<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
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
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION 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.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036-8299
(212) 969-3000
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 the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER NOTE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
13% Series B Notes due
2004.................. $100,000,000 100% $100,000,000 $30,303.03
</TABLE>
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(1) Estimated pursuant to Rule 457(f) 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. THE PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
--------
WILSHIRE
--------
Financial Services Group
OFFER TO EXCHANGE ITS 13% SERIES B NOTES DUE 2004 WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS
OUTSTANDING 13% SERIES A NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED.
----------
Wilshire Financial Services Group Inc. (the "Company"), hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying letter of transmittal (the "Letter of Transmittal," and together
with this Prospectus, the "Exchange Offer"), to exchange its 13% Series B Notes
due 2004 (the "New Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement (as defined) of which this Prospectus constitutes a part, for its
outstanding 13% Series A Notes due 2004 (the "Old Notes"), of which $100.0
million aggregate principal amount is outstanding. The New Notes and the Old
Notes are collectively referred to herein as the "Notes."
Interest on each New Note will accrue from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from August 15, 1997, the date of issuance of the Old Notes. Holders
of Old Notes whose Old Notes are accepted in exchange will not receive any
payment in respect of accrued and unpaid interest on the Old Notes. Such
accrued and unpaid interest on the Old Notes will be payable with the first
interest payment on the New Notes. Interest on the Notes is payable semi-
annually in arrears on August 15 and February 15 of each year, commencing
February 15, 1998.
The Notes will mature on August 15, 2004. On and after August 15, 2002 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 August 15, 2002 except that until August 15, 2000, 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 113% of the
principal amount thereof, plus accrued and unpaid interest to the redemption
date, from the net proceeds of one or more 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 price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the repurchase date. See
"Description of Notes."
The Notes will be general unsecured senior obligations of the Company,
ranking pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Company, including its 13% Notes due 2004.
Because the Company is a holding company that currently conducts substantially
all of its operations through its subsidiaries, the Notes will be effectively
subordinated to the claims of creditors of those subsidiaries.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York time, on ,
1997, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of
Old Notes may be withdrawn at any time prior to 5:00 p.m., New York time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. Old Notes may be
tendered only in denominations of $1,000 and integral multiples in excess
thereof. The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the
Indenture dated as of August 15, 1997 (the "Indenture") between the Company and
Bankers Trust Company, as trustee (the "Trustee"). The form and terms of the
New Notes are identical in all material respects to the form and terms of the
Old Notes, except that the New Notes have been registered under the Securities
Act. See "The Exchange Offer" and "Description of the New Notes."
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. If such a market were to develop, the New Notes could trade
at prices that may be higher or lower than their principal amount. The Company
does not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market. Therefore, there can be no assurance that
an active public market for the New Notes will develop. Although Prudential
Securities Incorporated (the "Initial Purchaser") has informed the Company that
they currently intend to make a market in the New Notes, they are not obligated
to do so, and any such market making may be discontinued at any time without
notice.
SEE "RISK FACTORS" ON PAGES 12 TO 19 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES WHO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1997
<PAGE>
The New Notes are being offered in order to satisfy certain obligations of
the Company under the Purchase Agreement (the "Purchase Agreement") dated as
of August 12, 1997 between the Company and the Initial Purchaser and the
Registration Rights Agreement (the "Registration Rights Agreement") between
the Company and the Initial Purchaser.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set
forth in no-action letters issued to third parties in other transactions.
However, the Company has not sought its own no-action letter and their can be
no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Based on those interpretations by the staff of the Commission,
the Company believes that New Notes issued pursuant to this Exchange Offer in
exchange for Old Notes may be offered for resale, resold, and otherwise
transferred by a holder thereof (other than (i) a broker-dealer who purchased
such Old Notes directly from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities Act or (ii) a person that
is an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided, that the holder is
acquiring the New Notes in the ordinary course of its business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders of Old Notes
wishing to accept the New Notes must represent to the Company that such
conditions have been met. Any Holder who participates in the Exchange Offer
for the purpose of participating in a distribution of the New Notes may not
rely on the position of the staff of the Commission as set forth in these no-
action letters and would have to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. A secondary resale transaction in the United States by a
holder who is using the Exchange Offer to participate in the distribution of
the New Notes must be covered by a registration statement containing the
selling securityholder information required by Item 507 of Regulation S-K of
the Securities Act.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
the consummation of the Exchange Offer, the Holders of Old Notes will continue
to be subject to the existing restrictions on transfer thereof and the Company
will have no further obligation to such Holders to provide for the
registration under the Securities Act of the Old Notes held by them.
The Prospectus, together with the Letter of Transmittal, is being sent to
registered Holders of Old Notes as of , 1997.
The Company will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use
of Proceeds" and "Plan of Distribution."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") on Form
S-4 under the Securities Act with respect to the New Notes offered by this
Prospectus. 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.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports, proxy statements, and other information
with the Commission. Such Registration Statement, including all exhibits
thereto, reports, proxy statements, and other information 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 Citicorp 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
the Company.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act. All of the statements contained in this
Prospectus, other than statements of historical fact, should be considered
forward-looking statements, including, but not limited to, those concerning
(i) the Company's strategies, objectives and plans for expansion of its
operations, products and services and growth of its portfolio of acquired
loans and foreclosed real estate, (ii) the Company's beliefs and expectations
regarding actions that may be taken by regulatory authorities having oversight
of the operations of certain of its subsidiaries and (iii) the Company's
beliefs as to the adequacy of its existing and anticipated cash and funding
resources. Although the Company believes the expectations reflected in those
forward-looking statements are reasonable, it can give no assurance that those
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed in this Prospectus, including, without
limitation, under "Risk Factors" beginning on page 12. All subsequent written
and oral forward-looking statements by or attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by such
Cautionary Statements. Prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof and are not intended to give any assurance as to future results. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<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 Offering Memorandum. Unless otherwise
indicated, loans and other financial assets held by the Company are presented
at the amounts at which those loans or other financial assets are carried on
the Company's balance sheet at that date. As used herein, the term "performing
loan" means a loan as to which payments have been and are being made
substantially in accordance with its contractual terms, the term "sub-
performing loan" means a loan as to which payments are delinquent for 90 days
or less or have a history of delinquencies, and the term "non-performing loan"
means a loan as to which payments are generally 91 or more days delinquent.
Unless the context otherwise requires, the term "Company" refers to Wilshire
Financial Services Group Inc. ("WFSG") and its subsidiaries, including, among
others, 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 COMPANY
The Company is primarily engaged in the acquisition, servicing and resolution
of pools of performing, sub-performing and non-performing residential and
commercial mortgage loans, as well as foreclosed real estate. The Company also
acquires mortgage-backed securities, purchases residential mortgage and
manufactured housing loans newly-originated through correspondents, services
loans for third parties and operates a merchant bankcard processing business.
At June 30, 1997, the Company had total assets of approximately $1.2 billion,
of which approximately $788.0 million consisted of loans and $136.0 million
consisted of foreclosed real estate.
Since the late 1980s, a significant market for the purchase of pools of non-
performing and sub-performing mortgage loans has developed in the United
States. This market initially consisted largely of sales of pools of loans by
governmental agencies such as the Federal Deposit Insurance Corporation (the
"FDIC") and the Resolution Trust Corporation (the "RTC") in connection with the
savings and loan crisis. Today, this market is comprised primarily of pools of
loans sold by banks, savings institutions, mortgage companies and insurance
companies. Management believes that private financial institutions, in order to
reduce their servicing costs and more effectively employ their capital, are
increasingly outsourcing the resolution of loans, particularly those that are
sub-performing and non-performing, to specialized companies with the experience
and infrastructure to most efficiently manage those loans.
The Company acquires pools of loans that, at the time of acquisition, consist
primarily of either (a) non-performing loans that because of their delinquent
status, are available for purchase at prices that reflect a significant
discount from their unpaid principal balances ("Discounted Loans") or (b)
performing and sub-performing loans that are available for purchase at prices
that more closely approximate their unpaid principal balances ("Non-Discounted
Loans"). At June 30, 1997, the Company held approximately $395.8 million of
Discounted Loans and approximately $392.2 million of Non-Discounted Loans. The
Company generally seeks to acquire smaller pools of loans (those with an
aggregate unpaid principal balance of less than $20.0 million) for which there
is currently less competitive demand. The Company believes that its willingness
to purchase smaller pools of loans enhances its acquisition opportunities and
allows the Company to develop long-term relationships and repeat business with
private financial institutions.
Since 1991, the Company's principal shareholders have overseen the purchase
and servicing by the Company and its affiliates of over 450 pools of loans
and/or foreclosed real estate for an aggregate purchase price of approximately
$2.5 billion. The volume of acquisitions by the Company has accelerated
significantly, growing from 41 pools that were acquired in 1996 for an
aggregate purchase price of approximately $578.7 million (including
approximately $351.0 million in the fourth quarter of that year) to 73 pools
that were acquired
1
<PAGE>
in the first six months of 1997 for an aggregate purchase price of
approximately $663.4 million. Comprehensive criteria and procedures have been
established for evaluating the risks associated with mortgage loans and the
real estate securing those loans. In reviewing a pool of loans for possible
acquisition, management develops a detailed model from which it estimates the
costs of servicing the loans in that pool and the amount and timing of cash
flows that can be expected to be generated from the loans to establish an
appropriate purchase price. In order to maximize the returns on its investment
in a pool of loans, the Company generally funds from 90% to 95% of the purchase
price with borrowed funds, including deposits at the Savings Banks. As a
result, the Company's asset base is highly leveraged. See "Risk Factors--
Extensive Use of Financial Leverage."
The Company, through an affiliate, actively services each acquired loan and
property to maximize cash flow, using specialized procedures and proprietary
software. Discounted Loans are resolved as quickly as possible (generally
within one to two years) after acquisition, through foreclosure, compromise, a
discounted payoff or reinstatement. Non-Discounted Loans are actively serviced
to ensure timely and accurate payments over their remaining lives. At June 30,
1997, an affiliate of the Company, as servicer or sub-servicer for the Company,
was servicing approximately $2.5 billion aggregate principal amount of loans,
of which approximately $1.2 billion was being serviced for unaffiliated third
parties (including approximately $532.5 million of loans previously securitized
by the Company and its affiliates).
In addition to pools of loans, the Company also acquires mortgage-backed
securities, consisting primarily of subordinate interests in private-label
securities backed by loans that were originated and are being serviced by
unaffiliated third parties ("Private-Label Securities"), as well as certain
governmental agency and other securities ("Government Securities") that are
held for liquidity purposes. In addition, the Company retains or, in certain
cases, acquires in the secondary market subordinate and other classes of
mortgage-backed securities backed by loans that were previously held in the
portfolio of the Company or an affiliate and for which the Company is
continuing to act as servicer ("Retained Securities"). Management believes that
its experience in acquiring pools of loans allows it to more effectively
evaluate the risks associated with the pool of loans underlying an issue of
mortgage-backed securities and effectively price those securities. Management
also believes that the size and liquidity of the market for subordinate classes
of mortgage-backed securities and the relatively small size of those classes
may from time to time result in the underpricing of those securities in the
market, thus providing the Company with attractive acquisition opportunities.
At June 30, 1997, the Company owned approximately $127.6 million of Private-
Label Securities, approximately $20.8 million of Retained Securities and
approximately $41.2 million of Government Securities.
The Company also acquires, through WCC, mortgage and manufactured housing
loans originated by correspondents pursuant to guidelines established by the
Company under its mortgage loan origination program. Mortgage products offered
under this program currently are targeted for higher credit quality borrowers.
During the six months ended June 30, 1997, the Company acquired approximately
$29.7 million of loans through this program.
The Company also conducts a merchant bankcard processing business that
generates revenues from merchant discounts and processing fees for Visa(R) and
MasterCard(R) credit card transactions. The Company focuses on those market
niches, principally mail order, telephone order and audio-text transactions
where the lack of a customer's physical presence at the time of a transaction
creates a higher risk of chargebacks, because those market niches are believed
by management to offer higher risk-adjusted returns. During the six months
ended June 30, 1997, revenues from these operations totaled $3.4 million.
BUSINESS STRATEGY
The Company believes that its success depends upon its ability to (i)
properly evaluate credit risk, (ii) efficiently service pools of loans and
(iii) fund acquisitions on a cost effective basis. The Company's objective is
to expand in markets where it can capitalize on its core competence in these
three areas through a strategy consisting of the following key elements:
2
<PAGE>
. Significant Growth of Acquisitions of Loan Pools and Mortgage-Backed
Securities. The Company plans to expand its acquisition of pools of
loans by more actively marketing its services to those private financial
institutions that are most likely to be sellers of those pools, with a
view to adding new customers and developing more repeat business. As
part of these efforts, the Company has recently extended its acquisition
and servicing operations to the United Kingdom and France and is
considering entering other non-U.S. markets. The Company also plans to
expand its asset base by acquiring additional mortgage-backed
securities.
. Expansion of Mortgage Loan Origination Network and Products. The Company
plans to further expand its mortgage loan origination program by
increasing the number of authorized correspondents and developing new
products targeted to those market niches in the mortgage lending market
where the Company believes its core competencies give it a competitive
advantage.
. Growth of Servicing Business. The Company plans to more actively market
its servicing expertise to other owners and purchasers of loans, both in
the U.S. and abroad.
. Growth of Merchant Bankcard Processing Operations. The Company plans to
continue development of its merchant bankcard processing operations
through increased marketing.
. Utilizing Varied Funding Sources. The Company expects to continue to use
the most cost-efficient funding sources available, including secured
term loans, warehouse lines of credit, repurchase facilities and
deposits at the Savings Banks, as well as the proceeds from future sales
of its equity and debt securities. The Company utilizes securitizations
as a funding mechanism and expects to securitize pools of loans when
economically attractive.
CORPORATE HISTORY AND STRUCTURE
Until December 1996, the Company's principal shareholders, Andrew A.
Wiederhorn and Lawrence A. Mendelsohn (the "Principal Shareholders"), engaged
in the loan acquisition and servicing business through the Savings Banks, which
they acquired in 1993 and 1994, and through a private entity, Wilshire Credit
Corporation ("WCC"), which was founded in 1987. The Company was formed to
succeed to the ownership of the Savings Banks and to conduct, through
subsidiaries, various businesses previously conducted by the Principal
Shareholders through WCC. The Company completed an initial public offering of
its common stock in December 1996.
For tax and accounting reasons, WCC was not acquired by the Company at the
time of its initial public offering but agreed to cease all further loan
acquisition activities for its own account. In addition, WCC agreed to act as
the Company's servicer for a period not to exceed three years for fees that are
at or below prevailing market rates. For the six months ended June 30, 1997,
servicing fees paid by the Company to WCC aggregated approximately $6.1
million. Commencing no later than November 1999, subject to the Company's
receipt of requisite licenses, all servicing activities currently conducted by
WCC will be conducted directly by a subsidiary of the Company.
At June 30, 1997, WCC continued to hold pools of loans and securities
aggregating approximately $32.8 million and had outstanding indebtedness of
approximately $108.9 million, which was incurred to finance its own growth and
to provide funds to the Principal Shareholders to enable them to acquire the
Savings Banks and fund their growth. Substantially all of WCC's indebtedness is
recourse debt that is secured by pledges of its servicing rights and is
personally guaranteed by the Principal Shareholders.
3
<PAGE>
RECENT DEVELOPMENTS
Effective August 14, 1997, the Company issued to an affiliate shares of a new
series of its preferred stock having an aggregate liquidation value of $27.5
million in exchange for the cancellation of certain accounts payable to that
affiliate aggregating approximately $27.1 million and cash in the amount of
approximately $400,000, resulting in an increase in stockholders' equity of
$27.5 million. See "Recent Developments."
GROWTH CONSTRAINT
The Savings Banks have provided a deposit-based funding source for the loan
purchase activities of the Company and certain affiliated companies. In
November 1996, as a result of the substantial growth at the Savings Banks and
concern over, among other things, high loan loss provisions on loans acquired
as part of the acquisition of the Savings Banks by the Principal Shareholders
(the "Inherited Loans") and certain sub-prime auto loans subsequently acquired
by the Savings Banks, the Office of Thrift Supervision (the "OTS") imposed
cease-and-desist orders (the "Orders") on, and restricted further growth of
assets at, both of the Savings Banks. The Company does not expect to be able to
use the Savings Banks for growth unless the Orders are lifted or modified. The
OTS recently completed its annual examination of the Savings Banks and issued a
Report of Examination that continues to be critical of the Savings Banks in a
significant number of respects. The Company does not expect the Orders to be
lifted in the near future. See "Risk Factors--Regulation of the Savings Banks."
THE EXCHANGE OFFER
Old Notes................. The Old Notes were sold by the Company on Au-
gust 15, 1997 (the "Issue Date"), pursuant to
the Purchase Agreement dated as of August 12,
1997 between the Company and the Initial Pur-
chaser.
Registration Rights....... Pursuant to the Purchase Agreement, the Company
and the Initial Purchaser entered into the Reg-
istration Rights Agreement for the benefit of
the holders of the Old Notes, providing, among
other things, for the Exchange Offer.
The Exchange Offer........ The New Notes are being offered in exchange for
an equal principal amount of Old Notes. Old
Notes may be tendered only in denominations of
$1,000 and integral multiples in excess there-
of. As of the date of this Prospectus,
$100,000,000 in aggregate principal amount of
Old Notes are outstanding. The issuance of the
New Notes is intended to satisfy the obliga-
tions of the Company contained in the Registra-
tion Rights Agreement.
Resale.................... Generally, holders of Old Notes (other than any
holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Secu-
rities Act) who exchange their Old Notes for
New Notes pursuant to the Exchange Offer may
offer such New Notes for resale, resell such
New Notes and otherwise transfer such New Notes
without compliance with the registration and
prospectus delivery provisions of the Securi-
ties Act; provided such New Notes are acquired
in the ordinary course of the holder's business
and such holder has no arrangements with any
4
<PAGE>
person to participate in the distribution of
such New Notes. Each broker-dealer that re-
ceives New Notes for its own account in ex-
change for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading ac-
tivities, must acknowledge that it will deliver
a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." If
a holder of Old Notes does not exchange such
Old Notes for New Notes pursuant to the Ex-
change Offer, such Old Notes will continue to
be subject to the restrictions on transfer con-
tained in the legend thereon. In general, the
Old Notes may not be offered or sold, unless
registered under the Securities Act, except
pursuant to exemption from, or in transaction
not subject to, the Securities Act and applica-
ble state securities laws. See "The Exchange
Offer--Consequences of Failure to Exchange;
Transfers of Exchange Notes."
The Old Notes are currently eligible for trad-
ing in the Private Offerings, Resales and Trad-
ing through Automated Linkages ("PORTAL") mar-
ket. Following the commencement of the Exchange
Offer but prior to its consummation, the Old
Notes may continue to be traded in the PORTAL
market. However, to the extent that Old Notes
are tendered and accepted in connection with
the Exchange Offer, any trading market for re-
maining Old Notes will be adversely affected.
Following consummation of the Exchange Offer,
the New Notes will not be eligible for PORTAL
trading.
Expiration Date........... The term "Expiration Date" shall mean 5:00
p.m., New York time, on , 1997, unless the
Company shall, in its sole discretion, have ex-
tended the period of time for which the Ex-
change Offer is open, in which event the "Expi-
ration Date" shall mean the latest time and
date at which the Exchange Offer, as so ex-
tended by the Company, shall expire.
Accrued Interest on the
New Notes and the Old The New Notes will bear interest at the rate of
Notes.................... 13% per annum from the most recent date to
which interest has been paid on the Old Notes
or, if no interest has been paid on the Old
Notes, from August 15, 1997. Holders of Old
Notes whose Old Notes are accepted for exchange
will not receive any payment in respect of ac-
crued and unpaid interest on such Old Notes.
Such accrued and unpaid interest on the Old
Notes will be payable with the first interest
payment on the New Notes. See "Description of
the New Notes--Terms of the New Notes."
5
<PAGE>
The tender of Old Notes pursuant to the Ex-
Withdrawal................ change Offer may be withdrawn at any time prior
to 5:00 p.m., New York time, on the Expiration
Date. Any Old Notes not accepted for exchange
for any reason will be returned without expense
to the tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Certain Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain cus-
tomary conditions, which may be waived by the
Company. See "The Exchange Offer--Certain Con-
ditions to the Exchange Offer." Except for the
requirements of applicable Federal and state
securities laws, there are no Federal or state
regulatory requirements or approvals to be com-
plied with or obtained by the Company in con-
nection with the Exchange Offer.
Procedures for Tendering Each holder of Old Notes desiring to accept the
Old Notes................ Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise de-
liver the Letter of Transmittal, or facsimile
thereof, together with the Old Notes and any
other required documents, to the Exchange Agent
(as defined) at the address set forth herein
and in the Letter of Transmittal on or prior to
the Expiration Date. See "The Exchange Offer--
Procedures for Tendering Old Notes."
Untendered Old Notes...... Following the consummation of the Exchange Of-
fer, holders of Old Notes eligible to partici-
pate but who do not tender their Old Notes will
not have any further registration rights and
such Old Notes will continue to be subject to
certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes
could be adversely affected.
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Notes are regis-
tered in the name of a broker, dealer, commer-
cial bank, trust company or other nominee and
who wishes to tender should contact such regis-
tered holder promptly and instruct such regis-
tered holder to tender on such beneficial own-
er's behalf. If such beneficial owner wishes to
tender on such owner's behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering its Old Notes, ei-
ther make appropriate arrangements to register
ownership of the Old Notes in such owner's name
or obtain a properly completed bond power from
the registered holder.
Guaranteed Delivery Holders of Old Notes who wish to tender their
Procedures............... Old Notes and (i) whose Old Notes are not imme-
diately available or (ii) who cannot deliver
their Old Notes, the Letter of Transmittal and
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfers)
prior to the Expiration Date, must tender their
Old Notes according to the guaranteed delivery
procedures. See "The Exchange Offer--Guaranteed
Delivery Procedures."
6
<PAGE>
Acceptance of Old Notes
and Delivery of New Subject to the prior satisfaction, or waiver,
Notes.................... of all of the conditions of the Exchange Offer,
the Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to the Expiration
Date. Upon acceptance by the Company of the Old
Notes properly tendered and not withdrawn prior
to the Expiration Date, the Company will issue
New Notes having an aggregate principal amount
equal to the sum of the aggregate principal
amount of such Old Notes. See "The Exchange Of-
fer--Acceptance of Old Notes for Exchange; De-
livery of New Notes." The New Notes issued pur-
suant to the Exchange Offer will be delivered
promptly following the Expiration Date. See
"The Exchange Offer--Terms of the Exchange Of-
fer; Period for Tendering Old Notes."
Federal Income Tax The exchange of New Notes for Old Notes should
Consequences............. not be a sale or exchange or otherwise a tax-
able event for Federal income tax purposes. See
"Certain Federal Income Tax Consequences."
THE NEW NOTES
Securities Offered........ $100,000,000 aggregate principal amount of 13%
Series B Notes due 2004.
Maturity Date............. August 15, 2004.
Interest Payment Dates.... August 15 and February 15, commencing on Febru-
ary 15, 1998.
Optional Redemption....... The New Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after August 15, 2002 at the redemp-
tion prices set forth herein, plus accrued and
unpaid interest thereon to the date of redemp-
tion. In addition, prior to August 15, 2000,
the Company may, at its option, redeem up to
35% of the original aggregate principal amount
of the New Notes at 113% of the principal
amount thereof, plus accrued and unpaid inter-
est, if any, to the redemption date, from the
net proceeds of one or more public sales of
Qualified Capital Stock (as defined herein) if
at least 65% of the original aggregate princi-
pal amount of the New Notes remains outstanding
after such redemption and if such redemption
occurs within 60 days after the closing of any
such public sale. See "Description of Notes--
Optional Redemption."
Ranking................... The New Notes will be general unsecured senior
obligations of WFSG, ranking pari passu in
right of payment with all existing and future
unsubordinated indebtedness of WFSG, including
its 13% Notes due 2004 (the "13% Notes"). The
New Notes will not be obligations of the
Company's subsidiaries. Because WFSG is a hold-
ing company that currently conducts substan-
tially all of its operations through its sub-
sidiaries, including the Savings Banks, the
right of WFSG (and therefore,
7
<PAGE>
the right of WFSG's creditors and stockholders)
to participate in any distribution of the as-
sets or earnings of any subsidiary is subject
to the prior claims of creditors of such sub-
sidiaries, including any claims of WFSG as a
creditor to the extent such claims may be rec-
ognized. As a result, the New Notes will be ef-
fectively subordinate to the claims of credi-
tors of WFSG's subsidiaries.
Change of Control......... Upon a Change of Control Event (as defined
herein), holders of the New Notes will have the
option to require the Company to repurchase all
outstanding New Notes at 101% of their princi-
pal amount, plus accrued interest to the date
of repurchase. A "Change of Control Event," as
defined in the Indenture pursuant to which the
New Notes will be issued, includes the follow-
ing events, among others: the acquisition by
any person or group (other than the Existing
Principal Stockholders (as defined) of the Com-
pany) of more than 40% of the Company's voting
stock; a merger, consolidation or other busi-
ness combination between the Company and an-
other person in which more than 40% of the vot-
ing stock of the surviving or transferee com-
pany is owned by persons other than the Exist-
ing Principal Stockholders (as defined) of the
Company or a change in a majority of the direc-
tors 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 as-
surance that the Company will have the funds
available to repurchase the New Notes in the
event of a Change of Control Event.
Certain Covenants......... The Indenture pursuant to which the New 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 and to redeem Notes in
the event of certain asset sales and limit the
ability of the Company and its subsidiaries to
incur certain indebtedness (not including se-
cured indebtedness used to acquire or refinance
the acquisition of loans or other financial as-
sets), pay dividends or make other distribu-
tions, 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 arrange-
ment that would impose certain restrictions on
the ability of subsidiaries to make dividend
and other payments to the Company. The Inden-
ture also will restrict the Company's ability
to merge, consolidate or sell all of its as-
sets. See "Description of Notes--Certain Cove-
nants."
Use of Proceeds........... The Company will not receive any cash proceeds
or incur any additional indebtedness as a re-
sult of the issuance of the New Notes pursuant
to the Exchange Offer. The net proceeds from
the sale of the Old Notes was approximately
$95.6 million. The Company intends to use such
net proceeds to provide the capital (or equity)
portion of the Company's investment in future
leveraged acquisitions of pools of loans and
other investments and for general corporate
purposes.
Risk Factors.............. Holders of the Old Notes should carefully con-
sider all of the information contained in this
Prospectus, including the information set forth
under the caption "Risk Factors," before
tendering their Old Notes in the Exchange Of-
fer.
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 years ended December 31, 1996,
1995 and 1994 have been derived from the audited consolidated financial
statements of the Company included elsewhere in this Prospectus (the "Audited
Financial Statements"). The historical income statement and balance sheet data
presented for the six month periods ended June 30, 1997 and 1996 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 six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for any other
interim period of the entire year ending December 31, 1997. 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. Because certain
predecessors of the Company 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. Financial
information as of December 31, 1996 and 1995 and for the years then ended is
presented on a consolidated basis. For convenience, all the accompanying
financial statements are referred to as "consolidated." See Note 1 to the
Consolidated Financial Statements.
The pools of loans acquired by the Company consist primarily of either
Discounted Loans or Non-Discounted Loans, but may include other types of loans.
However, for accounting purposes, all of the loans in a particular pool are
classified as either Discounted Loans or Non-Discounted Loans, based on whether
that pool consists primarily of Discounted Loans or Non-Discounted Loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Matters."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income.... $ 43,792 $ 21,951 $ 48,422 $ 24,381 $ 9,569
Total interest expense... 34,691 12,020 29,277 14,481 5,457
--------- --------- --------- --------- --------
Net interest income...... 9,101 9,931 19,145 9,900 4,112
Provision for loan
losses(1)............... (1,424) 10,868 16,549 4,266 2,173
--------- --------- --------- --------- --------
Net interest income
(loss) after provision
for loan losses......... 10,525 (937) 2,596 5,634 1,939
Other income............. 18,086 5,006 17,942 2,937 986
Operating expenses....... 19,693 5,376 15,446 7,932 4,703
--------- --------- --------- --------- --------
Income (loss) before
income taxes............ 8,918 (1,307) 5,092 639 (1,778)
Income tax provision
(benefit)............... 3,744 (1,279) 125 47 (526)
--------- --------- --------- --------- --------
Net income (loss)........ $ 5,174 $ (28) $ 4,967 $ 592 $ (1,252)
========= ========= ========= ========= ========
SELECTED CASH FLOW DATA:
Cash provided by (used
in) operations
(excluding loans held
for sale)............... (34,494) (6,884) (19,453) 1,589 (1,614)
Proceeds and repayment,
net, from loans and
other assets............ 256,456 57,242 393,392 76,695 22,011
Purchases of loans and
other assets............ (773,356) (240,957) (621,934) (190,863) (57,049)
Cash from financing
activities.............. 438,808 200,578 395,811 108,231 42,323
--------- --------- --------- --------- --------
Net increase (decrease)
in cash(2)............. $(112,586) $ 9,979 $ 147,816 $ (4,348) $ 5,671
========= ========= ========= ========= ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995 1994
---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 39,712 $152,298 $ 4,482 $ 8,830
Portfolio assets:
Discounted Loans, net................... 395,829 219,630 31,354 2,094
Non-Discounted Loans, net............... 392,158 191,962 259,417 179,377
Mortgage-backed and other securities.... 189,658 84,964 28,672 29,887
Foreclosed real estate, net............. 135,984 78,200 4,964 1,208
---------- -------- -------- --------
Total portfolio assets.................. $1,113,629 $574,756 $324,407 $212,566
Total assets............................. 1,196,092 753,849 340,695 230,636
Deposits................................. 445,333 501,614 303,524 196,289
Short-term debt.......................... 583,468 97,624 13,000 21,500
Long-term debt........................... 84,245 75,000 -- --
Stockholders' equity(3).................. 68,927 61,022 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------- --------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------- --------
(ANNUALIZED)
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets....... 0.99% (0.01)% 0.95% 0.24% (0.92)%
Return on average equity....... 16.24% (0.16)% 13.68% 8.65% (31.08)%
Average interest yield on total
loans......................... 9.02% 10.09% 9.41% 10.02% 7.96 %
Net interest spread(4)(5)...... 1.64% 3.86% 3.07% 3.44% 3.08 %
Net interest margin(5)(6)...... 1.86% 4.37% 3.63% 3.87% 3.14 %
Ratio of earnings to fixed
charges(7):
Including interest on
deposits..................... 1.25 0.89 1.17 1.04 -- (8)
Excluding interest on
deposits..................... 1.42 0.06 2.19 2.19 --
Long-term debt to total
capitalization(9)............. 0.55 -- 0.55 -- --
Total financial liabilities to
equity........................ 16.35 14.13 11.35 47.40 32.95
Average equity to average
assets........................ 6.09% 5.13% 6.90% 2.72% 2.96 %
Non-Performing Loans to total
Non-Discounted Loans at end of
period(10).................... 14.85% 5.39% 23.69% 4.46% 5.95 %
Allowance for loan losses to
total Non-Discounted Loans at
end of period................. 6.45% 5.13% 13.88% 3.60% 3.72 %
</TABLE>
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------
1997 1996 1995 1994
--------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Number of pools of loans acquired.... 73 41 33 38
Investments and originations:
Discounted Loans and foreclosed
real estate........................ $ 247,190 $ 324,159 $ 29,224 $ 2,538
Non-Discounted Loans(11)............ 416,234 254,517 157,671 39,023
Mortgage originations............... 29,742 2,280 8,748 4,345
Mortgage-backed and other
securities......................... 107,654 67,604 2,965 14,469
--------- --------- -------- --------
Total............................. $ 800,820 $ 648,560 $198,608 $ 60,375
Recoveries and repayments............ (68,277) (66,160) (61,135) (21,824)
Loan sales and securitizations....... (180,135) (301,411) (16,031) --
Net change in portfolio assets....... 538,873 250,349 111,841 106,580
</TABLE>
10
<PAGE>
- --------
(1) Approximately $8.6 million of the increase in the provisions from 1995 to
1996 related to the Sub-Prime Auto Loans (as defined herein) and $4.8
million of the 1996 provision related to the Inherited Loans. See
"Business--Allowances for Losses."
(2) The increase in cash in 1996 and the decrease in cash for the six months
ended June 30, 1997 reflect the receipt of cash from the Company's sale of
common stock and its 13% Notes (as defined herein) and the subsequent
investment of that cash in interest earning assets.
(3) Effective January 1, 1996, $11.0 million of common stock was issued in
exchange for subordinated debt. Prior to the Company's initial public
offering, an additional $17.8 million of common stock was issued for cash.
In December 1996, the Company completed its initial public offering, which
resulted in $20.9 million of new capital. Effective July 31, 1997, the
Company issued to an affiliate shares of a new series of its preferred
stock having an aggregate liquidation value of $27.5 million in exchange
for the cancellation of certain accounts payable to that affiliate
aggregating approximately $27.1 million and cash in the amount of
approximately $400,000, resulting in an increase in stockholders' equity
of $27.5 million. See "Recent Developments."
(4) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(5) The reduction in net interest margin and net interest spread in the six
months ended June 30, 1997 primarily reflects the significant increase in
the Company's holdings of Discounted Loans during the six months then
ended. The acquisition of a pool of Discounted Loans tends to reduce net
interest margin and net interest spread, because the interest cost of the
debt used to fund the acquisition is not offset by a corresponding
increase in interest income. Relatively little cash flow from a pool of
Discounted Loans is generally received during the first two quarters
following the acquisition of that pool and the Company only recognizes
interest and discount on Discounted Loans when those loans result in the
receipt of cash. In addition, a significant portion of the income
associated with Discounted Loans generally results from gains on sales of
foreclosed real estate, which are not reflected in interest income. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Accounting Matters." The reduction also reflected a full
quarter of interest expense on the $84.2 million of its 13% Notes, the
proceeds of which were held for part of the quarter in a lower-yielding
liquid investment prior to their use by the Company to fund acquisitions.
(6) Net interest margin represents net interest income divided by total
average earning 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.
(8) Earnings for the year ended December 31, 1994 were inadequate to cover
fixed charges by $1.8 million.
(9) Total capitalization equals long-term debt plus equity.
(10) It is the Company's policy to establish an allowance for uncollectible
interest on Non-Discounted Loans that are past due more than 90 days or at
such earlier time, when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual, at which time those loans are placed on non-accrual status and
deemed non-performing.
(11) Excludes purchases of newly-originated mortgage and manufactured housing
loans, which are shown as mortgage originations.
11
<PAGE>
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of risk.
Each prospective investor should carefully examine this entire Offering
Memorandum and should give particular attention to the risk factors set forth
below before purchasing the Notes offered hereby.
EXTENSIVE USE OF FINANCIAL LEVERAGE
The Company is highly leveraged. At June 30, 1997, the Company's outstanding
indebtedness for borrowed money aggregated approximately $667.7 million, of
which approximately $583.5 million was short-term debt secured by the
Company's loans and other financial assets. In addition, at that date the
Savings Banks had outstanding deposits aggregating approximately $445.3
million. The Company's outstanding indebtedness, together with the deposits at
the Savings Banks, represented approximately 93.1% of the Company's total
assets at June 30, 1997. The Company's ability to make payments of principal
or interest on or to refinance its indebtedness (including the Notes) depends
on its future operating performance and its ability to effect additional debt
and/or equity financing, which is subject to economic, financial, competitive
and other factors beyond its control. In addition, the holders of the
Company's secured indebtedness will have a prior claim upon the assets
securing that indebtedness and the rights of the holders of the Notes may be
deemed to be structurally subordinated to the rights of the holders of that
indebtedness as well as to the rights of depositors at the Savings Banks.
The Company finances its acquisitions of pools of loans with secured
borrowings, which generally represent 95% of the purchase price for pools of
Non-Discounted Loans and 90% of the purchase price for pools of Discounted
Loans. While the highly leveraged nature of the company's loans and other
financial assets offers the opportunity for increased rates of return on the
Company's invested capital, it involves a greater degree of risk. A relatively
small decline in the value of a pool of loans can reduce or eliminate the
Company's capital invested in that pool of loans. In addition, in the case of
indebtedness incurred pursuant to repurchase agreements, such a decline can
result in margin calls (i.e., demands by the Company's lenders for additional
cash or assets as security for their loans), which can have an adverse impact
on the Company's liquidity and capital resources. This high degree of leverage
also makes the Company more vulnerable to a downturn in real estate values or
the economy generally. Though management generally expects to repay any
indebtedness incurred in connection with an acquisition from the proceeds of
the acquired pool of loans, a downturn in the economy or real estate market
could reduce those proceeds. An increase in market interest rates or a decline
in the value of the collateral securing the acquired pool of loans could
adversely effect the ability of the Company to repay its borrowings and could
have a material adverse effect on the Company's results of operations and
financial condition.
NEED FOR ADDITIONAL FINANCING
The Company is dependent upon third-party financing. The Company's financing
sources include warehouse and repurchase facilities with investment banking
firms, secured term loans, brokered and wholesale deposits at the Savings
Banks, funds from securitizations, proceeds from sales of debt and equity
securities and internally generated funds. At June 30, 1997, the Company had
warehouse and repurchase financing facilities totalling approximately $1.1
billion, of which approximately $463.0 million was available. Approximately
60% in principal amount of the Company's warehouse and repurchase financing
facilities are committed for specified periods of time, generally six months
to three years, and the balance may be withdrawn at any time.
From time to time, the Company securitizes pools of loans and uses the
proceeds to repay borrowings on its warehouse and repurchase facilities,
thereby increasing its ability to purchase additional pools of loans. Any
substantial reduction in the size or availability of the securitization market
or other accounting, tax or regulatory changes adversely affecting the
securitization of loans could make the Company more dependent upon its other
funding sources, if available, and adversely affect the Company's ability to
acquire pools of loans.
12
<PAGE>
In the past, the Company has relied on the ability of the Savings Banks to
use brokered and wholesale deposits as a significant source of funds. The
Savings Banks' funding strategy had been to offer deposit rates above those
customarily offered by banks and savings institutions 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 an investor to
competing investments. Pursuant to the Orders issued by the OTS, the Savings
Banks are currently prohibited from increasing total assets above specified
levels and are required to implement certain procedural and administrative
changes that may increase the expenses they incur in acquiring additional
financial assets. See "--Regulation of the Savings Banks." There can be no
assurance as to when, if ever, the Orders will be lifted or modified so that
the Company can use the Savings Banks as a source of additional funds. In
addition, under FDIC regulations, an "under-capitalized" savings bank may not
accept, renew or roll over any brokered deposit and an "adequately-
capitalized" savings bank may not do so unless it has applied for and been
granted a waiver from the FDIC and complies with certain rate limitations. See
"Regulation--Brokered Deposits." Approximately 47.0% of Girard's outstanding
deposits as of June 30, 1997 were obtained through third-party deposit
brokers. For purposes of the FDIC regulations, "brokered deposits" include
deposits obtained through third-party deposit brokers and also include
deposits obtained without the use of a broker if they are obtained through the
solicitation of deposits by offering rates of interest (with respect to such
deposits) which are "significantly higher" than the prevailing rate of
interest on depository institutions having the same type of charter in such
depository institution's normal market area. The Company believes that the
rates of interest that it currently pays on its wholesale deposits not
obtained through brokers are not "significantly higher" than those in its
market area; however, if in the future the Company were forced by market
perceptions of the credit-worthiness of the Savings Banks to increase those
interest rates substantially, the non-brokered wholesale deposits could become
"brokered deposits" subject to the above requirements and rate limitations. If
the Savings Banks could not continue to offer deposit rates at levels above
those of other banks and savings institutions, they could experience
difficultly attracting deposits. If the Company were required to replace
funding now represented by deposits at the Savings Banks (for instance if the
Savings Banks ceased to be "well capitalized" and the FDIC did not grant a
waiver for the use of brokered deposits) it could experience an increase in
its overall cost of funds.
The Company's expansion strategy will result in the need for additional debt
and/or equity financing in the future, and there can be no assurance that the
Company will be able to obtain such financing on acceptable terms. The
Company's high degree of leverage may make it more difficult for the Company
to obtain additional financing for future working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes and
may cause the Company to dedicate a substantial portion of its cash flow from
operations to the payment of principal and interest on indebtedness, thereby
reducing the funds available for operations and future business opportunities.
To the extent the Company is unable to extend or replace existing facilities,
securitize its loans or increase deposits at the Savings Banks, the Company
may have to curtail its acquisition of pools of loans and newly-originated
mortgage and manufactured housing loans, which could have a material adverse
effect on its financial position and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
RISKS RELATED TO ACQUIRED POOLS OF LOANS
In determining the purchase price for pools of loans, management makes
certain assumptions regarding among other things, the real estate market and
the Company's ability to successfully resolve loans and to dispose of any
foreclosed real estate. To the extent that the Company's underlying
assumptions prove to be inaccurate or the basis for those assumptions change
(for example, an unanticipated decline in the real estate market), the price
paid by the Company for a pool of loans may prove to have been excessive,
resulting in a lower yield or a loss to the Company. Therefore, the success of
the Company is highly dependent on its pricing of pools of loans as well as
general economic conditions in the geographic areas in which the foreclosed
real estate or properties
13
<PAGE>
underlying the loans are located. Adverse changes in national economic
conditions or in the economic conditions of regions in which the Company
acquires pools of loans could impair its ability to successfully resolve loans
and have an adverse effect on the value of those pools of loans. In addition,
because non-performing loans do not make regular cash payments, the return to
the Company is significantly influenced by the time it takes to resolve the
loan, which varies based on, among other things, state consumer protection and
foreclosure laws, both of which are subject to change. If and to the extent
that the Company expands its operations to include the acquisition of pools of
loans of a type or from a geographic market with respect to which management
does not have substantial prior experience, such operations may involve a
higher risk of loss.
The Company's operating results and cash flow fluctuate from quarter to
quarter as a result of the volume of the Company's acquisitions of pools of
loans and newly-originated mortgage and manufactured housing loans, the prices
paid by the Company for pools of loans, the volume of loans resolved, the
differences between the Company's cost of funds and the average interest rates
of the acquired loans, the timing and size of provisions for loan losses,
variations in the effectiveness of the Company's hedging strategies, the
interest rate for senior classes of mortgage-backed securities issued in
securitizations, and the timing and size of securitizations or other loan
dispositions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In addition, fluctuations in quarterly results and
cash flows could have a negative effect on the Company's ability to service
its indebtedness.
REGULATION OF THE SAVINGS BANKS
Following examinations of the Savings Banks and Wilshire Acquisitions
Corporation ("WAC"), the holding company for the Savings Banks, by the OTS in
each of 1994, 1995, 1996 and 1997, the OTS has issued Reports of Examination
that were critical of the Savings Banks and WAC in a number of significant
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 and (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 OTS.
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 and the quality of the assets
acquired by the Savings Banks. 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 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 also 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. Due to the issuance of the Orders, the Company does not
expect to be able to grow the Savings Banks until and unless the Orders are
lifted or modified.
The Orders also required 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
14
<PAGE>
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 were 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. The Savings Banks implemented
numerous actions to address the requirements of the Orders, including (i)
hiring additional management personnel for the Savings Banks, (ii) engaging
Arthur Andersen LLP to review management's implementation of corrective
actions designed to respond to the provisions of the Orders, as required by
the OTS, (iii) increasing the size of the internal asset review department,
and (iv) revising internal asset review policies as appropriate.
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.
The OTS recently completed its 1997 examination of the Savings Banks and
issued a Report of Examination that continues to be critical of the Savings
Banks in a number of significant respects and indicated that the Orders would
not be lifted. The 1997 Report of Examination characterized asset quality as
"poor" and expressed concern with, among other things (i) the sale of
substantially all of the Savings Banks' performing Loans and the acquisition
of non-Performing Loans and their impact on earnings and future loss
provisions, (ii) the Savings Banks' procedures for acquiring and servicing
loans, (iii) the policies and procedures concerning allowances for loan and
lease losses and hedging transactions, (iv) the methods for measuring and
monitoring interest rate risk and (v) recordkeeping and systems for financial
and other reporting. The 1997 Report of Examination also indicated that (i)
the Savings Banks had not adequately demonstrated that the servicing fees
charged to the Savings Banks by WCC were comparable to fees charged by non-
affiliated parties, (ii) the Savings Banks' books and records continued to be
deficient in several respects, (iii) First Bank's merchant bankcard operations
reflected certain deficiencies and (iv) the Savings Banks' loan loss policy
was not adequately supported or documented. As a result, the Savings Banks
were found not to be in compliance with the provisions of the Orders covering
bankcard operations, transactions with affiliates, allowance for loan and
lease losses and accounting books and records and the Savings Bank were
directed to remedy the deficiencies in a timely manner.
As part of its examination of Girard, the OTS indicated that, based on
Girard's portfolio as of March 31, 1997, Girard should increase its provision
for loan losses and reserves for real estate owned to $27.0 million effective
as of June 30, 1997. Since completion of the 1997 examination, Girard's
management has continued to discuss with OTS personnel the level of reserves
to be required. Among other things, management has argued that (i) the amount
of additions to the General Valuation Allowance ("GVA") suggested by the
examination team with respect to non-performing single family mortgage loans
is excessive because the Savings Banks use an asset-specific reserve
methodology for such loans that results in Specific Valuation Allowances (or
asset-specific reserves) against such loans in amounts that are conservative
by industry standards and (ii) a dollar number for reserve additions as of
June 30, 1997 cannot be determined as of March, 1997 (as the examination staff
attempted to do) because the portfolio has changed from March to the end of
June, 1997 as a result of settlements, recoveries and revised valuations
associated with migrations of loans to real estate owned. The OTS has
disagreed with some of management's arguments, but has agreed not to require
additions to the GVA at this time. There can be no assurance that the OTS will
not require substantial additional reserves following future examinations. It
is likely that the non-traditional nature of the Savings Banks' activities (in
terms of both funding sources and investments) will cause the Savings Banks to
be subject for the foreseeable future to heightened regulatory scrutiny.
The Company is currently classified as a multiple savings and loan holding
company under applicable law as a result of its ownership of the Savings
Banks. Multiple savings and loan holding companies are subject to activities
limitations. In general, a multiple savings and loan holding company (or a
subsidiary thereof that is not
15
<PAGE>
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. 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. The Company recently filed an
application with the OTS to merge First Bank and Girard, which would enable
the Company to be treated as a unitary savings and loan holding company.
Although the OTS has indicated in discussions with management that it would
permit the merger of First Bank and Girard, there can be no assurance as to
whether or when such merger will be consummated.
RISK OF INCREASED CAPITAL REQUIREMENTS
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" rather than
"adequately capitalized" (as those terms are defined under the regulatory
framework for prompt corrective action) because of the riskiness of their
business plan. OTS regulations permit the OTS to impose even higher capital
requirements on a savings bank if it determines that the bank's existing
capital is or may become inadequate in view of the bank's circumstances. In
making such determination, the OTS can take into account a number of factors,
including the bank's loan portfolio quality, recent operating losses or
anticipated losses, the condition of its holding company and whether the bank
is receiving special supervisory attention, among other matters. In connection
with the 1997 examination, the OTS indicated that the capital level of Girard
was less than satisfactory and the capital level of First Bank was not
adequate in view of their risk profiles, despite the fact that the Savings
Banks had capital levels that qualified them as "well capitalized" under OTS
regulatory capital requirements. The OTS also suggested in the Report of
Examination that the Savings Banks' current capital requirements may not be
appropriate given the deficiencies noted in the examination. Following the
1997 examination, the Savings Banks' management had further discussions with
the OTS relating to capital levels at the Savings Banks, in which the OTS
indicated that the dollar amount of capital maintained by the Savings Banks as
of March 31, 1997 would be viewed as satisfying the minimum capital
requirements for the immediate future and that the Company would not be
required to inject additional capital at this time. Notwithstanding the
foregoing, the OTS may review this decision at any time and could impose
additional capital requirements on the Savings Banks in the future. If the OTS
were to impose higher capital requirements on the Savings Banks, the Company
might inject additional capital into the Savings Banks, whether or not such
usage of capital is optimal for 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.
In the event that the Company was unable or refused to inject capital into
the Savings Banks to qualify as "well-capitalized" as required by the OTS in
the Orders or to meet higher individual capital requirements imposed by the
OTS, significant adverse consequences can be expected to result. Among other
things, failure to maintain capital at the level necessary for the Savings
Banks to qualify as "well-capitalized" could result in a prohibition on the
use by the Savings Banks of funding sources on which they rely. Under FDIC
regulations, a depository institution that does not qualify as "well-
capitalized" must obtain a waiver from the FDIC before accepting or renewing
any brokered deposit. There can be no assurance that such a waiver would be
granted. Approximately 47.0% of Girard's deposits (or approximately $161.7
million) as of June 30, 1997 were obtained through third party deposit
brokers.
16
<PAGE>
ABILITY TO MANAGE GROWTH
The Company has undergone rapid and significant growth and is continuing to
pursue a policy of rapid growth, including expansion of its operations
internationally. The Company's rapid growth has imposed a significant strain
on its management resources and there can be no assurance that the Company
will be able to attract and retain the necessary personnel to manage its
operations effectively, in which event its business, operating results and
financial condition could be materially and adversely affected.
RISKS OF INTERNATIONAL OPERATIONS
The Company's international operations are subject to most of the same risks
associated with its U.S. operations as well as such additional risks as
fluctuations in foreign currency exchange rates, 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 of foreign laws. In addition, the
Company's management has only limited experience in the purchasing and
servicing of real estate loans in foreign countries and its ability to
evaluate and effectively price loan pool acquisitions abroad may be subject to
a higher risk of error. Accordingly, there can be no assurance that one or
more of these factors will not have a materially adverse effect on the
Company's operations.
Since the commencement of operations in Western Europe in September 1996,
the Company has acquired one pool of Discounted Loans and one pool of Non-
Discounted Loans in the United Kingdom with aggregate principal amounts of
approximately $15.6 million and $0.9 million, respectively, and has purchased
a French entity which owns portfolios of Non-Discounted Loans, Discounted
Loans and foreclosed real estate in France for an aggregate purchase price of
approximately $50 million. The Company has also agreed, along with a co-
investor, to acquire from a major international insurance company its
portfolio of Discounted and Non-Discounted Loans in France for an aggregate
purchase price of approximately $150 million (for which the Company would be
responsible for half). If these acquisitions are completed, the Company's
concentration of assets located internationally will be significantly
increased. There can be no assurance however as to when or if such
acquisitions will be completed.
COMPETITION
The Company faces competition in purchasing pools of loans from several
other companies that specialize in this business, some of which have greater
resources than the Company. For large pools of loans (over $20.0 million), the
Company's competitors also include several investment banks and investor
consortiums. The current level of return realized by the Company and its
competitors in purchasing pools of loans and foreclosed real estate could
attract additional competitors to these markets. Heightened competition would
likely result in higher prices for pools of loans and correspondingly lower
yields on the Company's investment in those pools.
DEPENDENCE ON WILSHIRE CREDIT CORPORATION
The Company relies on WCC to service its pools of loans and is expected to
continue to rely on WCC for two to three years. In addition, the Company's
mortgage loan origination program is conducted through WCC to comply with
certain licensing requirements, and WCC also provides certain administrative
services to the Company. WCC is significantly leveraged and its servicing
rights are pledged to secure those borrowings. Until such time as the Company
commences servicing for its own account, the loss of the services of WCC for
any reason could have a material adverse impact on the Company. See "Business-
Servicing--The Sub Servicer."
DEPENDENCE ON AND CONTROL BY PRINCIPAL SHAREHOLDERS
The Company's growth and development to date have been highly dependent upon
the services of its Principal Shareholders: Andrew A. Wiederhorn, the
Company's Chief Executive Officer, and Lawrence A. Mendelsohn, the Company's
President. The loss of the services of either Mr. Wiederhorn or Mr. Mendelsohn
for
17
<PAGE>
any reason could have a material adverse effect on the Company. The Company is
party to employment agreements with each of Messrs. Wiederhorn and Mendelsohn.
See "Management--Employment Agreements." The Company also maintains "key man"
life insurance on the lives of Messrs. Wiederhorn and Mendelsohn.
The Principal Shareholders beneficially own in the aggregate approximately
73% of the combined voting power of all outstanding shares of common stock of
the Company. As a result, acting together, they are able to effectively
control all matters requiring approval by stockholders. This voting control
may have the effect of discouraging offers by third parties to acquire the
Company because the consummation of any such acquisition would require the
consent of the Principal Shareholders.
At June 30, 1997, WCC had approximately $108.9 million of outstanding
indebtedness to a single lender that was incurred to finance its growth and to
provide funds to the Principal Shareholders to finance their acquisition of
the Savings Banks and to fund their growth. Substantially all of this
indebtedness is personally guaranteed by the Principal Shareholders. If the
Principal Shareholders were required to personally repay WCC's indebtedness,
the Principal Shareholders would need to sell a significant portion of their
shares of common stock of the Company to fund such repayment, which could
result in a Change in Control.
RISKS RELATED TO SECURITIZATION
Under certain circumstances, the Company may be required to advance funds to
securitization trusts, indemnify the trustee and the underwriters and
repurchase certain loans that were securitized. In connection with a
securitization, the Company may be required to agree that, in the event of a
breach of any representation or warranty made by it that materially and
adversely affects the value of an underlying mortgage loan, the Company will
repurchase that loan at a price equal to the then outstanding principal
balance of the loan and any accrued and unpaid interest thereon. In addition,
under certain circumstances, the Company could be removed as the servicer for
the loans it securitizes.
HEDGING ACTIVITIES
A significant portion of the Company's earnings are derived from its net
interest income. Changes in the general level of interest rates generally will
affect the Company's net interest income by affecting the spread between the
Company's interest-earning assets and interest-bearing liabilities and the
cost of carry of non-performing loans and foreclosed real estate. The Company
actively monitors its assets and liabilities and employs a hedging strategy
that 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 creditworthiness of the counter-parties to hedging
transactions may impact the effectiveness of the Company's hedging strategies.
Poorly designed strategies or improperly executed transactions may increase
rather than mitigate the interest risk. At the conclusion of its recent
examination of the Savings Banks, the OTS indicated that, in the OTS's
judgment the Company's hedge analyses are insufficient to support current
hedging activities at the Savings Banks.
LIMITATIONS ON CHANGE IN CONTROL
The Indenture requires the Company, upon the occurrence of a Change of
Control Event, to make an offer to purchase the Notes at 101% of the principal
amount thereof, plus accrued interest, if any, to the date of repurchase. The
exercise by the holders of the Notes of their right to require the Company to
purchase the Notes upon the occurrence of a Change in Control Event may have
an adverse effect on the Company. In addition, the 13% Notes have a similar
provision. There can be no assurance that the Company would have sufficient
funds available to repurchase any of the Notes or the 13% Notes that may be
tendered upon the occurrence of a Change of Control Event. See "Description of
Notes--Certain Covenants-- Change in Control."
18
<PAGE>
LIMITED MARKET FOR THE NEW NOTES
The Company does not intend to list the New Notes on any national securities
exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation system. The Company has
been advised by the Initial Purchaser, that following the completion of the
Exchange Offer, the Initial Purchaser presently intends to make a market in
the New Notes. The Initial Purchaser, however, is not obligated to do so and
any market-making activities with respect to the New Notes may be discontinued
at any time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any trading market for the New Notes.
19
<PAGE>
RECENT DEVELOPMENTS
Effective July 31, 1997, the Company issued to an affiliate shares of a new
series of its preferred stock having an aggregate liquidation value of $27.5
million in exchange for the cancellation of certain accounts payable to that
affiliate aggregating approximately $27.1 million and cash in the amount of
approximately $400,000, resulting in an increase in stockholders' equity of
$27.5 million. The holders of the preferred stock have a preference with
respect to dividends and distributions on liquidation. Dividends on the
preferred stock will be payable in additional shares of preferred stock rather
than cash. The Company has the option, at any time, to call the preferred
stock at its liquidation value, subject to certain limitations contained in
the indenture relating to the 13% Notes and the Indenture relating to the
Notes.
The Company is currently in discussions with the OTS regarding the
modification or elimination of certain restrictive provisions of the Orders
and has reached a tentative oral agreement that additional reserves and
capital are not currently required. There can be no assurance that any
modifications to the Orders will occur or that the OTS will not require
additional capital or reserves now or in the immediate future.
The Company has agreed, along with a co-investor, to acquire from a major
international insurance company, its portfolio of Discounted and Non-
Discounted Loans in France for an aggregate purchase price of approximately
$150 million (for which the Company would be responsible for half).
The Company is a party to a letter of intent with a mortgage loan originator
located in California regarding the potential acquisition of the originator
for a purchase price of approximately $2.7 million. The Company also is a
party to a letter of intent with another mortgage loan originator regarding
the potential acquisition of the originator for a fixed component of
approximately $8.0 million and a variable component based upon after tax
earnings. There can be no assurance as to when or if such acquisitions will be
consummated.
USE OF PROCEEDS
The Company will not receive any cash proceeds or incur any additional
indebtedness as a result of issuance of the New Notes pursuant to the Exchange
Offer. The net proceeds from the sale of the Old Notes was approximately $95.6
million. The Company intends to use such net proceeds to provide the capital
(or equity) portion of the Company's investment in future leveraged
acquisitions of pools of loans and other investments and for general corporate
purposes.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997 and as adjusted to give effect to the (i) the Exchange Offer and (ii) the
issuance of its preferred stock as described under "Recent Developments." The
information below should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere herein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Warehouse facilities and repurchase agreements........ $ 583,468 $ 583,468
Deposits.............................................. 445,333 445,333
---------- ----------
Total short-term debt............................... $1,028,801 $1,028,801
========== ==========
Long-term debt:
13% Notes due 2004.................................... $ 84,245 $ 84,245
13% Series B Notes due 2004........................... -- 100,000
---------- ----------
Total long-term debt................................ 84,245 184,245
---------- ----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 10,000,000
shares authorized; no shares outstanding (actual);
27,500 shares outstanding (as adjusted)(1)........... -- 27,500
Common Stock, par value $0.01 per share; 50,000,000
shares authorized; 7,570,000 shares issued and
outstanding(2)....................................... 55,897 55,897
Retained earnings..................................... 10,396 10,396
Unrealized gain on securities available for sale,
net.................................................. 2,634 2,634
---------- ----------
Total stockholders' equity.......................... 68,927 96,427
---------- ----------
Total capitalization................................ $ 153,172 $ 280,672
========== ==========
</TABLE>
- --------
(1) See "Recent Developments."
(2) Excludes shares issuable upon the exercise of options. See "Management--
Executive Compensation."
REGULATORY CAPITAL RATIOS OF THE SAVINGS BANKS
The following table sets forth the regulatory capital ratios of the Savings
Banks at June 30, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Regulatory capital ratios of First Bank
Tangible capital................................................ 11.2%
Core capital.................................................... 11.2%
Total capital to risk-weighted assets........................... 15.2%
Regulatory capital ratios of Girard
Tangible capital................................................ 8.4%
Core capital.................................................... 8.4%
Total capital to risk-weighted assets........................... 10.8%
</TABLE>
21
<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
constitute the "Exchange Offer"), to exchange up to $100,000,000 aggregate
principal amount New Notes for a like aggregate principal amount at maturity
of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn. The Exchange Offer is being made with respect to all of the Old
Notes.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to the Trustee, for
distribution to all registered holders of Old Notes. The Company's obligation
to accept Old Notes for exchange pursuant to the Exchange Offer is subject to
certain conditions. See "--Certain Conditions to the Exchange Offer."
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the terms of the Registration Rights Agreement, the Company is
obligated to (i) file a registration statement with the Commission with
respect to a registered offer to exchange the Old Notes for a new series of
notes with terms substantially identical in all material respects to the Old
Notes (except that the new notes will not contain terms with respect to
transfer restrictions) and (ii) use its best efforts to cause such
registration statement to become effective under the Securities Act within 180
days after the Issue Date. This Prospectus and the Registration Statement to
which it relates are intended to satisfy the Company's obligations under the
Registration Rights Agreement.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold, and otherwise transferred by a holder thereof
(other than a holder that is an "affiliate" of the Company within the meaning
of Rule 405 of the Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act; provided, that the
New Notes are acquired in the ordinary course of such holder's business and
such holder does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving the New Notes, whether or not such person is the Holder, (ii)
neither the Holder nor any such person has an arrangement or understanding
with any person to participate in the distribution of such New Notes, (iii)
neither the Holder nor any such person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, and (iv) the Holder and such
other person acknowledge that (a) any person participating in the Exchange
Offer for the purpose of distributing the New Notes must, in the absence of an
exemption herefrom, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on the no-action letters referenced above and (b)
failure to comply with such requirements in such instance could result in the
Holder incurring liability under the Securities Act for which such Holder is
not indemnified by the Company.
As a result of the filing and effectiveness of the Exchange Offer
Registration Statement of which this Prospectus is a part, certain prospective
increases in the interest rate on the Old Notes provided for in the
Registration Rights Agreement will not occur. See "Exchange Offer;
Registration Rights." Following the
22
<PAGE>
consummation of the Exchange Offer, Holders of the Old Notes will not have any
further registration rights and the Old Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the Old Notes could be adversely affected. See "Consequences of Failure to
Exchange."
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and the Letter of Transmittal, to exchange $1,000 in principal
amount of New Notes for each $1,000 in principal amount of its outstanding Old
Notes. New Notes will only be issued in denominations of $1,000 and integral
multiples in excess thereof. The Company will accept for exchange any Old
Notes which are properly tendered on or prior to the Expiration Date. The
Exchange Offer may be extended, terminated or amended as provided below.
The form and terms of the New Notes under the Indenture will be identical in
all material respects to the form and terms of the Old Notes, except that (i)
the offering of the New Notes will have been registered under the Securities
Act and therefore will not bear legends restricting the transfer thereof, and
(ii) holders of the New Notes will not be entitled to certain rights intended
for Holders of unregistered securities under the Registration Rights Agreement
which will terminate upon the consummation of the Exchange Offer. The New
Notes evidence the same debt as the Old Notes and will be issued under, and be
entitled to the benefits of, the Indenture governing the Old Notes. The New
Notes will bear interest from the date of issuance at the same rate and upon
the same terms as the Old Notes. See "Description of Notes." Holders of Old
Notes whose Old Notes are accepted in exchange will not receive any payment in
respect of accrued and unpaid interest on the Old Notes. Such accrued and
unpaid interest on the Old Notes will be payable with the first interest
payment on the New Notes.
The Company has fixed the close of business on , 1997 as the record date
for the Exchange Offer for the purpose of determining the persons to whom this
Prospectus and the Letter of Transmittal will be mailed initially. Only a
registered Holder of Old Notes (or such Holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the
Indenture may participate in the Exchange Offer. There will be no fixed record
date for determining registered Holders of Old Notes entitled to participate
in the Exchange Offer.
Holders of Old Notes do not have appraisal or dissenters' rights in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the
Securities Act and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for tendering Holders of
Old Notes for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Tendering Holders will not be required to pay brokerage commissions or fees
or, subject to the instructions of the Letter of Transmittal, transfer taxes
with respect to the exchange of Old Notes for New Notes pursuant to the
Exchange Offer. The Company will pay all charges and expenses, other than
certain taxes which may be levied in the event of any transfer of ownership,
in connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m. New York City time, on ,
1997, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
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The Company expressly reserves the right, in its sole discretion, at any
time or from time to time, to (i) extend the period of time during which the
Exchange Offer is open, and thereby delay acceptance for exchange of any Old
Notes tendered pursuant to the Exchange Offer (ii) if any of the conditions
set forth under "Conditions of the Exchange Offer" shall not have been
satisfied, to terminate the Exchange Offer or (iii) to amend the terms of the
Exchange Offer in any manner. The Company shall give oral or written notice of
any such delay, extension, termination or amendment to the Holders of the Old
Notes as promptly as practicable, such notice in the case of any extension to
be issued no later than 10:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date. Without limiting the
manner in which the Company may choose to make any such announcement, the
Company shall not, unless otherwise required by law, have any obligation to
publish, advertise or otherwise communicate such public announcement, other
than by making a timely release to any news agency customarily used by the
Company for making public announcements. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendments by means of a prospectus supplement
that will be distributed to the registered Holders of the Old Notes, and the
Company will extend the Exchange Offer for a period of five to ten business
days following such distribution, depending upon the significance of the
amendment and the manner of the disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
INTEREST ON THE NEW NOTES
Interest on each New Note will accrue from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from August 15, 1997, the date of issuance of the Old Notes.
Holders of Old Notes whose Old Notes are accepted in exchange will not receive
any payment in respect of accrued and unpaid interest on the Old Notes. Such
accrued and unpaid interest on the Old Notes will be payable with the first
interest payment on the New Notes. Interest on the Notes is payable semi-
annually in arrears on August 15 and February 15 of each year, commencing
February 15, 1998.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth herein and in this Prospectus and the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal relating
to such Old Notes, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth below under
"Exchange Agent" on or prior to the Expiration Date for the Exchange Offer. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent, along with the related Letter of Transmittal, prior to the
Expiration Date for the Exchange Offer or (ii) the Holder must comply with the
guaranteed delivery procedures described below (unless such tender is being
effected pursuant to the procedure for book-entry transfer described below).
By executing the Letter of Transmittal, each Holder of Old Notes will make
to the Company the representations set forth above in the third paragraph
under the heading "Purpose and Effect of the Exchange Offer."
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ENSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY.
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Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the Old Notes by causing DTC
to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's procedure for such transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at its addresses set forth
herein under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder (including any
participant in DTC whose name appears on a security position listed as the
owner of Old Notes, of the Old Notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of an Eligible Institution (as
defined). In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such
guarantees must be by a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or by a commercial bank or trust company having an office or
correspondent in the United States or by such other Eligible Institution
within the meaning of Rule 17A(d)-15 under the Exchange Act (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than a signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with
the signature thereon guaranteed by an Eligible Institution.
Tenders may be made only in principal amounts of $1,000 and integral
multiples in excess thereof. Subject to the foregoing, Holders may tender less
than the aggregate principal amounts represented by the Old Notes deposited
with the Exchange Agent provided they properly indicate this fact in the
Letter of Transmittal accompanying the Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes tendered or to be tendered pursuant to such Exchange
Offer either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
as to any particular Old Notes tendered or to be tendered pursuant to the
Exchange Offer either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If a Letter of Transmittal, endorsement, bond power, power of attorney or
other document required by the Letter of Transmittal is signed by a person or
persons other than the registered holder or holders of Old Notes, such Old
Notes must be endorsed or accompanied by appropriate powers of attorney, in
either case signed exactly as the name or names of the registered holder or
holders that appear on the Old Notes.
If a Letter of Transmittal or any Old Notes or powers of attorney are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or
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representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or the nominee and who wishes to tender
Old Notes in the Exchange Offer should contact such registered holder promptly
and instruct such registered holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender directly, such beneficial
owner must, prior to competing and executing the Letter of Transmittal and
tendering Old Notes, make appropriate arrangement to register ownership of the
Old Notes in such beneficial owner's name. Beneficial owners should be aware
that the transfer of registered ownership may take considerable time.
GUARANTEED DELIVERY PROCEDURES
Holders who desire to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes and Letter of
Transmittal or any other documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date, or (iii) who cannot complete
the procedures for book-entry transfers on a timely basis must tender their
Old Notes according to the guaranteed delivery procedures set forth in the
Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and
Notice of Guaranteed Delivery (as defined in the Letter of Transmittal)
must be signed by such Holder:
(ii) prior to the Expiration Date, the Exchange Agent must have received
from the Holder and the Eligible Institution a properly completed and duly
executed Letter of Transmittal and a Notice of Guaranteed Delivery (by
facsimile, mail or hand delivery) setting forth the name and address of the
Holder, the certificate number or numbers of the tendered Old Notes, and
the principal amount of tendered Old Notes, stating that the tender is
being made thereby and guaranteeing that, within five business days after
the date of delivery of the Notice of Guaranteed Delivery, the tendered Old
Notes and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent; and
(iii) such properly completed and executed documents required by the
Letter of Transmittal and the tendered Old Notes in proper form for
transfer must be received by the Exchange Agent within five business days
after the Expiration Date.
Any Holder who desires to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent
received the Notice of Guaranteed Delivery and Letter of Transmittal relating
to such Old Notes prior to 5:00 p.m. New York City time, on the Expiration
Date. Failure to complete the guaranteed delivery procedures outlined above
will not, of itself, affect the validity or effect the revocation of any
Letter of Transmittal form properly completed and executed by a Holder who
attempted to use the guaranteed delivery process.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent. Upon acceptance by the Company
of all Old Notes properly tendered and not withdrawn prior to the Expiration
Date, the Company will issue New Notes to each tendering holder having an
aggregate principal amount equal to the sum of the aggregate principal amount
of such Old Notes tendered.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes, a properly
26
<PAGE>
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Old Notes will be returned without expense to
the tendering holder thereof as promptly as practicable after the expiration
date or termination of the Exchange Offer.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any reason
the Exchange Offer is not completed within 180 days of the Issue Date, the
Company will, at its cost, (a) as promptly as practicable and in any event no
later than 60 days after such filing obligation arises, file with the
Commission a shelf registration statement covering resales of the Notes (the
"Shelf Registration Statement"), (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act
within 45 days after such filing occurs and (c) use its best efforts to keep
effective the Shelf Registration Statement until two years after the date of
original issuance of the Notes or such shorter period that will terminate when
all of the Notes covered thereby have been sold pursuant thereto or in certain
other circumstances. The Company will, in the event of the Shelf Registration
Statement, provide to each holder of the Notes copies of the prospectus, which
is a part of the Shelf Registration Statement, notify each such holder when
the Shelf Registration Statement for the Notes has become effective and take
certain other actions as are required to permit unrestricted resales of the
Notes. A holder of Notes who sells such Notes pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York time, on the business day prior to the Expiration Date, unless previously
accepted for payment.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person
having tendered the Old Notes to be withdrawn, identify the Old Notes to be
withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the respective Exchange Agent, then, prior to the release of
such certificates the withdrawing holder must also submit the certificate
numbers of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes,"
at any time on or prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding the foregoing or any other provision of the Exchange Offer,
the Company shall not be required to accept for exchange, or issue New Notes
in exchange for, any Old Notes and may terminate or amend the Exchange Offer,
if at any time before the acceptance of such Old Notes for exchange or the
exchange of the New Notes for such Old Notes, any of the following events
shall occur, which occurrence, in the sole judgment
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of the Company any regardless of the circumstances (including any action by
the Company) giving rise to any such events, makes it inadvisable to proceed
with the Exchange Offer:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any domestic or
foreign government or governmental authority or any action shall have been
taken, proposed or threatened, by any domestic or foreign government,
governmental authority, agency or court, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or would otherwise make it
inadvisable in the reasonable judgment of the Company to proceed with the
Exchange Offer;
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof;
(c) any change (or development involving a prospective change) shall have
occurred or be threatened in the business, properties, assets, liabilities,
financial condition, operations, results of operation or prospects of the
Company that, in the reasonable judgment of the Company, is or may be
adverse to the Company, or the Company shall have become aware of facts
that, in the sole judgment of the Company, have or may have an adverse
significance with respect to the value of the New Notes or the Old Notes;
or
(d) any governmental approval has not been obtained which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to tendering holders, (ii) extend the Exchange
Offer and retain all Old Notes tendered prior to the Expiration Date, subject,
however, to the rights of Holders to withdraw such Old Notes, or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept
validly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company may extend the Exchange
Offer for a period of five to 10 business days following such distribution,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during
such five to 10 business day period.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for Old Notes, if
at such time any stop order shall be threatened or in effect with respect to
the Registration Statement or the qualification of the Indenture under the
Trust Indenture Act of 1939.
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The Company has no obligation to, and will not knowingly, accept tenders of
Old Notes from affiliates of the Company (within the meaning of Rule 405 under
the Securities Act) or from any other holder or holders who are not eligible
to participate in the Exchange Offer under applicable law or interpretations
thereof by the Commission, or if the New Notes to be received by such holder
or holders of Old Notes in the Exchange Offer, upon receipt, will not be
tradeable by such holder without restriction under the Securities Act and the
Exchange Act and without material restrictions under the "blue sky" or
securities laws of substantially all of the states.
Holders of Old Notes may have certain rights and remedies against the
Company under the Registration Rights Agreement should the Company fail to
consummate the Exchange Offer, notwithstanding any nonfulfillment of the above
conditions. Such conditions are not intended to modify such rights and
remedies in any respect.
EXCHANGE AGENT
Bankers Trust Company has been appointed as the exchange agent (the
"Exchange Agent"). The executed Letters of Transmittal should be directed to
the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the related Letter of Transmittal and requests for Notices of Guaranteed
Delivery should be directed to the Exchange Agent addressed as follows:
By Registered or By Hand/Overnight Courier:
Certified Mail:
Bankers Trust Company
Bankers Trust Company Corporate Trust & Agency Group
c/o BT Services Tennessee, Inc. Reorganization Dept.
Corporate Trust & Agency Group Receipt & Delivery Window
Reorganization Dept. 123 Washington Street,
P.O. Box 292737 1st Floor
Nashville, TN 37229-2737 New York, NY 10006
By Facsimile: By Telephone:
(615) 315-0139 (615) 835-3575
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional
solicitations may be made in person or by telephone by officers and employees
of the Company.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$75,000, which includes fees and expenses of the Exchange Agent, the Trustee
under the Indenture for the New Notes, accounting, legal, printing and related
fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or
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request that Old Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized upon the consummation of the Exchange
Offer. The expenses of the Exchange Offer will be amortized by the Company
over the term of the New Notes in accordance with generally accepted
accounting principles.
CONSEQUENCES OF FAILURE TO EXCHANGE; TRANSFERS OF EXCHANGE NOTES
The Old Notes which are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person whom the seller reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A under the Securities Act, purchasing for its
own account or for the account of a qualified institutional buyer to whom
notice is given that the resale, pledge or other transfer is being made in
reliance on Rule 144A, (iii) in an offshore transaction in accordance with
Regulation S under the Securities Act, but only in the case of a transfer that
is effected by the delivery to the transferee of Old Notes registered in its
name (or its nominee's name) on the books maintained by the registrar of the
Old Notes, (iv) pursuant to an exemption from registration in accordance with
Rule 144 (if available) or Rule 145 under the Securities Act, (v) in reliance
on another exemption from the registration requirements of the Securities Act
but only in the case of a transfer that is effected by the delivery to the
transferee of Old Notes registered in its name (or its nominee's name) on the
books maintained by the registrar of the Old Notes, and subject to the receipt
by the registrar or co-registrar of a certification of the transferor and an
opinion of counsel (satisfactory to the Company) to the effect that such
transfer is in compliance with the Securities Act, or (vi) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALES OF THE NEW NOTES
With respect to resales of New Notes, based on an interpretation by the
staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a Holder (other than (i) a broker dealer
who purchases such New Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Old Notes for New Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes, will be allowed to resell
the New Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the New Notes a prospectus
that satisfies the requirements of Section 10 thereof. However, if any Holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such Holder must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Further, each broker-dealer that receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes.
ADDITIONAL INTEREST
The Registration Rights Agreement provides that, if (i) an Exchange Offer or
Shelf Registration Statement is not declared effective on or prior to the
180th day following the Issue Date; or (ii) the Exchange Offer is not
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consummated within 30 days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission or a Shelf
Registration Statement is not declared effective on or prior to the 180th
calendar day after the Issue Date; or (iii) either (A) the registration
statement relating to a registered Exchange Offer (the "Exchange Offer
Registration Statement") ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (B) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf Registration
Statement ceases to be effective at any time prior to the second anniversary
of its effective date (each such event referred to in clauses (i) through
(iii) above, a "Registration Default"), then the per annum interest rate on
the Notes will increase by 25 basis points following the 180-day period
referred to in clause (i) above, following the 30-day period or 180-day period
referred to in clause (ii) above, as the case may be, or in the case of clause
(iii) above, immediately following such Registration Default; and the per
annum interest rate will increase by an additional 25 basis points at the
beginning of each subsequent 30-day period in the case of clause (i), (ii) or
(iii) above, or 90-day period in the case of clause (iv) above; provided,
however, that in no event will the per annum interest rate borne by the Notes
be increased by more than 150 basis points. Upon the filing of the Exchange
Offer Registration Statement, the consummation of the Exchange Offer or the
effectiveness of the Shelf Registration Statement, as the case may be, the
interest borne by the Notes from the date of such filing, consummation or
effectiveness, as the case may be, will be reduced to the original interest
rate set forth on the cover of this Offering Memorandum; provided, however,
that, if after any such reduction in interest rate, a different Registration
Default occurs, the interest rate may again be increased pursuant to the
foregoing provisions.
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SELECTED FINANCIAL INFORMATION
The following tables present selected 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 years ended December 31, 1996,
1995 and 1994 have been derived from the Audited Financial Statements of the
Company included elsewhere in this Prospectus. The historical income statement
and data presented for the six month periods ended June 30, 1997 and 1996 has
been derived from Unaudited 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 six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for any
other interim period of the entire year ending December 31, 1997. The selected
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. Because certain
predecessors of the Company 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. Financial
information as of December 31, 1996 and 1995 and for the years then ended is
presented on a consolidated basis. For convenience, all the accompanying
financial statements are referred to as "consolidated." See Note 1 to the
Consolidated Financial Statements.
The pools of loans acquired by the Company generally consist primarily of
either Discounted Loans or Non- Discounted Loans, but may include other types
of loans. However, for accounting purposes all of the loans in a particular
pool are classified as either Discounted Loans or Non-Discounted Loans, based
on whether the pool consists primarily of Discounted Loans or Non-Discounted
Loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Accounting Matters."
32
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
--------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income..... $ 43,792 $ 21,951 $ 48,422 $ 24,381 $ 9,569
Total interest expense.... 34,691 12,020 29,277 14,481 5,457
--------- -------- --------- --------- --------
Net interest income..... 9,101 9,931 19,145 9,900 4,112
Provision for (recovery
of) loan losses(1)....... (1,424) 10,868 16,549 4,266 2,173
--------- -------- --------- --------- --------
Net interest income
(loss) after provision
for loan losses........ 10,525 (937) 2,596 5,634 1,939
--------- -------- --------- --------- --------
Other Income:
Bankcard income(2)...... 3,391 3,275 6,790 4,694 635
Bankcard processing
expense................ (2,330) (2,616) (5,124) (3,462) (274)
Gain on sale of loans... 11,216 1,983 11,538 642 --
Loan fees and charges... 451 632 1,747 610 43
Trading account--
unrealized gain........ 14 1,601 1,833 -- --
Foreclosed real estate,
net.................... 2,739 (115) 556 (170) (241)
Servicing revenue....... 1,944 -- -- -- --
Other, net.............. 661 246 602 623 823
--------- -------- --------- --------- --------
Total other income.... 18,086 5,006 17,942 2,937 986
--------- -------- --------- --------- --------
Other Expenses:
Compensation and
employee benefits...... 6,651 1,538 4,464 2,516 1,922
FDIC insurance
premiums............... 523 387 2,381 721 261
Occupancy............... 415 142 339 385 319
Professional services... 962 297 700 1,028 507
Data processing and
equipment rentals...... 153 124 229 232 162
Loan service fees and
expenses............... 7,995 2,122 5,176 1,958 242
Other general and
administrative
expenses............... 2,994 766 2,157 1,092 1,290
--------- -------- --------- --------- --------
Total other expenses.. 19,693 5,376 15,446 7,932 4,703
--------- -------- --------- --------- --------
Income (loss) before in-
come taxes............... 8,918 (1,307) 5,092 639 (1,778)
Income tax provision (ben-
efit).................... 3,744 (1,279) 125 47 (526)
--------- -------- --------- --------- --------
Net income (loss)......... $ 5,174 $ (28) $ 4,967 $ 592 $ (1,252)
========= ======== ========= ========= ========
SELECTED CASH FLOW DATA:
Cash provided by (used in)
operations (excluding
loans held for sale)..... $ (34,494) $ (6,884) $ (19,453) $ 1,589 $ (1,614)
Proceeds and repayments
from loans and other
assets................... 256,456 57,242 393,392 76,695 22,011
Purchase of loans and
other assets............. (773,356) (240,957) (621,934) (190,863) (57,049)
Cash from financing activ-
ities.................... 438,808 200,578 395,811 108,231 42,323
--------- -------- --------- --------- --------
Net increase (decrease)
in cash(3)............. $(112,586) $ 9,979 $ 147,816 $ (4,348) $ 5,671
========= ======== ========= ========= ========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995 1994
---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 39,712 $152,298 $ 4,482 $ 8,830
Portfolio assets:
Discounted Loans, net................... 395,829 219,630 31,354 2,094
Non-Discounted Loans, net............... 392,158 191,962 259,417 179,377
Mortgage Backed other securities........ 189,658 84,964 28,672 29,887
Foreclosed real estate, net............. 135,984 78,200 4,964 1,208
---------- -------- -------- --------
Total portfolio assets................ $1,113,629 $574,756 $324,407 $212,566
Total assets.............................. 1,196,092 753,849 340,695 230,636
Deposits.................................. 445,333 501,614 303,524 196,289
Short-term debt........................... 583,468 97,624 13,000 21,500
Long-term debt............................ 84,245 75,000 -- --
Stockholders' equity(4)................... 68,927 61,022 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------- --------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------- --------
(ANNUALIZED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets....... 0.99% (0.01)% 0.95% 0.24% (0.92)%
Return on average equity....... 16.24% (0.16)% 13.68% 8.65% (31.08)%
Average interest yield on total
loans......................... 9.02% 10.09 % 9.41% 10.02% 7.96 %
Net interest spread(5)(6)...... 1.64% 3.86 % 3.07% 3.44% 3.08 %
Net interest margin(6)(7)...... 1.86% 4.37 % 3.63% 3.87% 3.14 %
Ratio of earnings to fixed
charges(8):
Including interest on
deposits.................... 1.25 0.89 1.17 1.04 -- (9)
Excluding interest on
deposits.................... 1.42 0.06 2.19 2.19 --
Long-term debt to total
capitalization(10)............ 0.55 -- 0.55 -- --
Total financial liabilities to
equity........................ 16.35 14.13 11.35 47.40 32.95
Average equity to average
assets........................ 6.09% 5.13% 6.90% 2.72% 2.96 %
Non-Performing loans to Non-
Discounted Loans at end of
period(11).................... 14.85% 5.39% 23.69% 4.46% 5.95 %
Allowance for loan losses to
total Non-Discounted Loans at
end of period................. 6.45% 5.13% 13.88% 3.60% 3.72 %
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------
1997 1996 1995 1994
---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Number of pools of loans acquired.... 73 41 33 38
Investments and originations:
Discounted Loans and foreclosed
real estate....................... $ 247,190 $ 324,159 $ 29,224 $ 2,538
Non-Discounted Loans (11)(12)...... 416,234 254,517 157,671 39,023
Mortgage originations.............. 29,742 2,280 8,748 4,345
Mortgage-backed and other
securities........................ 107,654 67,604 2,965 14,469
--------- --------- -------- --------
Total............................ $ 800,820 $ 648,560 $198,608 $ 60,375
Recoveries and repayments............ (68,277) (66,160) (61,135) (21,824)
Loan sales and securitizations....... (180,135) (301,411) (16,031) --
Net change in portfolio assets....... 538,873 250,349 111,841 106,580
</TABLE>
34
<PAGE>
- --------
(1) Approximately $8.6 million of the increase in the provisions from 1995 to
1996 related to the Sub-Prime Auto Loans and $4.8 million of the 1996
provision related to the Inherited Loans. See "Business--Allowances for
Losses."
(2) The Company began its bankcard operations in 1994.
(3) The increase in cash in 1996 and the decrease in cash for the six months
ended June 30, 1997 reflect the receipt of cash from the Company's sale
of common stock and its 13% Notes and the subsequent investment of that
cash in interest earning assets.
(4) Effective January 1, 1996, $11.0 million of common stock was issued in
exchange for subordinated debt. Prior to the Company's initial public
offering, an additional $17.8 million of common stock was issued for
cash. In December 1996, the Company completed its initial public
offering, which resulted in $20.9 million of new capital. Effective July
30, 1997, the Company issued to an affiliate shares of a new series of
its preferred stock having an aggregate liquidation value of $27.5
million in exchange for the cancellation of certain accounts payable to
that affiliate aggregating approximately $27.1 million and cash in the
amount of approximately $400,000, resulting in an increase in
stockholders' equity of approximately $27.5 million. See "Recent
Developments."
(5) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(6) The reduction in net interest margin and net interest spread in the six
months ended June 30, 1997 primarily reflects the significant increase in
the Company's holdings of Discounted Loans during the six months then
ended. The acquisition of a pool of Discounted Loans tends to reduce net
interest margin and net interest spread, because the interest cost of the
debt used to fund the acquisition is not offset by a corresponding
increase in interest income. Relatively little cash flow from a pool of
Discounted Loans is generally received during the first two quarters
following the acquisition of a pool and the Company only recognizes
interest and discount on Discounted Loans when those loans result in the
receipt of cash. In addition, a significant portion of the income
associated with Discounted Loans generally results from gains on sales of
foreclosed real estate, which are not reflected in interest income. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Accounting Matters." The reduction also reflected a full
quarter of interest expense on the $84.2 million of its 13% Notes, the
proceeds of which were held for part of the quarter in a lower-yielding
liquid investment prior to their use by the Company to fund acquisitions.
(7) Net interest margin represents net interest income divided by total
average earning assets.
(8) 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.
(9) Earnings for the year ended December 31, 1994 were inadequate to cover
fixed charges by $1.8 million.
(10) Total capitalization equals long-term debt plus equity.
(11) It is the Company's policy to establish an allowance for uncollectible
interest on Non-Discounted Loans that are past due more than 90 days or
at such earlier time, when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to
warrant further accrual at which time those loans are placed on non-
accrual status and deemed non-performing.
(12) Excludes purchases of newly-originated mortgage and manufactured housing
loans, which are shown as mortgage originations.
35
<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 Offering Memorandum.
ACCOUNTING MATTERS
The pools of loans acquired by the Company consist primarily of either
Discounted Loans or Non-Discounted Loans, but may include other types of
loans. However, for accounting purposes all loans in a particular pool are
classified as either Discounted Loans or Non-Discounted Loans, based on
whether the pool consists primarily of Discounted Loans or Non-Discounted
Loans.
Discounted Loans are presented in the Consolidated Financial Statements net
of unamortized discount and the allowance for loan losses established for
those loans. For Discounted Loans purchased by the Savings Banks, the discount
is 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 pool of loans that have yet to be specifically
identified ("general valuation allowances") and (c) portions of the discounts
regarded as yield adjustments. For Discounted Loans purchased by the Company's
subsidiaries (other than the Savings Banks), the discount is segregated into a
specific reserve and a yield adjustment. The allowance for loan losses is
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 using a cash based methodology. Accrued interest and
discount on Discounted Loans is recognized in income only when collected in
cash.
The acquisition of a pool of Discounted Loans tends to reduce net interest
margin and net interest spread, because the interest cost of the debt used to
fund the acquisition is not offset by a corresponding increase in interest
income. Relatively little cash flow from a pool of Discounted Loans is
generally received during the first two quarters following an acquisition of
that pool and the Company only recognizes interest and discount on Discounted
Loans in income when those loans result in the receipt of cash. The Company is
considering modifying its methodology for accreting income on the portion of
purchase discounts regarded as yield adjustments to take account of the
payment characteristics of Discounted Loans and more closely approximate a
"level-yield" method. If management had adopted these changes in methodology
in the first half of 1997, it would have resulted in higher earnings for the
first half. No final decision has been made by the Company as to the proposed
modification and a number of issues remain to be resolved, including the
review by the OTS of the impact of the proposed modification on the Savings
Banks. Therefore, no assurance can be given as to when or if such modified
methodology will be implemented.
Non-Discounted Loans are presented in the Consolidated Financial Statements
in substantially the same manner as Discounted Loans, except that interest
income is recognized on an accrual basis.
Gains or losses on loans sold through securitization transactions are based
on the difference between the cash proceeds received from the sale of the
senior classes of mortgage-backed securities to outside investors and the
Company's cost basis allocated to the senior classes of mortgage-backed
securities. The Company's cost basis in loans sold is allocated between the
senior classes of mortgage-backed securities and the subordinate classes of
mortgage-backed 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 classes of
mortgage-backed 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. In cases where the Company
has financed the holding of subordinate classes with a lender under a
repurchase agreement, the Company uses such lender's determination of market
value for purposes of potential margin calls in determining fair value. In
other
36
<PAGE>
cases, the Company determines the fair value of the subordinate classes of
mortgage-backed securities utilizing prepayment and credit loss assumptions it
deems 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.
For accounting purposes, the Company's mortgage-backed and other securities
are classified as "held to maturity," "trading account securities" 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 an historical cost basis, adjusted for the amortization of
premiums and accretion of discounts using a method that approximates the
interest method. Trading account securities include subordinate classes of
mortgage-backed securities issued in loan securitization transactions
initiated by the Company. Such securities are carried at estimated fair value
as described above, 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.
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 the 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.
Historically, the Company has not recorded on its balance sheet the
servicing rights to loans sold in securitizations, which would have had the
effect of increasing other income and total assets. However, if the Company
purchases servicing rights from a third party, it records such servicing
rights on its balance sheets.
INTEREST INCOME
A significant portion of the Company's earnings come from net interest
income, which is the difference between the interest income received plus
accreted or received purchase discount on its financial assets and the
interest expense paid on its outstanding 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, the percentage of Discounted Loans included in the portfolio and
the timing of receipt or accretion of purchase discount. In addition, net
interest income reflects the full interest cost of funding the acquisition of
Discounted Loans and foreclosed real estate but does not reflect any accretion
of purchase discount on those assets until cash is collected (which generally
occurs later in the life of a pool of Discounted Loans) and does not reflect
any gain on sales of foreclosed real estate.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from the Company's 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.
37
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------
1997 1996 1995 1994
---------------------------------- ----------------------------- ----------------------------- --------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE
---------- -------- ------------- -------- -------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Mortgage-backed
securities...... $ 140,139 $ 7,034 10.04% $ 29,241 $ 1,797 6.15% $ 24,054 $ 1,359 5.65% $ 23,515
Loan portfolio
net of
unaccreted
discount(2)..... 766,307 34,574 9.02 470,654 44,294 9.41 217,716 21,821 10.02 99,497
Investment
securities and
other........... 74,068 2,184 5.90 27,446 2,331 8.49 14,216 1,201 8.45 7,969
---------- ------- -------- ------- -------- ------- --------
Total interest-
earning assets.. 980,514 43,792 8.93 527,341 48,422 9.18 255,986 24,381 9.52 130,981
Non-interest
earning cash.... 2,600 -- -- 6,019 -- -- 1,868 -- -- 2,053
Allowance for
loan losses .... (74,303) -- -- (39,675) -- -- (21,591) -- -- (4,509)
Other assets.... 137,748 -- -- 32,061 -- -- 15,277 -- -- 7,646
---------- ------- -------- ------- -------- ------- --------
Total assets.... $1,046,559 $43,792 $525,746 $48,422 $251,540 $24,381 $136,171
========== ======= ======== ======= ======== ======= ========
AVERAGE
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest-bearing
deposits........ $ 462,730 $13,654 5.90% $419,109 $25,002 5.97% $229,533 $13,944 6.08% $118,277
FHLB advances... 479 14 5.64 2,420 159 6.57 1,381 104 7.53 5,916
Short-term
borrowings and
other interest
bearing
obligations..... 405,134 15,268 7.54 55,218 3,799 6.88 7,099 399 5.62 4,757
Long-term debt.. 83,090 5,755 13.85 2,292 317 13.85 306 34 11.00 --
---------- ------- -------- ------- -------- ------- --------
Total interest-
bearing
liabilities..... 951,433 34,691 7.29 479,039 29,277 6.11 238,319 14,481 6.08 128,950
Non-interest
bearing
deposits........ 5,907 -- -- 2,822 -- -- 2,196 -- -- 1,537
Escrow
deposits........ 394 -- -- 257 -- -- 106 -- -- 74
Other
liabilities..... 25,102 -- -- 7,330 -- -- 4,077 -- -- 1,582
---------- ------- -------- ------- -------- ------- --------
Total
liabilities..... 982,836 34,691 -- 489,448 29,277 -- 244,698 14,481 132,143
Stockholders'
equity.......... 63,723 -- -- 36,298 -- -- 6,842 -- -- 4,028
---------- ------- -------- ------- -------- ------- --------
Total
liabilities and
stockholders'
equity.......... $1,046,559 $34,691 $525,746 $29,277 $251,540 $14,481 $136,171
========== ======= ======== ======= ======== ======= ========
Net interest
income.......... $ 9,101 $19,145 $ 9,900
Net interest
spread(3)(4).... 1.64% 3.07% 3.44%
Net interest
margin(4)....... 1.86 3.63 3.87
Ratio of average
interest-earning
assets to
average
interest-bearing
liabilities..... 103.1% 110.1% 107.4% 101.6%
<CAPTION>
---------------------
1994
---------------------
AVERAGE
INTEREST YIELD/RATE
-------- ----------
<S> <C> <C>
AVERAGE ASSETS:
Mortgage-backed
securities...... $1,361 5.79%
Loan portfolio
net of
unaccreted
discount(2)..... 7,923 7.96
Investment
securities and
other........... 285 3.58
------
Total interest-
earning assets.. 9,569 7.31
Non-interest
earning cash.... -- --
Allowance for
loan losses .... -- --
Other assets.... -- --
------
Total assets.... $9,569
======
AVERAGE
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest-bearing
deposits........ $5,017 4.24%
FHLB advances... 228 3.85
Short-term
borrowings and
other interest
bearing
obligations..... 212 4.46
Long-term debt.. -- --
------
Total interest-
bearing
liabilities..... 5,457 4.23
Non-interest
bearing
deposits........ -- --
Escrow
deposits........ -- --
Other
liabilities..... -- --
------
Total
liabilities..... 5,457
Stockholders'
equity.......... -- --
------
Total
liabilities and
stockholders'
equity.......... $5,457
======
Net interest
income.......... $4,112
Net interest
spread(3)(4).... 3.08%
Net interest
margin(4)....... 3.14
Ratio of average
interest-earning
assets to
average
interest-bearing
liabilities.....
</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.
(3) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(4) The reduction in net interest margin and net interest spread in the six
months ended June 30, 1997 primarily reflects the significant increase in
the Company's holdings of Discounted Loans during the six months then
ended. The acquisition of a pool of Discounted Loans tends to reduce net
interest margin and net interest spread, because the interest cost of the
debt used to fund the acquisition is not offset by a corresponding
increase in interest income. Relatively little cash flow from a pool of
Discounted Loans is generally received during the first two quarters
following the acquisition of that pool and the Company only recognizes
interest and discount on Discounted Loans when those loans result in the
receipt of cash. In addition, a significant portion of the income
associated with Discounted Loans generally results from gains on sales of
foreclosed real estate, which are not reflected in interest income. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Accounting Matters." The reduction also reflected a full
quarter of interest expense on the $84.2 million of its 13% Notes, the
proceeds of which were held for part of the quarter in a lower-yielding
liquid investment prior to their use by the Company to fund acquisitions.
38
<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>
SIX MONTHS ENDED JUNE 30,
1997 VS. SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED DECEMBER 31,
---------------------------- -----------------------------------------------------------------------
1996 V. 1995 1995 V. 1994 1994 V. 1993
------------------------ ----------------------- ---------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO DUE TO
---------------------------- ------------------------ ----------------------- ---------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
-------- --------- -------- ------- ------- ------- ------ ------- ------- ----- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Mortgage-backed
securities...... $ 825 $ 5,311 $ 6,136 $ 127 $ 311 $ 438 $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio.. (1,900) 16,038 14,138 (1,243) 23,716 22,473 2,486 11,412 13,898 708 5,832 6,540
Investment
securities and
other........... -- 1,567 1,567 6 1,124 1,130 581 335 916 (112) 344 232
-------- -------- -------- ------- ------- ------- ------ ------- ------- ----- ------ ------
Total interest-
earning assets.. (1,075) 22,916 21,841 (1,110) 25,151 24,041 3,030 11,782 14,812 764 7,151 7,915
-------- -------- -------- ------- ------- ------- ------ ------- ------- ----- ------ ------
Interest-Bearing
Liabilities:
Interest-bearing
deposits........ 126 2,895 3,021 (247) 11,305 11,058 2,810 6,117 8,927 1,368 2,885 4,253
FHLB advances... (10) (63) (73) (11) 66 55 (632) 507 (125) -- 228 228
Short-term
borrowings and
other interest-
bearing
obligations..... 667 13,301 13,968 109 3,291 3,400 66 122 188 146 (19) 127
Long term-debt.. -- 5,755 5,755 10 273 283 -- 34 34 -- -- --
-------- -------- -------- ------- ------- ------- ------ ------- ------- ----- ------ ------
Total interest-
bearing
liabilities....... 783 21,888 22,671 (139) 14,935 14,796 2,244 6,780 9,024 1,514 3,094 4,608
-------- -------- -------- ------- ------- ------- ------ ------- ------- ----- ------ ------
Increase
(decrease) in net
interest income... $ (1,858) $ 1,028 $ (830) $ (971) $10,216 $ 9,245 $ 786 $ 5,002 $ 5,788 $(750) $4,057 $3,307
======== ======== ======== ======= ======= ======= ====== ======= ======= ===== ====== ======
</TABLE>
39
<PAGE>
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1996
NET INTEREST INCOME
The Company's net interest income was approximately $9.1 million for the six
months ended June 30, 1997 compared to approximately $9.9 million for the six
months ended June 30, 1996, a decrease of 8.4%. The reduction in net interest
margin and net interest spread in the six months ended June 30, 1997 primarily
reflects the increased interest cost of short-term debt incurred in the last
quarter of 1996 and the first six months of 1997 to fund the purchase of
approximately $247.2 million of pools of Discounted Loans, which was not
offset by a corresponding increase in interest income since relatively little
cash from Discounted Loans is generally received during the first two quarters
following an acquisition of a pool of Discounted Loans and the Company only
recognizes interest and discount on Discounted Loans when collected in cash.
The components of the Company's net interest income for the periods are
discussed below.
Interest Income
The Company's interest income was approximately $43.8 million for the six
months ended June 30, 1997 compared to approximately $22.0 million for the six
months ended June 30, 1996, an increase of 99.5%. The increase in the
Company's interest income was due primarily to an increase in interest on
loans from $20.4 million for the six months ended June 30, 1996 to $34.6
million for the six months ended June 30, 1997, reflecting an increase in the
balance of the Company's loans from $459.3 to $788.0 million at June 30, 1996
and 1997, respectively.
Interest Expense
The Company's interest expense was approximately $34.7 million for the six
months ended June 30, 1997 compared to approximately $12.0 million for the six
months ended June 30, 1996, an increase of 188.6%. The increase in interest
expense resulted from an increase in interest-bearing liabilities from June
30, 1996 to June 30, 1997 of approximately $612.5 million, including the
issuance in the fourth quarter of 1996 and the first quarter of 1997 of $84.2
million of its 13% Notes, and an increase in the cost of funds from 5.76% at
June 30, 1996 to 7.44% at June 30, 1997.
PROVISIONS FOR LOAN LOSSES
The Company's provision for loan losses for the first six months of 1997 was
a net recovery of approximately $1.4 million from the reversal of
approximately $2.5 million of excess reserves on loans previously sold, which
was partially offset by an additional provision of approximately $1.1 million.
This compares with a provision for loan losses of approximately $10.9 million
in the first six months of 1996 from reserves established primarily for the
Sub-Prime Auto Loans and the Inherited Loans.
OTHER INCOME
The Company's other income was approximately $18.1 million for the six
months ended June 30, 1997 compared with approximately $5.0 million for the
six months ended June 30, 1996, an increase of 261.3%. The components of the
Company's other income are reflected in the following table:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income..................................... $ 3,391 $ 3,275
Bankcard processing expense......................... (2,330) (2,616)
Gain on sale of loans............................... 11,216 1,983
Loan fees and charges............................... 451 632
Trading account-unrealized gain..................... 14 1,601
Foreclosed real estate, net......................... 2,739 (115)
Servicing revenue................................... 1,944 --
Other, net.......................................... 661 246
----------- -----------
Total other income.................................. $ 18,086 $ 5,006
=========== ===========
</TABLE>
40
<PAGE>
The increase in other income is primarily attributable to the sale of loans,
which resulted in a gain of approximately $11.2 million, an increase in income
from real estate owned, net, resulting from the ongoing disposition of assets
from a $72.3 million pool of foreclosed real estate acquired in the fourth
quarter of 1996. This increase was partially offset by a decrease of
approximately $1.6 million from unrealized gains on trading securities.
The gain on sale of loans is the result of the sale of approximately $175
million of loans as to which the Company retained the servicing rights and
other participation interests in the portfolio. As of the sale date, the
Company allocated $3.5 million and $1.8 million of original cost to retained
servicing rights and other participation interests retained in the loans,
respectively, and such amounts are included in other assets.
OTHER EXPENSE
The Company's other expense totaled approximately $19.7 million for the six
months ended June 30, 1997 compared to approximately $5.4 million for the six
months ended June 30, 1996, an increase of 266.3%.
Compensation and Employee Benefits
The largest component of other expenses was compensation and employee
benefits which increased by 332.4% from approximately $1.5 million for the six
months ended June 30, 1996 to approximately $6.7 million for the six months
ended June 30, 1997. The increase was primarily due to an increase in the
average number of full-time equivalent employees from 50 as of June 30, 1996
to 166 as of June 30, 1997, reflecting the expansion of the Company's business
activities, particularly loan acquisition activities and the growth of
activities at its non-bank subsidiaries.
Loan Service Fees and Expenses Paid to Affiliate
Loan servicing fees and expenses are paid to WCC and include (a) servicing
fees and (b) collection-related expenses incurred directly by WCC and
reimbursed by the Company. Loan service fees and expenses paid to affiliate
were approximately $8.0 million for the six months ended June 30, 1997
compared to approximately $2.1 million for the six months ended June 30, 1996,
an increase of approximately 276.8%. The increase was primarily the result of
the increase in the unpaid principal balance of loans being serviced by WCC on
behalf of the Company to approximately $1.3 billion at June 30, 1997 compared
to approximately $408 million at June 30, 1996. Also, collection-related
expenses increased from the six months ended June 30, 1996 to the comparable
period in 1997 due to the substantial increase in Discounted Loans, most of
which were acquired at the end of 1996 and the first six months of 1997.
Discounted Loan portfolios generally require higher expenditures during the
first two quarters after acquisition.
Other general and administrative expenses increased from approximately $0.8
million for the six months ended June 30, 1996 to approximately $3.0 million
for the six months ended June 30, 1997, due primarily to the expansion of
business activities of its non-bank subsidiaries, particularly loan
acquisition activities such as due diligence.
INCOME TAXES
Income taxes amounted to an expense of approximately $3.7 million during the
six months ended June 30, 1997 compared with a benefit of approximately $1.3
million during the six months ended June 30, 1996. The change was primarily
due to the utilization of net operating loss deductions in 1996 and a
normalized tax provision in 1997.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $9.2 million or
93.4% during year 1996, as compared to the same period in the prior year. This
increase resulted from an approximately $24.0 million or 98.6% increase to
interest income due to an approximately $278.3 million or 104.5% increase in
average interest-
41
<PAGE>
earning assets from period to period. The increase in interest income was
offset in part by an approximately $14.8 million or 102.2% increase in
interest expense due to an approximately $240.7 million or 101.0% increase in
average interest-bearing liabilities, primarily certificates of deposit, and,
to a lesser extent, a 10 basis point increase in the weighted average rate
paid on interest-bearing liabilities. The increase in interest income during
1996, as compared to the same period in the prior year, reflects substantial
increases in the average balances of the Company's loans.
PROVISIONS FOR LOAN LOSSES
Provisions for loan losses are charged to operations to maintain an
allowance for losses at a level that management considers adequate based upon
an evaluation of known and inherent risks, 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 Savings Banks recorded provisions for losses on loans totaling
approximately $16.5 million for 1996, as compared to approximately $4.3
million for the prior year, an increase of 287.9%. The following table sets
forth the Savings Banks' provision for loan losses for the year ended December
31, 1996:
<TABLE>
<CAPTION>
PROVISION % OF TOTAL
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Inherited Loans................................. $ 4,845 29.3%
Sub-Prime Auto Loans............................ 8,583 51.8%
Other Purchased Loans........................... 3,121 18.9%
------------ ----------
Total provision for loan losses............... $ 16,549 100.0%
============ ==========
</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 increased the provision by approximately $4.8 million in 1996
related to the Inherited Loans owned by First Bank or Girard at the time the
Savings Banks were acquired by the Company.
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 Savings Bank's allowances for losses on Non-Discounted Loans and
Discounted Loans and may require adjustments to the Savings Banks' allowances
for loan losses.
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
The Company's net interest income after provision for loan losses decreased
53.9% to approximately $2.6 million for 1996 from income of approximately $5.6
million for 1995. This decrease was due to the substantial increase in
provisions for estimated losses on loans.
42
<PAGE>
OTHER INCOME
The Company's other income was approximately $17.9 million for 1996 compared
to approximately $2.9 million for 1995, an increase of 510.9%. This increase
was primarily attributable to gains on 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,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income..................................... $ 6,790 $ 4,694
Bankcard processing expense......................... (5,124) (3,462)
Gain on sale of loans............................... 11,538 642
Loan fees and charges............................... 1,747 610
Amortization of deferred credits.................... 461 460
Trading account-unrealized gain..................... 1,833 --
Foreclosed real estate net.......................... 556 (170)
Other, net.......................................... 141 163
----------- -----------
Total other income................................ $ 17,942 $ 2,937
=========== ===========
</TABLE>
Bankcard Income and Processing Expense
The increase in other income for 1996 was due in part to an increase of
approximately $2.1 million in bankcard income, from approximately $4.7 million
for 1995 to approximately $6.8 million for 1996. The large increase in income
from the Company's merchant bankcard operations was primarily due to the
development of new accounts. Bankcard processing expense increased by
approximately $1.6 million from approximately $3.5 million for 1995 to
approximately $5.1 million for 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 due primarily to an increase of
approximately $10.9 million in gains on sales of loans, from approximately
$0.6 million for 1995 to approximately $11.5 million for 1996. This increase
was due to gains from the sale of approximately $287.8 million of loans. For
the year ended December 31, 1996, gain on sale of whole loans totaled $5.4
million and gains from securitizations totaled approximately $6.1 million.
Other income also includes loan fees and charges (e.g., late fees,
commitment fees). Loan fees and charges increased approximately $1.1 million,
from approximately $0.6 million for 1995 to approximately $1.7 million for
1996. The increase was primarily due to an increase in loan volume.
OTHER EXPENSE
The Company's other expense totaled approximately $15.4 million for 1996
compared to approximately $7.9 million for 1995, an increase of 94.7%.
Loan Service Fees and Expenses
The largest component of other expense in 1996 was loan service fees and
expense which increased by approximately $3.2 million from approximately $2.0
million for 1995 to approximately $5.2 million for 1996. Loan servicing fees
and expenses are paid to WCC and include (a) 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
43
<PAGE>
increase substantially. The volume of loans, particularly Discounted Loans,
being serviced for the Company by WCC increased substantially during 1996
compared to 1995 due to the substantial growth in the Company's loan pool
acquisition activity. In addition, 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 of that year.
Compensation and Employee Benefits
Other expense relating to compensation and employee benefits also increased
from approximately $2.5 million for 1995 to approximately $4.5 million for
1996, an increase of approximately $2.0 million (or 77.4%). 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 1995 to 54 for 1996, reflecting the expansion of
business activities, particularly loan acquisition activities and the growth
of merchant 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 $0.7 million for 1995
to approximately $2.4 million for 1996, an increase of approximately $1.7
million (or 230.2%), as a result of growth in deposits outstanding and the
SAIF special assessment.
INCOME TAXES
Income taxes amounted to approximately $0.1 million during 1996 compared to
a provision of less than $0.1 million during 1995. This increase was due
primarily to assessment of the valuation allowances against deferred tax
assets. The Company's effective tax rate amounted to 2.5% and 7.4% during 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% during 1996 and 1995.
RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1995 COMPARED TO 1994
NET INTEREST INCOME
The Company's net interest income was approximately $9.9 million for 1995
compared to approximately $4.1 million for 1994, an increase of 140.8%. The
components of the Company's net interest income for these years are discussed
below.
Interest Income
The Company's interest income was approximately $24.4 million for 1995
compared to approximately $9.6 million for 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 a 69.9% increase in the gross principal amount of the Company's holdings of
performing loans from approximately $198.6 million in 1994 to approximately
$337.5 million in 1995. The Savings Banks made substantial acquisitions of
Discounted Loans in June 1995 and Non-Discounted 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.
44
<PAGE>
Interest Expense
The Company's interest expense was approximately $14.5 million for 1995
compared to approximately $5.5 million in 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
95.8%), which occurred in order to fund the growth of the Company's loan pool
acquisition activity. 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 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 LOAN LOSSES
In connection with its provision for loan losses the Company recorded an
expense totaling approximately $4.3 million for 1995 compared to approximately
$2.2 million for 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 LOAN LOSSES
The Company's net interest income after provision for loan losses increased
190.6% to approximately $5.6 million for 1995 from approximately $1.9 million
for 1994.
OTHER INCOME
The Company's other income was approximately $2.9 million for 1995 compared
to approximately $1.0 million for 1994, an increase of 197.9%. 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
Amortization of deferred credits ............................. 460 388
Foreclosed real estate, net .................................. (170) (241)
Other, net ................................................... 163 435
------- -----
Total other income ......................................... $ 2,937 $ 986
======= =====
</TABLE>
The increase in other income in 1995 was due primarily to an increase of
approximately $4.1 million in income from merchant bankcard operations, from
approximately $0.6 million for 1994 to approximately $4.7 million for 1995.
Merchant bankcard processing expense increased by approximately $3.2 million
from approximately $0.3 million for 1994 to approximately $3.5 million for
1995. These increases reflect a full year of merchant bankcard operations in
1995 compared to a partial year of operations in 1994. The increase in other
45
<PAGE>
income in 1995 was also due in part to approximately $0.6 million in gains on
sales of loans in 1995 from no gains on sales of loans for 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 a 120%
increase in the Company's holdings of loans from approximately $103.6 million
in 1994 to approximately $228.0 million in 1995.
OTHER EXPENSE
The Company's other expense totaled approximately $7.9 million for 1995
compared to approximately $4.7 million for 1994, an increase of 68.7%. 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
1994 to $2.0 million in 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 pool 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 foreclosed real estate (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 37 in
1995 (including an entire year's compensation expenses for Girard in 1995).
FDIC insurance premiums increased from approximately $0.3 million in 1994 to
approximately $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 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 foreclosed real estate (net). Other expenses related to
foreclosed real estate (net) were approximately $0.2 million in 1994 and $0.2
million in 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 TAXES
Income taxes 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.
CHANGES IN FINANCIAL CONDITION
Mortgage-Backed Securities and Other Securities
The Company's holdings of mortgage-backed securities and other securities
increased approximately $104.7 million during the six months ended June 30,
1997 primarily as a result of purchasing certain subordinated
46
<PAGE>
securities. These purchases reflect the Company's strategy of investing in
mortgage-backed securities to take advantage of management's expertise in
evaluating pools of loans and certain pricing opportunities in the market for
mortgage-backed securities.
For accounting purposes, the Company's mortgage-backed and other securities
are classified as available for sale, trading account securities and held to
maturity. At June 30, 1997, securities classified as available for sale
consisted primarily of subordinate classes of mortgage-backed securities
issued by unaffiliated third parties and certain mortgage-backed securities
originated by affiliates. Securities classified as trading account securities
consisted primarily of Retained Securities. At June 30, 1997, securities
classified as held to maturity consisted primarily of Government Securities
that were acquired for liquidity purposes. The following table sets forth the
Company's mortgage-backed and other securities available for sale and held to
maturity at the dates indicated:
MORTGAGE-BACKED AND OTHER SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995 1994
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities................... $144,253 $31,270 $ 9,083 $10,943
Trading account securities:
Mortgage-backed securities................... 17,778 24,541 -- --
Held to maturity:
U.S. Government and other securities......... 7,437 7,429 6,470 4,505
Mortgage-backed securities................... 20,190 21,724 13,119 14,439
-------- ------- ------- -------
Total...................................... 27,627 29,153 19,589 18,944
-------- ------- ------- -------
Total investment securities.................. $189,658 $84,964 $28,672 $29,887
======== ======= ======= =======
</TABLE>
Loans Receivable, Net
Since January 1, 1994, the Company has substantially increased the level of
its acquisition of pools of Non-Discounted Loans and Discounted Loans. As a
result, the average balance of the Company's portfolio of Non-Discounted Loans
and Discounted Loans has increased significantly as illustrated by the
following table:
AVERAGE BALANCE OF THE PORTFOLIO OF NON-DISCOUNTED LOANS AND DISCOUNTED LOANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------
1997 1996 1995 1994
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Single-family
residential.............. $ 606,072 $327,014 $ 93,350 $ 31,414
Multi-family residential.. 87,700 73,470 70,631 36,089
Commercial and other
mortgage loans........... 134,187 58,227 53,852 33,163
Consumer and other........ 173,692 29,110 10,137 2,917
---------- -------- -------- --------
Total loans............. 1,001,651 487,821 227,970 103,583
Unaccreted discount....... (235,344) (17,167) (10,254) (4,086)
Allowance for loan
losses................... (74,303) (39,675) (21,591) (4,509)
---------- -------- -------- --------
Total................... $ 692,004 $430,979 $196,125 $ 94,988
========== ======== ======== ========
</TABLE>
The Company's portfolio of Non-Discounted Loans and Discounted Loans, net of
discounts and allowances, increased by approximately $376.4 million during the
six months ended June 30, 1997 primarily as a result of the Company's strategy
of actively acquiring pools of loans, which totaled approximately $663.4
million for the six months ended June 30, 1997.
47
<PAGE>
Foreclosed Real Estate, Net
Foreclosed real estate consists of properties acquired by foreclosure (or
deed-in-lieu thereof) on loans held by the Company or properties that were
purchased directly. Foreclosed real estate increased by approximately $57.8
million during the six months ended June 30, 1997 primarily as a result of the
foreclosure of certain Discounted Loans acquired in the fourth quarter of 1996
and the first quarter of 1997. The Company actively manages its portfolio of
foreclosed real estate with a view to accelerating and maximizing the
realization of cash from the disposition of that real estate.
Due to/from Affiliate
Due from affiliate, net of $7.5 million at June 30, 1997 was primarily
attributable to payments received in the normal course of servicing operations
by WCC, which had not been remitted to the Company.
Deposits
Deposits decreased by approximately $56.3 million or 11.2% during the six
months ended June 30, 1997. Pursuant to the Orders imposed upon First Bank and
Girard, effective October 31, 1996, First Bank and Girard are prohibited 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 by the Orders in prior
quarters.
Notes Payable
In the fourth quarter of 1996 and the first quarter of 1997, the Company
issued $84.2 million of its 13% Notes. In the third quarter of 1997, the
Company issued $100.0 million of its Old Notes.
Short-Term Borrowings
Short-term borrowings increased by approximately $485.8 million during the
six months ended June 30, 1997, resulting from increased use of repurchase
agreements and warehouse financing to fund the purchases of loans and
securities, instead of deposits.
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
manage 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 pools of loans 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, Government Securities, interest rate futures contracts
48
<PAGE>
or interest rate swap agreements. 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 pool of loans and decides whether to hedge
the interest rate exposure of a particular pool of loans. In general, the
Company tends to hedge pools of loans that have fixed rates. 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. To date, the Company has not
experienced any significant costs in hedging pools of loans. In general, when
a pool of loans is acquired, the Company will determine whether or not to
hedge and, with respect to any sale or financing of any pool of loans through
securitization, the Company will determine whether or not to discontinue its
duration-matched hedging activities with respect to the relevant loans.
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 $229.3 million notional principal amount of interest rate swap
agreements outstanding at June 30, 1997, which had the effect of decreasing
the Company's net interest income by approximately $0.2 million during the six
months ended June 30, 1997.
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. At June 30, 1997, management estimates based upon the
MVPE analysis prepared by the OTS that the 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 13% decrease or
6% increase, respectively. The following table highlights the interest rate
sensitivity of the OTS's models of MVPE of a change in rates from 0 to 400
basis points ("bp") as of June 30, 1997:
INTEREST RATE SENSITIVITY OF THE SAVINGS BANKS' NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
------------------------
%
CHANGE IN RATES AMOUNT $ CHANGE CHANGE
--------------- ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+400bp............................................. $37,915 $(18,865) (33)%
+300bp............................................. 43,879 (12,901) (23)%
+200bp............................................. 49,387 (7,393) (13)%
+100bp............................................. 53,816 (2,964) (5)%
0bp............................................ 56,780 -- --
-100bp............................................. 58,743 1,963 3 %
-200bp............................................. 60,090 3,310 6 %
-300bp............................................. 61,310 4,530 8 %
-400bp............................................. 62,917 6,137 11 %
</TABLE>
Management of the Savings Banks believes that the assumptions (including
pre-payment assumptions) used by it to evaluate the vulnerability of the
Savings Banks' operations to changes in interest rates approximate actual
experience and considers them reasonable; however, the interest rate
sensitivity of the Savings Banks' assets and
49
<PAGE>
liabilities and the estimated effects of changes in interest rates on the
Savings Banks' 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. Additionally, the OTS's model
does not incorporate all of the terms and features of the hedging instruments.
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 pools of loans, mortgage-backed securities and newly-
originated mortgage and manufactured housing loans, 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 from institutional investors and other lenders
and public and private debt offerings, including the 13% Notes, the Old Notes
and the New Notes offered hereby. In certain limited circumstances, the
Company has also borrowed money from WCC in order to fund the acquisition of
loans. The Company repaid such borrowings with preferred stock on July 31,
1997. See "Recent Developments" and "Compensation Committee Interlocks and
Insider Participation." In addition, the Savings Banks obtain funding through
FHLB advances. The Company's liquidity is actively managed on a daily basis
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 for the Savings Banks include wholesale and brokered
certificates of deposit. At June 30, 1997, the Savings Banks had approximately
$437.0 million of certificates of deposit. At June 30, 1997, scheduled
maturities of certificates of deposit during the 12 months ending June 30,
1998 and thereafter amounted to approximately $415.6 million and approximately
$21.4 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 Savings Banks believe
that the Savings Banks will be able to adjust the rates paid on certificates
of deposit to retain deposits in changing interest rate environments.
At June 30, 1997, the Company's sources of borrowing included (i)
uncommitted 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, (ii) a committed $150 million warehouse lending agreement
with Prudential Securities Credit Corporation, and (iii) certain repurchase
arrangements with major investment banks, including $350 million (committed)
under a repurchase agreement with Credit Suisse First Boston Mortgage Capital
LLC, $60.9 million (committed) under a repurchase agreement with Salomon
Brothers Realty Corp. and $36.5 million (committed) under a repurchase
agreement with Salomon Brothers Realty Corp. 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. At June 30, 1997,
the Savings Banks had no FHLB advances outstanding, and were eligible to
borrow up to an aggregate of $9.6 million from the FHLB of San Francisco and
had approximately $12.8 million of multi-family residential loans and
approximately $2.6 million of commercial loans pursuant to which it could
obtain funds from repurchase agreements and had approximately $5.5 million of
unencumbered investment securities and mortgage-backed and related securities
which could be issued to secure such borrowings.
The Company's uses of cash include the funding of purchases of pools of
loans, mortgage-backed securities and newly-originated mortgage and
manufactured housing loans, payment of interest expenses, repayment of loans,
funding of initial over-collateralization requirements for securitizations,
operating and administrative expenses, income taxes and capital expenditures.
The Company's purchases of pools of loans and other assets are expected to
utilize secured borrowings and be highly leveraged. The actual dollar amount
of secured borrowings incurred by the Company will vary depending on a number
of factors, including the amount of leverage lenders are willing to make
available (which will be affected by market conditions), and management's
50
<PAGE>
determination as to the appropriate amount of leverage. With respect to pools
of Discounted Loans and Non-Discounted Loans, the Company generally seeks to
fund 90% and 95%, respectively, of the purchase price of such pools of loans
with borrowed money. The Company draws on a number of sources to obtain such
funds including certificates of deposit and repurchase arrangements with major
investment banks. Capital expenditures by the Company have not been material.
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." 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 pools of loans, newly-originated mortgage
and manufactured housing loans and Private-Label Securities. The Company
believes that cash flow from operations, the net proceeds of the offering of
the Notes, 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 current operating needs,
commitments and capital expenditures in the near term.
Given the Company's rapid growth and assuming that the Company continues to
experience such growth, management believes that additional debt and/or equity
financing may be required in the medium term to sustain this level of growth.
The 13% Notes and the Notes contain, certain limitations on indebtedness which
may restrict the ability of the Company to issue additional indebtedness in
the future and the Company may be obligated to seek equity financing. There
can be no assurance that any such debt or equity financing will be available
to the Company on financially attractive terms in the future.
The Company is required to maintain funds sufficient to meet two semi-annual
interest payments on its 13% Notes and Notes in liquid assets. In addition,
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 12.2% as of June 30, 1997 and averaged 10.5%, 9.1%, and 8.0%
during the years ended December 31, 1996, 1995 and 1994, respectively.
Girard's liquidity, as measured for regulatory purposes, amounted to 7.2% as
of June 30, 1997 and averaged 6.3%, 11.2%, and 8.5% during the year ended
December 31, 1996, 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 are 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 were required to maintain minimum capital
ratios required of institutions to be deemed "well-capitalized" beginning
December 31, 1996. In connection with the 1997 examination, the OTS indicated
that the capital level of Girard was less than satisfactory and the capital
level of First Bank was not adequate in view of their risk profiles, despite
the fact that the Savings Banks had capital levels that qualified them as
"well capitalized" under OTS regulatory capital requirements. The OTS also
suggested in the Report of Examination that the Savings Banks' current capital
requirements may not be appropriate given the deficiencies noted in the
examination. Following the 1997 examination, the Savings Banks' management had
further discussions with the OTS relating to capital levels at
51
<PAGE>
the Savings Banks, in which the OTS indicated that the dollar amount of
capital maintained by the Savings Banks as of June 30, 1997 as set forth below
would be viewed as satisfying the minimum capital requirements for the
immediate future and that the Company would not be required to inject
additional capital at this time. Notwithstanding the foregoing, the OTS may
review this decision at any time and could impose additional capital
requirements on the Savings Banks in the future.
The following table sets forth the regulatory capital ratios of the Savings
Banks at June 30, 1997:
REGULATORY CAPITAL RATIOS OF THE SAVINGS BANKS
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
"WELL
OTS CAPITALIZED"
MINIMUM UNDER OTS
ACTUAL REQUIREMENT 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 to
Tangible Assets:
First Bank............. $12,886 11.2% 1.5% $11,155 9.7% N/A N/A N/A
Girard................. 31,711 8.4% 1.5% 26,045 6.9% N/A N/A N/A
Tier 1 Capital to
Average Assets:
First Bank............. 12,886 9.7% 3.0% 8,918 6.7% 5.0% 6,273 4.7%
Girard................. 31,711 8.2% 3.0% 20,109 5.2% 5.0% 12,375 3.2%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 12,886 13.9% N/A N/A N/A 6.0% 7,307 7.9%
Girard................. 31,711 9.5% N/A N/A N/A 6.0% 11,591 3.5%
Total Risk-Based Capital
to Risk-Weighted
Assets:
First Bank............. 14,096 15.2% 8.0% 6,657 7.2% 10.0% 4,797 5.2%
Girard................. 36,103 10.8% 8.0% 9,277 2.8% 10.0% 2,570 0.8%
</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. See "Regulation--The Savings Banks--Regulatory Capital
Requirements."
52
<PAGE>
BUSINESS
GENERAL
The Company is primarily engaged in the acquisition, servicing and
resolution of pools of performing, sub- performing and non-performing
residential and commercial mortgage loans, as well as foreclosed real estate.
The Company also acquires mortgage-backed securities, purchases residential
mortgage and manufactured housing loans newly-originated through
correspondents, services loans for third parties and operates a merchant
bankcard processing business. At June 30, 1997, the Company had total assets
of approximately $1.2 billion, of which approximately $788.0 million consisted
of loans and $136.0 million consisted of foreclosed real estate.
The Company acquires pools of loans that, at the time of acquisition,
consist primarily of either Discounted Loans or Non-Discounted Loans. At June
30, 1997, the Company held approximately $395.8 million of Discounted Loans
and approximately $392.2 million of Non-Discounted Loans. The Company
generally seeks to acquire smaller pools of loans (those with an aggregate
unpaid principal balance of less than $20.0 million) for which there is
currently less competitive demand. The Company believes that its willingness
to purchase smaller pools of loans enhances its acquisition opportunities and
allows the Company to develop long-term relationships and repeat business with
private financial institutions.
Since 1991, the Company's Principal Shareholders have overseen the purchase
and servicing by the Company and its affiliates of over 450 pools of loans and
foreclosed real estate for an aggregate purchase price of approximately $2.5
billion. The volume of acquisitions has accelerated significantly, growing
from 41 pools that were acquired in 1996 for an aggregate purchase price of
approximately $578.7 million (including approximately $351.0 million in the
fourth quarter of that year) to 73 pools that were acquired in the first six
months of 1997 for an aggregate purchase price of approximately $663.4
million. Comprehensive criteria and procedures have been established for
evaluating the risks associated with mortgage loans and the real estate
securing those loans. In reviewing a pool of loans for possible acquisition,
management develops a detailed model from which it estimates the costs of
servicing the loans in that pool and the amount and timing of cash flows that
can be expected to be generated from the loans to establish an appropriate
purchase price. In order to maximize the returns on its investment in a pool
of loans, the Company generally funds from 90% to 95% of the purchase price
with borrowed funds, including deposits at the Savings Banks. As a result, the
Company's asset base is highly leveraged. See "Risk Factors--Extensive Use of
Financial Leverage."
The Company, through WCC, actively services each acquired loan and property
to maximize cash flow, using specialized procedures and proprietary software.
Discounted Loans are resolved as quickly as possible (generally within one to
two years) after acquisition, through foreclosure, compromise, a discounted
payoff or reinstatement. Non-Discounted Loans are actively serviced to ensure
timely and accurate payments over their remaining lives. At June 30, 1997, WCC
as servicer or sub-servicer for the Company, was servicing approximately $2.5
billion aggregate principal amount of loans, of which approximately $1.2
billion was being serviced for unaffiliated third parties (including
approximately $532.5 million of loans previously securitized by the Company
and its affiliates).
In addition to pools of loans, the Company also acquires mortgage-backed
securities, consisting primarily of Private-Label Securities, as well as
Government Securities that are held for liquidity purposes. In addition, the
Company retains or, in certain cases, acquires in the secondary market
Retained Securities that were previously held in the portfolio of the Company
or WCC and for which the Company, through WCC, is continuing to act as
servicer. Management believes that its experience in acquiring pools of loans
allows it to more effectively evaluate the risks associated with the pool of
loans underlying an issue of mortgage-backed securities and effectively price
those securities. Management also believes that the size and liquidity of the
market for subordinate classes of mortgage-backed securities and the
relatively small size of those classes may from time to time result in the
underpricing of those securities in the market, thus providing the Company
with attractive acquisition opportunities. At June 30, 1997, the Company owned
approximately $127.6 million of Private-Label Securities, approximately $20.8
million of Retained Securities and approximately $41.2 million of Government
Securities.
53
<PAGE>
The Company also acquires, through WCC, mortgage and manufactured housing
loans originated by correspondents pursuant to guidelines established by the
Company under its mortgage loan origination program. Mortgage products offered
under this program currently are targeted for higher credit quality borrowers.
During the six months ended June 30, 1997, the Company acquired approximately
$29.7 million of loans through this program.
The Company also conducts a merchant bankcard processing business that
generates revenues from merchant discounts and processing fees for Visa and
MasterCard credit card transactions. The Company focuses on those market
niches, principally mail order, telephone order and audio-text transactions
where the lack of a customer's physical presence at the time of a transaction
creates a higher risk of chargebacks, because those market niches are believed
by management to offer higher risk-adjusted returns. During the six months
ended June 30, 1997, revenues from these operations totalled $3.4 million.
The Company believes that its success depends upon its ability to (i)
properly evaluate credit risk, (ii) efficiently service pools of loans and
(iii) fund acquisitions on a cost effective basis. The Company's objective is
to expand in markets where it can capitalize on its core competence in these
three areas through a strategy consisting of the following key elements:
. Significant Growth of Acquisitions of Loan Pools and Mortgage-Backed
Securities. The Company plans to expand its acquisition of pools of loans
by more actively marketing its services to those private financial
institutions that are most likely to be sellers of those pools, with a
view to adding new customers and developing more repeat business. As part
of these efforts, the Company has recently extended its acquisition and
servicing operations to the United Kingdom and France and is considering
entering other non-U.S. markets. The Company also plans to expand its
asset base by acquiring additional mortgage-backed securities from
unaffiliated third parties.
. Expansion of Mortgage Origination Network and Products. The Company plans
to further expand its mortgage loan origination program by increasing the
number of authorized correspondents and developing new products targeted
to those market niches in the mortgage lending market where the Company
believes its core competencies give it a competitive advantage.
. Growth of Servicing Business. The Company plans to more actively market
its servicing expertise to other owners and purchasers of loans, both in
the U.S. and abroad.
. Growth of Merchant Bankcard Processing Operations. The Company plans to
continue development of its merchant bankcard processing operations
through increased marketing.
. Utilizing Varied Funding Sources. The Company expects to continue to use
the most cost-efficient funding sources available, including secured term
loans, warehouse lines of credit, repurchase facilities and deposits at
the Savings Banks, as well as the proceeds from future sales of equity
and debt securities. The Company utilizes securitizations as a funding
mechanism and expects to securitize pools of loans when more economically
attractive.
ACQUISITIONS OF POOLS OF LOANS
General
Since the late 1980s, a significant market for the purchase of pools of non-
performing and sub-performing mortgage loans has developed in the United
States. This market initially consisted largely of sales of pools of loans by
governmental agencies such as the FDIC and the RTC in connection with the
savings and loan crisis. Today, this market is comprised primarily of pools of
loans sold by banks, savings institutions, mortgage companies and insurance
companies. Management believes that private financial institutions in order to
reduce their servicing costs and more effectively employ their capital are
increasingly outsourcing the resolution of loans, particularly those that are
sub-performing and non-performing, to specialized companies with the
experience and infrastructure to most efficiently manage those loans.
54
<PAGE>
The Company acquires pools of loans from a wide variety of sources,
including banks, savings institutions, finance companies, leasing companies,
mortgage companies, insurance companies and governmental agencies. The Company
generally obtains information on available pools of loans from several
sources, including referrals from sellers with whom the Company has transacted
business in the past. The Company recently began to actively market its
services with the intent of developing a larger customer base from whom the
Company may purchase pools of loans and to develop more repeat business. Pools
of loans generally are acquired in auctions through competitive bids or in
negotiated transactions. The competition for larger pools of loans generally
is more intense and often involves competitive bids. Unlike some of its
competitors, the Company generally purchases smaller pools of loans (those
with an aggregate unpaid principal balance of less than $20.0 million) in
negotiated transactions and auctions for which there is currently less
competitive demand.
Prior to making an offer to purchase a pool of loans, the Company conducts
an extensive investigation and evaluation of the individual loans comprising
the pool of loans and or the separate parcels of real estate in the pool. This
examination typically consists of an analysis of the information provided by
the seller (generally, the credit and collateral files for the loans), other
relevant material that may be available (including tax records) and the
underlying collateral. The Company compares this data with its own mortgage
loan database, which contains among other things, listings of property values
and loan loss experience in local markets for similar assets, obtains value
opinions from third parties and, in some cases, conducts site inspections. In
addition, for Discounted Loans, the Company generally obtains a broker price
opinion ("BPO") on each parcel of real property. The Company also reviews
information on the local economy and real estate markets including the amount
of time generally required to complete foreclosure on real property in the
jurisdiction in which the property is located. In connection with its review
of a pool of loans being considered for acquisition, the Company reviews each
loan or property in such pool of loans and designs a preliminary servicing
plan for each loan and property that is intended to maximize the cash flow
from such loan or property.
The Company's senior acquisition personnel, who conduct the due diligence
review of each pool of loans being considered for purchase, recommend to
management the price to be offered for the pool by using a proprietary
modeling system that focuses on, among other things, the anticipated future
cash flow from each component loan or property. In evaluating anticipated cash
flow, the Company makes a number of assumptions concerning the overall pool of
loans based on its review of each loan or property, including assumptions as
to the percentage of loans to be foreclosed, the timing of the receipt of
payments and the expenses associated with servicing the loans. The Company's
investment committee, which consists of senior management and the senior
acquisition personnel who conduct the due diligence review, makes a final
determination as to the offering price. Loan acquisition decisions at the
Savings Banks are made by their respective boards of directors. If an offer is
accepted by the seller, the Company and the seller generally enter into a loan
sale agreement, which generally contains representations and warranties by the
seller concerning the loans being sold and an agreement by the seller to
repurchase any loan found to be in breach of those representations and
warranties.
The Company, through WCC, actively services each acquired loan and property
to maximize cash flow. Upon acquisition of a pool of loans, servicing
personnel begin servicing each loan or property within the pool based on the
preliminary servicing plan or a revised plan and employ specialized procedures
and proprietary software designed to efficiently service performing loans,
non-performing loans and foreclosed real estate.
Discounted Loans
Discounted Loans consist primarily of non-performing residential mortgage
loans that are purchased at significant discounts to their unpaid principal
balances. After a pool of Discounted Loans is acquired, the Company seeks to
resolve the Discounted Loans as expeditiously as possible generally within one
to two years. The Company's Discounted Loans require more intensive servicing
than Non-Discounted Loans. The Company's servicing plan for Discounted Loans
generally consists of foreclosure, compromise, a discounted payoff or, in some
cases, reinstatement. Discounted Loans become foreclosed real estate on the
Company's balance sheet when the Company obtains title to the underlying
properties through foreclosure or otherwise as part of its resolution of those
loans.
55
<PAGE>
The Company generally purchases smaller pools of Discounted Loans for which
there is currently less competitive demand. The Company believes that its
willingness to purchase smaller pools of loans enhances its acquisition
opportunities and allows the Company to develop long-term relationships and
repeat business with private financial institutions. The following table sets
forth the number and aggregate purchase price of pools of Discounted Loans of
various sizes acquired during the periods indicated:
ACQUIRED POOLS OF DISCOUNTED LOANS BASED ON POOL SIZE
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31, TOTAL
ENDED ----------------------------------- ----------------
JUNE 30, SINCE
1997 1996 1995 1994 JANUARY 1, 1994
------------ ------------ ----------- ---------- ----------------
NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT
--- -------- --- -------- --- ------- --- ------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pool Size:
Less than $5 million................................ 28 $ 31,391 4 $ 1,892 6 $ 2,620 1 $2,538 35 $ 47,317
Over $5 million to $10 million...................... 6 39,915 1 6,588 -- -- -- -- 5 33,812
Over $10 million to $20 million..................... 2 33,370 -- -- -- -- -- -- -- --
Over $20 million to $50 million..................... 3 73,851 2 54,583 1 26,604 -- -- 6 155,038
Over $50 million.................................... 1 68,663 4 261,096 -- -- -- -- 4 261,096
-- -------- --- -------- --- ------- --- ------ ----- ----------
Total.......................................... 40 $247,190 11 $324,159 7 $29,224 1 $2,538 50 $ 497,263
== ======== === ======== === ======= === ====== ===== ==========
</TABLE>
At June 30, 1997, the unpaid principal balance of the Company's portfolio of
Discounted Loans, net of unaccreted discount and valuation allowance,
aggregated approximately $395.8 million or 33.1% of the Company's total
assets. The following table sets forth the composition of the Company's
portfolio of Discounted Loans by type at the dates indicated:
COMPOSITION OF DISCOUNTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995 1994
-------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted Loans:
Single-family residential............. $488,599 $276,759 $ 50,937 $ 348
Multi-family residential.............. 30,869 317 -- --
Commercial real estate................ 68,944 4,919 1,523 432
Consumer and other(1)................. 188,883 1,342 979 2,215
-------- -------- -------- ------
Total Discounted Loans.................. 777,295 283,337 53,439 2,995
Unaccreted discount and deferred
fees(1)................................ (341,093) (58,088) (6,671) (470)
Valuation allowance(2).................. (40,373) (5,619) (15,414) (431)
-------- -------- -------- ------
Total Discounted Loans, net............. $395,829 $219,630 $ 31,354 $2,094
======== ======== ======== ======
</TABLE>
- --------
(1) In the first quarter of 1997, the Company acquired a pool of charged-off
consumer obligations for less than 5% of their face amount. Accordingly,
the amounts shown for "Consumer and other" and "Unaccreted discount and
deferred fees" increased substantially.
(2) For discussion of the valuation allowance allocation for purchase
discount, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Accounting Matters."
56
<PAGE>
The real properties that secure the Company's Discounted Loans are located
throughout the United States. The following table sets forth the states with
the greatest concentration of those properties at June 30, 1997:
GEOGRAPHIC CONCENTRATION OF DISCOUNTED LOANS
<TABLE>
<CAPTION>
SINGLE- MULTI-
FAMILY RESIDENTIAL FAMILY RESIDENTIAL COMMERCIAL REAL ESTATE
-------------------- -------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
New York................ $ 138,655 28.4% $ 9,179 29.7% $ 8,739 12.7%
New Jersey.............. 89,685 18.4 4,304 13.9 5,697 8.3
Connecticut............. 35,381 7.2 7,570 24.5 17,829 25.9
California.............. 26,972 5.5 5,778 18.7 17,076 24.8
Pennsylvania............ 25,581 5.2 -- -- 230 0.3
Other................... 172,325 35.3 4,038 13.2 19,373 28.0
---------- ------- ---------- -------- ------------ ----------
Total................. $ 488,599 100.0% $ 30,869 100.0% $ 68,944 100.0%
========== ======= ========== ======== ============ ==========
</TABLE>
Non-Discounted Loans
Non-Discounted Loans consist primarily of performing and sub-performing
residential mortgage loans that are purchased at or near their unpaid
principal balances. Non-Discounted Loans on the Company's balance sheet
include acquired pools of Non-Discounted Loans and newly-originated mortgage
and manufactured housing loans purchased by the Company pursuant to its
mortgage loan origination program. See "--Mortgage Loan Origination." The
Company generally holds Non-Discounted Loans as interest earning assets until
they are repaid or sold through a securitization, whole loan sale or
otherwise. Non-Discounted Loans are actively serviced to ensure timely and
accurate payments. The servicing activities generally involve extensive
customer contact for sub-performing loans to ensure that loans are reinstated
and remain current and far less customer contact for performing loans so long
as the obligor remains current with respect to contractual payments. If a Non-
Discounted Loan becomes delinquent for an extended period, the Company
generally seeks to resolve the loan as quickly as possible through
foreclosure, compromise, a discounted payoff or, in some cases, reinstatement,
among other options.
The following table sets forth the number and aggregate purchase price of
pools of Non-Discounted Loans of various sizes acquired during the periods
indicated:
ACQUIRED POOLS OF NON-DISCOUNTED LOANS BASED ON POOL SIZE
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31, TOTAL
------------ ------------------------------------- ----------------
SINCE JANUARY 1,
1997 1996 1995 1994 1994
------------ ------------ ------------ ----------- ----------------
NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT
--- -------- --- -------- --- -------- --- ------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pool Size:
Less than $5 million.............................. 20 $ 35,976 25 $ 40,267 22 $ 80,319 35 $22,201 101 $ 181,936
Over $5 million to $10 million.................... 7 48,470 -- -- 3 26,642 1 5,295 10 75,354
Over $10 million to $20 million................... 2 22,786 3 41,418 -- -- 1 11,527 6 75,731
Over $20 million to $50 million................... 2 58,640 1 45,263 -- -- -- -- 3 103,903
Over $50 million.................................. 2 250,362 1 127,569 1 50,710 -- -- 3 244,829
-- -------- --- -------- --- -------- --- ------- ----- ----------
Total............................................. 33 $416,234 30 $254,517 26 $157,671 37 $39,023 123 $ 681,753
== ======== === ======== === ======== === ======= ===== ==========
</TABLE>
57
<PAGE>
At June 30, 1997, the unpaid principal balance of the Company's portfolio of
Non-Discounted Loans, net of unaccreted discount and valuation allowance,
aggregated approximately $392.2 million or 32.8% of the Company's total
assets. The following table sets forth the composition of the Company's
portfolio of Non-Discounted Loans by type at the dates indicated:
COMPOSITION OF NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-Discounted Loans:
Single-family residen-
tial................... $220,400 $ 74,895 $139,566 $ 53,095
Multi-family residen-
tial................... 73,548 69,044 71,239 77,884
Commercial real estate.. 111,290 63,374 53,458 57,881
Consumer and other...... 54,803 22,817 19,753 6,733
-------- -------- -------- --------
Total Non-Discounted
Loans.................... 460,041 230,130 284,016 195,593
Unaccreted discount and
deferred fees............ (38,213) (6,232) (14,362) (8,946)
Valuation allowance(1).... (29,670) (31,936) (10,237) (7,270)
-------- -------- -------- --------
Total Non-Discounted
Loans, net............... $392,158 $191,962 $259,417 $179,377
======== ======== ======== ========
</TABLE>
- --------
(1) For a discussion of the valuation allowance allocation for purchase
discount, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Accounting Matters."
The real properties that secure the Company's Non-Discounted Loans are
located throughout the United States. The following table sets forth the
states with the greatest concentration of those properties at June 30, 1997:
GEOGRAPHIC CONCENTRATION OF NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
SINGLE- MULTI-
FAMILY RESIDENTIAL FAMILY RESIDENTIAL COMMERCIAL REAL ESTATE
-------------------- -------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California.............. $ 70,749 32.1% $ 57,482 78.2% $ 58,536 52.6%
New York................ 17,265 7.8 8,904 12.1 20,332 18.3
New Jersey.............. 16,599 7.5 1,000 1.4 6,068 5.5
Texas................... 11,676 5.3 1,049 1.4 3,193 2.9
Massachusetts........... 11,775 5.4 669 0.9 1,445 1.3
Other................... 92,336 41.9 4,444 6.0 21,716 19.4
---------- ------- ---------- -------- ------------ ---------
Total................. $ 220,400 100.0% $ 73,548 100.0% $ 111,290 100.0%
========== ======= ========== ======== ============ =========
</TABLE>
58
<PAGE>
The following table sets forth certain information at June 30, 1997
regarding the dollar amount for Non-Discounted Loans maturing based on their
contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the respective dollar amounts of those loans
which have fixed or adjustable interest rates. No information is shown with
respect to Discounted Loans because those loans, by definition, are in default
and unlikely to mature in accordance with their stated amortization schedules.
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 NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
MATURING IN
----------------------------------------------
AFTER FIVE
AFTER ONE YEARS
ONE YEAR OR YEAR THROUGH THROUGH TEN AFTER TEN
LESS FIVE YEARS YEARS YEARS
----------- ------------ ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residential...... $10,271 $15,135 $20,962 $174,032
Multi-family residential....... 11,453 23,832 24,949 13,314
Commercial and other mortgage
loans......................... 29,494 42,879 20,587 18,330
Consumer and other loans....... 17,192 23,158 3,464 10,989
Interest rate terms on amounts
due after one year:
Fixed........................ -- 50,929 30,451 112,240
Adjustable................... -- 54,075 39,511 104,425
</TABLE>
Scheduled contractual principal repayments are not necessarily predictive of
the actual maturities of Non-Discounted 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
prevailing mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially higher than prevailing mortgage loan rates.
59
<PAGE>
Discounted Loan and Non-Discounted Loan Activity
The following table sets forth the activity in the Company's portfolio of
Discounted Loans and Non-Discounted Loans (excluding originations, which are
shown separately) during the periods indicated. The amounts shown in the
following table represent the unpaid principal balance of the loans.
LOAN PORTFOLIO ACTIVITY
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------
1997 1996 1995 1994(1)
---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period..... $ 513,467 $ 337,455 $198,588 $ 74,045
Discounted Loan purchases:
Single-family residential........ 296,420 336,614 49,662 1,542
Multi-family residential......... 33,312 464 96 --
Commercial and other mortgage
loans........................... 66,529 10,741 869 1,843
Consumer and other loans(2)...... 190,602 444 5,368 239
---------- --------- -------- --------
Total Discounted Loans
purchased..................... 586,863 348,263 55,995 3,624
Non-Discounted Loan purchases(3):
Single-family residential........ 335,219 239,263 121,883 36,462
Multi-family residential......... 9,727 507 -- 61,247
Commercial and other mortgage
loans........................... 53,646 6,803 2,126 31,091
Consumer and other loans(4)...... 36,413 18,791 11,012 10,847
---------- --------- -------- --------
Total Non-Discounted Loans
purchased..................... 435,005 265,364 135,021 139,647
Originations:
Single-family residential........ 22,900 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......... 6,842 -- -- --
---------- --------- -------- --------
Total loans originated......... 29,742 2,280 8,748 4,345
Sales of Loans..................... (180,135) (326,236) (16,673) --
Principal repayments, net of capi-
talized interest.................. (66,363) (54,180) (27,464) (14,813)
Transfer to foreclosed real estate
and other......................... (81,243) (59,479) (16,760) (8,260)
---------- --------- -------- --------
Net increase in loans.............. 723,869 176,012 138,867 124,543
---------- --------- -------- --------
Balance at end of period........... $1,237,336 $ 513,467 $337,455 $198,588
========== ========= ======== ========
</TABLE>
- --------
(1) Includes as purchases $90.6 million aggregate principal amount of loans
held by Girard on the date of its acquisition.
(2) In the first quarter of 1997, the Company acquired a pool of charged-off
consumer obligations for less than 5% of their face amount. Accordingly,
the amount shown for "Consumer and other loans" increased substantially.
(3) Excludes originations.
(4)Includes $24.5 million of the Sub-Prime Auto Loans acquired in late 1995
and early 1996.
Foreign Expansion Plans
The Company is expanding its loan acquisition activities to the United
Kingdom and France with a view towards future expansion in Western Europe.
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 those
that prevailed in the United States in the late 1980s and early 1990s. A
significant decline in real estate prices began in the United Kingdom in late
1989 and France in 1992. At present, there are only a few purchasers of
distressed real estate loans in the United Kingdom and France, as the case was
in the United States when the RTC first began selling loans in the late 1980s.
Accordingly, management believes that there may be opportunities to acquire
pools of
60
<PAGE>
loans at favorable prices. At June 30, 1997, the Company had established
offices in London and Paris and had 28 full time employees, including the
former head of Securum Holdings N.V., a Swedish company responsible for the
resolution of impaired real estate loans made by Swedish banks throughout
Europe. In addition, the Company has established a United Kingdom company and
a French company, to conduct its servicing operations in the U.K. and France,
respectively, using the Company's policies, procedures and systems which have
been adapted to U.K. and France requirements.
Since the commencement of operations in Western Europe in September 1996,
the Company has acquired one pool of Discounted Loans and one pool of Non-
Discounted Loans in the United Kingdom with aggregate principal amounts of
approximately $15.6 million and $0.9 million, respectively, and purchased a
French organization which owns portfolios of Non-Discounted, Discounted Loans
and foreclosed real estate in France for an aggregate purchase price of
approximately $50 million. The Company has agreed along with a co-investor, to
acquire from a major international insurance company its portfolio of
Discounted and Non-Discounted Loans in France for an aggregate purchase price
of approximately $150 million (for which the Company would be responsible for
half). If these acquisitions are completed, the Company's concentration of
assets located internationally will be significantly increased. There can be
no assurance however as to when or if such acquisitions will be completed.
MORTGAGE LOAN ORIGINATION
The Company operates a mortgage loan origination program for the
origination, through correspondents, of related first and second lien mortgage
loans and manufactured housing loans. The Company does not seek to compete
broadly with other mortgage and secured loan originators but, instead, targets
market niches where management believes its experience in evaluating credit
risk and servicing non-conforming loans gives it a competitive advantage. For
example, the Company has developed loan products that permit first time home
buyers, who are otherwise qualified according to federal agency guidelines but
who do not have sufficient funds for a down payment, to purchase a home using
100% financing. To date, the Company has targeted only prime quality borrowers
for its mortgage loan origination program. While its license applications are
pending, the Company is conducting its mortgage loan origination program
through WCC, for which WCC is not compensated.
All borrowers and collateral must meet the Company's credit underwriting
guidelines. The Company believes that the higher risk generally associated
with non-conforming loans is offset by the Company's strong credit
underwriting guidelines and the higher pricing associated with these loans.
The Company intends to expand this business by developing new products,
increasing correspondent relationships and targeting homebuilders and
manufactured housing companies that concentrate on first-time buyers.
At June 30, 1997, the Company had approximately seventy-five approved
correspondents, each of which has been subject to a thorough due diligence and
approval process to better provide quality and integrity as a source of new
business. The agreement with each correspondent requires among other things,
specified minimum levels of experience in origination of non-conforming
mortgage loans and representations and warranties from the correspondent and
buy-back provisions identical to those required of the Company for the
securitization of loans. Correspondents originate loans based on guidelines
provided by the Company and sell the loans to the Company on a servicing-
released basis.
The Company's guidelines set forth the specific lending requirements as they
relate to the processing, underwriting, property appraisal, closing, funding
and delivery of loans to borrowers. Once a correspondent has completed its
underwriting process it will submit the initial loan application to the
Company's underwriting
61
<PAGE>
department, which reviews the application and performs its own underwriting
analysis. Evaluations of initial loan applications are conducted by 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 focus on debt-to-income ratios, loan-to-value ratios, current credit
reports on potential borrowers, property appraisals and a potential borrower's
employment 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 that do not conform
to the Company's guidelines are rejected and returned to the correspondent.
Variations from the Company's underwriting guidelines must be approved by an
appropriate officer of the Company.
Since commencing its mortgage loan origination program, the Company has
purchased loans totaling approximately $53.3 million in principal amount. At
June 30, 1997, the unpaid principal balance of the outstanding loans purchased
by the Company under this program was approximately $44.6 million and the
weighted average interest rate and maturity of those loans were 11.94% and 276
months, respectively. The weighted average principal balance of those loans at
origination was approximately $50,000. Approximately 31.0%, 18.0%, 6.0%, 6.0%
and 6.0% of the original principal amount of those loans were originated in
California, Oregon, Arizona, Washington and Texas, respectively and no other
state accounted for more than 5% of the total.
Since the commencement of its mortgage loan origination program, the Company
has not foreclosed on any property, but has commenced foreclosure proceedings
on one property. The following table sets forth, as of June 30, 1997,
information with respect to the delinquency of loans originated under the
Company's mortgage loan origination program:
DELINQUENCY STATUS OF MORTGAGE ORIGINATION PORTFOLIO
(AT JUNE 30, 1997)
<TABLE>
<CAPTION>
PRINCIPAL PERCENT OF
NO. OF LOANS BALANCE PORTFOLIO
------------ --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PERIOD OF DELINQUENCY:
31--60 days................................... 30 $1,289 2.9%
61--90 days................................... 16 696 1.6
91 days or more............................... 21 1,290 2.9
--- ------ ---
Total....................................... 67 $3,275 7.4%
=== ====== ===
</TABLE>
MORTGAGE-BACKED SECURITIES
The Company acquires mortgage-backed securities, consisting primarily of
Private-Label Securities and Government Securities held for liquidity
purposes. In addition, the Company retains or, in certain cases, acquires
Retained Securities issued in connection with the securitization of loans
previously held in its portfolio. Management believes that its experience in
acquiring pools of loans allows it to more effectively evaluate the risks
associated with a pool of loans that supports an issue of mortgage-backed
securities being considered for purchase and price those securities.
Management also believes that the size and liquidity of the market for
subordinate classes of mortgage-backed securities and the relatively small
size of those classes may from time to time result in the underpricing of
these securities in the market, providing the Company with attractive
acquisition opportunities. The following table sets forth the Company's
holdings of mortgage-backed and other government securities at the dates
indicated:
62
<PAGE>
MORTGAGE-BACKED SECURITIES AND GOVERNMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
JUNE 30,
1997 1996 1995 1994
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Private-Label Securities...................... $127,635 $21,382 $ -- $ --
Retained Securities........................... 20,778 28,239 -- --
Government Securities......................... 41,245 35,343 28,672 29,887
-------- ------- ------- -------
Total Securities............................ $189,658 $84,964 $28,672 $29,887
======== ======= ======= =======
</TABLE>
Prior to making an offer to purchase a pool of Private-Label Securities, the
Company conducts an extensive investigation and evaluation of the underlying
pool of loans. This examination typically includes an analysis of the
information provided by the seller, other relevant material that may be
available (including tax records) and, in some cases, the underlying
collateral. The Company compares this data with its own mortgage loan
database, which contains among other things, listings of property values and
loan loss experience in local markets for similar assets, and, in some cases,
conducts site inspections. In addition, the Company obtains BPOs on a sample
of the real properties underlying the loans. The Company generally obtains
BPOs for larger loans, particularly if such loans have large balances, are
non-owner occupied, are for second homes or are located in unusual places. The
Company also evaluates the servicer and reviews information on the local
economy and real estate markets in which the properties are located. In
determining the purchase price for the mortgage-backed securities, the Company
prepares a model which focuses on different prepayment speeds in conjunction
with various default and loss assumptions.
The Company generally acquires Private-Label Securities in negotiated
transactions where the aggregate value of the securities acquired is generally
between $2.0 and $3.0 million. At June 30, 1997, the Company held
approximately $127.6 million principal amount of Private-Label Securities. The
Company's two largest holdings of Private-Label Securities were Salomon
Brothers Mortgage Securitizations VII Series 1996--LB3 and Securitized Asset
Sales, Inc. Series 1994-4, which represent 14.4% and 9.2% of the Company's
portfolio. The following table sets forth the Company's holdings of Private-
Label Securities at June 30, 1997:
PRIVATE-LABEL SECURITIES
<TABLE>
<CAPTION>
NUMBER OF NET BOOK
RATING CATEGORY(1) INVESTMENTS VALUE
------------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AAA/Aaa1 to A-/A3.............................. 1 $ 1,997
BBB+/Baa1 to BBB-/Baa3......................... 6 26,206
BB+/Ba1 to BB-/Ba3............................. 16 26,513
B+/B1 to B-/B3................................. 9 13,979
Unrated........................................ 12 58,940
-------- -------------
Total.......................................... 44 $ 127,635
======== =============
</TABLE>
- --------
(1) Most recent rating by independent rating agency.
63
<PAGE>
The Company generally retains or, in certain cases, acquires Retained
Securities issued in connection with the securitization of its loans. The
following table sets forth information regarding the Company's Retained
Securities:
RETAINED SECURITIES
<TABLE>
<CAPTION>
COLLATERAL BALANCE
-----------------------
JUNE 30,
ISSUE NAME ISSUE DATE COLLATERAL TYPE INITIAL 1997 RETAINED CLASSES
---------- ------------- --------------------- ----------- ----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consumer Obligation
Structured Trust 1995- Miscellaneous
A...................... March 1995 Consumer $ 42,508 $ 22,558 Class B
Manufactured Housing
Trust Manufactured
1995-A................. June 1995 Housing 35,763 20,974 Class B
Series 1995-M1 Mortgage
Funding Co............. August 1995 Home Equity 25,687 15,622 Class B
Residential ARM loans 47,291 29,631
Mortgage Pass-Through
1996-2................. August 1996 Residential Loans 138,429 126,445 Class B1
Class B2
Class B3
Mortgage Pass-Through
1996-3................. December 1996 Residential Loans 278,286 253,513 Class B1
Class B2
Class B3
IO Classes
Mortgage Pass-Through
1996-4................. December 1996 Residential Loans 67,722 63,804 Class B
Class C
----------- -----------
Total..................................................... $ 635,686 $ 532,547
=========== ===========
</TABLE>
SERVICING
General
In connection with its review of a pool of loans and foreclosed real estate
being considered for acquisition, management designs a servicing plan for each
underlying loan and parcel of real estate that is intended to maximize the
cash flow from that loan or parcel of property. The servicing plan may consist
of foreclosure, compromise, a discounted payoff or, in some cases,
reinstatement. WCC has developed and made available to the Company specialized
procedures and proprietary software designed to effectively service
performing, non-performing and sub-performing loans. The software provides the
Company with, among other things, automated payment-processing, cashiering,
collection and reporting functions.
At June 30, 1997, WCC as servicer or sub-servicer for the Company, was
servicing approximately $2.5 billion aggregate principal amount of loans, of
which approximately $1.2 billion principal amount of loans was being serviced
for unaffiliated third parties (including approximately $532.5 million of
loans previously securitized by the Company and its affiliates). The same
types of loans are serviced for unaffiliated third parties as those serviced
for its own account. The Company began servicing loans for unaffiliated third
parties in December 1996 and was recently engaged to service a large loan
portfolio. See "Recent Developments." Management believes that the Company's
servicing operations are adequate for the current volume of loans being
serviced and expected to be serviced in the immediate future. However, as the
volume of loans grows, the Company will need to hire additional personnel and
add to its existing systems. There can be no assurance that the Company will
be able to locate and hire sufficient personnel to continue to expand its
servicing operation.
64
<PAGE>
The Company recently expanded its loan servicing activities to encompass
Western Europe and has established servicing operations in the United Kingdom
and France. Management believes that there is a demand in the European market
for U.S.-style loan servicing, with its automated systems and detailed
investor reporting and aggressive work-out approaches. Most purchasers of
distressed loans in the United Kingdom and France are U.S.-based and have
utilized U.S.-style servicing and investor reporting in connection with the
purchase of distressed loans in the United States. With the exception of
recently originated loans, the prevailing loan servicing and reporting systems
in the United Kingdom and France are less technologically developed and more
labor intensive than those in the United States. The Company's loan servicing
operations in Western Europe utilize the Company's U.S.-based servicing
system, which has been adapted for servicing loans in Western Europe.
Servicing Agreements
The Company is party to a loan servicing agreement with WCC pursuant to
which WCC acts as sub-servicer for the Company and provides loan portfolio
management services, including billing, portfolio administration and
collection services for the Company's pools of loans. The Company pays WCC a
servicing fee at or below prevailing market rates for each pool of loans that
WCC is servicing for the Company. The Company has the option at any time after
November 15, 1998 to acquire WCC's servicing operations including its computer
systems and software (the "Servicing Transfer"), provided that the Company or
one of its subsidiaries has obtained the appropriate regulatory approvals and
licenses to service loans. The Company also may request that the Servicing
Transfer occur on an earlier date, provided that the foregoing conditions are
met, but WCC has no obligation to effect the Servicing Transfer prior to
November 15, 1998. The Servicing Transfer will occur automatically on November
15, 1999, unless prohibited. Upon the effectiveness of the Servicing Transfer,
the Company will service loans directly for its own account, as well as for
the accounts of WCC and unaffiliated third parties. In addition, upon the
effectiveness of the servicing transfer, WCC will cease servicing loans for
itself and the Company will begin servicing WCC's loans for a fee equal to the
Company's cost for such servicing.
Each of the Savings Banks is party to a loan servicing agreement 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. It is anticipated that the Savings
Banks will terminate their agreements with WCC upon the effectiveness of the
Servicing Transfers, at which time the Savings Banks will enter into an
agreement with the Company pursuant to which the Company will provide similar
services to the Savings Banks.
For the six months ended June 30, 1997, servicing fee revenue earned from
the Company (including the Savings Banks) by WCC aggregated approximately $6.1
million.
The Sub-Servicer
WCC is based in Portland, Oregon, is wholly-owned by the Principal
Shareholders and was formed in 1987 to manage the activities of a group of
affiliated companies owned by the Principal Shareholders in the loan and lease
servicing business. At December 31, 1996, WCC had total assets of
approximately $347.5 million and total liabilities of approximately $319.8
million. Total revenues and net income for the year ended December 31, 1996
were approximately $26.2 million and $8.9 million, respectively. At August 31,
1997, WCC had approximately 222 employees.
At June 30, 1997, WCC continued to hold pools of loans and securities
aggregating approximately $32.8 million and had outstanding indebtedness of
approximately $108.9 million, which was incurred to finance its own growth and
to provide funds to the Principal Shareholders to enable them to acquire the
Savings Banks and fund their growth. Substantially, all of WCC's indebtedness
is secured by pledges of its servicing rights and is personally guaranteed by
the Principal Shareholders. Loans made to WCC prior to October 1, 1995 have
maturities beginning in July 1998. Such loans can be extended at WCC's option
for three additional two-year periods and one additional one-year period.
Loans made to WCC between October 1, 1995 and May 15, 1996 have five year
terms and can be extended at WCC's option for one additional five-year period.
Loans
65
<PAGE>
made after May 15, 1996 have two year terms and can be extended at WCC's
option for four additional two-year periods.
MERCHANT BANKCARD PROCESSING OPERATIONS
The Company is continuing to develop its merchant 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 transactions, where the Company
believes it obtains higher returns. These market niches present higher risk
because the consumer is not physically present at the time of the credit card
transaction and as a result there is a greater risk of charge-backs. The
Company has no control over charge-backs as Visa(R) and Mastercard(R) have
absolute authority to decide if a charge-back will be allowed. The Company
believes that the most significant risk is from fraud by merchants, which the
Company seeks to minimize through the management of its accounts. The Company
attempts to minimize the effects of charge-backs through the pricing of its
services and managing merchant cash reserves. Revenues from the bankcard
operations, which commenced in the third quarter of 1994 have increased from
approximately $0.6 million in 1994 to approximately $6.8 million in 1996 and
totaled approximately $3.4 million during the six months ended June 30, 1997.
Management believes that there are opportunities to expand this business using
its existing infrastructure and through acquisitions.
FUNDING SOURCES
General
In order to maximize the return on its investment in acquired loans, the
Company funds acquisitions with third party debt financing so that the
Company's invested capital is generally 10% or less of the purchase price for
the loans. The three principal sources for such funding are warehouse and
repurchase agreements with major investment banks, deposits at the Savings
Banks and the securitization of loans. In addition, the Company publicly sold
its 13% Notes in December 1996 and Old Notes in August 1997. In certain
limited circumstances in the past, the Company has also borrowed money from
WCC in order to fund the acquisition of loans. The Company repaid such
borrowings with preferred stock on July 31, 1997. See "Recent Developments"
and "Compensation Committee Interlocks and Insider Participation." Management
of the Company closely monitors rates and terms of competing sources of funds
on a regular basis and generally utilizes the funding source deemed most cost
effective at the time.
The following table sets forth information relating to the Company's secured
borrowings and other interest- bearing obligations at the dates indicated:
THE COMPANY'S BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995 1994
----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances........................... $ -- $ -- $ -- $ 13,000
Deposits at the Savings Banks........... 445,333 501,614 303,524 196,289
Warehouse and Repurchase Agreements..... 583,468 97,624 13,000 8,500
Notes Payable and Subordinated Debt..... 84,245 75,000 11,000 --
----------- -------- -------- --------
Total................................. $ 1,113,046 $674,238 $327,524 $217,789
=========== ======== ======== ========
</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.
66
<PAGE>
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS AT OR FOR THE YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995 1994
------------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:
Average amount outstanding during
the period........................ $ 479 $ 2,420 $ 1,381 $ 5,916
Maximum month-end balance
outstanding during the period..... $ 8,000 $ 11,000 $ 8,000 $13,000
Weighted average rate:
During the period................ 5.64% 6.57% 7.53% 3.85%
At end of period................. -- -- -- 4.33%
Warehouse and repurchase agreements:
Average amount outstanding during
the period........................ $405,134 $ 55,218 $ 7,099 $ 4,757
Maximum month-end balance
outstanding during the period..... $583,468 $154,000 $14,950 $11,377
Weighted average rate:
During the period................ 7.54% 6.88% 5.62% 4.46%
At end of period................. 7.82% 7.88% 6.70% 5.81%
</TABLE>
Warehouse Credit Facilities and Repurchase Agreements
The following table sets forth information with respect to the Company's
warehouse credit facilities and repurchase agreements of the Company
(excluding the Savings Banks) at June 30, 1997:
<TABLE>
<CAPTION>
LENDER EXPIRATION DATES AMOUNT UTILIZED
------ ----------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
COMMITTED FACILITIES:
Credit Suisse First Boston
Mortgage Capital LLC.......... November 28, 1998 $ 350,000(1) $ 335,872
Prudential Securities Credit
Corporation................... December 31, 1997 150,000 24,730
Salomon Brothers Realty Corp... May 15, 2000 60,937 59,606
Salomon Brothers Realty Corp... May 15, 2000 36,522 36,522
UNCOMMITTED FACILITIES:(2)
Bear, Stearns International
Limited....................... (3) 100,000 43,140
CS First Boston (Hong Kong)
Limited....................... (3) 100,000 44,561
----------- -----------
Total Amount(4).............. $ 797,459 $ 544,431
=========== ===========
</TABLE>
- --------
(1) The Company and Credit Suisse First Boston Mortgage Capital LLC have
agreed in principle to increase the amount of the facility to $425 million.
(2) Although the agreements governing such commitments do not specify a
minimum or maximum amount available, the parties have orally agreed that
such agreements may be used up to the amount specified.
(3) Facility may be terminated at any time.
(4) Excludes uncommitted facilities at the Savings Banks which may be used for
up to $210 million of acquisitions in the aggregate.
The borrower under the warehouse and repurchase agreements is usually a
subsidiary of the Company, which may be a special purpose entity. The
agreements are generally guaranteed by WFSG and are secured by the pools of
loans acquired with any funds received by the Company pursuant to such
agreements. The agreements generally provide that if the value of the
collateral falls below specified levels the lender may make a margin call. The
agreements generally provide the lender with the right to act as underwriter
in connection with the securitization of any loans acquired by the Company
with borrowings from the lender. Certain of the agreements provide for the
repayment of borrowings with the excess cash flow on the acquired assets,
which has the effect of accelerating the repayment and delevering the
Company's investment. The Company's facilities bear
67
<PAGE>
interest at rates ranging from LIBOR plus .25% to LIBOR plus 3% and provide
for advances against the value of the pledged collateral from 75% to 100%.
Securitizations
Through June 30, 1997, the Company and its affiliates have securitized
approximately $712.2 million of loans through four publicly offered and three
privately placed securitizations, including performing, non-performing and
sub-performing mortgage loans, manufactured housing loans, and consumer loans,
non-conforming loans and foreclosed real estate. The Company retains the
servicing rights to the loans it securitizes. Securitizations allow the
Company to increase its loan acquisition volume, reduce the risks associated
with interest rate fluctuations and provide access to longer term funding
sources.
In a securitization, the Company generally transfers a pool of loans to a
separate entity (a "Special Purpose Entity") in exchange for a subordinate
class of mortgage-backed securities in the Special Purpose Entity and cash,
which constitutes the proceeds of one or more senior classes of mortgage-
backed securities issued by the Special Purpose Entity. The cash generally
will be used to repay borrowings used to finance the acquisition of the pool
of loans being securitized. Generally, the holders of the senior classes of
mortgage-backed securities are entitled to receive scheduled principal
collected on the pool of securitized loans and interest at the pass-through
interest rates on the certificate balances. The subordinate mortgage-backed
securities represent the right to receive cash flows from the pool of
securitized loans after payment of the required amounts to the holders of the
senior classes of mortgage-backed 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 classes of mortgage-backed securities
issued if it would improve 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 classes of mortgage-backed
securities of full and timely payment of the scheduled pass-through interest
and principal. To the extent that the credit enhancement for senior classes of
mortgage-backed securities consists of an insurance and indemnity agreement,
the Company would generally have an obligation to indemnify the insurer for
any losses incurred. In addition, the pooling and servicing agreements that
govern the distribution of cash flows from the pool of securitized loans
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 their principal amount 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
classes of mortgage-backed securities than the amortization of the principal
balance of the pool of securitized loans. The purpose of the over-
collateralization is to provide a source of payment in the event of higher
than anticipated credit losses or lower receipts upon the resolution of a
loan. Losses resulting from defaults by borrowers on the payment of principal
or interest on the loans in a pool of securitized loans will reduce the over-
collateralization to the extent that funds are available and may result in a
reduction in the value of the subordinate mortgage-backed securities retained
by the Company.
The Company generally transfers loans to the Special Purpose Entity without
recourse, except that the Company provides certain representations and
warranties with respect to the loans. The Company may be required to
repurchase a loan at a price equal to the then outstanding principal balance
of the loan and any accrued and unpaid interest thereon if it does not conform
to the Company's representations and warranties. See "Risk Factors--Risks
Related to Securitization."
Funding Sources for the Savings Banks
The Savings Banks were acquired by the Principal Shareholders to provide a
source of funding for loan acquisitions and to manage reinvestment risk
associated with Discounted Loans and securitizations. The primary source of
funds for the Savings Banks is "wholesale" certificates of deposit. To a
lesser extent, Girard obtains brokered certificates of deposit from national
investment banking firms that, pursuant to agreements with Girard,
68
<PAGE>
solicit funds from their customers for deposit with Girard. At June 30, 1997,
approximately $161.7 million or 36% of the Savings Banks' total deposits were
brokered and approximately $275.3 million or 62% were wholesale deposits.
Wholesale deposits generally are obtained on terms that are more economically
attractive terms to the Savings Banks than brokered deposits.
The Orders issued by the OTS 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. See "Risk Factors--Regulation of the Savings
Banks." The Company does not expect to be able to use the Savings Banks for
growth unless the Orders are lifted or modified.
The Savings Banks' funding strategy has been to offer deposit rates above
those customarily offered by banks and savings institutions in their markets.
The Savings Banks have been able to pursue this strategy because the general
and administrative costs associated with their operations are significantly
lower than those of banks and savings institutions with branch office
networks. The Savings Banks have generally accumulated deposits by
participating in deposit rate surveys that list the Savings Banks among the
higher rate paying insured institutions, and by periodically advertising in
various local market newspapers and other media. However, because the Savings
Banks compete for deposits primarily on the basis of rate, they could
experience difficulties in attracting deposits if they could not continue to
offer rates on their deposits that are above those of other banks and savings
institutions.
The following table sets forth information relating to the Savings Banks'
deposits at the dates indicated:
SAVINGS BANKS' DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------------
1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------
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...... $ 5,924 0.00% $ 5,625 0.00% $ 5,111 0.00% $ 3,045 0.00%
NOW and money market
checking accounts...... 1,784 1.42 2,023 1.82 1,267 2.99 3,170 3.28
Savings accounts........ 653 2.04 480 2.15 304 2.38 215 2.25
Certificates of
deposit................ 436,972 5.99 493,486 5.92 296,842 6.15 189,859 5.48
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits......... $445,333 5.84% $501,614 5.84% $303,524 6.03% $196,289 5.35%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth, by various interest rate categories, the
Savings Banks' certificates of deposit at June 30, 1997:
INTEREST RATES FOR THE SAVINGS BANKS' CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
JUNE 30,
1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less......................................... $ 738
3.51-4.50............................................. --
4.51-5.50............................................. 16,817
5.51-6.50............................................. 416,444
6.51-7.50............................................. 1,441
7.51-8.50............................................. 1,532
--------
Total............................................... $436,972
========
</TABLE>
69
<PAGE>
The following table sets forth the amount and maturities of the Savings
Banks' certificates of deposit as of June 30, 1997:
MATURITIES OF THE SAVINGS BANKS' CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
ORIGINAL MATURITY IN MONTHS
-------------------------------
12 OR LESS 13 TO 36 37 OR MORE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balances Maturing in 3 Months or Less........... $76,582 $ 64,213 $ 99
Weighted Avg.................................. 5.75% 6.08% 5.50%
Balances Maturing in 4 to 12 Months............. $43,773 $228,572 $2,476
Weighted Avg.................................. 5.95% 6.05% 7.38%
Balances Maturing in 13 to 36 Months............ -- $ 18,939 $2,318
Weighted Avg.................................. -- 6.18% 6.03%
Balances Maturing in 37 or More Months.......... -- -- --
Weighted Avg.................................. -- -- --
</TABLE>
At June 30, 1997, the Savings Banks had outstanding an aggregate of
approximately $87.0 million of certificates of deposit in face amounts equal
to or greater than $100,000 maturing as follows: approximately $27.8 million
within three months; approximately $30.0 million over three months through six
months; approximately $25.7 million over six months through twelve months, and
approximately $3.5 million later than twelve months.
In addition to deposits, each of the Savings Banks is party to a master
repurchase agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC").
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 the Savings Banks to purchase pools of loans with
immediate financing from BSMCC, which can then be repaid as deposits are
increased.
Each of the Savings Banks also obtains advances from the FHLB of San
Francisco upon the security of certain of its assets, including FHLB stock,
provided certain standards related to its creditworthiness 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 pursuant to various credit programs (each of
which has its own interest rate) which may be fixed or adjustable, and a range
of maturities.
ASSET QUALITY
The Company is exposed to risks of a decline in the value of the collateral
that secures its loans and the ability of borrowers to repay their loans.
Management closely monitors the Company's loans for potential problems on a
periodic basis and reports to the Board of Directors at regularly scheduled
meetings. The Company does not consider its large holdings of non-performing
and sub-performing loans and foreclosed real estate to be representative of
its actual loss experience or indicative of future losses. The Company
purchases each pool of Discounted Loans at a significant discount from the
unpaid principal balance of the loans and/or the fair market value of the real
estate securing those loans. Accordingly, the Company will only experience a
loss on a pool of Discounted Loans if and to the extent that the cash flow
generated by the underlying loans or the sale of the foreclosed real estate
does not exceed the purchase price of the pool. Management believes that the
Company's servicing expertise permits resolution of its Discounted Loans in a
timely and profitable manner.
Non-Performing Non-Discounted Loans
It is the Company's policy to establish an allowance for uncollectible
interest on performing loans that are past due 90 days or more or sooner when,
in the judgment of management, the probability of collection of interest
70
<PAGE>
is deemed to be insufficient to warrant further accrual. Upon such a
determination those loans are placed on non-accrual status and deemed to be
non-performing. When a performing loan is placed on non-accrual status,
previously accrued but unpaid interest is reversed by a charge to interest
income. Because most Discounted Loans are non-performing at the time of
acquisition, the Company does not establish any allowance for loss on these
loans because they are acquired at a substantial discount to their unpaid
principal balances and will only result in losses if recoveries on those loans
do not exceed the purchase price. The following table sets forth certain
information relating to the Company's non-performing Non-Discounted Loans at
the dates indicated:
NON-PERFORMING NON-DISCOUNTED LOANS(1)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995 1994
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential.............. $39,540 $37,383 $10,996 $ 5,554
Multi-family residential............... 2,219 2,002 270 1,471
Commercial real estate and land........ 12,227 6,760 910 4,207
Consumer and other loans............... 14,342 8,379 503 400
------- ------- ------- -------
Total................................ $68,328 $54,524 $12,679 $11,632
======= ======= ======= =======
Non-performing loans as a percentage of:
Total Non-Discounted Loans(2).......... 14.85% 23.69% 4.46% 5.95%
Total assets........................... 5.71% 7.23% 3.71% 5.04%
Allowance for loan losses as a percentage
of:
Total Non-Discounted Loans(2).......... 6.45% 13.88% 3.60% 3.72%
Non-performing Non-Discounted Loans.... 43.42% 58.57% 80.74% 62.50%
Allowance for loan losses and discount as
a percentage of:
Non-performing Non-Discounted Loans.... 99.35% 70.00% 194.01% 139.40%
</TABLE>
- --------
(1) This table does not include Discounted Loans although a substantial
portion of such loans are non-performing.
(2) Total Non-Discounted Loans is exclusive of Discounted Loans, undisbursed
loan proceeds, unaccreted discount and allowance for loan losses.
The relatively high percentage of non-performing loans in the Company's
holdings of Non-Discounted Loans results in part from the accounting treatment
of pools of loans. For accounting purposes, all of the loans in a particular
pool are classified as either Discounted Loans or Non-Discounted Loans,
depending on whether the pool consists primarily of non-performing loans or
primarily of performing and sub-performing loans. Accordingly, a pool of Non-
Discounted Loans may contain a substantial number of sub-performing and non-
performing loans, notwithstanding that it consists primarily of performing
loans. Moreover, the percentage of non-performing Non-Discounted Loans to
total Non-Discounted Loans does not reflect any unaccreted discount (or
allowance for loan losses) related to such non-performing loans.
Foreclosed Real Estate
The Company values its holdings of foreclosed real estate at the lower of
cost or fair value less estimated costs of sale. Foreclosed real estate held
by the Company is periodically re-evaluated to determine that it is being
carried at the lower of cost or fair value less estimated costs of sale.
Holding and maintenance costs are recorded as expenses in the period incurred.
Deficiencies resulting from valuation adjustments subsequent to acquisition
are recognized as a valuation allowance. Subsequent increases in the value of
foreclosed real estate 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 the aggregate carrying value of the Company's holdings of
foreclosed real estate (categorized by source of acquisition) at the dates
indicated:
71
<PAGE>
FORECLOSED REAL ESTATE BY LOAN TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995 1994
-------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted Loans:
Single-family residential.................. $ 80,494 $15,274 $3,226 $ --
Multi-family residential................... 1,105 -- -- --
Commercial and other mortgage loans........ 5,573 200 66 --
-------- ------- ------ ------
Total.................................... 87,172 15,474 3,292 --
Non-Discounted Loans:
Single-family residential.................. 4,770 2,773 1,676 613
Multi-family residential................... 89 100 611 254
Commercial and other mortgage loans........ 1,409 124 578 464
-------- ------- ------ ------
Total.................................... 6,268 2,997 2,865 1,331
Foreclosed real estate purchased directly:
Single-family residential.................. 47,929 59,729 -- --
Allowance for total losses................... (5,385) -- (1,193) (123)
-------- ------- ------ ------
Foreclosed real estate, net.................. $135,984 $78,200 $4,964 $1,208
======== ======= ====== ======
</TABLE>
The following table sets forth certain geographic information as of June 30,
1997 related to the Company's foreclosed real estate holdings:
GEOGRAPHIC DISTRIBUTION OF FORECLOSED REAL ESTATE
<TABLE>
<CAPTION>
MULTI-
FAMILY RESIDENTIAL
SINGLE FAMILY AND COMMERCIAL REAL
RESIDENTIAL ESTATE
------------------- -----------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
-------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
New York........................... $ 57,590 566 $ 1,435 9
New Jersey......................... 24,856 265 411 5
California......................... 9,806 83 3,158 17
Connecticut........................ 9,491 165 872 12
Florida............................ 2,958 67 574 7
Other.............................. 28,492 454 1,726 88
-------- ----- ----------- --------
Total............................ $133,193 1,600 $ 8,176 138
======== ===== =========== ========
</TABLE>
Classified Assets Owned by the Savings Banks
OTS regulations require that each insured savings association classify its
assets on a regular basis. In addition, in connection with examinations of
insured institutions, such as the Savings Banks, 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,
72
<PAGE>
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 June 30, 1997
consisted of approximately $295.3 million of assets classified as substandard
and approximately $0.4 million of assets classified as doubtful. The
substandard and doubtful asset classifications include approximately $174.3
million and approximately $0.3 million of Discounted Loans, respectively. In
addition, at the same date, approximately $37.1 million of assets were
designated as special mention, which includes approximately $5.3 million of
Sub-Prime Auto Loans.
Allowances for Losses
The Company (excluding the Savings Banks) generally does not establish loan
loss reserves for Discounted Loans and foreclosed real estate since these
assets are generally purchased at a discount from the unpaid principal balance
of the loans and/or fair market value of the real estate. To the extent that
the Company (excluding the Savings Banks) identifies the need for allowances
against Discounted Loans or foreclosed real estate, allowances are established
through a reduction of the purchase discount. If loan losses exceed the
purchase discount, the Company (excluding the Savings Banks) will establish a
loan loss reserve through a charge against earnings. To date, the Company has
not established loan loss reserves for pools of Discounted Loans or pools of
foreclosed real estate purchased at a discount.
The Savings Banks maintain an allowance for loan losses at a level believed
adequate by management to absorb potential losses in the Savings Banks' loan
portfolios. 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 Savings Banks use their internal asset review system to identify and
evaluate impaired loans and to classify loans as special mention, substandard,
doubtful, or loss. These terms correspond to varying degrees of risk that the
loans will not be collected in part or in full. The Savings Banks' 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 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.
When the Savings Banks increase 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 allocating a portion of the purchase discount
deemed to be associated with measurable credit risk. The allocation is based
on a review 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
73
<PAGE>
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 further charges to unaccreted discount or, if no discount
remains, through a charge against earnings.
The OTS, as part of its examination process, periodically reviews the
Savings Banks' allowances for losses and the carrying values of their assets.
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
that were delinquent for more than 30 days, notwithstanding that the
automobiles securing those loans were retained. Approximately 44.2% of the
approximately 2,000 Sub-Prime Auto Loans remaining in the Savings Banks'
portfolio have become delinquent for more than 120 days. The Savings Banks
have established reserves aggregating $5.3 million at June 30, 1997, including
a 10% reserve on those loans that remain current. The total reserve for losses
as a percentage of the unpaid principal balance of the Savings Banks'
portfolio of Sub-Prime Auto Loans was 49.0% at June 30, 1997.
The OTS recently completed its 1997 examination of the Savings Banks and
issued a Report of Examination that continues to be critical of the Savings
Banks in a number of significant respects and indicated that the Orders would
not be lifted. The 1997 Report of Examination characterized asset quality as
poor and expressed concern with, among other things (i) the sale of
substantially all of the Savings Banks' Non-Discounted Loans and the
acquisition of Discounted Loans and their impact on earnings and future loss
provisions, (ii) the Savings Banks' procedures for acquiring and servicing
loans, (iii) the policies and procedures concerning allowances for loan and
lease losses and hedging transactions, (iv) the methods for measuring and
monitoring interest rate risk and (v) recordkeeping and systems for financial
and other reporting. The 1997 Report of Examination also indicated that (i)
the Savings Banks had not adequately demonstrated that the servicing fees
charged to the Savings Banks by WCC were comparable to fees charged by non-
affiliated parties, (ii) the Savings Banks' books and records continued to be
deficient in several respects, (iii) First Bank's merchant bankcard operations
reflected certain deficiencies and (iv) the Savings Banks' loan loss policy
was not adequately supported or documented. As a result, the Savings Banks
were found not to be in compliance with the provisions of the order covering
bankcard operations, transactions with affiliates, allowance for loan and
lease losses and accounting books and records and the Savings Banks were
directed to remedy the deficiencies in a timely manner.
As part of its examination of Girard, the OTS indicated that, based on
Girard's portfolio as of March 31, 1997, Girard should increase its provision
for loan losses and reserves for real estate owned to $27.0 million as
effective of June 30, 1997. Since completion of the 1997 examination, Girard's
management has continued to discuss with OTS personnel the level of reserves
to be required. Among other things, management has argued that (i) the amount
of additions to the General Valuation Allowance ("GVA") suggested by the
examination team with respect to non-performing single family mortgage loans
is excessive because the Savings Banks use an asset-specific reserve
methodology for such loans that results in Specific Valuation Allowances (or
asset-specific reserves) against such loans in amounts that are conservative
by industry standards and (ii) a dollar number for reserve additions as of
June 30, 1997 cannot be determined as of March, 1997 (as the examination staff
attempted to do) because the portfolio has changed from March to the end of
June, 1997 as a result of settlements, recoveries and revised valuations
associated with migrations of loans to real estate owned. The OTS has
disagreed with some of management's arguments, but has agreed not to require
additions to the GVA at this time. There can be no assurance that the OTS will
not require additional reserves following future examinations. It is likely
that the non-traditional nature of the Savings Banks' activities (in terms of
both funding sources and investments) will cause the Savings Banks to be
subject for the foreseeable future to heightened regulatory scrutiny.
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The following table sets forth information with respect to the Savings
Banks' allowances for losses by category of loan:
ALLOWANCES FOR LOSSES BY LOAN CATEGORY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------- ------------------------------------------
% OF % OF % OF % OF
1997 TOTAL 1996 TOTAL 1995 TOTAL 1994 TOTAL
------- ----- ------- ----- ------- ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Category:
Real estate......... $22,914 32.7% $24,051 64.0% $ 9,830 38.3% $6,948 90.2%
Non-real estate..... 6,756 9.7% 7,885 21.0% 407 1.6% 322 4.2%
Discounted Loans.... 40,373 57.6% 5,619 15.0% 15,414 60.1% 431 5.6%
------- ----- ------- ----- ------- ----- ------ -----
Total Allowances.. $70,043 100.0% $37,555 100.0% $25,651 100.0% $7,701 100.0%
======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
The following table sets forth an analysis of activity in the Savings Banks'
allowance for losses during the periods indicated:
ACTIVITY IN THE ALLOWANCES FOR LOSSES(1)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ---------------------------
1997(1) 1996 1995 1994
-------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period...... $37,555 $ 25,651 $ 7,701 $ 4,314
Provision for loan losses......... (1,424) 16,549 4,266 2,173
Allocation from purchased loan
discounts........................ 47,958 10,752 19,007 2,809
Charge-offs:(1)
Real estate..................... 11,482 14,336 5,096 1,620
Non-real estate................. 2,851 2,883 308 46
------- -------- -------- -------
Total charge-offs............. 14,333 17,219 5,404 1,666
Recoveries:
Real estate..................... (271) (1,735) (81) (71)
Non-real estate................. (16) (87) -- --
------- -------- -------- -------
Total Recoveries.............. (287) (1,822) (81) (71)
------- -------- -------- -------
Net charge-offs (recoveries).... 14,046 15,397 5,323 1,595
------- -------- -------- -------
Balance, end of period............ $70,043 $ 37,555 $ 25,651 $ 7,701
======= ======== ======== =======
Net charge-offs (recoveries) as a
percentage of average loan
portfolio........................ 2.0% 3.6% 2.7% 1.7%
======= ======== ======== =======
</TABLE>
- --------
(1) In establishing charge-offs for Discounted Loans, the OTS treats a
Discounted Loan as if it was originated by the Savings Banks and requires
a charge-off from the unpaid principal balance to the fair value of a
Discounted Loan even though the loan was acquired at a substantial
discount from its unpaid principal balance. This results in large charge-
offs.
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<PAGE>
The table below sets forth the delinquency status of the Company's Non-
Discounted Loans at the dates indicated:
DELINQUENCY EXPERIENCE FOR NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------
1997 1996 1995 1994
------------------ ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
-------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period of Delinquency:
31-60 days............ $ 25,122 5.5% $ 7,613 3.3% $ 3,726 1.3% $ 4,513 2.3%
61-90 days............ 13,932 3.0 7,204 3.1 3,037 1.1 2,202 1.1
91 days or
more(1)(2)........... 68,328 14.8 54,524 23.7 12,679 4.5 11,632 6.0
-------- ---- ------- ------- ------- --- ------- ---
Total loans
delinquent......... $107,382 23.3% $69,341 30.1%(3) $19,442 6.9% $18,347 9.4%
======== ==== ======= ======= ======= === ======= ===
</TABLE>
- --------
(1) All loans delinquent 90 days or more were on nonaccrual status.
(2) The increase in 1996 is primarily due to Inherited Loans, Sub-Prime Auto
Loans and purchased sub-performing residential loans. The increase in the
first quarter of 1997 is primarily due to the acquisition of a large
portfolio of Discounted Loans in the fourth quarter of 1996.
(3) Increase in Percent of Portfolio reflects the securitization and sale of
approximately $259.9 million of the Company's performing loans in the
fourth quarter of 1996.
PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon and
consist of approximately 18,000 square feet of office space leased from a
corporation owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn, for an
aggregate annual rental of approximately $276,000 plus a portion of the
expenses incurred by the lessor in connection with the operation of the
building. The lease expires December 31, 2001. The Savings Banks' sublease
approximately 8,000 square feet of office space in two locations in Portland,
Oregon from the Company for an aggregate annual rental in 1997 of $4. The term
of the sub-lease is year to year. The Savings Banks' lease their branch
offices in Beverly Hills, California pursuant to a lease expiring February 29,
2000. First Bank leases office space for its merchant bankcard operations in
Calabasas, California pursuant to a lease expiring November 30, 1999. The
Company also leases office space in London, England and Paris, France. 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 pools of loans, minimizing
operating costs and increasing overall profitability. In addition to standard
industry software applications, management has developed proprietary
applications designed to provide decision support and automation of portfolio
tracking and reporting.
The proprietary software packages developed for asset resolution use
advanced financial models to support the resolution strategy and to 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
At August 31, 1997, the Company had 158 employees in the United States and
18 employees in Europe. The employees are not party to a collective bargaining
agreement, and management believes that it has good relations with its
employees. At August 31, 1997, WCC had 222 employees. See "--Servicing--The
Sub-Servicer."
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LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business, none of which are believed by management to be
material.
ENVIRONMENTAL MATTERS
The Company has acquired and will continue to acquire foreclosed real
estate. Accordingly, 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 with the
contamination. 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.
COMPETITION
The Company's principal competitors include other companies that specialize
in the acquisition of Discounted Loans, mortgage banking companies, mortgage
brokers, commercial banks, credit unions, thrift institutions, credit card
issuers and finance companies. Many of these institutions are substantially
larger and have considerably greater financial, technical and marketing
resources than the Company. The Company believes that it is able to compete on
the basis of providing prompt and responsive service and its ability to
analyze, effectively price and resolve Discounted Loans and Non-Discounted
Loans.
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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 Offering Memorandum. 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, 1996 and 1997, 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 OTS.
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 measured at the end
of each calendar quarter beginning 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 required
the Savings Banks to: (a) revise policies
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<PAGE>
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 were 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 required 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. The Savings Banks
delivered copies of their revised IAR Policies to the OTS prior to the
required date of October 31, 1996. 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. Management of the
Savings Banks implemented the IAR system by the required date of October 31,
1996.
The Orders also 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.
The Orders also required 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. The Savings Banks
delivered copies of their revised ALLL Policies to the OTS prior to the
required date of October 31, 1996. In addition, the Orders required 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 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 which the Savings
Banks have submitted to date.
The Orders also required that the Savings Banks revise and submit to the OTS
their loan purchase policies and procedures, certain pricing models and other
reports (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. The
Savings Banks delivered copies of their revised Loan Purchase Policies to the
OTS prior to their required dates. In addition, the Orders required 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 Loan Purchase
Policies. 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 required that the Savings Banks submit to the OTS a management
plan, a revised business plan, a revised audit policy and an amended
accounting policy (such policies being the "Other Policies") that require
management to establish and adhere to appropriate guidance and procedures for,
among other things, augmenting
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<PAGE>
the depth of the management team, specifying business strategies, ensuring a
high standard of audit control and integrity of records and providing 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. The Savings Banks delivered copies of their revised
Other Policies to the OTS prior to their required dates.
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.
The Savings Banks have implemented numerous actions to address the
requirements of the Orders, including (i) hiring additional management
personnel 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
internal asset review policies accordingly.
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.
The OTS recently completed its 1997 examination of the Savings Banks and
issued a Report of Examination that continues to be critical of the Savings
Banks in a number of significant respects and indicated that the Orders would
not be lifted. The 1997 Report of Examination characterized asset quality as
"poor" and expressed concern with, among other things (i) the sale of
substantially all of the Savings Banks' Non-Discounted Loans and the
acquisition of Discounted Loans and their impact on earnings and future loss
provisions, (ii) the Savings Banks' procedures for acquiring and servicing
loans, (iii) the policies and procedures concerning allowances for loan and
lease losses and hedging transactions, (iv) the methods for measuring and
monitoring interest rate risk and (v) recordkeeping and systems for financial
and other reporting. The 1997 Report of Examination also indicated that (i)
the Savings Banks had not adequately demonstrated that the servicing fees
charged to the Savings Banks by WCC were comparable to fees charged by non-
affiliated parties, (ii) the Savings Banks' books and records continued to be
deficient in several respects, (iii) First Bank's merchant bankcard operations
reflected certain deficiencies and (iv) the Savings Banks' loan loss policy
was not adequately supported or documented. As a result, the Savings Banks
were found not to be in compliance with the provisions of the order covering
bankcard operations, transactions with affiliates, allowance for loan and
lease losses and accounting books and records and the Savings Banks were
directed to remedy the deficiencies in a timely manner.
As part of its examination of Girard, the OTS indicated that, based on
Girard's portfolio as of March 31, 1997, Girard should increase its provision
for loan losses and reserves for real estate owned to $27.0 million effective
as of June 30, 1997. Since completion of the 1997 examination, Girard's
management has continued to discuss with OTS personnel the level of reserves
to be required. Among other things, management has argued that (i) the amount
of additions to the General Valuation Allowance ("GVA") suggested by the
examination team with respect to non-performing single family mortgage loans
is excessive because the Savings Banks use an asset-specific reserve
methodology for such loans that results in Specific Valuation Allowances (or
asset-specific reserves) against such loans in amounts that are conservative
by industry standards and (ii) a dollar number for reserve additions as of
June 30, 1997 cannot be determined as of March, 1997 (as the examination
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staff attempted to do) because the portfolio has changed from March to the end
of June, 1997 as a result of settlements, recoveries and revised valuations
associated with migrations of loans to real estate owned. The OTS has
disagreed with some of management's arguments, but has agreed not to require
additions to the GVA at this time. There can be no assurance that the OTS will
not take such actions following future examinations. It is likely that the
non-traditional nature of the Savings Banks' activities (in terms of both
funding sources and investments) will cause the Savings Banks to be subject
for the foreseeable future to heightened regulatory scrutiny.
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 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. 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"), 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
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<PAGE>
engaged in securities underwriting or market making. The Company recently
filed an application with the OTS to merge First Bank and Girard, which would
enable the Company to be treated as a unitary savings and loan holding
company. Although the OTS has indicated in discussions with management that it
would permit the merger of First Bank and Girard, there can be no assurance as
to whether or when such merger will be consummated.
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 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 and the Savings Banks
comply with the Orders.
In connection with the 1997 examination, the OTS indicated that the capital
level of Girard was less than satisfactory and the capital level of First Bank
was not adequate in view of their risk profiles, despite the fact that the
Savings Banks had capital levels that qualified them as "well capitalized"
under OTS regulatory capital requirements. The OTS also suggested in the
Report of Examination that the Savings Banks' current capital requirements may
not be appropriate given the deficiencies noted in the examination. Following
the 1997
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examination, the Saving Banks' management had further discussions with the OTS
relating to capital levels at the Savings Banks, in which the OTS indicated
that the dollar amount of capital maintained by the Savings Banks as of March
31, 1997 would be viewed as satisfying the minimum capital requirements for
the immediate future and that the Company would not be required to inject
additional capital at this time. Notwithstanding the foregoing, the OTS may
review this decision at any time and could impose additional capital
requirements on the Savings Banks in the future.
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 June 30, 1997, 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 June 30, 1997.
The OTS promulgated a regulation that requires that an interest-rate risk
component be included in the risk-based capital regulation. However, the
effective date of this regulation has been delayed. Under the regulation, 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 regulation been in effect at June 30, 1997, the Savings Banks'
capital ratios would not have been affected.
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
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("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
institution's primary federal banking regulator, resulting in nine assessment
classifications. Deposit insurance premium assessment rates currently range
from .04% 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 amount to be determined from time to time 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
1980s and early 1990s, 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. Based on the Savings Banks' deposits as of March 31, 1995, the one-
time special assessment 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")
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 depend 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,
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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) "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 June 30,
1997, 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
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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 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 benefitting 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
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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 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
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. 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" consist of certain housing and consumer-related assets on a
monthly basis in at least nine out of every 12 months. As of June 30, 1997,
the qualified thrift investments of the First Bank and Girard were
approximately 63.0% and 85.6%, 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 June 30, 1997, First Bank's and Girard's unimpaired capital and
surplus amounted to approximately $14.1 million and approximately $36.1
million, respectively, resulting in a general loans-to-one borrower limitation
of approximately $2.1 million and approximately $5.4 million, respectively
under applicable laws and regulations.
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. 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,
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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 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.
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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 August 31, 1997:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
Andrew A. Wiederhorn............. 31 Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer
Lawrence A. Mendelsohn........... 36 President and Director
Sheryl Anne Morehead............. 44 Executive Vice President, S&L Group and
Chief Executive Officer of the Savings
Banks
Chris Tassos..................... 40 Executive Vice President and Chief
Financial Officer
Phillip D. Vincent............... 43 Executive Vice President, Loan Servicing
Bo G. Aberg...................... 48 Senior Vice President, Europe
Donald J. Berchtold.............. 51 Senior Vice President, Administration
Kenneth R. Kepp.................. 41 Senior Vice President, Operations
Glenn J. Ohl..................... 42 Senior Vice President and Chief Financial
Officer of WFC
Peter O'Kane..................... 31 Senior Vice President, Loan Acquisitions
Don H. Coleman................... 58 Director
Philip G. Forte.................. 33 Director
David Dale-Johnson............... 49 Director
</TABLE>
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded WCC in 1987 and
continues to serve as the Chief Executive Officer of WCC and certain of its
affiliates. 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. Mr.
Mendelsohn also is the Vice President of WCC and certain of its affiliates.
From February 1993 until October 1996 Mr. Mendelsohn was Executive Vice
President of WCC and certain of its affiliates. 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.
Sheryl Anne Morehead is Executive Vice President, S&L Group of the Company
and Chief Executive Officer of the Savings Banks. Ms. Morehead was Senior Vice
President, S&L Group of the Company and Chief Executive Officer of the Savings
Banks from November 1996 until June 1997. From December 1993 until October
1996, Ms. Morehead was the Chief Credit Officer/Chief Operating Officer of
First Los Angeles Bank/San Paoulo Bank Group, a commercial banking
institution. From August 1990 until December 1993, Ms. Morehead was the Chief
Credit Officer/Executive Vice President of First Federal Bank of Santa Monica,
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 Executive Vice President and Chief Financial Officer of the
Company. Mr. Tassos was Senior Vice President and Chief Financial Officer of
the Company from October 1996 until June 1997. 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
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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 Executive Vice President, Loan Servicing of the
Company. Mr. Vincent was Senior Vice President, Loan Servicing of the Company
from October 1996 until June 1997. 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.
Bo G. Aberg is 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 Senior Vice President, Administration. From March
1992 until October 1996 Mr. Berchtold was Senior Vice President,
Administration of WCC and its affiliates. From February 1991 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.
Kenneth R. Kepp is Senior Vice President, Operations. From November 1991
until October 1996 Mr. Kepp was the Senior Vice President--Operations of WCC
and its affiliates. 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.
Glenn J. Ohl is Senior Vice President and Chief Financial Officer of WFC.
Mr. Ohl was Chief Financial Officer of WFC from November 1996 until June 1997.
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 Senior Vice President, Loan Acquisitions. Mr. O'Kane was
Vice President, Loan Acquisitions from October 1996 until June 1997. From May
1994 until October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions
of WCC and its affiliates. 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.
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
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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 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.
OTHER KEY PERSONNEL
Stuart Adair is 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.
R. Scott Stevenson is 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
The Audit Committee, which consists of a majority of independent directors
who are not affiliated with the Principal Shareholders, 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
The Company's Board of Directors is divided into three classes. Directors of
each class are 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. Philip G. Forte's term expires in 2000, Andrew A. Wiederhorn's and
Lawrence A. Mendelsohn's terms expire in 1999, and Don H. Coleman's and David
Dale-Johnson's terms expire in 1998.
COMPENSATION OF DIRECTORS
The Company pays its non-employee directors a per meeting fee of $1,000 for
each board meeting and a fee of $100 per hour for each committee meeting
attended which is not on a regularly scheduled meeting date. Under the
Company's Stock Incentive Plan, on the last trading day of each calendar
quarter, the Company automatically grants each non-employee director an option
to purchase shares of common stock equal to $6,250 divided by the fair market
value per share of the common stock on the date of grant.
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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. Neither David
Dale-Johnson nor Don Coleman participated in the compensation decisions
relating to Messrs. Wiederhorn's and Mendelsohn's base salary for fiscal 1996
and 1997. Messrs. Wiederhorn and Mendelsohn actively participated in such
decisions.
As noted under "Business-Properties," the Company leases office space for
its corporate headquarters from a corporation owned by Andrew A. Wiederhorn
and Lawrence A. Mendelsohn. The lease agreement provides for an aggregate
annual rent payment in 1997 of approximately $276,000 and expires December 31,
2001. In addition to base rent, the Company is required to pay its
proportionate share of operating expenses incurred by the lessor in connection
with the operations of the building. Girard and First Bank sub-lease
approximately 8,000 sq. ft. of office space in two locations from the Company
for an aggregate annual rental payment in 1997 of $4. The term of the sub-
lease is year-to-year.
On December 24, 1996, certain executive officers and directors exchanged
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 owned 94.9% of the
capital stock of Girard and First Bank), for 5,447,901 shares of common stock
of the Company.
The Company is a party to a loan servicing agreement with WCC pursuant to
which WCC acts as sub-servicer for the Company and provides loan portfolio
management services, including billing, portfolio administration and
collection services for the Company's pools of loans. The Company pays WCC a
servicing fee equal to or below prevailing market rates for each pool of loans
that WCC is servicing for the Company. The Company has the option at any time
after November 15, 1998 to acquire WCC's servicing operations, including its
computer systems and software (the "Servicing Transfer"), provided that the
Company or one of its subsidiaries has obtained the appropriate regulatory
approvals and licenses to service loans. The Company also may request that the
Servicing Transfer occur on an earlier date, provided that the foregoing
conditions are met, but WCC has no obligation to effect the Servicing Transfer
prior to November 15, 1998. The Servicing Transfer will occur automatically on
November 15, 1999, unless prohibited. Upon the effectiveness of the Servicing
Transfer, the Company is expected to terminate its servicing arrangement with
WCC and begin servicing loans, through its subsidiary, Wilshire Servicing
Company, for its own account and for the account of certain unaffiliated third
parties. In addition, upon the effectiveness of the Servicing Transfer, WCC
will cease servicing loans for itself and the Company will begin servicing
WCC's loans for a fee equal to the Company's costs for such servicing. Since
WCC has pledged certain of the servicing rights owned by it to a third party
creditor, the transfer of the servicing of those loans to the Company on the
effectiveness of the Servicing Transfer may require approval by that creditor.
Each of the Savings Banks is a party to a loan servicing agreement 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. It is anticipated that the
Savings Banks will terminate their agreements with WCC upon the effectiveness
of the Servicing Transfer, at which time the Savings Banks will enter into an
agreement with the Company pursuant to which the Company will provide similar
services to the Savings Banks.
While the Company is obtaining necessary regulatory approvals, WCC is
originating residential mortgage loans for the Company's account through its
correspondent relationships and transferring the newly-originated loans to the
Company, which simultaneously provides the funding for those loans.
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The Company and WCC and its private affiliates are parties to a
Administrative Services Agreement pursuant to which WCC and its private
affiliates (Messrs. Wiederhorn and Mendelsohn are the sole shareholders of WCC
and its private affiliates) and the Company have agreed to provide certain
services to each other, including, among other things, certain financial
reporting functions, legal compliance, banking, risk management and
operational and strategic services. The agreement provides for the payment of
a market rate fee plus reimbursement of any out-of-pocket expenses for any
services rendered by one party to another. The initial term of the agreement
expires on December 31, 1997, subject to renewal for successive one-year
periods.
Messrs. Wiederhorn and Mendelsohn are the sole shareholders of WCC. Messr.
Wiederhorn is also the sole director of WCC. While the Company is in the
process of obtaining the necessary licensing approvals for its servicing
operations, certain executive officers of the Company, including Mr.
Wiederhorn, Mr. Mendelsohn, Kenneth Kepp, Donald Berchtold, Chris Tassos and
Phillip Vincent, are continuing to serve as executive officers of WCC and
receive minimal compensation from WCC. Following receipt of the necessary
licensing approvals, only Messrs. Wiederhorn and Mendelsohn will continue to
be executive officers of WCC.
In the first quarter of 1997, WCC assigned the servicing rights to a
portfolio of home equity loans, second lien mortgages, consumer loans and
mortgage-backed securities (the "Institutional Portfolio") to the Company.
Thereafter, the Company purchased the Institutional Portfolio from a major
institutional investor at a discount that resulted in the Company's receipt of
a service fee of approximately $5.6 million, the recognition of which is being
deferred and amortized over the life of the Institutional Portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Matters."
The Company has purchased mortgage and other loans from WCC. The 13% Notes
Indenture (as defined herein) contains an exception to the prohibition on
transactions with affiliates for purchases on or before March 31, 1997 of loan
portfolios acquired by an affiliate of the Company after July 31, 1996, where
the purchase price does not exceed the lower of two independent bids for the
acquired loan portfolios. Management believes that the Company's loan
purchases were made in compliance with the 13% Notes Indenture.
At June 30, 1997, WCC had outstanding indebtedness of approximately $108.9
million, which was incurred to finance its own growth and to provide funds to
the Principal Shareholders to enable them to acquire the Savings Banks and
fund their growth. Substantially all of WCC's indebtedness is recourse debt
that is secured by pledges of its servicing rights and is personally
guaranteed by the Principal Shareholders. If the Principal Shareholders were
required repay WCC's indebtedness, the Principal Shareholders may need to sell
a significant portion of their shares of common stock in the Company to fund
such repayment, which could result in a Change in Control.
Effective July 31, 1997, the Company issued to an affiliate shares of a new
series of its preferred stock having an aggregate liquidation value of $27.5
million in exchange for the cancellation of certain accounts payable to that
affiliate aggregating approximately $27.1 million and cash in the amount of
approximately $400,000, resulting in an increase in stockholders' equity of
approximately $27.5 million. See "Recent Developments." The holders of the
preferred stock will have a preference with respect to payment of dividends
and distributions on liquidation. Dividends on the preferred stock will be
payable in additional shares of preferred stock rather than cash. The Company
will have the option, at any time, to call the preferred stock at its
liquidation value subject to certain limitations contained in the indenture
relating to 13% Notes and the Indenture relating to the Notes.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by the
Company for services rendered during the year ended December 31, 1996 to the
Chief Executive Officer of the Company, and to each of the four other most
highly compensated executive officers of the Company whose total cash
compensation for the year ended December 31, 1996 exceeded $100,000 (the
"Named Executive Officers").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS (#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn
Chairman, Chief
Executive
Officer, Secretary and
Treasurer.............. 1996 65,000(1) -- 730,000 --
Lawrence A. Mendelsohn
President.............. 1996 73,494(1) -- 365,000 --
David Spahlinger(2)
President, First Bank.. 1996 260,401 -- -- --
R. Scott Stevenson
President, Savings
Banks.................. 1996 136,801 40,000(3) -- 81,370(4)
</TABLE>
- --------
(1) Mr. Wiederhorn and Mr. Mendelsohn elected in the past to receive minimal
compensation from WCC and other non-public affiliates to maintain capital
in WCC and the other non-public affiliates and have received shareholder
loans from WCC to fund their investment in the Savings Bank and certain
other expenses.
(2) Mr. Spahlinger left the employment of First Bank in October 1996.
(3) Annual discretionary bonus paid by the Savings Banks. The amount of annual
discretionary bonus was determined by the board of directors of the
Savings Banks.
(4) Includes relocation bonus and sick leave payout.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning stock options granted by
the Company during the year ended December 31, 1996 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS/SARS ANNUAL RATES OF
NUMBER OF GRANTED TO STOCK PRICE
SECURITIES EMPLOYEES IN APPRECIATION FOR
UNDERLYING YEAR ENDED EXERCISE OR OPTION TERM(1)
OPTIONS/SARS DECEMBER 31, BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) 1996 ($/SH) DATE 5% 10%
- ---- ------------ ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 730,000 67% 11.4 (2) $4,097,000 $11,367,000
Lawrence A. Mendelsohn.. 365,000 33% 11.43 (2) $2,001,000 $ 5,573,000
David Spahlinger........ -- -- -- -- -- --
R. Scott Stevenson...... -- -- -- -- -- --
</TABLE>
- --------
(1) 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 the rules of the
Securities and Exchange Commission. They do not represent the Company's
estimate or projection of future prices of the common stock.
(2) December 24, 2001 for the incentive stock options (19,047 shares for Mr.
Wiederhorn and 19,047 shares for Mr. Mendelsohn) and December 24, 2006 for
the non-qualified stock options (710,953 shares for Mr. Wiederhorn and
345,953 shares for Mr. Mendelsohn).
EMPLOYMENT AGREEMENTS
The Company has entered into substantially similar employment agreements,
effective November 1, 1996, with Andrew A. Wiederhorn (as Chief Executive
Officer) and Lawrence A. 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 to 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.
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Each agreement provides for an annual base salary of $300,000, which may be
increased, but not decreased, by the Compensation Committee of the Board of
Directors, and an annual bonus. The bonuses 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 equally in the first $400,000 of any such bonus and two-
thirds and one-third, respectively, of any additional bonus amount. In
addition, the agreements provide that Mr. Wiederhorn and Mr. Mendelsohn may
participate in the Company's Incentive Stock Plan. See "--Incentive Stock
Plan."
Each 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 termination of
employment, the Company will continue to indemnify 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.
Each agreement may be terminated by the Executive for good reason at any
time or with or without good reason during the change in control protection
period (if a change in control occurs) or by the Company at any time with or
without cause. If the Executive terminates his employment with the Company
under these circumstances or if the Executive is terminated without cause or
the Executive's employment terminates as a result of the Company giving notice
of nonextension of the Employment Term, the Executive 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 Company's incentive stock plan (the "Stock Plan") is intended 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"),
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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.
Administration of the Plan
The Stock Plan is 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 1,825,000 shares of the Company's common stock, par value $.01
per share (the "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 selects 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).
Director Options
On the last trading day of each calendar quarter, 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 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.
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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.
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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PRINCIPAL STOCKHOLDERS
The following table shows as of August 31, 1997 the beneficial ownership of
common stock with respect to (i) each person who was known by the Company to
own beneficially more than 5% of the outstanding shares of the Company's
common stock, (ii) each director and nominee for director, (iii) each
executive officer named in the Summary Compensation Table, and (iv) directors
and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER(1) OF BENEFICIAL OWNERSHIP CLASS
------------------- ----------------------- ----------
<S> <C> <C>
Andrew A. Wiederhorn................. 4,352,131(2) 52.44
Lawrence A. Mendelsohn............... 2,178,330(3) 27.45
Bo G. Aberg.......................... 5,000(4) *
Donald J. Berchtold.................. 16,417(5) *
Kenneth E. Kepp...................... 9,245(6) *
Sheryl Anne Morehead................. 5,000(4) *
Chris Tassos......................... 14,761(7) *
Phillip D. Vincent................... 14,285(8) *
Glenn J. Ohl......................... 7,857(4) *
Peter O'Kane......................... 13,333(9) *
Don H. Coleman....................... 23,273(10) *
Philip G. Forte...................... 5,768(11) *
David Dale-Johnson................... 24,225(10) *
Wellington Management Company,
LLP(12)............................. 801,000 10.58
All executive officers and directors
as a group (11 persons)............. 6,669,625 76.29
</TABLE>
- --------
(1) The address for each stockholder, other than Wellington Management
Company, LLP is c/o Wilshire Financial Services Group Inc., 1776 SW
Madison Street, Portland, OR 97205. The address for Wellington Management
Company, LLP is 75 State Street, Boston, Massachusetts 02109.
(2) Includes 5,004 shares of common stock held by his minor children. Also
includes 730,000 shares of common stock which may be acquired upon the
exercise of options.
(3) Includes 70,000 shares of common stock held by a partnership controlled
by Mr. Mendelsohn and his spouse. Also includes 365,000 shares of common
stock which may be acquired upon the exercise of options.
(4) Includes 5,000 shares of common stock which may be acquired upon the
exercise of options.
(5) Includes 2,571 held by his spouse and 952 shares held by his minor
children. Also includes 8,133 shares of common stock which may be
acquired upon the exercise of options.
(6) Includes 6,845 shares of common stock which may be acquired upon the
exercise of options.
(7) Includes 4,761 shares held jointly with his spouse and 10,000 shares of
common stock which may be acquired upon the exercise of options.
(8) Includes 3,333 shares held jointly with his spouse and 952 shares held by
his minor children. Also includes 10,000 shares of common stock which may
be acquired upon the exercise of options.
(9) Includes 8,000 shares of common stock which may be acquired upon the
exercise of options.
(10) Includes 12,051 shares of common stock which may be acquired upon the
exercise of options.
(11) Includes 4,816 shares of common stock which may be acquired upon the
exercise of options.
(12) Based upon information obtained from a Schedule 13G filed with the
Securities and Exchange Commission on or about April 9, 1997.
* less than one percent
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a discussion of certain relationships and related transactions see
"Compensation Committee Interlocks and Insider Participation."
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DESCRIPTION OF NOTES
The Old Notes were and the New Notes will be issued pursuant to an Indenture
(the "Indenture") between WFSG and Bankers Trust Company, as trustee (the
"Trustee"), a form of which is available upon request to the Company. 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. All references to the term "Notes" as
used in this summary refers to the Old Notes and New Notes. The term "Company"
as used in this summary refers only to WFSG and does not include WFSG's
subsidiaries. Whenever sections or defined terms of the Indenture are referred
to, such sections or defined terms are hereby incorporated herein by such
reference.
GENERAL
The Notes will be general unsecured senior obligations of the Company
limited in aggregate original principal amount to $100 million and will mature
on August 15, 2004 (the "Stated Maturity"). The Notes will rank pari passu in
right of payment with all existing and future unsubordinated indebtedness of
the Company (including the 13% Notes) and will be issued in registered form
only, without coupons, 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 August 15 and February 15 of each year (each an
"Interest Payment Date"), commencing February 15, 1998 to the holders of
record at the close of business on August 1 or February 1 (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 the Company 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 the Company is a
holding company that currently conducts substantially all of its operations
through its Subsidiaries, its right 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 any 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 of
such creditors, other than the Company, include substantial obligations with
respect to deposits and other borrowings. Additionally, distributions to the
Company 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."
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes offered hereby will be
represented by a single permanent Global Note 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 under "Certificated Notes."
Notes that are (i) originally issued to or transferred to institutional
"accredited investors" (other than QIBs) (as such terms are defined under
"Transfer Restrictions") or (ii) issued as described below under "Certificated
Notes" will be issued in registered, definitive, certificated form. Upon the
transfer to a QIB of certificated Notes initially issued to an institutional
"accredited investor" (other than a QIB), such certificated Notes may, unless
the Global Note has previously been exchanged for certificated Notes, be
exchanged for an interest in the Global Note representing the principal amount
of the Notes being transferred.
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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 Initial Purchaser 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 (which may include the Initial
Purchaser), banks, trust companies, clearing corporations and certain other
organizations, some of whom (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 Note, the
Depositary will credit, on its book-entry registration and transfer system,
the principal amount of the Notes represented by the Global Note to the
accounts of participants. Ownership of beneficial interests in the Global Note
will be limited to participants or persons that hold interests through
participants and that are "QIBs" (as defined herein under "Transfer
Restrictions"). 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 Note.
So long as the Depositary, or its nominee, is the registered owner of the
Global Note, 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
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in the Notes represented by the Global Note 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 Note 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 Note 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 Note 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 Note as
shown on the records of the Depositary. The Company also expects that payments
by participants to owners of beneficial interests in such Global Note 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. The Notes are expected to be eligible for trading and settlement
through DTC's PORTAL System.
CERTIFICATED NOTES
Transferees of Notes who are not "QIBs" (as defined herein under "Transfer
Restrictions") may hold notes only in certificated form. In addition, if (i)
the Company notifies the Trustee in writing that the Depositary is no longer
willing, eligible or able to continue as Depositary under the Indenture and a
successor Depositary is not appointed in respect thereof within 90 days, or
(ii) the Company, at its option, notifies the Trustee in writing that it
elects to discontinue use of the Global Note, then, upon surrender of the
Global Note by the Depositary, the
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Company will issue definitive Notes in certificated form to each person that
the Depositary identified as being the beneficial holder of the related Notes.
All certificated Notes will be subject to the legend requirements described
herein under "Transfer Restrictions."
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 the Company 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 August 15, 2002 except as described
below. On or after that date, the Notes may be redeemed, in whole or in part,
at the following redemption prices (expressed as a percentage of the principal
amount) plus accrued and unpaid interest to (but excluding) the redemption
date, if redeemed during the 12-month period beginning August 15, of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002 106.50%
2003 103.25%
</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 August 15, 2000, with the Net Cash Proceeds received by the Company
from one or more public sales of Qualified Capital Stock at a redemption price
of 113.00% 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 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 September 30, 1997.
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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 issue Disqualified Capital Stock if, on
the date of such incurrence or issuance 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
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
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
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(13) Hedging Obligations directly related to: (i) Indebtedness
permitted to be incurred by the Company or any of its Subsidiaries
pursuant to the Indenture; (ii) loans held by the Company or any of 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. 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 Company or its Subsidiaries nor may such Liquid Assets be
used as reserves for any self-insurance maintained by the Company.
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
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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 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;
(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.
Limitation on Certain Asset Sales. (a) The Company will not, and will not
permit any of its Subsidiaries to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Subsidiary for such Asset Sale
is not less than the fair market value of the assets sold (as determined by
the Board of Directors of the Company, whose good faith determination will be
conclusive) and (ii) the consideration received by the Company or the relevant
Subsidiary in respect of such Asset Sale consists of at least 85% cash or cash
equivalents.
(b) If the Company or any Subsidiary engages in an Asset Sale, the Company
may, at its option, within 12 months after such Asset Sale, (i) apply all or a
portion of such Net Asset Sale Proceeds to the repayment of
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Indebtedness (other than Junior Indebtedness) of the Company or a Subsidiary
or (ii) invest (or enter into a legally binding agreement to invest) all or a
portion of such Net Asset Sale Proceeds in properties and assets to replace
the properties and assets that were the subject of the Asset Sale or in
properties and assets that will be used in businesses of the Company or its
Subsidiaries, as the case may be. If any such legally binding agreement to
invest such Net Asset Sale Proceeds is terminated, the Company may, within 90
days of such termination or within 12 months of such Asset Sale, whichever is
later, invest such Net Asset Sale Proceeds as provided in clause (i) or (ii)
(without regard to the parenthetical contained in such clause (ii) above). The
amount of such Net Asset Sale Proceeds not so used as set forth above in this
paragraph (b) constitutes "Excess Proceeds"; provided, however, that any
Excess Proceeds held at the Savings Banks shall be considered Excess Proceeds
only to the extent that such Excess Proceeds may be distributed to the Company
without restriction or approval by any regulatory authority (including the
OTS).
(c) When the aggregate amount of Excess Proceeds exceeds $5 million the
Company will, within 30 days thereafter, make an offer to purchase from all
Holders of Notes, on a pro rata basis, in accordance with the procedures set
forth in the Indenture, the maximum principal amount (expressed as a multiple
of $1,000) of Notes that may be purchased with the Excess Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued interest, if any, to the date such offer to purchase is consummated.
To the extent that the aggregate principal amount of Notes tendered pursuant
to such offer to purchase is less than the Excess Proceeds, the Company may
use such deficiency for general corporate purposes. If the aggregate principal
amounted of Notes validly tendered and not withdrawn by Holders thereof
exceeds the Excess Proceeds, the Notes to be purchased will be selected on a
pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds will be reset to zero.
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 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 transactions involving
aggregate payments in excess of $2,500,000, or in the event that no members of
the relevant 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
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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 series of transactions in which the
total amount involved does not exceed $125,000, or (vii) 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 initial public offering of the Company's Common Stock.
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
its 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, 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
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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 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.
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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;
(ii) failure by the Company to pay the principal of 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 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 file annually with the Trustee an officers' certificate
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 Securities and Exchange
Commission (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
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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.
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.
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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 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. Bankers Trust Company also
serves as trustee under the 13% Notes Indenture.
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.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger or consolidation)
(collectively, a "transfer") by the Company or a Subsidiary, directly or
indirectly, in one or a series of related transactions, to any person other
than the Company or a Subsidiary of (a) any Capital Stock of any Subsidiary,
(b) all or substantially all of the properties and assets of the Company and
its Subsidiaries representing a division or line of business or (c) any other
properties or assets of the Company or any Subsidiary, other than transactions
in the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" does not include any transfer of properties or assets (i)
that is governed by the provisions of the Indenture described under "Merger,
Consolidation and Transfer of Assets" or a merger, consolidation or other
transfer between WCC and the Company, (ii) between or among the Company and
its Subsidiaries pursuant to transactions that do not violate any other
provision of the Indenture, or (iii) the gross proceeds of which do not exceed
$1 million for any particular item. For purposes of this definition, the term
"ordinary course of business" shall include, without limitation, (x)
dispositions of collateral acquired by the Company through foreclosure or
otherwise and (y) dispositions of Investment Assets through securitization,
whole loan sales, foreclosure sales, compromise, discounted pay-off, real
estate investment trusts, other transactions.
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"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;
(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
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(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 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.
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"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 and 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 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
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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.
"Investment Assets" means mortgage loans, mortgage-backed securities,
leases, manufactured housing loans, home equity loans, automobile loans,
leases or installment contracts, credit card receivables, consumer
receivables, foreclosed real estate and other financial assets.
"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
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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 Asset Sale Proceeds" means, with respect to any Asset Sale, the
proceeds thereof 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), net of (a) brokerage commissions and other fees
and expenses (including fees and expenses of legal counsel and investment
banks) related to such Asset Sale, (b) provisions for all taxes payable as a
result of such Asset Sale, (c) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets that are the subject of
such Asset Sale, (d) amounts required to be paid to any person (other than the
Company or any Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale
and retained by the seller after such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"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.
"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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"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 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
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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
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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 a
Wholly-Owned Subsidiary.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Initial Purchaser entered into a registration rights
agreement (the "Registration Rights Agreement") on the date of original
issuance of the Notes pursuant to which the Company agreed, for the benefit of
holders of the Old Notes, that it would, at its cost (i) within 60 days of the
date of the original issuance of the Notes (the "Issue Date"), file a
registration statement (the "Exchange Offer Registration Statement") with the
Commission with respect to a registered offer to exchange the Old Notes for a
new series of notes (the "Exchange Notes"), which will have terms
substantially identical in all material respects to the Old Notes (except that
the Exchange Notes will not contain terms with respect to transfer
restrictions) and (ii) within 180 days of the Issue Date use its best efforts
to cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act. The registration statement to which this Prospectus
relates is the Exchange Offer Registration Statement. Upon the Exchange Offer
Registration Statement being declared effective, the Company will offer the
Exchange Notes in exchange for surrender of the Old Notes. The Company will
keep the Exchange Offer open for not less than 30 days (or longer if required
by applicable law) after the date of notice of the Exchange Offer is mailed to
the holders of the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will receive a New
Note having a principal amount at maturity equal to that of the surrendered
Note. Under existing interpretations of the staff of the Commission, the New
Notes would in general be freely transferable after the Exchange Offer without
further registration under the Securities Act; provided that broker-dealers
("Participating Broker-Dealers") receiving New Notes in the Exchange Offer
will have a prospectus delivery requirement upon their resales of such New
Notes. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the New
Notes (other than a resale of an unsold allotment from the original sale of
the Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Agreement, the Company is required to allow
Participating Broker-Dealers to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such New Notes
(other than a resale of an unsold allotment).
Each holder of the Old Notes who wishes to exchange such Notes for New Notes
pursuant to the Exchange Offer will be required to make certain
representations including representations that (i) any New Notes to be
received by it will be acquired in the ordinary course of its business, (ii)
it has no arrangement with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and (iii) it
is not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company, or if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the New Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any reason
the Exchange Offer is not completed within 180 days of the Issue Date, the
Company will, at its cost, (a) as promptly as practicable and in any event no
later than 60 days after such filing obligation arises, file with the
Commission a shelf registration statement covering resales of the Old Notes
(the "Shelf Registration Statement"), (b) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
within 45 days after such filing occurs and (c) use its best efforts to keep
effective the Shelf Registration Statement until two years after the date of
original issuance of the Old Notes or such shorter period that will terminate
when all of the Old Notes covered thereby have been so pursuant thereto or in
certain other circumstances. The Company will, in the event of the Shelf
Registration Statement, provide to each holder of the Old Notes copies of the
prospectus, which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement for the Old Notes has become
effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old
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Notes who sells such Old Notes pursuant to the Shelf Registration Statement
generally would be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Agreement which are applicable to such a holder (including
certain indemnification obligations). If, upon completion of the Exchange
Offer, the Initial Purchaser holds Old Notes acquired by it as part of the
initial distribution of the Old Notes, the Company, upon the request of the
Initial Purchaser, simultaneously with the delivery of the New Notes pursuant
to the Exchange Offer, shall issue and deliver to the Initial Purchaser, in
exchange for the Old Notes held by the Initial Purchaser, a like principal
amount of debt securities of the Company identical in all material respects to
the Old Notes and bearing the same CUSIP number as the Old Notes.
If the Company fails to comply with the above provisions or if any such
registration statement fails to become effective, then, as liquidated damages,
additional interest shall become payable in respect of the Old Notes as
follows:
(i) the Exchange Offer Registration Statement is not declared effective
on or prior to the 180th day following the Issue Date; or
(ii) the Exchange Offer is not consummated within 30 days after the date
on which the Exchange Offer Registration Statement was declared effective
by the Commission or a Shelf Registration Statement is not declared
effective on or prior to the 180th calendar day after the Issue Date; or
(iii) either (A) the Exchange Offer Registration Statement ceases to be
effective at any time prior to the time that the Exchange Offer is
consummated or (B) if applicable, the Shelf Registration Statement has been
declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of its effective date
(each such event referred to in clauses (i) through (iii) above, a
"Registration Default"), then the per annum interest rate on the Old Notes
will increase by 25 basis points following the 60-day period referred to in
clause (i) above, following the 30-day period or 180-day period referred to in
clause (ii) above, as the case may be, or in the case of clause (iii) above,
immediately following such Registration Default; and the per annum interest
rate will increase by an additional 25 basis points at the beginning of each
subsequent 30-day period in the case of clause (i), (ii) or (iii) above, or
90-day period in the case of clause (iv) above; provided, however, that in no
event will the per annum interest rate borne by the Notes be increased by more
than 150 basis points. Upon the filing of the Exchange Offer Registration
Statement, the consummation of the Exchange Offer or the effectiveness of the
Shelf Registration Statement, as the case may be, the interest borne by the
Old Notes from the date of such filing, consummation or effectiveness, as the
case may be, will be reduced to the original interest rate set forth on the
cover of this Offering Memorandum; provided, however, that, if after any such
reduction in interest rate, a different Registration Default occurs, the
interest rate may again be increased pursuant to the foregoing provisions.
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DESCRIPTION OF THE 13% NOTES
13% NOTES
General
The 13% Notes were issued under an indenture dated as of December 24, 1996
(the "13% Notes Indenture") among the Company and Bankers Trust Company, as
trustee. The 13% Notes were limited in aggregate principal amount to $75
million (plus up to $11,250,000 subject to the underwriter's over-allotment
option). The 13% Notes outstanding at March 31, 1997 totaled $84,250,000.
The 13% Notes bear interest at the rate of 13% per annum, payable semi-
annually in arrears on January 1 and July 1 of each year, commencing July 1,
1997, to the holders of record at the close of business on December 15 or June
15, as the case may be, next preceding the interest payment date. The 13%
Notes mature on January 1, 2004.
Optional Redemption
The 13% Notes may not be redeemed prior to January 1, 2002 except as
described below. On or after such date, the 13% Notes may be redeemed, in
whole or in part, at the following redemption prices (expressed as a
percentage of the principal amount) plus accrued and unpaid interest to (but
excluding) the redemption date, if redeemed during the 12-month period
beginning January 1, of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002.................................................... 106.50%
2003.................................................... 103.25%
</TABLE>
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the 13% Notes at any time and from time
to time until January 1, 1999, with the net cash proceeds received by the
Company from one or more public sales of qualified capital stock, at a
redemption price of 113% of the principal amount of the 13% Notes redeemed,
plus accrued and unpaid interest thereon; provided, however, that at least 65%
of the original aggregate principal amount of the 13% Notes must remain
outstanding after each such redemption.
Ranking
The 13% Notes are general unsecured obligations of the Company. Because the
Company is a holding company that currently conducts substantially all of its
operations through its subsidiaries, the right of the Company (and therefore
the right of the Company'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 the subsidiaries, including any claims of the
Company as a creditor to the extent such claims may be recognized. As a
result, the 13% Notes will be effectively subordinate to the claims of
creditors of the Company's subsidiaries.
Certain Covenants
The 13% Notes Indenture contains 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 to incur certain indebtedness
(not including secured indebtedness used to acquire or refinance the
acquisition of loans or other 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 the subsidiaries to make dividend and
other payments to the Company. The 13% Notes Indenture also restricts the
Company's ability to merge, consolidate or sell all of its assets.
122
<PAGE>
Events of Default
In the event of certain payment or other defaults with respect to the 13%
Notes, including defaults with respect to other indebtedness if 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, than the trustee or the holders
of not less than 25% in principal amount of the 13% Notes then outstanding may
declare all of the 13% Notes to be immediately due and payable.
123
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the acquisition, ownership and disposition of
the Notes. This discussion is a summary for general information only and does
not consider all aspects of U.S. federal income tax that may be relevant to
the purchase, ownership, and disposition of the Notes by a prospective
investor in light of his or her personal circumstances. This discussion also
does not address the federal income tax consequences of ownership of Notes not
held as capital assets within the meaning of Section 1221 of the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), or the federal income tax
consequences to investors subject to special treatment under the federal
income tax laws, such as dealers in securities or foreign currency, tax-exempt
entities, banks, thrifts, insurance companies, persons that hold the Notes as
part of a "straddle", a "hedge" against currency risk or a "conversion
transaction", persons that have a "functional currency" other than the U.S.
dollar, and investors in pass-through entities. In addition, this discussion
is generally limited to the tax consequences to initial holders. It does not
describe any tax consequences arising out of the tax laws of any state, local
or foreign jurisdiction.
This discussion is based upon the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. All of the
foregoing are subject to change, possibly on a retroactive basis and any such
change could affect the continuing validity of this discussion.
HOLDERS OF OLD NOTES CONSIDERING EXCHANGING THEIR OLD NOTES FOR NEW NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF FEDERAL
INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION TO THEIR PARTICULAR SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note that is (i) a citizen or resident
(as defined in Section 7701(b)(1) of the Code) of the United States, (ii) a
corporation organized under the laws of the United States or any political
subdivision thereof or therein, or (iii) an estate or trust, the income of
which is subject to U.S. federal income tax regardless of the source (a "U.S.
Holder"). Certain U.S. federal income tax consequences relevant to a holder
other than a U.S. Holder (a "Non-U.S. Holder") are discussed separately below.
Stated Interest
Interest on a Note will be taxable to a U.S. Holder as ordinary interest
income at the time it accrues or is received in accordance with such holder's
method of accounting for tax purposes.
Market Discount
If a Note is acquired at a "market discount," some or all of any gain
realized upon a sale or other disposition or payment at maturity, or some or
all of a partial principal payment, of such Note may be treated as ordinary
income, as described below. For this purpose, "market discount" is the excess
(if any) of the stated redemption price at maturity over the purchase price,
subject to a statutory de minimis exception. Unless a U.S. Holder has elected
to include the market discount in income as it accrues, any gain realized on
any subsequent disposition of such Note (other than in connection with certain
nonrecognition transactions) or payment at maturity, or some or all of any
partial principal payment with respect to such Note, will be treated as
ordinary income to the extent of the market discount that is treated as having
accrued during the period such Note was held.
The amount of the market discount treated as having accrued will be
determined either (i) on a ratable basis by multiplying the market discount
times a fraction, the numerator of which is the number of days the Note was
held by the U.S. Holder and the denominator of which is the total number of
days after the date such U.S. Holder acquired the Note up to and including the
date of its maturity, or (ii) if the U.S. Holder so elects, on a constant
interest rate method. A U.S. Holder may make that election with respect to any
Note but, once made, such election is irrevocable.
124
<PAGE>
In lieu of recharacterizing gain upon disposition as ordinary income to the
extent of accrued market discount at the time of disposition, a U.S. Holder of
a Note acquired at a market discount may elect to include market discount in
income currently, through the use of either the ratable inclusion method or
the elective constant interest method. Once made, the election to include
market discount in income currently applies to all Notes and other obligations
of the U.S. Holder that are purchased at a market discount during the taxable
year for which the election is made, and all subsequent taxable years of the
U.S. Holder, unless the Internal Revenue Service (the "Service") consents to a
revocation of the election. If an election is made to include market discount
in income currently, the basis of the Note in the hands of the U.S. Holder
will be increased by the market discount thereon as it is included in income.
Unless a U.S. Holder who acquires a Note at a market discount elects to
include market discount in income currently, such U.S. Holder may be required
to defer deductions for any interest paid on indebtedness allocable to such
Notes in an amount not exceeding the deferred income until such income is
realized.
Bond Premium
If a U.S. Holder purchases a Note and immediately after the purchase the
adjusted basis of the Note exceeds the sum of all amounts payable on the
instrument after the purchase date (other than qualified stated interest) the
Note has "bond premium." A U.S. Holder may elect to amortize such bond premium
over the remaining term of such Note (or, in certain circumstances, until an
earlier call date).
If bond premium is amortized, the amount of interest that must be included
in the U.S. Holder's income for each period ending on an interest payment date
or at stated maturity, as the case may be, will be reduced by the portion of
premium allocable to such period based on the Note's yield to maturity. If
such an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will receive a tax benefit from the
premium only in computing its gain or loss upon the sale or other disposition
or payment of the principal amount of the Note.
An election to amortize premium will apply to amortizable bond premium on
all Notes and other bonds, the interest on which is includable in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first
taxable year to which the election applies or thereafter acquired, and may be
revoked only with the consent of the Service.
Exchange Offer
The exchange of the Notes for Exchange Notes pursuant to the Exchange Offer
should not be a taxable exchange for federal income tax purposes. As a result,
there should be no federal income tax consequences to Holders exchanging the
Notes for the Exchange Notes pursuant to the Exchange Offer. The Company is
obligated to pay additional interest to the holders of Notes under certain
circumstances described above. Such payments should be taxable to U.S. Holders
at the time it accrues or is received in accordance with such holder's method
of accounting.
Sale, Exchange or Redemption of the Notes
Upon the disposition of a Note by sale, exchange or redemption, the U.S.
Holder will generally recognize gain or loss equal to the difference between
(i) the amount realized on the disposition (other than amounts attributable to
accrued interest) and (ii) the U.S. Holder's tax basis in the Note. A U.S.
Holder's tax basis in a Note generally will equal the cost of the Note (net of
accrued interest) to the U.S. Holder increased by amounts includable in income
as market discount (if the holder elects to include market discount on a
current basis) and reduced by any amortized bond premium and any payments
other than payments of qualified stated interest made on such Note.
Assuming the Note is held as a capital asset, such gain or loss (except to
the extent that the market discount rules otherwise provide) will generally
constitute capital gain or loss and will be long-term capital gain or loss if
the U.S. Holder has held such Note for longer than one year.
125
<PAGE>
Backup Withholding and Information Reporting
Under the Code, a U.S. Holder of a Note may be subject, under certain
circumstances, to information reporting and/or backup withholding at a 31%
rate with respect to cash payments in respect of interest or the gross
proceeds from dispositions thereof. This withholding applies only if the
holder (i) fails to furnish its social security or other taxpayer
identification number ("TIN") within a reasonable time after a request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report interest
properly, or (iv) fails, under certain circumstances, to provide a certified
statement, signed under penalty of perjury, that the TIN provided is its
correct number and that it is not subject to backup withholding. Any amount
withheld from a payment to a U.S. Holder under the backup withholding rules is
allowable as a credit (and may entitle such holder to a refund) against such
holder's U.S. federal income tax liability, provided that the required
information is furnished to the Service. Certain persons are exempt from
backup withholding, including corporations and financial institutions. Holders
of Notes should consult their tax advisors as to their qualification for
exemption from withholding and the procedure for obtaining such exemption.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note that is not a (i) a citizen or
resident of the United States, (ii) a corporation organized under the laws of
the United States or any political subdivision thereof or therein, or (iii) an
estate or trust, the income of which is subject to U.S. federal income tax
regardless of the source (a "Non-U.S. Holder").
This discussion does not deal with all aspects of U.S. federal income and
estate taxation that may be relevant to the purchase, ownership or disposition
of the Notes by any particular Non-U.S. Holder in light of that Holder's
personal circumstances, including holding the Notes through a partnership. For
example, persons who are partners in foreign partnerships and beneficiaries of
foreign trusts or estates who are subject to U.S. federal income tax because
of their own status, such as United States residents or foreign persons
engaged in a trade or business in the United States, may be subject to U.S.
federal income tax even though the entity is not subject to income tax on the
disposition of its Note.
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of the Note will be considered "U.S. trade or
business income" if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business or (ii) in the case of a resident of a
country which the United States has an income tax treaty, also attributable to
a permanent establishment (or to a fixed base) in the United States.
Stated Interest
Generally, any interest paid to a Non-U.S. Holder of a Note that is not
"U.S. trade or business income" will not be subject to United States tax if
the interest qualifies as "portfolio interest." Generally, interest on the
Notes will qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
voting stock of the Company and is not a controlled foreign corporation with
respect to which the Company is a "related person" within the meaning of the
Code, and (ii) the beneficial owner, under penalties of perjury, certifies
that the beneficial owner is not a United States person and such certificate
provides the beneficial owner's name and address.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding.
U.S. trade or business income will be taxed at regular U.S. rates rather than
the 30% gross rate. To claim the benefit of a tax treaty or to claim exemption
from withholding because the income is U.S. trade or business income, the Non-
U.S. Holder must provide a properly executed Form 1001 or 4224, as applicable,
prior to the payment of interest. The Forms 1001 and 4224 must be periodically
updated.
126
<PAGE>
Sale, Exchange or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a Note generally will not be subject to U.S. federal income tax,
unless (i) such gain is U.S. trade or business income, (ii) subject to certain
exceptions, the Non-U.S. Holder is an individual who holds the Note as a
capital asset and is present in the United States for 183 days or more in the
taxable year of the disposition, or (iii) the Non-U.S. Holder is subject to
tax pursuant to the provisions of U.S. tax law applicable to certain U.S.
expatriates.
Federal Estate Tax
Notes held (or treated as held) by an individual who is a Non-U.S. Holder at
the time of his death will not be subject to U.S. federal estate tax provided
that the individual does not actually or constructively own 10% or more of the
total voting power of all voting stock of the Company and income on the Notes
was not U.S. trade or business income.
Information Reporting and Backup Withholding
The Company must report annually to the Service and to each Non-U.S. Holder
any interest that is subject to withholding or that is exempt from U.S.
withholding tax pursuant to a tax treaty or the portfolio interest exception.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides.
In the case of payments of principal on the Notes by the Company to a Non-
U.S. Holder, the regulations provide that backup withholding and information
reporting will not apply to payments if the Holder certifies to its non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its paying agent has actual knowledge
that the holder is a United States person or that the conditions of any other
exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of Notes to or through the
United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner
certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the Holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of a Note to or through a non-U.S. office of a non-U.S. broker
that is not a U.S. related person will not be subject to information reporting
or backup withholding. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for U.S. federal income tax purposes, or (ii)
a foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of
a United States trade or business.
In the case of the payment of proceeds from the disposition of Notes through
a non-U.S. office of a broker that is either a U.S. person or a "U.S. related
person," regulations require information reporting on the payment, unless the
broker has documentary evidence in its files that the owner is a Non-U.S.
Holder and the broker has no knowledge to the contrary. Backup withholding
will not apply to payments made through foreign offices of a broker that is a
U.S. person or a U.S. related person (absent actual knowledge that the payee
is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
127
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities. The
Company has agreed that, for a period of 180 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented available to any
broker-dealer for use in connection with any such resale. In addition, until
, 1997, all dealers effecting transactions in the New Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the
resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of the New Notes and any commission or concessions received by any
such persons may be deemed to be an underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the holders of the Old Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holder of the securities (including
any broker-dealers) against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby is being passed on for the Company
by Proskauer Rose LLP, New York, New York.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company and its subsidiaries at
December 31, 1996 and 1995 and for the three years ended December 31, 1996,
1995 and 1994 included in this Offering Memorandum have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report herein.
Commencing with the fiscal year that began January 1, 1997, Arthur Andersen,
LLP, is serving as the Company's independent auditors. To date, Arthur
Andersen, LLP has not performed any audits of the financial statements or
issued any reports on the Company.
On April 13, 1997, the Company replaced Deloitte & Touche LLP as its
independent auditors with Arthur Andersen LLP. The decision to change auditors
was recommended by the Audit Committee of the Board of Directors and approved
by the Board of Directors. The decision was based on Arthur Andersen's work
with the Company in 1996 and early 1997, which included loan sale and
securitization structuring, domestic and international tax consulting,
international expansion planning and assisting the Company's savings and loan
128
<PAGE>
subsidiaries with their regulatory improvement activities. These services
resulted in a significant portion of the fees paid to all public accounting
forms during the past year. It was the Board's view that their appointment to
the role of independent accountants will enhance the cohesiveness and service
provided by one firm as the Company pursues its long-term goals and
objectives. Arthur Andersen LLP's election as the Company's independent
accountants was ratified at the annual meeting of stockholders of the Company
held on May 12, 1997.
During the past two years and the interim period from December 31, 1996
until April 3, 1997, there were no disagreements with Deloitte & Touche LLP
regarding any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The Auditors' Report for
the years ended December 31, 1996 and 1995 was unqualified with an emphasis
paragraph highlighting the Company's savings and loan subsidiaries' regulatory
agreements.
129
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--June 30, 1997
(unaudited) and December 31, 1996...................................... F-2
Consolidated Statements of Operations--Quarter Ended June 30, 1997 and
1996 and Six Months Ended June 30, 1997 and 1996 (unaudited)........... F-3
Consolidated Statements of Cash Flows--Quarter Ended June 30, 1997 and
1996 and Six Months Ended June 30, 1997 and 1996 (unaudited)........... F-4
Consolidated Statements of Stockholders' Equity--Six Months Ended June
30, 1997 (unaudited) and Years Ended December 31, 1996, 1995 and 1994.. F-6
Notes to Interim Consolidated Financial Statements...................... F-7
Independent Auditors' Report.............................................. F-8
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--December 31, 1996 and
1995................................................................... F-9
Consolidated Statements of Operations--Years Ended December 31, 1996,
1995 and 1994.......................................................... F-10
Consolidated Statements of Cash Flows--Years Ended December 31, 1996,
1995 and 1994.......................................................... F-11
Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1996, 1995 and 1994................................................ F-14
Notes to Consolidated Financial Statements.............................. F-15
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report.............................................. F-36
Consolidated Financial Statements:
Consolidated Statements of Operations for the Period from January 1,
1994 through November 8, 1994.......................................... F-37
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through November 8, 1994.......................................... F-38
Notes to Consolidated Financial Statements.............................. F-39
</TABLE>
F-1
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 39,712 $152,298
Mortgage backed securities available for sale, at
fair value......................................... 144,253 31,270
Mortgage backed securities held to maturity, at
amortized cost..................................... 20,190 21,724
Securities held to maturity, at amortized cost...... 7,437 7,429
Trading account securities.......................... 17,778 24,541
Loans, net.......................................... 196,472 176,026
Discounted loans, net............................... 395,829 206,740
Loans held for sale, net, at lower cost or market... 195,686 28,826
Stock in Federal Home Loan Bank of San Francisco, at
cost............................................... 4,881 2,958
Real estate owned, net.............................. 135,984 78,200
Leasehold improvements and equipment, net........... 1,130 317
Due from affiliate, net............................. 7,502 5,051
Accrued interest receivable......................... 7,247 3,517
Prepaid expenses and other assets................... 18,561 10,769
Deferred tax asset, net............................. 3,430 4,183
---------- --------
TOTAL........................................... $1,196,092 $753,849
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................ $ 445,333 $501,614
Short-term borrowings............................... 583,468 97,624
Notes payable....................................... 84,245 75,000
Accounts payable and other liabilities.............. 13,614 17,872
Deferred credits.................................... 505 717
---------- --------
Total liabilities................................. 1,127,165 692,827
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock..................................... -- --
Common stock........................................ 55,897 55,897
Retained earnings................................... 10,396 5,222
Unrealized loss on available-for-sale securities,
net................................................ 2,634 (97)
---------- --------
Total stockholders' equity........................ 68,927 61,022
---------- --------
TOTAL........................................... $1,196,092 $753,849
========== ========
</TABLE>
See notes to interim financial statements.
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans............................ $ 20,655 $ 11,527 $ 34,574 $ 20,436
Mortgage-backed securities....... 4,275 576 7,034 898
Securities and federal funds
sold............................ 1,244 304 2,184 617
--------- --------- --------- ---------
Total interest income.......... 26,174 12,407 43,792 21,951
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits......................... 6,647 5,736 13,654 10,633
Borrowings....................... 14,070 1,310 21,037 1,387
--------- --------- --------- ---------
Total interest expense......... 20,717 7,046 34,691 12,020
--------- --------- --------- ---------
NET INTEREST INCOME................ 5,457 5,361 9,101 9,931
PROVISION FOR ESTIMATED LOSSES ON
LOANS............................. 445 5,483 (1,424) 10,868
--------- --------- --------- ---------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR ESTIMATED LOSSES
ON LOANS........................ 5,012 (122) 10,525 (937)
--------- --------- --------- ---------
OTHER INCOME (LOSS):
Bankcard income.................. 1,747 1,691 3,391 3,275
Bankcard processing expense...... (1,152) (1,351) (2,330) (2,616)
Gain on sale of loans............ 11,216 -- 11,216 1,983
Loan fees and charges............ 219 433 451 632
Trading account-unrealized gain.. -- -- 14 1,601
Real estate owned, net........... 1,557 (75) 2,739 (115)
Servicing revenue................ 1,784 -- 1,944 --
Other, net....................... 215 119 661 246
--------- --------- --------- ---------
Total other income............. 15,586 817 18,086 5,006
--------- --------- --------- ---------
OTHER EXPENSES:
Compensation and employee
benefits........................ 3,609 752 6,651 1,538
FDIC insurance premiums.......... 293 221 523 387
Occupancy........................ 254 71 415 142
Professional services............ 649 43 962 297
Data processing and equipment
rentals......................... 90 69 153 124
Loan service fees and expenses
paid to affiliate............... 5,049 931 7,995 2,122
Other general and administrative
expenses........................ 1,841 438 2,994 766
--------- --------- --------- ---------
Total other expenses........... 11,785 2,525 19,693 5,376
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION......................... 8,813 (1,830) 8,918 (1,307)
INCOME TAX PROVISION (BENEFIT)..... 3,701 (805) 3,744 (1,279)
--------- --------- --------- ---------
NET INCOME (LOSS).................. $ 5,112 $ (1,025) $ 5,174 $ (28)
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Primary.......................... $ 0.68 $ (0.23) $ 0.68 $ (0.01)
Fully diluted.................... $ 0.66 $ -- $ 0.66 $ --
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary.......................... 7,570,000 4,370,081 7,570,000 3,623,132
Fully diluted.................... 7,775,729 -- 7,852,328 --
</TABLE>
See notes to interim financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1997 1996 1997 1996
--------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 5,112 $ (1,025) $ 5,174 $ (28)
Reconciliation of net income to net
cash (used in) provided by
operating activities:
Provision for estimated loan
losses.......................... 445 5,483 (1,424) 10,868
Depreciation and amortization.... 92 46 203 78
Gain on sale of real estate
owned........................... (1,838) (30) (3,111) (43)
Purchase of loans held for sale.. (162,032) -- (349,519) --
Proceeds from sale of loans held
for sale........................ 191,351 -- 191,351 --
Gain on sale of loans............ (11,216) -- (11,216) (1,983)
Amortization of discounts and
deferred fees................... (3,628) (764) (10,703) (2,244)
Amortization of deferred
credits......................... (116) (115) (212) (230)
FHLB stock dividend.............. (44) (26) (91) (44)
Change in:
Trading account securities....... (20) (29) 6,763 (7,092)
Accrued interest receivable...... 1,321 (784) (3,730) (1,504)
Prepaid expenses and other
assets.......................... (7,757) (864) (7,792) 475
Due from affiliate, net.......... (7,502) 16,555 (2,451) (2,816)
Due to affiliate, net............ (27,488) -- -- --
Deferred tax asset, net.......... 326 145 (1,154) (783)
Accounts payable and other
liabilities..................... (14,751) (1,989) (4,750) (938)
Minority interest................ -- (900) -- (600)
--------- -------- --------- ---------
Net cash provided by (used in)
operating activities.......... (37,745) 15,703 (192,662) (6,884)
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans.................. (129,508) (84,072) (313,905) (222,273)
Loan repayments, net of
originations...................... 14,202 16,271 36,621 20,843
Proceeds from sale of loans........ -- -- -- 23,568
Purchase of mortgage-backed
securities available for sale..... (13,939) -- (107,654) --
Repayments of mortgage-backed
securities available for sale..... 190 1,301 430 1,714
Proceeds from maturity of
investment securities held to
maturity.......................... -- -- -- 5,000
Purchase of mortgage-backed
securities held to maturity....... -- (1,846) -- (11,246)
Repayments of mortgage-backed
securities held to maturity....... 769 477 1,484 833
Purchase of securities and FHLB
stock............................. (1,833) (5,918) (1,833) (7,321)
Proceeds from sale of real estate
owned............................. 13,563 941 26,570 5,284
Purchases of leasehold improvements
and equipment..................... (400) (49) (445) (117)
--------- -------- --------- ---------
Net cash used in investing
activities (116,956) (72,895) (358,732) (183,715)
--------- -------- --------- ---------
</TABLE>
See notes to interim financial statements.
(Continued)
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in
deposits........................ (17,656) 67,564 (56,281) 129,538
Issuance of common stock......... -- 8,000 -- 17,750
Proceeds from short-term
borrowings...................... 338,903 84,295 699,049 195,145
Repayments of short-term
borrowings...................... (185,608) (115,005) (213,205) (141,855)
Proceeds from notes payable...... -- -- 9,245 --
--------- --------- --------- ---------
Net cash provided by
financing activities........ 135,639 44,854 438,808 200,578
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. (19,062) (12,338) (112,586) 9,979
CASH AND CASH EQUIVALENTS:
Beginning of quarter............. 58,774 26,799 152,298 4,482
--------- --------- --------- ---------
End of quarter................... $ 39,712 $ 14,461 $ 39,712 $ 14,461
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION--
Cash paid during the quarter for:
Interest......................... $ 16,855 5,730 $ 27,551 10,616
Income taxes..................... 650 -- 4,150 --
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned
acquired in settlement of
loans........................... 61,631 1,192 81,243 3,804
Equipment acquired through
capital lease................... -- -- 493 --
Transfer of securities from
available for sale to trading... -- -- -- 636
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for
common stock.................... -- -- -- 11,000
</TABLE>
See notes to interim financial statements.
F-5
<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
---------- ------ --------- ------- ------------ ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 366,288 $ 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 1,000 934,575 3,750 4,750
---------- ------ --------- ------- ------- ------ -------
BALANCE, December 31,
1994................... 1,000,000 1,000 1,300,863 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................... -- -- 1,300,863 6,800 255 (16) 7,039
Net income............. 4,967 4,967
Unrealized loss on
available-for-sale
securities--net of
tax................... (81) (81)
Exchange of subordi-
nated debt for
common stock.......... 1,606,618 11,000 11,000
Issuance of common
stock................. 4,662,519 38,097 38,097
---------- ------ --------- ------- ------- ------ -------
BALANCE, December 31,
1996................... -- -- 7,570,000 55,897 5,222 (97) 61,022
Net income (unau-
dited)................ 5,124 5,174
Unrealized gain on
available-for-sale
securities--net of tax
(unaudited)........... 2,731 2,731
---------- ------ --------- ------- ------- ------ -------
BALANCE, June 30, 1997
(unaudited)............ -- $ -- 7,570,000 $55,897 $10,396 $2,634 $68,927
========== ====== ========= ======= ======= ====== =======
</TABLE>
See notes to interim financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The consolidated financial statements of Wilshire Financial Services Group
Inc. and Subsidiaries (the "Company") are unaudited and should be read in
conjunction with the 1996 Annual Report on Form 10-K. A summary of the
Company's significant accounting policies is set forth in Note 1 to the
Consolidated Financial Statements in the 1996 Annual Report on Form 10-K.
In the opinion of management, all adjustments generally comprised of normal
recurring accruals necessary for fair presentations of the interim financial
statements have been included and all intercompany accounts and transactions
have been eliminated in consolidation. Operating results for the quarter ended
June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
Certain reclassifications of 1996 amounts were made in order to conform to
the 1997 presentation, none of which affect previously reported net income.
2. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
FINANCIAL INSTRUMENTS INVOLVING OFF-BALANCE SHEET RISK--In hedging the
interest rate exposure of a fixed-rate or lagging index asset, the Company may
create a hedge which matches the principal amortization of such an asset
against the maturity of the Company's liabilities generally by entering into
short sales or forward sales of U.S. Treasury securities, Government
securities, interest rate futures contracts or interest rate swap agreements.
This results in market gains or losses on hedging interests, 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. At June 30, 1997, the notional amounts of interest rate swaps
were $229,285. The weighted average fixed and floating-rate interest payments
were 6.06% and 0.29% over USD LIBOR, respectively. At June 30, 1997, the
Company also had open short positions on 530 10-year U.S. Treasury Note and
260 5-year U.S. Treasury Note interest rate futures contracts.
PURCHASE COMMITMENTS--At June 30, 1997, the Company had outstanding
commitments to purchase loans at a cost of $0.5 million.
4. EARNINGS PER SHARE
The Company will adopt SFAS No. 128, "Earnings per Share," effective
December 15, 1997. Adoption of this accounting standard will not affect
previously reported earnings per share data for fiscal years ending prior to
January 1, 1997.
5. SIGNIFICANT TRANSACTIONS
During the quarter ended June 30, 1997, the Company completed a sale of
approximately $175 million of loans, resulting in a gain of approximately
$11.2 million. At the sale date, the Company allocated $3.5 million and $1.8
million of original cost to retained servicing rights and other participates
interests retained in the loans, respectively, and such amounts are included
in the other assets.
F-7
<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 December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996, 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 December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years ended December 31, 1996,
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.
Deloitte & Touche LLP
March 14, 1997
Los Angeles, California
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $152,298 $ 3,382
Federal funds sold......................................... 1,100
-------- --------
Total cash and cash equivalents........................ 152,298 4,482
Mortgage-backed securities available for sale, at fair
value
(amortized cost: December 31, 1996, $31,367; December 31,
1995, $9,099)............................................. 31,270 9,083
Mortgage-backed securities held to maturity, at amortized
cost
(fair values: December 31, 1996, $21,252; December 31,
1995, $12,873)............................................ 21,724 13,119
Securities held to maturity, at amortized cost (fair val-
ues: December 31, 1996, $7,518; December 31, 1995,
$6,488)................................................... 7,429 6,470
Trading account securities................................. 24,541
Loans, net................................................. 176,026 258,827
Discounted loans, net...................................... 206,740 13,347
Loans held for sale, net, at lower of cost or market....... 28,826 18,597
Stock in Federal Home Loan Bank of San Francisco, at cost.. 2,958 1,421
Real estate owned, net..................................... 78,200 4,964
Leasehold improvements and equipment, net.................. 317 275
Due from affiliate......................................... 5,051 3,755
Accrued interest receivable................................ 3,517 3,042
Prepaid expenses and other assets.......................... 10,769 3,143
Deferred tax asset, net.................................... 4,183 170
-------- --------
TOTAL.................................................. $753,849 $340,695
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits................................................. $501,614 $303,524
Short-term borrowings.................................... 97,624 13,000
Notes payable............................................ 75,000
Accounts payable and other liabilities................... 17,872 4,398
Subordinated debt........................................ 11,000
Deferred credits......................................... 717 1,134
Minority interest in subsidiaries........................ 600
-------- --------
Total liabilities...................................... 692,827 333,656
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--$.01 par value, 50,000,000 shares autho-
rized, 7,570,000 (1996) and 1,300,863 (1995) outstand-
ing..................................................... 55,897 6,800
Preferred stock--$.01 par value, 10,000,000 authorized,
none outstanding
Retained earnings........................................ 5,222 255
Unrealized loss on available for sale securities, net.... (97) (16)
-------- --------
Total stockholders' equity............................. 61,022 7,039
-------- --------
TOTAL.................................................. $753,849 $340,695
======== ========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- --------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
INTEREST INCOME:
Loans......................................... $ 44,294 $ 21,821 $ 7,923
Mortgage-backed securities.................... 1,797 1,359 1,361
Securities and federal funds sold............. 2,331 1,201 285
--------- --------- -------
Total interest income....................... 48,422 24,381 9,569
--------- --------- -------
INTEREST EXPENSE:
Deposits...................................... 25,002 13,944 5,017
Borrowings.................................... 4,275 537 440
--------- --------- -------
Total interest expense...................... 29,277 14,481 5,457
--------- --------- -------
NET INTEREST INCOME............................. 19,145 9,900 4,112
PROVISION FOR ESTIMATED LOSSES ON LOANS......... 16,549 4,266 2,173
--------- --------- -------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOSSES ON LOANS...................... 2,596 5,634 1,939
--------- --------- -------
OTHER INCOME (LOSS):
Bankcard income............................... 6,790 4,694 635
Bankcard processing expense................... (5,124) (3,462) (274)
Gain on sale of loans......................... 11,538 642
Loan fees and charges......................... 1,747 610 43
Trading account--unrealized gain.............. 1,833
Amortization of deferred credits.............. 461 460 388
Real estate owned, net........................ 556 (170) (241)
Other, net.................................... 141 163 435
--------- --------- -------
Total other income.......................... 17,942 2,937 986
--------- --------- -------
OTHER EXPENSES:
Compensation and employee benefits............ 4,464 2,516 1,922
FDIC insurance premiums....................... 2,381 721 261
Occupancy..................................... 339 385 319
Professional services......................... 700 1,028 507
Data processing and equipment rentals......... 229 232 162
Loan service fees and expenses paid to
affiliates.................................... 5,176 1,958 242
Other general and administrative expenses..... 2,157 1,092 1,290
--------- --------- -------
Total other expenses........................ 15,446 7,932 4,703
--------- --------- -------
INCOME (LOSS) BEFORE INCOME TAX PROVISION....... 5,092 639 (1,778)
INCOME TAX PROVISION (BENEFIT).................. 125 47 (526)
--------- --------- -------
NET INCOME (LOSS)............................... $ 4,967 $ 592 $(1,252)
========= ========= =======
EARNINGS (LOSS) PER SHARE....................... $ 1.07 $ 0.46 $ (2.52)
========= ========= =======
WEIGHTED AVERAGE SHARES......................... 4,647,068 1,300,863 496,873
========= ========= =======
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1996 1995 1994
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 4,967 $ 592 $(1,252)
Reconciliation of net income (loss) to net cash
(used in) provided by operating activities:
Provision for estimated loan losses............... 16,549 4,266 2,173
Provision for real estate owned losses............ 598 100
Depreciation and amortization..................... 165 241 121
(Gain) loss on sale of real estate owned.......... (623) (97) 406
Purchase of loans held for sale................... (28,826)
Gain on sale of loans............................. (11,538) (642)
Amortization of discounts and deferred fees....... (3,324) (1,246) (600)
Amortization of deferred credits.................. (461) (460) (388)
FHLB stock dividend............................... (111) (40) (39)
Change in:
Trading account................................... (24,541) 489
Accrued interest receivable....................... (475) (1,443) (238)
Prepaid expenses and other assets................. (7,626) (1,094) 1,074
Due from affiliates............................... (1,296) (345) (3,043)
Deferred income taxes............................. (4,013) (419) 111
Accounts payable and other liabilities............ 13,474 1,846 (474)
Minority interest................................. (600) 26
Other............................................. (194) (54)
------- ------ -------
Net cash (used in) provided by operating
activities..................................... (48,279) 1,589 (1,614)
------- ------ -------
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans............................ $(482,506) $(186,895) $(41,561)
Loan repayments, net of originations......... 54,180 49,035 16,836
Proceeds from sale of loans.................. 312,949 16,673
Purchase of mortgage-backed securities
available for sale.......................... (24,537) (10,655)
Repayments of mortgage-backed securities
available for sale.......................... 2,226 1,528
Proceeds from sale of mortgage-backed
securities available
for sale.................................... 2,150 3,452
Proceeds from maturity of investment
securities held to maturity................. 5,654 1,000
Purchase of mortgage-backed securities held
to maturity................................. (16,079) (4,198)
Repayments of mortgage-backed securities held
to maturity................................. 1,820 824 643
Change in unrealized (gain) loss on mortgage-
backed securities available for sale........ 81 (654) 511
Purchases of securities and FHLB stock....... (2,447) (2,965) (105)
Proceeds from sale of FHLB stock............. 231
Purchases of real estate owned............... (67,344)
Proceeds from sale of real estate owned...... 16,482 5,254 569
Purchase of subsidiary net of cash and cash
equivalents................................. (346)
Purchases of leasehold improvements and
equipment................................... (195) (349) (184)
--------- --------- --------
Net cash used in investing activities...... (199,716) (114,168) (35,038)
--------- --------- --------
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................... $198,090 $107,731 $26,181
Issuance of common stock....................... 38,097 3,750
Issuance of subordinated debt.................. 9,000
Proceeds from short-term borrowings............ 618,733 77,419 41,677
Repayments of short-term borrowings............ (534,109) (85,919) (30,285)
Proceeds from notes payable.................... 75,000
Issuance of preferred stock.................... 1,000
-------- -------- -------
Net cash provided by financing activities.... 395,811 108,231 42,323
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 147,816 (4,348) 5,671
CASH AND CASH EQUIVALENTS:
Beginning of year.............................. 4,482 8,830 3,159
-------- -------- -------
End of year.................................... $152,298 $ 4,482 $ 8,830
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--Cash paid during the year for:
Interest....................................... $ 21,746 $ 13,833 $ 5,479
Income taxes................................... 216 365 110
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans........................... 21,751 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.......................................... 1,000
</TABLE>
See notes to consolidated financial statements.
(Concluded)
F-13
<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
---------- ------ --------- ------- ------------ ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 366,288 $ 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 1,000 934,575 3,750 4,750
---------- ------ --------- ------- ------ ----- -------
BALANCE, December 31,
1994................... 1,000,000 1,000 1,300,863 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................... 1,300,863 6,800 255 (16) 7,039
Net income............. 4,967 4,967
Unrealized loss on
available-for-sale
securities--net of
tax................... (81) (81)
Exchange of
subordinated debt for
common stock.......... 1,606,618 11,000 11,000
Issuance of common
stock................. 4,662,519 38,097 38,097
---------- ------ --------- ------- ------ ----- -------
BALANCE, December 31,
1996................... -- $ -- 7,570,000 $55,897 $5,222 $ (97) $61,022
========== ====== ========= ======= ====== ===== =======
</TABLE>
See notes to consolidated financial statements.
F-14
<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--The principal operations of Wilshire Financial
Services Group Inc. ("WFSG") and subsidiaries (collectively, the "Company")
are conducted through two second-tier subsidiary savings banks, Girard Savings
Bank F.S.B. ("GSB") and First Bank of Beverly Hills F.S.B. ("FBBH")
(collectively, the "Banks"), and a nonbank subsidiary, Wilshire Funding
Corporation ("WFC"). The Banks are federally chartered savings institutions
regulated by the Office of Thrift Supervision ("OTS") with two branches and a
merchant bankcard center in Southern California. Administrative headquarters
of the Company, the Banks and WFC are located in Portland, Oregon. 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--WFSG was incorporated in 1996 to be the holding
company for Wilshire Acquisitions Corporation ("WAC"), which is the holding
company for the Banks. WFSG formed certain nonbank subsidiaries, including
WFC, and completed an initial public offering of common stock and notes
payable in the fourth quarter of 1996. The accompanying consolidated financial
statements include the accounts of WAC and the Banks for periods prior to the
formation of WFSG. Intercompany accounts have been eliminated in
consolidation.
For purposes of presenting information about WFSG's common stock, weighted
average number of shares outstanding and earnings or loss per share,
outstanding shares of common stock of WAC prior to its combination with WFSG
have been retroactively restated to their WFSG equivalents based on the
conversion ratio at the time of the combination discussed above.
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, federal funds sold, and
securities with original maturities less than 90 days.
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 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 subordinated securities and
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.
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. Discounts are segregated into (a)
valuation allowances for estimated losses on specific loans ("specific
valuation allowances") and (b) portions of the discounts regarded as yield
adjustments. In addition, for discounted loans purchased by the Banks, the
initial discounts are further segregated into a valuation allowance for the
inherent risk of losses in the loan portfolio that have yet to be specifically
identified ("general valuation allowance") as required by OTS regulations. 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 adjustment is accreted into
income using a method approximating the interest method. 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 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 Statement of Financial Accounting Standards ("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 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.
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
INTEREST-RATE SWAPS--Interest-rate swap agreements used to manage interest-
rate risk are treated as hedges of specified assets and are accounted for on a
settlement basis. That is, the periodic net settlement with the counterparties
to the swap agreements of the interest paid/received is recorded as an
adjustment to interest income derived from the hedged assets.
REAL ESTATE OWNED--Real estate acquired in settlement of loans or purchased
directly is originally recorded at fair value less estimated costs to sell, or
purchase price. Loan balances in excess of fair value of real estate acquired
through foreclosure are charged against the allowance for loan losses at the
date of foreclosure. Any subsequent operating expenses or income, reduction in
estimated values, as well as gains or losses on disposition of such
properties, are recorded in 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 is shorter.
PURCHASE ACCOUNTING ADJUSTMENTS--The Banks were acquired in purchase
accounting transactions, and the purchase prices 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.
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.
EARNINGS PER SHARE--Earnings per share for all periods presented are
calculated based upon the weighted average number of shares of 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. There is
not a significant difference between primary and fully diluted earnings per
share in any of the years reported herein.
RECENT ACCOUNTING STANDARDS--In 1996, the Company adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of, SFAS No. 122, Accounting for
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Mortgage Servicing Rights, and SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS Nos. 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 effected through
securitization transactions, and repurchase agreements. 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 items in the consolidated financial statements
for 1995 and 1994 were reclassified to conform to the 1996 presentation.
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities as of December 31, 1996 and 1995
are shown below. Fair value estimates were obtained from an independent
pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- ---- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed se-
curities............................. $31,367 $ 23 $120 $31,270
======= ==== ==== =======
Held-to-maturity:
U.S. Treasury notes................. $ 7,429 $ 89 $ 7,518
Mortgage-backed securities.......... 21,724 29 $501 21,252
------- ---- ---- -------
Total held-to-maturity............ $29,153 $118 $501 $28,770
======= ==== ==== =======
1995
- ----
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>
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The amortized cost and estimated fair value of securities held to maturity
other than mortgage-backed securities at December 31, 1996 and 1995, by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
1996 COST VALUE
---- --------- ------
<S> <C> <C>
Due in one to five years............................... $7,429 $7,518
====== ======
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 December 31, 1996, securities, including trading account securities, with
carrying values of $67,073 and market values of approximately $66,909 were
pledged to secure merchant bankcard transactions, certain guarantees related
to a loan securitization transaction, short-term borrowings and lines of
credit (see Note 7), and interest-rate swaps. Of the total securities pledged,
securities with fair values of approximately $59,391 were delivered to, and
are held by, a third-party custodian.
There were no sales of securities during the year ended December 31, 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.
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans are comprised of loans, discounted loans and loans held
for sale. Following is a summary of each loan category by type:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
LOANS 1996 1995
----- --------- --------
<S> <C> <C>
Real estate loans:
One to four units................................ $ 63,562 $138,547
Over four units.................................. 68,897 71,239
Commercial....................................... 54,013 50,749
Land............................................. 2,558 2,709
--------- --------
Total loans secured by real estate............... 189,030 263,244
Other loans...................................... 22,768 19,832
--------- --------
211,798 283,076
Less:
Allowance for loan losses........................ (31,936) (10,016)
Deferred loan fees............................... (173) (245)
Discount on purchased loans not included in
allowance
for loan losses................................. (3,663) (13,988)
--------- --------
$ 176,026 $258,827
========= ========
</TABLE>
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C>
DECEMBER 31,
------------------
DISCOUNTED LOANS 1996 1995
---------------- --------- -------
Real Estate loans:
One to four units................................. $ 260,672 $18,380
Commercial........................................ 935 863
Land.............................................. 46
--------- -------
Total loans secured by real estate................ 261,653 19,243
Other loans....................................... 946 967
--------- -------
262,599 20,210
Less:
Allowance for loan losses......................... (5,619) (3,855)
Discount on purchased loans not included in
allowance for loan losses........................ (50,240) (3,008)
--------- -------
$ 206,740 $13,347
========= =======
LOANS HELD FOR SALE
-------------------
Real estate loans:
One to four units................................. $ 27,420 $33,497
Over four units................................... 464
Commercial........................................ 9,061 466
Land.............................................. 1,680 194
--------- -------
Total loans secured by real estate................ 38,625 34,157
Other loans....................................... 445 12
--------- -------
39,070 34,169
Allowances, discounts and deferred fees........... (10,244) (15,572)
--------- -------
$ 28,826 $18,597
========= =======
</TABLE>
Discounted loans include loans purchased in the fourth quarter of 1996 with
discounts of $48,802 at December 31, 1996; these loans are being evaluated in
order to allocate a portion of the discounts to the allowance for loan losses
during the first quarter of 1997.
As of December 31, 1996 and 1995, loans with adjustable rates of interest
were $230,983 and $265,702, respectively, and loans with fixed rates of
interest were $282,484 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.
At December 31, 1996, loans with unpaid principal balances of $43,615 were
pledged to secure credit line borrowings and repurchase agreements included in
short-term borrowings (see Note 7).
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Balance, beginning of year......................... $25,651 $ 7,701 $4,314
Loans charged off.................................. (17,218) (5,404) (1,666)
Recoveries......................................... 1,822 81 71
Provision for loan losses.......................... 16,549 4,266 2,173
Allocations from purchased loan discounts.......... 10,751 19,007 2,809
------- ------- ------
Balance, end of year............................... $37,555 $25,651 $7,701
======= ======= ======
</TABLE>
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1996 and 1995, the Banks had impaired loans totaling $12,553
and $14,241, respectively, and had recorded specific valuation allowances to
measure the impairments of those loans totaling $4,173 and $4,155,
respectively. At the same dates, the Banks had impaired loans totaling $13,711
and $9,593, respectively, with no recorded specific valuation allowances. At
December 31, 1996, the nonbank subsidiaries had impaired loans with unpaid
principal balances of $4,472 and a carrying value, net of purchase discount,
of $2,768, which is below fair value. The average unpaid principal balances of
impaired loans during the years ended December 31, 1996 and 1995 were $25,049
and $24,204, respectively. Interest income recognized on impaired loans during
the same periods was $1,746 and $1,631, respectively, based on cash payments.
These amounts exclude consideration of single-family residential and other
loan pools evaluated for impairment on a pooled basis. Other loans consist of
consumer loan pools, including portfolios of sub-prime automobile loans
purchased at par in 1995 and 1996. As of December 31, 1996, the Company had
charged off all sub-prime automobile 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 December 31, 1996 and 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 real estate values in recent years,
and in the northeastern United States. Substantially all loans originated or
acquired by FBBH and GSB prior to their acquisition by the Company were
collateralized by Southern California real estate. The geographic
diversification of the portfolio is generally widening through loan
acquisitions.
4. REAL ESTATE OWNED
Real estate owned consists of property obtained through foreclosure and
purchased directly. Activity in the allowance for estimated losses on real
estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ----
<S> <C> <C> <C>
Allowance for losses on real estate owned, beginning
of year............................................ $1,193 $ 123 $ 55
Charge-offs......................................... (3,322) (82) (32)
Allocation of purchase discount..................... 2,129 554
Provision for the year.............................. 598 100
------ ------ ----
Allowance for losses on real estate owned, end of
year................................................ $ -- $1,193 $123
====== ====== ====
</TABLE>
Real estate owned purchased directly by WFC with a net carrying value of
$59,729 at December 31, 1996 collateralizes credit line borrowings (see Note
7).
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Leasehold improvements................................ $ 319 $ 299
Furniture and equipment............................... 837 718
-------- --------
Total cost............................................ 1,156 1,017
Accumulated depreciation and amortization............. (839) (742)
-------- --------
$ 317 $ 275
======== ========
6. DEPOSITS
Deposits consist of:
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Passbook accounts..................................... $ 480 $ 304
Money market accounts................................. 2,023 1,267
NOW/checking.......................................... 5,625 5,111
Time deposits:
Less than $100........................................ 382,018 247,814
$100 or more.......................................... 111,468 49,028
-------- --------
Total deposits........................................ $501,614 $303,524
======== ========
</TABLE>
A summary of time deposits by maturity at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997............................................................. $389,509
1998............................................................. 103,019
Thereafter....................................................... 958
--------
$493,486
========
</TABLE>
7. NOTES PAYABLE, SHORT-TERM BORROWINGS AND SUBORDINATED DEBT
Notes payable at December 31, 1996 are unsecured, bear interest at 13% and
mature in 2004.
Short-term borrowings at December 31, 1996 include repurchase agreements
and line of credit borrowings. Short-term borrowings at December 31, 1995
are repurchase agreements.
Proceeds from the various credit facilities are used primarily for the
acquisition of loan pools.
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Following is information about borrowings under repurchase agreements:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Average balance during the year.......................... $51,316 $4,122
Highest amount outstanding during the year............... 190,000 14,950
Average interest rate during the year.................... 6.9% 5.6%
Average interest rate--end of year....................... 7.8% 6.7%
</TABLE>
As of December 31, 1996, the Company has committed lines of credit,
including repurchase agreement lines, totaling $350,000, and uncommitted lines
of $360,000. $97,624 is drawn on these lines and included in short-term
borrowings at December 31, 1996.
WAC's capitalization prior to the formation of WFSG included subordinated
debt with majority stockholders in amounts up to $50,000. Subordinated debt
paid interest at 14% per annum, compounded quarterly, had no stated maturity,
and represented an unsecured general obligation of WAC. As of December 31,
1995, borrowings under the subordinated debt agreement were $11,000.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995 1994
------ ---- -----
<S> <C> <C> <C>
Current tax expense (benefit):
Federal................................................. $3,208 $434 $(656)
State................................................... 930 32 19
------ ---- -----
4,138 466 (637)
------ ---- -----
Deferred tax expense (benefit):
Federal................................................. (3,135) (250) 90
State................................................... (878) (169) 21
------ ---- -----
(4,013) (419) 111
------ ---- -----
Total income tax provision (benefit).................. $ 125 $ 47 $(526)
====== ==== =====
</TABLE>
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>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Federal income tax provision at statutory rate......... 35.0% 35.0% (35.0)%
State taxes (benefit), net of federal tax effect....... 8.5 4.0
Valuation allowance.................................... (33.9) (25.1) 8.8
Change in prior year estimate.......................... (4.7) (7.8)
Other.................................................. (2.4) 1.3 (3.4)
----- ----- -----
Effective income tax rate.............................. 2.5% 7.4% (29.6)%
===== ===== =====
</TABLE>
F-23
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deferred income tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Purchase discounts......................................... $2,884 $1,349
Purchase accounting........................................ 483 629
Depreciation............................................... 73 65
Provision for loan loss.................................... 2,291 408
Net operating loss......................................... 170
Other...................................................... 10
------ ------
Gross deferred tax assets.................................. 5,731 2,631
------ ------
Deferred tax liabilities:
Partnership income......................................... (44)
Deferred loan fees......................................... (217) (351)
FHLB stock dividends....................................... (268) (242)
State taxes................................................ (42)
Unrealized gains on securities............................. (744)
Other...................................................... (277) (98)
------ ------
Gross deferred tax liabilities............................. (1,548) (735)
------ ------
Total deferred tax asset................................... 4,183 1,896
Valuation allowance........................................ -- (1,726)
------ ------
Net deferred tax asset..................................... $4,183 $ 170
====== ======
</TABLE>
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
PROFIT SHARING PLAN--The Company's 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 Company's Board of
Directors, the Company may elect to contribute to the plan based on profits of
the Company or based on matching participants' contributions. For the years
ended December 31, 1996, 1995 and 1994, the Company contributed $43, $28 and
$0, respectively, to the plan.
LEASE COMMITMENTS--The following is a schedule by year of future minimum
rental payments under operating leases:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997........................................... $ 498
1998........................................... 502
1999........................................... 453
2000........................................... 276
2001........................................... 276
------
Total......................................... $2,005
======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Lease commitments include commitments to an affiliated company which require
annual lease payments of $276 through 2001.
FINANCIAL INSTRUMENTS INVOLVING OFF-BALANCE SHEET RISK--The Company is a
party to interest-rate swap transactions in managing interest-rate exposure as
part of asset/liability management. Interest-rate swap transactions generally
involve the exchange of fixed- and floating-rate interest-payment obligations
without the exchange of the underlying principal amounts. The swap agreements
involve credit risk to the extent of the counterparties' obligation to settle
under the terms of the agreements. Settlements occur monthly. The Company
controls credit risk by entering into agreements with financially sound and
reputable counterparties.
During 1996, the Company entered into swap agreements to pay fixed-rate
interest payments in exchange for receiving floating-rate interest payments.
The notional principal amounts of the interest-rate swaps were $234,338 at
December 31, 1996; these notional principal amounts amortize downward in each
successive month until they mature in 1999-2001. The amortization is designed
to mirror the projected decrease in the principal balances of the loans the
swaps are matched against. The weighted average fixed-payment rates on the
swaps were 6.07% at December 31, 1996. The floating-rate payments are based on
a weighted-average of .28% over USD LIBOR. The effect of these agreements is
to convert loans to floating-rate assets to maintain a more predictable spread
between the income on such assets and the interest expense on deposits and
other borrowings, which reprice frequently.
At December 31, 1996 and 1995, the Company had commitments to extend credit
of $499 and $793, respectively. 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.
PURCHASE COMMITMENTS--At December 31, 1996, the Company had outstanding
commitments to purchase loans at a cost of $152,834. Included in the purchase
commitments were commitments to purchase from third parties, at a cost of
$115,100, loans that are serviced by Wilshire Credit Corporation ("WCC"),
which is affiliated with WFSG by common ownership. WCC transferred its rights
to servicing fees earned on this portfolio, which include a profit
participation element, to Wilshire Servicing Corporation, a subsidiary of
WFSG. The servicing rights were transferred at WCC's historical cost basis of
$0.
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 Company is contingently liable for losses, if any,
that could arise if the collectibility of any securitized loan is
unenforceable due to the absence of original notes or files. In addition, the
Company is 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 Company 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-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
As of March 14, 1997, a routine annual examination of the Banks is being
conducted by the OTS. As of that date, the OTS has not informed management of
any matters that would have an effect on the accompanying financial
statements.
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 mandatory--and possibly
additional discretionary--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 risk-based capital, 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-26
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Banks' actual and required capital amounts and ratios were as follows:
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
"WELL
CAPITALIZED"
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES (1) PROVISIONS
------------- ---------------------- --------------
DECEMBER 31, 1996 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------- ------- ----- ----------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets:
FBBH................... $12,835 11.9% $ 8,643 ^ 8.0% $10,804 ^10.0%
GSB.................... 36,726 10.1% 29,081 ^ 8.0% 36,351 ^10.0%
Tier 1 Capital to Risk-
Weighted Assets:
FBBH................... 11,436 10.6% Not applicable 6,482 ^ 6.0%
GSB.................... 32,136 8.8% Not applicable 26,810 ^ 6.0%
Tier 1 Capital to Average
Assets (Core Capital):
FBBH................... 11,436 8.0% 4,292 ^ 3.0% 7,152 ^ 5.0%
GSB.................... 32,136 8.3% 11,669 ^ 3.0% 19,447 ^ 5.0%
Tangible Capital:
FBBH................... 11,436 8.0% 2,156 ^ 1.5% Not applicable
GSB.................... 32,136 7.9% 6,101 ^ 1.5% Not applicable
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% 3,995 ^ 3.0% 6,657 ^ 5.0%
GSB.................... 13,852 10.3% 4,049 ^ 3.0% 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>
- --------
(1) These capital adequacy ratios represent the requirements for all savings
institutions. The Bank's minimum required ratios specified in their Orders
are those in the column containing the "well capitalized" requirements.
F-27
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 1996, the Banks' capital ratios were sufficient for them
to be categorized as "well capitalized," and at December 31, 1995, FBBH's
ratios were sufficient for them to be deemed "adequately capitalized" and
GSB's were sufficient for them to be deemed "well capitalized," based solely
on quantitative measures. The Banks have not been notified by the OTS as to
their capital category. If notified or otherwise deemed to be categorized as
less than "well capitalized," the Banks could be subject to restrictions in
addition to those specified in the Orders, including restrictions on holding
brokered deposits. As of December 31, 1996, FBBH had no brokered deposits and
GSB had brokered deposits of $172,427. In the event that GSB is categorized as
less than "well capitalized," it can potentially retain brokered deposits with
the permission of the Federal Deposit Insurance Corporation. Alternatively,
liquidity can be maintained with borrowings on lines of credit (see Note 7).
Because the Banks are currently near the total asset maximums permitted under
the Orders, the Banks do not expect to add brokered deposits until and unless
the growth restrictions are removed.
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 WAC and,
ultimately, to WFSG.
SAIF ASSESSMENT--During the fourth quarter of 1996, the Company paid
approximately $1.4 million for a special SAIF deposit insurance fund
assessment resulting from legislation enacted to recapitalize the SAIF fund.
11. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by WCC. Management believes that the
terms of the servicing agreement are no less favorable to the Company than
terms offered by other servicers. Due from affiliate in the accompanying
consolidated statements of financial condition substantially represents the
amount of loan payments collected by WCC but not yet remitted to the Company
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 Company.
Subsequent to the effective date of the initial public offering, WFSG
purchased from WCC loans with unpaid principal balances of $17,032, at their
fair values, which approximated their carrying value on the books of WCC.
Certain costs associated with the initial public offering in the amount of
$274, which were paid by WCC, were subsequently reimbursed by WFSG.
12. STOCK OPTIONS
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. FBBH and GSB granted 19,447 and 69,724
options in 1995, respectively. All grants were made with exercise prices at
least equal to the book value of the relevant Bank's shares on the grant
dates. In the fourth quarter of 1996, these options were converted into 31,225
options to purchase the stock of WFSG. The options are exercisable no earlier
than 60 days after the effective date of the initial public offering of WFSG
stock.
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 1,500,000
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 between 100% and 125% of the fair value of WFSG common stock at the
grant date. Restricted stock and stock appreciation rights may also be granted
under the Stock Plan. The initial awards under the new Stock Plan were granted
at the date of the initial public offering. Options for 1,095,000 shares were
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
F-28
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
will be determined under a formula ($6 divided by the fair market value per
share of WFSG common stock on each grant date). As of December 31, 1996, no
options had been granted to nonemployee directors under the new Stock Plan.
A summary of the Company's stock options as of December 31, 1996, 1995 and
1994 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ --------------- ---------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 31,225 $8.80 5,872 $14.90 --
Granted................. 1,095,000 11.46 25,353 7.39 5,872 $14.90
--------- ------ -----
Outstanding at end of
year.................... 1,126,225 11.34 31,225 8.80 5,872 14.90
========= ====== =====
</TABLE>
Additional information regarding options outstanding as of December 31, 1996
is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
PRICES SHARES PRICE PRICE
------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
$5.58..................................... 18,359 3.50 years $ 5.58
$10.50-$11.55.............................. 730,000 9.74 10.55
$12.15-$13.13.............................. 371,994 9.88 13.11
$14.90.................................... 5,872 2.50 14.90
---------
1,126,225 9.65 11.34
=========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for
its Stock Plan. Accordingly, no compensation cost has been recognized for the
Stock Plan. Had compensation cost for the Company's Stock Plan been determined
based on the fair value at the grant date consistent with the methods of SFAS
No. 123, the Company's net income and earnings per share for the year ended
December 31, 1996 would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<S> <C>
Net income to common shareholders:
As reported..................................................... $4,967
Pro forma....................................................... $2,775
Net income per common and common share equivalent:
As reported..................................................... $ 1.07
Pro forma....................................................... $ 0.60
</TABLE>
The weighted-average grant-date fair value of options granted during 1996
was $3.79 for options with exercise prices equivalent to market price of the
stock at the grant date and $2.75 for options with exercise prices exceeding
the market price of the stock at the grant date. Fair values were estimated
using the Black-Scholes option-pricing model with the following weighted
average assumptions used: no dividend yield, expected volatility of 25%, risk-
free interest rate of 6.6% and expected lives of three to five years.
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
F-29
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
-------- ---------
<S> <C> <C>
Assets:
Cash and due from banks................................... $152,298 $152,298
Mortgage-backed securities held to maturity............... 21,724 21,252
Mortgage-backed securities available for sale............. 31,270 31,270
Securities held to maturity............................... 7,429 7,518
Trading account securities................................ 24,541 24,541
Loans, discounted loans, and loans held for sale.......... 411,592 424,450
Federal Home Loan Bank stock.............................. 2,958 2,958
Liabilities:
Deposits.................................................. 501,614 504,629
Short-term borrowings..................................... 97,624 97,624
Notes payable............................................. 75,000 75,000
Off-balance-sheet liabilities--Interest-rate swaps........ (500)
</TABLE>
<TABLE>
<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.......... 290,771 295,747
Federal Home Loan Bank stock.............................. 1,421 1,421
Liabilities:
Deposits.................................................. 304,020 307,177
Short-term 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--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
F-30
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and extent to which the loans will be either collected according to
original terms, restructured, or foreclosed upon. Discounted loans fair
values are therefore assumed to be equivalent to carrying values. 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 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 approximated the prevailing rates
offered to depositors as of the reporting date.
Short-Term Borrowings--The carrying amounts of short-term borrowings
approximate fair value due to the short-term nature of these instruments.
Notes Payable--The fair value is assumed to be the carrying value because
the notes were issued in a market transaction near December 31, 1996.
Subordinated Debt--The fair value of subordinated debt issued to
shareholders by WAC was 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 values of interest-rate swaps
(1996 only) are 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 are estimated based on deferred fees
associated with such commitments, which are immaterial as of the reporting
date.
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.
F-31
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------
JUNE
DECEMBER 31, SEPTEMBER 30, 30, MARCH 31,
1996 1996 1996 1996
------------ ------------- ------- ---------
<S> <C> <C> <C> <C>
Interest income................. $14,285 $12,186 $12,407 $9,544
Interest expense................ 9,685 7,572 7,046 4,974
Provision for loan losses....... 798 4,883 5,483 5,385
------- ------- ------- ------
Net interest income (loss) after
provision for loan losses...... 3,802 (269) (122) (815)
Noninterest income.............. 11,796 1,140 817 4,189
Noninterest expense............. 4,772 5,298 2,525 2,851
------- ------- ------- ------
Income (loss) before income
taxes.......................... 10,826 (4,427) (1,830) 523
Income tax provision (benefit).. 4,777 (3,373) (805) (474)
------- ------- ------- ------
Net income (loss)............... $ 6,049 $(1,054) $(1,025) $ 997
======= ======= ======= ======
</TABLE>
<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....................... 2,214 1,449 1,175 796
Noninterest income.............. 353 1,591 526 467
Noninterest expense............. 2,795 2,052 1,629 1,456
------ ------ ------ ------
(Loss) income before income
taxes.......................... (228) 988 72 (193)
Income tax provision (benefit).. (21) 78 4 (14)
------ ------ ------ ------
Net income (loss)............... $ (207) $ 910 $ 68 $ (179)
====== ====== ====== ======
</TABLE>
F-32
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
-------- -------
<S> <C> <C>
ASSETS
Cash.......................................................... $ 65,207 $ 1
Intercompany receivable....................................... 22,095
Investment in subsidiaries.................................... 48,065 18,777
Prepaid expenses and other assets............................. 4,665 153
-------- -------
$140,032 $18,931
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities........................ $ 4,010 $ 317
Due to affiliates............................................. 575
Note payable.................................................. 75,000
Subordinated debt to majority stockholders.................... 11,000
-------- -------
Total liabilities......................................... 79,010 11,892
Contributed and retained equity............................... 61,022 7,039
-------- -------
$140,032 $18,931
======== =======
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Interest income...................................... $ 45 $ 9 $ 24
Interest expense..................................... 421 243 31
------ ------ -------
Net interest expense................................. (376) (234) (7)
Noninterest income................................... 563 1,155 611
Noninterest expense.................................. 125 363 156
------ ------ -------
Income before equity in earnings of subsidiaries and
income tax benefit.................................. 62 558 448
Income tax benefit................................... 131
Equity in earnings (loss) of subsidiaries............ 4,774 34 (1,700)
------ ------ -------
Net income (loss).................................... $4,967 $ 592 $(1,252)
====== ====== =======
</TABLE>
F-33
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 4,967 $ 592 $(1,252)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Amortization of purchase accounting
adjustments..................................... (1,045) (1,045) (488)
Equity in loss (earnings) of subsidiaries....... (4,774) (34) 1,700
Change in:
Prepaid expenses and other assets............. (4,512) 51 495
Accounts payable and other liabilities........ 4,657 90 (111)
Due from affiliates........................... (71) (29)
Due to affiliates............................. (575)
Intercompany receivables...................... (22,095)
Other......................................... 33
------- ------- -------
Net cash (used in) provided by operating
activities.................................. (23,377) (384) 315
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES--
Net investment in subsidiaries.................... (24,514) (9,000) (4,746)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable......................... 75,000
Issuance of capital stock......................... 38,097 4,750
Issuance of subordinated debt..................... 9,000
Dividends from subsidiary......................... 65
------- ------- -------
Net cash provided by financing activities... 113,097 9,065 4,750
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 65,206 (319) 319
CASH:
Beginning of year................................. 1 320 1
------- ------- -------
End of year....................................... $65,207 $ 1 $ 320
======= ======= =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to subordinated debt.. $ 2,000
Exchange of subordinated debt for common stock.... $11,000
</TABLE>
F-34
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. PRO FORMA INFORMATION CONCERNING ACQUISITIONS
During 1994, WAC 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 pro
forma 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 pro forma 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 noninterest revenue.................. $7,222
Net loss..................................................... (920)
</TABLE>
F-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER THE SOLICITATION OF AN OFFER, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
Recent Developments...................................................... 20
Use of Proceeds.......................................................... 20
Capitalization........................................................... 21
Regulatory Capital Ratios of the Savings Banks........................... 21
The Exchange Offer....................................................... 22
Selected Financial Information........................................... 32
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 36
Business................................................................. 53
Regulation............................................................... 78
Management............................................................... 89
Principal Stockholders................................................... 98
Certain Relationships and Related Transactions........................... 98
Description of Notes..................................................... 99
Exchange Offer; Registration Rights...................................... 120
Description of the 13% Notes............................................. 122
Certain Federal Income Tax Consequences.................................. 124
Plan of Distribution..................................................... 128
Legal Matters............................................................ 128
Independent Auditors..................................................... 128
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
AFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------
WILSHIRE
--------
Financial Services Group
OFFER TO EXCHANGE ITS 13%
SERIES B NOTES DUE 2004 FOR ANY
AND ALL OUTSTANDING 13%
SERIES A NOTES DUE 2004
-----------
PROSPECTUS
-----------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.1 Certificate of Incorporation (Incorporated by reference to the
Company's Registration Statement on Form S-1 (No. 333-15263)
dated December 19, 1996)
3.2 By-laws (Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 333-15263) dated December 19, 1996)
4.1 Form of Indenture, dated as of August 15, 1997 among Wilshire Fi-
nancial Services Group Inc. and Bankers Trust Company, as trustee
(Incorporated by reference to the Company's Current Report on
Form 8-K dated August 26, 1997)
4.2 Form of Notes (included in Exhibit 4.1) (Incorporated by refer-
ence to the Company's Current Report on Form 8-K dated August 26,
1997)
4.3 Registration Rights Agreement (Incorporated by reference to the
Company's Current Report on Form 8-K dated August 26, 1997)
4.4 Letter of Transmittal and Notice of Guaranteed Delivery
5.1 Opinion of Proskauer Rose LLP
10.1 Certificate of Designation of Cumulative Redeemable PIK Preferred
Stock
12Statement regarding the computation of the ratio of earnings to
fixed charges
16 Letter on Change in Certifying Accountant (Incorporated by refer-
ence to the Company's Current Report on Form 8-K dated April 17,
1997).
23.1Consent of Proskauer Rose LLP (included in Exhibit 5.1)
23.2Consent of Deloitte & Touche LLP
24Power of Attorney (see page II-4)
25Form T-1
27Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules:
Schedules are 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.
II-1
<PAGE>
(c) Reports, Opinions and Appraisals
None.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar volume of securities offered would not exceed that which was
registered) and any deviation from the low or high and the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement:
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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.
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(d) That every prospectus (i) that is filed pursuant to paragraph (d)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection with
an offering of securities subject to Rule 415 (Section 230.415 of this
chapter), will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
(e) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(f) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to items 4, 10(b), 11, or 13 of Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(g) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when it
became effective.
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-4 AND HAS DULY CAUSED THIS 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 6TH DAY
OF OCTOBER, 1997.
Wilshire Financial Services Group
Inc.
/s/ Andrew A. Wiederhorn
By: _________________________________
ANDREW A. WIEDERHORN CHIEF
EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andrew A. Wiederhorn and Lawrence A.
Mendelsohn, and each of them, his attorney-in-fact, with full power of
substitution, for him in all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or either of them, or their
substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THEIR
CAPACITIES ON OCTOBER 6, 1997.
SIGNATURE TITLE
/s/ Andrew A. Wiederhorn Chairman of the Board, Chief
- ------------------------------------- Executive Officer, Secretary
ANDREW A. WIEDERHORN and Treasurer (Principal
Executive Officer)
/s/ Lawrence A. Mendelsohn President and Director
- -------------------------------------
LAWRENCE A. MENDELSOHN
/s/ Donald H. Coleman Director
- -------------------------------------
DONALD H. COLEMAN
/s/ David Dale Johnson Director
- -------------------------------------
DAVID DALE JOHNSON
/s/ Philip G. Forte Director
- -------------------------------------
PHILIP G. FORTE
/s/ Chris Tassos Executive Vice President and
- ------------------------------------- Chief Financial Officer
CHRIS TASSOS (Principal Accounting and
Financial Officer)
II-4
<PAGE>
EXHIBIT 4.4
LETTER OF TRANSMITTAL
FOR
13% SERIES A NOTES
OF
WILSHIRE FINANCIAL SERVICES GROUP INC.
PURSUANT TO THE
EXCHANGE OFFER
IN RESPECT OF
ALL OF ITS OUTSTANDING 13% SERIES A NOTES DUE 2004
FOR
13% SERIES B NOTES DUE 2004
---------------
PURSUANT TO THE PROSPECTUS DATED , 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON ,
1997 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE EXPIRATION DATE). TENDERS OF
OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE BUSINESS DAY
PRIOR TO THE EXPIRATION DATE.
TO: BANKERS TRUST COMPANY, EXCHANGE AGENT
By Mail: By Hand and
By Overnight Courier
Bankers Trust Company Bankers Trust Company
c/o BT Services Tennessee, Inc. Corporate Trust & Agency Group
Corporate Trust & Agency Group Reorganization Department
Reorganization Dept. Receipt & Delivery Window
P.O. Box 292737 123 Washington Street,
Nashville, TN 37229-2737 1st Floor
New York, NY 10006
By Facsimile Transmission: (615) 315-0139
Confirm By Telephone: (615) 835-3575
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR
OLD NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
(the "Prospectus"), dated , 1997, of Wilshire Financial Services Group
Inc., a Delaware corporation (the "Company"), which, together with this Letter
of Transmittal and the instructions hereto (the "Letter of Transmittal"),
constitute the Company's offer (the "Exchange Offer") to exchange $1,000
principal amount of its 13% Series B Notes Due 2004 (the "New Notes") that
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the
Prospectus constitutes a part, for each $1,000 principal amount of its
outstanding 13% Series A Notes Due 2004 (the "Old Notes"), upon the terms and
subject to the conditions set forth in the Prospectus.
<PAGE>
This Letter of Transmittal is to be used by Holders if: (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders; (ii) tender of Old Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company
("DTC") pursuant to the procedures set forth in the Prospectus under "The
Exchange Offer--Procedures for Tendering" by any financial institution that is
a participant in DTC and whose name appears on a security position listing as
the owner of Old Notes (such participants, acting on behalf of Holders, are
referred to herein, together with such Holders, as "Acting Holders"); or (iii)
tender of Old Notes is to be made according to the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures." DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
If Holders desire to tender Old Notes pursuant to the Exchange Offer and (i)
certificates representing such Old Notes are not lost but are not immediately
available, (ii) time will not permit this Letter of Transmittal, certificates
representing such Old Notes or other required documents to reach the Exchange
Agent prior to the Expiration Date or (iii) the procedures for book entry
transfer cannot be completed prior to the Expiration Date, such Holders may
effect a tender of such Old Notes in accordance with the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer Guaranteed
Delivery Procedures."
The term "Holder" with respect to the Exchange Offer means any person: (i)
in whose name Old Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered Holder; or (ii) whose Old Notes are held of record by DTC who
desires to deliver such Old Notes by book-entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with
respect to the Exchange Offer. Holders who wish to tender their Old Notes must
complete this letter in its entirety.
All capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this latter of Transmittal and the Notice of Guaranteed Delivery
may be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
2
<PAGE>
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, list the certificate numbers and principal
amounts on a separately executed schedule and affix the schedule to this Letter
of Transmittal. Tenders of Old Notes will be accepted only in principal amounts
equal to $1,000 or integral multiples thereof.
DESCRIPTION OF OLD NOTES
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<TABLE>
<CAPTION>
CERTIFICATE
NUMBER(S)* AGGREGATE PRINCIPAL
(ATTACH SIGNED AMOUNT TENDERED
NAME(S) AND ADDRESS(ES) OF HOLDER(S) LIST IF (IF LESS THAN
(PLEASE FILL IN IF BLANK) NECESSARY) ALL)**
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
<S> <C> <C>
TOTAL PRINCIPAL AMOUNT OF OLD NOTES
TENDERED
</TABLE>
- --------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to all
Old Notes listed. See Instruction 2.
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: _______________________________________________
DTC Book Entry Account No.: __________________________________________________
Transaction Code No.: ________________________________________________________
[_]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Holder(s) of Old Notes: ___________________________________________
Window Ticket No. (if any): __________________________________________________
Date of Execution of Notice of Guaranteed Delivery: __________________________
Name of Eligible Institution that Guaranteed Delivery: _______________________
----------------------------------------------------------------------------
If Delivered by Book Entry Transfer: Name of Tendering Institution: __________
DTC Book Entry Account No.: __________________________________________________
Transaction Code No.: ________________________________________________________
[_]CHECK HERE IF YOU ARE A BROKER DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ________________________________________________________________________
Address: _____________________________________________________________________
3
<PAGE>
Ladies and Gentlemen:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Company the principal amount of Old Notes indicated above. Subject to
and effective upon the acceptance for exchange of the principal amount of Old
Notes tendered in accordance with this Letter of Transmittal, the undersigned
sells, assigns and transfers to, or upon the order of, the Company all right,
title and interest in and to the Old Notes tendered hereby. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Company and as Trustee under the Indenture for the Old Notes and
the New Notes) with respect to the tendered Old Notes with full power of
substitution to (i) deliver certificates for such Old Notes to the Company, or
transfer ownership of such Old Notes on the account books maintained by DTC,
together in either such case, with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company and (ii) present such Old
Notes for transfer on the books of the Company and receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes, all
in accordance with the terms of the Exchange Offer. The power of attorney
granted in this paragraph shall be deemed irrevocable and coupled with an
interest.
The undersigned hereby represents and warrants that he has full power and
authority to tender, sell, assign and transfer the Old Notes tendered hereby
and that the Company will acquire good and unencumbered title thereto, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim, when the same are acquired by the Company. The
undersigned also acknowledges that this Exchange Offer is being made in
reliance upon an interpretation by the staff of the Securities and Exchange
Commission that the New Notes issued in exchange for the Old Notes pursuant to
the Exchange Offer may be offered for sale, resold and otherwise transferred
by holders thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Notes. If the
undersigned is not a broker-dealer, the undersigned represents that it is not
engaged in, and does not intend to engage in, a distribution of the New Notes.
The undersigned represents that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of such holder's
business, (ii) such holder has no arrangements with any person to participate
in the distribution of such New Notes and (iii) such holder is not a
"affiliate," as defined under Rule 405 of the Securities Act of the Company
or, if such holder is an affiliate, that such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities,
it acknowledges that it has no arrangements with any person to participate in
the distribution of the New Notes and that it will deliver a prospectus in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The undersigned will upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the assignment and transfer of the Old Notes tendered
hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent. If any tendered Old Notes are
not accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Old Notes will be returned (except as
noted below with respect to tenders through DTC), without expense, to the
undersigned at the address shown below or at a different address shown below
or at a different address as may be indicated under "Special Issuance
Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
4
<PAGE>
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the
Old Notes accepted for exchange and return any Old Notes not tendered or not
exchanged, in the name(s) of the undersigned (or in either such event in the
case of Old Notes tendered by DTC, by credit to the account at DTC).
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please send the certificates representing the New Notes issued in exchange for
the Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signatures, unless,
in either event, tender is being made through DTC. In the event that both
"Special Issuance Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange and return any Old Notes not
tendered or not exchanged in the name(s) of, and send said certificates to,
the person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special
Delivery Instructions" to transfer any Old Notes from the name of the
registered holder(s) thereof if the Company does not accept for exchange any
of the Old Notes so tendered.
5
<PAGE>
PLEASE SIGN HERE
(To Be Completed by All Tendering Holders of
Old Notes Regardless of Whether Old Notes Are Being
Physically Delivered Herewith)
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in DTC, exactly as such participant's name appears
on a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity, such person must set forth
his or her full title below under "Capacity" and submit evidence satisfactory
to the Company of such person's authority to so act. See Instruction 3 herein.
If the signature appearing below is not of the registered Holder(s) of the
Old Notes, then the registered Holder(s) must sign a valid proxy
X ____________________________________ Date: ________________________________
X ____________________________________ Date: ________________________________
SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY
Name(s): _____________________________ Address: _____________________________
_______________________________ _______________________________
(PLEASE PRINT) (INCLUDING ZIP CODE)
Capacity _____________________________ Area Code and Telephone No: __________
Social Security No: __________________
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE (See Instruction 3 herein)
Certain Signatures Must Be Guaranteed by an Eligible Institution
_______________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
_______________________________________________________________________________
(Address (including zip code) and Telephone Number (including area code) of
Firm)
_______________________________________________________________________________
(Authorized Signature)
_______________________________________________________________________________
(Printed Name)
_______________________________________________________________________________
(Title)
6
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN) (SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certifi- To be completed ONLY if certifi-
cates for Old Notes in a princi- cates for Old Notes in a princi-
pal amount not tendered are to be pal amount not tendered or not
issued in the name of, or the New accepted for purchase or the New
Notes issued pursuant to the Ex- Notes issued pursuant to the Ex-
change Offer are to be issued to change Offer are to be sent to
the order of, someone other than someone other than the person or
the person or persons whose sig- persons whose signature(s) ap-
nature(s) appear(s) within this pear(s) within this Letter of
Letter of Transmittal or issued Transmittal or to an address dif-
to an address different from that ferent from that shown in the box
shown in the box entitled "De- entitled "Description of Old
scription of Old Notes" within Notes" within this Letter of
this Letter of Transmittal, or if Transmittal.
Old Notes tendered by book-entry
transfer that are not accepted
for purchase are to be credited
to an account maintained at DTC.
Name _____________________________
(PLEASE PRINT)
Address __________________________
(PLEASE PRINT)
Name _____________________________ __________________________________
(PLEASE PRINT) (ZIP CODE)
Address __________________________ __________________________________
(PLEASE PRINT) TAXPAYER IDENTIFICATION OR SOCIAL
__________________________________ SECURITY NUMBER (SEE SUBSTITUTE
(ZIP CODE) FORM W-9 HEREIN)
__________________________________
TAXPAYER IDENTIFICATION OR SOCIAL
SECURITY NUMBER (SEE SUBSTITUTE
FORM W-9 HEREIN)
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER AND THE SOLICITATION
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. The certificates
for the tendered Old Notes (or a confirmation of a book-entry transfer into
the Exchange Agent's account at DTC of all Old Notes delivered
electronically), as well as a properly completed and duly executed copy of
this Letter of Transmittal or facsimile hereof and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein prior to 5:00 P.M., New York City time, on the
Expiration Date. The method of delivery of the tendered Old Notes, this Letter
of Transmittal and all other required documents to the Exchange Agent is at
the election and risk of the Holder and, except as otherwise provided below,
the delivery will be deemed made only when actually received the Exchange
Agent. Instead of delivery by mail, it is recommended that the Holder use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes
should be sent to the Company.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date must tender their Old Notes and follow the
guaranteed delivery procedures set forth in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder of the Old Notes,
the certificate number or numbers of such Old Notes and the principal amount
of Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five business days after the Expiration Date, this
Letter of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of electronic delivery of book-
entry delivery into the Exchange Agent's account at DTC) and any the required
documents will be deposited by the Eligible Institution with the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal
(or facsimile hereof), as well as all other documents required by this Letter
of Transmittal and the certificate(s) representing all tendered Old Notes in
proper form for transfer (or a confirmation of electronic mail delivery of
book-entry delivery into the Exchange Agent's account at DTC), must be
received by the Exchange Agent within five business days after the Expiration
Date, all as provided in the Prospectus under the caption, "The Exchange
Offer--Guaranteed Delivery Procedures." Any Holder of Old Notes who wishes to
tender his Old Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery prior to 5:00 P.M., New York City time, on the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any irregularities or conditions of tender as
to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within
such time as the Company shall determine. Neither the Company, the Exchange
Agent nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes, nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering Holders of Old Notes, unless otherwise
provided in this Letter of Transmittal, as soon as practicable following the
Expiration Date.
2. PARTIAL TENDERS. Tenders of Old Notes will be accepted in all
denominations of $1,000 and integral multiples in excess thereof. If less than
the entire principal amount of any Old Notes is tendered, the tendering Holder
should fill in the principal amount tendered in the third column of the chart
entitled "Description of Old Notes." The entire principal amount of Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire
8
<PAGE>
principal amount of all Old Notes is not tendered, Old Notes for the principal
amount of the Old Notes delivered to the Exchange Agent will be deemed to have
been tendered unless otherwise indicated. If the entire principal amount of
all Old Notes is not tendered, Old Notes for the principal amount of the Old
Notes not tendered and a certificate or certificates representing New Notes
issued in exchange of any Old Notes accepted will be sent to the Holder at his
registered address, unless a different address is provided in the appropriate
box on this Letter of Transmittal or unless tender is made through DTC,
promptly after the Old Notes are accepted for exchange.
3. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof)
is signed by the registered Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of Old Notes tendered and the certificate(s) for New
Notes issued in exchange therefor is to be issued (or any untendered principal
amount of Old Notes is to be reissued) to the registered Holder, such Holder
need not and should not endorse any tendered Old Note, nor provide a separate
bond power. In any other case, such holder must either properly endorse the
Old Notes tendered or transmit a properly completed separate bond power with
this Letter of Transmittal, with the signatures on the endorsement or bond
power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder(s) of any Old Notes listed, such Old Notes
must be endorsed or accompanied by appropriate bond powers signed as the name
of the registered Holder(s) appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution unless the Old Notes tendered pursuant
thereto are tendered (i) by a registered Holder (including any participant in
DTC whose name appears on a security position listing as the owner of Old
Notes) who has not completed the box set forth herein entitled "Special
Issuance Instructions" or the box entitled "Special Delivery Instructions" or
(ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable spaces, the name and address to which New Notes or
substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of
the person signing this Letter of Transmittal (or in the case of tender of the
Old Notes through DTC, if different from DTC). In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
5. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are
to be registered or issued in the name of, any person other than the
registered Holder of the Old Notes tendered hereby, or if tendered Old Notes
are registered in the name of any person other than the person signing this
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered Holder or any
other person) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
this Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
9
<PAGE>
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
6. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify specified conditions in the Exchange Offer in the case of any
Old Notes tendered.
7. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instruction.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address specified
in the Prospectus. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
(DO NOT WRITE IN SPACE BELOW)
CERTIFICATE SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Delivery Prepared by ___ Checked by _____________ Date ___________________
10
<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Old Notes are
accepted for payment is required to provide the Exchange Agent (as payer) with
such Holder's correct TIN on Substitute Form W-9 below or otherwise establish
a basis for exemption from backup withholding. If such Holder is an
individual, the TIN is his social security number. If the Exchange Agent is
not provided with the correct TIN, a $50 penalty may be imposed by the
Internal Revenue Service, and payments made with respect to New Notes may be
subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed Internal Revenue Service Form W-8,
signed under penalties of perjury, attesting to that Holder's exempt status. A
Form W-8 can be obtained from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to withhold
20% of any payments made to the Holder or other payee. Backup withholding is
not an additional federal income tax. Rather, the federal income tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the Exchange
Offer, the Holder is required to provide the Exchange Agent with either: (i)
the Holder's correct TIN by completing the form below, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such Holder is awaiting a
TIN and that (A) the Holder has not been notified by the Internal Revenue
Service that the Holder is subject to backup withholding as a result of
failure to report all interest or dividends or (B) the Internal Revenue
Service has notified the Holder that the Holder is no longer subject to backup
withholding; or (ii) an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (E.G., social
security number or employer identification number) of the registered Holder of
the Old Notes. If the Old Notes are held in more than one name or are held not
in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
11
<PAGE>
PAYER'S NAME:
PART 1--PLEASE PROVIDE YOUR ----------------------
TIN IN THE BOX AT RIGHT AND Social security number
CERTIFY BY SIGNING AND
DATING BELOW.
SUBSTITUTE OR
FORM W-9 ----------------------
DEPARTMENT OF Employer identification
THE TREASURY number
INTERNAL PART 2--Certification--Under Penalties of Perjury, I
REVENUE certify that:
SERVICE --------------------------------------------------------
(1) The number shown on this form is my correct
Taxpayer Identification Number (or I am waiting for a
number to be issued to me) and
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
(2) I am not subject to backup withholding either
because I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup
withholding as a result of failure to report all
interest or dividends, or the IRS has notified me
that I am no longer subject to backup withholding.
--------------------------------------------------------
Certificate instructions--You must PART 3 --
cross out item (2) in Part 2 above if Awaiting
you have been notified by the IRS TIN [_]
that you are subject to backup with-
holding because of underreporting in-
terest or dividends on your tax re-
turn. However, if after being noti-
fied by the IRS that you were subject
to backup withholding you received
another notification from the IRS
stating that you are no longer sub-
ject to backup withholding, do not
cross out item (2).
SIGNATURE ______________ DATE _______
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO HOLDERS OF NEW NOTES PURSUANT
TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3
OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
60 days, 31 percent of all reportable payments made to me thereafter will be
withheld until I provide a number.
______________________________________ ______________________________________
Signature Date
<PAGE>
The Exchange Agent for the Exchange Offer is:
BANKERS TRUST COMPANY
By Certified or Registered Mail: By Hand/Overnight Courier
Bankers Trust Company Bankers Trust Company
c/o BT Services Tennessee, Inc. Corporate Trust & Agency Group
Corporate Trust & Agency Group Reorganization Department
Reorganization Dept. Receipt & Delivery Window
P.O. Box 292737 123 Washington Street,
Nashville, TN 37229-2737 1st Floor
New York, NY 10006
By Facsimile Transmission: (615) 315-0139
By Telephone: (615) 835-3575
13
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
13% SERIES A NOTES DUE 2004
OF
WILSHIRE FINANCIAL SERVICES GROUP INC.
As set forth in the Prospectus, dated , 1997 (the "Prospectus"), of
Wilshire Financial Services Group Inc. (the "Company"), in the accompanying
Letter of Transmittal and instructions thereto (the "Letter of Transmittal"),
this form or one substantially equivalent hereto must be used to accept the
Company's exchange offer (the "Exchange Offer") to exchange all of its
outstanding 13% Series A Notes due 2004 (the "Old Notes") if (i) certificates
representing the Old Notes to be tendered for exchange are not lost but are
not immediately available, (ii) time will not permit the Letter of
Transmittal, certificates representing such Old Notes or other required
documents to reach the Exchange Agent prior to the Expiration Date or (iii)
the procedure for book-entry transfer cannot be completed prior to the
Expiration Date. This form may be delivered by an Eligible Institution by mail
or hand delivery or transmitted, via telegram, telex or facsimile, to the
Exchange Agent as set forth below. All capitalized terms used herein but not
defined herein shall have the meanings ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD
NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE BUSINESS DAY
PRIOR TO THE EXPIRATION DATE.
TO: BANKERS TRUST COMPANY, EXCHANGE AGENT
By Certified or Registered Mail: By Hand/Overnight Courier:
Bankers Trust Company Bankers Trust Company
c/o BT Services Tennessee, Inc. Corporate Trust & Agency Group
Corporate Trust & Agency Group Reorganization Department
Reorganization Dept. Receipt & Delivery Window
P.O. Box 292737 123 Washington Street,
Nashville, TN 37229-2737 1st Floor
New York, NY 10006
By Facsimile Transmission: (615) 315-0139
By Telephone: (615) 835-3575
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA TELEGRAM,
TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and subject
to the conditions set forth in the Exchange Offer and the Letter of
Transmittal, receipt of which is hereby acknowledged, the aggregate principal
amount of Old Notes set forth below pursuant to the guaranteed delivery
procedures set forth in the Prospectus.
The undersigned understands that tenders of Old Notes will be accepted only
in principal amounts equal to $1,000 or integral multiples thereof. The
undersigned understands that tenders of Old Notes pursuant to the Exchange
Offer may not be withdrawn after 5:00 p.m., New York City time on the Business
Day prior to the Expiration Date. Tenders of Old Notes may also be withdrawn
if the Exchange offer is terminated without any such Old Notes being purchased
thereunder or as otherwise provided in the Prospectus.
<PAGE>
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
Signature(s) of the Registered Name(s) of Registered Holder(s):
Owner(s) or Authorized ______________________________________
Signatory: ___________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ Address:
Principal Amount of Old Notes ______________________________________
Tendered: Area Code and Telephone No.: _________
______________________________________ If Old Notes will be delivered by
book-entry transfer at The
Certificate No(s). of Old Notes Depository Trust Company, Depository
(if available): Account No.: _________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
Date: ________________________________ ______________________________________
This Notice of Guaranteed Delivery must be signed by the registered holder(s)
of Old Notes exactly as its (their) name(s) appear on certificates for Old
Notes or on a security position listing as the owner of Old Notes or by
person(s) authorized to become registered Holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature
is by a trustee, executor, administrator, guardian, attorney-in-fact, officer
or other person acting in a fiduciary or representative capacity, such person
must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):______________________________________________________________________
_____________________________________________________________________
Capacity:_____________________________________________________________________
Address(es):__________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Do not send Old Notes with this form. Debentures should be sent to the
Exchange Agent together with a properly completed and duly executed Letter of
Transmittal.
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or a correspondent in the United
States, hereby (a) represents that each holder of Old Notes on whose behalf
this tender is being made "own(s)" the Old Notes covered hereby within the
meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended,
(b) represents that such tender of Old Notes complies with such Rule 14e-4,
and (c) guarantees that, within five New York Stock Exchange trading days
from the date of this Notice of Guaranteed Delivery, a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof), together with
certificates representing the Old Notes covered hereby, in proper form for
transfer (or confirmation of the book-entry transfer of such Old Notes into
the Exchange Agent's account at The Depository Trust Company, pursuant to the
procedure for book-entry transfer set forth in the Prospectus) and required
documents will be deposited by the undersigned with the Exchange Agent.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVERY THE LETTER OF
TRANSMITTAL AND OLD NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE
TIME PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN
FINANCIAL LOSS TO THE UNDERSIGNED.
Name of Firm: _______________________ _____________________________________
Authorized Signature
Address: ____________________________ Name: _______________________________
_____________________________________ Title: ______________________________
Area Code and Telephone No.: ________ Date: _______________________________
2
<PAGE>
EXHIBIT 5.1
LETTERHEAD OF PROSKAUER ROSE LLP
October 7, 1997
Wilshire Financial Services Group, Inc.
Portland, Oregon
Ladies and Gentlemen:
You have requested our opinion in connection with the filing by Wilshire
Financial Services Group, Inc., a Delaware corporation ("Wilshire"), with the
Securities and Exchange Commission of a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933 (the
"Securities Act") with respect to $100,000,000 principal amount of Wilshire's
13% Series B Notes due 2004 (the "New Notes"). The Registration Statement
relates to the offer (the "Exchange Offer") by Wilshire to exchange the New
Notes for $100,000,000 principal amount of Wilshire's outstanding 13% Series A
Notes Due 2004 (the "Old Notes").
We have examined such records, documents and other instruments as we have
deemed relevant and necessary as a basis for the opinions hereinafter set
forth. We have also assumed without investigation the authenticity of any
document submitted to us as an original, the conformity to originals of any
document submitted to us as a copy, the authenticity of the originals of such
latter documents, the genuineness of all signatures and the legal capacity of
natural persons signed such documents.
Based upon the foregoing, it is our opinion that:
The New Notes, when duly executed by Wilshire, authenticated by the trustee
pursuant to the terms of the related Indenture and exchanged for the Old Notes
in accordance with the terms of the Exchange Offer, will be duly authorized
and legally issued and will constitute binding obligations of Wilshire
entitled to the benefits of the Indenture in accordance with their terms,
subject as to their binding nature to applicable bankruptcy, insolvency,
fraudulent conveyance, fraudulent transfer, reorganization, moratorium and
similar laws affecting creditor's rights and remedies generally and subject to
general principles of equity, including principals of commercial
reasonableness, good faith and fair dealing (regardless of whether enforcement
is sought in a proceeding at law or in equity).
The foregoing opinions relate only to matters of the general corporate law
of the State of Delaware and to matters of Federal law and do not purport to
express any opinion on the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the caption
"Legal Matters," in the Prospectus contained in the Registration Statement. In
so doing, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act or the rules and regulations
of the Securities and Exchange Commission thereunder.
<PAGE>
Except to the extent provided in the preceding paragraph, this opinion is
rendered solely to Wilshire in connection with the Exchange Offer and may not
be relied upon by, nor may copies be delivered to, any other person or entity
for any purpose without our prior written consent.
Very truly yours,
/s/ Proskauer Rose LLP
2
<PAGE>
EXHIBIT 10.1
CERTIFICATE OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
CUMULATIVE REDEEMABLE SENIOR
PIK PREFERRED STOCK
PAR VALUE $.01 PER SHARE
OF
WILSHIRE FINANCIAL SERVICES GROUP INC.
Wilshire Financial Services Group Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), pursuant to
Section 151 of the General Corporation Law of the State of Delaware (the
"GCL"), certifies that the Board of Directors of the Corporation, by unanimous
written consent adopted as of July 31, 1997 pursuant to Section 141(f) of the
GCL, duly adopted the following resolutions:
WHEREAS, the Board of Directors of the Corporation is authorized, within the
limitations and restrictions stated in the Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation"), to fix by resolution or
resolutions the designation of each series of preferred stock, $.01 par value
per share (the "Preferred Stock"), the number of shares constituting such
series and the powers, designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof as may be fixed by resolution or resolutions of the Board of Directors
under the GCL;
WHEREAS, it is the desire of the Board of Directors of the Corporation to
authorize a series of preferred stock to be designated the "Cumulative
Redeemable Senior PIK Preferred Stock" and to fix the terms of the Cumulative
Redeemable Senior PIK Preferred Stock and the number of shares constituting
such series for purposes of the private offering and sale thereof to Wilshire
Credit Corporation, an affiliate of the Company, in consideration of
approximately $400,000 in cash and the assignment of all of Wilshire Credit
Corporation=s right, title and interest in and to the obligations of the
Corporation and certain of its subsidiaries to pay approximately $27,100,000
to Wilshire Credit Corporation.
NOW THEREFORE, BE IT RESOLVED that pursuant to the authority vested in the
Board of Directors by the Certificate of Incorporation there is created a
series of preferred stock consisting of Twenty Seven Thousand Five Hundred
(27,500) shares of Cumulative Redeemable Senior PIK Preferred Stock, par value
$.01 per share.
1. Designation and Number of Shares. The designation of such series of
Preferred Stock, par value $.01 per share, authorized by this resolution shall
be Cumulative Redeemable Senior PIK Preferred Stock (the "Senior Preferred
Stock"). The number of shares of the Senior Preferred Stock shall be Twenty
Seven Thousand Five Hundred (27,500) and no more. Each share of the Senior
Preferred Stock shall have a stated value equal to $1,000.
2. Rank. The Senior Preferred Stock shall, with respect to dividend rights
and rights upon liquidation, winding up and dissolution, rank senior to: (a)
any other series of Preferred Stock established by the Board of Directors
after the date hereof, the terms of which specifically shall provide that such
shares rank junior to the Senior Preferred Stock; (b) all other classes and
series of preferred stock established by the Board of Directors, unless the
holders of the Senior Preferred Stock shall agree pursuant to Section 7(b)
hereof that such shares shall rank pari passu with or senior to the shares of
Senior Preferred Stock; and (c) all other equity securities of the
Corporation, including the Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation (all of the securities of the Corporation which
rank junior to the Senior Preferred Stock are at times collectively referred
to herein as the "Junior Securities").
3. Dividends. (a) Subject to Section 3(b) below, the holders of the shares
of the Senior Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds at the time legally available
therefor, cumulative dividends at the annual rate of One Hundred Forty dollars
($140.00) per share, and no more. Such dividends shall be payable in equal
semiannual payments on July 30 and January 31 of each year (or such prorated
amount as may be applicable with respect to the first such payment),
commencing
<PAGE>
January 31, 1998 (each of such dates being a "Dividend Payment Date"). Such
dividends shall be paid to the holders of record at the close of business on
the date specified by the Board of Directors of the Corporation at the time
such dividend is declared; provided, however, that such date shall not be more
than sixty (60) days nor less than ten (10) days prior to the respective
Dividend Payment Date. Each such semiannual dividend shall be fully cumulative
and shall accrue (whether or not declared), without interest, from the first
day of the semiannual period in which such dividend may be payable through the
Dividend Payment Date with respect to such semiannual period as herein
provided. If the Dividend Payment Date is not a business day, the Dividend
Payment Date shall be the next succeeding business day. Accumulated unpaid
dividends for any past dividend periods may be declared by the Board of
Directors and paid on any date, whether or not a regular Dividend Payment Date,
fixed by the Board of Directors, to holders of record on the books of the
Corporation on such record date as may be fixed by the Board of Directors with
respect to such payment.
(b) Any dividend accruing in respect of the Senior Preferred Stock shall be
paid by issuing additional shares of the Senior Preferred Stock at the rate of
one thousandth (1/1,000) of a share for each one dollar ($1.00) of such
dividend, and the issuance of such additional shares of the Senior Preferred
Stock shall constitute full payment of the dividend. Any such shares of the
Senior Preferred Stock shall, upon issuance, be fully paid and non-assessable.
Dividends payable on the Senior Preferred Stock for any period less than a full
semiannual dividend period shall be composed on the basis of a 360-day year and
the actual number of days elapsed in the period for which payable.
(c) (i) So long as any shares of the Senior Preferred Stock are outstanding,
the Corporation shall not declare, pay or set apart for payment any dividend on
any of the Junior Securities or make any payment on account of, or set apart
for payment money for a sinking or other similar fund for, the purchase,
redemption or other retirement of, any of the Junior Securities or any
warrants, rights, calls or options exercisable for any of the Junior
Securities, or make any distribution in respect thereof, either directly or
indirectly and whether in cash, obligations or shares of the Corporation or
other property (other than distributions or dividends in stock to the holders
of such stock), and shall not permit any corporation or other entity controlled
by the Corporation to purchase or redeem any of the Junior Securities or any
warrants, rights, calls or options exercisable for any of the Junior
Securities, unless prior to or concurrently with such declaration, payment or
setting apart for payment, purchase or distribution, as the case may be, all
accrued and unpaid dividends on shares of the Senior Preferred Stock not paid
on the dates provided for herein shall have been, or concurrently therewith
shall be, paid.
(ii) Subject to the foregoing provisions of this paragraph 3(c), the Board of
Directors may declare and the Corporation may pay or set apart for payment,
dividends and other distributions on any of the Junior Securities, and may
purchase or otherwise redeem any of the Junior Securities or any warrants,
rights, or options exercisable for any of the Junior Securities, and the
holders of the shares of the Senior Preferred Stock shall not be entitled to
share therein.
4. Liquidation Preference. (a) In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the Corporation,
whether voluntary or involuntary, the holders of shares of the Senior Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders, for each share
held, an amount in cash equal to one thousand dollars ($1,000), plus an amount
equal to all accrued but unpaid dividends thereon (without interest) to the
date fixed for liquidation (the "Liquidation Value"), before any payment shall
be made or any assets distributed to the holders of the Junior Securities. If
the assets of the Corporation are not sufficient to pay in full the Liquidation
Value payable to the holders of outstanding shares of Senior Preferred Stock or
any other series of Preferred Stock having liquidation rights ranking pari
passu with the shares of Senior Preferred Stock, then the holders of all such
shares shall share ratably in such distribution of assets in accordance with
the respective amounts which would be payable on such distribution if the
amounts to which the holders of outstanding shares of Senior Preferred Stock
and of such other series of Preferred Stock are entitled were paid in full.
(b) For the purposes of this Section 4, neither the voluntary sale,
conveyance, exchange, or transfer (for cash, shares of stock, securities, or
other consideration) of all or substantially all the property or assets of the
2
<PAGE>
Corporation nor the consolidation or merger of the Corporation with one or more
other corporations shall be deemed to be a liquidation, dissolution, or winding
up, voluntary or involuntary, unless such voluntary sale, conveyance, exchange,
or transfer shall be in connection with a dissolution or winding up of the
business of the Corporation.
5. Redemption. To the extent the Corporation shall have funds legally
available for such payment, the Corporation may redeem, at its option and at
any time, shares of the Senior Preferred Stock, in whole or in part, at a
redemption price per share equal to the Liquidation Value thereof on the date
fixed for redemption, plus all dividends accrued and unpaid on the Senior
Preferred Stock so redeemed up to the date fixed for redemption.
(b) Shares of Senior Preferred Stock which have been issued and reacquired in
any manner, including shares purchased or redeemed, shall (upon compliance with
any applicable provisions of the laws of the State of Delaware) have the status
of authorized and unissued shares of Preferred Stock undesignated as to series
and may be redesignated and reissued as part of any series of Preferred Stock.
(c) No sinking fund payments shall be required to be made by the Corporation
in connection with the redemption of the Senior Preferred Stock pursuant to
this Section 5.
6. Procedure for Redemption. (a) In the event that fewer than all of the then
outstanding shares of the Senior Preferred Stock are to be redeemed, the shares
of Senior Preferred Stock to be redeemed shall be determined by lot, or pro
rata as may be determined by the Board of Directors, or by any other method
selected by the Board of Directors which is not inconsistent with applicable
law.
(b) In the event the Corporation shall redeem shares of the Senior Preferred
Stock, notice of such redemption shall be given by first class mail, postage
prepaid, mailed not less than sixty (60) days prior to the redemption date, to
each holder of record of the shares to be redeemed at such holder's address as
the same appears on the stock register of the Corporation. Each such notice
shall state: (i) the redemption date; (ii) the number of shares (and partial
shares) of the Senior Preferred Stock to be redeemed and, if less than all the
shares held by such holder are to be redeemed from such holder, the number of
shares to be redeemed from such holder; (iii) the redemption price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on the shares to be
redeemed will cease to accrue on such redemption date.
(c) Notice having been mailed as provided in Section 6(b), from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption) dividends on the shares of Senior Preferred Stock so called for
redemption shall cease to accrue, and such shares shall no longer be deemed to
be outstanding and shall have the status of authorized but unissued shares of
Preferred Stock, unclassified as to series, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from
the Corporation the redemption price) shall cease. Upon surrender in accordance
with said notice of the certificates for any shares so redeemed (properly
endorsed or assigned for transfer, if the Board of Directors of the Corporation
shall so require and the notice shall so state), such shares shall be redeemed
by the Corporation at the redemption price aforesaid. In the event that fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
7. Voting Rights. (a) The holders of shares of the Senior Preferred Stock
shall have no right or power to vote on any question or in any proceeding or to
be represented on any question or in any proceeding or to be represented at, or
to receive notice of, any meeting of stockholders, except as otherwise provided
in Section 7(b) below or by law.
(b) The holders of Senior Preferred Stock shall have the right to vote as a
separate class on the following matters: (i) the amendment of any of the
principal terms of the Senior Preferred Stock; (ii) the authorization,
creation, issuance or sale of any class of capital stock ranking senior to or
on parity with the Senior Preferred
3
<PAGE>
Stock as to dividends or liquidation preference; or (iii) the merger of the
Corporation into or consolidation with another entity or the sale of all or
substantially all of the assets of the Corporation to another entity. The
affirmative vote of the holders of not less than fifty percent (50%) of the
outstanding shares of Senior Preferred Stock shall be necessary to authorize
any transaction referenced in subsections (b) (i) through (iii) above. On all
matters on which the holders of the Senior Preferred Stock shall be entitled to
vote, they shall be entitled to one vote for each full share held.
8. Restrictions on Dividends and Redemption. Notwithstanding anything
contained herein to the contrary, (a) no cash dividends on shares of the Senior
Preferred Stock shall be declared by the Board of Directors or paid in cash or
set apart for payment by the Corporation and (b) no shares of the Senior
Preferred Stock shall be redeemed by the Corporation, in each case at such time
as the terms and provisions of the Indenture dates as of August 15, 1997
between the Corporation and Bankers Trust Company prohibits such declaration,
payment or setting apart for payment or provides that such declaration,
payment, setting apart for payment, or redemption would constitute a breach
thereof or a default thereunder, unless the Corporation has obtained the
consent of Bankers Trust Company (in its capacity as Trustee thereunder) to the
payment or setting apart for payment of such dividends or the redemption of
such Senior Preferred Stock; provided, however, that nothing herein contained
shall in any way or under any circumstances be construed or deemed to require
the Board of Directors to declare, or the Corporation to pay or set apart for
payment, any dividends on shares of the Senior Preferred Stock at any time,
whether permitted by any of such agreements or not.
IN WITNESS WHEREOF, Wilshire Financial Services Group Inc. has caused this
certificate to be signed by its Chief Executive Officer this 31st day of July,
1997.
WILSHIRE FINANCIAL SERVICES GROUP
INC.
/s/ Andrew A. Wiederhorn
By: _________________________________
Andrew A. Wiederhorn
Chief Executive Officer
4
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months
DECEMBER 31, Ended
------------------------------- June 30,
1994 1995 1996 1997
---------------------------------------------
Earnings:
Pre-tax income
(loss)................... ($1,778) $639 $5,092 $8,918
-------- ------ ------ ------
Add:
Interest and fixed
charges.................. 5,457 14,481 29,277 34,691
Portion of rent
under long-term
operating leases
representative of
and interest
factor................... 0 0 0
Total earnings
available for fixed
charges................... 3,679 15,120 34,369 43,609
-------- ------ ------ ------
Fixed charges
Interest and fixed
charges.................. 5,457 14,481 29,277 34,691
Portion of rent under
long-term operating
losses representative
of an interest
factor................... 0 0 0
Total fixed charges....... 5,457 14,481 29,277 34,691
-------- ------ ------ ------
Deficiency in earnings
to cover fixed
charges.................... 1,778 -- -- --
Ratio of earnings to
fixed charges.............. 1.04 1.17 1.26
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Wilshire Financial Service Group Inc.
We consent to the use in this Registration Statement of Wilshire Financial
Services Group Inc. and subsidiaries on Form S-4, for an offer to exchange its
13% Series B Notes Due 2004 for any and all of its outstanding 13% Series A
Notes Due 2004, of our report dated March 14, 1997 (which expresses an
unqualified opinion on the consolidation financial statements of Wilshire
Financial Services Group Inc. and includes an explanatory paragraph relating
to certain regulatory agreements); and our report dated March 10, 1995 on the
consolidated statements of operations and of cash flows of Girard Savings Bank
F.S.B. and subsidiary, which reports appear in the Prospectus, which is a part
of this Registration Statement.
Deloitte & Touche LLP
October 9, 1997
Los Angeles, California
<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT
TO SECTION 305(b)(2) ___________
______________________________
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
_________________________________
WILSHIRE FINANCIAL SERVICES GROUP INC.
(Exact name of obligor as specified in its charter)
DELAWARE 93-1223879
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification no.)
1776 SW MADISON ST. PORTLAND, OR 97205
(Address of principal executive offices) (Zip Code)
13% SERIES B NOTES DUE 2004
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with Obligor.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
Item 3.-15. Not Applicable
ITEM 16. LIST OF EXHIBITS.
Exhibit 1 - Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990, Certificate of Amendment
of the Organization Certificate of Bankers Trust Company
dated June 21, 1995 - Incorporated herein by reference
to Exhibit 1 filed with Form T-1 Statement, Registration
No. 33-65171, Certificate of Amendment of the
Organization Certificate of Bankers Trust Company dated
March 20, 1996, incorporate by referenced to Exhibit 1
filed with Form T-1 Statement, Registration No. 333-
25843 and Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated June 19,
1997, copy attached.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2 filed with
Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise corporate trust
powers - Incorporated herein by reference to Exhibit 2
filed with Form T-1 Statement, Registration No. 33-
21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as amended on
February 18, 1997, Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 333-24509-01.
-2-
<PAGE>
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by Section
321(b) of the Act. - Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration No.
22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust Company
dated as of June 30, 1997. Copy attached.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 25th day
of September, 1997.
BANKERS TRUST COMPANY
By: /s/ Jason Krasilovsky
-----------------------------
Jason Krasilovsky
Assistant Treasurer
-4-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 25th day
of September, 1997.
BANKERS TRUST COMPANY
By: Jason Krasilovsky
Jason Krasilovsky
Assistant Treasurer
-5-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 6/30/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 11
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3 |
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED
SAVINGS BANKS JUNE 30, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C> <C>
C400
Dollar Amounts in Thousands RCFD Bil Mil Thou
ASSETS / / / / / / / /
1. Cash and balances due from depository institutions (from Schedule RC-A):............................ / / / / / / /
a. Noninterest-bearing balances and currency and coin(1)............................................0081 1,724,000 1.a.
b. Interest-bearing balances(2).....................................................................0071 2,648,000 1.b.
2. Securities:........................................................................................./ / / / / / /
a. Held-to-maturity securities (from Schedule RC-B column A)........................................1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D).....................................1773 3,990,000 2.b.
3. Federal funds sold and securities purchased under agreements to resell in domestic offices..........1350 26,430,000 3.
of the bank and of its Edge and Agreement subsidiaries, and in IBFS:................................/ / / / / / /
a. Federal funds sold
b. Securities purchased under agreements to resell
4. Loans and lease financing receivables:............................................................../ / / / / / /
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 17,815,000............/ / / / / / / 4.a
b. LESS: Allowance for loan and leases losses RCFD 3123 723,000............/ / / / / / / 4.b
c. LESS: Allocated transfer risk reserve RCFD 3128 0............/ / / / / / / 4.c
d. Loans and leases, net of unearned income,......................................................../ / / / / / /
allowance, and reserve (item 4.a minus 4.b and 4.c)...............................................2125 17,092,000 4.d.
5. Assets held in trading accounts.....................................................................3545 40,350,000 5.
6. Premises and fixed assets (including capitalized leases)............................................2145 937,000 6.
7. Other real estate owned (from Schedule RC-M)........................................................2150 195,000 7.
8. Investments in unconsolidated subsidiaries and associated companies.................................2130 96,000 8.
(from Schedule RC-M)................................................................................2155 691,000 9.
10. Intangible assets (from Schedule RC-M)..............................................................2143 85,000 10.
11. Other assets (from Schedule RC-F)...................................................................2160 4,633,000 11.
12. Total assets (sum of items 1 through 11)............................................................2170 98,871,000 12.
</TABLE>
__________________________
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held in trading accounts.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 6/30/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-2
City, State ZIP: New York, NY 10006 12
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3 |
</TABLE>
SCHEDULE RC--CONTINUED
<TABLE>
<CAPTION>
---------------------------------
Dollar Amounts in Thousands / / / / / / / / Bil Mil Thou_
LIABILITIES / / / / / / / /
<S> <C> <C> <C>
13. Deposits: / / / / / / / /
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) RCON 2200 18,026,000 13.a
(1) Noninterest-bearing(1).........................RCON 6631 3,184,000.... / / / / / / / / / / / / / / 13.a(1)
(2) Interest-bearing...............................RCON 6636 14,842,000.... / / / / / / / / / / / / / / 13.a(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E / / / / / / / / / / / / / /
part II) RCFN 2200 22,173,000 13.b
(1) Noninterest-bearing.............................RCON 6631 1,454,000 / / / / / / / / / / / / / / /
(2) Interest-bearing................................RCFN 6636 20,719,000 / / / / / / / / / / / / / / 13.b(2)
14. Federal funds purchased and securities sold under agreements to repurchase in / / 2800 14,623,000 14.
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: / / / / / / / / / / / / / /
a. Federal funds purchases........................................................... RCFD 0278
b. Securities sold under agreements to repurchase.................................... RCFD 0279 14.b
15. a. Demand notes issued to the U.S. Treasury.......................................... RCON 2840 0 15.a.
b. Trading liabilities............................................................... RCFD 3548 19,819,000 15.b.
16. Other borrowed money: / / / / / / / / / / / / / /
a. With original maturity of one year or less........................................ RCFD 2332 6,877,000 16.a.
b. With original maturity of more than one year...................................... A547 217,000 16.b
c. With a remaining maturity of more than three years................................ A548 4,848,000 16.c
17. Mortgage indebtedness and obligations under capitalized leases.......................
18. Bank's liability on acceptances executed and outstanding............................. RCFD 2920 691,000 18.
19. Subordinated notes and debentures.................................................... RCFD 3200 1,251,000 19.
20. Other liabilities (from Schedule RC-G)............................................... RCFD 2930 4,872,000 20.
21. Total liabilities (sum of items 13 through 20)....................................... RCFD 2948 93,397,000 21.
/ / / / / / / / / / / / / /
22. Limited-life preferred stock and related surplus..................................... RCFD 3282 0 22.
EQUITY CAPITAL / / / / / / / / / / / / / /
23. Perpetual preferred stock and related surplus........................................ RCFD 3838 1,000,000 23.
24. Common stock......................................................................... RCFD 3230 1,001,000 24.
25. Surplus (exclude all surplus related to preferred stock)............................. RCFD 3839 540,000 25.
26. a. Undivided profits and capital reserves............................................ RCFD 3632 3,314,000 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities............ RCFD 8434 ( 3,000) 26.b
27. Cumulative foreign currency translation adjustments.................................. RCFD 3284 ( 378,000) 27.
28. Total equity capital (sum of items 23 through 27).................................... RCFD 3210 5,474,000 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of items / / / / / / / / / / / / / /
21,22 and 28)........................................................................ RCFD 3300 98,871,000 29.
</TABLE>
Memorandum
To be reported only with the March Report of Condition.
<TABLE>
<S> <C> <C> <C>
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the bank Number
by independent external auditors as of any date during 1996........................... RCFD 6724 N/A M
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank.
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors (may
be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
- -------------
(1) Including total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
<PAGE>
State of New York,
Banking Department
I, MANUEL KURSKY, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION
8005 OF THE BANKING LAW," dated June 19, 1997, providing for an increase in
authorized capital stock from $1,601,666,670 consisting of 100,166,667 shares
with a par value of $10 each designated as Common Stock and 600 shares with a
par value of $1,000,000 each designated as Series Preferred Stock to
$2,001,666,670 consisting of 100,166,667 shares with a par value of $10 each
designated as Common Stock and 1,000 shares with a par value of $1,000,000 each
designated as Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York,
this 27th day of June in the Year of our Lord
----- -------
one thousand nine hundred and NINETY-SEVEN.
Manuel Kursky
------------------------------
Deputy Superintendent of Banks
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
_____________________________
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a
Managing Director and an Assistant Secretary of Bankers Trust Company, do hereby
certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of march, 1903.
3. The organization certificate as heretofore amended is hereby
amended to increase the aggregate number of shares which the corporation shall
have authority to issue and to increase the amount of its authorized capital
stock in conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Six Hundred and One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,601,666,670), divided into One
Hundred Million, One Hundred Sixty-Six Thousand, Six Hundred Sixty-Seven
(100,166,667) shares with a par value of $10 each designated as Common
Stock and 600 shares with a par value of One Million Dollars ($1,000,000)
each designated as Series Preferred Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is Two Billion One Million, Six Hundred Sixty-Six Thousand, Six
Hundred Seventy Dollars ($2,001,666,670), divided into One Hundred Million,
One Hundred Sixty-Six Thousand, Six Hundred Sixty-Seven (100,166,667)
shares with a par value of $10 each designated as Common Stock and 1000
shares with a par value of One Million Dollars ($1,000,000) each designated
as Series Preferred Stock."
<PAGE>
5. The foregoing amendment of the organization certificate was
authorized by unanimous written consent signed by the holder of all outstanding
shares entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this
19th day of June, 1997.
James T. Byrne,
-------------------------
James T. Byrne, Jr.
Managing Director
Lea Lahtinen
-------------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an
Assistant Secretary of Bankers Trust Company, the corporation described in the
foregoing certificate; that she has read the foregoing certificate and knows the
contents thereof, and that the statements herein contained are true.
Lea Lahtinen
-------------------------
Lea Lahtinen
Sworn to before me this 19th day
of June, 1997.
Sandra L. West
- -------------------------------------
Notary Public
SANDRA L. WEST
Notary Public State of New York
No. 31-4942101
Qualified in New York County
Commission Expires September 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of June 30, 1997, and Statement of Earnings
for the six months ended June 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 39,712
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 17,778
<INVESTMENTS-HELD-FOR-SALE> 144,253
<INVESTMENTS-CARRYING> 27,627
<INVESTMENTS-MARKET> 27,627
<LOANS> 787,987
<ALLOWANCE> 70,043
<TOTAL-ASSETS> 1,196,092
<DEPOSITS> 445,333
<SHORT-TERM> 583,468
<LIABILITIES-OTHER> 14,119
<LONG-TERM> 84,245
0
0
<COMMON> 55,897
<OTHER-SE> 13,030
<TOTAL-LIABILITIES-AND-EQUITY> 1,127,165
<INTEREST-LOAN> 34,574
<INTEREST-INVEST> 7,034
<INTEREST-OTHER> 2,184
<INTEREST-TOTAL> 43,792
<INTEREST-DEPOSIT> 13,654
<INTEREST-EXPENSE> 34,691
<INTEREST-INCOME-NET> 9,101
<LOAN-LOSSES> (1,424)
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 19,693
<INCOME-PRETAX> 8,918
<INCOME-PRE-EXTRAORDINARY> 8,918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,174
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 9.02
<LOANS-NON> 68,328
<LOANS-PAST> 0
<LOANS-TROUBLED> 35,622
<LOANS-PROBLEM> 9,407
<ALLOWANCE-OPEN> 37,555
<CHARGE-OFFS> 14,333
<RECOVERIES> 287
<ALLOWANCE-CLOSE> 70,043
<ALLOWANCE-DOMESTIC> 70,043
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
