding,
without duplication, (i) the portion of net income (or loss) of any other
Person (other than any of such Person's consolidated Subsidiaries) in which
such Person or any of its Subsidiaries has an ownership interest, except to
the extent of the amount of dividends or other distributions actually paid to
such Person or its consolidated Subsidiaries in cash by such other Person
during such period, (ii) net income (or loss) of any Person combined with such
Person or any of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iii) any gain or
loss, net of taxes, realized upon the termination of any employee pension
benefit plan and (iv) solely for the purpose of determining Consolidated Net
Income (Loss) in connection with the calculation of Restricted Payments
permitted to be made hereunder, the net income of any consolidated Subsidiary
of such Person to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that income is
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not at the time permitted, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulations applicable to that Subsidiary or its
shareholders; provided that, upon the termination or expiration of such
dividend or distribution restrictions, the portion of net income (or loss) of
such consolidated Subsidiary allocable to such Person and previously excluded
shall be added to the Consolidated Net Income (Loss) of such Person to the
extent of the amount of dividends or other distributions available to be paid
to such Person in cash by such Subsidiary.
"Consolidated Net Worth" of any Person and its Subsidiaries mean as of the
date of determination all amounts that would be included under stockholders'
equity on a consolidated balance sheet of such Person and its Subsidiaries
determined in accordance with GAAP.
"Control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through ownership of voting securities (or pledge of voting securities
if the pledgee thereof may on the date of determination exercise or control
the exercise of the voting rights of the owner of such voting securities), by
contract or otherwise; and the terms "to Control," "Controlling" and
"Controlled" have meanings correlative to the foregoing.
"Credit Support" means credit support designed to enhance the likelihood of
payment on securities issued in connection with a securitization of loans or
other assets which are generally funded with the proceeds of such
securitization, including without limitation subordination of certain classes
of securities, insurance policies, representations and warranties, reserve
funds, liquidity reserves, lost- and missing- note reserves and letters of
credit.
"Currency Agreement" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means an event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or exchangeable), or
upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the
option of the holder thereof, in whole or in part on, or prior to, or is
exchangeable for debt securities of the Company or its Subsidiaries prior to,
the final Stated Maturity of principal of the Notes; provided that only the
amount of such Capital Stock that is redeemable prior to the Stated Maturity
of principal of the Notes shall be deemed to be Disqualified Capital Stock.
"Disinterested Director" of any Person means, with respect to any
transaction or series of related transactions, a member of the board of
directors of such Person who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions.
"Existing Principal Stockholders" means, individually or collectively,
Andrew A. Wiederhorn and Lawrence A. Mendelsohn and their respective estates,
spouses, heirs, ancestors, lineal descendants and legatees and legal
representatives of any of the foregoing and the trustee of any bona fide trust
of which one or more of the foregoing are the trustees or the majority
beneficiaries, and any entity of which any of the foregoing, individually or
collectively, beneficially owns more than 50% of the Voting Stock thereof.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under compulsion to
complete the transaction; provided, however, that the Fair Market Value of any
asset or assets shall be determined by the Board of Directors of the Company,
acting in good faith, and shall be evidenced by a resolution of such Board of
Directors delivered to the Trustee.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) Consolidated Interest Expense of such Person for such period, and (ii) the
product of (A) all cash dividend payments on any series of
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Preferred Stock or Disqualified Capital Stock of such Person or its
Subsidiaries for such period, and (B) a fraction, the numerator of which is
one and the denominator of which is one minus the then-current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such Indebtedness
against loss, (iii) to supply funds to, or in any other manner invest in, the
debtor (including any agreement to pay for property or services without
requiring that such property be received or such services be rendered), (iv)
to maintain working capital or equity capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the debtor,
or (v) otherwise to assure a creditor with respect to Indebtedness against
loss; provided that the term shall not include endorsements for collection of
deposit, in either case in the ordinary course of business.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holders" means the registered holders of the Notes.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit issued under letter of
credit facilities, and in connection with any agreement by such Person to
purchase, redeem, exchange, convert or otherwise acquire for value any Capital
Stock of such Person now or hereafter outstanding, (ii) all obligations of
such Person evidenced by bonds, notes, debentures or other similar
instruments, (iii) all indebtedness of such Person created or arising under
any conditional sale or other title retention agreement with respect to
property acquired by such Person, but excluding trade payables arising in the
ordinary course of business, (iv) all obligations under interest rate
agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends payable by other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien, upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or
asset or the amount of the obligations so secured), (vii) all guarantees by
such Person of Guaranteed Indebtedness, (viii) all Disqualified Capital Stock
(valued at the greater of book value and voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends) of such Person, and
(ix) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing or any liability of the types referred to in clauses
(i) through (viii) above. For purposes hereof, (x) the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of
such Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital Stock, such fair market
value is to be determined in good faith by the board of directors (or any duly
authorized committee thereof) of the issuer of such Disqualified Capital
Stock, and (y) Indebtedness is deemed to be incurred pursuant to a revolving
credit facility each time an advance is made thereunder.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Subsidiary
against fluctuations in interest rates.
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"Junior Indebtedness" means any Indebtedness of the Company subordinated in
right of payment of either principal, premium (if any) or interest thereon to
the Notes.
"Leverage Ratio" as of any date of determination means the ratio of (i) the
aggregate amount of all Indebtedness and Disqualified Capital Stock of the
Company, excluding (A) Indebtedness and Guarantees thereof permitted to be
incurred pursuant to clauses (e) (1), (2), (3), (6) and (7) of "Certain
Covenants--Limitation on Indebtedness," (B) Hedging Obligations permitted to
be incurred pursuant to clause (e)(13) of the covenant described under
"Certain Covenants--Limitation on Indebtedness" and (C) Junior Indebtedness of
the Company to (ii) the Consolidated Net Worth of the Company.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days
from the determination date: (a) repurchase agreements on obligations of, or
are guaranteed as to timely receipt of principal and interest by, the United
States or any agency or instrumentality thereof when such obligations are
backed by the full faith and credit of the United States provided that the
party agreeing to repurchase such obligations is a primary dealer in U.S.
government securities, (b) federal funds and deposit accounts, including but
not limited to certificates of deposit, time deposits and bankers' acceptances
of any U.S. depository institution or trust company incorporated under the
laws of the United States or any state, provided that the debt of such
depository institution or trust company at the date of acquisition thereof has
been rated by Standard & Poor's Corporation in the highest short-term rating
category or has an equivalent rating from another nationally recognized rating
agency, or (c) commercial paper of any corporation incorporated under the laws
of the United States or any state thereof that on the date of acquisition is
rated investment grade by Standard & Poor's Corporation or has an equivalent
rating from another nationally recognized rating agency; (iii) any debt
instrument which is an obligation of, or is guaranteed as to the receipt of
principal and interest by the United States, its agencies or any U.S.
government sponsored enterprise, or (iv) any mortgage-backed or mortgage-
related security issued by the United States, its agencies, or any U.S.
government sponsored enterprise which the payment of principal and interest
from the mortgages underlying such securities will be passed through to the
holder thereof and which such security has a remaining weighted average
maturity of 15 years or less. Notwithstanding the foregoing, Liquid Assets
shall not include any debt instruments, securities or collateralized mortgage
obligations (real estate mortgage investment conduits) that would be
classified as a "High-Risk Mortgage Security" pursuant to the policy statement
adopted by the Federal Financial Institutions Examination Counsel on February
10, 1992, as reflected in Volume I of the Federal Reserve Report Service, Part
3-1562.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock, or any capital contribution in respect of Capital Stock, as
referred to under "Certain Covenants, Limitation on Restricted Payments," the
proceeds of such issuance or sale or capital contribution in the form of cash
or cash equivalents, including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed for, cash or cash equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Subsidiary of the Company), net of attorney's fees, accountant's fees and
brokerage, consulting, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale or capital contribution and
net of taxes paid or payable by the Company as a result thereof.
"Non-Recourse Indebtedness" is defined to mean, with respect to any Person,
Indebtedness of such Person for which (i) the sole recourse for collection of
principal and interest on such Indebtedness is against the specific assets
identified in the instruments evidencing or securing such Indebtedness, (ii)
such assets were acquired with the proceeds of such Indebtedness or such
Indebtedness was incurred concurrently with the acquisition of such
assets; and (iii) no other assets (other than Credit Support) of such Person
or of any other Person may be realized upon or in collection of principal or
interest on such Indebtedness.
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"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment of principal, premium (if any) and interest thereon
to the Notes.
"Permitted Acquisition Indebtedness" means any secured funding arrangement
with a financial institution or other lender to the extent (and only to the
extent) funding thereunder is used exclusively to finance or refinance the
purchase or origination of loans, real estate owned or other financial assets
by the Company or a Subsidiary.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have
been made; (ii) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other similar Liens imposed by
law and arising in the ordinary course of business and with respect to amounts
not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made, (iii) Liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory or regulatory obligations, surety and appeal bonds, progress
payments, development obligations, government contracts, performance and
return-of-money bonds and other obligations of a similar nature, in each case
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money or otherwise constituting a liability in accordance
with GAAP); (v) with respect to property of the Company or any Subsidiary,
Liens granted on such property or assets in favor of the Person from whom the
Company or such Subsidiary acquired such property or assets which Liens secure
the payment of a contingent portion of the purchase price of such property so
long as such Liens are granted and such arrangement is entered into in the
ordinary course of business of the Company; (vi) attachment or judgment Liens
not giving rise to a Default or Event of Default and which are being contested
in good faith by appropriate proceedings; (vii) easements, rights-of-way,
restrictions, homeowners association assessments and similar charges or
encumbrances that do not materially interfere with the ordinary course of
business of the Company or any of its Subsidiaries; (viii) zoning
restrictions, licenses, restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of
such property in the ordinary course of business of the Company or any
Subsidiary or the value of such real property for the purpose of such
business; (ix) Liens in favor of the Company or any Subsidiary that is a
Wholly Owned Subsidiary of the Company; (x) Liens existing on the Closing
Date; (xi) Liens securing Non-Recourse Indebtedness of the Company or a
Subsidiary thereof; (xii) Liens with respect to the property or assets of the
Company or a Subsidiary securing Indebtedness permitted to be incurred
pursuant to clauses (e)(1), (2), (3), (6) and (7) of "Certain Covenants--
Limitations on Indebtedness"; (xiii) Liens granted after the Closing Date on
any assets or Capital Stock of the Company or its Subsidiaries created in
favor of the Holders; (xiv) Liens with respect to the property or assets of a
Subsidiary granted by such Subsidiary to the Company to secure Indebtedness
owing to the Company; (xv) Liens securing Indebtedness which is incurred to
refinance Permitted Indebtedness, provided that such Liens constitute
Permitted Liens under this clause (xv) only to the extent that they do not
extend to or cover any property or assets of the Company or any Subsidiary
other than the property or assets securing the Indebtedness being refinanced;
(xvi) leases or subleases granted to others not materially interfering with
the ordinary course of business of the Company or any of its Subsidiaries;
(xvii) other Liens securing obligations not exceeding $1,000,000; and (xviii)
Liens securing Hedging Obligations of the Company or such Subsidiary so long
as such Hedging Obligations relate to Indebtedness that is, and is permitted
under the Indenture to be, secured by a Lien on the same property securing
such Hedging Obligations.
"Permitted Payment" means, so long as no Default or Event of Default is
continuing,
(a) the purchase, redemption, defeasance or other acquisition or retirement
for value of any Capital Stock of the Company or any Affiliate (other than a
Wholly-Owned Subsidiary) of the Company, Junior Indebtedness or Pari Passu
Indebtedness in exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege where, in connection therewith,
cash is paid in lieu of the issuance of fractional shares or scrip), or out of
the Net Cash Proceeds or Fair Market Value of property not constituting Net
Cash Proceeds of, a
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substantially concurrent issue and sale (other than to a Subsidiary of the
Company or to an employee benefit plan of the Company or any of its
Subsidiaries) of Qualified Capital Stock of the Company; provided that the Net
Cash Proceeds or Fair Market Value of such property received by the Company
from the issuance of such shares of Qualified Capital Stock, to the extent so
utilized, shall be excluded from clause (d)(iii) of the covenant described
under "Covenants, Limitation on Restricted Payments" above; and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness or Pari Passu Indebtedness in
exchange for, or out of the Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company) of new Indebtedness
by the Company (such a transaction, a "refinancing"); provided, that any such
new Indebtedness of the Company (i) shall be in a principal amount that does
not exceed an amount equal to the sum of (A) the principal amount of the
Indebtedness so refinanced less any discount from the face amount of such
Indebtedness to be refinanced expected to be deducted from the amount payable
to the holders of such Indebtedness in connection with such refinancing, (B)
the amount of any premium expected to be paid in connection with such
refinancing pursuant to the terms of the Junior Indebtedness or Pari Passu
Indebtedness refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing by means of a tender
offer, privately negotiated repurchase or otherwise and (C) the amount of
legal, accounting, printing and other similar expenses of the Company incurred
in connection with such refinancing; provided, further, that for purposes of
this clause (i), the principal amount of any Indebtedness shall be deemed to
mean the principal amount thereof or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination; (ii) (A) if such refinanced Indebtedness has an Average Life to
Stated Maturity shorter than that of the Notes or a final Stated Maturity
earlier than the final Stated Maturity of the Notes, such new Indebtedness
shall have an Average Life to Stated Maturity no shorter than the Average Life
to Stated Maturity of such refinanced Indebtedness and a final Stated Maturity
no earlier than the final Stated Maturity of such refinanced Indebtedness or
(B) in all other cases each Stated Maturity of principal (or any required
repurchase, redemption, defeasance or sinking fund payments) of such new
Indebtedness shall be after the final Stated Maturity of principal of the
Notes; and (iii) is (A) made expressly subordinated to or pari passu with the
Notes to substantially the same extent as the Indebtedness being refinanced or
(B) expressly subordinate to such refinanced Indebtedness.
"Permitted Repurchase Facilities" includes purchase and sale facilities
pursuant to which the Company or a Subsidiary sells loans, real estate owned
or other financial assets to a financial institution or other entity and
agrees to repurchase such loans, real estate owned or financial assets.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary liquidation or dissolution of such Person, over Capital Stock of any
other class in such Person.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Savings Banks pursuant to 12 U.S.C. Section 1464(t) and 12
C.F.R. Section 567 (and any amendment to either thereof) or any successor law
or regulation, or such higher amount of capital as either Savings Bank,
respectively, is required to maintain in order to meet any individual minimum
capital standard applicable to the Savings Bank pursuant to 12 U.S.C. Section
1464(s) and 12 C.F.R. Section 567.3 or to comply with any enforcement action,
including but not limited to the Orders, issued pursuant to 12 U.S.C. Section
1818(b) (and any amendment to any of the foregoing) or any successor law or
regulation.
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"Restricted Payment" means
(a) the declaration, payment or setting apart of any funds for the payment
of any dividend on, or making of any distribution to holders of, the Capital
Stock of the Company or any Subsidiary of the Company (other than (i)
dividends or distributions in Qualified Capital Stock of the Company and (ii)
dividends or distributions payable on or in respect of any class or series of
Capital Stock of a Subsidiary of the Company as long as the Company receives
at least its pro rata share of such dividends or distributions in accordance
with its ownership interests in such class or series of Capital Stock);
(b) the purchase, redemption or other acquisition or retirement for value,
directly or indirectly, of any Capital Stock of the Company or any Affiliate
of the Company (other than a Wholly-Owned Subsidiary, and other than the
purchase from a non-Affiliate of the Company of Capital Stock of any joint
venture or other Person which is an Affiliate of the Company solely because of
the Company's direct or indirect ownership of 20% or more of the Voting Stock
of such joint venture or other Person); or
(c) the making of any principal payments on, or repurchase, redemption,
defeasance, retirement or other acquisition for value, directly or indirectly,
of any Junior Indebtedness or Pari Passu Indebtedness, prior to any Stated
Maturity of principal or scheduled redemption or defeasance of, or any
scheduled sinking fund payment on, such Junior Indebtedness or Pari Passu
Indebtedness.
"Securitization Entity" means any pooling arrangement or entity formed or
originated for the purpose of holding, and/or issuing securities representing
interests in, one or more pools of mortgages, leases, credit card receivables,
home equity loan receivables, automobile loans, leases or installment sales
contracts, other consumer receivables, real estate owned or other financial
assets of the Company or any Subsidiary, and shall include, without
limitation, any partnership, limited liability company, liquidating trust,
grantor trust, owner trust, real estate mortgage investment conduit, real
estate investment trust or collateralized bond obligation.
"Significant Subsidiary" means, with respect to any Person, any consolidated
Subsidiary of such Person for which the net income of such Subsidiary was more
than 25% of the Consolidated Net Income of such Person in both of the two
prior fiscal years.
"Stated Maturity" when used with respect to any Indebtedness (including,
without limitation, the Notes) means the dates specified in the instrument
governing such Indebtedness as the fixed dates on which any principal amount
of such Indebtedness is due and payable (including, without limitation, by
reason of any required redemption, purchase, defeasance or sinking fund
payment) and, when used with respect to any installment of interest on
Indebtedness, means the date on which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of Voting
Stock thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of such Person or a
combination thereof.
"Unsecured Debt Coverage Ratio" means, with respect to any Person for any
period, the ratio of Consolidated EBITDA of such Person for such period to the
Fixed Charges of such Person for such period. In the event that the Company
incurs, assumes, guarantees or redeems any Indebtedness (including any
Indebtedness which constitutes Acquired Indebtedness) subsequent to the
commencement of the period for which the Unsecured Debt Coverage Ratio is
being calculated but prior to the event for which the calculation of the
Unsecured Debt Coverage Ratio is made (the "Calculation Date"), then the
Unsecured Debt Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, guarantee or redemption of Indebtedness, as if
the same had occurred at the beginning of the applicable four-quarter period,
including an assumption of investment returns at the rate equal to the higher
of the six-month Treasury bill rate or six-month LIBOR at the beginning of
such four-quarter period. For purposes of making the computation referred to
above, investments in the equity of, or other acquisitions or dispositions,
which constitute all or substantially all of an operating unit of a business
and discontinued operations (as determined in accordance with GAAP) that have
104
<PAGE>
been made by the Company or any of its Subsidiaries, including all mergers,
consolidations and dispositions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be calculated on a pro forma basis assuming that all such investments,
acquisitions, dispositions, discontinued operations, mergers and
consolidations (and the reduction of any associated fixed charge obligations
and the change in Consolidated EBITDA resulting therefrom) had occurred on the
first day of the four-quarter period. If since the beginning of such period
any Person (that subsequently became a Subsidiary or was merged with or into
the Company or any Subsidiary since the beginning of such period) shall have
made any investment in the equity of, or other acquisition or disposition,
which constitutes all or substantially all of an operating unit of a business,
discontinued operation, merger or consolidation that would have required
adjustment pursuant to this definition, then the Unsecured Debt Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
investment, acquisition, disposition, discontinued operation, merger or
consolidation had occurred at the beginning of the applicable four-quarter
period. For purposes of this definition, whenever pro forma effect is to be
given to a transaction, the pro forma calculations shall be made in good faith
by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate
in effect on the Calculation Date had been the applicable rate for the entire
period. Interest on a Capital Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by a responsible financial or accounting
officer of the Company to be the rate of interest implicit in such Capital
Lease Obligation in accordance with GAAP. Interest on Indebtedness that may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then
based upon such optional rate chosen as the Company may designate.
"Voting Stock" means Capital Stock of the class or classes of which the
holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at
the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency) or (ii) in respect
of a partnership, the general voting power under ordinary circumstances to
elect the board of directors or other governing board of such partnership or
of the Person which is a general partner of such partnership.
"Wholly-Owned Subsidiary" means a Subsidiary all of the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly-Owned Subsidiary.
105
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement with
respect to the Notes Offering (the "Notes Underwriting Agreement") between
WFSG and Friedman, Billings, Ramsey & Co., Inc. (the "Notes Underwriter"),
WFSG has agreed to sell and the Notes Underwriter has agreed to purchase from
WFSG the aggregate principal amount of Notes offered hereby.
The Notes Underwriting Agreement provides that, subject to the terms and
conditions set forth therein (including the completion of the Common Stock
Offering), the Notes Underwriter will purchase all of the Notes offered hereby
if any such Notes are purchased.
The Notes Underwriter proposes to offer the Notes directly to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of % of the principal amount. The Notes Underwriter may allow, and
such dealers may reallow, a concession not in excess of % of the principal
amount on sales to certain other dealers. The offering of the Notes is made
for delivery when, as and if accepted by the Notes Underwriter and is subject
to prior sale and to withdrawal, cancellation or modification of the offer
without notice. The Notes Underwriter reserves the right to reject any order,
in whole or in part, for the purchase of Notes. After the initial public
offering of the Notes, the offering price and other selling terms may be
changed by the Notes Underwriter.
The Notes Underwriter does not intend to confirm sales to any account over
which it exercises discretionary authority.
The Company has agreed to indemnify the Notes Underwriter against certain
liabilities, including liabilities under the federal securities laws, or to
contribute to payments that the Notes Underwriter may be required to make in
respect thereof.
LEGAL MATTERS
The legality of the Notes offered hereby will is being passed on for the
Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York. Certain
legal matters in connection with the Notes offered hereby will be passed upon
for the Notes Underwriter by Gibson, Dunn & Crutcher LLP, Orange County,
California.
EXPERTS
The audited consolidated financial statements of the Company and its
subsidiaries at and for the nine months ended September 30, 1996, and at
December 31, 1995 and 1994 and for the two years then ended, the audited
consolidated financial statements of Girard Savings Bank, F.S.B. and
Subsidiary for the period from January 1 through November 8, 1994, and the
audited combined financial statements of Wilshire Credit Corporation and
Affiliates at and for the nine months ended September 30, 1996 and at December
31, 1995 and 1994 and for the two years then ended, have been included herein
in reliance upon the reports of Deloitte & Touche LLP, independent auditors,
upon the authority of said firm as experts in auditing and accounting.
106
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION
WCC'S LOAN ACTIVITY
Since the Company has and will be engaged in the loan acquisition and
origination businesses similar to those conducted by WCC, this section
contains certain information with respect to loans serviced, acquired or
originated by WCC to assist investors in evaluating the Company's ability to
engage in these activities on an ongoing basis. These loans (including
servicing rights) are not owned by the Company and investors in the Common
Stock or the Notes will have no right or claim to such assets. The financial
statements of WCC are included as an appendix since the Company will carry on
certain similar business operations with some of the same management as WCC.
However, the Company does not believe that the historical results of
operations of WCC are representative of future results of operations of the
Company or WFC. In addition, there can be no assurance that the results of
operations of WCC will be indicative of future performance or that the Company
will be able to acquire, originate and service mortgage loans to the same
extent as WCC.
ACTIVITY IN WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN ACQUISITION AND ORIGINATION
DATA:
Loan purchases and originations:
Single-family residential.......... $ 143,581 $ 5,742 $ 57,832 $ 1,059
Multi-family residential........... -- 983 667 --
Commercial and other mortgage
loans............................. 3,915 2,671 39,002 1,964
Consumer and other................. 45 14,223 101,890 39,330
---------- -------- -------- --------
Total............................ 147,541 23,619 199,391 42,353
Discounted loan purchases:
Single-family residential.......... 92,444 36,653 26,342 95
Multi-family residential........... 1,158 4,773 1,392 191
Commercial and other mortgage
loans............................. 16,598 22,252 8,087 4,322
Consumer and other................. 1,030 50,345 5,669 284,663
---------- -------- -------- --------
Total............................ 111,230 114,023 41,490 289,271
---------- -------- -------- --------
Total loan acquisitions and
originations........................ $ 258,771 $137,642 $240,881 $331,624
========== ======== ======== ========
LOANS SOLD........................... $ 138,429 $133,500 $ 9,000 $ --
LOANS SERVICED-END OF PERIOD......... $1,418,507 $894,649 $889,585 $606,122
</TABLE>
107
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
The following table sets forth the composition of WCC's total gross loan
portfolio at the end of the periods indicated.
COMPOSITION OF WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------
1996 1995 1994 1993
------------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residential...... $ 72,425 $ 60,951 $ 138,063 $ 197
Multi-family residential....... 1,838 2,196 721 --
Commercial and other mortgage
loans......................... 26,079 25,277 36,276 242
Consumer and other............. 30,841 51,848 96,980 50,563
--------- --------- --------- --------
Loan Portfolio............... 131,183 140,272 272,040 51,002
Discounted Loan Portfolio:
Single-family residential...... 112,972 79,636 19,939 68
Multi-family residential....... 6,265 8,835 699 135
Commercial and other mortgage
loans......................... 58,027 60,736 8,905 2,008
Consumer and other............. 313,496 261,880 324,358 453,693
--------- --------- --------- --------
Discounted Loan Portfolio.... 490,760 411,087 353,901 455,904
Accrued Interest................. 266,617 238,021 210,050 210,667
Unaccreted discount (1).......... (601,840) (615,341) (583,870) (658,946)
--------- --------- --------- --------
Total Loan Portfolio, net ....... $ 286,720 $ 174,039 $ 252,121 $ 58,627
========= ========= ========= ========
</TABLE>
- --------
(1) Includes unaccreted discount for principal and accrued interest.
WCC'S FINANCIAL INFORMATION
General. The following tables present Summary Combined Financial Information
for WCC and affiliates at the dates and for the periods indicated. The
historical income statement and balance sheet data at and for the nine months
ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993
have been derived from the audited combined financial statements of WCC and
affiliates included elsewhere in this Prospectus (the "WCC Audited Financial
Statements").
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1996. The Summary
Consolidated Financial Information should be read in conjunction with, and is
qualified in its entirety by reference to, the WCC Financial Statements and
related notes as set forth elsewhere herein.
Management believes that WCC's historical financial statements are only
relevant to the extent that such financial statements give an indication of
the ability of management to acquire Loan Portfolios and that such historical
financial information is not directly relevant in evaluating the Company's
results of operations because (i) the servicing revenues of WCC--its primary
source of revenues--are significantly different from the servicing revenues
that the Company may generate in the future, (ii) the public investors will
acquire no interest in the historical assets or liabilities of WCC and the
earnings on such assets are substantially different from that which might be
expected for the Company, and (iii) the Company is not expected to generate
significant servicing revenues for at least two years.
108
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
Significant Differences in Servicing Revenues. The servicing revenues
expected to be derived by the Company in the future are expected to be a fixed
rate per performing loan on the principal amount of such loan or a specified
dollar amount per month and a fixed rate as a percentage of the principal
amount or cash flow for a non-performing loan, in each case consistent with
standard industry practice. Servicing revenues generated by WCC in the past
are very different from those expected to be generated by the Company since a
substantial percentage of loans owned and serviced by WCC were participated
out to third party investors pursuant to participation agreements. These
participation agreements provided that WCC would generally receive 5-10% of
cash flow from each asset until the investors had received their capital and
thereafter WCC was generally entitled to receive 15-35% of the cash flow.
Accordingly, WCC's servicing revenues included an element of profit
participation which is not expected to be present in a typical servicing
arrangement for the Company and WCC's servicing revenues would be expected to
be higher than the servicing revenues expected to be generated by the Company
in the future.
No Transfer of Historical Assets and Liabilities. As part of the
Reorganization, the public investors will acquire no interest in the
historical assets or liabilities of WCC, nor in any income to be derived from
those assets or expense associated with those liabilities. As mentioned above,
the most significant assets on the WCC balance sheet are the loans subject to
participation agreements, which agreements have a significant impact on WCC's
rights to such assets and the income stream generated by such assets. It is
currently anticipated that the Company will seek to acquire assets outright
and not engage in participation agreements (in order to obtain all of the
benefit (and risk) of such assets).
Timing of Servicing Revenues. Following the completion of the Common Stock
Offering and the Notes Offering, WCC would service at market rates any loans
acquired by the Company for at least two years following the offering and
possibly longer (up to three years). Accordingly, the Company would have a
servicing expense (the fee payable to WCC) during such period and WCC would
generate the profits associated with such servicing (the servicing fee less
the cost of servicing).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
WCC SELECTED FINANCIAL 1996 1995 1994 1993
INFORMATION ------------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing fees.................. $ 6,041 $ 9,739 $ 3,339 $1,356
Interest and dividend income.... 6,718 5,124 1,667 560
Other revenues.................. 1,542 668 657 4,509
Compensation and other general
and administrative expenses.... (9,278) (11,029) (5,964) (4,509)
Interest expense................ (9,116) (3,789) (894) (339)
Other........................... 72 (194) 133 --
-------- -------- -------- ------
Net income (loss)............... $ (4,021) $ 519 $ (1,062) $1,577
======== ======== ======== ======
BALANCE SHEET DATA:
Total assets.................... $353,168 $206,373 $288,004
Loan portfolio, net............. -- 121,420 125,942
Discounted Loan portfolio, net.. 4,824 19,352 17,188
Loans held for sale, at lower of
cost or market................. 281,896 33,267 108,991
Participation liabilities....... 143,424 150,298 205,331
Borrowings...................... 243,239 70,165 60,941
Stockholders' equity (deficit).. (50,963) (23,801) (11,099)
</TABLE>
109
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
Servicing Fees and Income from Investments in Loans and Securities. WCC's
servicing fees decreased by $1.7 million, and income from investments in loans
and securities increased by $3.8 million, during the nine months ended
September 30, 1996 (annualized basis) compared to the year ended December 31,
1995. These changes are related to a shift between mid-1995 and mid-1996 to a
strategy of acquiring more loan portfolios for WCC's own account rather than
acquiring loans with participation funding. Participation arrangements entail
greater servicing income, whereas direct ownership in loans entails more
interest income.
Other Revenues. Other revenues are derived from various sources including
rental income from commercial properties and gains on sales of loans. Total
other revenues increased during the first nine months of 1996 compared to the
year ended December 31, 1995 due to the sale of loans which resulted in a gain
of approximately $0.9 million.
General and Administrative Expense. WCC's general and administrative expense
increased by approximately $1.3 million during the nine months ended September
30, 1996 (annualized basis) compared to the year ended December 31, 1995 as a
result of the increased cost in acquiring and servicing a greater number of
loan portfolios.
Interest Expense. WCC's interest expense increased by approximately $8.4
million during the nine months ended September 30, 1996 (annualized basis)
compared to the year ended December 31, 1995 as a result of increased
borrowings to acquire loan portfolios and to fund shareholder loans to
capitalize the Savings Banks.
Performing and Discounted Loans. WCC's loans increased by approximately
$112.7 million during the nine months ended September 30, 1996 as a result of
the Company's business strategy of aggressively acquiring loan portfolios of
discounted loans and performing mortgage loans.
Participations. Participations decreased by approximately $6.9 million
during the nine months ended September 30, 1996 primarily as a result of
securitization of portfolios or the resolution of outstanding loans and
decreased reliance on participation funding for acquiring loan portfolios.
Borrowings. Borrowings increased by approximately $173.1 million during the
nine months ended September 30, 1996 as a result of WCC securitizing certain
loans (accounted for as a financing), acquiring more loan portfolios for WCC's
own account rather than acquiring loans with participation funding, and
distributions to shareholders.
Stockholders' Equity. Stockholders' equity decreased by approximately $27.2
million during the nine months ended September 30, 1996 primarily as a result
of distributions to shareholders, primarily for the purpose of adding capital
to affiliated banks to fund growth and for other purposes.
110
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-3
Consolidated Statements of Operations--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994 ................................ F-4
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994................................. F-5
Consolidated Statements of Stockholders' Equity--Nine Months Ended
September 30, 1996
and Years Ended December 31, 1995 and 1994............................. F-7
Notes to Consolidated Financial Statements.............................. F-8
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report............................................ F-27
Consolidated Financial Statements:
Consolidated Statements of Operations for the Period from January 1,
1994 through
November 8, 1994....................................................... F-28
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through
November 8, 1994....................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
WILSHIRE CREDIT CORPORATION AND AFFILIATES
Independent Auditors' Report............................................ F-33
Combined Financial Statements:
Combined Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-34
Combined Statements of Operations--Nine Months Ended September 30, 1996
and the
Years Ended December 31, 1995 and 1994 ................................ F-35
Combined Statements of Stockholders' Equity--Nine Months Ended September
30, 1996
and the Years Ended December 31, 1995 and 1994......................... F-36
Combined Statements of Cash Flows--Nine Months Ended September 30, 1996
and
the Years Ended December 31, 1995 and 1994............................. F-37
Notes to Combined Financial Statements.................................. F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Wilshire Financial Services Group Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of September 30, 1996 and December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1996 and for the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Wilshire Financial Services Group
Inc. and Subsidiaries as of September 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiaries, First Bank of Beverly Hills, F.S.B. and Girard Savings
Bank, F.S.B., are operating under regulatory agreements with the Office of
Thrift Supervision that require them to meet certain prescribed requirements.
/s/ Deloitte & Touche LLP
November 13, 1996
Los Angeles, California
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 11,231 $ 3,382
Federal funds sold................................ 9,300 1,100
-------- --------
Total cash and cash equivalents................. 20,531 4,482
Mortgage-backed securities held to maturity, at
amortized cost (fair values: September 30, 1996,
$21,778; December 31, 1995, $12,873)............. 22,380 13,119
Mortgage-backed securities available for sale, at
fair value (amortized cost: September 30, 1996,
$6,652; December 31, 1995, $9,099)............... 6,483 9,083
Securities held to maturity, at amortized cost
(fair values:
September 30, 1996, $7,452; December 31, 1995,
$6,488).......................................... 7,425 6,470
Trading account securities........................ 7,092 --
Loans, net........................................ 177,280 258,827
Discounted loans, net............................. 3,419 13,347
Loans held for sale, net, at lower of cost or
market........................................... 260,804 18,597
Stock in Federal Home Loan Bank of San Francisco,
at cost.......................................... 2,911 1,421
Real estate owned, net............................ 2,514 4,964
Leasehold improvements and equipment, net......... 336 275
Due from affiliate................................ 8,357 4,514
Accrued interest receivable....................... 4,268 3,042
Prepaid expenses and other assets................. 3,887 1,724
Income taxes receivable, net...................... 5,422 1,589
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits.......................................... $487,535 $303,524
Borrowings........................................ -- 13,000
Accounts payable and other liabilities............ 7,625 4,398
Subordinated debt................................. -- 11,000
Deferred credits.................................. 832 1,134
Minority interest in subsidiaries................. 277 600
Due to affiliates................................. 2,286 759
-------- --------
Total liabilities............................... 498,555 334,415
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock................................... -- --
Common stock...................................... 35,550 6,800
Retained earnings (accumulated deficit)........... (827) 255
Unrealized loss on available-for-sale securities,
net of tax....................................... (169) (16)
-------- --------
Total stockholders' equity...................... 34,554 7,039
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C> <C>
INTEREST INCOME:
Loans...................................... $31,686 $21,821 $ 7,923
Mortgage-backed securities................. 1,280 1,359 1,361
Securities and federal funds sold.......... 1,171 1,201 285
------- ------- --------
Total interest income.................... 34,137 24,381 9,569
------- ------- --------
INTEREST EXPENSE:
Deposits................................... 17,448 13,944 5,017
Borrowings................................. 2,144 537 440
------- ------- --------
Total interest expense................... 19,592 14,481 5,457
------- ------- --------
NET INTEREST INCOME.......................... 14,545 9,900 4,112
PROVISION FOR ESTIMATED LOSSES ON LOANS...... 15,751 4,266 2,173
------- ------- --------
NET INTEREST (LOSS) INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS............... (1,206) 5,634 1,939
------- ------- --------
OTHER INCOME (LOSS):
Bankcard income............................ 5,078 4,694 635
Bankcard processing expense................ (3,865) (3,462) (274)
Gain on sale of loans...................... 1,983 642 --
Loan fees and charges...................... 1,217 610 43
Trading account--unrealized gain........... 1,601 -- --
Gain on sale of mortgage-backed securities
available for sale........................ -- 14 54
Amortization of deferred credits........... 346 460 388
Other, net................................. 17 149 381
------- ------- --------
Total other income (loss)................ 6,377 3,107 1,227
------- ------- --------
OTHER EXPENSES:
Compensation and employee benefits......... 2,955 2,516 1,922
FDIC insurance premiums.................... 2,066 721 261
Occupancy.................................. 218 385 319
Professional services...................... 572 1,028 507
Data processing and equipment rentals...... 189 232 162
Real estate owned, net..................... 231 170 241
Loan service fees and expenses paid to
affiliate................................. 3,522 1,958 242
Other general and administrative expenses.. 1,152 1,092 1,290
------- ------- --------
Total other expenses..................... 10,905 8,102 4,944
------- ------- --------
(LOSS) INCOME BEFORE INCOME TAX PROVISION.... (5,734) 639 (1,778)
INCOME TAX (BENEFIT) PROVISION............... (4,652) 47 (526)
------- ------- --------
NET (LOSS) INCOME............................ $(1,082) $ 592 $ (1,252)
======= ======= ========
(LOSS) EARNINGS PER SHARE.................... $(14.05) $ 25.09 $(135.43)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $ (1,082) $ 592 $(1,252)
Reconciliation of net (loss) income to net
cash (used in) provided by operating
activities:
Provision for estimated losses on loans... 15,751 4,266 2,173
Provision for real estate owned losses.... -- 598 100
Depreciation and amortization............. 116 241 121
Loss (gain) on sale of real estate owned.. 164 (97) 406
Gain from sale of mortgage-backed
securities available
for sale ................................ -- (14) (54)
Gain on sale of loans..................... (1,983) (642) --
Amortization of discounts and deferred
fees..................................... (2,126) (1,246) (600)
Amortization of deferred credits.......... (346) (460) (388)
FHLB stock dividend....................... (64) (40) (39)
Change in:
Trading account......................... (6,526) -- 489
Accrued interest receivable............. (1,226) (1,443) (238)
Prepaid expenses and other assets....... (2,163) (698) 483
Due from affiliates..................... (3,843) (452) (2,833)
Due to affiliates....................... 1,527 107 (210)
Current income taxes receivable......... 728 (396) 591
Deferred income taxes................... (4,561) (419) 111
Accounts payable and other liabilities.. 3,227 1,846 (474)
Minority interest....................... (323) 26 --
Other................................... 43 (180) --
-------- -------- -------
Net cash (used in) provided by
operating activities................. (2,687) 1,589 (1,614)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans........................... (227,632) (186,895) (41,561)
Loan repayments, net of originations........ 35,521 49,035 16,836
Proceeds from sale of loans................. 26,335 16,673 --
Purchase of mortgage-backed securities
available for sale......................... -- -- (10,655)
Proceeds from maturity of securities held to
maturity................................... 5,000 1,000 --
Purchase of mortgage-backed securities held
to maturity................................ (11,182) -- (4,198)
Repayments of mortgage-backed securities
held to maturity........................... 1,820 824 643
Proceeds from sale of mortgage-backed
securities available for sale.............. -- 1,496 3,963
Repayments of mortgage-backed securities
available for sale......................... 1,871 1,528 --
Purchases of securities and FHLB stock...... (7,344) (2,965) (105)
Proceeds from sale of FHLB stock............ -- 231 --
Proceeds from sale of real estate owned..... 5,763 5,254 569
Purchase of subsidiary net of cash and cash
equivalents................................ -- -- (346)
Purchases of leasehold improvements and
equipment.................................. (177) (349) (184)
-------- -------- -------
Net cash used in investing
activities........................... (170,025) (114,168) (35,038)
</TABLE>
(continued)
See notes to consolidated financial statements.
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits...................... $ 184,011 $107,731 $ 26,181
Proceeds from issuance of common stock...... 17,750 -- 3,750
Issuance of subordinated debt............... -- 9,000 --
Proceeds from other borrowings.............. 308,109 77,419 41,677
Repayments of other borrowings.............. (321,109) (85,919) (30,285)
Issuance of preferred stock................. -- -- 1,000
--------- -------- --------
Net cash provided by (used in) financing
activities............................... 188,761 108,231 42,323
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 16,049 (4,348) 5,671
CASH AND CASH EQUIVALENTS:
Beginning of year........................... 4,482 8,830 3,159
--------- -------- --------
End of year................................. $ 20,531 $ 4,482 $ 8,830
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Interest.................................... $ 18,772 $ 13,833 $ 5,479
Income taxes................................ 216 365 110
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans........................ 4,377 9,878 3,122
Loans to facilitate the sale of real estate
owned...................................... -- 367 2,352
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for common
stock...................................... 11,000 -- --
Exchange of preferred stock for subordinated
debt....................................... -- 2,000 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK EARNINGS FOR-SALE
------------------- -------------- (ACCUMULATED SECURITIES
SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------- ------ ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 6,644 $ 3,050 $ 915 $(159) $ 3,806
Net loss............... (1,252) (1,252)
Unrealized loss on
available-for-sale
securities--net of
tax................... (511) (511)
Issuance of stock...... 1,000,000 1,000 16,952 3,750 4,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1994................... 1,000,000 1,000 23,596 6,800 (337) (670) 6,793
Net income............. 592 592
Unrealized gain on
available-for-sale
securities--net of
tax................... 654 654
Exchange of preferred
stock for
subordinated debt..... (1,000,000) (1,000) (1,000)
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1995................... 23,596 6,800 255 (16) 7,039
Net loss............... (1,082) (1,082)
Unrealized loss on
available-for-sale
securities--net of tax
...................... (153) (153)
Exchange of
subordinated debt for
common stock.......... 29,142 11,000 11,000
Issuance of common
stock ................ 47,025 17,750 17,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, September 30,
1996................... -- $ -- 99,763 $35,550 $ (827) $(169) $34,554
========== ======= ====== ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Wilshire Financial Services Group Inc. and
subsidiaries (the "Company") operate two savings banks (the "Banks") located
in Southern California and have administrative headquarters in Portland,
Oregon. The Banks are federally chartered savings institutions regulated by
the Office of Thrift Supervision ("OTS"). The Company's primary sources of
revenue are real estate and consumer loans acquired in purchase transactions,
mortgage-backed securities, loan securitization transactions, and merchant
bankcard operations.
Principles of Consolidation and Combination--Wilshire Financial Services
Group Inc. ("WFSG") was incorporated in 1996 to be the holding company for
Wilshire Acquisitions Corporation ("WAC"), which is the holding company for
the Banks. WFSG has had no historical operations other than those of WAC and
its subsidiaries, but has formed other subsidiaries that will conduct other
operations in the future.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank of
Beverly Hills, F.S.B. ("FBBH") in a purchase accounting transaction. On
November 9, 1994, a newly-formed entity with ownership and management common
to WAC-Wilshire Acquisitions Corporation II ("WACII")--acquired 94.9% of the
common stock of Girard Savings Bank, F.S.B. and subsidiary ("GSB") in a
purchase accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated or
combined basis and includes the accounts of WAC, FBBH and GSB. With respect to
all consolidated and combined financial information, intercompany transactions
and balances have been eliminated. For convenience, all the accompanying
financial statements are referred to as "consolidated".
The purchase prices of the Banks were less than the fair values of the net
assets acquired. As a result, the Company recorded deferred credits, or
negative goodwill, totaling $2,156. These credits are being amortized over
five years on a straight-line basis. The other material purchase accounting
adjustment relates to the carrying value of GSB loans; the difference between
the carrying value and the estimated fair value of the loans at the date of
acquisition is being amortized over the expected lives of the related loans.
Use of Estimates in the Preparation of the Consolidated Financial
Statements--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amount of
income and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include valuation allowances for
loans and real estate owned, merchant bankcard charge-back reserves and fair
values of certain financial instruments for which there is not an active
market.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Securities and Mortgage-Backed Securities--The Company's securities
portfolios consist of mortgage-backed and other securities that are classified
as held-to-maturity, trading account and available-for-sale securities.
Securities are classified as held-to-maturity when management believes the
Company has the ability and the positive intent to hold the securities to
maturity. Securities classified as held-to-maturity are carried on
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an historical cost basis, adjusted for the amortization of premiums and
accretion of discounts using a method that approximates the interest method.
Securities classified as trading account securities are residual interests in
loan securitization transactions initiated by the Company. Trading account
securities are carried at estimated fair value, and unrealized gains and
losses are recorded in current operations. Securities are classified as
available-for-sale when the Company intends to hold the securities for an
indefinite period of time, but not necessarily to maturity. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of stockholders' equity. Realized gains and
losses from the sales of available-for-sale securities are reported separately
in the consolidated statements of operations and are calculated using the
specific identification method.
Loans, Discounted Loans, Loans Held for Sale and Allowance for Loan Losses--
The Company's principal business involves acquiring loans, including loans
that are nonperforming when acquired. Acquired loans are generally purchased
in pools, or portfolios, for prices at or below face value (i.e., unpaid
principal balances plus accrued interest). Nonperforming loans are generally
acquired at deep discounts to face value and are classified as discounted
loans in the consolidated statements of financial condition. Loans that have
been identified as likely to be sold are classified as held-for-sale in the
consolidated statements of financial condition. Loans other than discounted
loans and loans held for sale are classified simply as loans.
Discounted loans are presented in the consolidated statements of financial
condition net of unamortized discount and the portion of the allowance for
loan losses established for those loans. When discounted loans are purchased,
discounts are segregated into (a) valuation allowances for estimated losses on
specific loans ("specific valuation allowances"), (b) valuation allowances for
the inherent risk of losses in the loan portfolio that have yet to be
specifically identified ("general valuation allowances") and (c) portions of
the discounts regarded as yield adjustments. The allocated specific and
general valuation allowances are included in the allowance for loan losses.
The allowance for loan losses is also increased by additional provisions for
losses that are recorded in current operations. The portion of purchase
discounts regarded as yield adjustments is accreted into income in proportion
to cash receipts of principal. Accrued interest on discounted loans is
recognized in income only when collected in cash.
Loans other than discounted loans are presented in the consolidated
statements of financial condition in substantially the same manner as
discounted loans except that discounts associated with purchased loans are
accreted into income using a method approximating the interest method, and
interest income is recognized on an accrual basis. That portion of the total
loan portfolio representing originated loans is carried net of unamortized
deferred origination fees. Deferred fees are recognized in interest income
over the terms of the loans using a method that approximates the interest
method.
Loans held for sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held for sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value. Gains or losses
on loans sold through securitization transactions are based on the difference
between the cash proceeds received on the certificates sold to outside
investors and the Company's cost basis allocated to such interests in the
loans. The percentage allocation of the loan pools' cost basis between the
portions sold and subordinated interests retained is based on the relative
fair values of those portions.
The Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans)
for impairment under SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures. Commercial and multi-family real
estate loans are considered to be impaired, for financial reporting purposes,
when it is probable that the Company will be unable to collect all
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal or interest when due. Specific valuation allowances are established,
either through allocations of purchase discount or through provisions for
losses, as described above, for impaired loans with estimated fair values that
are less than the face value of the loans. Fair values of impaired loans are
estimated based on the fair value of the real estate collateral.
The Company evaluates single-family real estate, consumer and other loans
for impairment on a pooled basis. These loans are considered to be smaller-
balance, homogeneous loans, and are evaluated on a portfolio basis considering
the projected net realizable value of the portfolio compared to the net
carrying value of the portfolio.
All specific and general valuation allowances established for loans and
discounted loans are recorded in the allowance for loan losses. The allowance
is decreased by the amount of loans charged off and is increased by recoveries
of previously charged-off loans. The allowance is maintained at a level
believed adequate by management to absorb potential losses in the total loan
portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, previous loan loss experience,
current economic conditions, volume, growth and composition of the portfolio
and other relevant factors.
Derivative Financial Instruments--Beginning in 1996, the Company utilizes
interest-rate swaps as a component of its interest-rate risk hedging strategy.
Swaps are matched against fixed-rate loans, effectively converting them to
variable-rate loans. Settlements with the counterparty to the swaps increase
or reduce loan interest income reported in the statements of operations.
Real Estate Owned--Real estate acquired in settlement of loans is originally
recorded at fair value less estimated costs to sell. Loan balances in excess
of fair value of the real estate acquired are charged against the allowance
for loan losses at the date of acquisition. Allowances are recorded to provide
for estimated declines in fair value subsequent to the date of acquisition.
Any subsequent operating expenses or income, as well as gains or losses on
disposition of such properties, are charged to current operations.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Income Taxes--The Company files consolidated federal income tax returns with
its subsidiaries. Deferred tax assets and liabilities represent the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements.
A valuation allowance is recorded against deferred tax assets when there is
not presumptive evidence that it is more likely than not that the deferred tax
assets will be realized.
Bankcard Operations--Bankcard income includes merchant discounts and
transaction fees for processing Visa and Mastercard transactions. Bankcard
expense consists primarily of fees paid to the Company's third-party
processors and interchange fees paid to card-issuing banks. Other direct and
indirect costs of Bankcard operations are included in various other categories
of expenses and are not specifically allocated separately from other operating
expenses of the Company.
Capital Structure--In the accompanying consolidated statements of
stockholders' equity, shares of common stock issued and outstanding are
presented based on the actual number of shares issued by WAC, and the number
of shares issued by WACII adjusted to their WAC equivalents as determined when
the two entities merged in
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995. As of September 30, 1996 and December 31, 1995, WAC has the following
types of authorized shares of stock:
50,000,000 shares of common, $0.01 par value
200,000,000 shares of preferred, $0.01 par value
Of the 200,000,000 shares of preferred stock authorized, 100,000,000 has
been designated as Series A. The Series A preferred stock has a $1 per share
liquidation preference and a dividend rate of $.14 per share per annum,
noncumulative. No cash dividends have been declared or paid on such stock at
any point when it has been outstanding.
Preferred stock issued and outstanding at December 31, 1994 consisted of
Series A preferred stock of WACII, which was exchanged for Series A preferred
stock of WAC in 1995, pursuant to the merger of the two companies. All common
stock of WACII was also exchanged in the merger. The preferred stock of a
subsidiary (FBBH) held by the majority stockholders of WAC as of December 31,
1994 was also exchanged for WAC Series A preferred in 1995. All of the WAC
Series A preferred was then exchanged for subordinated debt issued by the
majority stockholders. Effective January 1, 1996, all subordinated debt was
exchanged for WAC's common stock.
Subsequent to September 30, 1996, all outstanding common stock of WAC was
exchanged by WAC stockholders for common stock of WFSG, and all minority
interests in common stock of FBBH and GSB were exchanged for common stock of
WFSG. Outstanding shares of WFSG, prior to an initial public offering of
common stock (see Note 17), total 5,500,000.
Earnings Per Share is calculated based on the weighted average number of
shares of WAC common stock outstanding during the year giving effect to the
exercise of stock options using the treasury stock method if such effect is
not anti-dilutive. The weighted average number of shares outstanding for the
nine months ended September 30, 1996 and for the years ended 1995 and 1994 was
77,024, 23,596 and 9,245, respectively.
Recent Accounting Standards--In 1996, the Company adopted SFAS Nos. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, SFAS No. 122, Accounting for Mortgage Servicing Rights, and
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 121 and 122
did not have a material effect on the Company's financial statements.
As permitted by SFAS No. 123, the Company did not adopt the provisions of
that statement relating to the accounting method used for stock options. The
Company will continue to use the intrinsic value method of accounting for its
stock options rather than the fair value method, and will make the disclosures
required by the statement (see Note 12).
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Financial Liabilities, is generally effective for relevant
transactions occurring after December 31, 1996, and must be applied
prospectively. Earlier application is not permitted. Based on the types of
transactions the Company has engaged in historically, the pronouncement is
expected to be relevant to similar future transactions and may affect both the
accounting for, and disclosures about, such transactions. Transactions
affected may include sales of loans, particularly sales affected through
securitization transactions, and repurchase agreements. The Company does not
currently service financial assets and does not expect to be immediately
affected by the provisions of SFAS No. 125 related to servicing. The Company
does not believe that the pronouncement would have had a material effect on
any transactions reflected in the accompanying financial statements, if its
provisions had been previously adopted.
Reclassifications--Certain amounts in the consolidated financial statements
for 1995 and 1994 have been reclassified to conform to the 1996 presentation.
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities as of September 30, 1996 and
December 31, 1995 are shown below. Fair value estimates were obtained from an
independent pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1996 COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 6,652 $ -- $169 $ 6,483
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 7,425 27 -- 7,452
Mortgage-backed securities....... 22,380 -- 602 21,778
------- ----- ---- -------
Total held-to-maturity......... $29,805 $ 27 $602 $29,230
======= ===== ==== =======
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 9,099 $ -- $ 16 $ 9,083
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 6,470 22 4 6,488
Mortgage-backed securities....... 13,119 -- 246 12,873
------- ----- ---- -------
Total held-to-maturity......... $19,589 $ 22 $250 $19,361
======= ===== ==== =======
</TABLE>
The amortized cost and estimated fair value of securities held to maturity
other than mortgage-backed securities at September 30, 1996, and December 31,
1995 by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
SEPTEMBER 30, 1996 COST VALUE
------------------ --------- ------
<S> <C> <C>
Due in one to five years................................... $7,425 $7,452
====== ======
DECEMBER 31, 1995
-----------------
Due in less than one year.................................. $4,970 $4,966
Due in one to five years................................... 1,500 1,522
------ ------
$6,470 $6,488
====== ======
</TABLE>
The Company receives payments on all mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 6 to 30 years.
At September 30, 1996, mortgage-backed securities with carrying values of
$22,779 and market values of approximately $22,247 were pledged to secure FHLB
borrowings, merchant bankcard transactions, certain guarantees related to a
loan securitization transaction and an interest-rate swap. There were no sales
of securities in the nine months ended September 30, 1996. Gross gains from
the sale of securities available for sale were $14 and $54 in the years ended
December 31, 1995, and 1994, respectively, and there were no gross losses in
these years. Of the total securities pledged, securities with fair values of
approximately $20,110 were delivered to, and are held in custody of, Bankers
Trust and the Federal Reserve Bank.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans comprise loans, discounted loans and loans held for
sale. Following is a summary of each loan category by type:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
LOANS
Real estate loans:
One to four units.............................. $ 49,047 $138,547
Over four units................................ 72,717 71,239
Commercial..................................... 58,361 50,749
Land........................................... 2,874 2,709
-------- --------
Total loans secured by real estate........... 182,999 263,244
Other loans...................................... 30,698 19,832
-------- --------
213,697 283,076
Less:
Allowance for loan losses...................... (32,519) (10,016)
Deferred loan fees............................. (196) (245)
Discount on purchased loans not included
in allowance for loan losses.................. (3,702) (13,988)
-------- --------
$177,280 $258,827
======== ========
DISCOUNTED LOANS
Real estate loans:
One to four units.............................. $ 9,561 $ 18,380
Commercial..................................... 482 863
-------- --------
Total loans secured by real estate........... 10,043 19,243
Other loans...................................... 724 967
-------- --------
10,767 20,210
Less:
Allowance for loan losses...................... (5,716) (3,855)
Discount on purchased loans not included in
allowance
for loan losses............................... (1,632) (3,008)
-------- --------
$ 3,419 $ 13,347
======== ========
LOANS HELD FOR SALE
Real estate loans:
One to four units.............................. $277,490 $ 33,497
Commercial..................................... 466
Land........................................... 194
-------- --------
Total loans secured by real estate........... 277,490 34,157
Other loans...................................... 12
-------- --------
277,490 34,169
Less allowances, discounts and deferred fees..... (16,686) (15,572)
-------- --------
$260,804 $ 18,597
======== ========
</TABLE>
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1996 and December 31, 1995, loans with adjustable rates
of interest were $317,087 and $265,702, respectively, and loans with fixed
rates of interest were $184,867 and $71,753, respectively. Adjustable-rate
loans are generally indexed to the FHLB's Eleventh District Cost of Funds
Index, LIBOR or Prime and are subject to limitations on the timing and extent
of adjustment. Most loans adjust within six months of changes in the index.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year.................. $ 25,651 $ 7,701 $ 4,314
Loans charged off........................... (12,494) (5,404) (1,666)
Recoveries.................................. 1,424 81 71
Provision for loan losses................... 15,751 4,266 2,173
Allocations from purchased loan discounts... 15,972 19,007 2,809
-------- ------- -------
Balance, end of year........................ $ 46,304 $25,651 $ 7,701
======== ======= =======
</TABLE>
At September 30, 1996 and December 31, 1995, the Company had classified
loans totaling $18,811 and $14,241, respectively, as impaired and had recorded
specific valuation allowances to measure the impairments of those loans
totaling $5,445 and $4,155, respectively. At the same dates, the Company had
classified loans totaling $2,499 and $9,593, respectively, as impaired with no
recorded specific valuation allowances. The average unpaid principal balances
of impaired loans during the nine months ended September 30, 1996 and the year
ended December 31, 1995 were $21,254 and $24,204, respectively. Interest
income recognized on impaired loans during the same periods was $1,135 and
$1,631, respectively, based on cash payments. These amounts exclude
consideration of single-family residential and consumer loan pools evaluated
for impairment on a pooled basis. Consumer loan pools include portfolios of
sub-prime automobile loans purchased at par in 1995 and 1996. As of September
30, 1996, the Company had charged off all such loans that were more than 60
days delinquent. The remaining portfolio consists of loans that have performed
over a period of approximately one year. Management considers the performing
loans to be unimpaired, and interest on them is recognized on an accrual
basis.
Management estimates are required to determine the allowance for loan
losses. Estimation is also involved in determining the ultimate recoverability
of purchased loans and, consequently, the pricing of purchased loans and the
adequacy of purchased discounts to provide allowances for credit risk. These
estimates are inherently uncertain and depend on the outcome of future events.
Regulatory authorities have required substantial increases in the allowances
maintained by many banks in recognition of the inherent risk in the existing
economic environment. Although management believes the levels of the allowance
as of September 30, 1996 and December 31, 1995 are adequate to absorb losses
inherent in the loan portfolio, rising interest rates, various other economic
factors and regulatory requirements may result in increasing losses that
cannot reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Banks' capital.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in recent years. Substantially all
loans originated or acquired by FBBH and GSB prior to their acquisition by the
Company were collateralized by Southern California real estate. Performing
mortgage loans acquired subsequently have also been concentrated in Southern
California, but to a lesser degree, and the geographic diversification of the
portfolio is generally widening through loan acquisitions.
F-14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REAL ESTATE OWNED
Real estate owned consists of property obtained through foreclosure. In the
accompanying consolidated statements of financial condition, real estate owned
is presented net of allowances for estimated losses. Activity in the allowance
for estimated losses on real estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
Allowance for losses on real estate owned,
beginning of year.......................... $ 1,193 $ 123 $ 55
Charge-offs................................. (1,599) (82) (32)
Allocation of purchase discount............. 762 554
Provision for the year...................... 598 100
------- ------- -----
Allowance for losses on real estate owned,
end of year................................ $ 356 $ 1,193 $ 123
======= ======= =====
</TABLE>
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Leasehold improvements............................ $ 258 $ 299
Furniture and equipment........................... 877 718
------ ------
Total cost........................................ 1,135 1,017
Accumulated depreciation and amortization......... (799) (742)
------ ------
$ 336 $ 275
====== ======
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Passbook accounts................................. $ 371 $ 304
Money market accounts............................. 795 1,267
NOW/checking...................................... 6,103 5,111
Time deposits:
Less than $100.................................. 386,264 247,814
$100 or more.................................... 94,002 49,028
-------- --------
Total deposits.................................. $487,535 $303,524
======== ========
</TABLE>
A summary of time deposits by maturity at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)........................... $381,378
1998.............................................................. 97,897
1999.............................................................. 991
--------
$480,266
========
</TABLE>
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWINGS AND SUBORDINATED DEBT
Borrowings at December 31, 1995 are repurchase agreements issued under a
master repurchase agreement with Bear Stearns Mortgage Capital Corp. Proceeds
from the agreements were used to acquire loan pools. The assets purchased by
Bear Stearns include the loans acquired by the Banks with the proceeds as well
as other assets. At December 31, 1995, the outstanding agreements were secured
by loans with unpaid principal balances of $54,210. Loans purchased by Bear
Stearns under the repurchase agreements are held in custody by a third party.
Following is information about borrowings under repurchase agreements:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
Average balance during the period.......... $35,721 $ 4,122 $ 4,757
Highest amount outstanding during the peri-
od........................................ 97,000 14,950 11,377
Average interest rate during the period.... 6.8% 5.6% 4.4%
Average interest rate--end of period....... -- 6.7% 5.8%
</TABLE>
WAC's capitalization includes subordinated debt with majority
stockholders in amounts up to $50,000. Subordinated debt pays interest at
14% per annum, compounded quarterly, has no stated maturity, and represents
an unsecured general obligation of the Company. As of December 31, 1995,
borrowings under the subordinated debt agreement were $11,000. As stated in
Note 1, the Company's common stock was exchanged for the subordinated debt
effective January 1, 1996.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal..................................... $ (93) $ 434 $ (656)
State....................................... 2 32 19
------- ------ ------
(91) 466 (637)
------- ------ ------
Deferred tax expense (benefit):
Federal..................................... (3,081) (250) 90
State....................................... (1,480) (169) 21
------- ------ ------
(4,561) (419) 111
------- ------ ------
Total income tax provision (benefit).......... $(4,652) $ 47 $ (526)
======= ====== ======
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate....................................... (34.0)% 35.0% (35.0)%
State taxes (benefit), net of federal tax
effect..................................... (11.1) 4.0
Valuation allowance......................... (29.2) (25.1) 8.8
Change in prior year estimate............... (5.2) (7.8)
Other....................................... (1.6) 1.3 (3.4)
----- ------ ------
Effective income tax rate................... (81.1)% 7.4% (29.6)%
===== ====== ======
</TABLE>
Deferred income taxes receivable (payable), which are included in income
taxes receivable, net in the consolidated statements of financial condition,
are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Purchase discounts.............................. $ 2,378 $ 1,349
Purchase accounting............................. 549 629
Depreciation.................................... 82 65
Provision for loan loss......................... 1,232 408
Net operating loss.............................. 2,661 170
Other........................................... 140 10
------- -------
Gross deferred tax assets..................... 7,042 2,631
------- -------
Deferred tax liabilities:
Partnership income.............................. (44) (44)
Deferred loan fees.............................. (207) (351)
FHLB stock dividends............................ (285) (242)
State taxes..................................... (620)
Unrealized gains on securities.................. (694)
Installment sales gain.......................... (344)
Other........................................... (118) (98)
------- -------
Gross deferred tax liability.................. (2,312) (735)
------- -------
Total deferred tax asset.......................... 4,730 1,896
Valuation allowance............................... -- (1,726)
------- -------
Net deferred tax asset............................ $ 4,730 $ 170
======= =======
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $761, $1,391 and $4,758 expiring
in the years 1997, 1998 and 1999, respectively, and net operating loss
carryforwards for state income tax purposes of $1,617 and $1,143 expiring in
2000 and 2001, respectively.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
Profit Sharing Plan--The Banks' employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Company's "control group." At the discretion of the Banks' Boards of
Directors, the Banks may elect to contribute to the plan based on profits of
the Banks or based on matching participants' contributions. For the year ended
December 31, 1995, the Banks contributed $28 to the plan. There have been no
contributions in 1996.
Lease Commitments--The following is a schedule by year of future minimum
rental payments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)............................... $281
1998.................................................................. 166
1999.................................................................. 157
2000.................................................................. 52
2001.................................................................. 30
----
Total............................................................... $686
====
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $52 through 2001.
Hedging Activity--The Banks are a party to an interest-rate swap agreement
with off-balance-sheet risk in the normal course of business. There is a risk
of loss (credit risk) if the counterparty fails to perform in the periodic
settlement of amounts owed to the Banks, if any, under the terms of the swap.
The swap is used to hedge interest-rate risk associated with fixed-rate loans.
Changes in market value of the swap correlate with changes in the market value
of the hedged loans. In April 1996, the Banks entered into an interest-rate
swap with a $70,000 notional amount with Bear Stearns. The swap effectively
converts $70,000 of purchased fixed-rate loans to variable-rate loans. The
Banks pay 6.25% and receive a variable rate based on the one-month USD LIBOR
plus .225%. The swap matures in April 2001 and has a cancellation trigger when
the two-year constant maturity treasury equals or exceeds 9%. The notional
principal amount amortizes at a rate of 1.2532% each month. At September 30,
1996, the notional principal is $65,614.
Lending Commitments--At December 31, 1995, the Company had commitments to
extend credit of $793. The Company did not have any commitments to extend
credit at September 30, 1996. These commitments expose the Company to credit
risk in excess of amounts reflected in the consolidated financial statements.
The Company receives collateral to support loans and commitments to extend
credit for which collateral is deemed necessary. The most significant category
of collateral is certificates of deposit.
Litigation--The Company is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's financial
position.
Securitization Contingencies--A loan securitization in March 1996 involved
the sale of discounted nonperforming loans with carrying amounts of
approximately $18,600. The Banks are contingently liable for losses, if any,
that could arise if the collectibility of any securitized loan is
unenforceable solely due to the absence of original notes. In addition, the
Banks are contingently liable to pay the interest due on the senior securities
if the liquidation of the assets underlying the securities results in a
shortfall on any due date; any such shortfall paid by the Banks would be
reimbursable if liquidation proceeds were ultimately sufficient to cover the
interest. Management believes that it is not probable that any losses will be
incurred for these or other reasons involving the securitization.
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. REGULATORY MATTERS
Regulatory Agreement--On October 31, 1996, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Order issued to FBBH superseded a previously existing Supervisory
Agreement between FBBH and the OTS issued June 8, 1995.
The Orders require of both Banks that they not engage in unsafe and unsound
practices and that they maintain minimum capital ratios required of
institutions to be deemed "well-capitalized" (as that term is defined under
the regulatory framework for prompt corrective action). In addition, the
Orders require the Banks to (I) revise policies and procedures concerning (i)
internal asset reviews, (ii) the allowances for loan and lease losses, (iii)
loan purchases, (iv) internal audits and (v) hedging transactions; (II)
develop plans to augment the depth and expertise of the management teams;
(III) revise business plans; (IV) modify certain policies concerning the
accounting for loan discounts; (V) improve monitoring of (i) interest rate
risk, (ii) balance sheet classifications of certain assets (e.g., as held for
sale versus held to maturity) and (iii) compliance with laws and regulations
concerning transactions with affiliates; (VI) ensure compliance with the
proper servicing of adjustable rate mortgages and escrow accounts; and (VII)
enhance recordkeeping. In addition, the Banks may not increase their total
assets beyond certain specified levels. Also, FBBH will be required to correct
OTS-identified deficiencies in merchant bankcard operations. These
requirements will be accompanied by related requirements that the Banks submit
to the OTS, by certain specified dates, various policies, plans and reports on
other actions to comply with the Orders. In some cases, OTS approval of such
information will be required. The Banks are currently in process of addressing
these requirements. Management believes that the Banks are complying with
those requirements that have taken effect.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Banks and their directors and
officers to further enforcement actions, including termination of Federal
Deposit Insurance Corporation insurance or civil money penalties.
Capital Requirements--The Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by the regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total tangible
capital, core capital and total capital to risk-weighted assets as those terms
are defined in OTS regulation. Under the regulatory framework for prompt
corrective action, quantitative and qualitative measures are used by the OTS
to determine whether an institution is categorized as "well capitalized,"
"adequately capitalized," "undercapitalized," or "significantly
undercapitalized." Certain regulatory actions are mandated by law, depending
on an institution's category. Quantitative measures include total capital to
risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1
capital to average assets, as those terms are defined in OTS regulation.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Banks' actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS "WELL-
CAPITALIZED", UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Total Capital to Risk-
Weighted Assets:
FBBH.................. $ 9,711 10.0% $ 7,760 Greater than or equal to 8.0% $ 9,701 Greater than or equal to 10.0%
GSB................... 30,297 11.0% 22,010 Greater than or equal to 8.0% 27,513 Greater than or equal to 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,434 8.7% Not Applicable 5,820 Greater than or equal to 6.0%
GSB................... 26,739 9.7% Not Applicable 16,508 Greater than or equal to 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,434 5.9% 5,706 Greater than or equal to 4.0% 7,132 Greater than or equal to 5.0%
GSB................... 26,739 7.0% 15,320 Greater than or equal to 4.0% 19,150 Greater than or equal to 5.0%
Tangible Capital:
FBBH.................. 8,434 6.0% 2,120 Greater than or equal to 1.5% Not Applicable
GSB................... 26,739 6.8% 5,855 Greater than or equal to 1.5% Not Applicable
DECEMBER 31, 1995
Total Capital to Risk-
Weighted
Assets:
FBBH.................. $ 9,820 9.8% $ 7,999 Greater than or equal to 8.0% $ 9,998 Greater than or equal to 10.0%
GSB................... 15,523 10.4% 11,973 Greater than or equal to 8.0% 14,967 Greater than or equal to 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,549 8.6% Not Applicable 5,999 Greater than or equal to 6.0%
GSB................... 13,852 9.3% Not Applicable 8,980 Greater than or equal to 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,549 6.4% 5,326 Greater than or equal to 4.0% 6,657 Greater than or equal to 5.0%
GSB................... 13,852 10.3% 5,398 Greater than or equal to 4.0% 6,748 Greater than or equal to 5.0%
Tangible Capital:
FBBH.................. 8,549 6.8% 3,075 Greater than or equal to 1.5% Not Applicable
GSB................... 13,852 6.2% 2,066 Greater than or equal to 1.5% Not Applicable
</TABLE>
As of September 30, 1996, the Banks' capital ratios were sufficient for them
to be categorized as "well capitalized" based solely on quantitative measures.
However, because of the Orders discussed above, each Bank can be categorized
by the OTS as no higher than "adequately capitalized." Because the Banks have
minimum regulatory capital requirements and the additional requirements under
the Orders discussed above, substantially all retained earnings of the Banks
are restricted as to distribution to stockholders.
At June 30, 1996, as a result of new legislation enacted to recapitalize the
SAIF deposit insurance fund, the Company accrued approximately $1.4 million
for a special assessment to be paid in the fourth quarter.
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by Wilshire Credit Corporation ("WCC"),
which is affiliated with the Company by common ownership. Management believes
that the terms of the servicing agreement are no less favorable to the Banks
than terms offered by other servicers. Due from affiliate in the accompanying
consolidated statements of financial condition represents the amount of loan
payments collected by WCC but not yet remitted to the Banks at that date. Loan
servicing fees and expenses shown in the consolidated statements of operations
were paid to WCC, and include reimbursements for direct expenses borne by WCC
on behalf of the Banks. Due to affiliates in the consolidated statements of
financial condition primarily comprises amounts owed to WCC for WAC operating
expenses paid by WCC. At September 30, 1996, due to affiliates also includes a
liability to WCC for a servicing fee with deferred payment terms.
12. STOCK OPTIONS
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. FBBH granted 19,447 and 23,161 options
in 1994 and 1995, respectively. GSB granted 69,724 options in 1995. All grants
were made with exercise prices at least equal to the book value of the
relevant bank's shares on the grant dates. Subsequent to September 30, 1996,
these stock options were converted into 31,225 options to purchase the stock
of WFSG. The options are exercisable at prices ranging from $5.58 to $14.90
per share no earlier than 60 days after the effective date of the initial
public offering of WFSG stock discussed in Note 17, and have remaining terms
of from two to three years. Their estimated fair value as of November 1, 1996
was $162; an amount no greater than this would have been reported as
compensation expense during 1994 and 1995 if the fair value method of
accounting discussed in SFAS No. 123 had been used to measure compensation
expense. Assuming that all grants were made in 1995, 1995 net income reported
in the consolidated statements of operations would have been $430 and earnings
per share would have been $18.22 if the fair value method of accounting for
the options had been used.
Pursuant to the initial public offering, the Company adopted a new Stock
Plan on November 1, 1996. Under the Stock Plan, the Company may grant options
and other awards not to exceed 1,750,000 shares of common stock over a ten-
year term. The options may be either incentive stock options or nonstatutory
stock options granted at exercise prices not less than 100% of the fair value
of WFSG common stock at the grant date (110% of fair value for incentive stock
options granted to persons holding over 10% of the Company's shares).
Restricted stock and stock appreciation rights may also be granted under the
Stock Plan.
The initial awards under the new Stock Plan are expected to be granted at
the date of the initial public offering. Options for approximately 1,050,000
to 1,083,750 will be granted to the Company's two largest stockholders. The
Stock Plan also provides that nonemployee Company directors will receive
automatic nonstatutory stock option grants. The number of shares granted to
nonemployee directors each quarter will be determined under a formula ($6
divided by the fair market value per share of WFSG common stock on each grant
date).
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 11,231 $ 11,231
Federal funds sold...... 9,300 9,300
Mortgage-backed
securities held to
maturity............... 22,380 21,778
Mortgage-backed
securities available
for sale............... 6,483 6,483
Securities held to
maturity............... 7,425 7,452
Trading account
securities............. 7,092 7,092
Loans, net.............. 177,280 173,938
Discounted loans, net... 3,419 3,419
Loans held for sale,
net.................... 260,804 264,180
Federal Home Loan Bank
stock.................. 2,911 2,911
Liabilities:
Deposits................ 487,535 487,821
Borrowings.............. -- --
Off-Balance Sheet
Liabilities:
Interest-rate swap...... -- 714
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 3,382 $ 3,382
Federal funds sold...... 1,100 1,100
Mortgage-backed
securities held to
maturity............... 13,119 12,873
Mortgage-backed
securities available-
for-sale............... 9,083 9,083
Securities held to
maturity............... 6,470 6,488
Loans, discounted loans
and loans held for
sale, net.............. 290,771 295,747
Federal Home Loan Bank
stock.................. 1,421 1,421
Liabilities:
Deposits................ 304,020 307,177
Borrowings.............. 13,000 13,000
Subordinated debt....... 11,000 11,000
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Due From Banks and Federal Funds Sold--The carrying amounts
approximate fair values, due to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities
are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans, Discounted Loans and Loans Held for Sale--It is not practicable to
estimate the fair value of discounted loans, which are predominately
nonperforming loans, due to uncertainties as to the nature, timing and
extent to which the loans will be either collected according to original
terms, restructured, or foreclosed upon. For other loans, fair values are
estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type, such as fixed and adjustable rate interest
terms. The fair values of fixed-rate mortgage loans are based on discounted
cash flows utilizing applicable risk-adjusted spreads relative to the
current pricing of similar fixed-rate loans as well as anticipated
prepayment schedules. The fair values of
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adjustable-rate mortgage loans are based on discounted cash flows utilizing
discount rates that approximate the pricing of available mortgage-backed
securities having similar rate and repricing characteristics, as well as
anticipated prepayment schedules. No value adjustments have been made for
changes in credit within the loan portfolio. It is management's opinion
that the allowance for estimated loan losses pertaining to loans results in
a fair value adjustment of the credit risk of such loans.
Federal Home Loan Bank Stock--The carrying amounts approximate fair
values because the stock may be sold back to the Federal Home Loan Bank at
carrying value.
Deposits--The fair values of deposits are estimated based on the type of
deposit products. Demand accounts, which include passbook and transaction
accounts, are presumed to have equal book and fair values, since the
interest rates paid on these accounts are based on prevailing market rates.
The estimated fair values of time deposits are determined by discounting
the cash flows of settlements of deposits having similar maturities and
rates, utilizing a yield curve that approximates the prevailing rates
offered to depositors as of the reporting date.
Borrowings--The carrying amounts of repurchase agreements approximates
fair value due to the short-term nature of these instruments.
Subordinated Debt--The fair value of subordinated debt issued to
shareholders by WAC is assumed to be equal to carrying value because the
debt terms were negotiated with related parties and there is no market for
the debt at such terms with unrelated parties.
Off-Balance-Sheet Liabilities--The fair value of an interest-rate swap
(1996 only) is estimated at the net present value of the future payable,
based on the current spread, discounted at a current rate. Fair values of
off-balance sheet commitments to lend (1995 only) are estimated based on
deferred fees associated with such commitments, which are immaterial as of
the reporting date, and are therefore not presented.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996(1)
------------- -------- ---------
<S> <C> <C> <C>
Interest income.......................... $12,186 $12,407 $9,544
Interest expense......................... 7,572 7,046 4,974
Provision for estimated losses on loans.. 4,883 5,483 5,385
------- ------- ------
Net interest loss after provision for es-
timated losses on loans................. (269) (122) (815)
Non-interest income...................... 1,240 917 4,220
Non-interest expense..................... 5,398 2,625 2,882
------- ------- ------
(Loss) income before income taxes........ (4,427) (1,830) 523
Income tax benefit....................... 3,373 805 474
------- ------- ------
Net (loss) income........................ $(1,054) $(1,025) $ 997
======= ======= ======
(Loss) earnings per share................ $(10.57) $(13.05) $18.90
======= ======= ======
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 7,329 $ 6,173 $ 5,776 $5,103
Interest expense............ 4,070 3,704 3,573 3,134
Provision for estimated
losses on loans............ 1,045 1,020 1,028 1,173
------- ------- ------- ------
Net interest income (loss)
after provision for
estimated losses on loans.. 2,215 1,449 1,175 796
Non-interest income......... 373 1,684 556 494
Non-interest expense........ 2,855 2,096 1,664 1,487
------- ------- ------- ------
Income (loss) before income
taxes...................... (268) 1,037 67 (197)
Income tax (expense)
benefit.................... 21 (78) (4) 14
------- ------- ------- ------
Net income (loss)........... $ (247) $ 959 $ 63 $ (183)
======= ======= ======= ======
Earnings (loss) per share... $(10.47) $ 40.66 $ 2.63 $(7.73)
======= ======= ======= ======
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 3,861 $ 2,108 $ 1,669 $1,931
Interest expense............ 2,315 1,317 970 855
Provision for estimated
losses on loans............ 2,173 -- -- --
------- ------- ------- ------
Net interest (loss) income
after provision for
estimated losses on loans.. (627) 791 699 1,076
Non-interest income......... 641 336 78 172
Non-interest expense........ 1,929 1,255 1,017 743
------- ------- ------- ------
(Loss) income before income
taxes...................... (1,915) (128) (240) 505
Income tax benefit.......... 566 38 71 (149)
------- ------- ------- ------
Net (loss) income........... $(1,349) $ (90) $ (169) $ 356
======= ======= ======= ======
(Loss) earnings per share... $(79.41) $(13.57) $(25.43) $53.55
======= ======= ======= ======
</TABLE>
- --------
(1) The financial information for the quarter ended March 31, 1996 was
restated to account for residual interests in loans sold as securitization
transactions as trading account securities. The effect on quarterly earnings
was an increase of $1,601 or $30.36 per share.
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash.............................................. $ -- $ 1
Investments in Banks.............................. 35,310 18,777
Prepaid expenses and other assets................. 715 153
------- -------
$36,025 $18,931
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities............ $ 764 $ 317
Due to affiliates................................. 707 575
Subordinated debt to majority stockholders........ -- 11,000
------- -------
Total liabilities............................... 1,471 11,892
------- -------
Contributed and retained equity................... 34,554 7,039
------- -------
$36,025 $18,931
======= =======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
Interest income............................. $ 2 $ 9 $ 24
Interest expense............................ 67 243 31
------- ------ -------
Net interest expense........................ (65) (234) (7)
Noninterest income.......................... 563 1,155 611
Noninterest expense......................... 125 363 156
------- ------ -------
Income before equity in earnings (loss) of
subsidiaries............................... 373 558 448
Equity in (loss) earnings of subsidiaries... (1,455) 34 (1,700)
------- ------ -------
Net (loss) income........................... $(1,082) $ 592 $(1,252)
======= ====== =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income.......................... $(1,082) $ 592 $(1,252)
Adjustments to reconcile net income (loss)
to
net cash (used in) provided by operating
activities:
Amortization of purchase accounting
adjustments.............................. (783) (1,045) (488)
Equity in loss (earnings) of
subsidiaries............................. 1,455 (34) 1,700
Change in:
Prepaid expenses and other assets........ (562) 51 495
Accounts payable and other liabilities... 447 90 (111)
Due to affiliates........................ 132 (71) (29)
Other.................................... -- 33 --
------- ------ -------
Net cash (used in) provided by operating
activities............................. (393) (384) 315
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in subsidiaries............. (17,358) (9,000) (4,746)
------- ------ -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of capital stock.................. 17,750 -- 4,750
Issuance of subordinated debt.............. -- 9,000 --
Dividends from subsidiary.................. -- 65 --
------- ------ -------
Net cash provided by financing
activities............................. 17,750 9,065 4,750
------- ------ -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS........................... (1) (319) 319
CASH:
Beginning of year.......................... 1 320 1
------- ------ -------
End of year................................ $ -- $ 1 $ 320
======= ====== =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to subordinated
debt...................................... $2,000
Conversion of subordinated debt to capital
stock..................................... $11,000
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PROFORMA INFORMATION CONCERNING ACQUISITIONS
As discussed in Note 1, during 1994 WACII acquired GSB in a purchase
accounting transaction. The results of GSB's operations are included in the
Company's consolidated financial statements subsequent to the date of
acquisition. The following proforma financial information shows the estimated
results of the Company's operations for the year ended December 31, 1994 as
though the GSB purchase had occurred as of the beginning of the year. The
proforma amounts are not necessarily indicative of what would have actually
occurred if the acquisition had occurred as of the beginning of the year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net interest income and non-interest revenue.................... $7,222
Net loss........................................................ (920)
Loss per share.................................................. (38.99)
</TABLE>
17. INITIAL PUBLIC OFFERINGS
WFSG is making initial public offerings (the "IPOs") of common stock and
debt, and has formed certain new subsidiaries to undertake the loan
acquisition and servicing businesses currently being conducted by WCC and
certain other affiliates of the Company. The loan acquisition activity, and
any other business activity, that may be conducted by WFSG's new subsidiaries
will be in addition to the activity already being performed by the Banks and
reflected in these consolidated financial statements on an historical basis.
The Company currently expects that the IPOs will be completed during 1996.
Certain business developments related to the IPOs that may be significant to
the operations of the Company are disclosed in other footnotes to these
consolidated financial statements.
18. SUBSEQUENT EVENTS--LOAN ACQUISITIONS AND SALES
In October and November 1996, GSB acquired approximately $279,000 in unpaid
principal amount of discounted residential mortgage loans, and committed to
acquire approximately $31,900 of additional discounted residential mortgage
loans in December. Management expects to sell, prior to December 31, 1996,
performing residential mortgage loans held for sale with market values
approximately equivalent to the purchase prices of the discounted loans.
Completion of the sales transactions by December 31, 1996 is necessary in
order for GSB to meet the growth restrictions imposed by its Order (see Note
10).
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Girard Savings Bank F.S.B.
San Diego, California
We have audited the accompanying consolidated statements of operations and
of cash flows of Girard Savings Bank F.S.B. and Subsidiary (the "Bank") for
the period from January 1, 1994 through November 8, 1994, the date of the
Bank's acquisition by Wilshire Acquisitions Corporation II. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated statements of operations and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Girard Savings Bank F.S.B. and Subsidiary for the period from January
1, 1994 through November 8, 1994, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
March 10, 1995
Los Angeles, California
F-27
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
INTEREST INCOME:
Loans................................................................ $5,577
Mortgage-backed securities........................................... 337
------
Total interest income.............................................. 5,914
------
INTEREST EXPENSE:
Deposits............................................................. 3,006
Borrowings........................................................... 292
------
Total interest expense............................................. 3,298
------
NET INTEREST INCOME.................................................... 2,616
PROVISION FOR ESTIMATED LOAN LOSSES.................................... 827
------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES.......... 1,789
------
OTHER LOSS, Service charges and other fees............................. (3)
------
OTHER EXPENSES:
Compensation and other employee benefits............................. 512
FDIC insurance premiums.............................................. 262
Depreciation and amortization........................................ 14
Amortization of excess of cost over net assets acquired.............. 993
Occupancy............................................................ 57
Professional services................................................ 338
Data processing...................................................... 54
Real estate owned, net............................................... 194
Other general and administrative..................................... 143
------
Total other expenses............................................... 2,567
------
LOSS BEFORE INCOME TAX PROVISION....................................... (781)
INCOME TAX PROVISION................................................... 156
------
NET LOSS............................................................... $ (937)
======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation....................................................... 14
Amortization of excess of cost over net assets acquired............ 993
Amortization of deferred interest and fees......................... (56)
Provision for loan losses.......................................... 827
Provision for real estate losses................................... 97
Change in:
Accrued interest receivable....................................... (109)
Prepaid expenses and other assets................................. (52)
Income taxes receivable........................................... 921
Other liabilities................................................. 468
Deferred taxes.................................................... 212
--------
Net cash provided by operating activities........................ 2,378
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments, net................................................ 5,503
Proceeds from the maturity of investments securities................ 3,497
Purchases of investment securities and FHLB stock................... (2,046)
Investment in real estate........................................... (107)
Proceeds from real estate sold...................................... 2,850
--------
Net cash provided by investing activities........................ 9,697
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.............................................. (2,402)
Issuance of common stock............................................ 13
Proceeds from FHLB advances......................................... 12,000
Payments of FHLB advances........................................... (21,000)
--------
Net cash used in financing activities............................ (11,389)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ 686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 2,903
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 3,589
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Payments during the period for:
Interest........................................................... $ 3,300
NONCASH INVESTING ACTIVITIES:
Loans originated to finance the sale of foreclosed real estate...... 1,190
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Girard Savings Bank F.S.B. and
subsidiary (the "Bank") are in accordance with generally accepted accounting
principles and conform to practices within the banking industry. A summary of
the significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of Girard Savings Bank F.S.B. and its wholly-owned subsidiary,
Girard Financial Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the accompanying consolidated financial
statements include provisions for losses on loans and real estate owned.
Investment Securities--As of January 1, 1994, the Bank adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This
statement address the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments are classified into three categories and
accounted for as follows: (i) debt securities which the enterprise has the
positive intent and ability to hold to maturity are classified as held-to-
maturity securities and reported at amortized cost; (ii) debt and equity
securities that are brought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value
with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and
reported at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of income
taxes. Prior to the adoption of SFAS No. 115, all investment securities were
classified as held for investment and valued at cost, adjusted for the
accretion of discounts and amortization of premiums which were recognized as
an adjustment to income. Subsequent to adoption, the Bank has classified all
of its investment securities as held to maturity and accounts for them in the
same manner.
Loans Receivable--Loans are reported at the principal amounts outstanding,
net of unearned income, net deferred loan origination fees and the allowance
for loan losses. Interest income is calculated using the simple interest
method. The recognition of interest income is discontinued when, in
management's judgment, the collection of interest is deemed to be unlikely.
Nonrefundable fees and direct costs associated with the origination of loans
are deferred and netted against outstanding loan balances. The net deferred
fees and costs recognized in interest income over the term of the loan using a
method that approximates the interest method. When recognized as interest
income, loan origination fees are included in revenues as interest on loans.
Discounts or premiums on acquired loans are accreted or amortized to
operations over the lives of the loans using a method that approximates the
level-yield method unless the loans are nonaccrual loans.
Provision and Allowance for Loan Losses--The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential
losses in the loan portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, previous loan loss
experience, current economic conditions, volume, growth and composition of the
loan portfolio and other relevant factors. The
F-30
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
allowance is increased by provisions for loan losses charged against
operations and recoveries of previously charged off credits.
The accompanying financial statements require the use of management
estimates to calculate the allowance for loan losses. These estimates are
inherently uncertain and depend on the outcome of future events. Regulatory
authorities have required substantial increases in the allowance maintained by
many banks in recognition of the inherent risk in the existing economic
environment. The Bank's lending is concentrated in the Southern California
area and specifically on loans collateralized by income-producing properties
in that area. The area has recently experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
borrower's ability to repay loans. Additional decline in the local economy
and/or rising interest rates may result in increasing losses that cannot
reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Bank's capital.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Real Estate Owned--Real estate acquired in settlement of loans is stated at
the lower of cost of fair value less estimated cost to sell. Loan balances in
excess of fair value of the real estate acquired are charged against the
allowance for loan losses at the date of acquisition. Any subsequent operating
expense or income, reduction in estimated values, and gains or losses on
disposition of such properties are charged to current operations.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, federal funds sold and
certificates of deposit with original maturities of three months or less.
2. SUBSEQUENT EVENT
Acquisition and Recapitalization--On November 9, 1994, pursuant to a stock
purchase agreement between Wilshire Acquisitions Corporation II ("WACII"),
Girard Savings Bank F.S.B., (the "Bank"), Girard Financial Corporation, the
stockholders of the Bank, and RT Holdings, Inc., WACII purchased 4,218,210
shares of the Bank's common stock held by the stockholders for $3,559. In
addition, the Bank issued and sold to WACII nonvoting preferred stock for
$1,000. WACII now owns 94.9% of the Bank's outstanding shares of common stock
and 100% of the Bank's outstanding preferred stock.
Prior to acquisition, the Bank wrote off $920 in goodwill associated with a
prior acquisition that otherwise would have been amortized over the next 14
years. Such goodwill was deemed to be impaired due to the cessation of
significant activity of the acquired business and disposition of its assets.
In addition, the Bank incurred additional legal and professional expenses of
approximately $256 related to its sale.
3. INCOME TAX PROVISION
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
Federal income tax benefit.......................................... $(61)
State income taxes.................................................. 5
----
Total current benefit............................................. (56)
----
Deferred:
Federal income taxes................................................ 212
----
Total income tax provisions....................................... $156
====
</TABLE>
F-31
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The principal temporary differences creating deferred taxes are related to
FHLB stock dividends, discounts on purchased loans, the allowance for loan
losses, deferred loan fees, and partnership income, which are taxable or
deductible in different years for tax and financial reporting purposes.
The difference between the effective tax rate implicit in the consolidated
statements of operations and the statutory income tax rate can be attributed
to the following:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate............................ (35.0%)
Nondeductible goodwill.................................................. 41.2
Valuation allowance..................................................... 7.6
Other................................................................... 6.2
-----
Effective income tax benefit rate....................................... 20.0%
=====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Profit Sharing Plan--Subsequent to the acquisition by WACII, the Bank's
employees began to participate in a defined contribution profit sharing and
401(k) plan sponsored by companies in the Wilshire Financial Services Group
"control group". At the discretion of the Bank's Board of Directors, the Bank
may elect to contribute to the plan based on profits of the Bank or based on
matching participants' contributions.
Lease Commitments--At November 8, 1994, there are no operating leases with
initial or remaining noncancellable lease terms in excess of one year.
Total rent expense from an operating lease was approximately $59 in 1994.
The lease provides that the Bank pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased premises in excess of a
predetermined base, in addition to the minimum monthly payments.
Lending Commitments--At November 8, 1994, the Bank had no outstanding
commitments to fund loans and no obligations under standby letters of credit
or other off-balance-sheet items with credit risk.
Litigation--The Bank is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Bank's financial
position.
F-32
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Wilshire Credit Corporation and Affiliates
Portland, Oregon:
We have audited the accompanying combined statements of financial condition
of Wilshire Credit Corporation and Affiliates (the "Corporations") as of
September 30, 1996 and December 31, 1995, and the related combined statements
of operations, stockholders' equity and cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994. These
combined financial statements are the responsibility of the Corporations'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Wilshire Credit
Corporation and Affiliates as of September 30, 1996 and December 31, 1995, and
the combined results of their operations and their cash flows for the nine
months ended September 30, 1996 and for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
November 13, 1996
Los Angeles, California
F-33
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................... $ 6,638 $ 3,577
SECURITIES:
Trading account................................... 11,818 --
Available for sale, at fair value (cost: $7,039
and $2,486 in 1996
and 1995, respectively).......................... 7,049 2,486
Held to maturity, at amortized cost (fair value:
$12,785 and $4,643 in 1996
and 1995, respectively).......................... 12,771 4,643
LOANS:
Loans, net........................................ -- 121,420
Discounted loans, net............................. 4,824 19,352
Loans held for sale, net, at lower of cost or
market........................................... 112,939 --
Discounted loans held for sale, net, at lower of
cost or market................................... 168,957 33,267
Commercial notes receivable....................... 10,811 9,261
OTHER RECEIVABLES................................... 2,935 1,769
DUE FROM AFFILIATES, Net............................ 2,473 759
PROPERTY, Net....................................... 8,953 6,717
OTHER ASSETS........................................ 3,000 3,122
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Participating interests in loans and securities... $143,424 $150,298
Borrowings........................................ 243,239 70,165
Capital lease obligations......................... 1,445 1,126
Due to affiliates................................. 8,431 3,698
Accounts payable and accrued liabilities.......... 7,592 4,887
-------- --------
Total liabilities............................... 404,131 230,174
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................................... 524 524
Retained earnings (accumulated deficit)........... (3,943) 78
Distributions to stockholders..................... (47,554) (24,403)
Unrealized gains on available-for-sale
securities....................................... 10 --
-------- --------
Total stockholders' equity (deficit)............ (50,963) (23,801)
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Servicing fees............................... $ 6,041 $ 9,739 $ 3,339
Interest and dividend income................. 6,718 5,124 1,667
Gain on sale of loans........................ 935 43 465
Rent and finance lease income................ 607 625 192
Other revenues (expense)..................... 72 (194) 133
------- ------- -------
Total revenues............................. 14,373 15,337 5,796
------- ------- -------
EXPENSES:
Compensation and benefits.................... 5,090 6,605 3,834
Interest expense............................. 9,116 3,789 894
Travel....................................... 1,032 1,233 177
Depreciation and amortization................ 766 504 208
Professional services........................ 537 898 311
Portfolio servicing expense.................. 281 52 32
Rent......................................... 105 254 217
Telephone.................................... 189 349 262
Postage...................................... 120 143 206
Advertising.................................. 150 82 33
Other general and administrative............. 1,008 909 684
------- ------- -------
Total expense.............................. 18,394 14,818 6,858
------- ------- -------
NET (LOSS) INCOME.............................. $(4,021) $ 519 $(1,062)
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAINS
ON AVAILABLE-
COMMON RETAINED DISTRIBUTIONS TO FOR-SALE
STOCK EARNINGS SHAREHOLDERS SECURITIES TOTAL
------ -------- ---------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $524 $ 1,599 $ (4,584) $-- $ (2,461)
Net loss.............. -- (1,062) -- -- (1,062)
Distributions to
shareholders......... -- -- (7,576) -- (7,576)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1994................... 524 537 (12,160) -- (11,099)
Net income............ -- 519 -- -- 519
Distributions to
shareholders......... -- -- (12,243) -- (12,243)
Dividends............. -- (978) -- -- (978)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1995................... 524 78 (24,403) -- (23,801)
Net loss.............. -- (4,021) -- -- (4,021)
Distributions to
shareholders......... -- -- (23,151) -- (23,151)
Unrealized gain on se-
curities
available-for-sale... -- -- -- 10 10
---- ------- -------- ---- --------
BALANCE, SEPTEMBER 30,
1996................... $524 $(3,943) $(47,554) $ 10 $(50,963)
==== ======= ======== ==== ========
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (4,021) $ 519 $ (1,061)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on sale of loans..................... (935) (43) (465)
Valuation adjustment--loans held for
sale..................................... -- -- 254
Interest capitalized on commercial notes.. (1,550) (581) --
Depreciation and amortization............. 524 343 179
Change in:
Trading securities...................... (11,818) -- --
Security purchased under agreement to
resell................................. -- 24,938 (24,938)
Other receivables....................... (1,166) 530 (756)
Due from affiliates..................... (1,714) (386) (373)
Other assets............................ 122 (1,912) (1,126)
Due to affiliates....................... 4,733 185 2,770
Accounts payable and accrued
liabilities............................ 2,705 1,931 1,926
Security sold but not yet purchased..... -- (24,738) 24,738
Other................................... -- 38 --
-------- -------- --------
Net cash provided by (used in)
operating activities................. (13,130) 345 1,148
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities.... (8,371) (4,160) (851)
Proceeds from maturities of held-to-maturity
securities................................. 243 368 --
Purchase of available-for-sale securities... (5,377) (2,602) --
Proceeds from maturities of available-for-
sale securities............................ 824 116 --
Acquisitions and originations of loans...... (258,771) (168,558) (240,881)
Proceeds from sale of loans................. 120,707 109,034 8,420
Receipts of principal on loans.............. 26,330 137,642 39,179
Origination of commercial notes receivable.. -- (7,680) (1,000)
Purchase of property........................ (2,248) (5,339) (219)
-------- -------- --------
Net cash provided by (used in)
investing activities................. (126,663) 58,828 (195,352)
-------- -------- --------
</TABLE>
See notes to combined financial statements.
F-37
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -------------------
1996 1995 1994
------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from participating interests..... $ -- $ 47,261 $179,938
Payments of principal to participating
interests................................ (6,874) (102,234) (36,564)
Proceeds from borrowings.................. 224,968 73,091 63,278
Principal payments of borrowings.......... (51,894) (63,867) (3,050)
Principal payments on capital leases...... (195) (125) (59)
Cash dividends paid ...................... -- (978) --
Other distributions to stockholders....... (23,151) (12,243) (7,576)
--------- --------- --------
Net cash provided by (used in) financing
activities............................. 142,854 (59,155) 195,967
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 3,061 18 1,763
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 3,577 3,559 1,796
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 6,638 $ 3,577 $ 3,559
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid............................. $ 8,734 $ 3,121 $ 359
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchases of property through capital
leases................................... $ 514 $ -- $ 101
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination--The combined financial statements of Wilshire Credit
Corporation and Affiliates (the "Corporations") include the accounts of the
following companies:
<TABLE>
<CAPTION>
COMPANY IDENTIFIER
------- ----------
<S> <C>
Wilshire Credit Corporation....................................... WCC
Wilshire Leasing Limited.......................................... WLL
Wilshire Properties I, Inc. ...................................... WP-I
Wilshire Properties II, Inc. ..................................... WP-II
Portland Servicing Corporation.................................... PSC
Wilshire Securities Corporation................................... WS
Wilshire Funding Corporation 1994-1............................... WF-4-1
Wilshire Funding Corporation 1995-1............................... WF-5-1
Wilshire Funding Corporation 1995-2............................... WF-5-2
Wilshire Funding Corporation 1995-3 .............................. WF-5-3
Wilshire Funding Corporation 1996-1............................... WF-6-1
Wilshire Consumer Receivables Funding Corporation, LLC............ WCRFC
Wilshire Manufactured Housing Funding Company, LLC................ WMHFC
Wilshire Mortgage Funding Company, LLC............................ WMF
WMFC, LLC......................................................... WMFC
Wilshire Funding Company, LLC..................................... WF
</TABLE>
All of the above companies are under common ownership and management. All
significant intercompany balances and transactions have been eliminated in
combination.
Nature of the Business--The Corporations acquire and service performing and
nonperforming (discounted) loan portfolios and mortgage-backed securities.
Funding for loan portfolio and mortgage-backed securities acquisitions is
provided principally by third-party investors who hold participating interests
in cash flows from specified portfolios and securities, generally on a
nonrecourse basis, or who lend to the Corporations with specified portfolios
and securities as collateral.
WLL operates under the name of Portland Cellular, providing cellular
telephone transmission for its customer base. Portland Cellular also provides
phones to certain of its customers under operating leases.
WP-I operates the Corporations' headquarters facilities, which were acquired
under a capital lease with a bargain purchase option.
WP-II owns and manages two commercial real estate properties located in
Oregon.
WS was formed for the purpose of engaging in broker/dealer activities, but
has had no significant activity.
WF-4-1, WF-5-1, WF-5-2, WF-5-3 and WF-6-1 were formed primarily for the
purpose of acquiring and securitizing various loan portfolios.
WCRFC, WMHFC and WMF were formed for the purpose of funding three
securitizations during 1995: a $25,464 consumer loan-backed bond, a $30,757
manufactured housing-backed bond, and a $64,753 mortgage-backed bond,
respectively.
F-39
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
WMFC is the holding company for WF which, was formed for the purpose of
acquiring and originating residential home mortgages.
Cash and Cash Equivalents--The Corporations consider all highly liquid
investments with maturities of three months or less, when purchased, to be
cash equivalents. Cash and cash equivalents consist primarily of cash in
accounts with banks and brokers and in money market funds.
Use of Estimates in the Preparation of the Combined Financial Statements--
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Securities--Securities consist primarily of B-class pass-through mortgage
and other asset-backed securities which were either purchased at discounts or
represent residual interests in loans previously securitized by the
Corporations, and U.S. Treasury securities. Until the third quarter of 1996,
all securities were classified as held-to-maturity based on management's
intent and the Corporations' ability to hold them to maturity, and differences
between cost and fair value of the securities were immaterial. In the third
quarter of 1996, purchases of B-class mortgage-backed securities were
increased significantly. In connection with that activity, management
reevaluated its intentions with respect to the various types of securities
held, and the securities portfolio was segregated into three components, as
follows:
Held-to-Maturity--U.S. Treasury securities are pledged for certain
borrowings and are classified as held-to-maturity based on the ability and
intent to hold them to maturity for that purpose. These securities are
carried at amortized cost.
Trading--B-class and other securities representing retained interests in
loans securitized by the Corporations are classified as trading securities.
These securities are carried at fair value, and changes in unrealized gains
or losses are recorded in the combined statements of operations.
Available-for-Sale--B-class mortgage-backed securities purchased from
third parties are classified as available-for-sale. These securities are
carried at fair value, and changes in unrealized gains or losses are
recorded in a separate stockholders' equity account in the combined balance
sheets. The available-for-sale classification also includes an equity
security-preferred stock of a privately-held company that does not have a
readily determinable fair value, and for which fair value is assumed to
approximate cost.
When the securities held prior to the third quarter of 1996 were transferred
from the held-to-maturity portfolio to the available-for-sale and trading
portfolios during the third quarter, they were transferred at their fair
values, which were not materially different than amortized cost.
Loans--The Corporations' principal business involves acquiring loans, and to
a significantly lesser extent, originating them. Acquired loans are generally
purchased in pools, or portfolios, for prices at or below face value (i.e.,
unpaid principal balances plus accrued interest). Nonperforming and
underperforming loan portfolios are generally acquired at deep discounts to
face value and are classified as discounted loans in the combined statements
of financial condition. Loans that have been identified as likely to be sold
are classified as held-for-sale in the combined statements of financial
condition. Loans other than discounted loans and loans held-for-sale are
classified simply as loans.
F-40
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Discounted loans are presented in the combined statements of financial
condition inclusive of accrued interest (purchased interest and subsequently
accrued interest) and net of unamortized discount. Discounted loans are
accounted for on a portfolio basis, generally using the cost recovery method.
The full extent of cash that will ultimately be collected on a specific
discounted loan portfolio is subject to substantial uncertainty. Collections
may be realized in various ways, such as negotiations with debtors resulting
in resumption of payments under original or restructured terms, significant
collections on one or a relatively few loans in a portfolio of many loans,
legal judgments against debtors, or repossession and sale of collateral.
Discounts are not accreted into income until the Corporations' initial net
investment in the portfolio is fully recovered, except in the case of certain
portfolios for which collections are more certain. For most portfolios,
accretion is determined in proportion to cash receipts of principal relative
to the total principal in the portfolios. .
Loans other than discounted loans are presented in the combined statements
of financial condition in the same manner as discounted loans except that
discounts associated with purchased loans are accreted into income using a
method approximating the interest method, and interest is recognized on an
accrual basis.
Loans held-for-sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held-for-sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value.
Commercial notes receivable comprise three originated loans to an
unaffiliated corporation and its operating subsidiary. The loans are presented
at cost, plus accrued compound interest capitalized in accordance with the
terms of the loans. Interest on the loans is collectible in cash based on a
formula relating to the earnings of the borrowers. The loans mature in August
2000.
The Corporations do not evaluate individual loans, except for commercial
notes receivable, for impairment under SFAS No. 114, "Accounting for
Impairment of a Loan," because acquisition decisions and certain other loan
management decisions are made on the basis of the value of each portfolio as a
unit rather than on the basis of the value of specific loans. Also, a
substantial majority of the loans purchased have small balances relative to
the total portfolio and are homogeneous by type within each portfolio.
Impairment is evaluated on a portfolio basis considering the projected net
realizable value of the portfolio compared to the net carrying value of the
portfolio. Credit risk related to each portfolio as a whole is one factor
considered by management in determining the purchase price for the portfolio;
therefore unaccreted discounts are assumed to provide a sufficient valuation
allowance for credit risk unless management's analysis indicates otherwise. As
of September 30, 1996 and December 31, 1995, no allowance for loan losses has
been provided in the financial statements. Specific loans are charged off,
with corresponding charges to loan discounts, when management determines they
are uncollectible. A substantial portion of the total discounted loan
portfolio consists of nonperforming and restructured loans. It is not
practicable to estimate the additional income that might have been recognized
had these loans performed under their original terms.
Interest Income Recognition--Interest is accrued on both loans and
discounted loans in accordance with their legal terms. However, to the extent
there is a participation agreement associated with a loan portfolio, the
liability to the participant is increased by the amount of interest accrued.
To the extent that the Corporations have a nonparticipated interest in a
discounted loan portfolio, interest income recognition is deferred and the
loan discount account is increased by the amount of interest accrued. To the
extent that the Corporations have a nonparticipated interest in commercial
notes receivable and in a loan portfolio other than a discounted loan
portfolio, interest income is recognized as the interest is accrued.
F-41
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Other Receivables--Other receivables consist primarily of certain direct
costs associated with collections of specific loans. The costs are generally
reimbursable by participants in the loan portfolios, or are charged to the
borrowers.
Due from and Due to Affiliates--Due from affiliates primarily consists of
amounts advanced for certain operating expenses to a savings and loan holding
company affiliated with the Corporations by common ownership and control. At
September 30, 1996, due from affiliates includes servicing fees, for which
payment was deferred, owed to the Corporations from one of the subsidiaries of
the savings and loan holding company. Due to affiliates primarily consists of
loan payments collected by the Corporations as servicer but not yet remitted
to the two subsidiaries of the bank holding company affiliate. These assets
and liabilities are reflected at cost, and do not bear interest.
Rental Income and Finance Lease Income--Rental income and finance lease
income is derived from operating leases on commercial real estate and from
cellular and portable telephone rentals.
Property--Property is stated at cost less accumulated depreciation.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets.
Participating Interests in Loans and Securities--Participation liabilities
represent amounts invested by third parties for an interest in cash flows from
loan portfolios and mortgage-backed securities, net of the cash flows already
remitted to the participants. Participants share credit risks and certain
other risks associated with the assets that provide the source of repayment
and potential income to the participants. If cash flows from specific assets
proved to be insufficient to provide participants recovery of their initial
investments or expected income on such investments, the Corporations'
liability would be reduced without recourse. Included in participation
liabilities as of September 30, 1996 and December 31, 1995 are $6,520 and
$5,605, respectively, representing amounts collected from borrowers but not
yet remitted to participants.
Agreements with participants generally provide that, in exchange for the
Corporations' servicing of assets, the Corporations retain a specified portion
of portfolio cash flows allocable to the participants' investment in addition
to cash flows relating to the Corporations' direct investment, if any. The
Corporations' retained portion of cash flows allocable to participants'
interests is recognized when received as servicing fee income. The
Corporations' retained portion generally increases after the point at which
participants have recouped their initial investments.
Financial Instruments--The Corporations enter into transactions involving
financial instruments both for speculative trading purposes and for hedging
purposes.
Premiums received or paid for writing or purchasing puts and calls for
trading purposes are recorded as liabilities or assets representing the market
value of the options. The liabilities or assets are subsequently marked to
market at each balance sheet date, and unrealized as well as realized gains
and losses are recorded in periodic income.
Forward sales and short sales of securities and certain options and futures
contracts are designated as hedges against future fluctuations in the market
value of loans held for sale resulting from changes in interest rates. Changes
in the market value of these instruments are deferred as adjustments to the
cost basis of the hedged loans and thus are recognized in connection with the
ultimate sale of such loans.
F-42
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes--Each of the companies whose operations are reflected in these
combined financial statements are Subchapter S corporations for income tax
purposes. Taxable income of the companies is passed through directly to the
stockholders and is not taxed at the corporate level.
Earnings per Share--Earnings per share data is omitted because each company
in the combined group has an independent capital structure, and varying
numbers of outstanding shares of stock.
Reclassification--Certain amounts in the combined financial statements and
related footnote disclosures for 1995 and 1994 were reclassified to conform to
the 1996 presentation. These reclassifications do not materially affect the
presentation.
2.SECURITIES
Securities consist of the following at September 30, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1996
Available-for-sale securities:
Mortgage-backed securities........ $ 4,553 $ 30 $ 20 $ 4,563
Equity securities................. 2,486 -- -- 2,486
------- ---- ---- -------
Total available-for-sale........ $ 7,039 $ 30 $ 20 $ 7,049
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $12,771 $-- $-- $12,785
======= ==== ==== =======
1995
Available-for-sale--
Equity securities................. $ 2,486 $-- $-- $ 2,486
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $ 4,643 $-- $-- $ 4,643
======= ==== ==== =======
</TABLE>
The Company receives payments on mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 13 to 30 years. U.S. Treasury maturities held at
September 30, 1996 mature within one year.
There were no sales of securities in the nine months ended September 30,
1996 or the years ended December 31, 1995 and 1994.
At September 30, 1996, all U.S. Treasury securities are pledged for certain
borrowings. Substantially all other securities collateralize other borrowings
and participating interests reflected as liabilities in the combined
statements of financial condition.
F-43
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3.LOANS
Loans, discounted loans and loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans at amortized cost:
Gross unpaid principal........................ $ 140,272
Gross accrued interest........................ 3,054
Discount...................................... (21,906)
---------
Loans, net.................................... $ 121,420
=========
Discounted loans, at cost:
Gross unpaid principal........................ $ 280,104 $ 341,269
Gross accrued interest........................ 234,562 221,394
Discount...................................... (509,842) (543,311)
--------- ---------
Discounted loans, net......................... $ 4,824 $ 19,352
========= =========
Loans held for sale, at cost which is lower than
market:
Gross unpaid principal........................ $ 131,182
Gross accrued interest........................ 4,719
Discounts and deferred hedging gains, or
losses net of premiums....................... (22,962)
---------
Loans held for sale, net...................... $ 112,939
=========
Discounted loans held for sale, at cost which is
lower than market:
Gross unpaid principal........................ $ 210,657 $ 69,818
Gross accrued interest........................ 27,336 13,573
Discount and deferred hedging gains, or losses
net of premiums.............................. (69,036) (50,124)
--------- ---------
Discounted loans held for sale, net........... $ 168,957 $ 33,267
========= =========
</TABLE>
Loans other than discounted loans consist primarily of loans secured by real
estate, of which approximately 50% are single family residential properties.
Discounted loans and discounted loans held for sale comprised both real estate
secured (approximately 35%) and consumer loans (approximately 65% based on
gross unpaid principal balances at September 30, 1996). Approximately 20% of
loans are to borrowers in the northeastern U.S. and approximately 15% of loans
are to borrowers in California. The remainder are to borrowers in diverse
geographical areas.
Substantially all loans collateralize participating interests and
borrowings.
F-44
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4.PROPERTY
Property consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Land.............................................. $2,550 $1,763
Buildings......................................... 5,971 4,701
Vehicles.......................................... 48 48
Furniture and equipment........................... 1,223 812
------ ------
Total........................................... 9,792 7,324
Less accumulated depreciation..................... 839 607
------ ------
Property, net..................................... $8,953 $6,717
====== ======
</TABLE>
Land and buildings comprise the Corporations' headquarters, which secure a
capital lease obligation (see Note 6), and two commercial real estate
projects, which collateralize certain borrowings (see Note 5).
The following table summarizes future minimum rental income under
noncancelable operating leases as of September 30, 1996:
<TABLE>
<S> <C>
1996.................................................................... $127
1997.................................................................... 322
1998.................................................................... 110
1999.................................................................... 116
2000.................................................................... 117
Thereafter.............................................................. 25
----
$817
====
</TABLE>
F-45
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. BORROWINGS
The Corporations have various borrowing agreements, most of which are
collateralized by loans and securities. These borrowings have either (a)
repayment terms tied to cash receipts of the related collateral or (b)
borrowing bases tied to the relative value of the collateral. Except certain
borrowings (mortgages) secured by investment real estate, the borrowings do
not have fixed repayment schedules. Following is a summary of borrowings by
major type, showing their outstanding balances, interest rates and final
maturity dates. Unless otherwise noted, the borrowings are secured by
substantially all of the Corporations' unparticipated interest in loans and
securities and/or the agreed-upon value of the servicing income to be derived
from participated interests. Interest is payable at least monthly on
substantially all borrowings.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Reverse repurchase agreements with rates ranging
from 5.6% to LIBOR plus .75-2.5%, maturing
October 1996................................... $ 85,795 $ 5,918
Borrowings with fixed rates of 12-12.5%,
maturing beginning in 1998, renewable at the
Corporations' option until 2005-6.............. 81,085 38,996
Mortgage-backed bonds issued to third parties
with rates ranging from LIBOR plus .5-5.5% (11%
cap), maturing in 2001......................... 50,381
Warehouse line for loan originations at LIBOR
plus 1.5%...................................... 12,374
Borrowings with rates of prime plus 5% and LIBOR
plus 4%, maturing in 1998-1999................. 3,542 13,447
Borrowings due on demand, interest at prime
plus........................................... 3,500 3,500
Other loan-secured borrowings................... 2,750
Borrowings secured by investment real estate
with fixed rates from 9.75-10.63%, payable
monthly and maturing in 1998 and 2005.......... 5,345 4,477
Related-party borrowings........................ 1,217 1,077
-------- -------
Total borrowings................................ $243,239 $70,165
======== =======
</TABLE>
The mortgage-backed bonds shown above were issued in a securitization
involving the Corporations' loans which was accounted for as a financing
transaction rather than as a sale of loans due to the extent of the
Corporations' residual interests in the transaction.
Maturities of long-term borrowings (mortgages on investment real estate) are
as follows:
<TABLE>
<S> <C>
1997 (including fourth quarter of 1996).............................. $ 110
1998................................................................. 80
1999................................................................. 1,195
2000................................................................. 95
2001................................................................. 940
Thereafter........................................................... 2,925
------
$5,345
======
</TABLE>
F-46
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is information about the Corporations' borrowings under reverse
repurchase agreements during the nine months ended September 30, 1996:
<TABLE>
<S> <C>
Average balance outstanding during the period.......................... $19,397
Highest balance outstanding during the period.......................... 85,685
Average interest rate during the period................................ 5,68%
Average interest rate at the end of the period......................... 7.36%
</TABLE>
Related party borrowings are borrowings from a trust managed on behalf of
the Corporations' majority stockholder and a relative of the majority
shareholder. During the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, the Corporations recognized interest expense
of $129, $153 and $200, respectively.
As of September 30, 1996, the Corporations have written borrowing
commitments from various third parties totaling $350 million, of which
approximately $82 million has been drawn and is included in borrowings above.
In addition, the Corporations have unwritten commitments totaling an
additional $150 million, of which approximately $5 million has been drawn and
is included in borrowings above. Of the total commitments, $300 million is in
the form of repurchase facilities, $100 million is in the form of a warehouse
facility, and $100 million is in the form of a term loan. Pursuant to a
reorganization of the Corporations and other commonly controlled entities (see
Note 14), management expects that undrawn amounts of these borrowing
commitments will be transferred to subsidiaries of Wilshire Financial Services
Group, Inc. ("WFSG") upon the effective date of WFSG's initial public offering
of common stock and debt.
6. CAPITAL LEASE OBLIGATIONS
The Corporations have purchased various assets, including its headquarters
facility and certain automobiles and equipment, under capital leases. Future
minimum lease payments for capital leases as of September 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996................................................................. $ 962
1997................................................................. 156
1998................................................................. 121
1999................................................................. 113
2000................................................................. 109
Thereafter........................................................... 62
------
Total.............................................................. 1,523
Less amount representing interest.................................. 78
------
Capital lease obligation.......................................... $1,445
======
</TABLE>
F-47
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. FINANCIAL INSTRUMENTS
The Corporations are parties to financial instruments with off-balance-sheet
risk in the normal course of business, primarily for the purposes of reducing
exposure to fluctuations in interest rates and changes in the market value of
loans held for sale ("hedging activities") and, prior to 1996, for purposes of
realizing short-term profits ("trading activities"). These financial
instruments include short sales and forward sales of U.S. Treasury securities
and short and long positions in option contracts and interest rate futures
contracts of durations similar to the fixed rate loans held for sale that are
being hedged. These instruments involve, to varying degrees, interest-rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The contract or notional amounts of these instruments
reflect the extent of the Corporations' involvement in particular classes of
financial instruments. The counterparties to these instruments are well-known
international broker-dealers and the Corporations do not believe there is
significant credit risk associated with the instruments.
Substantially all activities in the aforementioned financial instruments
during the nine months ended September 30, 1996 were hedging activities. At
September 30, 1996, the Corporations had futures and options positions
(primarily short positions) with notional amounts totalling $26,400 and
$12,400, respectively, and net deferred hedging losses totalling $193.
Substantially all activities in the aforementioned financial instruments
during the year ended December 31, 1995 were trading activities. At December
31, 1995, the Corporations had futures and options positions (primarily short
positions) with notional amounts totalling $3,122 and $10,603, respectively,
and fair market values of $57. During the year ended December 31, 1995, the
average fair values of these financial instruments were not material. Trading
gains and losses are included in other revenues in the combined statements of
operations
The purchase or sale of options and futures contracts bears a high degree of
market risk, subject to fluctuations in market values, rates or currencies in
the instruments underlying the contracts. The potential market loss on options
and futures are generally substantially in excess of the premium paid or
received. The options and futures transactions entered into by the
Corporations require cash margin deposits with the broker. As of September 30,
1996 and December 31, 1995, such margin requirements were $326 and $96,
respectively.
8. OPERATING LEASES
The Corporations maintain certain noncancelable operating leases on real
property and other assets, which expire through 1999. Future minimum lease
payments on such noncancelable operating leases as of September 30, 1996 are
as follows:
<TABLE>
<S> <C>
1996.................................................................. $ 362
1997.................................................................. 1,448
1998.................................................................. 1,415
1999.................................................................. 1,357
2000.................................................................. 113
------
$4,695
======
</TABLE>
The management fee portion of the annual lease payment for a corporate jet
of $401 is subject to escalation on January 1 of each year based on the
percentage change in the Consumer Price Index during the immediately preceding
year.
F-48
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. LOAN SERVICING
Loans serviced for others, except for participated loans acquired in the
name of WCC, are not included in the combined statements of financial
condition. The Corporations perform servicing for two affiliated savings banks
as well as other unrelated parties. The unpaid principal balances of loans
serviced for others are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Related parties................................... $501,954 $337,455
Others............................................ 13,537 18,417
-------- --------
Total........................................... $515,491 $355,872
======== ========
</TABLE>
At September 30, 1996 and December 31, 1995, WCC, in connection with the
foregoing loan servicing and in connection with WCC-owned and participated
loans, had made escrow payments in excess of amounts collected, which are
included in other receivables.
10. COMMITMENTS AND CONTINGENCIES
Profit-Sharing Plan--The Corporations' employees participate in a defined
contribution profit-sharing and 401(k) plan. At the discretion of the
Corporations' Boards of Directors, they may elect to contribute to the plan
based on profits of the Corporations or based on matching participants'
contributions. During 1996 and 1995, the Corporations contributed $97 and $46,
respectively, to the plan.
Litigation--The Corporations are defendants in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Corporations'
financial position.
Loan Purchase Commitments--At September 30, 1996, the Corporations were
committed to purchase $9,323 of loans for $9,323. The Corporations also had a
commitment from a participating investor to provide funding for the purchases.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimates
presented herein are not necessarily indicative of the amounts the
Corporations could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The methods and assumptions used to
estimate the fair value of each class of financial instrument for which it is
practicable to estimate that value are explained below:
Cash and Cash Equivalents--The carrying amounts reported in the combined
statements of financial condition for cash and cash equivalents approximate
their fair values.
Securities--Fair values of U.S. Treasury securities included in the held-to-
maturity classification are based on quoted market prices. Fair values of B-
class mortgage-backed securities included in the trading account and the
available-for-sale classification, including both purchased securities and
residual interests in loan
F-49
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
securitization transactions initiated by the Corporations, are estimated by
management based on data provided by an independent pricing service,
considering current interest rates, prepayments and other relevant factors. It
is not practicable to estimate the fair value of preferred stock of a closely-
held corporation included in the available-for-sale classification.
Loans--It is not practicable to estimate the fair value of discounted loans
(including discounted loans held for sale), which are predominantly non
performing loans, due to uncertainties as to the nature, timing and extent to
which the loans will be either collected according to original terms,
restructured, or foreclosed upon. The fair values of loans and loans held for
sale other than discounted loans and commercial notes using applicable risk-
adjusted spreads relative to the current pricing of similar loans as well as
anticipated prepayments. No value adjustments have been made for changes in
credit risk within the loan portfolios. It is management's opinion that the
allowance for estimated loan losses pertaining to loans results in a fair
value adjustment of the credit risk of such loans. It is not practicable to
estimate the fair value of commercial notes receivable. These loans were
extended in a leveraged buyout transaction and bear interest at rates from 15-
20%. The loans are repayable based on formulas tied to the earnings of the
borrower, and mature in 2001.
Participating Interests in Loans and Securities--It is not practicable to
estimate the fair values of participating interests in loans and securities.
These liabilities are payable from the cash flows generated by the related
loans and securities, less the Corporations' retained servicing fees, which
include a profit participation element. The fair values of the liabilities are
therefore linked to the fair values of the related securities and loans,
including discounted loans for which fair values are not reasonably estimable.
Borrowings--Information pertinent to an evaluation of the fair value of
borrowings is included in Note 5. Fair value is assumed to approximate the
face amount outstanding because the principal borrowings have variable
interest rates and generally mature as the loan collateral is collected or are
repayable on demand.
Off-Balance-Sheet Items--The fair value of options and futures used for
hedging purposes are based on quoted market prices.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 6,638 $ 6,638
Securities:
Trading securities................................... 11,818 11,818
Available for sale securities........................ 7,039 7,049
Held to maturity securities.......................... 12,771 12,785
Loans:
Discounted loans, net................................ 4,824 4,824
Loans held for sale, net............................. 112,939 131,763
Discounted loans held for sale, net.................. 168,957 168,957
Commercial notes..................................... 10,811 10,811
Liabilities:
Participating interests in loans and securities........ 143,424 143,424
Borrowings............................................. 243,239 243,239
Off-balance-sheet items:
Options................................................ -- (39)
Futures................................................ -- (152)
</TABLE>
F-50
<PAGE>
PURCHASERS OF THE COMPANY'S NOTES WILL NOT ACQUIRE ANY INTEREST IN WILSHIRE
CREDIT CORPORATION
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 3,577 $ 3,577
Securities:
Available for sale securities........................ 2,486 2,486
Held to maturity securities.......................... 4,643 4,643
Loans:
Loans, net........................................... 121,420 121,420
Discounted loans, net................................ 19,352 19,352
Discount loans held for sale, net.................... 33,267 33,267
Commercial notes..................................... 9,261 9,261
Liabilities:
Participating interests in loans and securities........ 150,298 150,298
Borrowings............................................. 70,165 70,165
Off-balance-sheet items:
Options................................................ -- 8
Futures................................................ -- 46
</TABLE>
12. SUBSEQUENT EVENTS--REORGANIZATION OF THE CORPORATIONS
WFSG is affiliated with the Corporations by common ownership and control,
and owns the two banks for which the Corporations service loans. WFSG is
making an initial public offering ("IPO") of common stock and debt, and has
formed certain new subsidiaries to undertake the loan acquisition and
servicing businesses currently being conducted by the Corporations. At the
effective date of WFSG's IPO, the Corporations will cease to acquire loans or
otherwise to compete with WFSG. The Corporations will continue to hold their
existing assets, and will continue to service loans for their own account and
for WFSG and its subsidiaries for a period of approximately two to three
years, when it is expected that WFSG's servicing subsidiary will have obtained
the necessary licenses to assume the servicing business from the Corporations.
Pursuant to the IPO and reorganization of the Corporations, and subsequent
to September 30, 1996, the Corporations will transfer certain rights they have
to future servicing income from a participation agreement with a third party.
The servicing rights, which have no recorded basis in the statements of
financial condition of the Corporations as of September 30, 1996, are the
rights to varying percentages of cash flows from the collection or liquidation
of loans and B-class mortgage-backed securities with principal balances
totalling approximately $269,862 as of September 30, 1996.
Management expects that support for existing commitments of the Corporations
subsequent to the reorganization will be derived from a combination of the
following: continued collection and liquidation of existing loans and
securities; servicing income for the period during which the Corporations
continue to conduct the servicing business; operating income from properties
leased to WFSG and its subsidiaries and to third parties; stockholder loans,
which are indirectly supported by the stockholders' interests in WFSG; and,
potentially, other transactions or businesses that the Corporations might
elect to pursue.
F-51
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO 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 UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFOR-
MATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH
SUCH INFORMATION IS GIVEN.
---------------
TABLE OF CONTENTS
---------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
The Company.............................................................. 20
Recent Developments...................................................... 21
Use of Proceeds.......................................................... 23
Capitalization........................................................... 24
Selected Financial Information........................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 45
Regulation............................................................... 65
Taxation................................................................. 74
Management............................................................... 76
Principal Stockholders................................................... 84
Certain Relationships and Related Transactions........................... 85
Description of Notes..................................................... 87
Underwriting............................................................. 106
Legal Matters............................................................ 106
Experts.................................................................. 106
Wilshire Credit Corporation.............................................. 108
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$75,000,000
------------------------
WILSHIRE
------------------------
Financial Services Group
% NOTES DUE 2003
---------------
PROSPECTUS
---------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LC962980.025
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated
expenses in connection with the registration, offering and sale of the
securities being registered hereby other than underwriting discounts and
commissions.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 27,181
NASD and NASDAQ fees.......................................... 44,000
Accounting fees and expenses.................................. 600,000
Legal fees and expenses....................................... 400,000
Blue sky fees and expenses (including counsel fees)........... 15,000
Printing and engraving expenses............................... 150,000
Transfer agent's fees......................................... 10,000
Miscellaneous expenses........................................ 125,000
----------
Total..................................................... $1,371,181
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Registrant's Certificate of Incorporation provides that
the Registrant shall indemnify to the fullest extent not prohibited by law any
current or former director or officer of the Registrant and may indemnify to
the fullest extent not prohibited by law any current or former employee or
agent of the Registrant who is made, or threatened to be made, a party to an
action, suit or proceeding, whether civil, criminal, administrative,
investigative or other (including and action, suit or proceeding by or in the
right of the Registrant), by reason of the fact that such person is or was a
director, officer, employee or agent of the Registrant or a fiduciary of any
employee benefit plan of the Registrant, or serves or served at the request of
the Registrant as a director, officer, employee or agent, or as a fiduciary of
an employee benefit plan, of another corporation, partnership, joint venture,
trust or other enterprise. The Registrant shall pay for or reimburse the
reasonable expenses incurred by such current of former director or officer and
may pay for or reimburse the reasonable expenses incurred by any such current
of former employee or agent in such proceeding in advance of the final
disposition of the proceeding if the person sets forth in writing (i) the
person's good faith belief that the person is entitled to indemnification and
(ii) the person's agreement to repay all advances if it is ultimately
determined that the person is not entitled to indemnification pursuant to the
Certificate of Incorporation. Article EIGHTH of the Registrant's Certificate
of Incorporation provides that no director of the Registrant shall be liable
for monetary damages for breach of fiduciary duty as a director. The
Registrant also provides its directors and officers coverage under a
director's and officer's liability insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the formation of the Company on October 28, 1996, the
Company sold two shares of Common Stock to Andrew A. Wiederhorn and one share
of Common Stock to Lawrence A. Mendelsohn at a purchase price of $5.00 per
share, pursuant to an exemption from registration under Section 4(2) of the
Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1.1 Form of Underwriting Agreement relating to the Common Stock
1.2 Form of Underwriting Agreement relating to the Notes
+3.1 Certificate of Incorporation
+3.2 By-laws
4.2 Form of Indenture, dated as of , 1996 among Wilshire
Financial Services Group Inc. and Bankers Trust Corporation
4.3 Form of Notes (included in Exhibit 4.2)
+5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP
**10.1 Form of Employment Agreement dated November 15, 1996 among the
Company and Andrew A. Wiederhorn
**10.2 Form of Employment Agreement dated November 15, 1996 among the
Company and Lawrence A. Mendelsohn
+10.3 Incentive Stock Plan
+10.11 Cease and Desist Order
**10.12 Servicing Agreement dated as of November 15, 1996 among
Wilshire Credit Corporation and Wilshire Financial Services
Group
+10.13 Master Repurchase Agreement dated as of July 29, 1996 among
Wilshire Credit Corporation and CS First Boston Capital
Corporation
+10.14 Additional Supplemental Terms to Master Repurchase Agreement,
dated as of July 29, 1996 between CS First Boston Mortgage
Capital Corp. and Wilshire Credit Corporation
+10.15 Interim Warehouse & Security Agreement, dated as of December 1,
1995, between Wilshire Funding Company, L.L.C. and Prudential
Securities Realty Funding Corp
+10.16 Amendment to Interim Warehouse and Security Agreement dated
June 28, 1996 between Wilshire Funding Company, L.L.C. and
Prudential Securities Realty Funding Corp
+10.17 Amendment No. 2 to Interim Warehouse and Security Agreement
dated September 27, 1996 between Wilshire Funding Company,
L.L.C. and Prudential Securities Realty Funding Corp
+10.18 Master Repurchase Agreement between First Bank of Beverly
Hills, F.S.B. and Bear Stearns Mortgage Capital Corporation
dated as of May 22, 1996
+10.19 Supplemental Terms and Conditions dated as of May 22, 1996
among First Bank of Beverly Hills, F.S.B. and Bear Stearns
Mortgage Capital Corporation
+10.20 Master Repurchase Agreement between Girard Savings Bank FSB and
Bear Stearns Mortgage Capital Corporation dated as of December
22, 1995
+10.21 Master Repurchase Agreement dated as of November 15, 1996
between CS First Boston Mortgage Capital Corp. and Wilshire
Funding Corp.
+10.22 Interim Warehouse and Security Agreement by and between
Prudential Securities Credit Corporation and WMFC 1997-2, Inc.
dated as of November 15, 1996
+11 Statement regarding earnings per share
+12 Statement regarding the computation of the ratio of earnings to
fixed charges
+21.1 Subsidiaries
+23.1 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in
Exhibit 5.1)
**23.2 Consent of Deloitte & Touche LLP
**23.3 Consent of Deloitte & Touche LLP
+23.4 Consent of KPMG Peat Marwick LLP
+24 Power of Attorney (see page II-4)
+25 Form T-1
+27 Financial Data Schedule
</TABLE>
- --------
+Previously filed.
**Refiled herewith.
II-2
<PAGE>
(b) Financial Statement Schedules:
The Financial Statement Schedules have been omitted because the information
required is not applicable or is included in the financial statements or notes
thereto. Columns omitted from schedules filed are omitted because the
information is not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at the time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Portland and the State of Oregon, on
this 9th day of December, 1996.
Wilshire Financial Services Group
Inc.
/s/ Andrew A. Wiederhorn
By: _________________________________
Andrew A. Wiederhorn Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
3 to the Registration Statement has been signed by the following persons in
their capacities on December 9, 1996.
SIGNATURE TITLE
/s/ Andrew A. Wiederhorn Chairman of the Board, Chief
- ------------------------------------- Executive Officer, Secretary and
ANDREW A. WIEDERHORN Treasurer (Principal Executive
Officer)
/s/ Lawrence A. Mendelsohn President and Director
- -------------------------------------
LAWRENCE A. MENDELSOHN
* Director
- -------------------------------------
DONALD H. COLEMAN
* Director
- -------------------------------------
DAVID DALE-JOHNSON
* Director
- -------------------------------------
PHILIP G. FORTE
* Senior Vice President and Chief
- ------------------------------------- Financial Officer (Principal
CHRIS TASSOS Accounting and Financial Officer)
/s/ Lawrence A. Mendelsohn
----------------------------------
*By:
LAWRENCE A. MENDELSOHN ATTORNEY-IN-
FACT
II-4
<PAGE>
EXHIBIT INDEX
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1.1 Form of Underwriting Agreement relating to the Common Stock
1.2 Form of Underwriting Agreement relating to the Notes
+3.1 Certificate of Incorporation
+3.2 By-laws
4.2 Form of Indenture, dated as of , 1996 among Wilshire
Financial Services Group Inc. and Bankers Trust Corporation
4.3 Form of Notes (included in Exhibit 4.2)
+5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP
**10.1 Form of Employment Agreement dated November 15, 1996 among the
Company and Andrew A. Wiederhorn
**10.2 Form of Employment Agreement dated November 15, 1996 among the
Company and Lawrence A. Mendelsohn
+10.3 Incentive Stock Plan
+10.11 Cease and Desist Order
**10.12 Servicing Agreement dated as of November 15, 1996 among
Wilshire Credit Corporation and Wilshire Financial Services
Group
+10.13 Master Repurchase Agreement dated as of July 29, 1996 among
Wilshire Credit Corporation and CS First Boston Capital
Corporation
+10.14 Additional Supplemental Terms to Master Repurchase Agreement,
dated as of July 29, 1996 between CS First Boston Mortgage
Capital Corp. and Wilshire Credit Corporation
+10.15 Interim Warehouse & Security Agreement, dated as of December 1,
1995, between Wilshire Funding Company, L.L.C. and Prudential
Securities Realty Funding Corp
+10.16 Amendment to Interim Warehouse and Security Agreement dated
June 28, 1996 between Wilshire Funding Company, L.L.C. and
Prudential Securities Realty Funding Corp
+10.17 Amendment No. 2 to Interim Warehouse and Security Agreement
dated September 27, 1996 between Wilshire Funding Company,
L.L.C. and Prudential Securities Realty Funding Corp
+10.18 Master Repurchase Agreement between First Bank of Beverly
Hills, F.S.B. and Bear Stearns Mortgage Capital Corporation
dated as of May 22, 1996
+10.19 Supplemental Terms and Conditions dated as of May 22, 1996
among First Bank of Beverly Hills, F.S.B. and Bear Stearns
Mortgage Capital Corporation
+10.20 Master Repurchase Agreement between Girard Savings Bank FSB and
Bear Stearns Mortgage Capital Corporation dated as of December
22, 1995
+10.21 Master Repurchase Agreement dated as of November 15, 1996
between CS First Boston Mortgage Capital Corp. and Wilshire
Funding Corp.
+10.22 Interim Warehouse and Security Agreement by and between
Prudential Securities Credit Corporation and WMFC 1997-2, Inc.
dated as of November 15, 1996
+11 Statement regarding earnings per share
+12 Statement regarding the computation of the ratio of earnings to
fixed charges
+21.1 Subsidiaries
+23.1 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in
Exhibit 5.1)
**23.2 Consent of Deloitte & Touche LLP
**23.3 Consent of Deloitte & Touche LLP
+23.4 Consent of KPMG Peat Marwick LLP
+24 Power of Attorney (see page II-4)
+25 Form T-1
+27 Financial Data Schedule
</TABLE>
- --------
+Previously filed.
**Refiled herewith.
<PAGE>
EXHIBIT 1.1
WILSHIRE FINANCIAL SERVICES GROUP INC.
1,500,000 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
[__________ __,] 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
Wilshire Financial Services Group Inc., a Delaware corporation (the
"Company"), confirms its agreement with Friedman, Billings, Ramsey & Co., Inc.
and each of the other Underwriters listed on Schedule I hereto (collectively,
the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc. is acting
as representative (in such capacity, the "Representative"), with respect to (i)
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of shares of Common Stock, par value
$0.01 per share, of the Company ("Common Stock") set forth in Schedule I hereto
and (ii) the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 1(b) hereof to purchase all or any
part of 225,000 additional shares of Common Stock solely to cover over-
allotments, if any. The 1,500,000 shares of Common Stock (the "Firm Shares") to
be purchased by the Underwriters and all or any part of the 225,000 shares of
Common Stock subject to the option described in Section 1(b) hereof (the "Option
Shares") are hereinafter called, collectively, the "Shares".
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1 (No. 333-15263) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations thereunder (the "Securities Act Regulations"). The Company has
prepared and filed such amendments thereto, if any, and such amended preliminary
prospectuses, if any, as may have been required to the date hereof, and will
file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The registration statement has been declared effective
under the Securities Act by the Commission. The registration statement as
amended at the time it became effective (including all information deemed to be
a part of the registration statement at the time it became effective pursuant to
Rule 430A(b) of the Securities Act Regulations) is hereinafter called the
"Registration Statement," except that, if the Company files a post-effective
amendment to such registration statement which becomes effective prior to the
Closing Time (as defined below), "Registration Statement" shall
<PAGE>
refer to such registration statement as so amended. Any registration statement
filed pursuant to Rule 462(b) of the Securities Act Regulations is hereinafter
called the "Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the 462(b) Registration Statement. Each
prospectus included in the registration statement, or amendments thereof or
supplements thereto, before it became effective under the Securities Act and any
prospectus filed with the Commission by the Company with the consent of the
Underwriters pursuant to Rule 424(a) of the Securities Act Regulations is
hereinafter called the "Preliminary Prospectus." The term "Prospectus" means
the final prospectus, as first filed with the Commission pursuant to paragraph
(1) or (4) of Rule 424(b) of the Securities Act Regulations, and any amendments
thereof or supplements thereto. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
The Company and the Underwriters agree as follows:
1. Sale and Purchase:
-----------------
(a) Firm Shares. Upon the basis of the warranties and representations and
other terms and conditions herein set forth, the Company agrees to sell to each
Underwriter, severally and not jointly, and each Underwriter agrees, severally
and not jointly, to purchase from the Company at the purchase price per share of
$_______, the number of Firm Shares set forth in Schedule I opposite such
Underwriter's name, plus any additional number of Firm Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 8 hereof, subject in each case, to such adjustments among the
Underwriters as the Representative in its sole discretion shall make to
eliminate any sales or purchases of fractional shares. The Underwriters may
from time to time increase or decrease the public offering price of the Firm
Shares after the initial public offering to such extent as the Underwriters may
determine in accordance with applicable law.
(b) Option Shares. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase from the Company up to an aggregate of 225,000 Option Shares at the
purchase price per share set forth in paragraph (a) above plus any additional
number of Option Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 8 hereof. The option hereby granted will
expire 30 days after the date hereof and may be exercised in whole or in part
from time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Firm Shares upon
notice by the Representative to the Company setting forth the number of Option
Shares as to which the several Underwriters are then exercising the option and
the time and date of payment and delivery for the Option Shares. Any such time
and date of delivery (a "Date of Delivery") shall be determined by the
Representative, but shall not be later than seven full business days (or
earlier, without the consent of the Company, than two full business days) after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Shares, each of the Underwriters, acting severally and not jointly, will
purchase that proportion of the total number of Option Shares then being
purchased which the number of Firm Shares set forth in Schedule I opposite the
name of such Underwriter bears to the total number of Firm Shares,
2
<PAGE>
subject in each case to such adjustments as the Representative in its sole
discretion shall make to eliminate any sales or purchases of fractional shares.
The Underwriters may from time to time increase or decrease the public offering
price of the Option Shares after the initial public offering to such extent as
the Underwriters may determine in accordance with applicable law.
2. Payment and Delivery:
--------------------
(a) Firm Shares. Payment of the purchase price for the Firm Shares shall
be made to the Company by wire transfer of immediately available funds or
certified or official bank check payable in federal (same-day) funds at the
offices of Proskauer Rose Goetz & Mendelsohn LLP located at 1585 Broadway, New
York, New York 10036 (unless another place shall be agreed upon by the
Representative and the Company) against delivery of the certificates for the
Firm Shares to the Representative for the respective accounts of the
Underwriters. Such payment and delivery shall be made at ____ a.m., New York
City time, on the third (fourth, if pricing occurs after 4:30 p.m. (New York
City time)) business day after the date hereof (unless another time, not later
than ten business days after such date, shall be agreed to by the Representative
and the Company). The time at which such payment and delivery are actually made
is hereinafter sometimes called the "Closing Time". Certificates for the Firm
Shares shall be delivered to the Representative in definitive form registered in
such names and in such denominations as the Representative shall specify. The
Representative shall provide such information at least two full business days
prior to the Closing Time. For the purpose of expediting the checking of the
certificates for the Firm Shares by the Representative, the Company agrees to
make such certificates available to the Representative for such purpose at least
one full business day preceding the Closing Time, provided that the Company
shall have received the names of registered holders and denominations from the
Representative as aforesaid.
(b) Option Shares. In addition, payment of the purchase price for the
Option Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal (same-
day) funds at the offices of Proskauer Rose Goetz & Mendelsohn LLP located at
1585 Broadway, New York, New York 10036 (unless another place shall be agreed
upon by the Representative and the Company), against delivery of the
certificates for the Option Shares to the Representative for the respective
accounts of the Underwriters. Such payment and delivery shall be made at ____
a.m., New York City time, on each Date of Delivery. Certificates for the Option
Shares shall be delivered to the Representative in definitive form registered in
such names and in such denominations as the Representative shall specify. The
Representative shall provide such information at least two full business days
prior to the relevant Date of Delivery. For the purpose of expediting the
checking of the certificates for the Option Shares by the Representative, the
Company agrees to make such certificates available to the Representative for
such purpose at least one full business day preceding the relevant Date of
Delivery, provided that the Company shall have received the names of registered
holders and denominations from the Representative as aforesaid.
3. Representations and Warranties of the Company:
---------------------------------------------
The Company represents and warrants to the Underwriters as of the date hereof
that:
3
<PAGE>
(a) the Company is a multiple savings and loan holding company duly
registered under the Home Owners' Loan Act, as amended ("HOLA"), and its current
business operations constitute permissible services or activities for a multiple
savings and loan holding company under HOLA and 12 C.F.R. Part 584;
(b) the Company has an authorized capitalization as of September 30, 1996
as set forth in the Prospectus under the column entitled "Actual" under the
caption "Capitalization" (and not under the column entitled "Adjusted"); the
outstanding shares of capital stock of the Company and its direct and indirect
subsidiaries (the "Subsidiaries"), Wilshire Funding Corporation, Wilshire
Servicing Corporation, Wilshire Acquisitions Corporation, First Bank of Beverly
Hills, F.S. B. ("First Bank") and Girard Savings Bank, F.S.B. ("Girard" and
together with First Bank, the "Savings Banks"), have been duly and validly
authorized and issued and are fully paid and non-assessable, and all of the
outstanding shares of capital stock of the Subsidiaries are directly or
indirectly owned of record and beneficially by the Company;
(c) the Company and each of the Company's Subsidiaries other than the
Savings Banks have been duly incorporated and is validly existing as a
corporation in good standing under the laws of its respective jurisdiction of
incorporation with the corporate power and authority to own its respective
properties and to conduct its respective business and, in the case of the
Company, to execute and deliver this Agreement and (i) the Employment Agreement
dated November 15, 1996 between the Company and Andrew A. Wiederhorn, (ii) the
Employment Agreement dated November 15,1996 between the Company and Lawrence A.
Mendelsohn, (iii) the Servicing Agreement dated as of November 15, 1996 among
Wilshire Credit Corporation, a Nevada corporation ("WCC"), the Company, Wilshire
Funding Corporation, a Delaware corporation ("WFC"), and Wilshire Servicing
Corporation, a Delaware corporation ("WSC"), (iv) the Loan Purchase Agreement
dated ______________ between WCC and WFC, (v) the Administrative Services
Agreement dated ____________ among WCC and certain of its affiliates and the
Company and (vi) the credit facilities filed as Exhibits 10.21 and 10.22 to the
Registration Statement (the "Other Transaction Documents");
(d) each Savings Banks has been chartered as a federal savings bank under
the laws of the United States of America, and its charter is in full force and
effect; each Savings Bank has full corporate power and corporate authority to
own its properties and conduct its business as described in the Registration
Statement and the Prospectus; each Savings Bank is a member of the Federal Home
Loan Bank System; and the savings accounts of depositors in the Savings Banks
are insured by the Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent
permitted by law and the rules and regulations of the FDIC, and no proceedings
for the termination of such insurance are pending, or to the best of the
Company's knowledge, threatened;
(e) except as set forth in the Prospectus, the Company and all of its
Subsidiaries are duly qualified or licensed by each jurisdiction in which they
conduct their respective businesses and in which the failure, individually or in
the aggregate, to be so qualified or licensed could have a material adverse
effect on the assets, operations, business or condition (financial or otherwise)
of the Company and its Subsidiaries taken as a whole, and the Company and its
Subsidiaries are duly qualified, and are in good standing, in each jurisdiction
in which they own or lease real
4
<PAGE>
property or maintain an office and in which such qualification is necessary,
except where the failure to be so qualified and in good standing would not have
a material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole;
(f) the Company and its Subsidiaries are in compliance in all material
respect with all applicable laws, rules, regulations, orders, decrees and
judgments, including those relating to transactions with affiliates;
(g) neither the Company nor any of its Subsidiaries is party to or
otherwise the subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement agreement or
understanding with the OTS, the FDIC or any other government authority or agency
responsible for the supervision, regulation or insurance of depository
institutions or their holding companies, other than the cease and desist orders
issued to the Savings Banks by the Office of Thrift Supervision (the "OTS") on
October 31, 1996 (the "Cease and Desist Orders"); the Savings Banks are in
compliance with the provisions of the Cease and Desist Orders in effect as of
the date hereof; and, to the best of the Company's knowledge, no further or
additional bank regulatory action against the Savings Banks and/or their
directors is threatened;
(h) neither the Company nor any of its Subsidiaries is in breach of, or in
default under (nor has any event occurred which with notice, lapse of time, or
both would constitute a breach of, or default under), its respective articles of
incorporation or charter or by-laws or in the performance or observance of any
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them is bound, except for such breaches or defaults which would not
have a material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole,
and the execution, delivery and performance of this Agreement and the Other
Transaction Documents, and consummation of the transactions contemplated hereby
and thereby will not conflict with, or result in any breach of or constitute a
default under (nor constitute any event which with notice, lapse of time, or
both would constitute a breach of, or default under), (i) any provision of the
articles of incorporation or charter or by-laws of the Company or any of its
Subsidiaries, or (ii) any provision of any indenture, mortgage, deed of trust,
loan or credit agreement or other agreement or instrument to which the Company
or any of its Subsidiaries is a party or by which any of them or their
respective properties may be bound or affected, or under any federal, state,
local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company or any of its Subsidiaries, except in the case of this
clause (ii) for such breaches or defaults which would not have a material
adverse effect on the assets, operations, business or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole;
(i) this Agreement has been duly authorized, executed and delivered by the
Company and is a legal, valid and binding agreement of the Company enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
affecting creditors' rights generally, and by general
5
<PAGE>
principles of equity, and except to the extent that the indemnification and
contribution provisions of Section 9 hereof may be limited by federal or state
securities laws and public policy considerations in respect thereof;
(j) the Other Transaction Documents have been duly authorized and will be,
upon execution and delivery by the Company, legal, valid and binding agreements
of the Company enforceable by it in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights generally, and by general
principles of equity;
(k) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the sale and delivery of the
Shares by the Company as contemplated hereby other than (A) such as have been
obtained, or will have been obtained at the Closing Time or the relevant Date of
Delivery, as the case may be, under the Securities Act, (B) such approvals as
have been obtained in connection with the approval of the quotation of the
Shares on the Nasdaq National Market System and (C) any necessary qualification
under the securities or blue sky laws of the various jurisdictions in which the
Shares are being offered by the Underwriters;
(l) each of the Company and its Subsidiaries has all necessary licenses,
authorizations, consents and approvals and has made all necessary filings
required under any federal, state or local law, regulation or rule, and has
obtained all necessary authorizations, consents and approvals from other
persons, required in order to conduct their respective businesses, except to the
extent that any failure to have any such licenses, authorizations, consents or
approvals, to make any such filings or to obtain any such authorizations,
consents or approvals would not, individually or in the aggregate, have a
material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole;
neither the Company nor any of its Subsidiaries is in violation of, or in
default under, any such license, authorization, consent or approval or any
federal, state, local or foreign law, regulation or rule or any decree, order or
judgment applicable to the Company or any of its Subsidiaries the effect of
which could be material and adverse to the assets, operations, business or
condition (financial or otherwise) of the Company and its Subsidiaries taken as
a whole;
(m) the Registration Statement has become effective under the Securities
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued under the Securities Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the Company, are
threatened by the Commission, and any request on the part of the Commission for
additional information has been complied with;
(n) the Registration Statement as of its effective date and the Prospectus
at the Closing Time or on any Date of Delivery (if any) complies in all material
respects with the requirements of the Securities Act and the Securities Act
Regulations; neither the Registration Statement as of its effective date nor the
Prospectus as of the Closing Time or on any Date of Delivery contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the
6
<PAGE>
Company makes no warranty or representation with respect to any statement
contained in the Registration Statement or the Prospectus in reliance upon and
in conformity with the information concerning the Underwriters and furnished in
writing by or on behalf of the Underwriters through the Representative to the
Company expressly for use in the Registration Statement or the Prospectus (that
information being limited to that described in the last sentence of the first
paragraph of Section 9(b) hereof);
(o) the Preliminary Prospectus and the Prospectus delivered to the
Underwriters for use in connection with this offering was identical to the
versions of the Preliminary Prospectus and Prospectus created to be transmitted
to the Commission for filing via the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T;
(p) except as set forth in the Preliminary Prospectus and the Prospectus,
there are no actions, suits or proceedings pending or, to the Company's
knowledge, threatened against the Company or any of its Subsidiaries or any of
their respective properties, at law or in equity, or before or by any federal,
state, local or foreign governmental or regulatory commission, board, body,
authority or agency which reasonably could be expected to have a material
adverse effect on the assets, operations, business or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole;
(q) the financial statements, including the notes thereto, included in the
Registration Statement and the Prospectus present fairly the consolidated or
combined financial position of the Company and its Subsidiaries, Girard and its
subsidiary and WCC and its affiliates as of the dates indicated and the
consolidated results of operations and changes in financial position and cash
flows of the Company and its Subsidiaries, Girard and its subsidiary and WCC and
its affiliates for the periods specified; such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as indicated in the notes
thereto);
(r) Deloitte & Touche LLP, whose reports on the consolidated or combined
financial statements of the Company and its Subsidiaries, Girard and its
subsidiary and WCC and its affiliates are filed with the Commission as part of
the Registration Statement and Prospectus, are independent public accountants as
required by the Securities Act and the Securities Act Regulations;
(s) subsequent to the effective date of the Registration Statement and the
date of the Prospectus up to and including the Closing Time and any Date of
Delivery, and except as may be otherwise stated in the Registration Statement or
Prospectus, there has not been (A) any material and unfavorable change, in the
assets, operations, business or condition (financial or otherwise) of the
Company and its Subsidiaries taken as a whole, (B) any transaction, which is
material to the Company and its Subsidiaries taken as a whole, contemplated or
entered into by the Company or any of its Subsidiaries or (C) any obligation,
contingent or otherwise, directly or indirectly incurred by the Company or any
of its Subsidiaries, which is material to the Company and its Subsidiaries taken
as a whole;
7
<PAGE>
(t) the Company is not, and upon the sale of the Shares as herein
contemplated will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(u) the Shares conform in all material respects to the description thereof
contained in the Registration Statement and the Prospectus;
(v) there are no persons with registration or other similar rights to have
any equity securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act;
(w) the Shares, when issued and delivered to and paid for by the
Underwriters as contemplated hereby, will be duly authorized and validly issued
and fully paid and nonassessable, free and clear of any pledge, lien,
encumbrance, security interest, preemptive right or other claim;
(x) the Company has not taken, and will not take, directly or indirectly,
any action which is designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares;
(y) neither the Company nor any of its affiliates directly, or indirectly
through one or more intermediaries, controls or has any other association with
(within the meaning of Article 1 of the By-laws of the National Association of
Securities Dealers, Inc. (the "NASD")), any member firm of the NASD, other than
Wilshire Securities Corporation; and
(z) any certificate signed by any officer of the Company or any Subsidiary
delivered to the Representative or to counsel for the Underwriters pursuant to
or in connection with this Agreement shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered thereby.
4. Certain Covenants of the Company: The Company
--------------------------------
hereby agrees with each Underwriter:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as the Representative may designate and to maintain
such qualifications in effect as long as required for the distribution of the
Shares, but not longer than 60 days following the Closing Time or any Date of
Delivery without the consent of the Company, provided that the Company shall not
be required to qualify as a foreign corporation or to consent to the service of
process under the laws of any such state (except service of process with respect
to the offering and sale of the Shares);
(b) to prepare the Prospectus in a form approved by the Underwriters and
file such Prospectus with the Commission pursuant to Rule 424(b) as soon as
possible, on the day following the execution and delivery of this Agreement and
to furnish promptly (and with respect to the initial delivery of such
Prospectus, as soon as possible on the day following the execution and delivery
of this Agreement) to the Underwriters as many copies of the Prospectus (or of
the Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act Regulations, which Prospectus and any
amendments or
8
<PAGE>
supplements thereto furnished to the Underwriters will be identical to the
version created to be transmitted to the Commission for filing via EDGAR, except
to the extent permitted by Regulation S-T;
(c) to advise the Representative promptly and (if requested by the
Representative) to confirm such advice in writing, when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective under the Securities Act Regulations;
(d) to advise the Representative promptly and (if requested by the
Representative) to confirm such advice in writing, of (i) any request by the
Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Representative promptly of any proposal
to amend or supplement the Registration Statement or Prospectus and to file no
such amendment or supplement to which the Representative shall reasonably object
in writing;
(e) if requested by any Underwriter, to furnish to such Underwriter for a
period of five years from the date of this Agreement (i) as soon as available,
copies of all annual, quarterly and current reports or other communications
supplied to holders of shares of Common Stock, (ii) as soon as practicable after
the filing thereof, copies of all reports filed by the Company with the
Commission, the NASD or any securities exchange and (iii) such other information
as the Underwriter may reasonably request regarding the Company and its
Subsidiaries;
(f) to advise the Underwriters promptly of the happening of any event known
to the Company within the time during which a Prospectus relating to the Shares
is required to be delivered under the Securities Act Regulations which, in the
judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, during such time,
to prepare and furnish, at the Company's expense, to the Underwriters promptly
such amendments or supplements to such Prospectus as may be necessary to reflect
any such change and to furnish to the Underwriters a copy of such proposed
amendment or supplement before filing any such amendment or supplement with the
Commission;
(g) to furnish promptly to the Representative a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments thereto (including all exhibits thereto) and such number of conformed
copies of the foregoing as the Underwriters may reasonably request;
9
<PAGE>
(h) to furnish to the Underwriters, not less than two business days before
filing with the Commission subsequent to the effective date of the Prospectus
and during the period referred to in paragraph (f) above, a copy of any document
proposed to be filed with the Commission pursuant to Section 13, 14, or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act");
(i) to make generally available to its security holders as soon as
practicable after the effective date of the Registration Statement an earning
statement (in form, at the option of the Company, complying with the provisions
of Rule 158 of the Securities Act Regulations) covering a period of 12 months
beginning after the effective date of the Registration Statement;
(j) to use its best efforts to effect and maintain the quotation of the
Shares on the Nasdaq National Market and to file with the Nasdaq National Market
all documents and notices required by the Nasdaq National Market of companies
that have securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market; and
(k) to refrain during a period of 180 days from the date of the Prospectus,
without the prior written consent of the Representative, from (i) offering,
pledging, selling, contracting to sell, selling any option or contract to
purchase, purchasing any option or contract to sell, granting any option for the
sale of, or otherwise disposing of or transferring, directly or indirectly, any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or filing any registration statement under the
Securities Act with respect to any of the foregoing or (ii) entering into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder, (B) any shares of Common Stock issued by the
Company upon the exercise of an option outstanding on the date hereof and
referred to in the Prospectus or (C) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to the Company's 1996
Incentive Stock Plan referred to in the Prospectus.
5. Payment of Expenses:
-------------------
(a) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
terminated (except if the Representative is unable to complete the offering
contemplated hereby due to the Representative's willful misconduct or bad
faith), including expenses, fees and taxes in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
printing and furnishing of copies of each thereof to the Underwriters and to
dealers (including costs of mailing and shipment), (ii) the preparation,
issuance and delivery of the certificates for the Shares to the Underwriters,
(iii) reproduction of this Agreement and any dealer agreements and furnishing of
copies of each to the Underwriters and to dealers (including costs of mailing
and shipping), (iv) the qualification of the Shares for offering and sale under
state laws that the Company and the Representative have mutually agreed are
appropriate and the
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determination of their eligibility for investment under state law as aforesaid
(including the legal fees and filing fees and other disbursements of counsel for
the Underwriters in the amount of $15,000 assuming that the Common Stock is
approved for quotation on the Nasdaq National Market; such $15,000 to be the
aggregate amount when taken together with such blue sky legal fees and filing
fees and other disbursements of counsel to Friedman, Billings, Ramsey & Co.,
Inc., as underwriter, in the concurrent offering by the Company of its __% Notes
due 2003 (the "Notes Offering")) and the printing and furnishing of copies of
any blue sky surveys or legal investment surveys to the Underwriters and to
dealers, (v) filing for review of the public offering of the Shares by the NASD,
(vi) the fees and expenses of any transfer agent or registrar for the Shares,
(vii) the fees and expenses incurred in connection with the inclusion of the
Shares in the Nasdaq National Market, and (viii) the performance of the
Company's other obligations hereunder. Upon the Representative's request, the
Company will provide funds in advance for filing fees.
(b) The Company agrees to reimburse the Representative for its reasonable
and documented out-of-pocket expenses in connection with the performance of its
activities under this Agreement, whether or not the transactions contemplated
hereunder are consummated or this Agreement is terminated, including, but not
limited to, costs such as printing, facsimile, courier service, direct computer
expenses, accommodations, travel and the fees and expenses of the
Representative's outside legal counsel and any other advisors, accountants,
appraisers, etc., and costs in connection with making road show presentations
with respect to the offering of the Shares. Such expenses shall not exceed,
when aggregated with the reimbursable expenses of Friedman, Billings, Ramsey &
Co., Inc., as underwriter, pursuant to the Underwriting Agreement dated December
__, 1996 for the Notes Offering, $300,000 (not including fees and expenses of
counsel with respect to state securities or blue sky laws), without the
Company's permission. Notwithstanding the foregoing, the Company will not be
obligated to reimburse the Representative for out-of-pocket expenses if the
Representative is unable to complete the offering contemplated hereby due to the
Representative's willful misconduct or bad faith.
6. Conditions of the Underwriters' Obligations: The
-------------------------------------------
obligations of the Underwriters hereunder are subject to the accuracy of the
representations and warranties on the part of the Company in all material
respects on the date hereof and at the Closing Time and on each Date of
Delivery, the performance by the Company of its obligations hereunder in all
material respects and to the following conditions:
(a) The Company shall furnish to the Underwriters at the Closing Time and
on each Date of Delivery opinions of counsel for the Company as set forth below,
addressed to the Underwriters and dated the Closing Time and each Date of
Delivery and in form satisfactory to Gibson, Dunn & Crutcher LLP, counsel for
the Underwriters, stating that:
(i) the Company is a multiple savings and loan holding company duly
registered under HOLA and its business operations, as described in the
Registration Statement and the Prospectus, constitute permissible services
or activities for a multiple savings and loan holding company under HOLA
and 12 C.F.R. Part 584;
(ii) the Company has an authorized capitalization as of September 30,
1996 as set forth in the Prospectus under the column entitled "Actual"
under the caption
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"Capitalization" (and not under the column entitled "Adjusted"); the
outstanding shares of capital stock of the Company and its Subsidiaries
have been duly and validly authorized and issued and are fully paid and
non-assessable, and all of the outstanding shares of capital stock of the
Subsidiaries are directly or indirectly owned of record and beneficially by
the Company;
(iii) the Company and each of the Company's Subsidiaries other than
the Savings Banks have been duly incorporated and is validly existing as a
corporation in good standing under the laws of its respective jurisdiction
of incorporation with full corporate power and authority to own its
respective properties and to conduct its respective business and, in the
case of the Company, to execute and deliver this Agreement;
(iv) each Savings Banks has been duly chartered as a federal savings
bank under the laws of the United States of America, and its charter is in
full force and effect; each Savings Bank has full corporate power and
corporate authority to own its properties and conduct its businesses as
described in the Registration Statement and the Prospectus; each Savings
Bank is a member of the Federal Home Loan Bank System; and the savings
accounts of depositors in the Savings Banks are insured by the SAIF of the
FDIC to the fullest extent permitted by law and the rules and regulations
of the FDIC, and, to such counsel's knowledge, no proceedings for the
termination of such insurance are pending or threatened;
(v) the Company and all of its Subsidiaries (other than the Savings
Banks) are duly qualified, and are in good standing, in Oregon and
California;
(vi) other than the Cease and Desist Orders, to such counsel's
knowledge, none of the Company and the Savings Banks is a party to or
otherwise the subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement agreement or
understanding with the OTS, the FDIC or any other government authority or
agency responsible for the supervision, regulation or insurance of
depository institutions or their holding companies; and, to such counsel's
knowledge, no further or additional bank regulatory action against the
Company, the Savings Banks or their directors is threatened, except actions
that would relate to a failure to comply fully with the Cease and Desist
Orders;
(vii) to such counsel's knowledge, neither the Company nor any of its
Subsidiaries is in breach of, or in default under (nor has any event
occurred which with notice, lapse of time, or both would constitute a
breach of, or default under), any license, indenture, mortgage, deed of
trust, loan or credit agreement or any other agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which any of
them or their respective properties may be bound or affected and identified
as a material agreement or instrument of the Company or a Subsidiary in the
certificate of the Company attached hereto or under any law, regulation or
rule or any decree, judgment or order applicable to the Company or any of
its Subsidiaries, except such breaches or defaults which would not have a
material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a
whole.
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(viii) the execution, delivery and performance of this Agreement and
the Other Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby do not and will
not conflict with, or result in any breach of, or constitute a default
under (nor constitute any event which with notice, lapse of time, or both
would constitute a breach of or default under), (i) any provisions of the
articles of incorporation, charter or by-laws of the Company or any
Subsidiary, (ii) any provision of any license, indenture, mortgage, deed of
trust, loan or credit agreement or other agreement or instrument known to
such counsel to which the Company or any Subsidiary is a party or by which
any of them or their respective properties may be bound or affected and
identified as a material agreement or instrument of the Company or a
Subsidiary in the certificate of the Company attached hereto, or (iii) any
law or regulation or any decree, judgment or order applicable to the
Company or any Subsidiary, except in the case of clause (ii) for such
conflicts, breaches or defaults which individually or in the aggregate
would not have a material adverse effect on the assets, operations,
business or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole;
(ix) this Agreement has been duly authorized, executed and delivered
by the Company;
(x) the Other Transaction Documents have been duly authorized and will
be, upon execution and delivery by the Company, legal, valid and binding
agreements of the Company enforceable by it in accordance with their terms,
except as may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws affecting creditors'
rights generally, and by general principles of equity;
(xi) no approval, authorization, consent or order of or filing with
any federal or state governmental or regulatory commission, board, body,
authority or agency is required in connection with the sale and delivery of
the Shares by the Company as contemplated hereby other than such as have
been obtained or made under the Securities Act and except that such counsel
need express no opinion as to any necessary qualification under the state
securities or blue sky laws of the various jurisdictions in which the
Shares are being offered by the Underwriters or any approval of the
underwriting terms and arrangements by the National Association of
Securities Dealers, Inc.;
(xii) the Company is not an "investment company" as such term is
defined in the Investment Company Act;
(xiii) the sale of the Shares by the Company is not subject to
preemptive or other similar rights arising by operation of law, under the
articles of incorporation or by-laws of the Company, under any agreement
known to such counsel to which the Company or any of its Subsidiaries is a
party or, to such counsel's knowledge, otherwise;
(xiv) the Shares, when issued and delivered to and paid for by the
Underwriters as contemplated hereby, will be duly authorized and validly
issued and fully paid and nonassessable;
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(xv) the form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the articles of
incorporation and by-laws of the Company;
(xvi) the Registration Statement has become effective under the
Securities Act and, to such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and, to
such counsel's knowledge, no proceedings with respect thereto have been
commenced or threatened;
(xvii) as of the effective date of the Registration Statement, the
Registration Statement and the Prospectus (except as to the financial
statements and other financial and statistical data contained therein, as
to which such counsel need express no opinion) complied as to form in all
material respects with the requirements of the Securities Act Regulations;
(xviii) the statements under the captions "Regulation" and
"Description of Capital Stock" in the Registration Statement and the
Prospectus, insofar as such statements constitute a summary of the legal
matters referred to therein, constitute accurate summaries thereof in all
material respects;
(xix) there are no actions, suits or proceedings pending or, to such
counsel's knowledge, threatened against the Company or any of its
Subsidiaries or any of their respective properties, at law or in equity, or
before or by any federal, state or foreign governmental or regulatory
commission, board, body, authority or agency which are required to be
described in the Prospectus but are not so described;
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company, independent
public accountants of the Company and Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(xvii) and (xviii) above), on the basis of the foregoing, nothing has come to
the attention of such counsel that causes them to believe that the Registration
Statement, the Preliminary Prospectus or the Prospectus, as of their respective
effective or issue dates and as of the date of such counsel's opinion, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that, in each case, such counsel need express no view with
respect to the financial statements and other financial and statistical data
included in the Registration Statement, Preliminary Prospectus or Prospectus).
For purposes of rendering the foregoing opinions, counsel may as to factual
matters rely upon statements, certificates and other assurances of public
officials and upon certificates of officers of the Company, which certificates
of officers of the Company will be furnished to the Underwriters together with
such counsel's opinion.
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<PAGE>
The Underwriters acknowledge that the opinions set forth above in this
Section 6(a) in paragraphs (i), (iv) and (vi) and with regard to paragraph
(xviii), with respect to the "Regulation" section of the Registration Statement
and Prospectus, will be rendered by Heller, Ehrman, White & McAuliffe
("Heller"); that the opinions set forth in paragraphs (vii), (viii) and (x) of
this Section 6(a) will be rendered by both Stoel Rives LLP, local counsel to the
Company in Oregon ("Oregon Counsel"), and Proskauer Rose Goetz & Mendelsohn LLP
("Proskauer"), with such opinion pursuant to paragraph (x) to be rendered with
respect to Other Transaction Documents governed by Oregon law (except for the
Employment Agreements between the Company and each of Andrew A. Wiederhorn and
Lawrence A. Mendelsohn (the "Employment Agreements")) by Oregon Counsel and with
respect to Other Transaction Documents governed by New York law by Proskauer;
and that the opinions set forth in all other paragraphs of this Section 6(a)
(including, with respect to paragraph (x), the execution and delivery of the
Employment Agreements, and with respect to paragraph (xviii), the "Description
of Capital Stock" section of the Registration Statement and Prospectus) will be
rendered by Proskauer.
(b) The Representative shall have received from Deloitte & Touche LLP,
letters dated, respectively, as of the date of this Agreement, the Closing Time
and each Date of Delivery, as the case may be, addressed to the Representative
as representative of the Underwriters and in form and substance satisfactory to
the Representative.
(c) The Underwriters shall have received at the Closing Time and on each
Date of Delivery the favorable opinion of Gibson, Dunn & Crutcher LLP, dated the
Closing Time or such Date of Delivery, addressed to the Representative and in
form and substance satisfactory to the Representative.
(d) No amendment or supplement to the Registration Statement or Prospectus
shall have been filed to which the Underwriters shall have objected in writing.
(e) Prior to the Closing Time and each Date of Delivery (i) no stop order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued by the Commission, and no suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus shall not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and the Closing Time or
the relevant Date of Delivery no material and unfavorable change (other than as
disclosed in the Registration Statement and Prospectus), in the assets,
operations, business or condition (financial or otherwise) of the Company and
its Subsidiaries taken as a whole shall occur or become known.
(g) At the Closing Time, the closing of the Notes Offering shall have
occurred, substantially concurrently with the closing of the offering of the
Shares.
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<PAGE>
(h) At the Closing Time, the Other Transaction Documents shall have been
entered into by all required parties and the undrawn amounts under the
transferred repurchase facilities, warehouse facilities and term loans shall
have been made available to the Company.
(i) At the Closing Time, the Shares shall have been approved for inclusion
in the Nasdaq National Market.
(j) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(k) The Representative shall have received letters from Andrew A.
Wiederhorn and Lawrence A. Mendelsohn, each a principal stockholder, director
and principal executive officer of the Company, in form and substance
satisfactory to the Representative, confirming that for a period of 180 days
after the Closing Time, such persons will not directly or indirectly (i) offer,
pledge to secure any obligation due on or within 180 days after the Closing
Time, sell, contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option for the sale of, or otherwise
dispose of or transfer (other than a disposition or transfer pursuant to which
the acquiror or transferee is subject to the restrictions on disposition and
transfer set forth in this Section 6(k) to the same extent as such director or
executive officer of the Company delivering a letter hereunder), directly or
indirectly, any share of Common Stock (other than by participating as selling
stockholders in a registered offering of Common Stock offered by the Company
with the consent of the Representative) or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, without the prior written consent of the Representative, which
consent may be withheld at the sole discretion of the Representative.
(l) The Company will, at the Closing Time and on each Date of Delivery,
deliver to the Underwriters a certificate of its two principal executive
officers, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, to the effect that,
to each of such officer's knowledge, the representations and warranties of the
Company set forth in this Agreement and the conditions set forth in paragraphs
(e), (f), and (h) have been met and are true and correct as of such date.
(m) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus as of the Closing Time or any
Date of Delivery as the Underwriters may reasonably request.
7. Termination: The obligations of the several Underwriters
-----------
hereunder shall be subject to termination in the absolute discretion of the
Representative, at any time prior to the Closing Time or any Date of Delivery,
if trading in securities on the New York Stock Exchange shall have been
suspended (including automatic halts in trading pursuant to market-decline
triggers other than those in which solely program trading is temporarily halted)
or minimum prices shall have been established on the New York Stock Exchange, or
if a banking moratorium shall
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<PAGE>
have been declared either by the United States or New York State authorities, or
if the United States shall have declared war in accordance with its
constitutional processes or there shall have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on the financial markets of the United States
as, in the judgment of the Representative, to make it impracticable to market
the Shares.
If the Representative elects to terminate this Agreement as provided in
this Section 7, the Company and the Underwriters shall be notified promptly by
telephone, promptly confirmed by facsimile.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply in all material respects with any of the terms of this
Agreement, the Company shall not be under any obligation or liability under this
Agreement (except to the extent provided in Sections 5 and 9 hereof) and the
Underwriters shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 9 hereof) or to one another
hereunder.
8. Increase in Underwriters' Commitments: If any Underwriter
-------------------------------------
shall default at Closing Time or on a Date of Delivery in its obligation to take
up and pay for the Shares to be purchased by it under this Agreement on such
date and if the total number of Shares which such Underwriter shall have agreed
but failed to take up and pay for does not exceed 10% of the total number of
Shares to be purchased on such date, each non-defaulting Underwriter shall take
up and pay for (in addition to the number of Shares which it is obligated to
purchase on such date pursuant to this Agreement) the portion of the total
number of Shares agreed to be purchased by the defaulting Underwriter on such
date in the proportion that its underwriting obligations hereunder bears to the
underwriting obligations of all non-defaulting Underwriters.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representative with the approval of the
Company or selected by the Company with the approval of the Representative).
If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the
nondefaulting Underwriters shall have the right to postpone the Closing Time or
the relevant Date of Delivery for a period not exceeding five business days in
order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and include
any Underwriter substituted under this Section 8 with the like effect as if such
substituted Underwriter had originally been named in this Agreement.
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9. Indemnity and Contribution by the Company and the
-------------------------------------------------
Underwriters:
- ------------
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and any person who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any loss, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, any such Underwriter or controlling
person may incur under the Securities Act, the Exchange Act or otherwise,
insofar as such loss, expense, liability or claim arises out of or is based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the term
Prospectus for the purpose of this Section 9 being deemed to include any
Preliminary Prospectus, the Prospectus and the Prospectus as amended or
supplemented by the Company), or arises out of or is based upon any omission or
alleged omission to state a material fact required to be stated in either such
Registration Statement or Prospectus or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as any such loss, expense, liability or claim arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in and in conformity
with information furnished in writing by the Underwriters through the
Representative to the Company expressly for use in such Registration Statement
or such Prospectus, provided, however, that the indemnity agreement contained in
this subsection (a) with respect to the Preliminary Prospectus or the Prospectus
shall not inure to the benefit of any Underwriter (or to the benefit of any
person controlling such Underwriter) with respect to any person asserting any
such loss, expense, liability or claim which is the subject thereof if the
Prospectus or any supplement thereto prepared with the consent of the
Representative and furnished to the Underwriters prior to the Closing Time
corrected any such alleged untrue statement or omission and if such Underwriter
failed to send or give a copy of the Prospectus or supplement thereto to such
person at or prior to the written confirmation of the sale of Shares to such
person, unless such failure resulted from noncompliance by the Company with
Section 4(b).
If any action is brought against an Underwriter or controlling person in
respect of which indemnity may be sought against the Company pursuant to the
preceding paragraph, such Underwriter shall promptly notify the Company in
writing of the institution of such action and the Company shall assume the
defense of such action, including the employment of counsel and payment of
expenses. Such Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless the employment of such counsel shall have been authorized in writing by
the Company in connection with the defense of such action or the Company shall
not have employed counsel to have charge of the defense of such action within a
reasonable time or such indemnified party or parties shall have reasonably
concluded (based on the advice of counsel) that there may be defenses available
to it or them which are different from or additional to those available to the
Company and which counsel to the Underwriter believes may present a conflict for
counsel representing the Company and the Underwriter (in which case the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses
shall be borne by the Company and paid as incurred (it being understood,
however, that
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<PAGE>
the Company shall not be liable for the expenses of more than one separate
counsel for the Underwriters or controlling persons in any one action or series
of related actions in the same jurisdiction representing the indemnified parties
who are parties to such action). Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without the its written consent.
(b) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Company, its directors, the officers that signed
the Registration Statement and any person who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any loss, expense, liability or claim (including the reasonable
cost of investigation) which, jointly or severally, the Company or any such
person may incur under the Securities Act, the Exchange Act or otherwise,
insofar as such loss, expense, liability or claim arises out of or is based upon
any untrue statement or alleged untrue statement of a material fact contained in
and in conformity with information furnished in writing by such Underwriter
through the Representative to the Company expressly for use in the Registration
Statement (or in the Registration Statement as amended by any post-effective
amendment thereof by the Company) or in a Prospectus, or arises out of or is
based upon any omission or alleged omission to state a material fact in
connection with such information required to be stated either in such
Registration Statement or Prospectus or necessary to make such information, in
the light of the circumstances under which made, not misleading. The statements
set forth in the last paragraph on the cover page and under the caption
"Underwriting" in the Preliminary Prospectus and the Prospectus (to the extent
such statements relate to the Underwriters) constitute the only information
furnished by or on behalf of any Underwriter through the Representative to the
Company for purposes of this Section 9(b).
If any action is brought against the Company or any such person in respect
of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify the
Representative in writing of the institution of such action and the
Representative, on behalf of the Underwriters, shall assume the defense of such
action, including the employment of counsel and payment of expenses. The
Company or such person shall have the right to employ its own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
the Company or such person unless the employment of such counsel shall have been
authorized in writing by the Representative in connection with the defense of
such action or the Representative shall not have employed counsel to have charge
of the defense of such action within a reasonable time or such indemnified party
or parties shall have reasonably concluded (based on the advice of counsel) that
there may be defenses available to it or them which are different from or
additional to those available to the Underwriters (in which case the
Representative shall not have the right to direct the defense of such action on
behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by such Underwriter and paid as incurred (it being
understood, however, that the Underwriters shall not be liable for the expenses
of more than one separate counsel in any one action or series of related actions
in the same jurisdiction representing the indemnified parties who are parties to
such action). Anything in this paragraph to the contrary notwithstanding, no
Underwriter shall be liable for any settlement of any such claim or action
effected without the written consent of such Underwriter.
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(c) If the indemnification provided for in this Section 9 is unavailable to
an indemnified party under subsections (a) and (b) of this Section 9 in respect
of any losses, expenses, liabilities or claims referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, expenses, liabilities or claims in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the Shares
and (ii) the relative fault of the Company on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, expenses, liabilities or claims, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company bear to the underwriting discounts and commissions received by
the Underwriters. The relative fault of the Company on the one hand and of the
Underwriters on the other shall be determined by reference to, among other
things, whether the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission relates to information supplied by the
Company or by the Underwriters and the parties, relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any claim or action.
(d) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in subsection (c) above. Notwithstanding
the provisions of this Section 9, (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and (ii) the Company shall not be required to
contribute any amount in excess of the amount by which the proceeds received in
connection herewith exceed the amount of any damages which the Company has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several in proportion to their respective
underwriting commitments and not joint.
10. Survival: The indemnity and contribution
--------
agreements contained in Section 9 and the covenants, warranties and
representations of the Company contained in Sections 3, 4 and 5 shall remain in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter, or any person who controls any Underwriter within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or
on behalf of the Company, its directors and officers or any person who controls
the Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, and the indemnity and contribution
20
<PAGE>
agreements contained in Section 9 and the Company's covenants in Section 5 shall
survive any termination of this Agreement or the sale and delivery of the
Shares. The Company and each Underwriter agree promptly to notify the others of
the commencement of any litigation or proceeding against it and, in the case of
the Company, against any of the Company's officers and directors, in connection
with the sale and delivery of the Shares, or in connection with the Registration
Statement or Prospectus.
11. Entire Agreement: This Agreement contains the entire
----------------
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersedes all prior oral and written agreements and
understandings (including, without limitation, the engagement letter dated July
24, 1996 between the Representative and the Company) relating to such subject
matter.
12. Notices: Except as otherwise herein provided, all
-------
statements, requests, notices and agreements shall be in writing or by telegram
and, if to the Underwriters, shall be sufficient in all respects if delivered to
Friedman, Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington,
Virginia 22209, Attention: Compliance Department; if to the Company, shall be
sufficient in all respects if delivered to the Company at the offices of the
Company at 1776 SW Madison Street, Portland, Oregon 97205 Attention. Lawrence
A. Mendelsohn.
13. GOVERNING LAW; HEADINGS: THIS AGREEMENT SHALL BE GOVERNED BY,
-----------------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO CONFLICTS OF LAWS PRINCIPLES. The section headings in this Agreement
have been inserted as a matter of convenience of reference and are not a part of
this Agreement.
14. Parties at Interest: The Agreement herein set forth has
-------------------
been and is made solely for the benefit of the Underwriters, the Company and the
controlling persons, directors and officers referred to in Sections 9 and 10
hereof, and their respective successors, assigns, executors and administrators.
No other person, partnership, association or corporation (including a purchaser,
as such purchaser, from any of the Underwriters) shall acquire or have any right
under or by virtue of this Agreement.
15. Counterparts: This Agreement may be signed by the parties in
------------
counterparts which together shall constitute one and the same agreement among
the parties.
21
<PAGE>
If the foregoing correctly sets forth the understanding among the Company
and the Underwriters, please so indicate in the space provided below for the
purpose, whereupon this Agreement shall constitute a binding agreement among the
Company and the Underwriters.
Very truly yours,
WILSHIRE FINANCIAL SERVICES GROUP INC.
By: ______________________________________
Title:
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.
By: ________________________________
Title:
For themselves and as Representative
of the other Underwriters named on
Schedule I hereto.
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<PAGE>
Schedule I
Number of Firm
Underwriter Shares to be Purchased
- ----------- ----------------------
Friedman, Billings, Ramsey & Co., Inc............
Total............................................ 1,500,000
---------
<PAGE>
EXHIBIT 1.2
WILSHIRE FINANCIAL SERVICES GROUP INC.
__% NOTES DUE 2003
UNDERWRITING AGREEMENT
[__________ __,] 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
Wilshire Financial Services Group Inc., a Delaware corporation (the
"Company"), confirms its agreement with Friedman, Billings, Ramsey & Co., Inc.,
as underwriter (the "Underwriter"), with respect to (i) the sale by the Company
and the purchase by the Underwriter of $75,000,000 aggregate principal amount of
the Company's __% Notes due 2003 (the "Notes") and (ii) the grant by the Company
to the Underwriter of the option described in Section 1(b) hereof to purchase
all or any part of an additional $11,250,000 aggregate principal amount of Notes
solely to cover over-allotments, if any. The $75,000,000 aggregate principal
amount of Notes (the "Firm Notes") to be purchased by the Underwriter and all or
any part of the $11,250,000 aggregate principal amount of Notes subject to the
option described in Section 1(b) hereof (the "Option Notes") are hereinafter
called, collectively, the "Notes". The Notes are to be issued pursuant to an
indenture (the "Indenture"), dated December __, 1996, between the Company and
Bankers Trust Company, as trustee (the "Trustee").
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1 (No. 333-15263) and a
related preliminary prospectus for the registration of the Notes under the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations thereunder (the "Securities Act Regulations"). The Company has
prepared and filed such amendments thereto, if any, and such amended preliminary
prospectuses, if any, as may have been required to the date hereof, and will
file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The registration statement has been declared effective
under the Securities Act by the Commission. The registration statement as
amended at the time it became effective (including all information deemed to be
a part of the registration statement at the time it became effective pursuant to
Rule 430A(b) of the Securities Act Regulations) is hereinafter called the
"Registration Statement," except that, if the Company files a post-effective
amendment to such registration statement which becomes effective prior to the
Closing Time (as defined below), "Registration Statement" shall refer to such
registration statement as so amended. Any registration statement filed pursuant
to Rule 462(b) of the Securities Act Regulations is hereinafter called the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the 462(b) Registration Statement. Each prospectus
included in the registration statement, or amendments thereof or supplements
thereto, before it became effective under the Securities Act and any
<PAGE>
prospectus filed with the Commission by the Company with the consent of the
Underwriter pursuant to Rule 424(a) of the Securities Act Regulations is
hereinafter called the "Preliminary Prospectus." The term "Prospectus" means the
final prospectus, as first filed with the Commission pursuant to paragraph (1)
or (4) of Rule 424(b) of the Securities Act Regulations, and any amendments
thereof or supplements thereto. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
The Company and the Underwriter agree as follows:
1. Sale and Purchase:
-----------------
(a) Firm Notes. Upon the basis of the warranties and representations and
other terms and conditions herein set forth, the Company agrees to sell to the
Underwriter and the Underwriter agrees to purchase from the Company $75,000,000
aggregate principal amount of Firm Notes at the purchase price of __.0% of the
principal amount thereof, plus accrued interest, if any, from the date of
issuance, December __, 1996 (the "Issue Date") to the Closing Time (as defined
below). The Underwriter may from time to time increase or decrease the public
offering price of the Firm Notes after the initial public offering to such
extent as the Underwriter may determine in accordance with applicable law.
(b) Option Notes. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
hereby grants an option to the Underwriter to purchase from the Company up to
$11,25,000 aggregate principal amount of Option Notes. The purchase price to be
paid for any Option Notes shall be the same percentage of the principal amount
thereof as the percentage set forth in paragraph (a) above for the Firm Notes,
plus accrued interest, if any, from the Issue Date to the relevant Date of
Delivery (as defined below) The option hereby granted will expire 30 days after
the date hereof and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Firm Notes upon notice by the Underwriter
to the Company setting forth the aggregate principal amount of Option Notes as
to which the Underwriter are then exercising the option and the time and date of
payment and delivery for the Option Notes. Any such time and date of delivery
(a "Date of Delivery") shall be determined by the Underwriter, but shall not be
later than seven full business days (or earlier, without the consent of the
Company, than two full business days) after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. The Underwriter
may from time to time increase or decrease the public offering price of the
Option Notes after the initial public offering to such extent as the Underwriter
may determine in accordance with applicable law.
2. Payment and Delivery:
--------------------
(a) Firm Notes. Payment of the purchase price for the Firm Notes shall be
made to the Company by wire transfer of immediately available funds or certified
or official bank check payable in federal (same-day) funds at the offices of
Proskauer Rose Goetz & Mendelsohn LLP located at 1585 Broadway, New York, New
York 10036 (unless another place shall be agreed upon by the Underwriter and
the Company) against delivery of the certificates for the Firm Notes
2
<PAGE>
to the Underwriter for the account of the Underwriter. Such payment and delivery
shall be made at ____ a.m., New York City time, on the third (fourth, if pricing
occurs after 4:30 p.m. (New York City time)) business day after the date hereof
(unless another time, not later than ten business days after such date, shall be
agreed to by the Underwriter and the Company). The time at which such payment
and delivery are actually made is hereinafter sometimes called the "Closing
Time". At least two full business days preceding the Closing Time, the Company
shall authorize and direct the Trustee to prepare and authenticate a global note
certificate representing the Notes (the "Global Note Certificate"). At least one
full business day preceding the Closing Time, the Representative shall advise
the Company and The Depository Trust Corporation ("DTC"), as depository (the
"Depository"), or the Trustee on its behalf, of the names and denominations in
which the Firm Notes are to be registered. At the Closing Time, the Company
shall deliver the "Letter of Representations to DTC" executed by itself, the
Trustee and DTC. The Company shall authorize and direct the Trustee to present
at the Closing Time (i) the Global Note Certificate registered in the name of
the Depository's nominee, as nominee of the Depository, and to retain the Global
Note Certificate pursuant to the DTC Fast System and (ii) the Note Register
evidencing ownership of the Firm Notes.
(b) Option Notes. In addition, payment of the purchase price for the
Option Notes shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal (same-
day) funds at the offices of Proskauer Rose Goetz & Mendelsohn LLP located at
1585 Broadway, New York, New York 10036 (unless another place shall be agreed
upon by the Underwriter and the Company), against delivery of the certificates
for the Option Notes to the Underwriter for the account of the Underwriter.
Such payment and delivery shall be made at ____ a.m., New York City time, on
each Date of Delivery. At least one full business day preceding the relevant
Date of Delivery, the Representative shall advise the Company and DTC, or the
Trustee on its behalf, of the names and denominations in which the Option Notes
are to be registered. The Company shall authorize and direct the Trustee to
present at the relevant Date of Delivery the Note Register evidencing ownership
of the Option Notes.
3. Representations and Warranties of the Company:
---------------------------------------------
The Company represents and warrants to the Underwriter as of the date hereof
that:
(a) the Company is a multiple savings and loan holding company duly
registered under the Home Owners' Loan Act, as amended ("HOLA"), and its current
business operations constitute permissible services or activities for a multiple
savings and loan holding company under HOLA and 12 C.F.R. Part 584;
(b) the Company has an authorized capitalization as of September 30, 1996
as set forth in the Prospectus under the column entitled "Actual" under the
caption "Capitalization" (and not under the column entitled "Adjusted"); the
outstanding shares of capital stock of the Company and its direct and indirect
subsidiaries (the "Subsidiaries"), Wilshire Funding Corporation, Wilshire
Servicing Corporation, Wilshire Acquisitions Corporation, First Bank of Beverly
Hills, F.S. B. ("First Bank") and Girard Savings Bank, F.S.B. ("Girard" and
together with First Bank, the "Savings Banks"), have been duly and validly
authorized and issued and are fully paid and non-assessable, and all of the
outstanding shares of capital stock of the Subsidiaries are directly or
indirectly owned of record and beneficially by the Company;
3
<PAGE>
(c) the Company and each of the Company's Subsidiaries other than the
Savings Banks have been duly incorporated and is validly existing as a
corporation in good standing under the laws of its respective jurisdiction of
incorporation with the corporate power and authority to own its respective
properties and to conduct its respective business and, in the case of the
Company, to execute and deliver this Agreement and the Indenture and to issue
the Notes and (i) the Employment Agreement dated November 15, 1996 between the
Company and Andrew A. Wiederhorn, (ii) the Employment Agreement dated November
15,1996 between the Company and Lawrence A. Mendelsohn, (iii) the Servicing
Agreement dated as of November 15, 1996 among Wilshire Credit Corporation, a
Nevada corporation ("WCC"), the Company, Wilshire Funding Corporation, a
Delaware corporation ("WFC"), and Wilshire Servicing Corporation, a Delaware
corporation ("WSC"), (iv) the Loan Purchase Agreement dated ______________
between WCC and WFC, (v) the Administrative Services Agreement dated
____________ among WCC and certain of its affiliates and the Company and (vi)
the credit facilities filed as Exhibits 10.21 and 10.22 to the Registration
Statement (the "Other Transaction Documents");
(d) each Savings Banks has been chartered as a federal savings bank under
the laws of the United States of America, and its charter is in full force and
effect; each Savings Bank has full corporate power and corporate authority to
own its properties and conduct its business as described in the Registration
Statement and the Prospectus; each Savings Bank is a member of the Federal Home
Loan Bank System; and the savings accounts of depositors in the Savings Banks
are insured by the Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent
permitted by law and the rules and regulations of the FDIC, and no proceedings
for the termination of such insurance are pending, or to the best of the
Company's knowledge, threatened;
(e) except as set forth in the Prospectus, the Company and all of its
Subsidiaries are duly qualified or licensed by each jurisdiction in which they
conduct their respective businesses and in which the failure, individually or in
the aggregate, to be so qualified or licensed could have a material adverse
effect on the assets, operations, business or condition (financial or otherwise)
of the Company and its Subsidiaries taken as a whole, and the Company and its
Subsidiaries are duly qualified, and are in good standing, in each jurisdiction
in which they own or lease real property or maintain an office and in which such
qualification is necessary, except where the failure to be so qualified and in
good standing would not have a material adverse effect on the assets,
operations, business or condition (financial or otherwise) of the Company and
its Subsidiaries taken as a whole;
(f) the Company and its Subsidiaries are in compliance in all material
respect with all applicable laws, rules, regulations, orders, decrees and
judgments, including those relating to transactions with affiliates;
(g) neither the Company nor any of its Subsidiaries is party to or
otherwise the subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement agreement or
understanding with the OTS, the FDIC or any other government authority or agency
responsible for the supervision, regulation or insurance of depository
institutions or their holding companies, other than the cease and desist orders
issued to the Savings Banks by the Office of Thrift Supervision (the "OTS") on
October 31, 1996 (the "Cease
4
<PAGE>
and Desist Orders"); the Savings Banks are in compliance with the provisions of
the Cease and Desist Orders in effect as of the date hereof; and, to the best of
the Company's knowledge, no further or additional bank regulatory action against
the Savings Banks and/or their directors is threatened;
(h) neither the Company nor any of its Subsidiaries is in breach of, or in
default under (nor has any event occurred which with notice, lapse of time, or
both would constitute a breach of, or default under), its respective articles of
incorporation or charter or by-laws or in the performance or observance of any
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them is bound, except for such breaches or defaults which would not
have a material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole,
and the execution, delivery and performance of this Agreement, the Indenture and
the Other Transaction Documents, and the issuance of the Notes and consummation
of the transactions contemplated hereby and thereby will not conflict with, or
result in any breach of or constitute a default under (nor constitute any event
which with notice, lapse of time, or both would constitute a breach of, or
default under), (i) any provision of the articles of incorporation or charter or
by-laws of the Company or any of its Subsidiaries, or (ii) any provision of any
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties may be bound or affected, or
under any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company or any of its Subsidiaries,
except in the case of this clause (ii) for such breaches or defaults which would
not have a material adverse effect on the assets, operations, business or
condition (financial or otherwise) of the Company and its Subsidiaries taken as
a whole;
(i) this Agreement has been duly authorized, executed and delivered by the
Company and is a legal, valid and binding agreement of the Company enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
affecting creditors' rights generally, and by general principles of equity, and
except to the extent that the indemnification and contribution provisions of
Section 8 hereof may be limited by federal or state securities laws and public
policy considerations in respect thereof;
(j) the Indenture has been duly authorized by the Company and when executed
and delivered by the Company and the Trustee will be a legal, valid and binding
agreement of the Company enforceable in accordance with its terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights generally, and by general
principles of equity;
(k) the Notes have been duly authorized by the Company and when executed by
the Company, authenticated by the Trustee and delivered against payment therefor
as contemplated by this Agreement, will constitute legal, valid and binding
obligations of the Company enforceable in accordance with their terms and
entitled to the benefits of the Indenture, except as may be
5
<PAGE>
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights generally and by general
principles of equity;
(l) the Other Transaction Documents have been duly authorized and will be,
upon execution and delivery by the Company, legal, valid and binding agreements
of the Company enforceable by it in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights generally, and by general
principles of equity;
(m) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the sale and delivery of the
Notes by the Company as contemplated hereby other than (A) such as have been
obtained, or will have been obtained at the Closing Time or the relevant Date of
Delivery, as the case may be, under the Securities Act and (B) any necessary
qualification under the securities or blue sky laws of the various jurisdictions
in which the Notes are being offered by the Underwriter;
(n) each of the Company and its Subsidiaries has all necessary licenses,
authorizations, consents and approvals and has made all necessary filings
required under any federal, state or local law, regulation or rule, and has
obtained all necessary authorizations, consents and approvals from other
persons, required in order to conduct their respective businesses, except to the
extent that any failure to have any such licenses, authorizations, consents or
approvals, to make any such filings or to obtain any such authorizations,
consents or approvals would not, individually or in the aggregate, have a
material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole;
neither the Company nor any of its Subsidiaries is in violation of, or in
default under, any such license, authorization, consent or approval or any
federal, state, local or foreign law, regulation or rule or any decree, order or
judgment applicable to the Company or any of its Subsidiaries the effect of
which could be material and adverse to the assets, operations, business or
condition (financial or otherwise) of the Company and its Subsidiaries taken as
a whole;
(o) the Registration Statement has become effective under the Securities
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued under the Securities Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the Company, are
threatened by the Commission, and any request on the part of the Commission for
additional information has been complied with;
(p) the Registration Statement as of its effective date and the Prospectus
at the Closing Time or on any Date of Delivery (if any) complies in all material
respects with the requirements of the Securities Act and the Securities Act
Regulations and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") and the rules and regulations thereunder (the "Trust Indenture
Act Regulations"); neither the Registration Statement as of its effective date
nor the Prospectus as of the Closing Time or on any Date of Delivery contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no warranty or representation with
6
<PAGE>
respect to any statement contained in the Registration Statement or the
Prospectus in reliance upon and in conformity with the information concerning
the Underwriter and furnished in writing by or on behalf of the Underwriter to
the Company expressly for use in the Registration Statement or the Prospectus
(that information being limited to that described in the last sentence of the
first paragraph of Section 8(b) hereof);
(q) the Preliminary Prospectus and the Prospectus delivered to the
Underwriter for use in connection with this offering was identical to the
versions of the Preliminary Prospectus and Prospectus created to be transmitted
to the Commission for filing via the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T;
(r) except as set forth in the Preliminary Prospectus and the Prospectus,
there are no actions, suits or proceedings pending or, to the Company's
knowledge, threatened against the Company or any of its Subsidiaries or any of
their respective properties, at law or in equity, or before or by any federal,
state, local or foreign governmental or regulatory commission, board, body,
authority or agency which reasonably could be expected to have a material
adverse effect on the assets, operations, business or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole;
(s) the financial statements, including the notes thereto, included in the
Registration Statement and the Prospectus present fairly the consolidated or
combined financial position of the Company and its Subsidiaries, Girard and its
subsidiary and WCC and its affiliates as of the dates indicated and the
consolidated results of operations and changes in financial position and cash
flows of the Company and its Subsidiaries, Girard and its subsidiary and WCC and
its affiliates for the periods specified; such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as indicated in the notes
thereto);
(t) Deloitte & Touche LLP, whose reports on the consolidated or combined
financial statements of the Company and its Subsidiaries, Girard and its
subsidiary and WCC and its affiliates are filed with the Commission as part of
the Registration Statement and Prospectus, are independent public accountants as
required by the Securities Act and the Securities Act Regulations;
(u) subsequent to the effective date of the Registration Statement and the
date of the Prospectus up to and including the Closing Time and any Date of
Delivery, and except as may be otherwise stated in the Registration Statement or
Prospectus, there has not been (A) any material and unfavorable change, in the
assets, operations, business or condition (financial or otherwise) of the
Company and its Subsidiaries taken as a whole, (B) any transaction, which is
material to the Company and its Subsidiaries taken as a whole, contemplated or
entered into by the Company or any of its Subsidiaries or (C) any obligation,
contingent or otherwise, directly or indirectly incurred by the Company or any
of its Subsidiaries, which is material to the Company and its Subsidiaries taken
as a whole;
7
<PAGE>
(v) the Company is not, and upon the sale of the Notes as herein
contemplated will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(w) the Indenture and the Notes conform in all material respects to the
description thereof contained in the Registration Statement and the Prospectus;
(x) there are no persons with registration or other similar rights to have
any securities registered pursuant to the Registration Statement or otherwise
registered by the Company under the Securities Act;
(y) the Company has not taken, and will not take, directly or indirectly,
any action which is designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Notes;
(z) neither the Company nor any of its affiliates directly, or indirectly
through one or more intermediaries, controls or has any other association with
(within the meaning of Article 1 of the By-laws of the National Association of
Securities Dealers, Inc. (the "NASD")), any member firm of the NASD, other than
Wilshire Securities Corporation; and
(aa) any certificate signed by any officer of the Company or any Subsidiary
delivered to the Underwriter or to counsel for the Underwriter pursuant to or in
connection with this Agreement shall be deemed a representation and warranty by
the Company to the Underwriter as to the matters covered thereby.
4. Certain Covenants of the Company: The Company hereby agrees with
--------------------------------
with the Underwriter:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Notes for offering and sale under the securities or
blue sky laws of such states as the Underwriter may designate and to maintain
such qualifications in effect as long as required for the distribution of the
Notes, but not longer than 60 days following the Closing Time or any Date of
Delivery without the consent of the Company, provided that the Company shall not
be required to qualify as a foreign corporation or to consent to the service of
process under the laws of any such state (except service of process with respect
to the offering and sale of the Notes);
(b) to prepare the Prospectus in a form approved by the Underwriter and
file such Prospectus with the Commission pursuant to Rule 424(b) as soon as
possible, on the day following the execution and delivery of this Agreement and
to furnish promptly (and with respect to the initial delivery of such
Prospectus, as soon as possible on the day following the execution and delivery
of this Agreement) to the Underwriter as many copies of the Prospectus (or of
the Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriter may reasonably request for the purposes
contemplated by the Securities Act Regulations, which Prospectus and any
amendments or supplements thereto furnished to the Underwriter will be
8
<PAGE>
identical to the version created to be transmitted to the Commission for filing
via EDGAR, except to the extent permitted by Regulation S-T;
(c) to advise the Underwriter promptly and (if requested by the
Underwriter) to confirm such advice in writing, when the Registration Statement
has become effective and when any post-effective amendment thereto becomes
effective under the Securities Act Regulations;
(d) to advise the Underwriter promptly and (if requested by the
Underwriter) to confirm such advice in writing, of (i) any request by the
Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Notes for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Underwriter promptly of any proposal to
amend or supplement the Registration Statement or Prospectus and to file no such
amendment or supplement to which the Underwriter shall reasonably object in
writing;
(e) if requested by the Underwriter, to furnish to the Underwriter for a
period of seven years from the date of this Agreement (i) as soon as available,
copies of all annual, quarterly and current reports or other communications
supplied to holders of the Notes, (ii) as soon as practicable after the filing
thereof, copies of all reports filed by the Company with the Commission, the
NASD or any securities exchange and (iii) such other information as the
Underwriter may reasonably request regarding the Company and its Subsidiaries;
(f) to advise the Underwriter promptly of the happening of any event known
to the Company within the time during which a Prospectus relating to the Notes
is required to be delivered under the Securities Act Regulations which, in the
judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, during such time,
to prepare and furnish, at the Company's expense, to the Underwriter promptly
such amendments or supplements to such Prospectus as may be necessary to reflect
any such change and to furnish to the Underwriter a copy of such proposed
amendment or supplement before filing any such amendment or supplement with the
Commission;
(g) to furnish promptly to the Underwriter a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments thereto (including all exhibits thereto) and such number of conformed
copies of the foregoing as the Underwriter may reasonably request;
(h) to furnish to the Underwriter, not less than two business days before
filing with the Commission subsequent to the effective date of the Prospectus
and during the period referred to
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in paragraph (f) above, a copy of any document proposed to be filed with the
Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act");
(i) to make generally available to its Note holders as soon as
practicable after the effective date of the Registration Statement an
earning statement (in form, at the option of the Company, complying with
the provisions of Rule 158 of the Securities Act Regulations) covering a
period of 12 months beginning after the effective date of the Registration
Statement;
(j) to use its best efforts to effect and maintain the quotation of
its common stock, par value $0.01 per share (the "Common Stock"), on the
Nasdaq National Market and to file with the Nasdaq National Market all
documents and notices required by the Nasdaq National Market of companies
that have securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market; and
(k) to refrain during a period of 180 days from the date of the Prospectus,
without the prior written consent of the Underwriter, from offering, selling,
contracting to sell, selling any option or contract to purchase, purchasing any
option or contract to sell, granting any option for the sale of, or otherwise
disposing of or transferring, directly or indirectly, any debt securities of the
Company that are substantially similar to the Notes or any securities
convertible into or exercisable or exchangeable for Notes, or filing any
registration statement under the Securities Act with respect to any of the
foregoing.
5. Payment of Expenses:
-------------------
(a) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
terminated (except if the Underwriter is unable to complete the offering
contemplated hereby due to the Underwriter's willful misconduct or bad faith),
including expenses, fees and taxes in connection with (i) the preparation and
filing of the Registration Statement, each Preliminary Prospectus, the
Prospectus, and any amendments or supplements thereto, and the printing and
furnishing of copies of each thereof to the Underwriter and to dealers
(including costs of mailing and shipment), (ii) the preparation, registration
and issuance of the Notes to holders thereof, (iii) reproduction of this
Agreement and any dealer agreements and furnishing of copies of each to the
Underwriter and to dealers (including costs of mailing and shipping), (iv) the
qualification of the Notes for offering and sale under state laws that the
Company and the Underwriter have mutually agreed are appropriate and the
determination of their eligibility for investment under state law as aforesaid
(including the legal fees and filing fees and other disbursements of counsel for
the Underwriter in the amount of $15,000 assuming that the Common Stock is
approved for quotation on the Nasdaq National Market; such $15,000 to be the
aggregate amount when taken together with such blue sky legal fees and filing
fees and other disbursements of counsel to Friedman, Billings, Ramsey & Co.,
Inc., as Representative, in the concurrent offering of Common Stock by the
Company (the "Common Stock Offering")) and the printing and furnishing of copies
of any blue sky surveys or legal investment surveys to the Underwriter and to
dealers, (v) filing for review of the public offering of the Notes by the NASD,
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(vi) the fees and expenses of DTC (and its nominees), the Trustee and any
transfer agent or registrar for the Notes, and (vii) the performance of the
Company's other obligations hereunder. Upon the Underwriter's request, the
Company will provide funds in advance for filing fees.
(b) The Company agrees to reimburse the Underwriter for its reasonable and
documented out-of-pocket expenses in connection with the performance of its
activities under this Agreement, whether or not the transactions contemplated
hereunder are consummated or this Agreement is terminated, including, but not
limited to, costs such as printing, facsimile, courier service, direct computer
expenses, accommodations, travel and the fees and expenses of the Underwriter's
outside legal counsel and any other advisors, accountants, appraisers, etc., and
costs in connection with making road show presentations with respect to the
offering of the Notes. Such expenses shall not exceed, when aggregated with the
reimbursable expenses of Friedman, Billings, Ramsey & Co., Inc., as
Representative, pursuant to the Underwriting Agreement dated December __, 1996
for the Common Stock Offering, $300,000 (not including fees and expenses of
counsel with respect to state securities or blue sky laws), without the
Company's permission. Notwithstanding the foregoing, the Company will not be
obligated to reimburse the Underwriter for out-of-pocket expenses if the
Underwriter is unable to complete the offering contemplated hereby due to the
Underwriter's willful misconduct or bad faith.
6. Conditions of the Underwriter's Obligations: The
-------------------------------------------
obligations of the Underwriter hereunder are subject to the accuracy of the
representations and warranties on the part of the Company in all material
respects on the date hereof and at the Closing Time and on each Date of
Delivery, the performance by the Company of its obligations hereunder in all
material respects and to the following conditions:
(a) The Company shall furnish to the Underwriter at the Closing Time and on
each Date of Delivery opinions of counsel for the Company as set forth below,
addressed to the Underwriter and dated the Closing Time and each Date of
Delivery and in form satisfactory to Gibson, Dunn & Crutcher LLP, counsel for
the Underwriter, stating that:
(i) the Company is a multiple savings and loan holding company duly
registered under HOLA and its business operations, as described in the
Registration Statement and the Prospectus, constitute permissible services
or activities for a multiple savings and loan holding company under HOLA
and 12 C.F.R. Part 584;
(ii) the Company has an authorized capitalization as of September 30,
1996 as set forth in the Prospectus under the column entitled "Actual"
under the caption "Capitalization" (and not under the column entitled
"Adjusted"); the outstanding shares of capital stock of the Company and its
Subsidiaries have been duly and validly authorized and issued and are fully
paid and non-assessable, and all of the outstanding shares of capital stock
of the Subsidiaries are directly or indirectly owned of record and
beneficially by the Company;
(iii) the Company and each of the Company's Subsidiaries
other than the Savings Banks have been duly incorporated and is validly
existing as a corporation in good standing under the laws of its respective
jurisdiction of incorporation with full corporate
11
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power and authority to own its respective properties and to conduct its
respective business and, in the case of the Company, to execute and deliver
this Agreement;
(iv) each Savings Banks has been duly chartered as a federal savings
bank under the laws of the United States of America, and its charter is in
full force and effect; each Savings Bank has full corporate power and
corporate authority to own its properties and conduct its businesses as
described in the Registration Statement and the Prospectus; each Savings
Bank is a member of the Federal Home Loan Bank System; and the savings
accounts of depositors in the Savings Banks are insured by the SAIF of the
FDIC to the fullest extent permitted by law and the rules and regulations
of the FDIC, and, to such counsel's knowledge, no proceedings for the
termination of such insurance are pending or threatened;
(v) the Company and all of its Subsidiaries (other than the Savings
Banks) are duly qualified, and are in good standing, in Oregon and
California;
(vi) other than the Cease and Desist Orders, to such counsel's
knowledge, none of the Company and the Savings Banks is a party to or
otherwise the subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement agreement or
understanding with the OTS, the FDIC or any other government authority or
agency responsible for the supervision, regulation or insurance of
depository institutions or their holding companies; and, to such counsel's
knowledge, no further or additional bank regulatory action against the
Company, the Savings Banks or their directors is threatened, except actions
that would relate to a failure to comply fully with the Cease and Desist
Orders;
(vii) to such counsel's knowledge, neither the Company
nor any of its Subsidiaries is in breach of, or in default under (nor has
any event occurred which with notice, lapse of time, or both would
constitute a breach of, or default under), any license, indenture,
mortgage, deed of trust, loan or credit agreement or any other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties may be bound or affected
and identified as a material agreement or instrument of the Company or a
Subsidiary in the certificate of the Company attached hereto or under any
law, regulation or rule or any decree, judgment or order applicable to the
Company or any of its Subsidiaries, except such breaches or defaults which
would not have a material adverse effect on the assets, operations,
business or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole.
(viii) the execution, delivery and performance of this
Agreement, the Indenture and the Other Transaction Documents by the Company
and the issuance of the Notes and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not conflict
with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would
constitute a breach of or default under), (i) any provisions of the
articles of incorporation, charter or by-laws of the Company or any
Subsidiary, (ii) any provision of any license, indenture, mortgage, deed of
trust, loan or credit agreement or other agreement or instrument known
12
<PAGE>
to such counsel to which the Company or any Subsidiary is a party or by
which any of them or their respective properties may be bound or affected
and identified as a material agreement or instrument of the Company or a
Subsidiary in the certificate of the Company attached hereto, or (iii) any
law or regulation or any decree, judgment or order applicable to the
Company or any Subsidiary, except in the case of clause (ii) for such
conflicts, breaches or defaults which individually or in the aggregate
would not have a material adverse effect on the assets, operations,
business or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole;
(ix) this Agreement has been duly authorized, executed and delivered
by the Company;
(x) the Indenture has been duly authorized, executed and delivered by
the Company, and, assuming due authorization, execution and delivery by the
Trustee, is a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except as may be limited
by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights generally and by
general principles of equity; the Indenture has been duly qualified under
the Trust Indenture Act;
(xi) the Notes have been duly authorized, executed and delivered by
the Company and, assuming due authentication thereof by the Trustee and
upon payment therefor and delivery in accordance with this Agreement, will
be legal, valid and binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits of the Indenture,
except as may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws affecting creditors'
rights generally and by general principles of equity;
(xii) the Other Transaction Documents have been duly
authorized and will be, upon execution and delivery by the Company, legal,
valid and binding agreements of the Company enforceable by it in accordance
with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, and by general principles of equity;
(xiii) no approval, authorization, consent or order of or
filing with any federal or state governmental or regulatory commission,
board, body, authority or agency is required in connection with the sale
and delivery of the Notes by the Company as contemplated hereby other than
such as have been obtained or made under the Securities Act and except that
such counsel need express no opinion as to any necessary qualification
under the state securities or blue sky laws of the various jurisdictions in
which the Notes are being offered by the Underwriter or any approval of the
underwriting terms and arrangements by the National Association of
Securities Dealers, Inc.;
(xiv) the Company is not an "investment company" as such
term is defined in the Investment Company Act;
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<PAGE>
(xv) the form of certificate used to evidence the Notes complies in
all material respects with all applicable statutory requirements, with any
applicable requirements of the articles of incorporation and by-laws of the
Company;
(xvi) the Registration Statement has become effective
under the Securities Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued
and, to such counsel's knowledge, no proceedings with respect thereto have
been commenced or threatened;
(xvii) as of the effective date of the Registration
Statement, the Registration Statement and the Prospectus (except as to the
financial statements and other financial and statistical data contained
therein, as to which such counsel need express no opinion) complied as to
form in all material respects with the requirements of the Securities Act
Regulations and the Trust Indenture Act Regulations;
(xviii) the statements under the captions "Regulation" and
"Description of Capital Stock" in the Registration Statement and the
Prospectus, insofar as such statements constitute a summary of the legal
matters referred to therein, constitute accurate summaries thereof in all
material respects;
(xix) the Notes and the Indenture conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus;
(xx) there are no actions, suits or proceedings pending or, to such
counsel's knowledge, threatened against the Company or any of its
Subsidiaries or any of their respective properties, at law or in equity, or
before or by any federal, state or foreign governmental or regulatory
commission, board, body, authority or agency which are required to be
described in the Prospectus but are not so described;
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company, independent
public accountants of the Company and Underwriter at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(xvii), (xviii) and (xix) above), on the basis of the foregoing, nothing has
come to the attention of such counsel that causes them to believe that the
Registration Statement, the Preliminary Prospectus or the Prospectus, as of
their respective effective or issue dates and as of the date of such counsel's
opinion, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that, in each case, such counsel need express no
view with respect to the financial statements and other financial and
statistical data included in the Registration Statement, Preliminary Prospectus
or Prospectus).
For purposes of rendering the foregoing opinions, counsel may as to factual
matters rely upon statements, certificates and other assurances of public
officials and upon certificates of
14
<PAGE>
officers of the Company, which certificates of officers of the Company will be
furnished to the Underwriter together with such counsel's opinion.
The Underwriter acknowledges that the opinions set forth above in this
Section 6(a) in paragraphs (i), (iv) and (vi) and with regard to paragraph
(xviii), with respect to the "Regulation" section of the Registration Statement
and Prospectus, will be rendered by Heller, Ehrman, White & McAuliffe
("Heller"); that the opinions set forth in paragraphs (vii), (viii) and (xii) of
this Section 6(a) will be rendered by both Stoel Rives LLP, local counsel to the
Company in Oregon ("Oregon Counsel"), and Proskauer Rose Goetz & Mendelsohn LLP
("Proskauer"), with such opinion pursuant to paragraph (xii) to be rendered with
respect to Other Transaction Documents governed by Oregon law (except for the
Employment Agreements between the Company and each of Andrew A. Wiederhorn and
Lawrence A. Mendelsohn (the "Employment Agreements")) by Oregon Counsel and with
respect to Other Transaction Documents governed by New York law by Proskauer;
and that the opinions set forth in all other paragraphs of this Section 6(a)
(including, with respect to paragraph (xii), the execution and delivery of the
Employment Agreements, and with respect to paragraph (xviii), the "Description
of Capital Stock" section of the Registration Statement and Prospectus) will be
rendered by Proskauer.
(b) The Underwriter shall have received from Deloitte & Touche LLP, letters
dated, respectively, as of the date of this Agreement, the Closing Time and each
Date of Delivery, as the case may be, addressed to the Underwriter and in form
and substance satisfactory to the Underwriter.
(c) The Underwriter shall have received at the Closing Time and on each
Date of Delivery the favorable opinion of Gibson, Dunn & Crutcher LLP, dated the
Closing Time or such Date of Delivery, addressed to the Underwriter and in form
and substance satisfactory to the Underwriter.
(d) No amendment or supplement to the Registration Statement or Prospectus
shall have been filed to which the Underwriter shall have objected in writing.
(e) Prior to the Closing Time and each Date of Delivery (i) no stop order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued by the Commission, and no suspension of the qualification of the
Notes for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus shall not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and the Closing Time or
the relevant Date of Delivery no material and unfavorable change (other than as
disclosed in the Registration Statement and Prospectus), in the assets,
operations, business or condition (financial or otherwise) of the Company and
its Subsidiaries taken as a whole shall occur or become known.
15
<PAGE>
(g) At the Closing Time, the closing of the Common Stock Offering shall
have occurred, substantially concurrently with the closing of the offering of
the Notes.
(h) At the Closing Time, the Other Transaction Documents shall have been
entered into by all required parties and the undrawn amounts under the
transferred repurchase facilities, warehouse facilities and term loans shall
have been made available to the Company.
(i) At the Closing Time (upon application of the net proceeds of the
offering of the Notes and Common Stock), the Company shall have Consolidated Net
Worth (as defined in the Indenture) equal to $40,000,000.
(j) At the Closing Time (upon application of the net proceeds of the
offering of the Notes and Common Stock), the Company shall have Liquid Assets
(as defined in the Indenture) with a value equal to at least 100% of the
required interest payments due on the Notes on the next two succeeding semi-
annual Interest Payment Dates (as defined in the Indenture); provided that
Liquid Assets of a Subsidiary (other than the Savings Banks) may be included in
such calculation only to the extent that such Liquid Assets may at such time be
distributed to the Company without restriction or notice to any Person (as
defined in the Indenture).
(k) At the Closing Time, the Common Stock of the Company shall have been
approved for inclusion in the Nasdaq National Market.
(l) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(m) The Company will, at the Closing Time and on each Date of Delivery,
deliver to the Underwriter a certificate of its two principal executive
officers, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, to the effect that,
to each of such officer's knowledge, the representations and warranties of the
Company set forth in this Agreement and the conditions set forth in paragraphs
(e), (f), (h), (i) and (j) have been met and are true and correct as of such
date.
(n) The Company shall have furnished to the Underwriter such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus as of the Closing Time or any
Date of Delivery as the Underwriter may reasonably request.
7. Termination: The obligations of the Underwriter hereunder
-----------
shall be subject to termination in the absolute discretion of the
Underwriter, at any time prior to the Closing Time or any Date of Delivery, if
trading in securities on the New York Stock Exchange shall have been suspended
(including automatic halts in trading pursuant to market-decline triggers other
than those in which solely program trading is temporarily halted) or minimum
prices shall have been established on the New York Stock Exchange, or if a
banking moratorium shall have been declared either by the United States or New
York State authorities, or if the United States shall have declared war in
accordance with its constitutional processes or there shall have occurred any
material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on the
financial markets of the United States as, in the judgment of the Underwriter,
to make it impracticable to market the Notes.
16
<PAGE>
If the Underwriter elects to terminate this Agreement as provided in this
Section 7, the Company shall be notified promptly by telephone, promptly
confirmed by facsimile.
If the sale to the Underwriter of the Notes, as contemplated by this
Agreement, is not carried out by the Underwriter for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply in all material respects with any of the terms of this
Agreement, the Company shall not be under any obligation or liability under this
Agreement (except to the extent provided in Sections 5 and 8 hereof) and the
Underwriter shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 8 hereof).
8. Indemnity and Contribution by the Company and the
-------------------------------------------------
Underwriter:
- -----------
(a) The Company agrees to indemnify, defend and hold harmless the
Underwriter and any person who controls the Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any loss, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, the Underwriter or controlling
person may incur under the Securities Act, the Exchange Act or otherwise,
insofar as such loss, expense, liability or claim arises out of or is based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the term
Prospectus for the purpose of this Section 8 being deemed to include any
Preliminary Prospectus, the Prospectus and the Prospectus as amended or
supplemented by the Company), or arises out of or is based upon any omission or
alleged omission to state a material fact required to be stated in either such
Registration Statement or Prospectus or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as any such loss, expense, liability or claim arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in and in conformity
with information furnished in writing by the Underwriter to the Company
expressly for use in such Registration Statement or such Prospectus, provided,
however, that the indemnity agreement contained in this subsection (a) with
respect to the Preliminary Prospectus or the Prospectus shall not inure to the
benefit of the Underwriter (or to the benefit of any person controlling the
Underwriter) with respect to any person asserting any such loss, expense,
liability or claim which is the subject thereof if the Prospectus or any
supplement thereto prepared with the consent of the Underwriter and furnished to
the Underwriter prior to the Closing Time corrected any such alleged untrue
statement or omission and if the Underwriter failed to send or give a copy of
the Prospectus or supplement thereto to such person at or prior to the written
confirmation of the sale of Notes to such person, unless such failure resulted
from noncompliance by the Company with Section 4(b).
If any action is brought against the Underwriter or a controlling person in
respect of which indemnity may be sought against the Company pursuant to the
preceding paragraph, the Underwriter shall promptly notify the Company in
writing of the institution of such action and the Company shall assume the
defense of such action, including the employment of counsel and payment of
expenses. The Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the
17
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expense of the Underwriter or such controlling person unless the employment of
such counsel shall have been authorized in writing by the Company in connection
with the defense of such action or the Company shall not have employed counsel
to have charge of the defense of such action within a reasonable time or such
indemnified party or parties shall have reasonably concluded (based on the
advice of counsel) that there may be defenses available to it or them which are
different from or additional to those available to the Company and which counsel
to the Underwriter believes may present a conflict for counsel representing the
Company and the Underwriter (in which case the Company shall not have the right
to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company and paid as incurred (it being understood, however, that the Company
shall not be liable for the expenses of more than one separate counsel for the
Underwriter or controlling persons in any one action or series of related
actions in the same jurisdiction representing the indemnified parties who are
parties to such action). Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without the its written consent.
(b) The Underwriter agrees to indemnify, defend and hold harmless the
Company, its directors, the officers that signed the Registration Statement and
any person who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any loss,
expense, liability or claim (including the reasonable cost of investigation)
which, jointly or severally, the Company or any such person may incur under the
Securities Act, the Exchange Act or otherwise, insofar as such loss, expense,
liability or claim arises out of or is based upon any untrue statement or
alleged untrue statement of a material fact contained in and in conformity with
information furnished in writing by the Underwriter to the Company expressly for
use in the Registration Statement (or in the Registration Statement as amended
by any post-effective amendment thereof by the Company) or in a Prospectus, or
arises out of or is based upon any omission or alleged omission to state a
material fact in connection with such information required to be stated either
in such Registration Statement or Prospectus or necessary to make such
information, in the light of the circumstances under which made, not misleading.
The statements set forth in the last paragraph on the cover page and under the
caption "Underwriting" in the Preliminary Prospectus and the Prospectus (to the
extent such statements relate to the Underwriter) constitute the only
information furnished by or on behalf of the Underwriter to the Company for
purposes of this Section 8(b).
If any action is brought against the Company or any such person in respect
of which indemnity may be sought against the Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify the
Underwriter in writing of the institution of such action and the Underwriter
shall assume the defense of such action, including the employment of counsel and
payment of expenses. The Company or such person shall have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Company or such person unless the employment of
such counsel shall have been authorized in writing by the Underwriter in
connection with the defense of such action or the Underwriter shall not have
employed counsel to have charge of the defense of such action within a
reasonable time or such indemnified party or parties shall have reasonably
concluded (based on the advice of counsel) that there may be defenses available
to it or them which are different from or additional to those available to the
Underwriter (in which case the Underwriter shall not have the right to
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<PAGE>
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Underwriter and paid as incurred (it being understood, however, that the
Underwriter shall not be liable for the expenses of more than one separate
counsel in any one action or series of related actions in the same jurisdiction
representing the indemnified parties who are parties to such action). Anything
in this paragraph to the contrary notwithstanding, the Underwriter shall not be
liable for any settlement of any such claim or action effected without the
written consent of the Underwriter.
(c) If the indemnification provided for in this Section 8 is unavailable to
an indemnified party under subsections (a) and (b) of this Section 8 in respect
of any losses, expenses, liabilities or claims referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, expenses, liabilities or claims in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and the Underwriter on the other hand from the offering of the Notes
and (ii) the relative fault of the Company on the one hand and of the
Underwriter on the other in connection with the statements or omissions which
resulted in such losses, expenses, liabilities or claims, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriter on the other shall be deemed to be
in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company bear to the underwriting discounts and commissions received by
the Underwriter. The relative fault of the Company on the one hand and of the
Underwriter on the other shall be determined by reference to, among other
things, whether the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission relates to information supplied by the
Company or by the Underwriter and the parties, relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any claim or action.
(d) The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriter were treated as one entity for such purpose)
or by any other method of allocation which does not take account of the
equitable considerations referred to in subsection (c) above. Notwithstanding
the provisions of this Section 8, (i) the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Notes underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which the Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and (ii) the Company shall not be required to
contribute any amount in excess of the amount by which the proceeds received in
connection herewith exceed the amount of any damages which the Company has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
19
<PAGE>
9. Survival: The indemnity and contribution agreements contained
--------
in Section 8 and the covenants, warranties and representations of the Company
contained in Sections 3, 4 and 5 shall remain in full force and effect
regardless of any investigation made by or on behalf of the Underwriter, or any
person who controls the Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, or by or on behalf of the
Company, its directors and officers or any person who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, and the indemnity and contribution agreements contained in Section
8 and the Company's covenants in Section 5 shall survive any termination of this
Agreement or the sale and delivery of the Notes. The Company and the Underwriter
agree promptly to notify the other of the commencement of any litigation or
proceeding against it and, in the case of the Company, against any of the
Company's officers and directors, in connection with the sale and delivery of
the Notes, or in connection with the Registration Statement or Prospectus.
10. Entire Agreement: This Agreement contains the entire agreement
----------------
and understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior oral and written agreements and
understandings (including, without limitation, the engagement letter dated July
24, 1996 between the Underwriter and the Company) relating to such subject
matter.
11. Notices: Except as otherwise herein provided, all statements,
-------
requests, notices and agreements shall be in writing or by telegram
and, if to the Underwriter, shall be sufficient in all respects if delivered to
Friedman, Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington,
Virginia 22209, Attention: Compliance Department; if to the Company, shall be
sufficient in all respects if delivered to the Company at the offices of the
Company at 1776 SW Madison Street, Portland, Oregon 97205 Attention. Lawrence
A. Mendelsohn.
12. GOVERNING LAW; HEADINGS: THIS AGREEMENT SHALL BE GOVERNED BY,
-----------------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. The section headings in
this Agreement have been inserted as a matter of convenience of reference and
are not a part of this Agreement.
13. Parties at Interest: The Agreement herein set forth has been
-------------------
and is made solely for the benefit of the Underwriter, the
Company and the controlling persons, directors and officers referred to in
Sections 8 and 9 hereof, and their respective successors, assigns, executors and
administrators. No other person, partnership, association or corporation
(including a purchaser, as such purchaser, from the Underwriter) shall acquire
or have any right under or by virtue of this Agreement.
14. Counterparts: This Agreement may be signed by the parties in
------------
counterparts which together shall constitute one and the same agreement among
the parties.
If the foregoing correctly sets forth the understanding among the Company
and the Underwriter, please so indicate in the space provided below for the
purpose, whereupon this Agreement shall constitute a binding agreement among the
Company and the Underwriter.
20
<PAGE>
Very truly yours,
WILSHIRE FINANCIAL SERVICES GROUP INC.
By: ______________________________________
Title:
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.
By: ________________________________
Title:
21
<PAGE>
EXHIBIT 4.1
WILSHIRE FINANCIAL SERVICES GROUP INC.
TO
BANKERS TRUST COMPANY, Trustee
___% NOTES DUE 2003
------------------------------
INDENTURE
Dated as of _________ __, 1996
------------------------------
<PAGE>
TABLE OF CONTENTS /*//
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE ONE Definitions and Other Provisions of General Application....................1
Section 1.1 Definitions....................................................1
Section 1.2 Compliance Certificates and Opinions.........................19
Section 1.3 Form of Documents Delivered to Trustee.......................20
Section 1.4 Acts of Holders, Record Dates................................20
Section 1.5 Notices, Etc., to Trustee and Company........................22
Section 1.6 Notice to Holders; Waiver....................................22
Section 1.7 Conflict with Trust Indenture Act............................23
Section 1.8 Effect of Headings and Table of Contents.....................23
Section 1.9 Successors and Assigns.......................................23
Section 1.10 Separability Clause.........................................23
Section 1.11 Benefits of Indenture........................................23
Section 1.12 Governing Law; Choice of Forum..............................23
Section 1.13 Legal Holidays..............................................25
ARTICLE TWO Note Forms................................................................25
Section 2.1 Forms Generally..............................................25
Section 2.2 Form of Face of Note.........................................25
Section 2.3 Form of Reverse of Note......................................27
Section 2.4 Form of Legend for Global Notes..............................29
</TABLE>
- ----------
/*// This Table fo Contents is not part of the Indenture
i
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<TABLE>
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<S> <C>
Section 2.5 Form of Trustee's Certificate of
Authentication................................................30
ARTICLE THREE The Notes..............................................................31
Section 3.1 Global Note; Depositary.......................................31
Section 3.2 Amount........................................................31
Section 3.3 Denominations.................................................31
Section 3.4 Execution, Authentication, Delivery and
Dating........................................................32
Section 3.5 Temporary Notes...............................................32
Section 3.6 Registration; Registration of Transfer and
Exchange......................................................33
Section 3.7 Mutilated, Destroyed, Lost and Stolen
Notes.........................................................34
Section 3.8 Payment of Interest; Interest Rights
Preserved.....................................................34
Section 3.9 Persons Deemed Owners.........................................36
Section 3.10 Cancellation.................................................36
Section 3.11 Computation of Interest......................................36
ARTICLE FOUR Book-Entry Provisions for Global Notes...................................37
Section 4.1 Applicability of Article......................................37
Section 4.2 Book-Entry Provisions For Global Note.........................37
ARTICLE FIVE Remedies.................................................................39
Section 5.1 Events of Default............................................39
Section 5.2 Acceleration of Maturity; Rescission and Annulment...........40
Section 5.3 Collection of Indebtedness and Suits for Enforcement by
Trustee......................................................41
Section 5.4 Trustee May File Proofs of Claim.............................42
Section 5.5 Trustee May Enforce Claims Without Possession of Notes.......42
Section 5.6 Application of Money Collected...............................43
Section 5.7 Limitation on Suits..........................................43
</TABLE>
ii
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<TABLE>
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Section 5.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest.........................................44
Section 5.9 Restoration of Rights and Remedies...........................44
Section 5.10 Rights and Remedies Cumulative..............................44
Section 5.11 Delay or Omission Not Waiver................................44
Section 5.12 Control by Holders..........................................44
Section 5.13 Waiver of Past Defaults.....................................45
Section 5.14 Undertaking for Costs.......................................45
Section 5.15 Waiver of Usury, Stay or Extension Laws.....................46
ARTICLE SIX The Trustee..............................................................46
Section 6.1 Certain Duties and Responsibilities..........................46
Section 6.2 Notice of Defaults...........................................47
Section 6.3 Certain Rights of Trustee....................................47
Section 6.4 Not Responsible for Recitals or Issuance of Notes.............48
Section 6.5 May Hold Notes................................................48
Section 6.6 Money Held in Trust...........................................48
Section 6.7 Compensation and Reimbursement................................49
Section 6.8 Disqualification; Conflicting Interests.......................49
Section 6.9 Corporate Trustee Required; Eligibility.......................49
Section 6.10 Resignation and Removal; Appointment of Successor............50
Section 6.11 Acceptance of Appointment by Successor.......................51
Section 6.12 Merger, Conversion, Consolidation or Succession to Business..52
Section 6.13 Preferential Collection of Claims Against Company............52
Section 6.14 Appointment of Authenticating Agent..........................52
</TABLE>
iii
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ARTICLE SEVEN Holders' Lists and Reports by Trustee and Company.....................54
Section 7.1 Company to Furnish Trustee Names and Addresses of
Holders; Trustee to Furnish Note Register.....................54
Section 7.2 Preservation of Information; Communications to Holders........55
Section 7.3 Reports by Trustee............................................55
ARTICLE EIGHT Amendments, Supplements and Waivers....................................56
Section 8.1 Supplemental Indentures Without Consent of Holders............56
Section 8.2 Supplemental Indentures with Consent of Holders...............57
Section 8.3 Execution of Supplemental Indentures..........................58
Section 8.4 Effect of Supplemental Indentures.............................58
Section 8.5 Conformity with Trust Indenture Act...........................58
Section 8.6 Reference in Notes to Supplemental Indentures.................58
Section 8.7 Notice of Supplemental Indenture..............................58
ARTICLE NINE Covenants................................................................59
Section 9.1 Payment of Principal, Premium and Interest...................59
Section 9.2 Maintenance of Office or Agency..............................59
Section 9.3 Money for Notes Payments to Be Held in Trust.................59
Section 9.4 Statement by Officers as to Default..........................61
Section 9.5 Payment of Taxes and Other Claims............................61
Section 9.6 Maintenance of Properties....................................61
Section 9.7 Corporate Existence; Keeping of Books........................62
Section 9.8 Insurance....................................................62
Section 9.9 Net Worth Maintenance........................................62
Section 9.10 Limitations on Indebtedness..................................62
Section 9.11 Liquidity Maintenance........................................64
</TABLE>
iv
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Section 9.12 Limitations on Restricted Payments...........................65
Section 9.13 Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries........................................66
Section 9.14 Limitations on Transactions with Affiliates...................67
Section 9.15 Limitations on Liens and Guarantees...........................68
Section 9.16 Offer to Purchase upon a Change of Control Event..............68
Section 9.17 Payments for Consent..........................................70
Section 9.18 Waiver of Certain Covenants...................................70
ARTICLE TEN Merger, Consolidation and Transfer of Assets..............................71
Section 10.1 Merger, Consolidation or Transfer of Assets of the Company....71
Section 10.2 Successor Substituted.........................................71
Section 10.3 Notes to Be Secured in Certain Events.........................72
ARTICLE ELEVEN Redemption of Notes....................................................72
Section 11.1 Applicability of Article.....................................72
Section 11.2 Optional Redemption..........................................72
Section 11.3 Election to Redeem; Selection by Trustee of Notes
to Be Redeemed...............................................72
Section 11.4 Notice of Redemption.........................................73
Section 11.5 Deposit of Redemption Price..................................74
Section 11.6 Notes Payable on Redemption Date.............................74
Section 11.7 Notes Redeemed in Part.......................................74
ARTICLE TWELVE Defeasance and Covenant Defeasance.....................................75
Section 12.1 Option to Effect Legal Defeasance or Covenant Defeasance......75
Section 12.2 Legal Defeasance and Discharge................................75
Section 12.3 Covenant Defeasance...........................................75
Section 12.4 Conditions to Legal or Covenant Defeasance....................76
</TABLE>
v
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Section 12.5 Deposited Money and U.S. Government Obligations To Be
Held in Trust; Other Miscellaneous Provisions.................77
Section 12.6 Reinstatement.................................................78
ARTICLE THIRTEEN Miscellaneous.........................................................78
Section 13.1. No Recourse Against Others...................................78
Section 13.2. Execution in Counterparts....................................78
</TABLE>
vi
<PAGE>
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939
AND INDENTURE, DATED AS OF ________________, 1996/*//
<TABLE>
<CAPTION>
TIA Section Indenture Section
<S> <C>
310(a)(1).................................... 6.9
(a)(2)....................................... 6.9
(a)(3)....................................... Not Applicable
(a)(4)....................................... Not Applicable
(a)(5)....................................... 6.9
(b).......................................... 1.5, 6.8, 6.9, 6.10, 6.11
(c).......................................... Not Applicable
311(a).......................................... 6.13
(b).......................................... 6.13
(c).......................................... Not Applicable
312(a).......................................... 7.1, 7.2
(b).......................................... 7.2
(c).......................................... 7.2
313(a).......................................... 7.3
(b)(1)....................................... Not Applicable
(b)(2)....................................... 7.3
(c).......................................... 1.6, 7.3
(d).......................................... 7.3
314(a).......................................... 1.5, 1.6, 7.4
(b).......................................... Not Applicable
(c)(1)....................................... 1.2
(c)(2)....................................... 1.2
(c)(3)....................................... Not Applicable
(d).......................................... Not Applicable
(e).......................................... 1.2
(f).......................................... Not Applicable
315(a).......................................... 6.1
(b).......................................... 1.6, 6.2
(c).......................................... 6.1
(d).......................................... 6.1
(e).......................................... 5.14
316(a)(last sentence)........................... 1.1 (definition of "Outstanding")
316(a)(1)(A).................................... 5.12
(a)(1)(B).................................... 5.13
(a)(2)....................................... Not Applicable
(b).......................................... 5.7, 5.8
(c).......................................... 1.4
317(a)(1)....................................... 5.3
(a)(2)....................................... 5.4
(b).......................................... 6.6, 9.3
318(a).......................................... 1.7
(b).......................................... 6.6, 9.3
(c).......................................... 1.7
</TABLE>
/*// This Reconciliation and tie is not part of the Indenture.
<PAGE>
INDENTURE, dated as of _______________ __, 1996, between WILSHIRE
FINANCIAL SERVICES GROUP INC., a corporation duly organized and existing under
the laws of the State of Delaware (herein called the "Company"), having its
principal office at 1776 SW Madison Street, Portland, Oregon 97205, and
BANKERS TRUST COMPANY, a New York banking corporation, as Trustee (herein
called the "Trustee").
RECITALS OF THE COMPANY
A. The Company has duly authorized the execution and delivery of
this Indenture to provide for the issuance of up to $86,250,000 in principal
amount of its unsecured ___% Notes due 2003 (herein called the "Notes"), to be
issued as in this Indenture provided.
B. All things necessary to make this Indenture a valid agreement
of the Company, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Notes by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER
PROVISIONS OF GENERAL APPLICATION
Section 1.1 Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
<PAGE>
(4) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(5) the word "including" is not limiting;
(6) references in this Indenture to any agreement, other document or
law "as amended" or "as amended from time to time," or to "amendments" of any
document or law, shall include any amendments, supplements, replacements,
renewals or other modifications from time to time, provided in the case of
modifications to documents, such modifications are permissible under this
Indenture; and
(7) references in this Indenture to any law include regulations
promulgated thereunder from time to time.
"Acquired Indebtedness" means Indebtedness of a person (i) existing
at the time such Person becomes a Subsidiary of or is merged with or into any
other Person or (ii) assumed in connection with the acquisition of assets from
such Person, in each case, other than Indebtedness incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary of such other
Person or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from such Person or
the date such Person becomes a Subsidiary of or is merged with or into such
other Person.
"Act", when used with respect to any Holder, has the meaning
specified in Section 1.4.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly Controlling or Controlled by or under direct or
indirect common Control with such specified Person and any legal or beneficial
owner, directly or indirectly, of 20% or more of the Voting Stock of such
specified Person. Notwithstanding the foregoing, no Securitization Entity
shall be deemed an Affiliate of the Company.
"Applicable Law" means all applicable provisions of all (i)
constitutions, treaties, statutes, laws, rules, regulations and ordinances of
any Governmental Authority, (ii) Governmental Approvals and (iii) orders,
decisions, judgments, awards and decrees of any Governmental Authority.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Notes.
"Authorized Officer" means any officer of the Company designated by
a Board Resolution to take certain actions as specified in this Indenture.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from the date
of determination to the date or dates of each successive
2
<PAGE>
scheduled principal payment of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means the board of directors or any duly
authorized committee of that board. Unless otherwise indicated, "Board of
Directors" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors of the Company, or by action of an Authorized
Officer designated as such pursuant to a resolution of the Board of Directors
of the Company, and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" of any Person means any obligations of
such Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of this Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents or
interests in (however designated) capital stock in such Person, including,
with respect to a corporation, common stock, Preferred Stock and other
corporate stock and, with respect to a partnership, partnership interests,
whether general or limited, and any rights (other than debt securities
convertible into corporate stock, partnership interests or other capital
stock), warrants or options exchangeable for or convertible into such
corporate stock, partnership interests or other capital stock.
"Change of Control Event" means an event or series of events by
which
(a) any "person" or "group" (as such terms are used in Sections 13(
d) and 14(d) of the Exchange Act), other than the Existing Principal
Stockholders, is or becomes after the date of issuance of the Notes the
"beneficial owner" (as defined in Rules 13 d-3 and 13d-5 under the
Exchange Act as in effect on the date of the In-denture), of more than 40%
of the total voting power of all Voting Stock of the Company then
outstanding;
(b) (1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or
(2) the Company conveys, transfers or leases all or
substantially all its assets to any person or group, in one transaction or
a series of
3
<PAGE>
transactions other than any conveyance, transfer or lease between the
Company and a Wholly-Owned Subsidiary of the Company,
in each case, with the effect that a person or group, other than the Existing
Principal Stockholders, is or becomes the beneficial owner of more than 40% of
the total voting power of all Voting Stock of the surviving or transferee
corporation of such transaction or series of transactions;
(c) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Compan y's Board of
Directors, or whose nomination for election by the Compan y's shareholders
was approved by a vote of a majority of the directors then still in office
who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute a majority of the directors then in office; or
(d) the shareholders of the Company shall approve any plan or
proposal for the liquidation or dissolution of the Company.
"Change of Control Purchase Date," "Change of Control Purchase
Notice," "Change of Control Purchase Price" and "Change of Control Purchase
Offer" are defined in Section 9.16.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board or its President, and by its Chief Financial Officer,
its Controller or an Assistant Controller, and delivered to the Trustee.
"Consolidated Depreciation and Amortization Expense" means with
respect to any Person for any period, the total amount of depreciation and
amortization expense of such Person for such period on a consolidated basis
and otherwise determined in accordance with GAAP.
"Consolidated EBITDA" means, with respect to any Person for any
period, the Consolidated Net Income (Loss) of such Person for such period plus
(a) provision for taxes based on income or profits of such Person for such
period deducted in computing Consolidated Net Income (Loss) plus (b)
Consolidated Interest Expense of such Person for such period, plus (c)
Consolidated Depreciation and Amortization Expense of such Person for such
period to the extent such depreciation and amortization were deducted in
computing
4
<PAGE>
Consolidated Net Income (Loss), plus (d) without duplication, any other non-
cash charges reducing Consolidated Net Income (Loss) of such Person for such
period less (e) without duplication, non-cash items increasing Consolidated
Net Income (Loss) of such Person for such period in each case, on a
consolidated basis for such Person in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period,
the sum of: (a) consolidated interest expense of such Person for such period,
other than interest expense on deposits, Permitted Acquisition Indebtedness
and Permitted Repurchase Facilities, whether paid or accrued (except to the
extent accrued in a prior period), to the extent such expense was deducted in
computing Consolidated Net Income (Loss) (including amortization of original
issue discount, non-cash interest payments and the interest component of
Capital Lease Obligations, excluding amortization of deferred financing fees)
and (b) consolidated capitalized interest of such Person for such period,
whether paid or accrued, to the extent such expense was deducted in computing
Consolidated Net Income (Loss).
"Consolidated Net Income (Loss)" of any Person means, for any
period, the consolidated net income (or loss) of such Person and its
consolidated Subsidiaries for such period as determined in accordance with
GAAP, adjusted, to the extent included in calculating such net income (loss),
by excluding, without duplication, (i) the portion of net income (or loss) of
any other Person (other than any of such Person's consolidated Subsidiaries)
in which such Person or any of its Subsidiaries has an ownership interest,
except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period, (ii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(iii) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan and (iv) solely for the purpose of determining
Consolidated Net Income (Loss) in connection with the calculation of
Restricted Payments permitted to be made hereunder, the net income of any
consolidated Subsidiary of such Person to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that
income is not at the time permitted, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulations applicable to that Subsidiary
or its shareholders; provided that, upon the termination or expiration of such
dividend or distribution restrictions, the portion of net income (or loss) of
such consolidated Subsidiary allocable to such Person and previously excluded
shall be added to the Consolidated Net Income (Loss) of such Person to the
extent of the amount of dividends or other distributions available to be paid
to such Person in cash by such Subsidiary.
"Consolidated Net Worth" of any Person and its Subsidiaries mean as
of the date of determination all amounts that would be included under
stockholders' equity on a consolidated balance sheet of such Person and its
Subsidiaries determined in accordance with GAAP.
"Control" when used with respect to any specified Person means the
power to direct the management and policies of such Person directly or
indirectly, whether through
5
<PAGE>
ownership of voting securities (or pledge of voting securities if the pledgee
thereof may on the date of determination exercise or control the exercise of
the voting rights of the owner of such voting securities), by contract or
otherwise; and the terms "to Control," "Controlling" and "Controlled" have
meanings correlative to the foregoing.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office as of the date hereof is located at Four Albany
Street, New York, New York 10006.
"Covenant Defeasance" has the meaning specified in Section 12.3.
"Credit Support" means credit support designed to enhance the
likelihood of payment on securities issued in connection with a securitization
of loans or other assets which are generally funded with the proceeds of such
securitization, including without limitation subordination of certain classes
of securities, insurance policies, representations and warranties, reserve
funds, liquidity reserves, lost- and missing- note reserves and letters of
credit.
"Currency Agreement" means, with respect to any Person, any foreign
exchange contract, currency swap agreement or other similar agreement to which
such Person is a party or a beneficiary.
"Default" means an event or condition the occurrence of which would,
with the lapse of time or the giving of notice or both, become an Event of
Default.
"Defaulted Interest" has the meaning specified in Section 3.8.
"Depositary" has the meaning specified in Section 3.1.
"Disqualified Capital Stock" means any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part on, or prior to, or
is exchangeable for debt securities of the Company or its Subsidiaries prior
to, the final Stated Maturity of principal of the Notes; provided that only
the amount of such Capital Stock that is redeemable prior to the Stated
Maturity of principal of the Notes shall be deemed to be Disqualified Capital
Stock.
"Disinterested Director" of any Person means, with respect to any
transaction or series of related transactions, a member of the board of
directors of such Person who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions.
"Event of Default" has the meaning specified in Section 5.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
6
<PAGE>
"Existing Principal Stockholders" means, individually or
collectively, Andrew A. Wiederhorn and Lawrence A. Mendelsohn and their
respective estates, spouses, heirs, ancestors, lineal descendants and legatees
and legal representatives of any of the foregoing and the trustee of any bona
fide trust of which one or more of the foregoing are the trustees or the
majority beneficiaries, and any entity of which any of the foregoing,
individually or collectively, beneficially owns more than 50% of the Voting
Stock thereof.
"Fair Market Value" means, with respect to any asset, the price
which could be negotiated in an arm's-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of which is under
compulsion to complete the transaction; provided, however, that the Fair
Market Value of any asset or assets shall be determined by the Board of
Directors of the Company, acting in good faith, and shall be evidenced by a
Board Resolution.
"Federal Deposit Insurance Corporation" means the Federal Deposit
Insurance Corporation or any successor thereto.
"Fixed Charges" means, with respect to any Person for any period,
the sum of (i) Consolidated Interest Expense of such Person for such period,
and (ii) the product of (A) all cash dividend payments on any series of
Preferred Stock or Disqualified Capital Stock of such Person or its
Subsidiaries for such period, and (B) a fraction, the numerator of which is
one and the denominator of which is one minus the then-current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles as in effect
on the date of computation.
"Global Note" means a Note bearing the legend prescribed in Section
2.4 evidencing all or part of the Notes, authenticated and delivered to the
Depositary or its nominee, and registered in the name of such Depositary or
nominee.
"Global Note Holder" has the meaning specified in Section 3.1.
"Governmental Approval" means an authorization, consent, approval,
permit, license, registration or filing with any Governmental Authority.
"Governmental Authority" with respect to any Person, means any
nation (including an Indian nation), any state or other political subdivision
thereof and any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government, including any
government authority, agency, department, board, commission or instrumentality
of the United States, any state of the United States or any political
subdivision thereof, and any tribunal or arbitrator(s) of competent
jurisdiction in each case, having jurisdiction or authority over such Person.
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"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any Person and any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or other obligation of such
Person (whether arising by virtue of partnership arrangements, or by
agreements to purchase assets, goods, securities or services, to take-or-pay
or to maintain financial statement conditions or otherwise) or (ii) entered
into for the purpose of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor" means any person Guaranteeing any obligation.
"Guaranteed Indebtedness" of any Person means, without duplication,
all Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such Indebtedness
against loss, (iii) to supply funds to, or in any other manner invest in, the
debtor (including any agreement to pay for property or services without
requiring that such property be received or such services be rendered), (iv)
to maintain working capital or equity capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the debtor,
or (v) otherwise to assure a creditor with respect to Indebtedness against
loss; provided that the term shall not include endorsements for collection of
deposit, in either case in the ordinary course of business.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holders" or "Noteholders" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. The
accretion of principal of a non-interest bearing or other discount security
shall be deemed the Incurrence of Indebtedness.
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"Indebtedness" means, with respect to any Person, without
duplication, (i) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services, excluding any trade payables
and other accrued current liabilities arising in the ordinary course of
business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit issued
under letter of credit facilities, and in connection with any agreement by
such Person to purchase, redeem, exchange, convert or otherwise acquire for
value any Capital Stock of such Person now or hereafter outstanding, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness of such Person created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person, but excluding trade payables arising in the
ordinary course of business, (iv) all obligations under Interest Rate
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends payable by other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien, upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or
asset or the amount of the obligations so secured), (vii) all guarantees by
such Person of Guaranteed Indebtedness, (viii) all Disqualified Capital Stock
(valued at the greater of book value and voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends) of such Person, and
(ix) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing or any liability of the types referred to in clauses
(i) through (viii) above. For purposes hereof, (x) the "maximum fixed
repurchase price" of any Disqualified Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital Stock, such fair market
value is to be determined in good faith by the board of directors (or any duly
authorized committee thereof) of the issuer of such Disqualified Capital
Stock, and (y) Indebtedness is deemed to be incurred pursuant to a revolving
credit facility each time an advance is made thereunder.
"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument, and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.
"Interest Payment Date" means the date on which any installment of
interest on the Notes becomes due and payable, as provided in Section 2.2.
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"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement, repurchase agreement, futures contract or other
financial agreement or arrangement designed to protect the Company or any
Subsidiary against fluctuations in interest rates.
"Issue Date" means the date on which the Notes are originally
issued.
"Junior Indebtedness" means any Indebtedness of the Company
subordinated in right of payment of either principal, premium (if any) or
interest thereon to the Notes.
"Legal Defeasance" has the meaning specified in Section 12.2.
"Legal Holiday" means any Saturday, Sunday or other day on which
banks in the States of New York or Oregon are authorized or obligated by law
or executive order to be closed for business.
"Leverage Ratio" as of any date of determination means the ratio of
(i) the aggregate amount of all Indebtedness and Disqualified Capital Stock of
the Company, excluding (A) Indebtedness and Guarantees thereof permitted to be
incurred pursuant to Section 9.10 (e) (1), (2), (3), (6) and (7) hereof; (B)
Hedging Obligations permitted to be incurred pursuant to Section 9.10 (e)(13)
hereof; and (C) Junior Indebtedness of the Company to (ii) the Consolidated
Net Worth of the Company.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days
from the determination date: (a) repurchase agreements on obligations of, or
are guaranteed as to timely receipt of principal and interest by, the United
States or any agency or instrumentality thereof when such obligations are
backed by the full faith and credit of the United States provided that the
party agreeing to repurchase such obligations is a primary dealer in U.S.
government securities, (b) federal funds and deposit accounts, including but
not limited to certificates of deposit, time deposits and bankers' acceptances
of any U.S. depository institution or trust company incorporated under the
laws of the United States or any state, provided that the debt of such
depository institution or trust company at the date of acquisition thereof has
been rated by Standard & Poor's Corporation in the highest short-term rating
category or has an equivalent rating from another nationally recognized rating
agency, or (c) commercial paper of any corporation incorporated under the laws
of the United States or any state thereof that on the date of acquisition is
rated investment grade by Standard & Poor's Corporation or has an equivalent
rating from another nationally recognized rating agency; (iii) any debt
instrument which is an obligation of, or is guaranteed as to the receipt of
principal and interest by the United States, its agencies or any U.S.
government sponsored enterprise, or (iv) any mortgage-backed or mortgage-
related security issued by the United States, its agencies, or
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any U.S. government sponsored enterprise which the payment of principal and
interest from the mortgages underlying such securities will be passed through
to the holder thereof and which such security has a remaining weighted average
maturity of 15 years or less. Notwithstanding the foregoing, Liquid Assets
shall not include any debt instruments, securities or collateralized mortgage
obligations (real estate mortgage investment conduits) that would be
classified as a "High-Risk Mortgage Security" pursuant to the policy statement
adopted by the Federal Financial Institutions Examination Counsel on February
10, 1992, as reflected in Volume I of the Federal Reserve Report Service, Part
3-1562.
"Maturity", when used with respect to any Note, means the date on
which the principal of such Note or an installment of principal becomes due
and payable as therein or herein provided, whether at the Stated Maturity or
by declaration of acceleration, call for redemption, upon repurchase or
otherwise.
"Net Cash Proceeds" means, with respect to any issuance or sale of
Capital Stock, or options, warrants or rights to purchase Capital Stock, or
debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock, or any capital contribution in respect of Capital Stock, as
referred to under Section 9.12 hereof, the proceeds of such issuance or sale
or capital contribution in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed for, cash or cash equivalents
(except to the extent that such obligations are financed or sold with recourse
to the Company or any Subsidiary of the Company), net of attorney's fees,
accountant's fees and brokerage, consulting, underwriting and other fees and
expenses actually incurred in connection with such issuance or sale or capital
contribution and net of taxes paid or payable by the Company as a result
thereof.
"Non-Recourse Indebtedness" means, with respect to any Person,
Indebtedness of such Person for which (i) the sole recourse for collection of
principal and interest on such Indebtedness is against the specific assets
identified in the instruments evidencing or securing such Indebtedness, (ii)
such assets were acquired with the proceeds of such Indebtedness or such
Indebtedness was incurred concurrently with the acquisition of such assets;
and (iii) no other assets (other than Credit Support) of such Person or of any
other Person may be realized upon or in collection of principal or interest on
such Indebtedness.
"Note Register" has the meaning specified in Section 3.6.
"Officers' Certificate" means a certificate signed by the Chairman
of the Board, a Vice Chairman of the Board, the Chief Executive Officer or the
President, and by the Chief Executive Officer, the President, the Chief
Financial Officer, the Controller or an Assistant Controller, of the Company
(provided that no one person signs twice on behalf of the Company), and
delivered to the Trustee. One of the officers signing an Officers'
Certificate given pursuant to Section 9.4 shall be the principal executive,
financial or
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accounting officer of the Company. Unless otherwise indicted, "Officers'
Certificate" means an Officers' Certificate of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company and who shall be acceptable to the Trustee.
"OTS" means the Office of Thrift Supervision or any successor
thereto.
"Outstanding", when used with respect to Notes, means, as of the
date of determination, all Notes theretofore authenticated and delivered under
this Indenture, except:
(i) Notes theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Notes for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Company) in trust or set aside and segregated
in trust by the Company (if the Company shall act as its own Paying Agent)
for the Holders of such Notes; provided that, if such Notes are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been made;
and
(iii) Notes in exchange for or in lieu of which other Notes
have been authenticated and delivered pursuant to this Indenture, other
than any such Notes in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Notes are held by a bona
fide purchaser in whose hands such Notes are valid obligations of the
Company
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, (i) Notes owned
by the Company or any other obligor on the Notes or any Affiliate of the
Company shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Notes which a Responsible Officer of the Trustee knows to be so owned shall be
so disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor on the Notes or any Affiliate
of the Company.
"Pari Passu Indebtedness" means any Indebtedness of the Company that
is pari passu in right of payment of principal, premium (if any) and interest
thereon to the Notes.
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"Paying Agent" means any Person authorized by the Company to pay the
principal of or any premium or interest on any Notes on behalf of the Company
or, if the Company is acting as its own Paying Agent, the Company.
"Permitted Acquisition Indebtedness" means any secured funding
arrangement with a financial institution or other lender to the extent (and
only to the extent) funding thereunder is used exclusively to finance or
refinance the purchase or origination of loans, real estate owned or other
financial assets by the Company or a Subsidiary.
"Permitted Liens" means (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens imposed by law and arising in the ordinary
course of business and with respect to amounts not yet delinquent or being
contested in good faith by appropriate legal proceedings promptly instituted
and diligently conducted and for which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made; (iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (iv) Liens incurred or deposits made to secure
the performance of tenders, bids, leases, statutory or regulatory obligations,
surety and appeal bonds, progress payments, development obligations,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature, in each case incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money or
otherwise constituting a liability in accordance with GAAP); (v) with respect
to property of the Company or any Subsidiary, Liens granted on such property
or assets in favor of the Person from whom the Company or such Subsidiary
acquired such property or assets which Liens secure the payment of a
contingent portion of the purchase price of such property so long as such
Liens are granted and such arrangement is entered into in the ordinary course
of business of the Company; (vi) attachment or judgment Liens not giving rise
to a Default or Event of Default and which are being contested in good faith
by appropriate proceedings; (vii) easements, rights-of-way, restrictions,
homeowners association assessments and similar charges or encumbrances that do
not materially interfere with the ordinary course of business of the Company
or any of its Subsidiaries; (viii) zoning restrictions, licenses, restrictions
on the use of real property or minor irregularities in title thereto, which do
not materially impair the use of such property in the ordinary course of
business of the Company or any Subsidiary or the value of such real property
for the purpose of such business; (ix) Liens in favor of the Company or any
Subsidiary that is a Wholly Owned Subsidiary of the Company; (x) Liens
existing on the Closing Date; (xi) Liens securing Non-Recourse Indebtedness of
the Company or a Subsidiary thereof, (xii) Liens with respect to the property
or assets of the Company or a Subsidiary securing Indebtedness permitted to be
incurred pursuant to Section 9.10 (e)(1), (2), (3), (6) and (7) hereof; (xiii)
Liens granted after the Issue Date on any assets or Capital Stock of the
Company or its Subsidiaries created in favor of the Holders; (xiv) Liens with
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respect to the property or assets of a Subsidiary granted by such Subsidiary
to the Company to secure Indebtedness owing to the Company; (xv) Liens
securing Indebtedness which is incurred to refinance Permitted Indebtedness,
provided that such Liens constitute Permitted Liens under this clause (xv)
only to the extent that they do not extend to or cover any property or assets
of the Company or any Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (xvi) leases or subleases granted to others
not materially interfering with the ordinary course of business of the Company
or any of its Subsidiaries; (xvii) other Liens securing obligations not
exceeding $1,000,000 in the aggregate; and (xviii) Liens securing Hedging
Obligations of the Company or such Subsidiary so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted under this
Indenture to be, secured by a Lien on the same property securing such Hedging
Obligations.
"Permitted Payment" means, so long as no Default or Event of Default
is continuing,
(a) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Capital Stock of the Company or any Affiliate
(other than a Wholly-Owned Subsidiary) of the Company, Junior Indebtedness or
Pari Passu Indebtedness in exchange for (including any such exchange pursuant
to the exercise of a conversion right or privilege where, in connection
therewith, cash is paid in lieu of the issuance of fractional shares or
scrip), or out of the Net Cash Proceeds or Fair Market Value of property not
constituting Net Cash Proceeds of, a substantially concurrent issue and sale
(other than to a Subsidiary of the Company or to an employee benefit plan of
the Company or any of its Subsidiaries) of Qualified Capital Stock of the
Company; provided that the Net Cash Proceeds or Fair Market Value of such
property received by the Company from the issuance of such shares of Qualified
Capital Stock, to the extent so utilized, shall be excluded from clause
(d)(iii) of Section 9.12 hereof; and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness or Pari Passu Indebtedness in
exchange for, or out of the Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company) of new Indebtedness
by the Company (such a transaction, a "refinancing"); provided, that any such
new Indebtedness of the Company (i) shall be in a principal amount that does
not exceed an amount equal to the sum of (A) the principal amount of the
Indebtedness so refinanced less any discount from the face amount of such
Indebtedness to be refinanced expected to be deducted from the amount payable
to the holders of such Indebtedness in connection with such refinancing, (B)
the amount of any premium expected to be paid in connection with such
refinancing pursuant to the terms of the Junior Indebtedness or Pari Passu
Indebtedness refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing by means of a tender
offer, privately negotiated repurchase or otherwise and (C) the amount of
legal, accounting, printing and other similar expenses of the Company incurred
in connection with such refinancing; provided, further, that for purposes of
this clause (i), the principal amount of any Indebtedness shall be deemed to
mean the principal amount thereof or, if such
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Indebtedness provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination; (ii) (A) if such refinanced
Indebtedness has an Average Life to Stated Maturity shorter than that of the
Notes or a final Stated Maturity earlier than the final Stated Maturity of the
Notes, such new Indebtedness shall have an Average Life to Stated Maturity no
shorter than the Average Life to Stated Maturity of such refinanced
Indebtedness and a final Stated Maturity no earlier than the final Stated
Maturity of such refinanced Indebtedness or (B) in all other cases each Stated
Maturity of principal (or any required repurchase, redemption, defeasance or
sinking fund payments) of such new Indebtedness shall be after the final
Stated Maturity of principal of the Notes; and (iii) is (A) made expressly
subordinated to or pari passu with the Notes to substantially the same extent
as the Indebtedness being refinanced or (B) expressly subordinate to such
refinanced Indebtedness.
"Permitted Repurchase Facilities" includes purchase and sale
facilities pursuant to which the Company or a Subsidiary sells loans, real
estate owned or other financial assets to a financial institution or other
entity and agrees to repurchase such loans, real estate owned or financial
assets.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Place of Payment" means the place or places where the principal of
and any premium and interest on the Notes are payable as specified in Section
9.2.
"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.7 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Preferred Stock" means, with respect to any Person, any Capital
Stock of any class or classes (however designated) which is preferred as to
the payment of dividends or distributions, or as to the distribution of assets
upon any voluntary liquidation or dissolution of such Person, over Capital
Stock of any other class in such Person.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Disqualified Capital Stock.
"Redemption Date", when used with respect to any Note to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Note to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
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"Registrar" means the Trustee or its nominee.
"Regular Record Date" for the interest payable on any Interest
Payment Date on the Notes means the __________ or ___________ (whether or not
a Business Day), as the case may be, next preceding such Interest Payment
Date.
"Regulatory Capital Requirements" means the minimum amount of
capital required to meet each of the industry-wide regulatory capital
requirements applicable to the Savings Banks pursuant to 12 U.S.C. Section
1464(t) and 12 C.F.R. Section 567 (and any amendment to either thereof) or
any successor law or regulation, or such higher amount of capital as either
Savings Bank, respectively, is required to maintain in order to meet any
individual minimum capital standard applicable to the Savings Bank pursuant to
12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 or to comply with any
enforcement action, including but not limited to the Cease and Desist Orders
issued October 31, 1996 to each Savings Bank by the OTS, issued pursuant to 12
U.S.C. Section 1818(b) (and any amendment to any of the foregoing) or any
successor law or regulation.
"Responsible Officer", when used with respect to the Trustee shall
mean any officer within the Corporate Trust and Agency Group (or any successor
group of the Trustee) including any vice president, assistant vice president,
assistant secretary or any other officer or assistant officer of the Trustee
customarily performing functions similar to those performed by the persons who
at the time shall be such officers, respectively, or to whom any corporate
trust matter is referred at the Trustee's Corporate Trust Office because of
his knowledge of and familiarity with the particular subject.
"Restricted Payment" means
(a) the declaration, payment or setting apart of any funds for the
payment of any dividend on, or making of any distribution to holders of, the
Capital Stock of the Company or any Subsidiary of the Company (other than (i)
dividends or distributions in Qualified Capital Stock of the Company and (ii)
dividends or distributions payable on or in respect of any class or series of
Capital Stock of a Subsidiary of the Company as long as the Company receives
at least its pro rata share of such dividends or distributions in accordance
with its ownership interests in such class or series of Capital Stock);
(b) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any Capital Stock of the Company or any
Affiliate of the Company (other than a Wholly-Owned Subsidiary, and other than
the purchase from a non-Affiliate of the Company of Capital Stock of any joint
venture or other Person which is an Affiliate of the Company solely because of
the Company's direct or indirect ownership of 20% or more of the Voting Stock
of such joint venture or other Person); or
(c) the making of any principal payments on, or repurchase,
redemption, defeasance, retirement or other acquisition for value, directly or
indirectly, of any Junior Indebtedness or Pari Passu Indebtedness, prior to
any Stated Maturity of principal or
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scheduled redemption or defeasance of, or any scheduled sinking fund payment
on, such Junior Indebtedness or Pari Passu Indebtedness.
"Savings Banks" mean First Bank of Beverly Hills, F.S.B. and Girard
Savings Bank, F.S.B.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securitization Entity" means any pooling arrangement or entity
formed or originated for the purpose of holding, and/or issuing securities
representing interests in, one or more pools of mortgages, leases, credit card
receivables, home equity loan receivables, automobile loans, leases or
installment sales contracts, other consumer receivables, real estate owned or
other financial assets of the Company or any Subsidiary, and shall include,
without limitation, any partnership, limited liability company, liquidating
trust, grantor trust, owner trust, real estate mortgage investment conduit,
real estate investment trust or collateralized bond obligation.
"Significant Subsidiary" means, with respect to any Person, any
consolidated Subsidiary of such Person for which the net income of such
Subsidiary was more than 25% of the Consolidated Net Income of such Person in
both of the two prior fiscal years.
"Special Record Date" for the payment of any Defaulted Interest
means a date fixed by the Trustee pursuant to Section 3.8.
"Stated Maturity" when used with respect to any Indebtedness
(including, without limitation, the Notes) means the dates specified in the
instrument governing such Indebtedness as the fixed dates on which any
principal amount of such Indebtedness is due and payable (including, without
limitation, by reason of any required redemption, purchase, defeasance or
sinking fund payment) and, when used with respect to any installment of
interest on Indebtedness, means the date on which such installment is due and
payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting
power of Voting Stock thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof.
"Successor Company" has the meaning specified in Section 10.1.
"Tax Allocation Agreement" means the tax allocation agreement, dated
as of __________, 1996, by and among the Company and its Subsidiaries, without
regard to any amendments, supplements or other modifications thereof after the
date hereof.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable
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provisions of this Indenture, and thereafter "Trustee" shall mean or include
each Person who is then a Trustee hereunder, and if at any time there is more
than one such Person, "Trustee" as used with respect to the Notes shall mean
the Trustee with respect to the Notes.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.
"Unsecured Debt Coverage Ratio" means, with respect to any Person
for any period, the ratio of Consolidated EBITDA of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the Company incurs, assumes, guarantees or redeems any Indebtedness (including
any Indebtedness which constitutes Acquired Indebtedness) subsequent to the
commencement of the period for which the Unsecured Debt Coverage Ratio is
being calculated but prior to the event for which the calculation of the
Unsecured Debt Coverage Ratio is made (the "Calculation Date"), then the
Unsecured Debt Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, guarantee or redemption of Indebtedness, as if
the same had occurred at the beginning of the applicable four-quarter period,
including an assumption of investment returns at the rate equal to the higher
of the six-month Treasury bill rate or six-month LIBOR at the beginning of
such four-quarter period. For purposes of making the computation referred to
above, investments in the equity of, or other acquisitions or dispositions,
which constitute all or substantially all of an operating unit of a business
and discontinued operations (as determined in accordance with GAAP) that have
been made by the Company or any of its Subsidiaries, including all mergers,
consolidations and dispositions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be calculated on a pro forma basis assuming that all such investments,
acquisitions, dispositions, discontinued operations, mergers and
consolidations (and the reduction of any associated fixed charge obligations
and the change in Consolidated EBITDA resulting therefrom) had occurred on the
first day of the four-quarter period. If since the beginning of such period
any Person (that subsequently became a Subsidiary or was merged with or into
the Company or any Subsidiary since the beginning of such period) shall have
made any investment in the equity of, or other acquisition or disposition,
which constitutes all or substantially all of an operating unit of a business,
discontinued operation, merger or consolidation that would have required
adjustment pursuant to this definition, then the Unsecured Debt Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
investment, acquisition, disposition, discontinued operation, merger or
consolidation had occurred at the beginning of the applicable four-quarter
period. For purposes of this definition, whenever pro forma effect is to be
given to a transaction, the pro forma calculations shall be made in good faith
by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate
in effect on the Calculation Date had been the applicable rate for the entire
period. Interest on a Capital Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by a
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responsible financial or accounting officer of the Company to be the rate of
interest implicit in such Capital Lease Obligation in accordance with GAAP.
Interest on Indebtedness that may optionally be determined at an interest rate
based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rate, shall be deemed to have been based upon the rate
actually chosen, or, if none, then based upon such optional rate chosen as the
Company may designate.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president (but shall not include any assistant vice
president), whether or not designated by a number or a word or words added
before or after the title "vice president".
"Voting Stock" means Capital Stock of the class or classes of which
the holders have (i) in respect of a corporation, the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such corporation (irrespective of whether
or not at the time Capital Stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency) or (ii)
in respect of a partnership, the general voting power under ordinary
circumstances to elect the board of directors or other governing board of such
partnership or of the Person which is a general partner of such partnership.
"Wholly-Owned Subsidiary" means a Subsidiary all of the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company or another Wholly-Owned Subsidiary.
Section 1.2 Compliance Certificates and Opinions.
------------------------------------
Upon any application or request by the Company to the Trustee to
take any action under any provision of this Indenture, the Company shall
furnish to the Trustee such certificates and opinions as may be required under
the Trust Indenture Act. Each such certificate or opinion shall be given in
the form of an Officers' Certificate, if to be given by officers of the
Company, or an Opinion of Counsel, if to be given by counsel, and shall comply
with the requirements of the Trust Indenture Act and any other requirements
set forth in this Indenture.
Every certificate or opinion (other than the Officers' Certificate
delivered under Section 9.4 hereof) with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
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(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 1.3 Form of Documents Delivered to Trustee.
--------------------------------------
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and
one or more other such Persons as to other matters, and any such Person may
certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or opinion of counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Company
stating that the information with respect to such factual matters is in the
possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 1.4 Acts of Holders, Record Dates.
-----------------------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective upon action by the requisite percentage
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of Holders when such instrument or instruments are delivered to the Trustee
and, where it is hereby expressly required, to the Company. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Holders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.1) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section.
Without limiting the generality of the foregoing, a Holder,
including a Depositary that is a Holder of a Global Note, may make, give or
take, by a proxy, or proxies, duly appointed in writing, any request, demand,
authorization, direction, notice, consent, waiver or other action provided or
permitted in this Indenture to be made, given or taken by Holders, and a
Depositary that is a Holder of a Global Note may provide its proxy or proxies
to the beneficial owners of interest in any such Global Note.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual
signing such instrument or writing acknowledged to him the execution thereof.
Where such execution is by a signer acting in a capacity other than his
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority. The fact and date of the execution of any
such instrument or writing, or the authority of the Person executing the same,
may also be proved in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the Trust
Indenture Act, fix any day as the record date for the purpose of determining
the Holders of Notes entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote
on any action, authorized or permitted to be given or taken by Holders of
Notes. If not set by the Company prior to the first solicitation of a Holder
of Notes made by any Person in respect of any such action, or, in the case of
any such vote, prior to such vote, the record date for any such action or vote
shall be the 30th day (or, if later, the date of the most recent list of
Holders required to be provided pursuant to Section 7.1) prior to such first
solicitation or vote, as the case may be. With regard to any record date for
action to be taken by the Holders Notes, only the Holders of Notes on such
date (or their duly designated proxies) shall be entitled to give or take, or
vote on, the relevant action.
(d) The ownership of Notes shall be proved by the Note Register.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder
of the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Note.
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(f) Without limiting the foregoing, a Holder entitled hereunder to
give or take any action hereunder with regard to any particular Note may do so
with regard to all or any part of the principal amount of such Note or by one
or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any different part of such principal amount.
Section 1.5 Notices, Etc., to Trustee and Company.
-------------------------------------
Except as otherwise expressly provided herein, any request, demand,
authorization, direction, notice, consent, waiver or Act of Holders or other
document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing to
or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust
& Agency Group, or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to the Company addressed to
it at the address of the Company's principal office specified in the first
paragraph of this instrument or at any other address previously furnished in
writing to the Trustee by the Company, Attention: Lawrence A. Mendelsohn.
Section 1.6 Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice to Holders of any event,
such notice shall be sufficiently given (unless otherwise herein expressly
provided) if in writing and mailed, first-class postage prepaid, to each
Holder affected by such event, at his address as it appears in the Note
Register, not later than the latest date (if any), and not earlier than the
earliest date (if any), prescribed for the giving of such notice. In any case
where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Where
this Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not
be a condition precedent to the validity of any action taken in reliance upon
such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
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Section 1.7 Conflict with Trust Indenture Act.
---------------------------------
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act that is required under such Act to be a
part of and govern this Indenture, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act that may be so modified or excluded, the latter provision shall
be deemed to apply to this Indenture as so modified or to be excluded, as the
case may be.
Section 1.8 Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
Section 1.9 Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 1.10 Separability Clause.
-------------------
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
Section 1.11 Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than (a) the parties hereto and their successors
hereunder and (b) the Holders, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
Section 1.12 Governing Law; Choice of Forum.
------------------------------
(A) THIS INDENTURE AND THE NOTES WILL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION
OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
(b) THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF
NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY
OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS INDENTURE AND THE NOTES, AND IRREVOCABLY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF
THE AFORESAID COURTS. THE
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COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO
UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH
COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(c) The Company hereby irrevocably appoints CT Corporation Systems
(the "Process Agent," which has consented thereto) with offices on the date
-------------
hereof at 1633 Broadway, New York, New York 10019, as Process Agent to receive
for and on behalf of the Company service of process in the County of New York
relating to this Indenture and the Notes. SERVICE OF PROCESS IN ANY suit,
ACTION OR PROCEEDING AGAINST THE COMPANY MAY BE MADE ON THE PROCESS AGENT BY
REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY ANY OTHER METHOD
OF SERVICE PROVIDED FOR UNDER APPLICABLE LAWS IN EFFECT IN THE STATE OF NEW
YORK, AND THE PROCESS AGENT IS HEREBY AUTHORIZED AND DIRECTED TO ACCEPT SUCH
SERVICE FOR AND ON BEHALF OF the company AND TO ADMIT SERVICE WITH RESPECT
THERETO. SUCH SERVICE UPON THE PROCESS AGENT SHALL BE DEEMED EFFECTIVE
PERSONAL SERVICE ON THE COMPANY, SUFFICIENT FOR PERSONAL JURISDICTION, 10 DAYS
AFTER MAILING, AND SHALL BE LEGAL AND BINDING UPON THE COMPANY FOR ALL
PURPOSES, NOTWITHSTANDING ANY FAILURE OF THE PROCESS AGENT TO MAIL COPIES OF
SUCH LEGAL PROCESS TO THE COMPANY OR ANY FAILURE ON THE PART OF THE COMPANY TO
RECEIVE THE SAME. The Company confirms that it has instructed the Process
Agent to mail to the Company, upon service of process being made on the
Process Agent pursuant to this Section, a copy of the summons and complaint or
other legal process served upon it, by registered mail, return receipt
requested, at the Company's address set forth in the first paragraph of this
instrument, or to such other address as the Company may notify the Process
Agent in writing. The Company agrees that it will at all times maintain a
process agent to receive service of process in the County of New York on its
behalf with respect to this Indenture and the Notes. If for any reason the
Process Agent or any successor thereto shall no longer serve as such process
agent or shall have changed its address without notification thereof to the
Trustee, the Company, immediately after gaining knowledge thereof, irrevocably
shall appoint a substitute process agent acceptable to the Trustee in the
County of New York and advise the Trustee thereof or notify the Trustee of the
new address, respectively.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY
HOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER
JURISDICTION.
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Section 1.13 Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date or
Stated Maturity of any Note shall not be a Business Day at any Place of
Payment, then (notwithstanding any other provision of this Indenture or of the
Notes (other than a provision of the Notes which specifically states that such
provision shall apply in lieu of this Section)) payment of interest or
principal (and premium, if any) need not be made at such Place of Payment on
such date, but may be made on the next succeeding Business Day at such Place
of Payment with the same force and effect as if made on the Interest Payment
Date or Redemption Date, or at the Stated Maturity, provided that no interest
shall accrue with respect to such payment for the period from and after such
Interest Payment Date, Redemption Date or Stated Maturity, as the case may be.
ARTICLE TWO
NOTE FORMS
Section 2.1 Forms Generally.
---------------
The Notes shall be in substantially the form set forth in this
Article, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Notes, as evidenced by their execution of the Notes.
The definitive Notes shall be printed, lithographed or engraved on
steel engraved borders or may be produced in any other manner, all as
determined by the officers of the Company executing such Notes, as evidenced
by their execution of such Notes.
Section 2.2 Form of Face of Note.
--------------------
THIS NOTE IS NOT A SAVINGS ACCOUNT OR SAVINGS DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, ANY OTHER
GOVERNMENTAL AGENCY OR OTHERWISE.
WILSHIRE FINANCIAL SERVICES GROUP INC.
......% Notes Due 2003
No......... ..........$
Wilshire Financial Services Group Inc., a corporation duly organized
and existing under the laws of Delaware (herein called the "Company", which
term includes any
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Successor Company under the Indenture hereinafter referred to), for value
received, hereby promises to pay to .........................., or registered
assigns, the principal sum of ....................... Dollars on
..........................., 2003, and to pay interest thereon from
.........., 1996 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semi-annually in arrears on
................. and .................. in each year, commencing
................, 1997, at the rate of ......% per annum, until the principal
hereof is paid or made available for payment, and at the rate of 1% over the
rate set forth above per annum on any overdue principal and (to the extent
that the payment of such interest shall be legally enforceable) on any overdue
installment of interest. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the Regular
Record Date for such interest, which shall be the ............... or
................ (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of business
on a Special Record Date for the payment of such Defaulted Interest to be
fixed by the Trustee, notice whereof shall be given to Holders of Notes not
less than 10 days prior to such Special Record Date, or be paid at any time in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said
Indenture.
All payments of principal (and premium, if any) and interest on this
Notes shall be made by the Company in immediately available funds; provided,
however, that should, in accordance with the terms of the Indenture,
principal, premium, if any, or interest on the Notes not be paid in
immediately available funds, such payment may be paid by check drawn on a bank
in The City of New York and mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register. Payment of the
principal of (and premium, if any) and interest on this Note will be made at
the office or agency of the Company maintained for that purpose in The City of
New York, Borough of Manhattan, in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
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IN WITNESS WHEREOF, the Company has caused this in strument to be
duly executed under its corporate seal.
Dated:
WILSHIRE FINANCIAL SERVICES GROUP INC.
By....................................
Attest:
........................
Section 2.3 Form of Reverse of Note.
-----------------------
This Note is one of a duly authorized issue of the Company (herein
called the "Notes"), issued under an Indenture, dated as of December ___, 1996
(herein called the "Indenture"), between the Company and Bankers Trust
Company, as Trustee (herein called the "Trustee", which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee and the Holders of the Notes and of the terms upon
which the Notes are, and are to be, authenticated and delivered. This Note is
one of the Notes designated on the face hereof, limited in aggregate principal
amount up to $69,000,000.
The Notes may not be redeemed prior to ................., 2001
except as set forth herein. On or after such date, the Notes may be redeemed
upon not less than 30 days' and not more than 60 days' notice by mail, at any
time on or after ................., 2001, as a whole or in part, at the
election of the Company, at the following Redemption Prices (expressed as
percentages of the principal amount): If redeemed during the 12-month period
beginning .................... of the years indicated,
Redemption
Year Price
---- ----------
2001 .......%
2002 .......%
, together in the case of any such redemption with accrued and unpaid interest
to the Redemption Date, but interest installments whose Stated Maturity is on
or prior to such Redemption Date will be payable to the Holders of such Notes,
or one or more Predecessor
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<PAGE>
Notes, of record at the close of business on the relevant Regular Record Dates
referred to on the face hereof, all as provided in the Indenture.
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Notes at any time and from time to
time prior to ..............................., 2001, with the Net Cash
Proceeds received by the Company from one or more public or private sales of
Qualified Capital Stock at a Redemption Price of ......% of the principal
amount of the Notes to be redeemed, plus accrued and unpaid interest thereon;
provided, however, that at least 65% of the original aggregate principal
amount of Notes must remain outstanding after each such redemption; and
provided, further, that such redemption must occur within 60 days after the
closing date of any such public or private sale of Qualified Capital Stock.
In the event of redemption of this Note in part only, a new Note or
Notes of like tenor for the unredeemed portion hereof will be issued in the
name of the Holder hereof upon the cancellation hereof.
Upon a Change of Control Event, the Holder of this Note will have
the right to cause the Company to repurchase all or any part of this Note at a
repurchase price equal to 101% of the principal amount of this Note plus
accrued interest to the date of purchase (subject to the right of the Holders
on the relevant Regular Record Date to receive interest due on the relevant
Interest Payment Date) as provided in, and subject to the terms of, the
Indenture.
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness evidenced by this Note and (b) certain restrictive
covenants, in each case upon compliance by the Company with certain conditions
set forth therein, which provisions apply to this Note.
If an Event of Default with respect to Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of
the Company and the rights of the Holders of the Notes to be affected under
the Indenture at any time by the Company and the Trustee with the consent of
the Holders of a majority in principal amount of the Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in principal amount of the Notes at the time
Outstanding, on behalf of the Holders of all Notes, to waive certain past
defaults under the Indenture and their consequences. Any such consent or
waiver shall be conclusive and binding upon the Holder of this Note and upon
all future Holders of this Note and of any Note issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Note.
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No reference herein to the Indenture and no provision of this Note
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and any premium and
interest on this Note at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable in the Note
Register, upon surrender of this Note for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Note are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Note Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Notes of
like tenor, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like aggregate principal amount of Notes of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
Section 2.4 Form of Legend for Global Notes.
-------------------------------
Any Global Note authenticated and delivered hereunder shall bear a
legend in substantially the following form:
"This Note is a Global Note within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee thereof. This Note may not be transferred to, or registered or
exchanged for Notes registered in the name of, any Person other than the
Depositary or a nominee thereof or a successor of such Depositary or a nominee
of such successor and no such transfer may be registered, except in the
limited circumstances described in the Indenture. Every Note authenticated
and delivered upon
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registration of transfer of, or in exchange for or in lieu of, this Note shall
be a Global Note subject to the foregoing, except in such limited
circumstances."
Section 2.5 Form of Trustee's Certificate of Authentication.
-----------------------------------------------
The Trustee's certificates of authentication shall be in
substantially the following form:
This is one of the Notes designated and referred to in the within-
mentioned Indenture.
BANKERS TRUST COMPANY, as Trustee
By
-----------------------------------
Authorized Officer
Section 2.6 Form of Assignment and Election to Purchase. Each Note
-------------------------------------------
shall include the following form of Assignment and Option of Holder to Elect
Purchase:
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED _________________ hereby sells, assigns and
transfers unto _____________________________________________________.
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
(Please print name and address of transferee)
this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint ___________________ Attorney to transfer
this Note on the Note Register, with full power of substitution.
Dated:
Signature of Holder Signature Guaranteed:
NOTICE: The signature to the foregoing Assignment must correspond to the name
as written upon the face of this Note in every particular, without alteration
or any change whatsoever.
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
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[ ] In connection with the Change of Control Purchase Offer made pursuant to
Section 9.16 of the Indenture, the undersigned hereby elects to have the
[ ] entire principal amount
[ ] $ _______________ ($1,000 in principal amount or an integral multiple
thereof) principal amount of this Note repurchased by the Company. The
undersigned hereby directs the Trustee or Paying Agent to pay it an
amount in cash equal to 101% of the principal amount indicated in the
preceding sentence plus accrued and unpaid interest on such principal
amount to the date of purchase.
Dated:
Signature of Holder Signature Guaranteed:
NOTICE: The signature to the foregoing must correspond to the name as written
upon the face of this Note in every particular, without alteration or any
change whatsoever.
ARTICLE THREE
THE NOTES
Section 3.1 Global Note; Depositary.
-----------------------
The Notes will initially be issued in the form of one or more Global
Notes. Each Global Note will be deposited on the Issue Date with The
Depository Trust Company or any successor thereto (the "Depositary"), or the
Trustee on its behalf, and registered in the name of the Depositary's nominee,
as nominee of the Depositary (such nominee being referred to herein as the
"Global Note Holder").
Section 3.2 Amount.
------
The aggregate principal amount of Notes which may be authenticated
and delivered under this Indenture is up to $86,250,000.00 (Eighty-Six Million
Two Hundred Fifty Thousand Dollars and No Cents), except as for Notes
authenticated and delivered pursuant to Section 3.5, 3.6, 3.7, 9.16 or 11.7.
Section 3.3 Denominations.
-------------
The Notes shall be issuable in registered form without coupons in
denominations of $1,000 and any integral multiple thereof.
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Section 3.4 Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Notes shall be executed on behalf of the Company by its Chairman
of the Board, its Vice Chairman of the Board, its Chief Executive Officer, its
President or one of its Vice Presidents, under its corporate seal, if any,
reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Notes may be
manual or facsimile.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery
of this Indenture, the Company may deliver Notes executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Notes, and the Trustee in accordance with
the Company Order shall authenticate and deliver such Notes.
Each Note shall be dated the date of its authentication.
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Trustee or an Authenticating Agent by manual signature of an
authorized officer of the Trustee or an Authenticating Agent, and such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered hereunder.
Notwithstanding the foregoing, if any Note shall have been authenticated and
delivered hereunder but never issued and sold by the Company, and the Company
shall deliver such Note to the Trustee for cancellation as provided in Section
3.10, for all purposes of this Indenture such Note shall be deemed never to
have been authenticated and delivered hereunder and shall never be entitled to
the benefits of this Indenture.
Section 3.5 Temporary Notes.
---------------
Pending the preparation of definitive Notes, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Notes which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Notes in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Notes may determine, as evidenced by their execution
of such Notes.
If temporary Notes are issued, the Company will cause definitive
Notes to be prepared without unreasonable delay. After the preparation of
definitive Notes, the temporary Notes shall be exchangeable for definitive
Notes upon surrender of the temporary Notes at the
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office or agency of the Company in a Place of Payment, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Notes the
Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor one or more definitive Notes of any authorized denominations
and of a like aggregate principal amount and tenor. Until so exchanged the
temporary Notes shall in all respects be entitled to the same benefits under
this Indenture as definitive Notes of such tenor.
Section 3.6 Capital Registration; Registration of Transfer and
--------------------------------------------------
Exchange.
--------
The Company shall cause to be kept at the Corporate Trust Office a
register (the register maintained in such office being herein sometimes
collectively referred to as the "Note Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Notes and of transfers of Notes. The Trustee is hereby
appointed "Note Registrar" for the purpose of registering Notes and transfers
of Notes as herein provided.
Upon surrender for registration of transfer of any Note at the
office or agency in a Place of Payment, the Company shall execute, and the
Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Notes of any authorized
denominations and of a like aggregate principal amount and tenor.
At the option of the Holder, Notes may be exchanged for other Notes
of any authorized denominations and of a like aggregate principal amount and
tenor, upon surrender of the Notes to be exchanged at such office or agency.
Whenever any Notes are so surrendered for exchange, the Company shall execute,
and the Trustee shall authenticate and deliver, the Notes which the Holder
making the exchange is entitled to receive.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Notes
surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Notes, other than exchanges
pursuant to Section 3.5, 9.16 or 11.7 not involving any transfer.
33
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The Company shall not be required (i) to issue, register the
transfer of or exchange Notes during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 11.3 and ending at the close of
business on the day of such mailing or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
Section 3.7 Mutilated, Destroyed, Lost and Stolen Notes.
-------------------------------------------
If any mutilated Note is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Note of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Note
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice
to the Company or the Trustee that such Note has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Note, a new Note of
like tenor and principal amount and bearing a number not contemporaneously
outstanding.
In case any such mutilated, destroyed, lost or stolen Note has
become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled
to all the benefits of this Indenture equally and proportionately with any and
all other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.8 Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest on any Note which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Note (or one or more Predecessor Notes) is registered at the
close of business on the Regular Record
34
<PAGE>
Date for such interest. All payments of interest on any Notes shall be made by
the Company in immediately available funds; provided, however, that should, in
accordance with the terms of the Indenture, interest on the Notes not be paid
in immediately available funds, such payment may be paid by check drawn on a
bank in The City of New York and mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.
Any interest on any Note which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case,
as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Note and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid
in respect of such Defaulted Interest or shall make arrangements satisfactory
to the Trustee for such deposit prior to the date of the proposed payment,
such money when deposited to be held in trust for the benefit of the Persons
entitled to such Defaulted Interest as in this clause provided. Thereupon the
Trustee shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 days and not less than 7 days prior
to the date of the proposed payment and not less than 7 days after the receipt
by the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the name and
at the expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to be mailed,
first-class postage prepaid, to each Holder of Notes at its address as it
appears in the Note Register, not less than 10 days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor having been so mailed, such Defaulted Interest
shall be paid to the Persons in whose names the Notes (or their respective
Predecessor Notes) are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following clause
(2).
(2) The Company may make payment of any Defaulted Interest on the
Notes in any other lawful manner not inconsistent with the requirements of any
securities exchange on which such Notes may be listed, and upon such notice as
may be required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Note.
35
<PAGE>
Section 3.9 Persons Deemed Owners.
---------------------
Prior to due presentment of a Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Note is registered as the owner of such Note for the
purpose of receiving payment of principal of and any premium and (subject to
Section 3.8) any interest on such Note and for all other purposes whatsoever,
whether or not such Note be overdue, and neither the Company, the Trustee nor
any agent of the Company or the Trustee shall be affected by notice to the
contrary.
So long as the Global Note Holder is the registered owner of any
Notes, the Global Note Holder will be considered the sole Holder under this
Indenture of any Notes evidenced by the Global Note for the purposes of
receiving payment on the Notes, receiving notices, and for all other purposes
under this Indenture and the Notes. Beneficial owners of Notes evidenced by
the Global Note will not be considered the owners or Holders thereof under
this Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
Section 3.10 Cancellation.
------------
All Notes surrendered for payment, redemption or registration of
transfer or exchange shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee and shall be promptly canceled by it.
The Company may at any time deliver to the Trustee for cancellation any Notes
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and may deliver to the Trustee (or to any
other Person for delivery to the Trustee) for cancellation any Notes
previously authenticated hereunder which the Company has not issued and sold,
and all Notes so delivered shall be promptly canceled by the Trustee. No Notes
shall be authenticated in lieu of or in exchange for any Notes canceled as
provided in this Section, except as expressly permitted by this Indenture. All
canceled Notes held by the Trustee shall be destroyed and the Trustee shall
deliver to the Company a certificate with respect to such destruction.
Section 3.11 Computation of Interest.
-----------------------
Interest on the Notes shall be computed on the basis of a 360-day
year of twelve 30-day months.
36
<PAGE>
ARTICLE FOUR
BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES
Section 4.1 Applicability of Article.
------------------------
Each Global Note shall be subject to this Article Four.
Section 4.2 Book-Entry Provisions For Global Note.
-------------------------------------
(a) Members of, or participants in, the Depositary ("Agent Members")
-------------
shall have no rights under this Indenture with respect to any Global Note held
on their behalf by the Depositary or under the Global Note, and the Depositary
may be treated by the Company, the Trustee and any agent of the Company or the
Trustee as the absolute owner of the Global Note for all purposes whatsoever.
Any Holder of the Global Note shall, by acceptance of such Global Note, agree
that the transfers of beneficial interests in such Global Note may be effected
only through a book-entry system maintained by the Depositary (or its agent),
and that ownership of a beneficial interest in the Global Note shall be
required to be reflected in a book-entry system. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or an agent
of the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Agent Members, the operation of customary practices
governing the exercise of the rights of a Holder of any Note.
(b) Notwithstanding any other provision of this Section, unless and
until it is exchanged in whole or in part for individual Notes represented
thereby, a Global Note representing all or a portion of the Notes may not be
transferred except as a whole by the Depositary to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary. Interests of
beneficial owners in the Global Notes (each an "Interest") may be transferred
--------
to one beneficial owner or to another Agent Member or exchanged for definitive
Notes in accordance with the rules and procedures of the Depositary and the
provisions of this Indenture. In addition, definitive Notes shall be
transferred to all beneficial owners in exchange for their beneficial
interests in Global Notes if (i) the Depositary for the Notes notifies the
Company that the Depositary is unwilling or unable to continue as Depositary
for the Global Notes or is no longer eligible to serve as Depositary pursuant
to the terms of this Indenture and a successor Depositary is not appointed by
the Company within 90 days after delivery of such notice; (ii) the Company, at
its sole discretion, notifies the Trustee in writing that it elects to cause
the issuance of definitive Notes under this Indenture; or (iii) there shall
have occurred and be continuing a Default or an Event of Default with respect
to any Notes represented by the Global Notes; and the Trustee shall, upon
receipt of a Company Order in accordance with Section 3.4, authenticate and
deliver, definitive Notes in an aggregate principal amount equal to the
principal amount of the Global Notes in exchange for such Global Notes. If
specified
37
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by the Company pursuant to Section 3.4, the Depositary may surrender a Global
Note in exchange in whole or in part for Notes of like tenor and terms and in
definitive form on such terms as are acceptable to the Company, the Trustee
and the Depositary.
(c) In connection with the transfer of Global Notes to beneficial
owners pursuant to the third sentence of paragraph (b) of this Section, the
Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute and the Trustee upon receipt of a
Company Order for the authentication and delivery of definitive Notes shall
authenticate and deliver, without service charge:
(i) to the Depositary or to each Person specified by such Depositary
a new Note or Notes of like tenor and terms and of any authorized
denomination as requested by such Person in aggregate principal amount
equal to and in exchange for such Person's beneficial interest in the
Global Note; and
(ii) to such Depositary a new Global Note of like tenor and terms
and in an authorized denomination equal to the difference, if any, between
the principal amount of the surrendered Global Note and the aggregate
principal amount of Notes delivered to Holders thereof.
Notwithstanding any other provision of this Indenture, any Note
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, any Global Note shall also be a Global Note and shall bear
the legend specified in Section 2.4 except for any Note authenticated and
delivered in exchange for, or upon registration of transfer of, a Global Note
pursuant to the preceding sentence.
(d) The Holder of any Global Note may grant proxies and otherwise
authorize any person, including Agent Members and persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
(e) Upon the exchange of a Global Note in its entirety for Notes in
definitive form, such Global Note shall be canceled by the Trustee.
(f) Notwithstanding anything herein to the contrary, if at any time
the Depositary for the Notes notifies the Company that it is unwilling or
unable to continue as a Depositary for the Notes or if at any time the
Depositary for the Notes shall no longer be registered or in good standing
under the Exchange Act, or other applicable statute or regulation, the Company
shall appoint a successor Depositary with respect to the Notes. If a
successor Depositary for the Notes is not appointed by the Company within 90
days after the Company receives such notice or becomes aware of such
condition, the Company will execute, and the Trustee, upon Company Request,
will authenticate and deliver Notes in definitive form in an aggregate
principal amount equal to the principal amount of the Global Note or Global
Notes representing Notes in exchange for such Global Note or Global Notes.
38
<PAGE>
ARTICLE FIVE
REMEDIES
Section 5.1 Events of Default.
-----------------
An "Event of Default" as used herein is any one of the following:
(a) failure by the Company to pay interest on any Note when due and
payable, if such failure continues for a period of 30 days;
(b) failure by the Company to pay principal on any Note when due and
payable at Stated Maturity or upon redemption, acceleration or otherwise;
(c) failure by the Company to comply with any other agreement or
covenant contained in this Indenture (other than a default specified in clause
(a) or (b) above) if such failure continues for a period of 30 days after
notice to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in principal amount of the Notes then Outstanding;
(d) Indebtedness of the Company or any Subsidiary of the Company is
not paid within any applicable grace period after final maturity or in the
event that final maturity is accelerated because of a default and, in either
case where the aggregate principal amount of such Indebtedness so unpaid or
accelerated is equal to or greater than 5% of the Company's Consolidated Net
Worth at the quarter end preceding the end of such grace period or such
acceleration;
(e) failure by, as the case may be, either or both of the Savings
Banks to comply with any of their Regulatory Capital Requirements; provided,
that an Event of Default under this clause (e) shall not be deemed to have
occurred (i) during the 60 day period following the first day on which either
or both of the Savings Banks, as the case may be, fails or fail to comply with
any of their Regulatory Capital Requirements, if within such 60 day period the
Savings Bank or the Savings Banks files or file a capital plan or plans with
the OTS, (ii) during the 90 day period following the initial submission of a
capital plan or plans to the OTS by either or both of the Savings Banks, as
the case may be, (or, if the OTS notifies the Savings Bank or Savings Banks in
writing that it needs a longer period of time to determine whether to approve
such capital plan or plans, such longer period as is so specified by the OTS),
unless prior to such date the OTS shall have notified the Savings Bank or
Savings Banks of its determination not to approve such capital plan or plans,
or (iii) during the period that the Savings Bank is, or the Savings Banks are,
as the case may be, operating in material compliance with a capital plan or
plans approved by the OTS;
(f) existence of one or more judgments against the Company or either
of the Savings Banks or any of their Subsidiaries, which remain undischarged
60 days after all rights to directly review such judgment, whether by appeal
or writ, have been exhausted or
39
<PAGE>
have expired, in excess, either individually or in the aggregate, of 5% of the
Company's Consolidated Net Worth as of the quarter end preceding the end of
such 60-day period,; or
(g) a receiver, liquidator, assignee, custodian, trustee,
conservator, sequestrator (or other similar official) shall take possession of
the Company or any Significant Subsidiary or any substantial part of the
property of the Company or any Significant Subsidiary without the consent of
the Company or such Significant Subsidiary, respectively, or a court having
jurisdiction in the premises shall enter a decree or order for relief in
respect of the Company or such Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency, receivership, conservatorship or
other similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, trustee, custodian, conservator, sequestrator (or other
similar official) of the Company or the Significant Subsidiary or for any
substantial part of the property of the Company or the Significant Subsidiary,
or ordering the winding-up or liquidation of the affairs of the Company or the
Subsidiary, and such decree or order shall continue unstayed and in effect for
a period of 60 consecutive days, or the Company or the Significant Subsidiary
shall commence a voluntary case under any applicable bankruptcy, insolvency,
receivership, conservatorship or other similar law now or hereafter in effect,
or shall consent to the entry of an order for relief in an involuntary case
under any such law, or shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian,
conservator, sequestrator (or other similar official) of the Company or the
Significant Subsidiary or of any substantial part of the property of the
Company or the Significant Subsidiary, or shall make any general assignment
for the benefit of creditors, or shall take any corporate action in
furtherance of any of the foregoing.
Section 5.2 Acceleration of Maturity;
-------------------------
Rescission and Annulment.
------------------------
If an Event of Default (other than an Event of Default specified in
clause (g) of Section 5.1) occurs and is continuing, then in every such case
the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Notes may declare the principal amount of all of the Notes to be
due and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by Holders), and upon any such declaration such principal
amount shall become immediately due and payable. If any Event of Default
specified in clause (g) of Section 5.1 occurs, the principal amount of all of
the Notes shall automatically become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
At any time after such a declaration of acceleration with respect to
Notes has been made and before a judgment or decree for payment of the money
due has been obtained by the Trustee as hereinafter in this Article provided,
the Holders of a majority in principal amount of the Outstanding Notes, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
40
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(A) all overdue interest on all Notes,
(B) the principal of (and premium, if any, on) any Notes which have
become due otherwise than by such declaration of acceleration and any interest
thereon at the rate or rates prescribed therefor in such Notes,
(C) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate or rates prescribed therefor in such Notes,
and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable, expenses, disbursements and advances of the Trustee's agents and
counsel;
and
(2) all Events of Default with respect to Notes, other than the non-
payment of the principal of Notes which have become due solely by such
declaration of acceleration, have been cured or waived as provided in Section
5.13.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Section 5.3 Collection of Indebtedness and Suits
------------------------------------
for Enforcement by Trustee.
--------------------------
The Company covenants that if
(1) default is made in the payment of any interest on any Note when
such interest becomes due and payable and such default continues for a period
of 30 days, or
(2) default is made in the payment of the principal of (or premium,
if any, on) any Note at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, for the
benefit of the Holders of such Notes, the whole amount then due and payable on
such Notes for principal and any premium and interest and, to the extent that
payment of such interest shall be legally enforceable, interest on any overdue
principal and premium and on any overdue interest, at the rate or rates
prescribed therefor in such Notes, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable expenses, disbursements and advances of the Trustee's
agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may (or, at
the direction of Holders of not less than 25% of the Outstanding Notes shall),
in addition to any other remedies available to it, institute a judicial
proceeding for the collection of the sums so due and unpaid and may prosecute
such proceeding to judgment or final decree, and may enforce the same against
the Company or any other obligor upon the Notes and collect the moneys
41
<PAGE>
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon the Notes, wherever
situated.
If an Event of Default with respect to Notes occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders of Notes by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce
any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
Section 5.4 Trustee May File Proofs of Claim.
--------------------------------
In case of any judicial proceeding relative to the Company (or any
other obligor upon the Notes), its property or its creditors, the Trustee
shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture
Act in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay the reasonable expenses,
disbursements and advances of the Trustee's agents and counsel, and any other
amounts due the Trustee under Section 6.7.
No provision of this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting
the Notes or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding; provided,
however, the Trustee may vote on behalf of the Holders for the election of a
trustee in bankruptcy or similar official and may be a member of a creditors'
or other similar committee.
Section 5.5 Trustee May Enforce Claims Without
----------------------------------
Possession of Notes.
-------------------
All rights of action and claims under this Indenture or the Notes
may be prosecuted and enforced by the Trustee without the possession of any of
the Notes or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable expenses, disbursements and
advances of the Trustee's agents and counsel, be for the ratable benefit of
the Holders of the Notes in respect of which such judgment has been recovered.
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Section 5.6 Application of Money Collected.
------------------------------
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or any
premium or interest, upon presentation of the Notes and the notation thereon
of the payment if only partially paid and upon surrender thereof if fully
paid:
FIRST: To the payment of all amounts due the Trustee under Section
6.7; and
SECOND: To the payment of the amounts then due and unpaid for
principal of and any premium and interest on the Notes in respect of which or
for the benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the amounts due and payable
on such Notes for principal and any premium and interest, respectively.
Section 5.7 Limitation on Suits.
-------------------
No Holder of any Note shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder,
unless
(1) such Holder has previously given written notice to the Trustee
of a continuing Event of Default with respect to the Notes;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Notes shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee
hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding;
and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Notes;
it being understood and intended that no one or more of such Holders shall
have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other of such Holders, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all of such Holders.
43
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Section 5.8 Unconditional Right of Holders to
---------------------------------
Receive Principal, Premium and Interest.
---------------------------------------
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
payment of the principal of and any premium and (subject to Section 3.8) any
interest on such Note on the Stated Maturity or maturities expressed in such
Note (or, in the case of redemption, on the Redemption Date), and to institute
suit for the enforcement of any such payment, and such rights shall not be
impaired without the consent of such Holder.
Section 5.9 Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders
shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the
Holders shall continue as though no such proceeding had been instituted.
Section 5.10 Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 3.7, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.
Section 5.11 Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder of any Notes to
exercise any right or remedy accruing upon any Default shall impair any such
right or remedy or constitute a waiver of any such Default or an acquiescence
therein. Every right and remedy given by this Article or by law to the Trustee
or to the Holders may be exercised from time to time, and as often as may be
deemed expedient, by the Trustee or by the Holders, as the case may be.
Section 5.12 Control by Holders.
------------------
The Holders of a majority in principal amount of the Outstanding
Notes shall have the right to direct the time, method and place of conducting
any proceeding for any
44
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remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, with respect to the Notes, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) subject to the provisions of Section 6.1, the Trustee shall have
the right to decline to follow any such direction if the Trustee in good faith
shall, by a Responsible Officer or Officers of the Trustee, determine that the
proceeding so directed would involve the Trustee in personal liability.
Section 5.13 Waiver of Past Defaults.
-----------------------
The Holders of not less than a majority in principal amount of the
Outstanding Notes may on behalf of the Holders of all the Notes waive any past
default hereunder and its consequences, except a default
(1) in the payment of the principal of or any premium or interest on
any Note, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected.
Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
Section 5.14 Undertaking for Costs.
---------------------
The parties to this Indenture agree, and each Holder of any Notes by
his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may
in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in
principal amount of the Outstanding Notes, or to any suit instituted by any
Holder for the enforcement of the payment of the principal of (or premium, if
any) or interest on any Notes
45
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on or after the Stated Maturity or maturities expressed in such Notes (or, in
the case of redemption, on or after the Redemption Date).
Section 5.15 Waiver of Usury, Stay or Extension Laws.
---------------------------------------
The Company covenants (to the extent that it may lawfully do so)
that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any usury, stay or
extension law wherever enacted, now or at any time hereafter in force, which
may affect the covenants or the performance of this Indenture; and the Company
(to the extent that it may lawfully do so) hereby expressly waives all benefit
or advantage of any such law and covenants that it will not hinder, delay or
impede the execution of any power herein granted to the Trustee, but will
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE SIX
THE TRUSTEE
Section 6.1 Certain Duties and Responsibilities.
-----------------------------------
The duties and responsibilities of the Trustee shall be as provided
by the Trust Indenture Act. Whether or not therein expressly so provided,
every provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject to the
provisions of this Section. If an Event of Default occurs (and is not cured),
the Trustee, in the exercise of its power, must use the degree of care of a
prudent man in the conduct of his own affairs. Subject to the requirement in
the foregoing sentence, the Trustee is under no obligation to exercise any of
its rights or powers under this Indenture at the request of any Holder, unless
such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of this Indenture.
Except during the continuance of an Event of Default, (i) the
Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and (ii) in
the absence of bad faith on its part, the Trustee may conclusively rely, as to
the truth of the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the Trustee and conforming
to the requirements of this Indenture.
The Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer of the Trustee, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts. The
Trustee shall not be liable with respect to any action taken or omitted to be
taken by it in good faith in accordance with the direction of the Holders or a
majority in principal amount of the Outstanding Notes relating to the time,
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method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust power conferred upon the Trustee, under this
Indenture.
Section 6.2 Notice of Defaults.
------------------
If a Default occurs and is continuing and is known to a Responsible
Officer of the Trustee, the Trustee shall mail to each Holder notice of the
Default as to and to the extent provided in the Trust Indenture Act. Except in
the case of a Default in the payment of principal of, premium, if any, or
interest on any Note, the Trustee may withhold notice if and so long as the
board of directors, the executive committee or a trust committee of directors
and/or Responsible Officers of the Trustee determines that withholding notice
is in the interest of the Holders.
Section 6.3 Certain Rights of Trustee.
-------------------------
Subject to the provisions of Section 6.1:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors of the Company may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith
on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction;
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document,
but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or
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investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;
(h) the permissive rights of the Trustee to do things enumerated in
this Indenture shall not be construed as a duty, and the Trustee shall not be
answerable for other than its negligent action, negligent omission or its
willful misconduct; and
(i) the Trustee shall not be charged with knowledge of any Event of
Default under Section 5 (other than an Event of Default under Section 5.1(a)
or (b) if the Trustee is also the Paying Agent with respect to the Notes)
hereof unless either (1) a Responsible Officer of the Trustee shall have
actual knowledge thereof or (2) the Trustee shall have received notice thereof
in accordance with Section 1.5 hereof from the Company or a Holder.
Section 6.4 Not Responsible for Recitals or Issuance of Notes.
-------------------------------------------------
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the
Company, and the Trustee or any Authenticating Agent assumes no responsibility
for their correctness. The Trustee makes no representations as to the
validity or sufficiency of this Indenture or of the Notes. The Trustee or any
Authenticating Agent shall not be accountable for the use or application by
the Company of Notes or the proceeds thereof.
Section 6.5 May Hold Notes.
--------------
The Trustee, any Authenticating Agent, any Paying Agent, any Note
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Notes and, subject to Sections
6.8 and 6.13, may otherwise deal with the Company with the same rights it
would have if it were not Trustee, Authenticating Agent, Paying Agent, Note
Registrar or such other agent.
Section 6.6 Money Held in Trust.
-------------------
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except
as otherwise agreed with the Company.
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Section 6.7 Compensation and Reimbursement.
------------------------------
The Company agrees:
(1) to pay to the Trustee reasonable compensation as from time to
time agreed with the Trustee for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
this Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad faith;
(3) to indemnify the Trustee for, and to hold it harmless against,
any loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the trust or trusts hereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder;
(4) to secure the Company's obligations under this Section, the
Trustee shall have a lien prior to the Notes upon all money or property held
or collected by the Trustee in its capacity as Trustee, except for such money
and property which is held in trust to pay principal (and premium, if any) or
interest on particular Notes;
(5) when the Trustee incurs any expenses or renders any services
after the occurrence of an Event of Default specified in Section 5.1(g), such
expenses and the compensation for such services are intended to constitute
expenses of administration under the Bankruptcy Code or any similar federal or
state law for the relief of debtors; and
(6) that the provisions of this Section 6.7 shall survive the
appointment of a successor trustee.
Section 6.8 Disqualification; Conflicting Interests.
---------------------------------------
If the Trustee has or shall acquire a conflicting interest within
the meaning of the Trust Indenture Act, the Trustee shall either eliminate
such interest or resign, to the extent and in the manner provided by, and
subject to the provisions of, the Trust Indenture Act and this Indenture.
Section 6.9 Corporate Trustee Required; Eligibility.
---------------------------------------
There shall at all times be a Trustee hereunder which shall be a
Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $50,000,000. If such Person
publishes reports of condition at least
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<PAGE>
annually, pursuant to law or to the requirements of its supervising or
examining authority, then for the purposes of this Section, the combined
capital and surplus of such Person shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published.
If at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect hereinafter specified in this Article.
Section 6.10 Resignation and Removal;
------------------------
Appointment of Successor.
------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.11.
(b) The Trustee may resign at any time with respect to the Notes by
giving written notice thereof to the Company. If the instrument of acceptance
by a successor Trustee required by Section 6.11 shall not have been delivered
to the Trustee within 30 days after the giving of such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Notes.
(c) The Trustee may be removed at any time with respect to the Notes
by Act of the Holders of a majority in principal amount of the Outstanding
Notes, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 6.8 after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Note for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.9 and
shall fail to resign after written request therefor by the Company or by any
such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or control
of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Notes, or (ii) subject to Section 5.14, any Holder
who has been a bona fide Holder of a Note for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee with respect to all
Notes and the appointment of a successor Trustee or Trustees.
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(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause,
the Company, by a Board Resolution, shall promptly appoint a successor Trustee
and shall comply with the applicable requirements of Section 6.11. If, within
one year after such resignation, removal or incapability, or the occurrence of
such vacancy, a successor Trustee shall be appointed by Act of the Holders of
a majority in principal amount of the Outstanding Notes delivered to the
Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment in accordance with the
applicable requirements of Section 6.11, become the successor Trustee and to
that extent supersede the successor Trustee appointed by the Company. If no
successor Trustee shall have been so appointed by the Company or the Holders
and accepted appointment in the manner required by Section 6.11, any Holder
who has been a bona fide Holder of a Note for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to all
Holders of Notes in the manner provided in Section 1.6. Each notice shall
include the name of the successor Trustee and the address of its Corporate
Trust Office.
Section 6.11 Acceptance of Appointment by Successor.
--------------------------------------
(a) In case of the appointment hereunder of a successor Trustee,
every such successor Trustee so appointed shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument in writing
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on the request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument in writing transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee
and shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts
referred to in paragraph (a) of this Section.
(c) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be eligible under this
Article.
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Section 6.12 Merger, Conversion, Consolidation
---------------------------------
or Succession to Business.
-------------------------
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Notes shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Notes so authenticated with the same effect as
if such successor Trustee had itself authenticated such Notes.
Section 6.13 Preferential Collection of Claims
---------------------------------
Against Company.
---------------
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor upon the Notes), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).
Section 6.14 Appointment of Authenticating Agent.
-----------------------------------
The Trustee may appoint an Authenticating Agent or Agents (which may
be an affiliate of the Company) with respect to the Notes which shall be
authorized to act on behalf of the Trustee to authenticate Notes issued upon
exchange, registration of transfer or partial redemption thereof (but not upon
original issuance or pursuant to Section 3.7), and Notes so authenticated
shall be entitled to the benefits of this Indenture and shall be valid and
obligatory for all purposes as if authenticated by the Trustee hereunder.
Wherever reference is made in this Indenture to the authentication and
delivery of Notes by the Trustee or the Trustee's certificate of
authentication, such reference shall be deemed to include authentication and
delivery on behalf of the Trustee by an Authenticating Agent and a certificate
of authentication executed on behalf of the Trustee by an Authenticating
Agent. Each Authenticating Agent shall be acceptable to the Company and shall
at all times be a corporation organized and doing business under the laws of
the United States of America, any state thereof or the District of Columbia,
authorized under such laws to act as Authenticating Agent, having a combined
capital and surplus of not less than $50,000,000 and subject to supervision or
examination by federal or state authority. If such Authenticating Agent
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Authenticating Agent
shall be deemed to be its combined capital and surplus as set forth in its
most recent report of condition so published. If at any time an Authenticating
Agent shall cease to be eligible in accordance with the provisions of this
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Section, such Authenticating Agent shall resign immediately in the manner and
with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating
Agent shall be a party, or any corporation succeeding to the corporate agency
or corporate trust business of an Authenticating Agent, shall continue to be
an Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any
further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such
a notice of resignation or upon such a termination, or in case at any time
such Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail written notice
of such appointment by first-class mail, postage prepaid, to all Holders of
Notes with respect to which such Authenticating Agent will serve, as their
names and addresses appear in the Note Register. Any successor Authenticating
Agent upon acceptance of its appointment hereunder shall become vested with
all the rights, powers and duties of its predecessor hereunder, with like
effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible under the provisions
of this Section.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.
If an appointment is made pursuant to this Section, the Notes may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
53
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This is one of the Notes designated and referred to in the within-
mentioned Indenture.
BANKERS TRUST COMPANY
as Trustee
By
-------------------------------
As Authenticating Agent
By
-------------------------------
Authorized Officer
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1 Company to Furnish Trustee Names
--------------------------------
and Addresses of Holders; Trustee to Furnish Note
-------------------------------------------------
Register.
--------
(a) The Company will furnish or cause to be furnished to the
Trustee:
(i) semi-annually, not later than five Business Days after each
Regular Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders of Notes as of such
Regular Record Date, and
(ii) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days prior
to the time such list is furnished;
excluding from any such list names and addresses received by the Trustee in
its capacity as Note Registrar.
(b) The Trustee shall furnish to the Company a copy of the list
maintained as the Note Register from time to time as requested by the Company
in writing.
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Section 7.2 Preservation of Information;
----------------------------
Communications to Holders.
-------------------------
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the
most recent list furnished to the Trustee as provided in Section 7.1 and the
names and addresses of Holders received by the Trustee in its capacity as Note
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished.
(b) The rights of the Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Notes, and the
corresponding rights and privileges of the Trustee, shall be as provided by
the Trust Indenture Act.
(c) Every Holder of Notes, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant
to the Trust Indenture Act.
Section 7.3 Reports by Trustee.
------------------
(a) The Trustee shall transmit to Holders such reports concerning
the Trustee and its actions under this Indenture as may be required pursuant
to the Trust Indenture Act at the times and in the manner provided pursuant
thereto. To the extent that any such report is required by the Trust
Indenture Act with respect to any 12-month period, such report shall cover the
12-month period ending March 15 and shall be transmitted by the next
succeeding May 15.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each securities exchange
upon which any Notes are listed, with the SEC and with the Company. The
Company will notify the Trustee when any Notes are listed on any securities
exchange.
Section 7.4 Reports by Company.
------------------
The Company shall file with the SEC and shall furnish to the Trustee
and the Holders, within 15 days after it files them with the SEC, copies of
its annual report and the information, documents and other reports which the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of
the Exchange Act. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall continue to file with the SEC and to provide
to the Trustee and the Holders the annual reports and the information,
documents and other reports which are specified in Section 13 or 15(d) of the
Exchange Act and applicable to a US corporation subject to such sections, such
information, documents and other reports to be filed and provided at the times
specified for the filing of such information, documents and
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reports under such section. The Company also shall comply with the other
provisions of Section 314(a) of the Trust Indenture Act.
ARTICLE EIGHT
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 8.1 Supplemental Indentures Without Consent of Holders.
--------------------------------------------------
Without the consent of any Holders, the Company, when authorized by
a Board Resolution, and the Trustee, at any time and from time to time, may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company, and
the assumption by any such successor of the covenants of the Company herein
and in the Notes;
(b) to provide for uncertificated Notes in addition to or in place
of certificated Notes (provided, that such uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code);
(c) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power conferred upon the Company
hereunder and under the Notes;
(d) to cure any ambiguity, to correct or supplement any provision
herein that may be defective or inconsistent with any other provision herein
or in the Notes, or to make any other provisions with respect to matters or
questions arising under this Indenture or under the Notes that shall not be
inconsistent with the provisions of this Indenture; provided that, in each
case, such provisions shall not adversely affect the interests of the Holders;
(e) to evidence, and provide for the acceptance of, the appointment
of a successor Trustee hereunder;
(f) to add any additional Events of Default;
(g) to secure the Notes or add a Guarantor; or
(h) to comply with any requirement of the SEC or state securities
regulators in connection with the qualification of this Indenture under the
Trust Indenture Act or any registration or qualification of the Notes under
the Securities Act or state securities laws.
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Section 8.2 Supplemental Indentures with Consent of Holders.
-----------------------------------------------
(a) Except as otherwise provided in Section 8.2(b), with the written
consent of the Holders of a majority in principal amount of the Outstanding
Notes, by Act of such Holders delivered to the Company and the Trustee, the
Company, when authorized by a Board Resolution, and the Trustee may enter into
an indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating or waiving any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Note
affected thereby,
(A) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount thereof,
premium, if any, or the rate of interest thereon,, or change the coin or
currency in which the principal of any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement
of any such payment after the Stated Maturity;
(B) reduce the percentage in principal amount of the Outstanding
Notes the consent of whose Holders is required for any such amendment or
modification, or the consent of whose Holders is required for any waiver (of
compliance with the provisions of this Indenture or Defaults hereunder and
their consequences) provided for in this Indenture;
(C) modify any provision of Section 11.2 or the definitions used
therein if the effect of such modification or waiver is to decrease the amount
of any payment required to be made by the Company thereunder or extend the
maturity date of such payment;
(D) modify any of the provisions of this Section 8.2 or Section 5.13
relating to supplemental indentures requiring the consent of Holders or
relating to the waiver of past defaults or relating to the waiver of certain
covenants, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Note affected thereby;
(E) except as otherwise permitted under the provisions of Article
Ten, consent to the assignment or transfer by the Company of any of its rights
and obligations under this Indenture; or
(F) waive a default in payment with respect to the Notes (other than
a default in payment that is due solely because of the acceleration of the
Maturity of the Notes).
(b) It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act and such notice shall approve the
substance thereof.
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Section 8.3 Execution of Supplemental Indentures.
------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article Eight or the modifications
thereby of the trusts created by this Indenture, the Trustee shall receive,
and (subject to Section 6.1) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture
is authorized or permitted by this Indenture. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
Section 8.4 Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes;
and every Holder of Notes theretofore or thereafter authenticated and
delivered hereunder shall be bound thereby and entitled to the benefits
thereof.
Section 8.5 Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to this Article Eight
shall conform to the requirements of the Trust Indenture Act as then in
effect.
Section 8.6 Reference in Notes to Supplemental Indentures.
---------------------------------------------
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article Eight may, and shall if
required by the Trustee, bear a notation in form acceptable to the Trustee as
to any matter provided for in such supplemental indenture. If the Company
shall so determine, new Notes so modified as to conform, in the opinion of the
Trustee and the Board of Directors, to any such supplemental indenture may be
prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Notes.
Section 8.7 Notice of Supplemental Indenture.
--------------------------------
After an supplemental indenture hereunder becomes effective, the
Company shall mail to Holders a notice briefly describing such supplemental
indenture; provided, that the failure to give such notice to all Holders, or
any defect therein, will not impair or affect the validity of the supplemental
indenture.
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ARTICLE NINE
COVENANTS
Section 9.1 Payment of Principal, Premium and Interest.
------------------------------------------
The Company covenants and agrees for the benefit of the Holders that
it will duly and punctually pay the principal of (and premium, if any, on) and
interest on the Notes in accordance with the terms of the Notes and this
Indenture.
The Notes shall be included in the Same-Day Funds Settlement System
or equivalent system of The Depository Trust Company until maturity to the
extent such systems are available. Each Global Note will be paid in
accordance with the provisions of Section 4.2 hereof.
Section 9.2 Maintenance of Office or Agency.
-------------------------------
The Company will maintain in the Borough of Manhattan, The City of
New York, State of New York, an office or agency where Notes may be presented
or surrendered for payment (a "Place of Payment") and where Notes may be
surrendered for registration of transfer or exchange. Initially, the Company
hereby designates the Corporate Trust Office for all such purposes. The
Company will give prompt written notice to the Trustee of the location, and
any change in the location, of such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such presentations and
surrenders, notices and demands may be made or served at the Corporate Trust
Office, and the Company hereby appoints the Trustee as its agent to receive
all such presentations and surrenders.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in each
Place of Payment for Notes for such purposes. The Company will give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.
Section 9.3 Money for Notes Payments to Be Held in Trust.
--------------------------------------------
If the Company shall at any time act as its own Paying Agent with
respect to the Notes, it will, on or before each due date of the principal of
or any premium or interest on any of the Notes, segregate and hold in trust
for the benefit of the Persons entitled thereto a sum sufficient to pay the
principal and any premium and interest so becoming due until such sums shall
be paid to such Persons or otherwise disposed of as herein provided and will
promptly notify the Trustee of its action or failure to act.
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Whenever the Company shall have one or more Paying Agents for the
Notes, it will, prior to each due date of the principal of or any premium or
interest on any Notes, deposit with a Paying Agent, in immediately available
funds, a sum sufficient to pay such amount, such sum to be held as provided by
the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the
Company will promptly notify the Trustee of its action or failure to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section that
such Paying Agent will:
(1) hold all sums held by it for the payment of principal of (and
premium, if any) or interest on Notes in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Notes) in the making of any such payment of
principal (and premium, if any) or interest; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability
with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of or any
premium or interest on any Note and remaining unclaimed for two years after
such principal, premium or interest has become due and payable shall be paid
to the Company on Company Request, or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as
an unsecured general creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such
trust money, and all liability of the Company as trustee thereof, shall
thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once, in a newspaper published in the English
language, customarily published on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of
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such publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
Section 9.4 Statement by Officers as to Default.
-----------------------------------
(a) The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate (one of the signers of which shall be the principal
executive officer, principal financial officer or principal accounting officer
of the Company), stating whether or not to the best knowledge of the signers
thereof the Company is, or was during the preceding year, in default in the
performance and observance of any of the terms, provisions and conditions of
this Indenture (without regard to any period of grace or requirement of notice
provided hereunder) and, if the Company shall be or shall have been in
default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Company or any Subsidiary gives notice or takes any other
action with respect to a claimed default (other than with respect to
Indebtedness in the principal amount of less than 5% of the Company's
Consolidated Net Worth at the quarter end preceding the giving of such notice
or taking of such action with respect to a claimed default), or if the Company
fails to comply with any of its Regulatory Capital Requirements, the Company
shall deliver to the Trustee by registered or certified mail, or by facsimile
transmission, confirmed by delivery of the original, an Officers' Certificate
specifying such event, notice or other action within five Business Days of its
occurrence.
Section 9.5 Payment of Taxes and Other Claims.
---------------------------------
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary or
upon the income, profits or property of the Company or any Subsidiary, and (2)
all lawful claims for labor, materials and supplies which, if unpaid, might by
law become a lien upon the property of the Company or any Subsidiary;
provided, however, that the Company shall not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which adequate reserves (in the good faith
judgment of the Board of Directors) have been made.
Section 9.6 Maintenance of Properties.
-------------------------
The Company will cause all properties owned by the Company or any
Restricted Subsidiary or used or held for use in the conduct of its business
or the business of any Restricted Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary
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repairs, renewals, replacements, betterments and improvements thereof, all as
in the judgment of the Company may be necessary so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times; provided, however, that nothing in this Section shall prevent the
Company or any Subsidiary from discontinuing the operation or maintenance of
any of such properties if such discontinuance is, in the judgment of its Board
of Directors, desirable in the conduct of its business or the business of the
Company or such Subsidiary and not disadvantageous in any material respect to
the Holders.
Section 9.7 Corporate Existence; Keeping of Books.
-------------------------------------
Subject to Article Ten, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the existence,
rights (charter and statutory) and franchises of the Company and its
Subsidiaries; provided, however, that the existence of any Subsidiary and any
such right or franchise of the Company or any Subsidiary may be terminated if
the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Subsidiaries and that the loss thereof is not and is not reasonably likely to
be disadvantageous in any material respect to the Holders.
The Company shall keep, and cause each Subsidiary to keep, proper
books and records, in which full and correct entries shall be made of all
financial transactions and the assets, liabilities and business of the Company
and its Subsidiaries, in each case in accordance with GAAP.
Section 9.8 Insurance.
---------
The Company will at all times maintain and will cause each of its
Subsidiaries to maintain (either in the name of the Company or in such
Subsidiary's own name) with financially sound and reputable insurers,
insurance on all its properties in such amounts as management of the Company
reasonably determines is appropriate under the circumstances.
Section 9.9 Net Worth Maintenance.
---------------------
On the Issue Date, and at all times thereafter determined at the end
of each fiscal quarter, the Company shall maintain Consolidated Net Worth
equal to (i) $40 million plus (ii) the cumulative amount equal to twenty-five
percent (25%) of the Consolidated Net Income (but not loss), if any, of the
Company and its Subsidiaries for each fiscal quarter commencing with the
quarter ending March 31, 1997.
Section 9.10 Limitations on Indebtedness.
---------------------------
(a) The Company shall not incur, directly or indirectly, any
Indebtedness or issue any Disqualified Capital Stock; provided, however, that
the Company may incur Indebtedness or Disqualified Capital Stock if, on the
date of such incurrence and after giving
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effect thereto, (i) no Default or Event of Default has occurred and is
continuing or would result therefrom and (ii) the Leverage Ratio does not
exceed 2.0 to 1.0.
(b) The Company will not create, incur, issue, assume, guarantee or
otherwise in any manner become directly or indirectly liable for or with
respect to, or otherwise permit to exist, any Junior Indebtedness (other than
Acquired Indebtedness) unless the Stated Maturity of principal (or any
required repurchase, redemption, defeasance or sinking fund payments) of such
Junior Indebtedness is after the final Stated Maturity of principal of the
Notes.
(c) The Savings Banks will not, and will not permit any of their
Subsidiaries to, create or incur any Indebtedness or issue any Preferred Stock
that in either case would qualify as regulatory capital for the Savings Banks
under 12 C.F.R. Part 567 or any successor regulation, except to the Company or
its Subsidiaries or to the extent that after giving effect to the creation or
incurrence of such Indebtedness or the issuance of such Preferred Stock the
total of the Savings Banks' aggregate Indebtedness and Preferred Stock that
qualifies as capital under 12 C.F.R. Part 567 does not exceed 65% of the
Savings Banks' aggregate tangible common equity.
(d) The Company will not permit any Subsidiary to, directly or
indirectly, incur any Indebtedness or issue any Disqualified Capital Stock.
(e) The foregoing provisions shall not apply to:
(1) Permitted Acquisition Indebtedness of the Company and its
Subsidiaries;
(2) Permitted Repurchase Facilities of the Company and its
Subsidiaries;
(3) Guarantees by the Company of (1) and (2);
(4) Intercompany Indebtedness between the Company and any of its
Subsidiaries;
(5) Incurrence by the Company of its obligations under the Notes;
(6) Non-Recourse Indebtedness of the Company and its Subsidiaries;
(7) Securities issued in a securitization by a Securitization Entity
formed by or on behalf of the Company or its Subsidiaries, regardless of
whether such securities are treated as indebtedness for tax purposes,
provided that neither the Company nor any Subsidiary (other than the
Securitization Entity formed solely for the purpose of such
securitization) is directly or indirectly liable as a guarantor or
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otherwise (excluding the provision of Credit Support) for such securities
or obligations of the Securitization Entity;
(8) Deposit liabilities of any insured depository Subsidiary;
(9) Unsecured Indebtedness of the Savings Banks having an initial
term to maturity in excess of one year, provided, however, that such
Indebtedness shall be considered to be Indebtedness of the Company for the
purpose of the Leverage Ratio;
(10) Unsecured working capital loans of Subsidiaries, not to exceed
$5.0 million in the aggregate, provided, however, that such Indebtedness
shall be considered to be Indebtedness of the Company for the purpose of
the Leverage Ratio;
(11) Acquired Indebtedness of Subsidiaries, provided, however, that
such Acquired Indebtedness shall be considered to be Indebtedness of the
Company for the purpose of the Leverage Ratio;
(12) Indebtedness secured by Permitted Liens; or
(13) Hedging Obligations directly related to: (i) Indebtedness
permitted to be incurred by the Company or its Subsidiaries pursuant to
this Indenture; (ii) loans held by the Company or its Subsidiaries pending
sale; or (iii) loans with respect to which the Company or any Subsidiary
has an outstanding purchase offer or commitment, financing commitment or
security interest.
(f) For purposes of determining compliance with the foregoing
covenant: (i) in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described above, the Company, in
good faith, will classify such item of Indebtedness and be required to include
the amount and type of such Indebtedness in one of the above clauses; and (ii)
an item of Indebtedness may be divided and classified in more than one of the
types of Indebtedness described above.
Section 9.11 Liquidity Maintenance.
---------------------
The Company shall, at all times when the Notes are not rated in an
investment grade category by one or more nationally recognized statistical
rating organizations, maintain Liquid Assets with a value equal to at least
100% of the required interest payments due on the Notes on the next two
succeeding semi-annual Interest Payment Dates. Liquid Assets of a Subsidiary
(other than the Savings Banks or other depository institution Subsidiary) may
be included in such calculation only to the extent that such Liquid Assets may
at such time be distributed to the Company without restriction or notice to
any Person. Such Liquid Assets shall not be the subject of any pledge, Lien,
encumbrance or charge of any kind and shall not be used as collateral or
security for Indebtedness for borrowed money or otherwise of the
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Company or its Subsidiaries nor may such Liquid Assets be used as reserves for
any self-insurance maintained by the Company.
Section 9.12 Limitations on Restricted Payments.
----------------------------------
The Company will not, and will not permit any Subsidiary to,
directly or indirectly, make any Restricted Payment if, at the time of such
Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be
continuing; or
(b) either Savings Bank would fail to meet any of the Regulatory
Capital Requirements; or
(c) the Company would fail to maintain sufficient Liquid Assets to
comply with the terms of the covenant set forth in Section 9.11 hereof; or
(d) the aggregate amount of all Restricted Payments (the amount of
such payments, if other than in cash, having been determined in good faith by
the relevant Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) declared and made after the Issue Date would
exceed the sum of
(i) 25% of the aggregate Consolidated Net Income (or, if
such Consolidated Net Income is a deficit, 100% of such deficit) of the
Company accrued on a cumulative basis during the period beginning on the
first day of the fiscal quarter during which the Issue Date occurred and
ending on the last day of the Company's last fiscal quarter ending prior
to the date of such proposed Restricted Payment; plus
(ii) the aggregate Net Cash Proceeds received by the Company
as capital contributions (other than from a Subsidiary) after the Issue Date;
plus
(iii) the aggregate Net Cash Proceeds and the Fair Market
Value of property not constituting Net Cash Proceeds received by the Company
from the issuance or sale (other than to a Subsidiary) of Qualified Capital
Stock after the issue date of the Notes; plus .
(iv) 100% of the amount of any Indebtedness of the Company or
a Subsidiary that is issued after the issue date of the Notes that is
thereafter converted into or exchanged for Qualified Capital Stock of the
Company; or
(e) the Unsecured Debt Coverage Ratio for the Company for the most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date of such Restricted
Payment is less than 2.00 to 1.00, determined after giving effect to such
Restricted Payment; provided, however, that the foregoing provisions will not
prevent (x) the payment of a dividend within 60 days after the date of its
declaration if at the date of declaration such payment was permitted by the
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foregoing provisions, or (y) any Permitted Payment, or (z) tax sharing
payments by the Company or any of its Subsidiaries pursuant to the existing
Tax Allocation Agreement (or any subsequently adopted tax allocation agreement
the terms of which are not materially less favorable in the aggregate to the
Company than the terms of Tax Allocation Agreement).
Section 9.13 Limitations on Dividends and Other Payment
------------------------------------------
Restrictions Affecting Subsidiaries.
-----------------------------------
The Company will not, and will not permit any of its Subsidiaries
(other than a Securitization Entity) to, create, assume or otherwise cause or
suffer to exist or to become effective any consensual encumbrance or
restriction on the ability of any such Subsidiary to
(a) pay any dividends or make any other distribution on its Capital
Stock;
(b) make payments in respect of any Indebtedness owed to the Company
or any other Subsidiary; or
(c) make loans or advances to the Company or any Subsidiary or to
guarantee Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions imposed by Applicable Law or regulation or by the
OTS or FDIC;
(2) restrictions existing under agreements in effect on the date of
this Indenture;
(3) consensual encumbrances or restrictions binding upon any Person
at the time such Person becomes a Subsidiary of the Company so long as
such encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions with respect to a Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially
all the assets (which term may include the Capital Stock) of such
Subsidiary;
(5) restrictions on the transfer of assets which are subject to
Liens;
(6) restrictions existing under agreements evidencing Permitted
Acquisition Indebtedness or Permitted Repurchase Facilities of any
Subsidiary that is formed for the sole purpose of acquiring or holding a
portfolio of assets, if such Indebtedness (i) is made without recourse to,
and with no cross-collateralization (which shall not include Guarantees),
against the assets of, the Company or any other Subsidiary, and (ii) upon
complete or partial liquidation of which the Indebtedness must be
correspondingly repaid in whole or in part, as the case may be; and
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(7) restrictions existing under any agreement that refinances or
replaces any of the agreements containing the restrictions in clauses (2),
(3) and (6); provided that the terms and conditions of any such
restrictions are not less favorable to the Holders than those under the
agreement evidencing or relating to the Indebtedness refinanced.
Section 9.14 Limitations on Transactions with Affiliates.
-------------------------------------------
The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, enter into any transaction or series of related
transactions (including without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of the Company
(except that the Company and any of its Subsidiaries may enter into any
transaction or series of related transactions with any Subsidiary of the
Company without limitation under this covenant) unless: (i) such transactions
or series of related transactions is on terms that are no less favorable to
the Company or such Subsidiary, as the case may be, than would be available in
a comparable transaction in an arm's length dealing with a Person that is not
such an Affiliate or, in the absence of such a comparable transaction, on
terms that the relevant Board of Directors determines in good faith would be
offered to a Person that is not an Affiliate; (ii) with respect to any
transaction or series of related transactions involving aggregate payments in
excess of $500,000, the Company delivers an Officers' Certificate to the
Trustee certifying that such transaction or series of transactions complies
with clause (i) above and has been approved by a majority of the Disinterested
Directors of the relevant Board of Directors of the Company or such
Subsidiary, as the case may be; and (iii) with respect to any transaction or
series of related transaction involving aggregate payments in excess of
$2,500,000, or in the event that no members of the Board of Directors are
Disinterested Directors with respect to any transaction or series of
transactions included in clause (ii), (x) in the case of a transaction
involving real property, the aggregate rental or sale price of such real
property shall be the fair market sale or rental value of such real property
as determined in a written opinion by a nationally recognized expert with
experience in appraising the terms and conditions of the type of transaction
or series of transactions for which approval is required and (y) in all other
cases, the Company delivers to the Trustee a written opinion of a nationally
recognized expert with experience in appraising the terms and conditions of
the type of transaction or series of transactions for which approval is
required to the effect that the transaction or series of transactions are fair
to the Company or such Subsidiary from a financial point of view. The
limitations set forth in this paragraph will not apply to (i) transactions
entered into pursuant to any agreement already in effect on the Issue Date and
any renewals or extensions thereof not involving modifications materially
adverse to the Company or any Subsidiary, (ii) normal banking relationships
with an Affiliate on an arms' length basis, (iii) any employment agreement,
stock option, employee benefit, indemnification, compensation, business
expense reimbursement or other employment-related agreement, arrangement or
plan entered into by the Company or any of its Subsidiaries which agreement,
arrangement or plan was adopted by the Board of Directors of the Company or
such Subsidiary (including a majority of the Disinterested Directors), as the
case may be, (iv) residential mortgage, credit card and other consumer loans
to an Affiliate who is an officer,
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director or employee of the Company or any of its Subsidiaries and which
comply with the applicable provisions of 12 U.S.C. Section 1468(b) and any
rules and regulations of the OTS thereunder, (v) any Restricted Payment or
Permitted Payment, (vi) any transaction or series of transactions in which the
total amount involved does not exceed $125,000, (vii) purchases on or before
March 31, 1997 of loan portfolios acquired by an Affiliate after July 31, 1996
where the purchase price does not exceed the lower of two current independent
bids for the loan portfolios or (viii) services rendered and obligations
incurred by the Company or any of its Subsidiaries pursuant to existing
agreements or agreements between the Company and/or any of its Subsidiaries
and Wilshire Credit Corporation, a Nevada corporation ("WCC"), and/or
Affiliates of WCC entered into on the Issue Date.
Section 9.15 Limitations on Liens and Guarantees.
-----------------------------------
The Company will not create, assume, incur or suffer to exist any
Lien (other than a Permitted Lien) upon any of the Company's assets (including
the Capital Stock of any Subsidiary) as security for Indebtedness, without
effectively providing that the Notes will be equally and ratably secured with
(or prior to) such Indebtedness.
In addition, the Company will not permit any Subsidiary of the
Company, directly or indirectly, to guarantee or assume, or subject any of its
assets to a Lien (other than a Permitted Lien) to secure, any Pari Passu
Indebtedness or Junior Indebtedness unless (i) such Subsidiary simultaneously
executes and delivers a supplemental indenture to this Indenture providing for
a guarantee of, or pledge of assets to secure, the Notes by such Subsidiary on
terms at least as favorable to the Holders of the Notes as such guarantee or
security interest in such assets is to the holders of such Pari Passu
Indebtedness or Junior Indebtedness, except that in the event of a guarantee
or security interest in such assets with respect to (x) Pari Passu
Indebtedness, the guarantee or security interest in such assets under the
supplemental indenture shall be made pari passu to the guarantee or security
interest in such assets with respect to such Pari Passu Indebtedness or (y)
Junior Indebtedness, any such guarantee or security interest in such assets
with respect to such Junior Indebtedness shall be subordinated to such
Subsidiary's guarantee or security interest in such assets with respect to the
Notes to the same extent as such Junior Indebtedness is subordinated to the
Notes and (ii) such Subsidiary waives and will not in any manner whatsoever
claim, or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Subsidiary of the Company as a result of any payment by such Subsidiary under
its guarantees.
Section 9.16 Offer to Purchase upon a Change of Control Event.
------------------------------------------------
(a) Upon the occurrence of a Change of Control Event, the Company
will offer to repurchase (the "Change of Control Purchase Offer") all Notes
from the Holders, and each Holder will have the right to require that the
Company repurchase such Holder's Notes, at a purchase price in cash equal to
101% of the principal amount thereof (the "Change of Control Purchase Price")
plus accrued and unpaid interest, if any, to the Change of Control
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Purchase Date (subject to the right of Holders on the relevant Regular Record
Date to receive interest due on an Interest Payment Date occurring prior to
such Change of Control Purchase Date), in accordance with the provisions of
this Section 9.16.
(b) Within 30 days following any Change of Control Event, the
Company shall mail a notice to each Holder with a copy to the Trustee (a
"Change of Control Purchase Notice") stating:
(i) that a Change of Control Event has occurred and that
such Holder has the right to require the Company to purchase such Holder's
Notes at a Change of Control Purchase Price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
Change of Control Purchase Date (subject to the right of Holders on the
relevant Regular Record Date to receive interest on an Interest Payment
Date occurring prior to the Change of Control Purchase Date);
(ii) the circumstances and relevant facts regarding such
Change of Control Event (including, in the case of any merger,
consolidation or sale of all or substantially all assets, information with
respect to pro forma results of operations, cash flow and capitalization
after giving effect to such Change of Control Event);
(iii) the Change of Control Purchase Date (which shall be no
earlier than 30 days nor later than 60 days from the date such Change of
Control Purchase Notice is mailed);
(iv) that, unless the Company defaults in making such
payment, any Note accepted for payment pursuant to the Change of Control
Purchase Offer shall cease to accrue interest after the Change of Control
Purchase Date;
(v) that Holders electing to have a Note purchased pursuant
to any Change of Control Purchase Offer shall be required to surrender the
Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, or transfer by book-entry transfer, to the
Company, a depositary, if appointed by the Company, or a Paying Agent at
the address specified in the notice, at least three Business Days before
the Change of Control Purchase Date; and
(vi) that Holders shall be entitled to withdraw their
election if the Company, the Depositary or the Paying Agent, as the case
may be, receives, not later than the last Business Day prior to the Change
of Control Purchase Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the
Note (and identification number) the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such Note
purchased.
(c) Holders electing to have a Note purchased will be required to
surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" duly completed, to the
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Company at the address specified in the notice at least three Business Days
prior to the Change of Control Purchase Date. Holders will be entitled to
withdraw their election if the Trustee or the Company receives not later than
one Business Day prior to the Change of Control Purchase Date, a telegram,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note (and identification number) which was delivered
by the Holder for purchase by the Company and a statement that such Holder is
withdrawing his election to have such Note purchased.
(d) On the Change of Control Purchase Date, all Notes purchased by
the Company in a Change of Control Purchase Offer shall be delivered to the
Trustee for cancellation, and the Company shall pay the Change of Control
Purchase Price plus accrued and unpaid interest, if any, to the Holders
entitled thereto.
(e) On or before the Change of Control Purchase Date, the Company
will deliver to the Trustee an Officers' Certificate stating that the Notes
purchased in the Change of Control Purchase Offer are accepted for payment by
the Company in accordance with the terms of this Section. The Company, the
Depositary or the Paying Agent, as the case may be, will promptly (but in any
case not later than five days after the Change of Control Purchase Date) pay
to each tendering Holder an amount equal to the Change of Control Purchase
Price of the Notes tendered by such Holder plus interest accrued thereon
(subject to the right of Holders on the relevant Regular Record Date to
receive interest due on the relevant Interest Payment Date). The Company will
publicly announce the results of the Change of Control Purchase Offer on the
Change of Control Purchase Date.
(f) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other applicable
securities laws or regulations in connection with the repurchase of Notes
pursuant to this Section 9.16. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of this Section
9.16, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
Section 9.16 by virtue thereof.
Section 9.17 Payments for Consent.
--------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder as an inducement to any
consent, waiver or amendment of any of the terms or provisions of this
Indenture or the Notes unless such consideration is paid to all Holders that
provide such consent or so waive or agree to amend.
Section 9.18 Waiver of Certain Covenants.
---------------------------
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 9.5 to 9.16, inclusive,
with respect to the Notes if before the time of compliance the Holders of a
majority in principal amount of the
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Outstanding Notes shall, by act of such Holders, either waive such compliance
in such instance or generally waive compliance with such term, provision or
condition, but no such waiver shall extend to or affect such term, provision
or condition except to the extent so expressly waived, and, until such waiver
shall become effective, the obligations of the Company and the duties of the
Trustee in respect of any such term, provision or condition shall remain in
full force and effect.
ARTICLE TEN
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Section 10.1 Merger, Consolidation or Transfer of Assets of the
--------------------------------------------------
Company.
-------
The Company shall not consolidate with or merge with or into, or
sell, assign, convey, transfer, lease or otherwise dispose of, in one
transaction or a series of transactions, all or substantially all its assets
to, any Person, unless: (i) the resulting, surviving or transferee Person
(the "Successor Company") shall be a Person organized and existing under the
laws of the United States of America or any state thereof or the District of
Columbia and the Successor Company (if not the Company) shall expressly
assume, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form reasonably satisfactory to the Trustee, all of the Company's
obligations under the Notes and this Indenture; (ii) immediately after giving
effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default or Event of Default
shall have occurred and be continuing; (iii) immediately after giving effect
to such transaction, the Successor Company would be able to incur an
additional $1.00 of Indebtedness without violating Section 9.10(a) hereof; and
(iv) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
transfer, sale, assignment, conveyance, lease or other disposition and such
supplemental indenture (if any) comply with this Indenture and all conditions
precedent provided for herein relating to such transaction have been complied
with.
Section 10.2 Successor Substituted.
---------------------
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any sale, assignment, conveyance, transfer, lease or
other disposition of the properties and assets of the Company substantially as
an entirety in accordance with Section 10.1, the Successor Company shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such Successor
Company herein, and in the event of any such sale, assignment, conveyance,
transfer or other disposition, the Company (which term shall for this purpose
mean the
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Successor Company), except in the case of a lease, shall be discharged of all
obligations and covenants under this Indenture and the Notes and may be
dissolved and liquidated.
Section 10.3 Notes to Be Secured in Certain Events.
-------------------------------------
If, upon any such consolidation of the Company with or merger of the
Company into any other corporation, or upon any sale, assignment, conveyance,
transfer, lease or other disposition of the property of the Company
substantially as an entirety to any other Person, any property or assets of
the Company would thereupon become subject to any Lien to secure Pari Passu
Indebtedness or Junior Indebtedness, then unless such Lien could be created
pursuant to Section 9.15 without equally and ratably securing the Notes, the
Company, prior to or simultaneously with such consolidation, merger, sale,
assignment, conveyance, transfer, lease or other disposition, will as to such
property or assets, secure the Notes Outstanding (together with, if the
Company shall so determine, any other Indebtedness of the Company now existing
or hereinafter created which is not subordinate in right of payment to the
Notes) equally and ratably with the Pari Passu Indebtedness or prior to the
Junior Indebtedness which upon such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition is to become secured as to
such property or assets by such Lien.
ARTICLE ELEVEN
REDEMPTION OF NOTES
Section 11.1 Applicability of Article.
------------------------
Any redemption of Notes before their Stated Maturity shall be in
accordance with their terms and in accordance with this Article.
Section 11.2 Optional Redemption.
-------------------
The Notes will not be redeemable prior to ____________, 2001, except
as provided on the reverse of the Form of Note set forth in Section 2.3.
Section 11.3 Election to Redeem; Selection by Trustee of Notes
-------------------------------------------------
to Be Redeemed.
--------------
Any election to redeem Notes shall be evidenced by a Board
Resolution. In case of any redemption at the election of the Company of less
than all the Notes, the Company shall, at least 60 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date
and of the principal amount of Notes to be redeemed and shall deliver to the
Trustee such documentation and records as shall enable the Trustee to select
the Notes to be redeemed pursuant to this Section 11.3.
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If less than all the Notes are to be redeemed, the particular Notes
to be redeemed shall be selected not more than 60 days prior to the Redemption
Date by the Trustee, from the Outstanding Notes not previously called for
redemption, by such method as the Trustee in its sole discretion shall deem
fair and appropriate and which may provide for the selection for redemption of
portions (equal to the minimum authorized denomination for Notes or any
integral multiple thereof) of the principal amount of Notes of a denomination
larger than the minimum authorized denomination for Notes.
The Trustee shall promptly notify the Company in writing of the
Notes selected for redemption and, in the case of any Notes selected for
partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Notes shall relate, in
the case of any Notes redeemed or to be redeemed only in part, to the portion
of the principal amount of such Notes which has been or is to be redeemed.
Section 11.4 Notice of Redemption.
--------------------
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed, at his address appearing in the
Note Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price and accrued interest, if any,
(3) if less than all the Outstanding Notes are to be
redeemed, the identification (and, in the case of partial redemption of
any Notes, the principal amounts) of the particular Notes to be redeemed,
(4) that on the Redemption Date the Redemption Price and
accrued interest, if any, will become due and payable upon each such Note
to be redeemed and, if applicable, that interest thereon will cease to
accrue on and after said date, and
(5) the place or places where such Notes are to be
surrendered for payment of the Redemption Price and accrued interest, if
any.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's written request, by
the Trustee in the name and at the expense of the Company and shall be
irrevocable.
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Section 11.5 Deposit of Redemption Price.
---------------------------
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 9.3) an amount of
money in immediately available funds sufficient to pay the Redemption Price
of, and (except if the Redemption Date shall be an Interest Payment Date)
accrued interest on, all the Notes which are to be redeemed on that date.
Section 11.6 Notes Payable on Redemption Date.
--------------------------------
Notice of redemption having been given as aforesaid, the Notes so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Notes shall cease to bear interest. Upon surrender of any such
Note for redemption in accordance with said notice, such Note shall be paid by
the Company at the Redemption Price, together with accrued interest to the
Redemption Date; provided, however, that, installments of interest whose
stated maturity is on or prior to the Redemption Date shall be payable to the
Holders of such Notes, or one or more Predecessor Notes, registered as such at
the close of business on the relevant Regular Record Dates according to their
terms and the provisions of Section 3.8.
If any Note called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and any premium shall subject
to Section 1.13 hereof, until paid, bear interest from the Redemption Date at
the rate prescribed therefor in the Note.
Section 11.7 Notes Redeemed in Part.
----------------------
Any Note which is to be redeemed only in part shall be surrendered
at a Place of Payment therefor (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing), and the Company shall
execute, and the Trustee shall authenticate and deliver to the Holder of such
Note without service charge, a new Note or Notes of like tenor, of any
authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unredeemed portion of the principal of
the Note so surrendered.
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ARTICLE TWELVE
DEFEASANCE AND COVENANT DEFEASANCE
Section 12.1 Option to Effect Legal Defeasance or Covenant
---------------------------------------------
Defeasance.
----------
The Company may, at the option of its Board of Directors evidenced
by a Board Resolution, at any time, elect to have either Section 12.2 or 12.3
be applied to all Outstanding Notes upon compliance with the conditions set
forth below in this Article.
Section 12.2 Legal Defeasance and Discharge.
------------------------------
Upon the Company's exercise under Section 12.1 hereof the option
applicable to this Section 12.2, the Company shall, subject to the
satisfaction of the conditions set forth in Section 12.4, be deemed to have
been discharged from its obligations with respect to all Outstanding Notes on
the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire Indebtedness represented by
the Outstanding Notes, which shall thereafter be deemed to be "Outstanding"
only for the purposes of Section 12.5 and the other Sections of this Indenture
referred to in (a) and (b) below, and the Company shall be deemed to have
satisfied all its other obligations under the Notes and this Indenture (and
the Trustee, on written demand of and at the expense of the Company, shall
execute proper instruments acknowledging the same), except for the following
provisions which shall survive until otherwise terminated or discharged
hereunder: (a) the rights of Holders of Outstanding Notes to receive solely
from the trust fund described in Section 12.4, and as more fully set forth in
such Section, payments in respect of the principal of, premium, if any, and
interest on such Notes as and when such payments are due, (b) the Company's
obligations with respect to such Notes under Sections 3.5, 3.6, 3.7, 9.2, 9.3
and 9.5, (c) the rights, powers, trusts, duties and immunities of the Trustee
and any Authenticating Agent hereunder and the Company's obligations in
connection therewith and (d) this Article. Subject to compliance with this
Article, the Company may exercise its option under this Section 12.2
notwithstanding the prior exercise of its option under Section 12.3.
Section 12.3 Covenant Defeasance.
-------------------
Upon the Company's exercise under Section 12.1 of the option
applicable to this Section 12.3, the Company shall, subject to the
satisfaction of the conditions set forth in Section 12.4, be released from its
obligations under the covenants contained in Article Nine (except Sections
9.1, 9.2, 9.5 and 9.7) with respect to the Outstanding Notes on and after the
date the conditions set forth below are satisfied (hereinafter, "Covenant
Defeasance"), and the Notes shall thereafter be deemed not Outstanding for the
purposes of any direction, waiver, consent or declaration or act of Holders
(and the consequences of any thereof) in connection with such covenants, but
shall continue to be deemed Outstanding for all other purposes
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hereunder (it being understood that such Notes shall not be deemed outstanding
for accounting purposes). For this purpose, Covenant Defeasance means that,
with respect to the Outstanding Notes, the Company may omit to comply with and
shall have no liability in respect of any term, condition or limitation set
forth in any such covenant, whether directly or indirectly, by reason of any
reference elsewhere herein to any such covenant or by reason of any reference
in any such covenant to any other provision herein or in any other document
and such omission to comply shall not constitute a Default or an Event of
Default under Section 5.1, but, except as specified above, the remainder of
this Indenture and such Notes shall be unaffected thereby.
Section 12.4 Conditions to Legal or Covenant Defeasance.
------------------------------------------
The following shall be the conditions precedent to the effectiveness
of any Legal Defeasance or Covenant Defeasance:
(a) the Company shall (i) irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, unencumbered cash in United States
dollars, unencumbered U.S. Government Obligations, or a combination thereof,
in such amounts as will be sufficient, in a written opinion of a nationally
recognized firm of independent public accountants delivered to the Trustee, to
pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated date for payment thereof or on the applicable Redemption Date,
as the case may be, and the Company must specify whether the Notes are being
defeased to maturity or to a particular Redemption Date, and (ii) irrevocably
instruct the Trustee to apply such cash and U.S. Government Obligations to
such payments with respect to the Notes;
(b) in the case of an election under Section 12.2, the Company shall
have delivered to the Trustee an Opinion of Counsel in the United States
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of this
Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such Opinion of Counsel
shall confirm that, the Holders of the Outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred;
(c) in the case of an election under Section 12.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the
United States confirming that the Holders of the Outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance has not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing (i) on the date of such deposit (other than a Default or Event of
Default resulting from the Incurrence of Indebtedness all or a portion of the
proceeds of which will be used to defease
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the Notes pursuant to this Article concurrently with such Incurrence) and (ii)
insofar as Section 5.1(g) hereof is concerned, at any time during the period
ending on the 91st day after the date of deposit (such condition not being
satisfied until such 91st day) ;
(e) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that on the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company; and
(h) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
Section 12.5 Deposited Money and U.S. Government Obligations To
--------------------------------------------------
Be Held in Trust; Other Miscellaneous Provisions.
------------------------------------------------
Subject to Section 12.6, all money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee pursuant to
Section 12.4 in respect of the Outstanding Notes shall be held in trust and
applied by the Trustee, in accordance with the provisions of the Notes and
this Indenture, to the payment, either directly or through any Paying Agent
(excluding the Company acting as Paying Agent) as the Trustee may determine,
to the Holders of such Notes of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not
be segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the cash or U.S. Government
Obligations deposited pursuant to Section 12.4 or the principal and interest
received in respect thereof.
Anything in this Article to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request
of the Company any money or U.S. Government Obligations held by it as provided
in Section 12.4 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under
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Section 12.4), are in excess of the amount thereof that would then be required
to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
Section 12.6 Reinstatement.
-------------
If the Trustee or Paying Agent is unable to apply any cash or U.S.
Government Obligations in accordance with Section 12.2 or 12.3, as the case
may be, by reason of any order or judgment of any court or Governmental
Authority enjoining, restraining or otherwise prohibiting such application,
then the Company's obligations under this Indenture and the Notes shall be
revived and reinstated as though no deposit had occurred pursuant to Section
12.2 or 12.3 until such time as the Trustee or Paying Agent is permitted to
apply all such money in accordance with Section 12.2 or 12.3, as the case may
be; provided, however, that, if the Company makes any payment of principal of,
premium, if any, or interest on any Note following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money held by the Trustee or
Paying Agent.
ARTICLE THIRTEEN
MISCELLANEOUS
Section 13.1. No Recourse Against Others.
--------------------------
A director, officer, employee, stockholder or incorporator, as such,
of the Company shall not have any liability for any obligations of the Company
under the Notes or this Indenture or for any claim based on, in respect of or
by reason of such obligations or their creation. Each Holder by accepting a
Note waives and releases all such liability.
Section 13.2. Execution in Counterparts.
-------------------------
This instrument may be executed in any number of counterparts, each
of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By:
--------------------------------
Name:
Title:
Attest:
By:
-----------------------------
Title:
BANKERS TRUST COMPANY, as Trustee
By:
--------------------------------
Name:
Title:
Attest:
By:
-----------------------------
Title:
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STATE OF [____________] )
) ss.:
COUNTY OF [________] )
On the _____ day of _______________, 1996 before me personally came
___________________________, to me known, who, being by me duly sworn, did
depose and say that he is __________________________ of Wilshire Financial
Services Group Inc., one of the corporations described in and which executed
the foregoing instrument; that he knows the seal of said corporation; that the
seal affixed to said instrument is such corporate seal; that it was so affixed
by authority of the Board of Directors of said corporation, and that he signed
his name thereto by like authority.
-----------------------------
Notary Public
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STATE OF [____________] )
) ss.:
COUNTY OF [________] )
On the ____ day of ____________ 1996 before me personally came
__________________ to me known, who, being by me duly sworn, did depose and
say that he is ______________________________ of Bankers Trust Company, one of
the corporations described in and which executed the foregoing instrument,
that he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation, and that he signed his name thereto by
like authority.
-------------------------------
Notary Public
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of November 15, 1996, by and between
Wilshire Financial Services Group Inc. (the "Company"), with its principal
office at 1776 SW Madison Street, Portland, Oregon 97205 and Andrew A.
Wiederhorn, residing at 4311 SW Greenleaf Drive, Portland, Oregon 97221 (the
"Executive").
W I T N E S S E T H:
-------------------
WHEREAS, Executive is currently employed as the Chief Executive Officer of
the Company and is also a director of the Company; and
WHEREAS, the Company and Executive desire to enter into this agreement (the
"Agreement") to set forth terms of Executive's employment by the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Employment. Except for earlier termination as provided in
------------------
Section 7 hereof, Executive's employment under this Agreement shall be for a
three (3) year term (the "Employment Term") commencing on the closing date for
the Company's initial public offering (the "Commencement Date"). Subject to
Section 7 hereof, the Employment Term shall be automatically extended for
additional terms of successive two (2) year periods unless the Company or
Executive gives written notice of the termination of Executive's employment
hereunder at least ninety (90) days prior to the expiration of the then current
Employment Term.
2. Positions. (a) Executive shall serve as Chief Executive Officer of
---------
the Company. It is the intention of the parties that during the Employment Term,
Executive shall also serve on the Board of Directors of the Company (the
"Board") as Chairman without additional compensation. During the term of this
Agreement, the Company shall recommend the Executive for election as a director.
(b) Executive shall report directly to the Board or other managing body of
the Company and shall have such duties and authority, consistent with his
position as Chief Executive Officer of the Company, as shall be determined from
time to time by the Board, provided that Executive shall have authority
comparable to that of chief executive officers of United States public companies
that are similar in size and business to the Company.
(c) During the Employment Term, Executive shall devote substantially all
of his business time, energy, skill and efforts to the performance of his duties
and responsibilities
<PAGE>
hereunder; provided, however, that Executive shall be allowed to (i) serve as a
director and an employee or consultant of privately held companies (including,
but not limited to, Wilshire Credit Corporation and its privately held
affiliates); (ii) serve as a director of other companies; (iii) engage in
charitable activities; and (iv) manage his personal financial and legal affairs.
3. Base Salary. During the Employment Term, the Company shall pay
-----------
Executive a base salary at the annual rate of not less than $300,000. Base
salary shall be payable in accordance with the usual payroll practices of the
Company. Executive's Base Salary shall be subject to annual review by the Board
in February of each year and may be increased, but not decreased, from time to
time upon recommendation of the Compensation Committee of the Board (the
"Committee"). The base salary determined as aforesaid from time to time shall
constitute "Base Salary" for purposes of this Agreement.
4. Incentive Compensation. (a) Bonus. For each fiscal year or portion
---------------------- -----
thereof during the Employment Term, Executive shall be entitled to receive an
annual bonus (the "Bonus") as determined by the Committee from time to time;
provided that such annual bonus together with the annual bonus payable to
Lawrence Mendelsohn, will not exceed 20% of the Company's pre-tax income (as
determined in accordance with generally accepted accounting principles and
reflected in the Company's audited financial statements) for the relevant
calender year (the "Bonus Pool"); provided further that such Bonus shall be
-------- -------
determined prior to subtracting any Bonus payable hereunder, or to Mr.
Mendelsohn. The Executive and Mr. Mendelsohn shall share equally in the first
$400,000 of the Bonus Pool and shall thereafter receive two-thirds (2/3rds) and
one-third (1/3rd), respectively, of any amounts remaining in the Bonus Pool.
Such annual bonus shall be payable in January of each year following the year
for which the bonus is payable (based on interim numbers for such year) and, if
necessary, shall be adjusted for any subsequent amendments to the Company's
financial statements following completion of the year end audit. Following any
fiscal quarter, the Company shall, at the request of the Executive, pay an
advance on any such Bonus; provided that any such advance (together with any
prior advances during the relevant calendar year) shall not exceed two-thirds
(2/3rds) of 20% of the Company's pre-tax income from the beginning of the
relevant calendar year through the end of such fiscal quarter (based on the
Company's interim financial statements). In the event that the aggregate amount
of advances made by the Company at the end of the relevant calendar year exceed
the amount of the Bonus as determined by the Committee for such year, the amount
in excess of the Bonus shall be treated as an interest free loan from the
Company, which shall be repaid by the Executive within six (6) months of the
determination by the Committee of such year's Bonus. Following the initial
Employment Term, such Bonus shall be subject to shareholder approval as and to
the extent required by Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) Options. The Executive shall also be entitled to participate in the
-------
Company's Incentive Stock Plan (the "Incentive Stock Plan") and receive
nonqualified, incentive or other options ("Options") to purchase shares of the
Company's common stock (the "Common Stock") under the Incentive Stock Plan as
determined by the Committee from time to time provided that the Incentive Stock
Plan is approved by the shareholders of the Company to the extent required by
Section 162(m) of the Code. Notwithstanding the foregoing, the Company may
recommend to the Committee that the Executive be granted Options under a plan
other than the Incentive Stock Plan provided that such other plan contains terms
and conditions which are substantially similar to the terms and conditions of
the Incentive Stock Plan, and further provided, that such other plan is approved
by the shareholders of the Company to the extent required by Section 162(m) of
the Code.
(c) Other Compensation. The Company may, upon recommendation of the
------------------
Committee, award to the Executive such other bonuses and compensation as it
deems appropriate and reasonable.
5. Employee Benefits and Vacation. (a) During the Employment Term,
------------------------------
Executive shall be entitled to (i) participate in all pension, retirement,
savings, welfare and other employee benefit plans and arrangements, including,
without limitation, any nonqualified deferred compensation plans, maintained by
the Company from time to time for the benefit of the senior
2
<PAGE>
executives of the Company in accordance with their respective terms as in effect
from time to time, (ii) a luxury automobile reasonably satisfactory to the
Executive and the Company (including, without limitation, reimbursement by the
Company of the costs of maintaining and operating such automobile), (iii)
reasonable use of Company-provided aircraft transportation for business-related
and personal travel, and (iv) the employment of a daycare provider for
Executive's dependents (with the daycare provider's salary paid by the Company
directly to the daycare provider net of any applicable federal or state
employment tax of which such taxes shall be withheld and remitted by the Company
to the appropriate taxing authorities and which salary shall not exceed
comparable salaries for such services). Executive acknowledges that the
aforementioned items will be includible as compensation for income tax purposes
to the extent required by applicable law. To the extent permitted under
applicable law, the Company shall not treat as compensation to Executive fringes
and perquisites provided to Executive or the items under Section 6 below.
(b) During the Employment Term, Executive shall be entitled to vacation
each year in accordance with the Company's policies in effect from time to time,
but in no event less than five (5) weeks paid vacation per calendar year. The
Executive shall also be entitled to such periods of sick leave as is customarily
provided by the Company for its senior executive employees.
6. Business Expenses. The Company shall also reimburse Executive for the
-----------------
travel, entertainment and other business expenses incurred by Executive in the
performance of his duties hereunder, in accordance with the Company's policies
as in effect from time to time.
7. Termination. (a) The employment of Executive under this Agreement
-----------
shall terminate upon the occurrence of any of the following events:
(i) the death of the Executive;
(ii) the termination of the Executive's employment by the
Company due to the Executive's Disability pursuant to Section 7(b)
hereof;
(iii) the termination of the Executive's employment by the
Executive for Good Reason pursuant to Section 7(c) hereof;
(iv) the termination of the Executive's employment by the
Company without Cause;
(v) the termination of employment by the Executive without
Good Reason upon sixty (60) days prior written notice;
(vi) the termination of employment by the Executive for any
reason during the period commencing on the date of a Change in Control
and ending on the day immediately prior to the second anniversary of
the Change in Control (the "Change in Control Protection Period");
3
<PAGE>
(vii) the termination of the Executive's employment by the
Company for Cause pursuant to Section 7(e); or
(viii) the retirement of the Executive by the Company at or
after his sixty-fifth birthday to the extent such termination is
specifically permitted as a stated exception from applicable federal
and state age discrimination laws based on position and retirement
benefits.
(b) Disability. If, by reason of the same or related physical or
----------
mental reasons, Executive is unable to carry out Executive's material duties
pursuant to this Agreement for more than six (6) months in any twelve (12)
consecutive month period (a "Disability"), the Company may terminate Executive's
employment for Disability upon thirty (30) days prior written notice, by a
notice of Disability termination, at any time thereafter during such twelve (12)
month period in which Executive is unable to carry out his duties as a result of
the same or related physical or mental illness. Such termination shall not be
effective if Executive returns to the full time performance of his material
duties within such thirty (30) day notice period.
(c) Termination for Good Reason. A Termination for Good Reason means
---------------------------
a termination by Executive by written notice given within sixty (60) days after
the occurrence of the Good Reason event. For purposes of this Agreement, "Good
Reason" shall mean the occurrence or failure to cause the occurrence, as the
case may be, without Executive's express written consent, of any of the
following circumstances, unless such circumstances are fully corrected prior to
the date of termination specified in the Notice of Termination for Good Reason
(as defined in Section 7(d) hereof): (i) any material diminution of Executive's
positions, duties or responsibilities hereunder (except in each case in
connection with the termination of Executive's employment for Cause or
Disability or as a result of Executive's death, or temporarily as a result of
Executive's illness or other absence), or the assignment to Executive of duties
or responsibilities that are inconsistent with Executive's position as Chief
Executive Officer; (ii) removal of the Executive from, or the non reelection of
the Executive to, the positions with the Company specified herein; (iii) a
relocation of the Company's principal United States executive offices to a
location more than fifty (50) miles from Portland, Oregon, or a relocation of
Executive away from such principal United States executive office; (iv) a
failure by the Company (A) to continue any bonus plan, program or arrangement in
which Executive is entitled to participate (the "Bonus Plans"), provided that
any such Bonus Plans may be modified at the Company's discretion from time to
time but shall be deemed terminated if (x) any such plan does not remain
substantially in the form in effect prior to such modification and (y) if plans
providing Executive with substantially similar benefits are not substituted
therefor ("Substitute Plans"), or (B) to continue Executive as a participant in
the Bonus Plans and Substitute Plans on at least the same basis as to potential
amount of the bonus and substantially the same level of criteria for
achievability thereof as Executive participated in immediately prior to any
change in such plans or awards, in accordance with the Bonus Plans and the
Substitute Plans; (v) any material breach by the Company of any material
provision of this Agreement; (vi) executive's removal from or failure to be
reelected to the Board; (vii) a failure of any successor to the Company to
assume in a writing delivered to Executive upon the assignee becoming such, the
obligations of the Company hereunder; or (viii) a failure of the Committee
4
<PAGE>
to grant the Executive an award of Options in accordance with Sections 4(b)
hereof, unless the applicable circumstances under (i) through (vii) are fully
corrected prior to the date of termination specified in the notice of
termination for Good Reason.
(d) Notice of Termination for Good Reason. A notice of termination
-------------------------------------
for Good Reason shall mean a notice that shall indicate the specific termination
provision in Section 7(c) relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination for Good
Reason. The failure by Executive to set forth in the notice of termination for
Good Reason any facts or circumstances which contribute to the showing of Good
Reason shall not waive any right of Executive hereunder or preclude Executive
from asserting such fact or circumstance in enforcing his rights hereunder. The
notice of termination for Good Reason shall provide for a date of termination
not less than fifteen (15) nor more than sixty (60) days after the date such
notice of termination for Good Reason is given.
(e) Cause. Subject to the notification provisions of Section 7(f)
-----
below, Executive's employment hereunder may be terminated by the Company for
Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i)
willful misconduct by Executive with regard to the Company or its business which
has a material adverse effect on the Company; (ii) the refusal of Executive to
follow the proper written direction of the Board, provided that the foregoing
refusal shall not be "Cause" if Executive in good faith believes that such
direction is illegal, unethical or immoral and promptly so notifies the Board;
(iii) the Executive being convicted of a felony (other than a felony involving a
traffic offense); (iv) the breach by Executive of any fiduciary duty owed by
Executive to the Company which has a material adverse effect on the Company; or
(v) Executive's material fraud with regard to the Company.
(f) Notice of Termination for Cause. A notice of termination for
-------------------------------
Cause shall mean a notice that shall indicate the specific termination provision
in Section 7(e) relied upon and shall set forth in reasonable detail the facts
and circumstances which provide a basis for termination for Cause. Further, a
notice of termination for Cause shall be required to include a copy of a
resolution duly adopted by at least two-thirds of the entire membership of the
Board at a meeting of the Board which was called for the purpose of considering
such termination and which Executive and his representative had the right to
attend and address the Board, finding that, in the good faith opinion of the
Board, Executive engaged in conduct set forth in the definition of Cause herein
and specifying the particulars thereof in reasonable detail. The date of
termination for a termination for Cause shall be the date indicated in the
notice of termination. Any purported termination for Cause which is held by a
court not to have been based on the grounds set forth in this Agreement or not
to have followed the procedures set forth in this Agreement shall be deemed a
termination by the Company without Cause.
8. Consequences of Termination of Employment. (a) Death. If
----------------------------------------- -----
Executive's employment is terminated during the Employment Term by reason of
Executive's death, the employment period under this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement except for: (i) any compensation earned but not yet paid, including
without limitation, any declared but unpaid bonus, any amount of Base Salary or
deferred compensation accrued or earned but unpaid, any accrued vacation pay
payable
5
<PAGE>
pursuant to the Company's policies and any unreimbursed business expenses
payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum
to Executive's estate; (ii) the product of (x) the target annual bonus for the
fiscal year of the Executive's death, multiplied by (y) a fraction, the
numerator of which is the number of days of the current fiscal year during which
the Executive was employed by the Company, and the denominator of which is 365,
which bonus shall be paid when bonuses for such period are paid to the other
executives; (iii) subject to Section 4(b) hereof, full accelerated vesting under
all outstanding equity-based and long-term incentive plans (with options
remaining outstanding as provided under the applicable stock option plan and a
pro rata payment under any long term incentive plans based on actual coverage
under such plans at the time payments normally would be made under such plans);
(iv) subject to Section 10 hereof, any other amounts or benefits owing to
Executive under the then applicable employee benefit plans or policies of the
Company, which shall be paid in accordance with such plans or policies; (v)
payment on a monthly basis of six (6) months of Executive's Base Salary on the
date of death, which shall be paid to Executive's spouse, or if she shall
predecease him, then to Executive's children (or their guardian if one is
appointed) in equal shares; and (vi) payment of the Executive's spouse's and
dependents' COBRA coverage premiums to the extent, and so long as, they remain
eligible for COBRA coverage, but in no event more than three (3) years. Section
12 hereof shall also continue to apply.
(b) Disability. If Executive's employment is terminated by reason of
----------
Executive's Disability, Executive shall be entitled to receive the payments and
benefits to which his representatives would be entitled in the event of a
termination of employment by reason of his death, provided that the payment of
Base Salary shall be reduced by the projected amount Executive would receive
under any long-term disability policy or program maintained by the Company
during the twelve (12) month period during which Base Salary is being paid.
Section 12 hereof shall also continue to apply.
(c) Termination by Executive for Good Reason or for any reason during
-----------------------------------------------------------------
the Change in Control Protection Period or Termination by the Company without
- -----------------------------------------------------------------------------
Cause or Nonextension of the Term by the Company. If (i) outside of the Change
- ------------------------------------------------
in Control Protection Period, Executive terminates his employment hereunder for
Good Reason during the Employment Term, (ii) a Change in Control occurs and
during the Change in Control Protection Period Executive terminates his
employment for any reason, (iii) Executive's employment with the Company is
terminated by the Company without Cause, or (iv) Executive's employment with the
Company terminates as a result of the Company giving notice of nonextension of
the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to
receive: (A) in a lump sum within ten (10) business days after such termination
(i) three (3) times Executive's Base Salary in effect of the date of
termination, (ii) three (3) times the highest annual bonus paid or payable to
Executive for any of the previous three (3) completed fiscal years by the
Company and its predecessors, (iii) any unreimbursed business expenses payable
pursuant to Section 6, and (iv) any Base Salary, Bonus, vacation pay or other
deferred compensation accrued or earned under law or in accordance with the
Company's policies but not yet paid at the date of termination; (B) subject to
Section 4(b) hereof, accelerated full vesting under all outstanding equity-based
and long-term incentive plans with Options remaining outstanding as provided
under the applicable stock option plan and a pro rata payment under any long
term incentive plans
6
<PAGE>
based on actual coverage under such plans payment being made at the time
payments would normally be made under such plans; (C) subject to Section 10
hereof, any other amounts or benefits due Executive under the then applicable
employee benefit plans of the Company as shall be determined and paid in
accordance with such plans, policies and practices; (D) three (3) years of
additional service and compensation credit (at his then compensation level) for
pension purposes under any defined benefit type qualified or nonqualified
pension plan or arrangement of the Company, measured from the date of
termination of employment and not credited to the extent that Executive is
otherwise entitled to such credit during such three (3) year period, which
payments shall be made through and in accordance with the terms of the
nonqualified defined benefit pension arrangement if any then exists, or, if not,
in an actuarially equivalent lump sum (using the actuarial factors then applying
in the Company's defined benefit plan covering Executive); (E) three (3) years
of the maximum Company contribution (assuming Executive deferred the maximum
amount and continued to earn his then current salary) measured from the date of
termination under any type of qualified or nonqualified 401(k) plan (payable at
the end of each such year); and (F) payment by the Company of the premiums for
the Executive (except in the case of death) and his spouse's and dependents'
health coverage for three (3) years under the Company's health plans which cover
the senior executives of the Company or materially similar benefits. Payments
under (F) above may, at the discretion of the Company, be made by continuing
participation of Executive in the plan as a terminee, by paying the applicable
COBRA premium for Executive and his spouse and dependents, or by covering
Executive and his spouse and dependents under substitute arrangements, provided
that, to the extent Executive incurs tax that he would not have incurred as an
active employee as a result of the aforementioned coverage or the benefits
provided thereunder, Executive shall receive from the Company an additional
payment in the amount necessary so that he will have no additional cost for
receiving such items or any additional payment. In the circumstances described
in each of (i) through (iv) above, Section 12 hereof shall also continue to
apply.
(d) Termination for Cause or Voluntary Resignation without Good Reason
------------------------------------------------------------------
or Retirement. If Executive's employment hereunder is terminated: (i) by the
- -------------
Company for Cause, (ii) by Executive without Good Reason outside of the Change
in Control Protection Period, or (iii) by the Company pursuant to Section
7(a)(viii) hereof, the Executive shall be entitled to receive only his Base
Salary through the date of termination, any earned but unpaid bonus, and any
unreimbursed business expenses payable pursuant to Section 6. Subject to
Section 4(b) hereof, all other benefits (including, without limitation, Options)
due Executive following such termination of employment shall be determined in
accordance with the plans, policies and practices of the Company.
9. Non-Competition. (a) Executive acknowledges that the Company
---------------
will suffer substantial damage, which would be difficult to ascertain, if
Executive shall enter into Competition, as defined below, with the Company and
that it is necessary for the Company to be protected by the prohibition against
Competition set forth herein.
(b) During the period of his actual employment by the Company and for
one (1) year thereafter, Executive will not enter into Competition with the
Company or its affiliated entities. Competition shall mean participating
directly in the day-to-day direct supervision or
7
<PAGE>
operations of a U.S. business which competes with, or is engaged, in the same
business as currently conducted by the Company; provided that Competition shall
--------
not include the items referred to in the proviso to Section 2(c).
(c) During Executive's Employment Term with the Company and for one
(1) year thereafter, the Executive shall not, without the express written
authorization of the Company, directly or indirectly (i) recruit, solicit or
induce any nonclerical employees of the Company or its affiliates to terminate
their employment with, or otherwise cease their relationship with, the Company
or its affiliates, or (ii) solicit or assist any third party in soliciting any
clients or customers of the Company or its affiliates.
(d) In the event of a breach or threatened breach of this Section 9,
Executive acknowledges that the Company will be caused irreparable injury and
that money damages may not be an adequate remedy and agree that the Company
shall be entitled to injunctive relief (in addition to its other remedies at
law) to have the provisions of this Section 9 enforced. If any restriction set
forth with regard to Competition is found by any court of competent
jurisdiction, or an arbitrator, to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend over the maximum period of
time, range of activities or geographic area as to which it may be enforceable.
10. No Mitigation; No Set-Off. In the event of any termination
--- -------------------------
of employment under Section 8, Executive shall be under no obligation to seek
other employment and there shall be no offset against any amounts due Executive
under this Agreement on account of any remuneration attributable to any
subsequent employment that Executive may obtain. Any amounts due under Section
8 are in the nature of severance payments, or liquidated damages, or both, and
are not in the nature of a penalty. Such amounts are inclusive, and in lieu of,
any amounts payable under any other salary continuation or cash severance
arrangement of the Company and to the extent paid or provided under any other
such arrangement shall be offset from the amount due hereunder.
11. Change in Control. For purposes of this Agreement, the term
-----------------
"Change in Control" shall mean (i) any "person" as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the
Company, any trustee or other fiduciary holding securities under any employee
benefit plan of the Company, or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of common stock of the Company), becoming the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii), or (iv) of this paragraph
or a director whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
promulgated under the Act) or other actual or threatened
8
<PAGE>
solicitation of proxies or consents by or on behalf of a person other than a
member of the Board) whose election by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two (2) year period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority of the
Board; (iii) the merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
provided, however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
(other than those covered in the exceptions in (i) above) acquires more than
twenty-five percent (25%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control; or (iv)
approval by the shareholders of the Company of a plan of complete liquidation of
the Company or the closing of the sale or disposition by the Company of all or
substantially all of the Company's assets other than the sale of all or
substantially all of the assets of the Company to a person or persons who
beneficially own, directly or indirectly, at least fifty percent (50%) or more
of the combined voting power of the outstanding voting securities of the Company
at the time of the sale.
12. Indemnification. (a) The Company agrees that if Executive is
---------------
made a party to or threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, member, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, other enterprise or non-profit organization,
including, without limitation, service with respect to employee benefit plans,
whether or not the basis of such Proceeding is alleged action in an official
capacity as a director, officer, member, employee, fiduciary or agent while
serving as a director, officer, member, employee, fiduciary or agent, he shall
be indemnified and held harmless by the applicable company to the fullest extent
authorized by Delaware law, as the same exists or may hereafter be amended,
against all Expenses incurred or suffered by Executive in connection therewith,
and such indemnification shall continue as to Executive even if Executive has
ceased to be an officer, director, member, fiduciary or agent, or is no longer
employed by the company, and shall inure to the benefit of his heirs, executors
and administrators.
(b) As used in this Agreement, the term "Expenses" shall include,
without limitation, damages, losses, judgments, liabilities, fines, penalties,
excise taxes, settlements and costs, attorneys' fees, accountants' fees, and
disbursements and costs of attachment or similar bonds, investigations, and any
expenses of establishing a right to indemnification under this Agreement.
(c) Expenses incurred by Executive in connection with any Proceeding
shall be paid by the Company in advance upon request of Executive and the giving
by the Executive of any undertakings required by applicable law.
9
<PAGE>
(d) Executive shall give the Company notice of any claim made against
him for which indemnity will or could be sought under this Agreement. In
addition, Executive shall give the Company such information and cooperation as
it may reasonably require and as shall be within Executive's power and at such
times and places as are reasonably convenient for Executive.
(e) With respect to any Proceeding as to which Executive notifies the
Company of the commencement thereof:
(i) The Company will be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Executive. Executive also shall have the right
to employ his own counsel in such action, suit or proceeding and the fees
and expenses of such counsel shall be at the expense of the Company.
(f) The Company shall not be liable to indemnify Executive under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim
in any manner which would impose any penalty or limitation on Executive without
Executive's written consent. Neither the company nor Executive will
unreasonably withhold or delay their consent to any proposed settlement.
(g) The right to indemnification and the payment of expenses incurred
in defending a Proceeding in advance of its final disposition conferred in this
Section 12 shall not be exclusive of any other right which Executive may have or
hereafter may acquire under any statute, provision of the certificate of
incorporation or by-laws of the Company, agreement, vote of stockholders or
disinterested directors or otherwise.
(h) The Company hereunder agrees to obtain officer and director
liability insurance policies covering Executive and shall maintain at all times
following the Commencement Date and during the Employment Term coverage under
such policies in the aggregate with regard to all officers and directors,
including Executive, of an amount not less than $10 million.
13. Special Tax Provision. (a) Anything in this Agreement to the
---------------------
contrary notwithstanding, in the event that any amount or benefit paid, payable,
or to be paid, or distributed, distributable, or to be distributed to or with
respect to Executive by the Company (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
person whose actions result in a change of ownership or effective control
covered by Code Section 280G(b)(2) or any person affiliated with the Company or
such person) as a result of a change in ownership or effective control of the
Company or a direct or indirect parent thereof (or the assets of any of the
foregoing) covered by Code Section 280G(b)(2)
10
<PAGE>
(collectively, the "Covered Payments") is or becomes subject to the excise tax
imposed by or under Section 4999 of the Code (or any similar tax that may
hereafter be imposed), and/or any interest, penalties or additions to tax, with
respect to such excise tax (such excise tax, together with such interest
penalties and additions to tax, is hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax
Reimbursement Payment") such that after payment by Executive of all taxes
(including, without limitation, any interest or penalties and any Excise Tax
imposed on or attributable to the Tax Reimbursement Payment itself), Executive
retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the
amount of the Excise Tax imposed upon the Covered Payments, and (ii) without
duplication, an amount equal to the product of (A) any deductions disallowed for
federal, state or local income tax purposes because of the inclusion of the Tax
Reimbursement Payment in Executive's adjusted gross income, and (B) the highest
applicable marginal rate of federal, state or local income taxation,
respectively, for the calendar year in which the Tax Reimbursement Payment is
made or is to be made. The intent of this Section 13 is that (a) the Executive,
after paying his federal, state and local income tax and payroll taxes, will be
in the same position as if he was not subject to the Excise Tax under Section
4999 of the Code and did not receive the extra payments pursuant to this Section
13 and this Section 13 shall be interpreted accordingly.
(b) Except as otherwise provided in Section 13(a), for purposes of
determining whether any of the Covered Payments will be subject to the Excise
Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated
as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code)
and such payments in excess of the Code Section 280G(b)(3) "base amount" shall
be treated as subject to the Excise Tax, unless, and except to the extent that,
the Company's independent certified public accountants appointed prior to the
change in ownership covered by Code Section 280G(b)(2) or legal counsel
(reasonably acceptable to Executive) appointed by such public accountants (or,
if the public accountants decline such appointment and decline appointing such
legal counsel, such independent certified public accountants as promptly
mutually agreed on in good faith by the Company and the Executive) (the
"Accountant"), deliver a written opinion to Executive, reasonably satisfactory
to Executive's legal counsel, that Executive has a reasonable basis to claim
that the Covered Payments (in whole or in part) (A) do not constitute "parachute
payments", (B) represent reasonable compensation for services actually rendered
(within the meaning of Section 280G(b)(4) of the Code) in excess of the "base
amount" allocable to such reasonable compensation, or (C) such "parachute
payments" are otherwise not subject to such Excise Tax (with appropriate legal
authority, detailed analysis and explanation provided therein by the
Accountants); and (ii) the value of any Covered Payments which are non-cash
benefits or deferred payments or benefits shall be determined by the Accountant
in accordance with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Tax Reimbursement
Payment, Executive shall be deemed: (i) to pay federal, state and/or local
income taxes at the highest applicable marginal rate of income taxation for the
calendar year in which the Tax Reimbursement Payment is made or is to be made,
and (ii) to have otherwise allowable deductions for federal, state and local
income tax purposes at least equal to those disallowed due to the inclusion of
the Tax Reimbursement Payment in Executive's adjusted gross income.
11
<PAGE>
(d) (i) (A) In the event that prior to the time the Executive has
filed any of his tax returns for the calendar year in which the change in
ownership event covered by Code Section 280G(b)(2) occurred, the Accountant
determines, for any reason whatever, the correct amount of the Tax Reimbursement
Payment to be less than the amount determined at the time the Tax Reimbursement
Payment was made, the Executive shall repay to the Company, at the time that the
amount of such reduction in Tax Reimbursement Payment is determined by the
Accountant, the portion of the prior Tax Reimbursement Payment attributable to
such reduction (including the portion of the Tax Reimbursement Payment
attributable to the Excise Tax and federal, state and local income tax imposed
on the portion of the Tax Reimbursement Payment being repaid by the Executive,
using the assumptions and methodology utilized to calculate the Tax
Reimbursement Payment (unless manifestly erroneous)), plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code.
(B) In the event that the determination set forth in (A) above is made
by the Accountant after the filing by the Executive of any of his tax returns
for the calendar year in which the change in ownership event covered by Code
Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of
such change in ownership, the Executive shall file at the request of the Company
an amended tax return in accordance with the Accountant's determination, but no
portion of the Tax Reimbursement Payment shall be required to be refunded to the
Company until actual refund or credit of such portion has been made to the
Executive, and interest payable to the Company shall not exceed the interest
received or credited to the Executive by such tax authority for the period it
held such portion (less any tax the Executive must pay on such interest and
which he is unable to deduct as a result of payment of the refund).
(C) In the event the Executive receives a refund pursuant to (B) above
and repays such amount to the Company, the Executive shall thereafter file for
refunds or credits by reason of the repayments to the Company. Executive and
the Company shall mutually agree upon the course of action, if any, to be
pursued (which shall be at the expense of the Company) if Executive's claim for
such refund or credit is denied.
(D) The Executive and the Company shall mutually agree upon the course
of action, if any, to be pursued (which shall be at the expense of the Company)
if the Executive's claim for refund or credit is denied.
(ii) In the event that the Excise Tax is later determined by the
Accountants or the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Tax Reimbursement Payment is made (including
by reason of any payment the existence or amount of which cannot be determined
at the time of the Tax Reimbursement Payment), the Company shall make an
additional Tax Reimbursement Payment in respect of such excess (plus any
interest, penalties or additions to tax payable with respect to such excess)
once the amount of such excess is finally determined.
(iii) In the event of any controversy with the Internal Revenue
Service (or other taxing authority) under this Section 13, subject to subpart
(i)(D) above, the Executive
12
<PAGE>
shall permit the Company to control issues related to this Section 13 (at its
expense), provided that such issues do not potentially materially adversely
affect the Executive, but the Executive shall control any other issues. In the
event the issues are interrelated, the Executive and the Company shall in good
faith cooperate so as not to jeopardize resolution of either issue, but if the
parties cannot agree Executive shall make the final determination with regard to
the issues. In the event of any conference with any taxing authority as to the
Excise Tax or associated income taxes, the Executive shall permit the
representative of the Company to accompany him and the Executive and his
representative shall cooperate with the Company and its representative.
(iv) With regard to any initial filing for a refund or any other
action required pursuant to this Section 13 (other than by mutual agreement) or,
if not required, agreed to by the Company and the Executive, the Executive shall
cooperate fully with the Company, provided that the foregoing shall not apply to
actions that are provided herein to be at the sole discretion of the Executive.
(e) The Tax Reimbursement Payment, or any portion thereof, payable by
the Company shall be paid not later than the fifth day following the
determination by the Accountant, and any payment made after such fifth day shall
bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company
shall use its best efforts to cause the Accountant to promptly deliver the
initial determination required hereunder and, if not delivered, within ninety
(90) days after the change in ownership event covered by Section 280G(b)(2) of
the Code, the Company shall pay the Executive the Tax Reimbursement Payment set
forth in an opinion from counsel recognized as knowledgeable in the relevant
areas selected by the Executive, and reasonably acceptable to the Company,
within five (5) days after delivery of such opinion. In accordance with Section
16(g), the Company may withhold from the Tax Reimbursement Payment and deposit
into applicable taxing authorities such amounts as are required to be withheld
by applicable law. To the extent that Executive is required to pay estimated or
other taxes on amounts received by Executive beyond any withheld amounts,
Executive shall promptly make such payments. The amount of such payment shall
be subject to later adjustment in accordance with the determination of the
Accountant as provided herein.
(f) The Company shall be responsible for all charges of the Accountant
and if (e) is applicable the reasonable charges for the opinion given by
Executive's counsel.
(g) The Company and the Executive shall mutually agree on and
promulgate further guidelines in accordance with this Section 13 to the extent,
if any, necessary to effect the reversal of excessive or shortfall Tax
Reimbursement Payments. The foregoing shall not in any way be inconsistent with
Section 13(d)(i)(D) hereof.
14. Legal and Other Fees and Expenses. In the event that a claim for
---------------------------------
payment or benefits under this Agreement is disputed, the Company shall pay all
reasonable attorney, accountant and other professional fees and reasonable
expenses incurred by Executive in pursuing such claim, unless the claim by the
Executive is found to be frivolous by any court or arbitrator.
13
<PAGE>
15. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Portland in the State of Oregon under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and the statement for reasons for
the decision; and (iv) request the matter to be handled by and in accordance
with the expedited procedures provided for in the Commercial Arbitration Rules.
The determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may be
entered on the arbitrators' award in any court having jurisdiction. All costs
of the American Arbitration Association and the arbitrator shall be borne by the
Company.
16. Miscellaneous.
-------------
(a) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oregon without reference to
principles of conflicts of laws.
(b) Entire Agreement/Amendments. This Agreement and the instruments
---------------------------
contemplated herein, contain the entire understanding of the parties with
respect to the employment of Executive by the Company from and after the
Commencement Date and supersedes any prior agreements, whether written or
otherwise, between the Company and Executive. There are no restrictions,
agreements, promises, warranties, covenants or undertakings between the parties
with respect to the subject matter herein other than those expressly set forth
herein and therein. This Agreement may not be altered, modified, or amended
except by written instrument signed by the parties hereto.
(c) No Waiver. The failure of a party to insist upon strict adherence
---------
to any term of this Agreement on any occasion shall not be considered a waiver
of such party's rights or deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement. Any
such waiver must be in writing and signed by Executive or an authorized officer
of the Company, as the case may be.
(d) Assignment. This Agreement shall not be assignable by Executive.
----------
This Agreement shall be assignable, with the consent of the Executive, by the
Company only to an acquiror of all or substantially all of the assets of the
Company, provided such acquiror promptly assumes all of the obligations
hereunder of the Company in a writing delivered to the Executive and otherwise
complies with the provisions hereof with regard to such assumption.
(e) Successors; Binding Agreement; Third Party Beneficiaries. This
--------------------------------------------------------
Agreement shall inure to the benefit of and be binding upon parties hereto and
their personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees legatees and permitted assignees of the parties
hereto. If the Executive dies while any amount would still be payable hereunder
if the Executive had continued to live, all such amounts, unless otherwise
14
<PAGE>
provided herein, shall be paid in accordance with the terms of the Agreement to
the personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees, legatees and permitted assignees of the parties
hereto.
(f) Communications. For the purpose of this Agreement, notices and
--------------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, and (ii)
two business days after being mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the initial page of this Agreement, provided that all
notices to the Company shall be directed to the attention of Lawrence Mendelsohn
of the Company, or to such other address as any party may have furnished to the
other in writing in accordance herewith. Notice of change of address shall be
effective only upon receipt.
(g) Withholding Taxes. The Company may withhold from any and all
-----------------
amounts payable under this Agreement such federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or regulation.
(h) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of Executive's employment.
(i) Counterparts. This Agreement may be signed in counterparts, each
------------
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
(j) Headings. The headings of the sections contained in this
--------
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By:
----------------------------------
Name:
Title:
--------------------------------------
Andrew A. Wiederhorn
16
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of November 15, 1996, by and between
Wilshire Financial Services Group Inc. (the "Company"), with its principal
office at 1776 SW Madison Street, Portland, Oregon 97205 and Lawrence A.
Mendelsohn, residing at 4428 SW Eleanor Lane, Portland, Oregon 97221 (the
"Executive").
W I T N E S S E T H:
-------------------
WHEREAS, Executive is currently employed as the President of the Company
and is also a director of the Company; and
WHEREAS, the Company and Executive desire to enter into this agreement (the
"Agreement") to set forth terms of Executive's employment by the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Employment. Except for earlier termination as provided in
------------------
Section 7 hereof, Executive's employment under this Agreement shall be for a
three (3) year term (the "Employment Term") commencing on the closing date for
the Company's initial public offering (the "Commencement Date"). Subject to
Section 7 hereof, the Employment Term shall be automatically extended for
additional terms of successive two (2) year periods unless the Company or
Executive gives written notice of the termination of Executive's employment
hereunder at least ninety (90) days prior to the expiration of the then current
Employment Term.
2. Positions. (a) Executive shall serve as President of the Company. It
---------
is the intention of the parties that during the Employment Term, Executive shall
also serve on the Board of Directors of the Company (the "Board") without
additional compensation. During the term of this Agreement, the Company shall
recommend the Executive for election as a director.
(b) Executive shall report directly to the Board or other managing body of
the Company and shall have such duties and authority, consistent with his
position as President of the Company, as shall be determined from time to time
by the Board, provided that Executive shall have authority comparable to that of
presidents of United States public companies that are similar in
size and business to the Company.
(c) During the Employment Term, Executive shall devote substantially all
of his business time, energy, skill and efforts to the performance of his duties
and responsibilities hereunder; provided, however, that Executive shall be
allowed to (i) serve as a director and an employee or
<PAGE>
consultant of privately held companies (including, but not limited to, Wilshire
Credit Corporation and its privately held affiliates); (ii) serve as a director
of other companies; (iii) engage in charitable activities; and (iv) manage his
personal financial and legal affairs.
3. Base Salary. During the Employment Term, the Company shall pay
-----------
Executive a base salary at the annual rate of not less than $300,000. Base
salary shall be payable in accordance with the usual payroll practices of the
Company. Executive's Base Salary shall be subject to annual review by the Board
in February of each year and may be increased, but not decreased, from time to
time upon recommendation of the Compensation Committee of the Board (the
"Committee"). The base salary determined as aforesaid from time to time shall
constitute "Base Salary" for purposes of this Agreement.
4. Incentive Compensation. (a) Bonus. For each fiscal year or portion
---------------------- -----
thereof during the Employment Term, Executive shall be entitled to receive an
annual bonus (the "Bonus") as determined by the Committee from time to time;
provided that such annual bonus together with the Annual Bonus payable to Andrew
Wiederhorn, will not exceed 20% of the Company's pre-tax income (as determined
in accordance with generally accepted accounting principles and reflected in the
Company's audited financial statements) for the relevant calender year (the
"Bonus Pool"); provided further that such Bonus shall be determined prior to
-------- -------
subtracting any Bonus payable hereunder or to Mr. Wiederhorn. The Executive and
Mr. Wiederhorn shall share equally in the first $400,000 of the Bonus Pool and
shall thereafter receive one-third (1/3rd) and two-thirds (2/3rds),
respectively, of any amounts remaining in the Bonus Pool. Such annual bonus
shall be payable in January of each year following the year for which the bonus
is payable (based on interim numbers for such year) and, if necessary, shall be
adjusted for any subsequent amendments to the Company's financial statements
following completion of the year end audit. Following any fiscal quarter, the
Company shall, at the request of the Executive, pay an advance on any such
Bonus; provided that any such advance (together with any prior advances during
the relevant calendar year) shall not exceed one-third (1/3rd) of 20% of the
Company's pre-tax income from the beginning of the relevant calendar year
through the end of such fiscal quarter (based on the Company's interim financial
statements). In the event that the aggregate amount of advances made by the
Company at the end of the relevant calendar year exceed the amount of the Bonus
as determined by the Committee for such year, the amount in excess of the Bonus
shall be treated as an interest free loan from the Company, which shall be
repaid by the Executive within six (6) months of the determination by the
Committee of such year's Bonus. Following the initial Employment Term, such
Bonus shall be subject to shareholder approval as and to the extent required by
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code").
(b) Options. The Executive shall also be entitled to participate in the
-------
Company's Incentive Stock Plan (the "Incentive Stock Plan") and receive
nonqualified, incentive or other options ("Options") to purchase shares of the
Company's common stock (the "Common Stock") under the Incentive Stock Plan as
determined by the Committee from time to time provided that the Incentive Stock
Plan is approved by the shareholders of the Company to the extent required by
Section 162(m) of the Code. Notwithstanding the foregoing, the Company may
recommend to the Committee that the Executive be granted Options under a plan
other than the Incentive Stock Plan provided that such other plan contains terms
and conditions which are substantially similar to the terms and conditions of
the Incentive Stock Plan, and further provided, that such other plan is approved
by the shareholders of the Company to the extent required by Section 162(m) of
the Code.
(c) Other Compensation. The Company may, upon recommendation of the
------------------
Committee, award to the Executive such other bonuses and compensation as it
deems appropriate and reasonable.
5. Employee Benefits and Vacation. (a) During the Employment Term,
------------------------------
Executive shall be entitled to (i) participate in all pension, retirement,
savings, welfare and other employee benefit plans and arrangements, including,
without limitation, any nonqualified deferred compensation plans, maintained by
the Company from time to time for the benefit of the senior executives of the
Company in accordance with their respective terms as in effect from time to
2
<PAGE>
time, (ii) a luxury automobile reasonably satisfactory to the Executive and the
Company (including, without limitation, reimbursement by the Company of the
costs of maintaining and operating such automobile), (iii) reasonable use of
Company-provided aircraft transportation for business-related and personal
travel, and (iv) the employment of a daycare provider for Executive's dependents
(with the daycare provider's salary paid by the Company directly to the daycare
provider net of any applicable federal or state employment tax of which such
taxes shall be withheld and remitted by the Company to the appropriate taxing
authorities and which salary shall not exceed comparable salaries for such
services). Executive acknowledges that the aforementioned items will be
includible as compensation for income tax purposes to the extent required by
applicable law. To the extent permitted under applicable law, the Company shall
not treat as compensation to Executive fringes and perquisites provided to
Executive or the items under Section 6 below.
(b) During the Employment Term, Executive shall be entitled to vacation
each year in accordance with the Company's policies in effect from time to time,
but in no event less than five (5) weeks paid vacation per calendar year. The
Executive shall also be entitled to such periods of sick leave as is customarily
provided by the Company for its senior executive employees.
6. Business Expenses. The Company shall also reimburse Executive for the
-----------------
travel, entertainment and other business expenses incurred by Executive in the
performance of his duties hereunder, in accordance with the Company's policies
as in effect from time to time.
7. Termination. (a) The employment of Executive under this Agreement
-----------
shall terminate upon the occurrence of any of the following events:
(i) the death of the Executive;
(ii) the termination of the Executive's employment by the
Company due to the Executive's Disability pursuant to Section 7(b)
hereof;
(iii) the termination of the Executive's employment by the
Executive for Good Reason pursuant to Section 7(c) hereof;
(iv) the termination of the Executive's employment by the
Company without Cause;
(v) the termination of employment by the Executive without
Good Reason upon sixty (60) days prior written notice;
(vi) the termination of employment by the Executive for any
reason during the period commencing on the date of a Change in Control
and ending on the day immediately prior to the second anniversary of
the Change in Control (the "Change in Control Protection Period");
3
<PAGE>
(vii) the termination of the Executive's employment by the
Company for Cause pursuant to Section 7(e); or
(viii) the retirement of the Executive by the Company at or
after his sixty-fifth birthday to the extent such termination is
specifically permitted as a stated exception from applicable federal
and state age discrimination laws based on position and retirement
benefits.
(b) Disability. If, by reason of the same or related physical or
----------
mental reasons, Executive is unable to carry out Executive's material duties
pursuant to this Agreement for more than six (6) months in any twelve (12)
consecutive month period (a "Disability"), the Company may terminate Executive's
employment for Disability upon thirty (30) days prior written notice, by a
notice of Disability termination, at any time thereafter during such twelve (12)
month period in which Executive is unable to carry out his duties as a result of
the same or related physical or mental illness. Such termination shall not be
effective if Executive returns to the full time performance of his material
duties within such thirty (30) day notice period.
(c) Termination for Good Reason. A Termination for Good Reason means
---------------------------
a termination by Executive by written notice given within sixty (60) days after
the occurrence of the Good Reason event. For purposes of this Agreement, "Good
Reason" shall mean the occurrence or failure to cause the occurrence, as the
case may be, without Executive's express written consent, of any of the
following circumstances, unless such circumstances are fully corrected prior to
the date of termination specified in the Notice of Termination for Good Reason
(as defined in Section 7(d) hereof): (i) any material diminution of Executive's
positions, duties or responsibilities hereunder (except in each case in
connection with the termination of Executive's employment for Cause or
Disability or as a result of Executive's death, or temporarily as a result of
Executive's illness or other absence), or the assignment to Executive of duties
or responsibilities that are inconsistent with Executive's position as
President; (ii) removal of the Executive from, or the non reelection of the
Executive to, the positions with the Company specified herein; (iii) a
relocation of the Company's principal United States executive offices to a
location more than fifty (50) miles from Portland, Oregon, or a relocation of
Executive away from such principal United States executive office; (iv) a
failure by the Company (A) to continue any bonus plan, program or arrangement in
which Executive is entitled to participate (the "Bonus Plans"), provided that
any such Bonus Plans may be modified at the Company's discretion from time to
time but shall be deemed terminated if (x) any such plan does not remain
substantially in the form in effect prior to such modification and (y) if plans
providing Executive with substantially similar benefits are not substituted
therefor ("Substitute Plans"), or (B) to continue Executive as a participant in
the Bonus Plans and Substitute Plans on at least the same basis as to potential
amount of the bonus and substantially the same level of criteria for
achievability thereof as Executive participated in immediately prior to any
change in such plans or awards, in accordance with the Bonus Plans and the
Substitute Plans; (v) any material breach by the Company of any material
provision of this Agreement; (vi) executive's removal from or failure to be
reelected to the Board; (vii) a failure of any successor to the Company to
assume in a writing delivered to Executive upon the assignee becoming such, the
obligations of the Company hereunder; or (viii) a failure of the Committee to
grant the Executive an award of
4
<PAGE>
Options in accordance with Sections 4(b) hereof, unless the applicable
circumstances under (i) through (vii) are fully corrected prior to the date of
termination specified in the notice of termination for Good Reason.
(d) Notice of Termination for Good Reason. A notice of termination
-------------------------------------
for Good Reason shall mean a notice that shall indicate the specific termination
provision in Section 7(c) relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination for Good
Reason. The failure by Executive to set forth in the notice of termination for
Good Reason any facts or circumstances which contribute to the showing of Good
Reason shall not waive any right of Executive hereunder or preclude Executive
from asserting such fact or circumstance in enforcing his rights hereunder. The
notice of termination for Good Reason shall provide for a date of termination
not less than fifteen (15) nor more than sixty (60) days after the date such
notice of termination for Good Reason is given.
(e) Cause. Subject to the notification provisions of Section 7(f)
-----
below, Executive's employment hereunder may be terminated by the Company for
Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i)
willful misconduct by Executive with regard to the Company or its business which
has a material adverse effect on the Company; (ii) the refusal of Executive to
follow the proper written direction of the Board, provided that the foregoing
refusal shall not be "Cause" if Executive in good faith believes that such
direction is illegal, unethical or immoral and promptly so notifies the Board;
(iii) the Executive being convicted of a felony (other than a felony involving a
traffic offense); (iv) the breach by Executive of any fiduciary duty owed by
Executive to the Company which has a material adverse effect on the Company; or
(v) Executive's material fraud with regard to the Company.
(f) Notice of Termination for Cause. A notice of termination for
-------------------------------
Cause shall mean a notice that shall indicate the specific termination provision
in Section 7(e) relied upon and shall set forth in reasonable detail the facts
and circumstances which provide a basis for termination for Cause. Further, a
notice of termination for Cause shall be required to include a copy of a
resolution duly adopted by at least two-thirds of the entire membership of the
Board at a meeting of the Board which was called for the purpose of considering
such termination and which Executive and his representative had the right to
attend and address the Board, finding that, in the good faith opinion of the
Board, Executive engaged in conduct set forth in the definition of Cause herein
and specifying the particulars thereof in reasonable detail. The date of
termination for a termination for Cause shall be the date indicated in the
notice of termination. Any purported termination for Cause which is held by a
court not to have been based on the grounds set forth in this Agreement or not
to have followed the procedures set forth in this Agreement shall be deemed a
termination by the Company without Cause.
8. Consequences of Termination of Employment. (a) Death. If
----------------------------------------- -----
Executive's employment is terminated during the Employment Term by reason of
Executive's death, the employment period under this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement except for: (i) any compensation earned but not yet paid, including
without limitation, any declared but unpaid bonus, any amount of Base Salary or
deferred compensation accrued or earned but unpaid, any accrued vacation pay
payable
5
<PAGE>
pursuant to the Company's policies and any unreimbursed business expenses
payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum
to Executive's estate; (ii) the product of (x) the target annual bonus for the
fiscal year of the Executive's death, multiplied by (y) a fraction, the
numerator of which is the number of days of the current fiscal year during which
the Executive was employed by the Company, and the denominator of which is 365,
which bonus shall be paid when bonuses for such period are paid to the other
executives; (iii) subject to Section 4(b) hereof, full accelerated vesting under
all outstanding equity-based and long-term incentive plans (with options
remaining outstanding as provided under the applicable stock option plan and a
pro rata payment under any long term incentive plans based on actual coverage
under such plans at the time payments normally would be made under such plans);
(iv) subject to Section 10 hereof, any other amounts or benefits owing to
Executive under the then applicable employee benefit plans or policies of the
Company, which shall be paid in accordance with such plans or policies; (v)
payment on a monthly basis of six (6) months of Executive's Base Salary on the
date of death, which shall be paid to Executive's spouse, or if she shall
predecease him, then to Executive's children (or their guardian if one is
appointed) in equal shares; and (vi) payment of the Executive's spouse's and
dependents' COBRA coverage premiums to the extent, and so long as, they remain
eligible for COBRA coverage, but in no event more than three (3) years. Section
12 hereof shall also continue to apply.
(b) Disability. If Executive's employment is terminated by reason of
----------
Executive's Disability, Executive shall be entitled to receive the payments and
benefits to which his representatives would be entitled in the event of a
termination of employment by reason of his death, provided that the payment of
Base Salary shall be reduced by the projected amount Executive would receive
under any long-term disability policy or program maintained by the Company
during the twelve (12) month period during which Base Salary is being paid.
Section 12 hereof shall also continue to apply.
(c) Termination by Executive for Good Reason or for any reason during
-----------------------------------------------------------------
the Change in Control Protection Period or Termination by the Company without
- -----------------------------------------------------------------------------
Cause or Nonextension of the Term by the Company. If (i) outside of the Change
- ------------------------------------------------
in Control Protection Period, Executive terminates his employment hereunder for
Good Reason during the Employment Term, (ii) a Change in Control occurs and
during the Change in Control Protection Period Executive terminates his
employment for any reason, (iii) Executive's employment with the Company is
terminated by the Company without Cause, or (iv) Executive's employment with the
Company terminates as a result of the Company giving notice of nonextension of
the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to
receive: (A) in a lump sum within ten (10) business days after such termination
(i) three (3) times Executive's Base Salary in effect of the date of
termination, (ii) three (3) times the highest annual bonus paid or payable to
Executive for any of the previous three (3) completed fiscal years by the
Company and its predecessors, (iii) any unreimbursed business expenses payable
pursuant to Section 6, and (iv) any Base Salary, Bonus, vacation pay or other
deferred compensation accrued or earned under law or in accordance with the
Company's policies but not yet paid at the date of termination; (B) subject to
Section 4(b) hereof, accelerated full vesting under all outstanding equity-based
and long-term incentive plans with Options remaining outstanding as provided
under the applicable stock option plan and a pro rata payment under any long
term incentive plans
6
<PAGE>
based on actual coverage under such plans payment being made at the time
payments would normally be made under such plans; (C) subject to Section 10
hereof, any other amounts or benefits due Executive under the then applicable
employee benefit plans of the Company as shall be determined and paid in
accordance with such plans, policies and practices; (D) three (3) years of
additional service and compensation credit (at his then compensation level) for
pension purposes under any defined benefit type qualified or nonqualified
pension plan or arrangement of the Company, measured from the date of
termination of employment and not credited to the extent that Executive is
otherwise entitled to such credit during such three (3) year period, which
payments shall be made through and in accordance with the terms of the
nonqualified defined benefit pension arrangement if any then exists, or, if not,
in an actuarially equivalent lump sum (using the actuarial factors then applying
in the Company's defined benefit plan covering Executive); (E) three (3) years
of the maximum Company contribution (assuming Executive deferred the maximum
amount and continued to earn his then current salary) measured from the date of
termination under any type of qualified or nonqualified 401(k) plan (payable at
the end of each such year); and (F) payment by the Company of the premiums for
the Executive (except in the case of death) and his spouse's and dependents'
health coverage for three (3) years under the Company's health plans which cover
the senior executives of the Company or materially similar benefits. Payments
under (F) above may, at the discretion of the Company, be made by continuing
participation of Executive in the plan as a terminee, by paying the applicable
COBRA premium for Executive and his spouse and dependents, or by covering
Executive and his spouse and dependents under substitute arrangements, provided
that, to the extent Executive incurs tax that he would not have incurred as an
active employee as a result of the aforementioned coverage or the benefits
provided thereunder, Executive shall receive from the Company an additional
payment in the amount necessary so that he will have no additional cost for
receiving such items or any additional payment. In the circumstances described
in each of (i) through (iv) above, Section 12 hereof shall also continue to
apply.
(d) Termination for Cause or Voluntary Resignation without Good Reason
------------------------------------------------------------------
or Retirement. If Executive's employment hereunder is terminated: (i) by the
- -------------
Company for Cause, (ii) by Executive without Good Reason outside of the Change
in Control Protection Period, or (iii) by the Company pursuant to Section
7(a)(viii) hereof, the Executive shall be entitled to receive only his Base
Salary through the date of termination, any earned but unpaid bonus, and any
unreimbursed business expenses payable pursuant to Section 6. Subject to
Section 4(b) hereof, all other benefits (including, without limitation, Options)
due Executive following such termination of employment shall be determined in
accordance with the plans, policies and practices of the Company.
9. Non-Competition. (a) Executive acknowledges that the Company
---------------
will suffer substantial damage, which would be difficult to ascertain, if
Executive shall enter into Competition, as defined below, with the Company and
that it is necessary for the Company to be protected by the prohibition against
Competition set forth herein.
(b) During the period of his actual employment by the Company and for
one (1) year thereafter, Executive will not enter into Competition with the
Company or its affiliated entities. Competition shall mean participating
directly in the day-to-day direct supervision or
7
<PAGE>
operations of a U.S. business which competes with, or is engaged, in the same
business as currently conducted by the Company; provided that Competition shall
--------
not include the items referred to in the proviso to Section 2(c).
(c) During Executive's Employment Term with the Company and for one
(1) year thereafter, the Executive shall not, without the express written
authorization of the Company, directly or indirectly (i) recruit, solicit or
induce any nonclerical employees of the Company or its affiliates to terminate
their employment with, or otherwise cease their relationship with, the Company
or its affiliates, or (ii) solicit or assist any third party in soliciting any
clients or customers of the Company or its affiliates.
(d) In the event of a breach or threatened breach of this Section 9,
Executive acknowledges that the Company will be caused irreparable injury and
that money damages may not be an adequate remedy and agree that the Company
shall be entitled to injunctive relief (in addition to its other remedies at
law) to have the provisions of this Section 9 enforced. If any restriction set
forth with regard to Competition is found by any court of competent
jurisdiction, or an arbitrator, to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend over the maximum period of
time, range of activities or geographic area as to which it may be enforceable.
10. No Mitigation; No Set-Off. In the event of any termination
--- -------------------------
of employment under Section 8, Executive shall be under no obligation to seek
other employment and there shall be no offset against any amounts due Executive
under this Agreement on account of any remuneration attributable to any
subsequent employment that Executive may obtain. Any amounts due under Section
8 are in the nature of severance payments, or liquidated damages, or both, and
are not in the nature of a penalty. Such amounts are inclusive, and in lieu of,
any amounts payable under any other salary continuation or cash severance
arrangement of the Company and to the extent paid or provided under any other
such arrangement shall be offset from the amount due hereunder.
11. Change in Control. For purposes of this Agreement, the term
-----------------
"Change in Control" shall mean (i) any "person" as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the
Company, any trustee or other fiduciary holding securities under any employee
benefit plan of the Company, or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of common stock of the Company), becoming the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii), or (iv) of this paragraph
or a director whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
promulgated under the Act) or other actual or threatened
8
<PAGE>
solicitation of proxies or consents by or on behalf of a person other than a
member of the Board) whose election by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two (2) year period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority of the
Board; (iii) the merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
provided, however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
(other than those covered in the exceptions in (i) above) acquires more than
twenty-five percent (25%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control; or (iv)
approval by the shareholders of the Company of a plan of complete liquidation of
the Company or the closing of the sale or disposition by the Company of all or
substantially all of the Company's assets other than the sale of all or
substantially all of the assets of the Company to a person or persons who
beneficially own, directly or indirectly, at least fifty percent (50%) or more
of the combined voting power of the outstanding voting securities of the Company
at the time of the sale.
12. Indemnification. (a) The Company agrees that if Executive is
---------------
made a party to or threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, member, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, other enterprise or non-profit organization,
including, without limitation, service with respect to employee benefit plans,
whether or not the basis of such Proceeding is alleged action in an official
capacity as a director, officer, member, employee, fiduciary or agent while
serving as a director, officer, member, employee, fiduciary or agent, he shall
be indemnified and held harmless by the applicable company to the fullest extent
authorized by Delaware law, as the same exists or may hereafter be amended,
against all Expenses incurred or suffered by Executive in connection therewith,
and such indemnification shall continue as to Executive even if Executive has
ceased to be an officer, director, member, fiduciary or agent, or is no longer
employed by the company, and shall inure to the benefit of his heirs, executors
and administrators.
(b) As used in this Agreement, the term "Expenses" shall include,
without limitation, damages, losses, judgments, liabilities, fines, penalties,
excise taxes, settlements and costs, attorneys' fees, accountants' fees, and
disbursements and costs of attachment or similar bonds, investigations, and any
expenses of establishing a right to indemnification under this Agreement.
(c) Expenses incurred by Executive in connection with any Proceeding
shall be paid by the Company in advance upon request of Executive and the giving
by the Executive of any undertakings required by applicable law.
9
<PAGE>
(d) Executive shall give the Company notice of any claim made against
him for which indemnity will or could be sought under this Agreement. In
addition, Executive shall give the Company such information and cooperation as
it may reasonably require and as shall be within Executive's power and at such
times and places as are reasonably convenient for Executive.
(e) With respect to any Proceeding as to which Executive notifies the
Company of the commencement thereof:
(i) The Company will be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Executive. Executive also shall have the right
to employ his own counsel in such action, suit or proceeding and the fees
and expenses of such counsel shall be at the expense of the Company.
(f) The Company shall not be liable to indemnify Executive under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim
in any manner which would impose any penalty or limitation on Executive without
Executive's written consent. Neither the company nor Executive will
unreasonably withhold or delay their consent to any proposed settlement.
(g) The right to indemnification and the payment of expenses incurred
in defending a Proceeding in advance of its final disposition conferred in this
Section 12 shall not be exclusive of any other right which Executive may have or
hereafter may acquire under any statute, provision of the certificate of
incorporation or by-laws of the Company, agreement, vote of stockholders or
disinterested directors or otherwise.
(h) The Company hereunder agrees to obtain officer and director
liability insurance policies covering Executive and shall maintain at all times
following the Commencement Date and during the Employment Term coverage under
such policies in the aggregate with regard to all officers and directors,
including Executive, of an amount not less than $10 million.
13. Special Tax Provision. (a) Anything in this Agreement to the
---------------------
contrary notwithstanding, in the event that any amount or benefit paid, payable,
or to be paid, or distributed, distributable, or to be distributed to or with
respect to Executive by the Company (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
person whose actions result in a change of ownership or effective control
covered by Code Section 280G(b)(2) or any person affiliated with the Company or
such person) as a result of a change in ownership or effective control of the
Company or a direct or indirect parent thereof (or the assets of any of the
foregoing) covered by Code Section 280G(b)(2)
10
<PAGE>
(collectively, the "Covered Payments") is or becomes subject to the excise tax
imposed by or under Section 4999 of the Code (or any similar tax that may
hereafter be imposed), and/or any interest, penalties or additions to tax, with
respect to such excise tax (such excise tax, together with such interest
penalties and additions to tax, is hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax
Reimbursement Payment") such that after payment by Executive of all taxes
(including, without limitation, any interest or penalties and any Excise Tax
imposed on or attributable to the Tax Reimbursement Payment itself), Executive
retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the
amount of the Excise Tax imposed upon the Covered Payments, and (ii) without
duplication, an amount equal to the product of (A) any deductions disallowed for
federal, state or local income tax purposes because of the inclusion of the Tax
Reimbursement Payment in Executive's adjusted gross income, and (B) the highest
applicable marginal rate of federal, state or local income taxation,
respectively, for the calendar year in which the Tax Reimbursement Payment is
made or is to be made. The intent of this Section 13 is that (a) the Executive,
after paying his federal, state and local income tax and payroll taxes, will be
in the same position as if he was not subject to the Excise Tax under Section
4999 of the Code and did not receive the extra payments pursuant to this Section
13 and this Section 13 shall be interpreted accordingly.
(b) Except as otherwise provided in Section 13(a), for purposes of
determining whether any of the Covered Payments will be subject to the Excise
Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated
as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code)
and such payments in excess of the Code Section 280G(b)(3) "base amount" shall
be treated as subject to the Excise Tax, unless, and except to the extent that,
the Company's independent certified public accountants appointed prior to the
change in ownership covered by Code Section 280G(b)(2) or legal counsel
(reasonably acceptable to Executive) appointed by such public accountants (or,
if the public accountants decline such appointment and decline appointing such
legal counsel, such independent certified public accountants as promptly
mutually agreed on in good faith by the Company and the Executive) (the
"Accountant"), deliver a written opinion to Executive, reasonably satisfactory
to Executive's legal counsel, that Executive has a reasonable basis to claim
that the Covered Payments (in whole or in part) (A) do not constitute "parachute
payments", (B) represent reasonable compensation for services actually rendered
(within the meaning of Section 280G(b)(4) of the Code) in excess of the "base
amount" allocable to such reasonable compensation, or (C) such "parachute
payments" are otherwise not subject to such Excise Tax (with appropriate legal
authority, detailed analysis and explanation provided therein by the
Accountants); and (ii) the value of any Covered Payments which are non-cash
benefits or deferred payments or benefits shall be determined by the Accountant
in accordance with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Tax Reimbursement
Payment, Executive shall be deemed: (i) to pay federal, state and/or local
income taxes at the highest applicable marginal rate of income taxation for the
calendar year in which the Tax Reimbursement Payment is made or is to be made,
and (ii) to have otherwise allowable deductions for federal, state and local
income tax purposes at least equal to those disallowed due to the inclusion of
the Tax Reimbursement Payment in Executive's adjusted gross income.
11
<PAGE>
(d) (i) (A) In the event that prior to the time the Executive has
filed any of his tax returns for the calendar year in which the change in
ownership event covered by Code Section 280G(b)(2) occurred, the Accountant
determines, for any reason whatever, the correct amount of the Tax Reimbursement
Payment to be less than the amount determined at the time the Tax Reimbursement
Payment was made, the Executive shall repay to the Company, at the time that the
amount of such reduction in Tax Reimbursement Payment is determined by the
Accountant, the portion of the prior Tax Reimbursement Payment attributable to
such reduction (including the portion of the Tax Reimbursement Payment
attributable to the Excise Tax and federal, state and local income tax imposed
on the portion of the Tax Reimbursement Payment being repaid by the Executive,
using the assumptions and methodology utilized to calculate the Tax
Reimbursement Payment (unless manifestly erroneous)), plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code.
(B) In the event that the determination set forth in (A) above is made
by the Accountant after the filing by the Executive of any of his tax returns
for the calendar year in which the change in ownership event covered by Code
Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of
such change in ownership, the Executive shall file at the request of the Company
an amended tax return in accordance with the Accountant's determination, but no
portion of the Tax Reimbursement Payment shall be required to be refunded to the
Company until actual refund or credit of such portion has been made to the
Executive, and interest payable to the Company shall not exceed the interest
received or credited to the Executive by such tax authority for the period it
held such portion (less any tax the Executive must pay on such interest and
which he is unable to deduct as a result of payment of the refund).
(C) In the event the Executive receives a refund pursuant to (B) above
and repays such amount to the Company, the Executive shall thereafter file for
refunds or credits by reason of the repayments to the Company. Executive and
the Company shall mutually agree upon the course of action, if any, to be
pursued (which shall be at the expense of the Company) if Executive's claim for
such refund or credit is denied.
(D) The Executive and the Company shall mutually agree upon the course
of action, if any, to be pursued (which shall be at the expense of the Company)
if the Executive's claim for refund or credit is denied.
(ii) In the event that the Excise Tax is later determined by the
Accountants or the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Tax Reimbursement Payment is made (including
by reason of any payment the existence or amount of which cannot be determined
at the time of the Tax Reimbursement Payment), the Company shall make an
additional Tax Reimbursement Payment in respect of such excess (plus any
interest, penalties or additions to tax payable with respect to such excess)
once the amount of such excess is finally determined.
(iii) In the event of any controversy with the Internal Revenue
Service (or other taxing authority) under this Section 13, subject to subpart
(i)(D) above, the Executive
12
<PAGE>
shall permit the Company to control issues related to this Section 13 (at its
expense), provided that such issues do not potentially materially adversely
affect the Executive, but the Executive shall control any other issues. In the
event the issues are interrelated, the Executive and the Company shall in good
faith cooperate so as not to jeopardize resolution of either issue, but if the
parties cannot agree Executive shall make the final determination with regard to
the issues. In the event of any conference with any taxing authority as to the
Excise Tax or associated income taxes, the Executive shall permit the
representative of the Company to accompany him and the Executive and his
representative shall cooperate with the Company and its representative.
(iv) With regard to any initial filing for a refund or any other
action required pursuant to this Section 13 (other than by mutual agreement) or,
if not required, agreed to by the Company and the Executive, the Executive shall
cooperate fully with the Company, provided that the foregoing shall not apply to
actions that are provided herein to be at the sole discretion of the Executive.
(e) The Tax Reimbursement Payment, or any portion thereof, payable by
the Company shall be paid not later than the fifth day following the
determination by the Accountant, and any payment made after such fifth day shall
bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company
shall use its best efforts to cause the Accountant to promptly deliver the
initial determination required hereunder and, if not delivered, within ninety
(90) days after the change in ownership event covered by Section 280G(b)(2) of
the Code, the Company shall pay the Executive the Tax Reimbursement Payment set
forth in an opinion from counsel recognized as knowledgeable in the relevant
areas selected by the Executive, and reasonably acceptable to the Company,
within five (5) days after delivery of such opinion. In accordance with Section
16(g), the Company may withhold from the Tax Reimbursement Payment and deposit
into applicable taxing authorities such amounts as are required to be withheld
by applicable law. To the extent that Executive is required to pay estimated or
other taxes on amounts received by Executive beyond any withheld amounts,
Executive shall promptly make such payments. The amount of such payment shall
be subject to later adjustment in accordance with the determination of the
Accountant as provided herein.
(f) The Company shall be responsible for all charges of the Accountant
and if (e) is applicable the reasonable charges for the opinion given by
Executive's counsel.
(g) The Company and the Executive shall mutually agree on and
promulgate further guidelines in accordance with this Section 13 to the extent,
if any, necessary to effect the reversal of excessive or shortfall Tax
Reimbursement Payments. The foregoing shall not in any way be inconsistent with
Section 13(d)(i)(D) hereof.
14. Legal and Other Fees and Expenses. In the event that a claim for
---------------------------------
payment or benefits under this Agreement is disputed, the Company shall pay all
reasonable attorney, accountant and other professional fees and reasonable
expenses incurred by Executive in pursuing such claim, unless the claim by the
Executive is found to be frivolous by any court or arbitrator.
13
<PAGE>
15. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Portland in the State of Oregon under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and the statement for reasons for
the decision; and (iv) request the matter to be handled by and in accordance
with the expedited procedures provided for in the Commercial Arbitration Rules.
The determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may be
entered on the arbitrators' award in any court having jurisdiction. All costs
of the American Arbitration Association and the arbitrator shall be borne by the
Company.
16. Miscellaneous.
-------------
(a) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oregon without reference to
principles of conflicts of laws.
(b) Entire Agreement/Amendments. This Agreement and the instruments
---------------------------
contemplated herein, contain the entire understanding of the parties with
respect to the employment of Executive by the Company from and after the
Commencement Date and supersedes any prior agreements, whether written or
otherwise, between the Company and Executive. There are no restrictions,
agreements, promises, warranties, covenants or undertakings between the parties
with respect to the subject matter herein other than those expressly set forth
herein and therein. This Agreement may not be altered, modified, or amended
except by written instrument signed by the parties hereto.
(c) No Waiver. The failure of a party to insist upon strict adherence
---------
to any term of this Agreement on any occasion shall not be considered a waiver
of such party's rights or deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement. Any
such waiver must be in writing and signed by Executive or an authorized officer
of the Company, as the case may be.
(d) Assignment. This Agreement shall not be assignable by Executive.
----------
This Agreement shall be assignable, with the consent of the Executive, by the
Company only to an acquiror of all or substantially all of the assets of the
Company, provided such acquiror promptly assumes all of the obligations
hereunder of the Company in a writing delivered to the Executive and otherwise
complies with the provisions hereof with regard to such assumption.
(e) Successors; Binding Agreement; Third Party Beneficiaries. This
--------------------------------------------------------
Agreement shall inure to the benefit of and be binding upon parties hereto and
their personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees legatees and permitted assignees of the parties
hereto. If the Executive dies while any amount would still be payable hereunder
if the Executive had continued to live, all such amounts, unless otherwise
14
<PAGE>
provided herein, shall be paid in accordance with the terms of the Agreement to
the personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees, legatees and permitted assignees of the parties
hereto.
(f) Communications. For the purpose of this Agreement, notices and
--------------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, and (ii)
two business days after being mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the initial page of this Agreement, provided that all
notices to the Company shall be directed to the attention of Andy Wiederhorn of
the Company, or to such other address as any party may have furnished to the
other in writing in accordance herewith. Notice of change of address shall be
effective only upon receipt.
(g) Withholding Taxes. The Company may withhold from any and all
-----------------
amounts payable under this Agreement such federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or regulation.
(h) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of Executive's employment.
(i) Counterparts. This Agreement may be signed in counterparts, each
------------
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
(j) Headings. The headings of the sections contained in this
--------
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By:
----------------------------------
Name:
Title:
--------------------------------------
Lawrence A. Mendelsohn
16
<PAGE>
EXHIBIT 10.12
LOAN SERVICING AGREEMENT
This Agreement is dated November 15, 1996 among Wilshire Credit
Corporation, a Nevada corporation ("WCC"), Wilshire Funding Corporation, a
Delaware corporation, ("WFC") Wilshire Financial Services Group Inc., a Delaware
corporation ("WFSG") and Wilshire Servicing Corporation, a Delaware corporation
("WSC"). WFC and WFSG are referred to as the "Company".
RECITALS
--------
The Company owns, and intends to acquire and make, loans, accounts,
chattel paper, real estate owned and other financial assets ("loans") during the
term of this Loan Servicing Agreement (the "Agreement"). The Company desires
that WCC service such loans. In addition, future entities that are affiliated
with the Company ("Affiliates") may acquire or make loans. The term Loan or
Loans shall mean all loans now owned by the Company or its Affiliates, acquired
or made by the Company or its Affiliates, or for which the Company or its
Affiliate acts as a master servicer, and including, without limitation, consumer
and commercial loans, secured and unsecured loans, and whether or not evidenced
by a promissory note.
The parties hereby agree as follows:
1. Non-Exclusive Servicing of Loans. At the request of the Company, WCC
--------------------------------
shall provide loan portfolio management services, including billing, portfolio
administration and collection services ("Services") for all Loans. The Company
agrees that WCC shall not be required to service loans for which WCC may not
have applicable licenses.
2. Manner and Performance of Service. Except as specifically provided
---------------------------------
herein, WCC shall be entitled to exercise its sole discretion in servicing the
Loans. WCC shall devote such time and attention as shall be necessary to
provide the Company with the Services described herein. WCC may service its own
loans and render services to any other current clients for existing contracts
and amendments thereof, provided that such activities do not interfere with
WCC's performance of the Services. Without limitation, WCC's Services shall
consist of the following:
2.1 WCC's Duties in General. WCC shall administer the Loans with
-----------------------
reasonable care, using that degree of skill and attention that WCC exercises
with respect to comparable Loans that it services for its own account or as a
fiduciary for others. WCC shall take all necessary actions which WCC in good
faith determines are commercially reasonable in regard to each Loan until it is
collected or WCC, in its good
<PAGE>
faith judgment, determines that it is no longer commercially reasonable to
continue to try to collect the outstanding indebtedness of the Loan.
2.2 Compliance. WCC shall use its best efforts to comply throughout
----------
the term of this Agreement with all requirements of applicable federal, state
and local laws and regulations thereunder, including to the extent applicable,
any consumer and debt collection protection laws and any other consumer credit,
equal opportunity and disclosure laws.
2.3 Collection. WCC shall use its reasonable efforts, but not less
----------
than the same efforts it uses with respect to comparable loans that it services
for its own account or for others, to collect all payments due and to become due
under each of the Loans from the party or parties liable thereunder (a
"Borrower").
2.4 Subcontractors. WCC may subcontract services, but no such
--------------
subcontract shall relieve or reduce WCC's obligations to perform services as
provided in this Agreement.
2.5 Indemnity. WCC shall reimburse and indemnify the Company and its
---------
successors and assigns for and against, and hold the Company and its successors
and assigns harmless from and against, any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements, including without limitation reasonable fees and disbursements of
counsel, which may be imposed upon, or incurred by the Company in any way
relating to or arising out of WCC's gross negligence in its performance of its
duties hereunder. The Company shall reimburse and indemnify WCC and its
successors and assigns for and against, and hold WCC and its successors and
assigns harmless from and against, any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses and
disbursements, including without limitation reasonable fees and disbursements of
counsel, which may be imposed upon, or incurred by WCC in any way relating to or
arising out of WCC's performance of its duties hereunder, the Loans or the
servicing thereof prior to the servicing by WCC other than arising out of WCC's
gross negligence.
2.6 Modifications, Adjustable Rate, and Payoffs. In connection with
-------------------------------------------
its collection efforts WCC may modify or change the interest rate of any Loan,
and quote to, and accept from, a Borrower a full or partial payoff amount on any
Loan as full settlement.
2.7 Monthly Accounting Reports. For each month during the term of
--------------------------
this Agreement, WCC will furnish the Company with a monthly report regarding the
Loans by the twenty-fifth (25th) day of the following month. WCC shall furnish
at WCC's cost such other information regarding WCC, the Loans and this Agreement
as the Company may from time to time reasonably request, provided, that if the
information or data requested by the Company is something WCC cannot produce
internally from its then
2
<PAGE>
existing reporting systems without manual compilation or production, or
reprogramming its computer system, the Company shall reimburse
WCC for its cost for furnishing such information.
3. Term. This Agreement shall be effective as of its original date and
----
will continue in full force and effect until five (5) years after the Servicing
Transfer as provided in Section 11 and thereafter for one year renewal periods
unless at least sixty (60) days prior to the beginning of the renewal period
either party notifies the other that the next one-year period will not be
renewed.
4. Fees and Costs. The Company shall pay WCC and WCC may retain or
--------------
disburse from any Loan proceeds the following amounts:
4.1 Reimbursement of Costs. All bona fide amounts paid by WCC to
----------------------
third parties in connection with this Agreement, including without limitation,
stationery suppliers, related printing costs, fees for recordings and filings,
mailgrams, repossession agency fees, legal fees, travel, insurance costs, and
payments arising out of acts or omissions of third parties (including persons
from which the Loans are acquired), and WCC's standard photocopy charges.
4.2 Service Fee. WCC shall be entitled to a fee ("WCC's Service
-----------
Fee") for servicing Loans equal to (a) all interest and other earnings paid or
accrued on amounts from time to time on deposit in any accounts in which
proceeds of Loans are deposited plus (b) a monthly fee equal to an amount
negotiated by the parties for each particular Loan portfolio, which monthly fee
shall be comparable to fees charged by other industry participants in arm's
length transactions for servicing comparable loan portfolios at the time of
acquisition.
4.3 Payment. WCC may withdraw from all Loan proceeds all escrow
-------
payments, costs, and WCC's Service Fee. Within twenty-five (25) days after the
last day of each calendar month WCC shall pay to the Company or the Affiliate
owning the Loan the Net Proceeds received in that calendar month less WCC's
Service Fee. The Company or the applicable Affiliate shall pay WCC within
fifteen (15) days after billing for any excess fees and costs. WCC shall
receive any ancillary income, other than late charges, and any float revenue.
5. Independent Contractor. WCC shall provide the Services in the
----------------------
capacity of an independent contractor. Nothing in this Agreement shall be
construed as establishing an employment, partnership or joint venture between
the Company and WCC.
6. Representations of the Company. The Company represents and warrants
------------------------------
as follows:
3
<PAGE>
6.1 The Company has been duly organized and is validly existing and
in good standing under the laws of the jurisdiction of its organization, with
power and authority to own its properties and to conduct its business as such
properties are currently owned and such business is currently conducted.
6.2 The Company has the power and authority to execute and deliver
this Agreement and to carry out its terms; and the execution, delivery, and
performance of this Agreement have been duly authorized by the Company by all
necessary corporate action on the part of the Company.
6.3 This Agreement constitutes a legal, valid and binding obligation
of the Company enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting
enforcement of creditor rights generally.
7. Representations of WCC. WCC represents and warrants as follows:
----------------------
7.1 WCC has been duly organized and is validly existing and in good
standing under the laws of the jurisdiction of its organization, with power and
authority to own its properties and to conduct its business as such properties
are currently owned and such business is currently conducted and has corporate
power, authority and legal right to service the Loans as provided in this
Agreement.
7.2 WCC has the power and authority to execute and deliver this
Agreement and to carry out its terms; and the execution, delivery, and
performance of this Agreement have been duly authorized by WCC by all necessary
corporate action on the part of WCC.
7.3 This Agreement constitutes a legal, valid and binding
obligation of WCC enforceable in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting enforcement of creditor rights generally.
8. Audits and Examinations.
-----------------------
8.1 WCC shall use reasonable efforts to maintain in good order and
condition throughout the term of this Agreement all Loan files and relevant
materials that WCC has received regarding the Loans.
8.2 WCC shall maintain a copy of each Loan file at its office or
elsewhere within its control, provided, that at the Company's request, WCC will
deliver copies of such Loans to the Company or a designee of the Company. WCC
shall make available to the Company or its duly authorized representatives,
attorneys or auditors the
4
<PAGE>
Loan files and the related accounts, records and computer systems maintained by
WCC at such times as the the Company shall reasonably request.
8.3 WCC shall permit the the Company, and its agents to audit the
books and records of WCC applicable to the Loans at WCC's business premises
during WCC's normal business hours upon reasonable prior notice to WCC. The
Company shall have direct access to WCC's management information system for the
Loans or, if applicable, to any service bureau used by WCC for the Loans.
9. Substitute Servicer; Limited Arbitration.
----------------------------------------
9.1 If at any time during the term of this Agreement WCC shall
breach, or default in the performance of a material obligation of WCC undertaken
in this Agreement, the Company and WCC shall consult for such period of time as
the Company may determine is reasonable under the circumstances to determine a
mutually acceptable resolution. In the event the Company and WCC fail to agree
thereon within such period as the Company may specify, then the Company may, by
written notice to WCC and without limitation of any other right or remedy of the
Company, require that WCC transfer the Loans, and all of WCC's servicing and
related rights and obligations in and with respect to the Loans, to a substitute
servicer to be designated by the Company. Such substitute servicer shall
thereupon perform, pursuant to a servicing contract acceptable to the Company,
all of WCC's duties and obligations under this Agreement. Upon the Company's
designation of such a substitute servicer, WCC shall within a reasonable time
and to the extent it holds possession thereof, deliver to such substitute
servicer all written evidence and documentation of the Loans and WCC thereafter
shall cooperate and follow all instructions of the Company in all reasonable
respects to facilitate such substitute servicer's performance of WCC's duties
and obligations under this Agreement. The fees and expenses of the substitute
servicer shall be paid by the Company. WCC, however, shall continue to be
entitled to WCC's Service Fee with regard to any Loan being serviced under this
section, net of all servicing fees paid by the Company to the substitute
servicer for such Loan.
9.2 If WCC wishes to contest or dispute the Company's appointment
of a substitute servicer, WCC shall so notify the Company in writing within
thirty (30) days after such appointment, specifying in the notice WCC's reasons
for doing so. Such controversy or dispute regarding the Company's appointment
of a substitute servicer shall be settled by arbitration, by one arbitrator in
Portland, Oregon in accordance with the Rules of the American Arbitration
Association ("AAA"), subject to the provisions of Section 9.3 and any other
applicable provisions of this Agreement. The arbitrator, whether appointed by
the parties or pursuant to the Rules of the AAA, shall be impartial and neutral
and shall have experience in the management of operations of an institution
which performs financing and collection services similar to those to be
performed by WCC under this Agreement. The decision of the arbitrator shall be
final, binding and
5
<PAGE>
conclusive upon the parties. The arbitrator shall comply with the privacy
restrictions provided in Section 9.7 regarding publication of any award.
9.3 In no event shall the arbitrator have power or authority to add
to or detract from the agreements of the parties nor to award punitive or
consequential damages. The arbitrator shall be authorized only to render an
award regarding a dispute or controversy concerning the Company's appointment of
a substitute servicer pursuant to Section 9.1 hereof, including an award of
costs and expenses as herein provided, and the arbitrator shall not purport to
determine, or issue an award regarding, any other legal or equitable rights or
remedies of the parties.
9.4 The arbitration hearing will conclude and the arbitrator's award
shall be rendered in writing within 30 days after it commences. The arbitrator
will make every effort to enforce this requirement strictly, but may extend the
time for the hearing upon a showing that exceptional circumstances require
extension to prevent manifest injustice.
9.5 The parties will share equally the expense of deposits and
advances required by the AAA but either party may advance such amounts, subject
to recovery thereof as an addition or offset to any award. The arbitrator shall
award to the prevailing party, as determined by the arbitrator, all costs, fees
and expenses related to the arbitration, including reasonable fees and expenses
of attorneys, experts and other professionals incurred by the prevailing party.
9.6 In the event of any legal action relating to the arbitration,
including any action to stay the arbitration, to vacate, modify or correct any
award or otherwise, the prevailing party in such action as determined by the
court shall be entitled to recover from the other party its court costs and
reasonable fees and expenses of attorneys, experts and other professionals
incurred in connection with the action, including such costs, fees and expenses
upon appeal. The institution and maintenance of an action for judicial relief,
or the pursuit of any provisional, ancillary, or judicial remedy by any party,
shall not constitute a waiver of the right of any party, including the plaintiff
in such judicial action, to submit the controversy or claim to arbitration
pursuant to Section 9.2 hereof.
9.7 WCC and the Company acknowledge that the existence, progress and
results of any arbitration held under this Agreement, and any arbitral award,
are to remain private. Each party agrees not to publish or disclose any
information regarding the arbitration or any such award by any means, except as
may be required for enforcement of any arbitral award and further agrees to take
reasonable care, but in no event less care than it takes to protect its own
confidential business information generally, to prevent disclosure and
dissemination of such information.
9.8 The award rendered in any arbitration may be enforced in any
court of competent jurisdiction.
6
<PAGE>
10. Non-Compete. For a period of twenty years from the date of this
-----------
Agreement, WCC will not, without the prior approval of the Company, compete with
or be engaged in the same business in the same areas as currently conducted by
the Company, including the purchase of any Loans that the Company or an
Affiliate are able to purchase under applicable law and including the servicing
of loan portfolios (other than its own loan portfolios and servicing for other
current clients for existing contracts and amendments thereof).
11. Servicing Transfer. If WSC has substantially all of the licenses
------------------
required of it to service, WSC may request and, following the second anniversary
of the closing date of the Company's initial public offering, it may demand that
WCC transfer to WSC , within thirty days of such demand, all obligations for
servicing the Loans, loans owned by WCC, and any other loans being serviced by
WCC for which WCC may under its agreement for such servicing, transfer such
servicing ("Servicing Transfer"). If the Servicing Transfer has not occurred by
the third anniversary of the closing date of the Company's initial public
offering, WCC and WSC shall effect the Servicing Transfer at such date. If WCC
is required to obtain consent from other owners of loans to transfer such
servicing, WCC shall make a good faith attempt to obtain such consent. Upon such
servicing transfer WCC shall assume the obligations of WCC under the servicing
contracts transferred.
11.1 Upon the Servicing Transfer, WSC may purchase, and WCC shall sell
and transfer to WSC, all WCC assets that WSC may desire for the servicing
business, including without limitation, all equipment, books, records, forms,
computer systems and software, real and personal property leases, and contracts
(to the extent they are assignable). As consideration for such assets, WSC
shall pay to WCC such consideration as shall be mutually agreed and assume all
liabilities (including liabilities associated with employees and employee
benefits) related thereto arising after the Servicing Transfer. In the event
that WSC is unable to assume the servicing rights and obligations for any loans,
then WSC shall cooperate with WCC to allow WCC reasonable access and use of the
transferred assets to permit WCC to continue servicing those loans not
transferred to the Company.
11.2 Upon the Servicing Transfer, WSC shall service all loans owned by
WCC and its affiliates (other than the Company and its subsidiaries) on the same
terms and conditions on which WCC is servicing WSC Loans under this Agreement
except that the fees and costs to be paid by WCC for the servicing of its loans,
and the loans of its affiliates shall be WSC's average cost for servicing
comparable loans as the parties shall mutually agree from time to time.
7
<PAGE>
11.3 Notwithstanding the assignment to WSC of servicing rights
arising from WCC contracts with third persons, any proceeds of such contracts in
excess of the fees and costs to be paid by WCC to WSC hereunder for comparable
loans shall be paid to WCC by WSC unless the parties otherwise agree.
12. General Provisions.
------------------
12.1 Written Notices. Notices under this Agreement must be in
---------------
writing and mailed, U.S. Mail with first class postage prepaid or overnight
mail, or telecopied, to the appropriate address shown above unless the address
has been changed by notice given as provided herein at least three (3) business
days in advance of the effective date of such change. Notice will be effective
three (3) business days after mailing or one business day after telecopy.
Wilshire Credit Corporation
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
Wilshire Financial Services Group Inc.
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
Wilshire Funding Corporation
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
Wilshire Servicing Corporation
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
12.2 Attorneys' Fees. If any judicial proceeding is initiated by
---------------
either of the parties arising out of the subject matter of this Agreement,
including without limitation any suit or action arising under state or federal
securities laws, trial, appeal, or bankruptcy, the prevailing party in such
proceeding will be entitled to recover, in addition to any judgment obtained in
such proceeding, reasonable attorneys' fees and court costs incurred.
8
<PAGE>
12.3 Events Beyond the Control of the Parties. Performance by either
----------------------------------------
party hereunder will not be deemed to be in default where the delay or default
is due to events beyond its reasonable control, including without limitation
war, insurrection, strike, lock-outs, riots, floods, earthquakes, fires,
casualties, acts of God, epidemics, quarantine restrictions, governmental
restrictions, inability to secure necessary labor or materials, acts of the
other party or failure to act of any public or governmental agency or entity.
12.4 Further Assurances. Following the execution of this Agreement,
------------------
WCC and the Company, respectively, shall, from time to time at the request of
the other, execute and deliver such other documents and instruments, and shall
take such other actions, as may be reasonably necessary or appropriate to carry
out and perform more effectively the terms and purposes of this Agreement.
12.5 Governing Law. This Agreement will be governed by the laws of
-------------
the state of Oregon. Any dispute arising from or in connection with this
Agreement, other than as provided in Section 9, shall be resolved in the
applicable state or federal court in Portland, Oregon.
12.6 Severability. If any provision herein is deemed unenforceable
------------
in whole or in part, such provision shall be deemed severable solely to the
extent of such enforceability without impacting the remainder of this Agreement.
12.7 Counterparts. This Agreement may be executed in one or more
-------------
counterparts. Each signed counterpart shall be deemed an original, but all of
them together constitute one and the same instrument.
12.8 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties as to its subject matter and supersedes all
proposals, oral or written,
9
<PAGE>
and all negotiations, conversations or discussions heretofore had between the
parties related to the subject matter of this Agreement. Any amendment to this
Agreement must be in writing signed by the party to be charged.
Wilshire Financial Services Group Inc. Wilshire Credit Corporation
By: By:
----------------------------------- -----------------------------------
Its: Its:
---------------------------------- ----------------------------------
Wilshire Funding Corporation
By:
-----------------------------------
Its:
----------------------------------
Wilshire Servicing Corporation
By:
-----------------------------------
Its:
----------------------------------
10
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Wilshire Financial Services Group, Inc.
We consent to the use in this Amendment No. 3 to the Registration Statement
of Wilshire Financial Services Group, Inc. and Subsidiaries on Form S-1 for an
offering of Common Stock of our report dated November 13, 1996 (which
expresses an unqualified opinion on the consolidated financial statements of
Wilshire Financial Services Group, Inc. and includes an explanatory paragraph
relating to certain regulatory agreements); our report dated March 10, 1995 on
the consolidated financial statements of Girard Savings Bank F.S.B. and
Subsidiary; and our report dated November 13, 1996 on the combined financial
statements of Wilshire Credit Corporation and Affiliates, which reports appear
in the Prospectus, which is a part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Prospectus
which is part of this Registration Statement.
Deloitte & Touche LLP
December 9, 1996
Los Angeles, California
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Wilshire Financial Services Group, Inc.
We consent to the use in this Amendment No. 3 to the Registration Statement
of Wilshire Financial Services Group, Inc. and Subsidiaries on Form S-1 for an
offering of Notes due 2003 of our report dated November 13, 1996 (which
expresses an unqualified opinion on the consolidated financial statements of
Wilshire Financial Services Group Inc. and includes an explanatory paragraph
relating to certain regulatory agreements); our report dated March 10, 1995 on
the consolidated financial statements of Girard Savings Bank F.S.B. and
Subsidiary; and our report dated November 13, 1996 on the combined financial
statements of Wilshire Credit Corporation and Affiliates, which reports appear
in the Prospectus, which is a part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Prospectus
which is part of this Registration Statement.
Deloitte & Touche LLP
December 9, 1996
Los Angeles, California
