<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 333-37575
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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: [_]
----------------
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>
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 MARCH 4,
1998, 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 March
4, 1998, 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 15 TO 21 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.
February 2, 1998
<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 February 2, 1998.
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."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
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. Unless otherwise indicated, the
information contained in this Prospectus assumes that the Wilshire REIT (as
defined) has been formed but has not acquired any assets from the Company.
THE COMPANY
Wilshire Financial Services Group Inc. ("WFSG" and together with its
subsidiaries, the "Company") is primarily engaged in the acquisition of pools
of performing, sub-performing and non-performing residential and commercial
mortgage loans, as well as foreclosed real estate and mortgage-backed
securities. The Company also acquires newly-originated residential mortgage and
manufactured housing loans through correspondents and operates a merchant
bankcard processing business. At September 30, 1997, the Company had total
assets of approximately $1.4 billion, including approximately $791.0 million of
loans, approximately $146.5 million of foreclosed real estate and approximately
$256.3 million of mortgage-backed and U.S. government securities. For the nine
months ended September 30, 1997, the Company had net income of approximately
$12.2 million.
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 September 30, 1997, the Company held approximately $350.4 million
of Discounted Loans and approximately $440.6 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.
From 1991 through December 31, 1997, the Company's principal shareholders
have overseen the purchase and servicing by the Company and its affiliates of
over 450 pools of loans for an aggregate purchase price of approximately $2.7
billion. The volume of acquisitions overseen by the Company's principal
shareholders 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 79 pools that were acquired in the first nine months of 1997 for an
aggregate purchase price of approximately $873.2 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
1
<PAGE>
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 its
savings bank subsidiaries. As a result, the Company's asset base is highly
leveraged. See "Risk Factors--Extensive Use of Financial Leverage."
The Company, through Wilshire Credit Corporation, an affiliate of the Company
(the "U.S. Servicer"), 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 September 30, 1997,
the U.S. Servicer, was servicing approximately $2.6 billion of assets,
including (i) approximately $1.2 billion aggregate principal amount of loans
for the Company, (ii) approximately $1.3 billion aggregate principal amount of
loans for third parties (including approximately $645.2 million of loans
previously securitized by the Company and its affiliates) and (iii)
approximately $93.5 million aggregate principal amount of loans owned by the
U.S. Servicer.
The Company also acquires, through the U.S. Servicer, 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. From the commencement of its mortgage loan
origination program through September 30, 1997, the Company purchased loans
totaling $80.2 million in principal amount.
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, 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. The Company
focuses on these market niches because management believes they offer higher
risk-adjusted returns. The Company attempts to manage risks through the pricing
of its services and managing merchant cash reserves through a software system
developed by the Company. During the nine months ended September 30, 1997, net
revenues from these operations totaled $1.6 million.
THE WILSHIRE REIT
In October 1997, the Company established Wilshire Real Estate Investment
Trust Inc. (the "Wilshire REIT"), which intends to qualify and will elect to be
taxed as a Real Estate Investment Trust ("REIT"). The Wilshire REIT has filed a
registration statement with the Securities and Exchange Commission in
connection with a proposed underwritten public offering of its common stock.
The Company currently owns 100% of the Wilshire REIT and expects to retain a
minority interest (currently expected to be approximately 9.9%, with options to
acquire an additional 10%) in the Wilshire REIT following the Wilshire REIT's
proposed initial public offering. There can be no assurance as to when or if
the Wilshire REIT's proposed initial public offering will be completed.
The Company formed the Wilshire REIT in connection with the Company's
strategy of focusing its acquisition activities on domestic residential and
domestic Non-Discounted commercial mortgage loans and expanding fee-based
income. The Wilshire REIT will conduct certain business activities that
management believes are more efficiently operated in a REIT tax advantaged
format. The Wilshire REIT intends to concentrate on the acquisition of
Discounted U.S. commercial mortgage loans and U.S. commercial properties ("U.S.
Commercial Investments"), mortgage-backed securities primarily comprised of
interests in residential mortgage loans ("MBS Investments") and international
Discounted and Non-Discounted Loans and properties ("International
Investments"). The Company intends to grant a right of first refusal to the
Wilshire REIT with
2
<PAGE>
respect to U.S. Commercial Investments, MBS Investments and International
Investments. The following table sets forth the expected primary revenue
sources for the Company and the Wilshire REIT:
<TABLE>
<CAPTION>
THE COMPANY WILSHIRE REIT
----------- -------------
<S> <C>
Loan Pool and Property Acquisi-
tions: Loan Pool and Property Acquisitions:
--U.S. Residential Performing --U.S. Commercial Non-Performing
--U.S. Residential Non-Performing --International Performing
--U.S. Commercial Performing --International Non-Performing
MBS Investments* MBS Investments
Fee Based Income:
--Specialty Servicing
--Management of the Wilshire REIT
</TABLE>
- --------
* Subject to the Wilshire REIT's right of first refusal.
Upon the consummation of the proposed initial public offering of the Wilshire
REIT, the Company or its affiliates intend to sell to the Wilshire REIT (i)
U.S. Commercial Investments for approximately $42.9 million, (ii) MBS
Investments for approximately $98.1 million, and (iii) International
Investments in the United Kingdom for approximately $5.3 million (the "Initial
Investments"). See "The Wilshire REIT-Initial Investments." The Company expects
to realize a book gain as a result of the sale of the Initial Investments. The
Company intends to grant the Wilshire REIT an option to purchase all or a
portion of the Company's interest in two portfolios of International
Investments in France for a purchase price of up to $110.0 million (including
approximately $40.9 million held on the Company's balance sheet at September
30, 1997). The Wilshire REIT is currently evaluating the suitability of such
investments under U.S. tax and French law.
Wilshire Realty Services Corporation ("WRSC"), a wholly-owned subsidiary of
the Company, intends to enter into a management agreement with the Wilshire
REIT, pursuant to which WRSC will manage the Wilshire REIT for a management fee
and an incentive fee. The Wilshire REIT intends to grant WRSC and certain of
the Wilshire REIT's directors options to purchase up to 10% of the common stock
of the Wilshire REIT or units of limited partnership interest in the Wilshire
REIT's operating partnership. The Company intends to enter into a servicing
agreement with the Wilshire REIT pursuant to which the Company will act as
servicer for the Wilshire REIT and provide loan and real property management
services in France and the United Kingdom. In addition, the Wilshire REIT
intends to enter into a servicing agreement with the U.S. Servicer pursuant to
which the U.S. Servicer will act as servicer for the Wilshire REIT and provide
loan and real property management services, including billing, portfolio
administration and collection services for the Wilshire REIT's U.S. assets.
CORPORATE HISTORY AND STRUCTURE OF THE COMPANY
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 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"), which they acquired in 1993 and
1994, respectively, and through the U.S. Servicer, which was founded in 1987.
WFSG was formed to succeed to the ownership of the Savings Banks and
to conduct, through subsidiaries, the loan acquisition business previously
conducted by the Principal Shareholders through the U.S. Servicer. The Company
completed an initial public offering of its Common Stock in December 1996. The
U.S. Servicer and certain of its non-public affiliates (the "Wilshire Private
Companies") were not acquired by WFSG at the time of its initial public
offering but agreed to cease all further loan acquisition activities. In
addition, the U.S. Servicer entered into a loan servicing agreement with the
Company pursuant to which the U.S. Servicer acts as a 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 the U.S. Servicer a servicing fee at or below
prevailing market rates for each pool
3
<PAGE>
of loans that the U.S. Servicer is servicing for the Company. The Company has
the option at any time after November 15, 1998 to acquire the U.S. Servicer's
servicing operations (the "Servicing Transfer"), provided 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 the foregoing conditions are met, but the
U.S. Servicer has no obligation to effect the Servicing Transfer prior to
November 15, 1998. The Servicing Transfer will occur automatically on November
15, 1999, provided the foregoing conditions are met.
The Wilshire Private Companies are primarily engaged in the specialty loan
servicing and resolution business. At September 30, 1997, the Wilshire Private
Companies had approximately 235 employees, principally engaged in servicing
operations. At September 30, 1997, the Wilshire Private Companies were
servicing approximately $2.6 billion of assets, including approximately $1.2
billion aggregate principal amount of loans for the Company. For the nine
months ended September 30, 1997, the Wilshire Private Companies had a net loss
of approximately $7.6 million. At September 30, 1997, the Wilshire Private
Companies had total assets of approximately $144.3 million and had total
liabilities of $213.7 million, including outstanding indebtedness of
approximately $124.3 million (approximately $105.6 million, net of securities
pledged to secure its outstanding indebtedness). Substantially all of the
Wilshire Private Companies' indebtedness is recourse debt that is secured by
pledges of its servicing rights and is personally guaranteed by the Principal
Shareholders. At September 30, 1997, the Wilshire Private Companies had a
negative net worth of approximately $69.4 million. Substantially all of the
Wilshire Private Companies' servicing rights have not been capitalized and
therefore are not reflected as assets nor included in the net worth of the
Wilshire Private Companies.
The Company is considering acquiring the Wilshire Private Companies prior to
the Servicing Transfer but, at this time, no decision has been made to proceed
with the acquisition. The Company believes that the acquisition of the Wilshire
Private Companies would (i) integrate servicing operations and eliminate
servicing fees being paid to the Wilshire Private Companies, (ii) increase fee
based revenues through servicing for unaffiliated third parties and the
Wilshire REIT, (iii) reduce potential regulatory concerns regarding the
relationship between the Savings Banks and the Wilshire Private Companies, (iv)
eliminate conflicts of interest between the Company and the Wilshire Private
Companies, and (v) enable the Company to acquire assets of distressed sub-prime
mortgage lenders and other specialty finance companies where the ability to
perform specialty servicing is an important consideration in realizing the
value of such acquisitions.
In September 1997, the Company appointed a special committee composed of two
independent directors of the Company and engaged Prudential Securities
Incorporated to review the potential acquisition of the Wilshire Private
Companies and to furnish any required fairness opinion. There can be no
assurances as to when or if such acquisition will occur or the form such an
acquisition might take. In addition, the acquisition of the Wilshire Private
Companies would be subject to a number of conditions, including shareholder
approval, approval of the Company's Board of Directors and compliance with the
indentures relating to the Company's 13% Notes and Old Notes. The indentures,
among other things, contain restrictions on the incurrence of debt and
transactions with affiliates. If the Company acquires the Wilshire Private
Companies, it is likely that any such acquisition will reduce the Company's net
worth, given the significant negative net worth of the Wilshire Private
Companies at September 30, 1997.
4
<PAGE>
After giving effect to the formation of the Wilshire REIT, the organizational
structure of the Company will be as follows:
--------------------------------------
Wilshire Financial Services Group Inc.
--------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ---------- ------------- ------------ ------------- ---------------- -------------------
WFSG Wilshire Wilshire Wilshire Wilshire Wilshire
Europe Inc. Funding Servicing Acquisitions Realty Services Real Estate
Corporation Corporation Corporation Corporation** Investment Trust***
- ---------- ------------- ------------- ------------- ---------------- -------------------
---------------- ---------------
Special Purpose First Bank of
Entities* Beverly Hills
F.S.B.****
---------------- ---------------
</TABLE>
- --------
* Entities formed or to be formed for financings and to complete
securitizations.
** Formed to manage the Wilshire REIT.
*** Following the consummation of the Wilshire REIT's proposed initial public
offering, WFSG expects to retain approximately 9.9% of the Wilshire REIT
with options to acquire an additional 10%.
**** Girard Savings Bank, F.S.B. merged with First Bank of Beverly Hills,
F.S.B. in December 1997. See "Recent Developments."
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:
. Growth of Acquisitions of Loan Pools. The Company plans to expand its
acquisition of pools of U.S. residential Discounted and Non-Discounted
Loans and U.S. commercial Non-Discounted Loans by more actively marketing
its services, with a view to adding new customers and developing more
repeat business. The Company intends to grant a right of first refusal to
the Wilshire REIT with respect to U.S. Commercial Investments, MBS
Investments and International Investments.
. Expansion of Fee Based Income.
. International Third Party Specialty Servicing. The Company intends to
continue to expand its third party specialty servicing operations in
Western Europe and to develop and acquire servicing operations in
Latin America.
. Management of the Wilshire REIT. The Company will act as the manager
and operator of the Wilshire REIT for a management fee and an
incentive fee.
. Expansion of Mortgage Loan Origination Network and Products. The Company
plans to further expand its mortgage loan origination program through
acquisitions of loan originators, 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.
. Opportunistic Acquisitions from Specialty Finance Companies. The Company
intends to acquire mortgage loans, properties and mortgage-backed
securities from distressed sub-prime mortgage lenders and other specialty
finance companies. The Company believes that the high levels of debt
coupled with the negative cash flow characteristics of many of these
businesses and the Company's specialty servicing abilities may present
favorable opportunities for the Company.
. Growth of Merchant Bankcard Processing Operations. The Company plans to
continue development of its merchant bankcard processing operations
through increased marketing and acquisitions of merchant portfolios and
other bankcard processors.
5
<PAGE>
RECENT DEVELOPMENTS
In October 1997, the Savings Banks entered into amended Cease and Desist
Orders (the "Orders") with the Office of Thrift Supervision (the "OTS") which
modified certain provisions of the original Cease and Desist Orders. See
"Regulation--Recent Regulatory Examinations." The Savings Banks continue to
remain subject to growth restrictions. In December 1997, Girard merged with
First Bank. See "Regulation--Activities Limitation."
The Company entered into a letter of intent to acquire certain assets of a
mortgage loan originator located in California for a purchase price of
approximately $2.8 million. The Company also entered into a letter of intent to
acquire a manufactured housing loan originator located in California for a
purchase price of approximately $5.7 million. There can be no assurance as to
when or if such acquisitions will be completed.
In December 1997, the Company completed a securitization of approximately
$131 million of unpaid principal balance of loans resulting in a gain of
approximately $7.5 million. At the sale date the Company allocated
approximately $2.3 million of original cost basis to retained servicing rights.
In December 1997, the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed underwritten public
offering of 3,500,000 shares of the Company's Common Stock. There can be no
assurance as to when or if the offering will be completed.
In the quarter ended December 31, 1997, the Company acquired or committed to
acquire 22 pools of loans and properties for an aggregate purchase price of
approximately $613.2 million. In such quarter, the Company acquired or
committed to acquire international assets for approximately $153.9 million,
U.S. Non-Discounted Loans for approximately $342.9 million, and U.S. Discounted
Loans for approximately $116.4 million. In the quarter ended December 31, 1997,
the Company acquired or committed to acquire 13 mortgage-backed securities for
a purchase price of approximately $43.7 million.
In January 1998, the Company acquired approximately $26.7 million of residual
securities and the related servicing rights.
6
<PAGE>
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
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 a 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.
7
<PAGE>
Expiration Date...........
The term "Expiration Date" shall mean 5:00
p.m., New York time, on March 4, 1998, unless
the Company shall, in its sole discretion, have
extended 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."
Withdrawal................ The tender of Old Notes pursuant to the Ex-
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
Old Notes................ Each holder of Old Notes desiring to accept the
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. In addition, either (i)
certificates for such Old Notes must be re-
ceived by the Exchange Agent, along with the
related Letter of Transmittal, prior to the Ex-
piration Date for the Exchange Offer, or (ii) a
timely confirmation of a book-entry transfer of
such Old Notes, if such procedure is available,
into the Exchange Agent's account at the Depos-
itory Trust Company, or (iii) the Holder must
comply with the guaranteed delivery procedures.
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.
8
<PAGE>
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
Procedures............... Holders of Old Notes who wish to tender their
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, or (iii) who can-
not complete the procedures for book-entry
transfers on a timely basis and deliver an
Agent's Message must tender their Old Notes ac-
cording to the guaranteed delivery procedures.
See "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes
and Delivery of New
Notes.................... Subject to the prior satisfaction, or waiver,
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 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
9
<PAGE>
the date of redemption. In addition, prior to
August 15, 2000, the Company may, at its op-
tion, redeem up to 35% of the original aggre-
gate principal amount of the New Notes at 113%
of the principal amount thereof, plus accrued
and unpaid interest, if any, to the redemption
date, from the net proceeds of one or more pub-
lic sales of Qualified Capital Stock (as de-
fined herein) if at least 65% of the original
aggregate principal amount of the New Notes re-
mains outstanding after such redemption and if
such redemption occurs within 60 days after the
closing of any such public sale. See "Descrip-
tion 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, the right of
WFSG's creditors and stockholders) to partici-
pate in any distribution of the assets or earn-
ings of any subsidiary is subject to the prior
claims of creditors of such subsidiaries, in-
cluding any claims of WFSG as a creditor to the
extent such claims may be recognized. As a re-
sult, the New Notes will be effectively subor-
dinate to the claims of creditors 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 New Notes
in the event of certain asset sales and limit
the ability of the Company and its subsidiaries
to incur certain indebtedness (not including
secured indebtedness used to acquire or refi-
nance the acquisition of loans or other finan-
cial assets), pay dividends or make other dis-
tributions, engage in transactions with affili-
ates,
10
<PAGE>
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."
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 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.
Use of Proceeds...........
Holders of Old Notes should carefully consider
Risk Factors.............. all of the information contained in this Pro-
spectus, including the information set forth
under the caption "Risk Factors," before
tendering their Old Notes in the Exchange Of-
fer.
11
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
The following tables present summary historical consolidated financial
information for the Company at the dates and for the periods indicated. The
historical income statement data for the years ended December 31, 1996, 1995
and 1994 and balance sheet data as of December 31, 1996 and 1995 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 data presented for the nine month periods ended
September 30, 1997 and 1996 and balance sheet data presented as of September
30, 1997 have been derived from audited consolidated financial statements (the
"Audited Interim Financial Statements" and, together with the Audited Financial
Statements, the "Consolidated Financial Statements"). Operating results for the
nine month period ended September 30, 1997 are not necessarily indicative of
the results that may be expected for any other interim period or the entire
year ending December 31, 1997. The summary historical 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 of
the Company.
The Company classifies loans as discounted or non-discounted on a pool basis.
Each pool is designated as discounted or non-discounted based on whether that
pool consists primarily of Discounted or Non-Discounted Loans at the time of
acquisition. For example, a pool of Non-Discounted Loans may contain non-
performing loans at the time of acquisition as long as the non-performing loans
were not the primary component of the pool at that time. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Accounting Matters."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 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... $ 75,456 $ 34,137 $ 48,422 $ 24,381 $ 9,569
Total interest expense.. 59,036 19,592 29,277 14,481 5,457
----------- --------- --------- --------- -------
Net interest income..... 16,420 14,545 19,145 9,900 4,112
Provision for loan
losses(1).............. 926 15,751 16,549 4,266 2,173
----------- --------- --------- --------- -------
Net interest income
(loss) after provision
for loan losses........ 15,494 (1,206) 2,596 5,634 1,939
Other income............ 46,717 6,146 17,942 2,937 986
Other expenses.......... 40,988 10,674 15,446 7,932 4,703
----------- --------- --------- --------- -------
Income (loss) before
income taxes........... 21,223 (5,734) 5,092 639 (1,778)
Income tax provision
(benefit).............. 8,981 (4,652) 125 47 (526)
----------- --------- --------- --------- -------
Net income (loss)....... $ 12,242 $ (1,082) $ 4,967 $ 592 $(1,252)
=========== ========= ========= ========= =======
SELECTED CASH FLOW DATA:
Cash provided by (used
in) operations
(excluding loans held
for sale).............. (95,237) (2,687) (19,453) 1,589 (1,614)
Proceeds and repayments,
from loans and other
assets................. 505,760 76,310 393,392 76,695 22,011
Purchases of loans and
other assets........... (1,060,582) (246,335) (621,934) (190,863) (57,049)
Cash from financing
activities............. 575,754 188,761 395,811 108,231 42,323
----------- --------- --------- --------- -------
Net increase (decrease)
in cash(2)............ $ (74,305) $ 16,049 $ 147,816 $ (4,348) $ 5,671
=========== ========= ========= ========= =======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1997 1996 1995 1994
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 77,993 $152,298 $ 4,482 $ 8,830
Portfolio assets:
Discounted Loans, net............... 350,460(3) 219,630 31,354 2,094
Non-Discounted Loans, net........... 440,559(3) 191,962 259,417 179,377
Mortgage-backed and other securi-
ties............................... 256,297(3) 84,964 28,672 29,887
Foreclosed real estate, net......... 146,464(3) 78,200 4,964 1,208
---------- -------- -------- --------
Total portfolio assets............. $1,193,780 $574,756 $324,407 $212,566
Total assets......................... 1,369,761 753,849 340,695 230,636
Deposits............................. 407,768 501,614 303,524 196,289
Short-term debt...................... 658,042(3) 97,624 13,000 21,500
Long-term debt....................... 184,245 75,000 11,000 --
Stockholders' equity(4).............. 99,769 61,022 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- --------------------
1997 1996 1996 1995 1994
------ ------ ----- ----- ------
(ANNUALIZED)
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets............. 1.42% (.22)% 0.95% 0.24% (0.92)%
Return on average equity............. 23.08% (3.09)% 13.68% 8.65% (31.08)%
Average interest yield on total
loans............................... 9.42% 9.39 % 9.41% 10.02% 7.96 %
Net interest spread(5)(6)............ 1.99% 3.15 % 3.07% 3.44% 3.08 %
Net interest margin(6)(7)............ 2.06% 3.88 % 3.63% 3.87% 3.14 %
Ratio of earnings to fixed
charges(8):
Including interest on deposits...... 1.36 -- 1.17 1.04 -- (9)
Excluding interest on deposits...... 1.54 -- 2.19 2.19 -- (9)
Long-term debt to total capitaliza-
tion(10)............................ 0.65 -- 0.55 0.61 --
Total financial liabilities to equi-
ty.................................. 12.73 14.43 11.35 47.40 32.95
Average equity to average assets..... 6.15% 7.24 % 6.90% 2.72% 2.96 %
Non-Performing Loans to total Non-
Discounted Loans at end of
period(11)(12)...................... 16.82% 9.11 % 23.69% 4.46% 5.95 %
Allowance for loan losses to total
Non-Discounted Loans at end of
period.............................. 10.96% 9.20 % 13.88% 3.60% 3.72 %
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------
1997 1996 1995 1994
------------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Number of pools of loans ac-
quired........................... 79 41 33 38
Investments and originations:
Discounted Loans and foreclosed
real estate..................... $ 316,931 $ 324,159 $ 29,224 $ 2,538
Non-Discounted Loans(13)......... 556,231 254,517 157,671 39,023
Mortgage originations............ 50,962 2,280 8,748 4,345
Mortgage-backed and other securi-
ties............................ 184,393 67,604 2,965 14,469
---------- --------- -------- --------
Total........................... $1,108,517 $ 648,560 $198,608 $ 60,375
Recoveries and repayments......... (136,316) (66,160) (61,135) (21,824)
Loan sales and securitizations.... (344,710) (301,411) (16,031) --
Net change in portfolio assets.... 619,024 250,349 111,841 106,580
</TABLE>
- --------
(1) Approximately $8.6 million of the increase in the provisions from 1995 to
1996 related to certain sub-prime auto loans and $4.8 million of the 1996
provision related to the loans inherited by the Company upon the
acquisition of the Savings Banks. See "Business--Allowances for Losses."
(2) The increase in cash in 1996 reflects the receipt of cash from the
Company's sale of Common Stock and its 13% Notes and the decrease in cash
for the nine months ended September 30, 1997 reflects the subsequent
investment of that cash in interest earning assets which was partially
offset by the proceeds of the Company's Old Notes and a securitization.
13
<PAGE>
(3) The Company or its affiliates intend to sell to the Wilshire REIT (i) U.S.
Commercial Investments for approximately $42.9 million, (ii) MBS
Investments for approximately $98.1 million, and (iii) International
Investments in the United Kingdom for approximately $5.3 million. This
will reduce the corresponding amount on the Company's balance sheet for
such assets, decrease short-term debt and increase cash. In addition, the
Company intends to grant the Wilshire REIT an option to purchase all or a
portion of the Company's interest in two portfolios of International
Investments in France, for a purchase price of up to $110.0 million
(including approximately $40.9 million held on the Company's balance sheet
at September 30, 1997). See "The Wilshire REIT."
(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 31, 1997, the
Company issued to the Wilshire Private Companies 27,500 shares of PIK
Preferred Stock having an aggregate liquidation value of $27.5 million in
exchange for the cancellation of certain accounts payable to the Wilshire
Private Companies 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.
(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 nine
months ended September 30, 1997 primarily reflects the significant
increase in the Company's holdings of Discounted Loans during the nine
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 of Discounted Loans 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 three quarters of interest expense on the $84.2 million of
13% Notes and part of the most recent quarter of interest expense on
approximately $100.0 million of Old Notes, the proceeds of which were held
for part of such periods 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 nonaccrual status and
deemed non-performing.
(12) The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether that pool consists primarily of Discounted or Non-Discounted Loans
at the time of acquisition. For example, a pool of Non-Discounted Loans
may contain non-performing loans at the time of acquisition as long as the
non-performing loans were not the primary component of the pool at that
time. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Accounting Matters."
(13) Excludes purchases of newly originated mortgage and manufactured housing
loans, which are shown as mortgage originations. During the quarter ended
September 30, 1997, the Company completed the securitization of
approximately $146.0 million of fixed and adjustable loans secured by
mortgages or residential properties resulting in a gain of approximately
$11.9 million, a decrease in Non-Discounted Loans and an increase in cash.
14
<PAGE>
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of risk.
Each prospective investor should carefully examine this entire Prospectus and
should give particular attention to the risk factors set forth below before
purchasing the Notes offered hereby.
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." 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. Holders of Old Notes 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.
EXTENSIVE USE OF FINANCIAL LEVERAGE. The Company is highly leveraged. At
September 30, 1997, the Company's outstanding indebtedness for borrowed money
aggregated approximately $842.3 million, of which approximately $658.0 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 $407.8 million. The Company's ability to make
payments of principal or interest on or to refinance its indebtedness 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, including restrictions on the Company's
ability to obtain additional debt financing contained in the indentures
relating to the 13% Notes and Old Notes.
The Company finances its acquisitions of pools of loans with secured
borrowings, which generally represent 95% of the purchase price for pools of
U.S. Non-Discounted Loans and 90% of the purchase price for pools of U.S.
Discounted Loans. While the highly leveraged nature of the Company's pools of
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. All 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'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. In addition, the indentures relating to the
Company's 13% Notes and Old Notes restrict the Company's ability to obtain
additional debt financing. The Company's high degree of leverage may make it
more difficult for the Company to obtain additional financing for future
working capital, capital
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<PAGE>
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."
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 September 30, 1997, the Company
had warehouse and repurchase financing facilities totaling approximately $1.1
billion, of which approximately $455.8 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.
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 other banks and savings institutions. 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."
RISKS RELATED TO ACQUIRED POOLS OF LOANS. The Company purchases distressed
mortgage loans, as well as mortgage loans that have had a history of
delinquencies. These distressed mortgage loans may presently be in default or
may have a greater than normal risk of future defaults and delinquencies
compared to a pool of newly originated, high quality loans of comparable type,
size and geographic concentration. 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 underlying the loans are
located. At September 30, 1997, approximately 58.8% of the Company's
Discounted Loan portfolio was concentrated in New York, New Jersey and
Connecticut and approximately 64.9% of the Company's foreclosed real estate
was located in such states. In addition, approximately 37.9% of the Company's
Non-Discounted Loan portfolio and approximately 10.4% of the Company's
foreclosed real estate was located in California at September 30, 1997.
Adverse changes in national economic conditions or in the economic conditions
in 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
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<PAGE>
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 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 has acquired and may continue to acquire, subject to the
Wilshire REIT's right of first refusal, mortgage-backed securities, including
"first loss" unrated and other subordinated classes. A first loss security is
the most subordinated class of a multi-class issuance of pass-through or debt
securities and is the first to bear the loss upon a default on the underlying
collateral. Such classes are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest
than more senior, rated classes. While the market values of most subordinated
classes tend to react less to fluctuations in interest rate levels than more
senior, rated classes, the market values of subordinated classes tend to be
more sensitive to changes in economic conditions than more senior classes. As
a result of these and other factors, mortgage-backed securities generally are
not actively traded and may not provide holders thereof with liquidity.
The yield to maturity on the type of mortgage-backed securities that the
Company has acquired and may continue to acquire, are extremely sensitive to
the default and loss experience of the underlying mortgage loans and the
timing of any defaults or losses. In addition, because these mortgage-backed
securities generally have less credit support than senior classes, to the
extent there are realized losses on the mortgage loans comprising the mortgage
collateral for such classes, the Company may not recover the full amount or,
indeed, any of its initial investment in such mortgage-backed securities.
SUBSTANTIAL VARIATIONS IN QUARTERLY RESULTS. 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. The Company's operating results
also could fluctuate significantly based on the timing of the receipt of cash
flow from the resolution of Discounted Loans. 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 as income when those loans result in
the receipt of cash. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Accounting Matters." In addition,
fluctuations in quarterly results and cash flows could have a negative effect
on the Company's ability to service its indebtedness.
ABILITY TO MANAGE GROWTH. The Company has undergone rapid and significant
growth and is continuing to pursue a policy of rapid growth, including growth
in foreign countries. 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.
INVESTMENT LIMITATIONS AS A RESULT OF THE FORMATION OF THE WILSHIRE
REIT. The Company will grant a right of first refusal to the Wilshire REIT
with respect to U.S. Commercial Investments, MBS Investments and International
Investments. As a consequence, the opportunity for the Company to invest in
such assets would be limited to the extent the Wilshire REIT takes advantage
of such investment opportunities. In deciding whether to invest in any assets,
the Wilshire REIT may consider, among other factors, whether the assets are
well-suited for the Wilshire REIT and whether the Wilshire REIT is financially
or strategically able to take advantage of the investment opportunity. The
Company or its affiliates intend to sell the following assets to the Wilshire
REIT: (i) U.S. Commercial Investments for approximately $42.9 million; (ii)
MBS Investments for approximately $98.1 million; and (iii) International
Investments in the United Kingdom for approximately $5.3 million. The Company
expects to realize a book gain as a result of this sale.
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<PAGE>
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.
RISKS RELATED TO INTERNATIONAL SERVICING OPERATIONS. The Company recently
established servicing operations in the United Kingdom and France. The
Company's loan servicing operations in Western Europe utilize the U.S.
Servicer's servicing system, which has been adapted for servicing loans in
Western Europe. It is not anticipated that these servicing operations will be
profitable in 1998.
The Company's international servicing operations are subject to most of the
same risks associated with its U.S. operations as well as additional risks
such 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 servicing loans in foreign
countries. 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.
DEPENDENCE ON THE U.S. SERVICER. The Company currently relies on the U.S.
Servicer to service its pools of loans and is expected to continue to rely on
the U.S. Servicer until the Servicing Transfer. In addition, the Company's
mortgage loan origination program is conducted through the U.S. Servicer to
comply with certain licensing requirements, and the U.S. Servicer provides
certain administrative services to the Company. The U.S. Servicer 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 the U.S. Servicer for any reason could
have a material adverse impact on the Company. At September 30, 1997, the
Company had only become licensed to service loans in one state. In its review
of the U.S. Servicer's servicing of loans for the Savings Banks, the OTS has
expressed criticism of certain aspects of the U.S. Servicer's loan servicing
operations.
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 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. As
a result, acting together, they may be able to effectively control the
election of the entire Board of Directors of the Company and 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.
REGULATION OF THE SAVINGS BANKS. Following examinations of the Savings Banks
and Wilshire Acquisitions Corporation, the holding company for the Savings
Banks ("WAC"), by the OTS in each of 1994, 1995, 1996 and 1997, the OTS 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
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<PAGE>
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 record keeping; (c) develop requirements to ensure that the
servicing of loans by the Wilshire Private Companies 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 Cease and Desist 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. In October 1997, the Savings Banks entered into amended Orders
with the OTS which modified certain provisions of the original Cease and
Desist Orders, effective October 28, 1997.
The Orders prohibit First Bank and Girard from increasing their total
assets, as measured at the end of each calendar quarter, in excess of $145
million and $408 million, respectively, plus total net interest credited on
deposit liabilities. 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 prohibit the Savings Banks from purchasing (i) any loans or real estate,
without the approval of the OTS, until certain acquisition and servicing
deficiencies identified by the OTS have been corrected, and (ii) any non-
performing assets or foreclosed real estate until such time as the Savings
Banks are rated a composite "3" rating according to the Uniform Financial
Institutions Rating System with continued compliance with required capital
ratios.
The Orders require the Savings Banks to (i) maintain an effective Internal
Asset Review ("IAR") system that provides for adequate internal controls to
ensure that management timely reviews and classifies assets pursuant to their
IAR policies; (ii) fully comply with all policies and procedures submitted to
the OTS pursuant to the previous Cease and Desist Orders; (iii) operate
pursuant to and comply with their business plans; (iv) submit to the OTS, by
no later than November 30, 1997, a written plan to develop or obtain the
internal expertise and resources necessary to measure, monitor and model net
interest income and net portfolio value (the "IRR Plan") (v) review and
analyze, by November 30, 1997, the terms of all existing loan servicing or
other agreements with affiliates, to confirm that such agreements comply with
the Orders and that there are formal written agreements with respect to all
transactions with affiliates; and (vi) compare the results of profitability
models with the performance of purchased assets. The Orders also require the
Savings Banks to submit to the OTS, by November 30, 1997 and after each
calendar quarter, reports (i) detailing their progress in implementing their
Allowance for Loan and Lease Losses policies and the results of their reserve
analysis for the preceding calendar quarter; (ii) detailing any violations of
the policies and procedures submitted to the OTS that occurred during the
preceding quarter, together with an explanation as to what caused or
contributed to the act or practice constituting such violation, and what, if
any, corrective action has been undertaken; (iii) detailing any variances from
the business plans that occurred during the preceding quarter, showing actual
and planned results, and explaining any variances greater than 5 percent; and
(iv) detailing the progress in implementing the IRR Plan during the preceding
quarter. Management believes that the Savings Banks have complied with those
provisions of the Orders that required the Savings Banks to complete certain
actions by November 30, 1997, with the exception of timely documentation of a
reduced loan service arrangement with an affiliate.
The Orders also require the Savings Banks to elect at least two additional
new outside directors with specific financial institution industry experience.
Such outside directors cannot have any association with affiliates of the
Savings Banks, the Company or institution-affiliated parties, except that such
directors can simultaneously serve as a director of each of the Savings Banks.
As of October 31, 1997, the Savings Banks had elected two new directors.
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To address regulatory concerns, First Bank submitted to the OTS a bankcard
plan (the "Bankcard Plan") which (i) established a method by which First Bank
will estimate the appropriate level of reserves for its bankcard operations;
(ii) established internal controls; (iii) created an overdraft policy that
requires timely recognition of overdraft losses and identifies employees with
authority to approve overdrafts; and (iv) ensures that First Bank will comply
with all applicable statutes and regulations. After each calendar quarter,
First Bank is required to report to the OTS, in writing, any variances to the
Bankcard Plan.
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.
RISK OF INCREASED CAPITAL REQUIREMENTS. Federally insured savings
associations 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 those standards on individual associations
on a case-by-case basis. 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 would otherwise have
qualified them as "well capitalized" under OTS regulatory capital
requirements. As a result, the Orders require First Bank and Girard to
maintain core capital and risk-based capital equal to the dollar amount of
capital at March 31, 1997 levels, as measured at the end of each calendar
quarter. At September 30, 1997, the capital levels exceed the capital levels
required by the Orders.
The Orders provide that in the event capital falls below the levels required
by the Orders as a result of any determination by the OTS or otherwise that
adversely affects the Savings Banks' financial condition the Savings Banks
would have to raise additional capital. If the OTS were to impose higher
capital requirements on the Savings Banks or additional capital were required
as a result of an adverse determination by the OTS or otherwise, 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 as required by the OTS in the Orders or to meet
higher individual capital requirements imposed by the OTS, significant adverse
consequences could result.
RISKS RELATED TO SECURITIZATION. Under certain circumstances, the Company
may be required to advance funds to securitization trusts, indemnify the
trustee and the underwriters of a securitization 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.
INTEREST RATE SENSITIVITY. A significant portion of the Company's earnings
are derived from its net interest income. Changes in the 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 could be subject to a significant decline in earnings in
an increasing interest rate environment due to the cost to carry noninterest-
bearing assets with interest-bearing liabilities. 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
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<PAGE>
transactions may increase rather than mitigate the interest risk. If there is
a rise in short-term interest rates, the Company's borrowing costs would rise
faster than the yield on the Company's assets, which would include both fixed
and adjustable rate assets. At the conclusion of its 1997 examination of the
Savings Banks, the OTS indicated that the Company's documentation of its
hedging activities at the Savings Banks was insufficient for regulatory
purposes.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW
PROVISIONS. Certain provisions of Delaware law and the Company's Certificates
of Incorporation (the "Charter") and By-laws could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from attempting to acquire control of the Company. Certain provisions of
the Company's Charter and By-laws require the Company to have a Board of
Directors comprised of three classes of directors with staggered terms of
office, provide for the issuance of "blank check" preferred stock by the Board
of Directors of the Company without stockholder approval, and impose various
procedural and other requirements that could make it more difficult for
stockholders to effect certain corporate actions. Furthermore, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" (defined generally as a person
owning more than 15% of a Company's outstanding voting stock) for a period of
three years after the date of the transaction in which the person first
becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 could also
have the effect of delaying or preventing a change of control of the Company.
LIMITATION ON CHANGE IN CONTROL. If a person or group other than the
Principal Shareholders is or becomes the beneficial owner of more than 40% of
the total voting power of the Company (a "Change in Control Event") the
indentures for the Company's 13% Notes and Old Notes require the Company to
make an offer to purchase the 13% Notes and Old Notes at 101% of the principal
amount thereof, plus accrued interest, if any, to the date of the repurchase.
The exercise by the holders of the 13% Notes or Old Notes of their right to
require the Company to purchase the 13% Notes or Old Notes, as the case may
be, upon the occurrence of a Change in Control Event may have an adverse
effect on the Company. There can be no assurance that the Company would have
sufficient funds available to repurchase any of the 13% Notes or Old Notes
that may be tendered upon the occurrence of a Change in Control Event.
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.
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THE COMPANY
The Company is primarily engaged in the acquisition of pools of performing,
sub-performing and non-performing residential and commercial mortgage loans,
as well as foreclosed real estate and mortgage-backed securities. The Company
also acquires newly originated residential mortgage and manufactured housing
loans through correspondents and operates a merchant bankcard processing
business. At September 30, 1997, the Company had total assets of approximately
$1.4 billion, including approximately $791.0 million of loans, approximately
$146.5 million of foreclosed real estate and approximately $256.3 million of
mortgage-backed and U.S. government securities. For the nine months ended
September 30, 1997, the Company had net income of approximately $12.2 million.
The Company's executive offices are located at 1776 SW Madison St.,
Portland, Oregon 97205, and the telephone number of its executive offices is
(503) 223-5600 and its facsimile number is (503) 223-8799.
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THE WILSHIRE REIT
GENERAL
In October 1997, the Company established the Wilshire REIT which intends to
qualify and will elect to be taxed as a REIT. The Wilshire REIT has filed a
registration statement with the Securities and Exchange Commission in
connection with a proposed underwritten public offering of its common stock.
The Company currently owns 100% of the Wilshire REIT and expects to retain a
minority interest (currently expected to be approximately 9.9%, with options
to acquire an additional 10%) in the Wilshire REIT following the Wilshire
REIT's proposed initial public offering. There can be no assurance as to when
or if the Wilshire REIT's proposed initial public offering will be completed.
The Company formed the Wilshire REIT in connection with the Company's
strategy of focusing its acquisition activities on domestic residential and
domestic Non-Discounted commercial mortgage loans and expanding fee based
income. The Wilshire REIT will conduct certain business activities that
management believes are more efficiently operated in a REIT tax advantaged
format. The Wilshire REIT intends to invest primarily in the following:
U.S. COMMERCIAL INVESTMENTS:
. Discounted commercial and multi-family mortgage loans secured by
commercial and multi-family real properties located in the United
States; and
. Commercial and multi-family real properties located in the United
States, including foreclosed real estate.
INTERNATIONAL INVESTMENTS:
. Discounted and Non-Discounted commercial, multi-family and residential
mortgage loans secured by real properties located outside the United
States;
. Commercial and residential real properties located outside the United
States, including foreclosed real estate located outside the United
States.
MORTGAGE-BACKED SECURITIES:
. Primarily residential, non-investment grade subordinated interests, and
to a lesser extent, investment-grade, subordinated interests in
mortgage-backed securities.
Although the Wilshire REIT expects to invest primarily in the foregoing
assets, the Wilshire REIT may also acquire or originate other mortgage loans
or real properties such as residential Discounted or Non-Discounted Loans and
commercial Non-Discounted Loans in the United States (collectively, "Other
Real Estate Related Assets"). The Wilshire REIT is expected to take an
opportunistic approach to its investments and, accordingly, the Wilshire REIT
may invest in Other Real Estate Related Assets at any time.
The Company intends to grant a right of first refusal to the Wilshire REIT
with respect to U.S. Commercial Investments, MBS Investments and International
Investments. As a consequence, the opportunity for the Company to invest in
such assets would be limited to the extent the Wilshire REIT takes advantage
of such investment opportunities.
MANAGEMENT AGREEMENT
WRSC intends to enter into a management agreement with the Wilshire REIT
(the "Management Agreement") pursuant to which WRSC, subject to the
supervision of the Wilshire REIT's board of directors, will formulate
operating strategies for the Wilshire REIT, arrange for the acquisition of
assets by the Wilshire REIT, arrange for various types of financing for the
Wilshire REIT, including repurchase agreements, secured term loans, warehouse
lines of credit, mortgage loans and the issuance of mortgage-backed
securities, monitor the performance of the Wilshire REIT's assets and provide
certain administrative and managerial services in
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connection with the operation of the Wilshire REIT. For performing these
services, WRSC will receive the following compensation, fees and other
benefits (including reimbursement of out-of-pocket expenses):
<TABLE>
<CAPTION>
FEE AMOUNT
--- ------
<C> <S>
Base Management Fee........................ Equal to 1% per annum of the first $1.0
billion of average invested assets, 0.75% of
the next $500.0 million of average invested
assets and 0.50% of average invested assets
above $1.5 billion.
Incentive Fee.............................. Twenty-five percent of the amount by which
the Wilshire REIT's funds from operations
plus certain gains (minus certain losses)
exceed the ten year U.S. Treasury rate plus
5% per annum.
Expense Reimbursement Fee.................. Reimbursement of due diligence costs and out-
of-pocket expenses.
</TABLE>
In addition, because WRSC's employees will perform certain due diligence
tasks that purchasers of real estate (including managers of REITs) typically
hire outside consultants to perform, WRSC will be reimbursed for (or charge
the Wilshire REIT directly for) its out-of-pocket costs for performing due
diligence on assets purchased by the Wilshire REIT or considered for purchase
by the Wilshire REIT. The Wilshire REIT does not expect to maintain an office
or employ full-time personnel. Instead, it expects to rely on the facilities
and resources of WRSC to conduct its operations, and it will be required to
pay WRSC's out-of-pocket expenses.
The Wilshire REIT intends to grant WRSC and certain of the Wilshire REIT's
directors options to purchase 2,000,000 shares of common stock of the Wilshire
REIT (2,300,000 shares if the underwriters for the Wilshire REIT's proposed
initial public offering exercise their over-allotment option in full) at a
price per share equal to the initial offering price of the Wilshire REIT's
common stock. One quarter of WRSC's options will become exercisable on each of
the first four anniversaries of the closing of the Wilshire REIT's proposed
initial public offering.
SERVICING AGREEMENT
The Wilshire REIT intends to enter into a loan servicing agreement with the
U.S. Servicer pursuant to which the U.S. Servicer will act as servicer for the
Wilshire REIT and provide loan and real property management services,
including billing, portfolio administration and collection services for the
Wilshire REIT's U.S. Commercial Investments, MBS Investments and Other Real
Estate Related Assets in the United States. The Wilshire REIT also intends to
enter into a servicing agreement with the Company's two European subsidiaries
(the "European Servicers") pursuant to which the European Servicers will act
as servicers for the Wilshire REIT and provide loan and real property
management services in France and the United Kingdom. The Wilshire REIT will
pay the U.S. Servicer and the European Servicers a servicing fee at market
rates for each pool of loans or real estate assets that they service for the
Wilshire REIT and to reimburse them for certain out-of-pocket costs associated
with servicing such assets.
INITIAL INVESTMENTS
The Company or its affiliates intend to sell to the Wilshire REIT, upon the
consummation of the proposed initial public offering of the Wilshire REIT, (i)
U.S. Commercial Investments for approximately $42.9 million, (ii) MBS
Investments for approximately $98.1 million, and (iii) International
Investments in the United Kingdom for approximately $5.3 million. The Company
intends to grant the Wilshire REIT an option to purchase all or a portion of
the Company's interest in two portfolios of International Investments in
France for a purchase price
24
<PAGE>
of up to $110.0 million (including approximately $25.3 million held on the
Company's balance sheet at September 30, 1997). The Wilshire REIT is currently
evaluating the suitability of such investments under U.S. tax and French law.
Although not a primary investment for the Wilshire REIT, in order to deploy
more of its initial capital, the Wilshire REIT has committed to pay
approximately $89 million for a portfolio of performing, sub-performing and
non-performing residential loans and properties. The Wilshire REIT is expected
to acquire such loans and properties prior to the closing of its proposed
initial public offering with a capital contribution from the Company and
financing from a major investment bank.
The Wilshire REIT also intends to acquire certain commercial real estate
from Wilshire Properties 1, Incorporated ("Wilshire Properties 1") and
Wilshire Properties--2 Incorporated ("Wilshire Properties 2") all of the
outstanding shares of which are owned by Messrs. Wiederhorn and Mendelsohn.
The operating partnership of the Wilshire REIT will issue 376,874 units in the
Wilshire REIT's operating partnership ("Units") (which will comprise
approximately 1.8% of the outstanding Units, or 1.6% if the underwriter's for
the Wilshire REIT's proposed initial public offering exercise their over-
allotment option in full) to Wilshire Properties 1 and Wilshire Properties 2
in consideration of the acquisition of the commercial properties. The
commercial properties include the buildings where the Company leases office
space. Upon the consummation of the Wilshire REIT's proposed initial public
offering the Company will pay rent to the Wilshire REIT.
The purchase price for the Initial Investments was derived by considering a
number of factors, including the amount and timing of potential net cash flows
on the Initial Investments, the range of possible returns on such assets and
the risks associated with such assets, including the risk that the ultimate
return will be significantly affected by losses, if any, realized on the
underlying mortgage loans and other factors such as prepayment experience on
the underlying mortgage loans. The number of Units to be issued in connection
with the acquisition of the commercial properties from Wilshire Properties 1
and Wilshire Properties 2 was based on recent appraisals of these properties
and the proposed public offering price of shares of common stock of the
Wilshire REIT.
The Initial Investments will consist of the following:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
BALANCE OR PURCHASE
CLASSIFICATION NUMBER APPRAISED VALUE PRICE
- -------------- ------ ------------------- ------------
<S> <C> <C> <C>
U.S. Commercial Investments:
Discounted U.S. Commercial Loans...... 201 $ 53,335,473 $ 29,910,533
U.S. Commercial Properties(1)......... 12 12,988,000 12,988,000
MBS Investments(2)...................... 28 557,903,330(2) 98,387,783
International Investments............... 19 6,246,723 5,323,488
------------
Total............................... $146,609,804
============
</TABLE>
- --------
(1) Includes 4 properties with an appraised value of approximately $11.3
million which the Wilshire REIT intends to acquire from Wilshire
Properties 1 and Wilshire Properties 2.
(2) Includes IO classes of mortgage-backed securities that are entitled to no
(or minimal) distributions of principal.
25
<PAGE>
RECENT DEVELOPMENTS
In October 1997, the Savings Banks entered into amended Orders with the OTS
which modified certain provisions of the Original Cease and Desist Orders. See
"Regulation--Recent Regulatory Examinations." The Savings Banks continue to
remain subject to growth restrictions. In December 1997, Girard merged with
First Bank. See "Recent Developments--Activities Limitations."
The Company entered into a letter of intent to acquire certain assets of a
mortgage loan originator located in California for a purchase price of
approximately $2.8 million. The Company also entered into a letter of intent
to acquire a manufactured housing loan originator located in California for a
purchase price of approximately $5.7 million. There can be no assurance as to
when or if such acquisitions will be completed.
In December 1997, the Company completed a securitization of approximately
$131 million of unpaid principal balance of loans resulting in a gain of
approximately $7.5 million. At the sale date, the Company allocated
approximately $2.3 million of original cost basis to retained servicing
rights.
In December 1997, the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed underwritten public
offering of 3,500,000 shares of the Company's Common Stock. There can be no
assurance as to when or if the offering will be completed.
In the quarter ended December 31, 1997, the Company acquired or committed to
acquire 22 pools of loans and properties for an aggregate purchase price of
approximately $613.2 million. In such quarter, the Company acquired or
committed to acquire international assets for approximately $153.9 million,
U.S. Non-Discounted Loans for approximately $342.9 million, and U.S.
Discounted Loans for approximately $116.4 million. In the quarter ended
December 31, 1997, the Company acquired or committed to acquire 13 mortgage-
backed securities for a purchase price of approximately $43.7 million.
In January 1998, the Company acquired approximately $26.7 million of
residual securities and the related servicing rights.
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 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.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997 and as adjusted to give effect to the Exchange Offer. 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>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Warehouse facilities and repurchase agreements....... $ 658,042 $ 658,042
Deposits............................................. 407,768 407,768
---------- ----------
Total short-term debt.............................. $1,065,810 $1,065,810
========== ==========
Long-term debt:
13% Notes due 2004................................... $ 84,245 $ 84,245
13% Series B Notes due 2004.......................... 100,000 100,000
---------- ----------
Total long-term debt............................... 184,245 184,245
---------- ----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; 27,500 shares
outstanding ........................................ 27,500 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.................................... 16,812 16,812
Unrealized loss on available for sale securities..... (440) (440)
---------- ----------
Total stockholders' equity......................... 99,769 99,769
---------- ----------
Total capitalization............................... $ 284,014 $ 284,014
========== ==========
</TABLE>
- --------
(1) 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 September 30, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Regulatory capital ratios of First Bank
Tangible capital to tangible assets....................... 11.5%
Core capital to tangible assets........................... 11.5%
Total capital to risk-weighted assets (Risk-Based
Capital)................................................. 15.7%
Regulatory capital ratios of Girard
Tangible capital to tangible assets....................... 9.9%
Core capital to tangible assets........................... 9.9%
Total capital to risk-weighted assets (Risk-Based
Capital)................................................. 13.1%
</TABLE>
At September 30, 1997, the total core capital and total risk-based capital
amounts of the Savings Banks, compared to the OTS requirements contained in
the Orders, was as follows:
<TABLE>
<CAPTION>
GIRARD FIRST BANK
-------------------------- --------------------------
OTS OTS
ACTUAL REQUIREMENT EXCESS ACTUAL REQUIREMENT EXCESS
------- ----------- ------ ------- ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Core Capital...... $34,617 $33,146 $1,471 $12,736 $11,872 $864
Total Risk-Based
Capital................ $38,475 $37,610 $ 865 $13,889 $13,179 $710
</TABLE>
27
<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 February 2, 1998, 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
28
<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 January 15, 1998 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 March
4, 1998, 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.
29
<PAGE>
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. 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" 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) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the Holder must comply with the guaranteed delivery
procedures 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 term "Agents Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part
of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Facility tendering Old Notes which are the subject of such Book-
Entry Confirmation that such participant has received and agrees to be bound
by the terms of the Letter of Transmittal, and that the Company may enforce
such agreement against such participant.
30
<PAGE>
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT OVERNIGHT OR HAND DELIVERY SERVICE 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.
If the Letter of Transmittal is signed by the record Holder(s) of the Old
Notes tendered hereby, the signature must correspond to the name(s) written on
the face of the Old Notes without alteration, enlargement or any change
whatsoever. If the Letter of Transmittal is signed by a participant in The
Depository Trust Company ("DTC"), the signature must correspond with the
name(s) as it appears on the security position listing as the Holder of the
Old Notes. 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 listing 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. 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 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.
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.
A tender will be deemed to have been received as of the date when the
tendering Holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility with an
Agent's Message) or a Notice of Guaranteed Delivery from an Eligible
Institution is received by the Exchange Agent. Issuances of New Notes in
exchange for Old Notes tendered pursuant to a Notice of Guaranteed Delivery by
an Eligible Institution will be made only against delivery of the Letter of
Transmittal (and any other required documents) and the tendered Old Notes (or
timely confirmation received of a book-entry transfer of Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility) with the
Exchange Agent.
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 Note 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 Note tendered or to be tendered pursuant to the
31
<PAGE>
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.
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 completing 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.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC 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 the Book-Entry Transfer Facility, an
Agent's Message must be transmitted to and received by the Exchange Agent on
or prior to the Expiration Date at the address set forth below under "--
Exchange Agent", or the guaranteed delivery procedure below must be complied
with. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All references in this Prospectus
to deposit or delivery of Old Notes shall be deemed to include DTC's book-
entry delivery method.
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 and deliver an
Agent's Message 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 in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility) 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 (or a confirmation of such book-entry transfer) must be received
by the Exchange Agent within five business days after the Expiration Date.
32
<PAGE>
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 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 it is required to file a
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
33
<PAGE>
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 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
34
<PAGE>
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 New 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.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Hand: By Overnight Mail or
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust & Agency Group Corporate Trust & Agency Group
P.O. Box 292737 Receipt & Delivery Window Reorganization Unit
Nashville, TN 37229-2737 123 Washington Street, 1st Floor 648 Grassmere Park Road
New York, NY 10006 Nashville, TN 37211
</TABLE>
For Information Call:
(800) 735-7777
Confirm: (615) 835-3572
Facsimile: (615) 835-3701
35
<PAGE>
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 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 NEW 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 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
36
<PAGE>
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
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.
37
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
The following tables present selected consolidated historical financial
information for the Company at the dates and for the periods indicated. The
historical income statement data for the years ended December 31, 1996, 1995
and 1994 and balance sheet data as of December 31, 1996 and 1995 have been
derived from the Audited Financial Statements. The historical income statement
data presented for the nine month periods ended September 30, 1997 and 1996
and balance sheet data presented as of September 30, 1997 have been derived
from Interim Audited Financial Statements. Operating results for the nine
month period ended September 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 historical 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 of
the Company.
The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether that pool consists primarily of Discounted or Non-Discounted Loans at
the time of acquisition. For example, a pool of Non-Discounted Loans may
contain non-performing loans at the time of acquisition as long as the non-
performing loans were not the primary component of the pool at that time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Matters."
38
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- -----------------------------
1997 1996 1996 1995 1994
----------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income... $ 75,456 $ 34,137 $ 48,422 $ 24,381 $ 9,569
Total interest expense.. 59,036 19,592 29,277 14,481 5,457
----------- --------- --------- --------- -------
Net interest income... 16,420 14,545 19,145 9,900 4,112
Provision for loan loss-
es(1).................. 926 15,751 16,549 4,266 2,173
----------- --------- --------- --------- -------
Net interest income
(loss) after provi-
sion for loan loss-
es................... 15,494 (1,206) 2,596 5,634 1,939
----------- --------- --------- --------- -------
Other Income:
Bankcard income(2)..... 4,998 5,078 6,790 4,694 635
Bankcard processing ex-
pense................. (3,419) (3,865) (5,124) (3,462) (274)
Gain on sale of loans.. 31,252 1,983 11,538 642 --
Loan fees and charges.. 662 1,217 1,747 610 43
Trading account--
unrealized gain....... 1,171 1,601 1,833 -- --
Foreclosed real estate,
net................... 4,574 (231) 556 (170) (241)
Servicing revenue...... 3,339 -- -- -- --
Gain on sale of securi-
ties.................. 3,053 -- -- -- --
Other, net............. 1,087 363 602 623 823
----------- --------- --------- --------- -------
Total other income.... 46,717 6,146 17,942 2,937 986
----------- --------- --------- --------- -------
Other Expenses:
Compensation and em-
ployee benefits....... 11,274 2,955 4,464 2,516 1,922
FDIC insurance premi-
ums................... 791 2,066 2,381 721 261
Occupancy.............. 727 218 339 385 319
Professional services.. 2,104 572 700 1,028 507
Data processing and
equipment rentals..... 250 189 229 232 162
Loan service fees and
expenses.............. 19,423 3,522 5,176 1,958 242
Other general and ad-
ministrative ex-
penses................ 6,419 1,152 2,157 1,092 1,290
----------- --------- --------- --------- -------
Total other expenses.. 40,988 10,674 15,446 7,932 4,703
----------- --------- --------- --------- -------
Income (loss) before in-
come taxes............. 21,223 (5,734) 5,092 639 (1,778)
Income tax provision
(benefit).............. 8,981 (4,652) 125 47 (526)
----------- --------- --------- --------- -------
Net income (loss)....... $ 12,242 $ (1,082) $ 4,967 $ 592 $(1,252)
=========== ========= ========= ========= =======
Selected Cash Flow Data:
Cash provided by (used
in) operations
(excluding purchase of
loans held for sale)... $ (95,237) $ (2,687) $ (19,453) $ 1,589 $(1,614)
Proceeds and repayments
from loans and other
assets................. 505,760 76,310 393,392 76,695 22,011
Purchase of loans and
other assets........... (1,060,582) (246,335) (621,934) (190,863) (57,049)
Cash from financing ac-
tivities............... 575,754 188,761 395,811 108,231 42,323
----------- --------- --------- --------- -------
Net increase (decrease)
in cash(3)............ $ (74,305) $ 16,049 $ 147,816 $ (4,348) $ 5,671
=========== ========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1997 1996 1995 1994
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 77,993 $152,298 $ 4,482 $ 8,830
Portfolio assets:
Discounted Loans, net............. 350,460(4) 219,630 31,354 2,094
Non-Discounted Loans, net......... 440,559(4) 191,962 259,417 179,377
Mortgage Backed and other securi-
ties............................. 256,297(4) 84,964 28,672 29,887
Foreclosed real estate, net....... 146,464(4) 78,200 4,964 1,208
---------- -------- -------- --------
Total portfolio assets........... $1,193,780 $574,756 $324,407 $212,566
Total assets....................... 1,369,761 753,849 340,695 230,636
Deposits........................... 407,768 501,614 303,524 196,289
Short-term debt.................... 658,042(4) 97,624 13,000 21,500
Long-term debt..................... 184,245 75,000 11,000 --
Stockholders' equity(5)............ 99,769 61,022 7,039 6,793
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 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........ 1.42% (.22)% 0.95% 0.24% (0.92)%
Return on average equity........ 23.08% (3.09)% 13.68% 8.65% (31.08)%
Average interest yield on total
loans.......................... 9.42% 9.39% 9.41% 10.02% 7.96%
Net interest spread(6)(7)....... 1.99% 3.15% 3.07% 3.44% 3.08%
Net interest margin(7)(8)....... 2.06% 3.88% 3.63% 3.87% 3.14%
Ratio of earnings to fixed
charges(9):
Including interest on
deposits...................... 1.36 -- 1.17 1.04 -- (10)
Excluding interest on
deposits...................... 1.54 -- 2.19 2.19 -- (10)
Long-term debt to total
capitalization(11)............. 0.65 -- 0.55 0.61 --
Total financial liabilities to
equity......................... 12.73 14.43 11.35 47.40 32.95
Average equity to average
assets......................... 6.15% 7.24% 6.90% 2.72% 2.96%
Non-Performing loans to Non-
Discounted Loans at end of
period(12)(13)................. 16.82% 9.11% 23.69% 4.46% 5.95%
Allowance for loan losses to
total Non-Discounted Loans at
end of period.................. 10.96% 9.20% 13.88% 3.60% 3.72%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------
1997 1996 1995 1994
------------- --------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Number of pools of loans acquired.. 79 41 33 38
Investments and originations:
Discounted Loans and foreclosed
real estate...................... $ 316,931 $ 324,159 $ 29,224 $ 2,538
Non-Discounted Loans (12)(14)..... 556,231 254,517 157,671 39,023
Mortgage originations............. 50,962 2,280 8,748 4,345
Mortgage-backed and other securi-
ties............................. 184,393 67,604 2,965 14,469
---------- --------- -------- -------
Total............................. $1,108,517 $ 648,560 $198,608 $60,375
Recoveries and repayments.......... (136,316) (66,160) (61,135) (21,824)
Loan sales and securitizations..... (344,710) (301,411) (16,031) --
Net change in portfolio assets..... 619,024 250,349 111,841 106,580
</TABLE>
- --------
(1) Approximately $8.6 million of the increase in the provisions from 1995 to
1996 related to certain sub-prime auto loans and $4.8 million of the 1996
provision related to the loans inherited by the Company upon the
acquisition of the Savings Banks. See "Business--Allowances for Losses."
(2) The Company began its bankcard operations in 1994.
(3) The increase in cash in 1996 reflects the receipt of cash from the
Company's sale of Common Stock and the 13% Notes and the decrease in cash
for the nine months ended September 30, 1997 reflects the subsequent
investment of that cash in interest earning assets which was partially
offset by the proceeds of the Company's Old Notes and a securitization.
(4) The Company or affiliates intend to sell to the Wilshire REIT (i) U.S.
Commercial Investments for approximately $42.9 million, (ii) MBS
Investments for approximately $98.1 million, and (iii) International
Investments in the United Kingdom for approximately $5.3 million. This
will reduce the corresponding amount on the Company's balance sheet for
such assets, decrease short-term debt and increase cash. In addition, the
Company intends to grant the Wilshire REIT an option to purchase all or a
portion of the Company's interest in two portfolios of International
Investments in France, for a purchase price of up to $110.0 million
(including approximately $40.9 million held on the Company's balance
sheet at September 30, 1997). See "The Wilshire REIT."
(5) 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 the Wilshire Private Companies 27,500
shares of PIK Preferred Stock having an aggregate liquidation value of
$27.5 million in exchange for the cancellation of certain accounts
payable to the Wilshire Private Companies 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.
(6) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(7) The reduction in net interest margin and net interest spread in the nine
months ended September 30, 1997 primarily reflects the significant
increase in the Company's holdings of Discounted Loans during the nine
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 of Discounted Loans 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
40
<PAGE>
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 three
quarters of interest expense on the $84.2 million of 13% Notes and part of
the most recent quarter of interest expense on approximately $100.0 million
of Old Notes, the proceeds of which were held for part of such periods in a
lower-yielding liquid investment prior to their use by the Company to fund
acquisitions.
(8) Net interest margin represents net interest income divided by total
average earning assets.
(9) 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.
(10) Earnings for the year ended December 31, 1994 were inadequate to cover
fixed charges by $1.8 million.
(11) Total capitalization equals long-term debt plus equity.
(12) 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.
(13) The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether that pool consists primarily of Discounted or Non-Discounted
Loans at the time of acquisition. For example, a pool of Non-Discounted
Loans may contain non-performing loans at the time of acquisition as long
as the non-performing loans were not the primary component of the pool at
that time. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Accounting Matters."
(14) Excludes purchases of newly originated mortgage and manufactured housing
loans, which are shown as mortgage originations. During the quarter ended
September 30, 1997, the Company completed the securitization of
approximately $146.0 million of fixed and adjustable loans secured by
mortgages or residential properties resulting in a gain of approximately
$11.9 million, a decrease in Non-Discounted Loans and increase in cash.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Historical Financial Information and the Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Prospectus.
ACCOUNTING MATTERS
The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether that pool consists primarily of Discounted or Non-Discounted Loans at
the time of acquisition. For example, a pool of Non-Discounted Loans may
contain non-performing loans at the time of acquisition as long as the non-
performing loans were not the primary component of the pool at that time. 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.
Discounted Loans are presented in the Consolidated Financial Statements net
of unamortized discount and an allowance for loan losses established for those
loans. Discounts are allocated into (a) valuation allowances for estimated
losses against face value on specific loans ("specific valuation allowances")
and (b) portions of the discounts regarded as yield adjustments. In addition,
for discounted loans purchased by the Savings 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 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 generally on a
cash basis.
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 a
pool of Discounted Loans 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 during the nine months ended September 30, 1997, it would have
resulted in higher earnings for the nine month period. 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
42
<PAGE>
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 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.
Prior to the adoption of SFAS No. 122, "Accounting for Mortgage Servicing
Rights", the Company did not record 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. The Company now capitalizes
servicing rights it purchases from third parties and on loans it purchases or
originates and sells on a servicing retained basis. At September 30, 1997, the
Company had capitalized approximately $6.7 million of servicing rights.
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.
43
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997
----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1)
---------- -------- -------------
<S> <C> <C> <C>
AVERAGE ASSETS:
Mortgage-backed
securities...... $ 150,360 $12,484 11.07%
Loan portfolio
net of
unaccreted
discounts(2).... 848,247 59,950 9.42
Investment
securities and
other........... 64,034 3,022 6.29
---------- -------
Total interest-
earning assets.. 1,062,641 75,456 9.47
Non-interest
earning cash.... 2,163
Allowance for
loan losses..... (71,641)
Other assets.... 157,367
---------- -------
Total assets.... $1,150,530 $75,456
========== =======
AVERAGE
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest-bearing
deposits........ $ 447,731 $20,008 5.96%
FHLB advances... 641 27 5.62
Short-term
borrowings and
other interest
bearing
obligations..... 503,016 28,521 7.56
Long-term debt.. 100,912 10,480 13.85
---------- -------
Total interest-
bearing
liabilities..... 1,052,300 59,036 7.48
Non-interest
bearing
deposits........ 5,696
Escrow
deposits........ 276
Other
liabilities..... 21,532
---------- -------
Total
liabilities..... 1,079,804 59,036
Stockholders'
equity.......... 70,726
---------- -------
Total
liabilities and
stockholders'
equity.......... $1,150,530 $59,036
========== =======
Net interest
income.......... $16,420
Net interest
spread(3)(4).... 1.99%
Net interest
margin(4)....... 2.06
Ratio of average
interest-earning
assets to
average
interest-bearing
liabilities..... 100.98%
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE
--------- -------- ------------- --------- -------- ------------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Mortgage-backed
securities...... $ 29,241 $ 1,797 6.15% $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79%
Loan portfolio
net of
unaccreted
discounts(2).... 470,654 44,294 9.41 217,716 21,821 10.02 99,497 7,923 7.96
Investment
securities and
other........... 27,446 2,331 8.49 14,216 1,201 8.45 7,969 285 3.58
--------- -------- --------- -------- --------- --------
Total interest-
earning assets.. 527,341 48,422 9.18 255,986 24,381 9.52 130,981 9,569 7.31
Non-interest
earning cash.... 6,019 1,868 2,053
Allowance for
loan losses..... (39,675) (21,591) (4,509)
Other assets.... 32,061 15,277 7,646
--------- -------- --------- -------- --------- --------
Total assets.... $525,746 $48,422 $251,540 $24,381 $136,171 $9,569
========= ======== ========= ======== ========= ========
AVERAGE
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest-bearing
deposits........ $423,011 $25,270 5.97% $232,510 $14,111 6.07% $118,277 $5,017 4.24%
FHLB advances... 2,420 159 6.57 1,381 104 7.53 5,916 228 3.85
Short-term
borrowings and
other interest
bearing
obligations..... 51,316 3,531 6.88 4,122 232 5.62 4,757 212 4.46
Long-term debt.. 2,292 317 13.85 306 34 11.00
--------- -------- --------- -------- --------- --------
Total interest-
bearing
liabilities..... 479,039 29,277 6.11 238,319 14,481 6.08 128,950 5,457 4.23
Non-interest
bearing
deposits........ 2,822 2,196 1,537
Escrow
deposits........ 257 106 74
Other
liabilities..... 7,330 4,077 1,582
--------- -------- --------- -------- --------- --------
Total
liabilities..... 489,448 29,277 244,698 14,481 132,143 5,457
Stockholders'
equity.......... 36,298 6,842 4,028
--------- -------- --------- -------- --------- --------
Total
liabilities and
stockholders'
equity.......... $525,746 $29,277 $251,540 $14,481 $136,171 $5,457
========= ======== ========= ======== ========= ========
Net interest
income.......... $19,145 $ 9,900 $4,112
Net interest
spread(3)(4).... 3.07% 3.44% 3.08%
Net interest
margin(4)....... 3.63 3.87 3.14
Ratio of average
interest-earning
assets to
average
interest-bearing
liabilities..... 110.1% 107.4% 101.6%
</TABLE>
- ----
(1) Presented on an annualized basis.
(2) The average balances of the loan portfolio include Discounted 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 nine
months ended September 30, 1997 primarily reflects the significant
increase in the Company's holdings of Discounted Loans during the nine
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 of Discounted Loans 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 "--Accounting Matters." The reduction also reflected
three quarters of interest expense on the $84.2 million of 13% Notes and
part of the most recent quarter of interest expense on approximately
$100.0 million of Old 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.
44
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
VS. NINE MONTHS ENDED
SEPTEMBER 30, 1996
----------------------------
INCREASE (DECREASE) DUE TO
----------------------------
RATE VOLUME TOTAL
-------- --------- --------
<S> <C> <C> <C>
Interest-Earning
Assets:
Mortgage-backed
securities...... $ 1,936 $ 9,268 $ 11,204
Loan portfolio.. (1,067) 29,331 28,264
Investment
securities and
other........... (142) 1,993 1,851
-------- -------- --------
Total interest-
earning assets.. 727 40,592 41,319
-------- -------- --------
Interest-Bearing
Liabilities:
Interest-bearing
deposits........ 694 1,866 2,560
FHLB advances... (24) (54) (78)
Short-term
borrowings and
other interest-
bearing
obligations..... (213) 26,695 26,482
Long term-debt.. -- 10,480 10,480
-------- -------- --------
Total interest-
bearing
liabilities...... 457 38,987 39,444
-------- -------- --------
Increase
(decrease) in net
interest income.. $ 270 $ 1,605 $ 1,875
======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 V. 1995 1995 V. 1994 1994 V. 1993
--------------------------- ------------------------------- ----------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ------------------------------- ----------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
--------- -------- -------- --------- ---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Mortgage-backed
securities...... $ 127 $ 311 $ 438 $ (52) $ 50 $ (2) $ 168 $ 975 $1,143
Loan portfolio.. (1,246) 23,719 22,473 2,485 11,413 13,898 708 5,832 6,540
Investment
securities and
other........... 6 1,124 1,130 582 334 916 (112) 344 232
--------- -------- -------- --------- ---------- ---------- --------- --------- --------
Total interest-
earning assets.. (1,113) 25,154 24,041 3,015 11,797 14,812 764 7,151 7,915
--------- -------- -------- --------- ---------- ---------- --------- --------- --------
Interest-Bearing
Liabilities:
Interest-bearing
deposits........ (218) 11,377 11,159 2,806 6,288 9,094 1,368 2,885 4,253
FHLB advances... (11) 66 55 (631) 507 (124) -- 228 228
Short-term
borrowings and
other interest-
bearing
obligations..... 63 3,236 3,299 40 (20) 20 146 (19) 127
Long term-debt.. 10 273 283 -- 34 34 -- -- --
--------- -------- -------- --------- ---------- ---------- --------- --------- --------
Total interest-
bearing
liabilities...... (156) 14,952 14,796 2,215 6,809 9,024 1,514 3,094 4,608
--------- -------- -------- --------- ---------- ---------- --------- --------- --------
Increase
(decrease) in net
interest income.. $ (957) $ 10,202 $ 9,245 $ 800 $ 4,988 $ 5,788 $ (750) $ 4,057 $ 3,307
========= ======== ======== ========= ========== ========== ========= ========= ========
</TABLE>
45
<PAGE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE
MONTHS ENDED
SEPTEMBER 30, 1996
NET INCOME
The Company's net income was approximately $12.2 million for the nine months
ended September 30, 1997 compared to a net loss of approximately $1.1 million
for the nine months ended September 30, 1996.
NET INTEREST INCOME
The Company's net interest income was approximately $16.4 million for the
nine months ended September 30, 1997 compared to approximately $14.5 million
for the nine months ended September 30, 1996, an increase of 12.9%. The
Company's asset base was significantly larger in the 1997 period as a result
of the Company's initial public offering in December 1996 and significantly
higher levels of borrowing and investment opportunities.
Interest Income
The Company's interest income was approximately $75.5 million for the nine
months ended September 30, 1997 compared to approximately $34.1 million for
the nine months ended September 30, 1996, an increase of 121.0%. The increase
in the Company's interest income was due primarily to an increase in the
Company's interest earning assets from approximately $508.3 million at
September 30, 1996 to approximately $1.1 billion at September 30, 1997.
Interest Expense
The Company's interest expense was approximately $59.0 million for the nine
months ended September 30, 1997 compared with approximately $19.6 million for
the nine months ended September 30, 1996, an increase of 201.3%. The increase
in interest expense resulted from an increase in interest-bearing liabilities
to approximately $1.3 billion at September 30, 1997 from approximately $487.5
million at September 30, 1996 and includes the issuance in the fourth quarter
of 1996 and early 1997 of $84.2 million of the Company's 13% Notes and the
issuance in the third quarter of 1997 of $100 million of the Old Notes.
In addition, the Company's weighted average cost of funds increased from
5.81% at September 30, 1996 to 7.68% at September 30, 1997 principally
reflecting the issuance of the 13% Notes and the Old Notes.
PROVISION FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the first nine months of 1997
was a net provision of approximately $0.9 million resulting from additional
provision of approximately $3.4 million, which was partially offset by the
reversal of approximately $2.5 million of excess reserves on loans previously
sold. This compares with a provision for estimated losses on loans of
approximately $15.8 million for the first nine months of 1996 from reserves
established primarily for certain sub-prime auto loans and loans held by the
Savings Banks at the time they were acquired.
46
<PAGE>
OTHER INCOME
The Company's other income was approximately $46.7 million for the nine
months ended September 30, 1997 compared with approximately $6.1 million for
the nine months ended September 30, 1996, an increase of 660.1%. The
components of the Company's non-interest income are reflected in the following
table:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income.................................. $ 4,998 $ 5,078
Bankcard processing expense...................... (3,419) (3,865)
Gain on sale of loans............................ 31,252 1,983
Loan fees and charges............................ 662 1,217
Trading account-unrealized gain.................. 1,171 1,601
Real estate owned, net........................... 4,574 (231)
Servicing revenue................................ 3,339 --
Gain on sale of securities....................... 3,053 --
Other, net....................................... 1,087 363
----------- -----------
Total other income............................. $ 46,717 $ 6,146
=========== ===========
</TABLE>
The increase in other income for the nine months ended September 30, 1997 is
primarily attributable to (i) sales of loans, which resulted in gains of
approximately $31.3 million, (ii) the sale of securities, which resulted in a
gain of approximately $3.1 million, (iii) income from real estate owned, net,
resulting from the ongoing disposition of assets from a $72.3 million pool of
properties acquired in the fourth quarter of 1996 and from disposition of real
estate relating to discounted loans, and (iv) an increase in servicing fees
paid by unaffiliated third parties.
Gain on Sale of Loans
The gain on sale of loans for the nine months ended September 30, 1997 is
the result of the sale of loans with a book value of approximately $347.8
million, of which approximately $201.8 million were sold through whole loan
sales and approximately $146 million were sold through securitizations. For
the nine months ended September 30, 1997, gain on the sale of whole loans
totaled approximately $19.3 million and gains from securitizations totaled
approximately $11.9 million. Gains or losses on loan portfolios sold as whole
loans or through securitization transactions are based on the difference
between the cash proceeds received on the loans sold to outside investors and
the Company's cost basis allocated to the loans.
Gain on the Sale of Securities
The gain on the sale of securities for the nine months ended September 30,
1997 is a result of the sale of approximately $9.1 million of mortgage-backed
securities which resulted in a gain of approximately $3.1 million. This gain
reflects the Company's strategy of investing in subordinate classes of
mortgage-backed securities which the Company believes are likely to experience
a ratings upgrade as a result of payment history, prepayment or default
experience or otherwise. The Company 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.
Real Estate Owned, net
The increase in income from real estate owned, net is primarily due to gains
on the disposition of real estate acquired through foreclosure or deed in lieu
thereof from the Company's portfolio of Discounted Loans or from the
properties acquired in the fourth quarter of 1996.
47
<PAGE>
Servicing Revenue
The increase in servicing revenue of approximately $3.3 million in the nine
months ended September 30, 1997 was primarily the result of contracting for
servicing rights on loan portfolios owned by unaffiliated third parties and
arranging for such loan portfolios to be serviced by the U.S. Servicer at a
rate which is lower than the rate received by the Company.
OTHER EXPENSE
The Company's other expenses totaled approximately $41.0 million for the
nine months ended September 30, 1997 compared with approximately $10.7 million
for the nine months ended September 30, 1996, an increase of 284.0% which
reflects the significant growth of the Company's asset base and operations.
Loan Service Fees and Expenses Paid to Affiliate
The largest component of other expenses was loan service fees and expenses,
which includes servicing fees paid to the U.S. Servicer and collection-related
expenses incurred directly by the U.S. Servicer and reimbursed by the Company.
Loan service fees and expenses paid to affiliate were approximately $19.4
million for the nine months ended September 30, 1997 compared to approximately
$3.5 million for the nine months ended September 30, 1996, an increase of
approximately 451.5%. The increase in loan servicing fees and expenses paid to
affiliate was primarily the result of the increase in the unpaid principal
balance of loans being serviced by the U.S. Servicer on behalf of the Company
to approximately $1.2 billion at September 30, 1997 from approximately $502.0
million at September 30, 1996 and an increase in sub-servicing fees of
approximately $2.7 million. Also, collection-related expenses increased from
the nine months ended September 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 nine months of 1997. Discounted Loans
generally require more significant expenditures than performing and sub-
performing loans.
Compensation and Employee Benefits
Compensation and employee benefits was approximately $11.3 million for the
nine months ended September 30, 1997, compared to approximately $3.0 million
for the nine months ended September 30, 1996, an increase of 281.5%. The
increase was primarily due to an increase in the number of full-time
equivalent employees from 46 at September 30, 1996 to 205 at September 30,
1997, reflecting the expansion of business activities, particularly loan
acquisition activities and the growth of activities at the non-bank
subsidiaries.
Other general and administrative expenses increased from approximately $1.2
million for the nine months ended September 30, 1996 to approximately $6.4
million for the nine months ended September 30, 1997 due primarily to the
expansion of business activities at the non-bank subsidiaries, particularly
loan acquisition activities such as due diligence costs.
INCOME TAX PROVISION (BENEFIT)
Income tax provision amounted to an expense of approximately $9.0 million
during the nine months ended September 30, 1997 compared with a benefit of
approximately $4.7 million during the nine months ended September 30, 1996.
The change was primarily due to the utilization of net operating loss
deductions in 1996 and a normalized tax provision in 1997.
48
<PAGE>
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-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 certain 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 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.
49
<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 the U.S. Servicer and include (a) servicing fees and
(b) collection-related expenses incurred directly by the U.S. Servicer and
reimbursed by the Company. Servicing fees for
50
<PAGE>
Discounted Loans have been based on a percentage of cash flows collected.
Therefore, when Discounted Loans are sold, servicing fees increase
substantially. The volume of loans, particularly Discounted Loans, being
serviced for the Company by the U.S. Servicer 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 the U.S. Servicer
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.
51
<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
52
<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 intends to sell to the Wilshire REIT a portion of its mortgage-
backed securities for approximately $98.1 million. In addition, the Company
intends to grant the Wilshire REIT a right of first refusal
53
<PAGE>
with respect to MBS Investments. As a consequence, the opportunity for the
Company to invest in such assets would be limited to the extent the Wilshire
REIT takes advantage of such investment opportunities.
The Company's holdings of mortgage-backed securities and other securities
increased approximately $171.3 million during the nine months ended September
30, 1997 primarily as a result of purchasing certain subordinated 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 September 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 the Wilshire Private Companies. Securities classified as trading
account securities consisted primarily of Retained Securities (as defined). At
September 30, 1997, securities classified as held to maturity consisted
primarily of Government Securities (as defined) 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>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1997 1996 1995 1994
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.............. $201,325 $31,270 $ 9,083 $10,943
Trading account securities:
Mortgage-backed securities.............. 28,163 24,541 -- --
Held to maturity:
U.S. Government and other securities.... 7,442 7,429 6,470 4,505
Mortgage-backed securities.............. 19,367 21,724 13,119 14,439
-------- ------- ------- -------
Total................................. 26,809 29,153 19,589 18,944
-------- ------- ------- -------
Total investment securities........... $256,297(1) $84,964 $28,672 $29,887
======== ======= ======= =======
</TABLE>
- --------
(1) The Company intends to sell to the Wilshire REIT (i) certain mortgage-
backed securities which at September 30, 1997 had a carrying value of
$77.4 million and (ii) certain mortgage-backed securities acquired for
$18.4 million subsequent to September 30, 1997.
Loans Net
The Company or its affiliates intend to sell to the Wilshire REIT (i) U.S.
Commercial Investments for approximately $42.9 million and (ii) International
Investments in the United Kingdom for approximately $5.3 million. In addition,
the Company intends to grant the Wilshire REIT a right of first refusal with
respect to U.S. Commercial Investments and International Investments. As a
consequence, the opportunity for the Company to invest in such assets would be
limited to the extent the Wilshire REIT takes advantage of such investment
opportunities.
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:
54
<PAGE>
AVERAGE UNPAID PRINCIPAL BALANCE OF THE PORTFOLIO OF NON-DISCOUNTED LOANS AND
DISCOUNTED LOANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------
1997 1996 1995 1994
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Single-family residential........ $ 686,636 $327,014 $ 93,350 $ 31,414
Multifamily residential.......... 91,011(1) 73,470 70,631 36,089
Commercial and other mortgage
loans........................... 144,019(1) 58,227 53,852 33,163
Consumer and other............... 191,184(2) 29,110 10,137 2,917
--------- -------- -------- --------
Total loans.................. 1,112,850 487,821 227,970 103,583
Unaccreted discount.............. (264,603) (17,167) (10,254) (4,086)
Allowance for loan losses........ (71,641) (39,675) (21,591) (4,509)
--------- -------- -------- --------
Total........................ $ 776,606 $430,979 $196,125 $ 94,988
========= ======== ======== ========
</TABLE>
- --------
(1) The Company or its affiliates intend to sell to the Wilshire REIT U.S.
Commercial Investments with an aggregate principal balance of
approximately $66.3 million.
(2) In the first quarter of 1997, the Company acquired approximately $174.2
million of consumer loans for less than 1.1% of their face amount.
Accordingly, the amount shown for "Consumer and other" increased
substantially.
The Company's portfolio of Non-Discounted Loans and Discounted Loans, net of
discounts and allowances, increased by approximately $379.4 million during the
nine months ended September 30, 1997 primarily as a result of the Company's
business strategy of aggressively acquiring Discounted Loans and other
mortgage loans.
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 $68.3
million during the nine months ended September 30, 1997 primarily as a result
of the foreclosure of certain Discounted Loans acquired in the fourth quarter
of 1996 and the first nine months 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 from Affiliate, net
Due from affiliate, net of approximately $47.4 million at September 30, 1997
was primarily attributable to payments received in the normal course of
servicing operations by U.S. Servicer, which had not yet been remitted to the
Company.
Deposits
Deposits decreased by approximately $93.8 million or 18.7% during the nine
months ended September 30, 1997. Pursuant to the Orders, 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. The Savings Banks have complied
with these requirements. Accordingly, the Savings Banks have allowed deposits
to pay off to the extent not necessary to fund asset growth.
Notes Payable
In the fourth quarter of 1996 and the first quarter of 1997, the Company
issued $84.2 million of 13% Notes. In the third quarter of 1997, the Company
issued $100.0 million of Old Notes.
55
<PAGE>
Short-Term Borrowings
Short-term borrowings increased by approximately $560.4 million during the
nine months ended September 30, 1997, resulting from increased use of
repurchase agreements and warehouse financing instead of deposits to fund the
purchases of loans and securities.
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 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 Company will seek to purchase IOs to hedge against maturity extension
risk in the Company's loan and securities portfolio in the event that the
Company encounters slower than anticipated prepayments while still
anticipating an acceptable return on the purchase of such IOs. Accordingly, if
the underlying mortgage collateral prepays (including prepayments as a result
of default and repurchases by the seller) at a rate faster than anticipated,
the weighted average life of the IO will be reduced, and the yield to maturity
adversely affected. Conversely, if the underlying mortgage collateral prepays
at a rate slower than anticipated, the weighted average life of the IO will be
extended, with the consequent positive effect on the anticipated yield to
maturity.
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 $214.4 million notional principal amount of interest rate swap
56
<PAGE>
agreements outstanding at September 30, 1997, which had the effect of
decreasing the Company's net interest income by approximately $0.2 million
during the nine months ended September 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 September 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 7%
decrease or 3% 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 September 30, 1997:
INTEREST RATE SENSITIVITY OF THE SAVINGS BANKS' NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
--------------------------
AMOUNT $ CHANGE % CHANGE
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+400bp............................................... $44,781 $(13,435) (23)%
+300bp............................................... 49,774 (8,442) (15)%
+200bp............................................... 54,057 (4,159) (7)%
+100bp............................................... 56,733 (1,483) (3)%
0bp.................................................. 58,216 -- --
- -100bp............................................... 59,144 928 2 %
- -200bp............................................... 59,793 1,577 3 %
- -300bp............................................... 60,547 2,331 4 %
- -400bp............................................... 61,692 3,476 6 %
</TABLE>
Management of the Savings Banks believes that the assumptions (including
prepayment 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 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, 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, borrowings under its warehouse and repurchase financing
facilities from institutional investors and other lenders and public and
private debt offerings, including the 13% Notes and Old Notes. In certain
limited circumstances, the Company also has borrowed money from the Wilshire
Private Companies in order to fund the acquisition of loans. The Company
repaid such borrowings with the PIK Preferred Stock on July 31, 1997. 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 of the Company. 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 September 30, 1997, the Savings Banks had
approximately $400.4 million of certificates of deposit. At
57
<PAGE>
September 30, 1997, scheduled maturities of certificates of deposit during the
12 months ending September 30, 1998 and thereafter amounted to approximately
$370.4 million and approximately $30.0 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 and that brokered and other wholesale
deposits can be both a relatively cost-effective and stable source of funds.
At September 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, $34.9 million (committed) under a repurchase agreement with Salomon
Brothers Realty Corp. and $57.8 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 eligible securities collateral, and reverse repurchase agreements.
At September 30, 1997, the Savings Banks had no FHLB advances outstanding, and
were eligible to borrow up to an aggregate of $5.4 million from the FHLB of
San Francisco and had approximately $5.4 million of unencumbered mortgage-
backed and related securities that could be pledged to secure such borrowings.
The Company's uses of cash include the funding of purchases of U.S.
residential Discounted Loans and Non-Discounted Loans, U.S. commercial Non-
Discounted 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
determination as to the appropriate amount of leverage. With respect to pools
of U.S. Discounted Loans and U.S. 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, mortgage-backed
securities and newly originated mortgage and manufactured housing loans. The
Company believes that cash flow from operations, 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 to sustain this level of growth
58
<PAGE>
once a substantial portion of the proceeds of this Offering are invested. The
indentures for the Company's 13% Notes and Old 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 semiannual
interest payments on the 13% Notes and Old 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 4% 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. The Company and the Savings Banks have complied with these
requirements.
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. 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 would otherwise have
qualified them as "well capitalized" under OTS regulatory capital
requirements. The OTS also indicated that the Savings Banks' current capital
requirements may not be appropriate given the deficiencies noted in the
examination. As a result, the Orders require First Bank and Girard to maintain
core capital and risk-based capital equal to the dollar amount of capital at
March 31, 1997, as measured at the end of each calendar quarter. The Orders
provide that in the event capital falls below the levels required by the
Orders as a result of any determination by the OTS or otherwise that adversely
affects the Savings Banks' financial condition, the Savings Banks would have
to raise additional capital. If the OTS were to impose higher capital
requirements on the Savings Banks or additional capital were required as a
result of an adverse determination by the OTS or otherwise, the Company might
inject additional capital into the Savings Banks, whether or not such usage of
capital is optimal for the Company.
At September 30, 1997, the total core capital and total risk-based capital
amounts of the Savings Banks, compared to the OTS requirements contained in
the Orders was as follows:
<TABLE>
<CAPTION>
GIRARD FIRST BANK
-------------------------- --------------------------
OTS OTS
ACTUAL REQUIREMENT EXCESS ACTUAL REQUIREMENT EXCESS
------- ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Core Capital...... $34,617 $33,146 $1,471 $12,736 $11,872 $864
Total Risk-Based
Capital................ $38,475 $37,610 $ 865 $13,889 $13,179 $710
</TABLE>
59
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at September 30, 1997:
REGULATORY CAPITAL RATIOS OF THE SAVINGS BANKS
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
"WELL CAPITALIZED"
FOR CAPITAL UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES(1) ACTION PROVISIONS
------------- ------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets
(Risk-Based Capital):
First Bank............... $13,889 15.7% $ 7,073 greater than/equal to 8.0% $ 8,841 greater than/equal to 10.0%
Girard................... 38,475 13.1% 23,555 greater than/equal to 8.0% 29,444 greater than/equal to 10.0%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............... 12,736 14.4% 3,536 greater than/equal to 4.0% 5,305 greater than/equal to 6.0%
Girard................... 34,617 11.8% 11,778 greater than/equal to 4.0% 17,666 greater than/equal to 6.0%
Core Capital to Tangible
Assets:
First Bank............... 12,736 11.5% 4,417 greater than/equal to 4.0% 5,521 greater than/equal to 5.0%
Girard................... 34,617 9.9% 13,925 greater than/equal to 4.0% 17,406 greater than/equal to 5.0%
Tangible Capital to
Tangible Assets:
First Bank............... 12,736 11.5% 1,656 greater than/equal to 1.5% Not applicable
Girard................... 34,617 9.9% 5,222 greater than/equal to 1.5% Not applicable
</TABLE>
- --------
(1) These capital adequacy ratios represent the requirements for all savings
institutions. The Savings Banks' minimum capital requirements are the
ratios specified in the Orders and those in the column containing the
"well-capitalized" requirements as well as the capital amounts indicated in
the preceding table.
60
<PAGE>
BUSINESS
GENERAL
The Company primarily acquires pools of performing, sub-performing and non-
performing residential and commercial mortgage loans, as well as foreclosed
real estate and mortgage-backed securities. The Company also acquires newly
originated residential mortgage and manufactured housing loans through
correspondents and operates a merchant bankcard processing business. At
September 30, 1997, the Company had total assets of approximately $1.4
billion, including approximately $791.0 million of loans, approximately $146.5
million of foreclosed real estate and approximately $256.3 million of
mortgage-backed and U.S. government securities. For the nine months ended
September 30, 1997, the Company had net income of approximately $12.2 million.
The Company acquires pools of loans that, at the time of acquisition,
consist primarily of either Discounted Loans or Non-Discounted Loans. At
September 30, 1997, the Company held approximately $350.5 million of
Discounted Loans and approximately $440.5 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 financial institutions.
From 1991 through December 31, 1997, 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 $2.7 billion. The volume of loan pool
acquisitions overseen by the Company's Principal Shareholders has accelerated
significantly, growing from 41 pools that were acquired in 1996 for an
aggregate purchase price of approximately $578.7 million to 79 pools that were
acquired in the first nine months of 1997 for an aggregate purchase price of
approximately $873.2 million. Comprehensive criteria and procedures have been
established by the Company 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 the U.S. Servicer, actively services each acquired loan
and property to maximize cash flow, using specialized procedures and
proprietary software. Discounted loans generally are resolved 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 September 30,
1997, the U.S. Servicer was servicing approximately $2.6 billion of assets,
including (i) approximately $1.2 billion aggregate principal amount of loans
for the Company; (ii) approximately $1.3 billion aggregate principal amount of
loans for third parties (including approximately $645.2 million of loans
previously securitized by the Company and its affiliates); and (iii)
approximately $93.5 million aggregate principal amount of the U.S. Servicer's
loans.
The Company also acquires, through the U.S. Servicer, 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 to higher
credit borrowers. From the commencement of its mortgage loan origination
program through September 30, 1997, the Company purchased loans totaling
approximately $80.2 million in principal amount.
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, principally mail order, telephone
order and audio-text transactions where the lack of a customer's physical
presence at the time
61
<PAGE>
of a transaction creates a higher risk of chargebacks. The Company focuses on
these market niches because management believes they offer higher risk-
adjusted returns. The Company attempts to manage its risks through the pricing
of its services and managing merchant cash reserves through a software system
developed by the Company. During the nine months ended September 30, 1997, net
revenues from these operations totaled $1.6 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:
. Growth of Acquisitions of Loan Pools. The Company plans to expand its
acquisition of pools of U.S. residential Discounted and Non-Discounted
Loans and U.S. commercial Non-Discounted Loans by more actively marketing
its services, with a view to adding new customers and developing more
repeat business. The Company has granted a right of first refusal to the
Wilshire REIT with respect to U.S. Commercial Investments, MBS
Investments and International Investments.
. Expansion of Fee-Based Income.
. International Third Party Specialty Servicing. The Company intends to
continue to expand its third party specialty servicing operations in
Western Europe and to develop and acquire servicing operations in
Latin America.
. Management of the Wilshire REIT. The Company will act as the manager
and operator of the Wilshire REIT for a management fee and an
incentive fee.
. Expansion of Mortgage Loan Origination Network and Products. The Company
plans to further expand its mortgage loan origination program through
acquisitions of loan originators, 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.
. Opportunistic Acquisitions from Specialty Finance Companies. The Company
intends to acquire mortgage loans, properties and mortgage-backed
securities from distressed sub-prime mortgage lenders and other specialty
finance companies. The Company believes that the high levels of debt
coupled with the negative cash flow characteristics of many of these
businesses and the Company's specialty servicing abilities may present
favorable opportunities for the Company.
. Growth of Merchant Bankcard Processing Operations. The Company plans to
continue development of its merchant bankcard processing operations
through increased marketing and acquisitions of merchant portfolios and
other bankcard processors.
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.
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
62
<PAGE>
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 which 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 is
willing to purchase 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.
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 First
Bank and Girard 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 the U.S. Servicer, 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 a preliminary servicing plan or a revised servicing 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, through
the U.S. Servicer, seeks to resolve the Discounted Loans as expeditiously as
possible, generally within one to two years. Discounted Loans require more
intensive servicing than Non-Discounted Loans. The 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.
The Company is willing to purchase 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
63
<PAGE>
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>
YEAR ENDED DECEMBER 31, TOTAL
----------------------------------- ----------------
NINE MONTHS
ENDED SINCE
SEPTEMBER 30, 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... 29 $ 52,700 4 $ 1,892 6 $ 2,620 1 $2,538 40 $ 59,750
Over $5 million to $10
million............... 8 52,993 1 6,588 -- -- -- -- 9 59,581
Over $10 million to $20
million............... 2 33,370 -- -- -- -- -- -- 2 33,370
Over $20 million to $50
million............... 4 109,205 2 54,583 1 26,604 -- -- 7 190,392
Over $50 million....... 1 68,663 4 261,096 -- -- -- -- 5 329,759
------ ----------- --- -------- --- ------- --- ------ ----- ----------
Total................. 44 $ 316,931 11 $324,159 7 $29,224 1 $2,538 63 $ 672,852
====== =========== === ======== === ======= === ====== ===== ==========
</TABLE>
At September 30, 1997, the unpaid principal balance of the Company's
portfolio of Discounted Loans, net of unaccreted discount and valuation
allowance, aggregated approximately $350.5 million or 25.6% 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,
SEPTEMBER 30, --------------------------
1997 1996 1995 1994
------------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted Loans:
Single-family residential......... $ 397,177 $276,759 $ 50,937 $ 348
Multifamily residential........... 12,876 317 -- --
Commercial real estate(1)......... 57,224 4,919 1,523 432
Consumer and other(2)............. 187,835 1,342 979 2,215
--------- -------- -------- ------
Total Discounted Loans.............. 655,112 283,337 53,439 2,995
Unaccreted discount and deferred
fees(2)............................ (270,509) (58,088) (6,671) (470)
Valuation allowance(3).............. (34,143) (5,619) (15,414) (431)
--------- -------- -------- ------
Total Discounted Loans, net......... $ 350,460 $219,630 $ 31,354 $2,094
========= ======== ======== ======
</TABLE>
- --------
(1) The Company or its affiliates intend to sell to the Wilshire REIT certain
U.S. Commercial Investments having an aggregate principal balance of
approximately $66.3 million.
(2) In the first quarter of 1997, the Company acquired approximately $174.2
million of consumer loans for less than 1.1% of their face amount.
Accordingly, the amounts shown for "Consumer and other" and "Unaccreted
discount and deferred fees" increased substantially.
(3) 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."
64
<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 and the unpaid principal
balance of the Discounted Loans which are secured by such properties at
September 30, 1997:
GEOGRAPHIC CONCENTRATION OF DISCOUNTED LOANS
<TABLE>
<CAPTION>
SINGLE-FAMILY MULTIFAMILY COMMERCIAL REAL
RESIDENTIAL RESIDENTIAL ESTATE TOTAL
---------------- --------------- --------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ANNUAL PERCENT
-------- ------- ------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New York............................................... $127,889 32.2% $ 379 2.9% $ 8,875 15.5% $137,143 29.3%
New Jersey............................................. 82,575 20.8 2,042 15.9 5,226 9.1 89,843 19.2
Connecticut............................................ 28,876 7.3 3,476 27.0 15,928 27.8 48,280 10.3
California............................................. 26,165 6.6 5,586 43.4 13,801 24.1 45,552 9.7
Pennsylvania........................................... 22,935 5.8 0 0.0 474 0.8 23,409 5.0
Other.................................................. 108,737 27.3 1,393 10.8 12,920 22.7 123,050 26.5
-------- ----- ------- ----- ------- ----- -------- -----
Total................................................ $397,177 100.0% $12,876 100.0% $57,224 100.0% $467,277 100.0%
======== ===== ======= ===== ======= ===== ======== =====
</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, through the U.S.
Servicer, 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, through the U.S. Servicer, 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>
YEAR ENDED DECEMBER 31, TOTAL
------------------------------------- ----------------
NINE MONTHS
ENDED SINCE
SEPTEMBER 30, 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......................... 21 $ 45,432 25 $ 40,267 22 $ 80,319 35 $22,201 103 $ 188,219
Over $5 million to $10 million............... 6 40,156 -- -- 3 26,642 1 5,295 10 72,093
Over $10 million to $20 million.............. 2 24,139 3 41,418 -- -- 1 11,527 6 77,084
Over $20 million to $50 million.............. 3 96,752 1 45,263 -- -- -- -- 4 142,015
Over $50 million............................. 3 349,752 1 127,569 1 50,710 -- -- 5 528,031
------ ----------- --- -------- --- -------- --- ------- ---- -----------
Total........................................ 35 $ 556,231 30 $254,517 26 $157,671 37 $39,023 128 $ 1,007,442
</TABLE>
65
<PAGE>
At September 30, 1997, the unpaid principal balance of the Company's
portfolio of Non-Discounted Loans, net of unaccreted discount and valuation
allowance, aggregated approximately $440.6 million or 32.2% 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,
SEPTEMBER 30, ----------------------------
1997 1996 1995 1994
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-Discounted Loans:
Single-family residential....... $277,231 $ 74,895 $139,566 $ 53,095
Multifamily residential......... 78,806 69,044 71,239 77,884
Commercial real estate.......... 108,414 63,374 53,458 57,881
Consumer and other.............. 50,747 22,817 19,753 6,733
-------- -------- -------- --------
Total Non-Discounted loans........ 515,198 230,130 284,016 195,593
Unaccreted discount and deferred
fees............................. (18,151) (6,232) (14,362) (8,946)
Valuation allowance(1)............ (56,488) (31,936) (10,237) (7,270)
-------- -------- -------- --------
Total Non-Discounted Loans, net... $440,559 $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 and the unpaid
principal balance of the Non-Discounted Loans which are secured by such
properties at September 30, 1997:
GEOGRAPHIC CONCENTRATION OF NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
SINGLE-FAMILY MULTIFAMILY COMMERCIAL
RESIDENTIAL RESIDENTIAL REAL ESTATE TOTAL
---------------- --------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California............................................ $ 75,772 27.3% $49,964 63.4% $ 50,397 46.5% $176,133 37.9%
New York.............................................. 33,093 11.9 9,194 11.7 16,598 15.3 58,885 12.7
New Jersey............................................ 36,870 13.3 918 1.2 5,850 5.4 43,638 9.4
Massachusetts......................................... 15,431 5.6 555 0.7 882 0.8 16,868 3.6
Pennsylvania.......................................... 15,218 5.5 -- 0.0 358 0.3 15,576 3.4
Other................................................. 100,847 36.4 18,175 23.0 34,329 31.7 153,351 33.0
-------- ----- ------- ----- -------- ----- -------- -----
Total............................................... $277,231 100.0% $78,806 100.0% $108,414 100.0% $464,451 100.0%
</TABLE>
The following table sets forth certain information at September 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.
66
<PAGE>
MATURITY OF NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
MATURING IN
---------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR YEAR THROUGH YEARS THROUGH AFTER TEN
OR LESS FIVE YEARS TEN YEARS YEARS
-------- ------------ ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residential....... $5,950 $ 8,672 $10,177 $252,432
Multifamily residential......... 16,978 17,166 22,015 22,647
Commercial and other mortgage
loans.......................... 27,580 35,749 17,370 27,715
Consumer and other.............. 20,060 15,220 4,418 11,049
Interest rate terms on amounts
due after one year.............
Fixed......................... -- 40,771 26,150 257,619
Adjustable.................... -- 36,036 27,830 56,224
</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.
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>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------
1997 1996 1996 1995 1994
---------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $ 513,467 $337,455 $ 337,455 $198,588 $ 74,045
Discounted Loan
purchases:
Single-family
residential.......... 238,792 -- 336,614 49,662 1,542
Multifamily
residential.......... 14,059(1) -- 464 96 --
Commercial and other
mortgage loans....... 54,305(1) -- 10,741 869 1,843
Consumer and other
loans(2)............. 187,493 -- 444 5,368 239
---------- -------- --------- -------- --------
Total Discounted
Loans purchased.... 494,649 -- 348,263 55,995 3,624
Non-Discounted Loan
purchases(3):
Single-family
residential.......... 596,623 221,581 239,263 121,883 36,462
Multifamily
residential.......... 25,523(1) -- 507 -- 61,247
Commercial and other
mortgage loans....... 54,040(1) -- 6,803 2,126 31,091
Consumer and other
loans................ 18,934 18,742 18,791 11,012 10,847
---------- -------- --------- -------- --------
Total Non-Discounted
Loans purchased.... 695,120 240,323 265,364 135,021 139,647
Originations:
Single-family
residential.......... 39,466 1,906 1,906 3,508 1,478
Multifamily
residential.......... -- 374 374 1,180 252
Commercial and other
mortgage loans....... -- -- -- 4,060 2,615
Consumer and other
loans................ 11,496 -- -- -- --
---------- -------- --------- -------- --------
Total loans
originated......... 50,962 2,280 2,280 8,748 4,345
Sales of Loans.......... (350,584) (27,965) (326,236) (16,673) --
Principal repayments,
net of capitalized
interest............... (116,969) (37,789) (54,180) (27,464) (14,813)
Transfer to foreclosed
real estate and other.. (116,335) (12,350) (59,479) (16,760) (8,260)
---------- -------- --------- -------- --------
Net increase in loans... 656,843 164,499 176,012 138,867 124,543
---------- -------- --------- -------- --------
Balance at end of
period................. $1,170,310 $501,954 $ 513,467 $337,455 $198,588
========== ======== ========= ======== ========
</TABLE>
67
<PAGE>
- --------
(1) The Company or its affiliates intend to sell to the Wilshire REIT certain
U.S. Commercial Investments with an aggregate principal balance of
approximately $66.3 million and International Investments in the United
Kingdom with an aggregate principal balance of approximately $14.9
million.
(2) In the first quarter of 1997, the Company acquired approximately $174.2
million of consumer loans for less than 1.1% of their face amount.
Accordingly, the amounts shown for "Consumer and other loans" and
"Unaccreted discount and deferred fees" increased substantially.
(3) Excludes originations.
International Assets and Operations
The Company intends to sell to the Wilshire REIT a participation interest in
two pools of loans in the United Kingdom: (i) a pool of Discounted Loans with
an aggregate outstanding principal balance of approximately $12.3 million, and
(ii) a pool of Non-Discounted Loans with an aggregate outstanding principal
balance of approximately $2.6 million. The purchase price for these pools of
loans will be approximately $5.3 million.
The Company intends to grant the Wilshire REIT an option to purchase all or
a portion of the Company's interest in two portfolios of International
Investments in France for a purchase price of up to $110.0 million (including
approximately $25.3 million held on the Company's balance sheet at
September 30, 1997). The Wilshire REIT is currently evaluating the suitability
of such investments under U.S. tax and French law.
The Company intends to grant a right of first refusal to the Wilshire REIT
with respect to International Investments. As a consequence, the opportunity
for the Company to invest in such assets would be limited to the extent the
Wilshire REIT takes advantage of such investment opportunities.
The Company in the fourth quarter of 1996 expanded its loan acquisition
activities to the United Kingdom and France. At September 30, 1997, the
Company had established offices in London and Paris and had 38 full time
employees at those locations, 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. The Company also established
loan servicing operations in the United Kingdom and France to service loans
for itself and third parties. The Company 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 workout 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 U.S. Servicer's servicing
system, which has been adapted for servicing loans in Western Europe.
From the commencement of operations in Western Europe in September 1996
until September 30, 1997, the Company has acquired one pool of Discounted
Loans and one pool of Non-Discounted Loans in the United Kingdom with
aggregate outstanding principal amounts of approximately $12.3 million and
$2.6 million, respectively, and has purchased a French company which owns two
portfolios of Non-Discounted Loans and two portfolios of Discounted Loans and
foreclosed real estate in France for an aggregate purchase price of
approximately $40.6 million. In September 1997, the Company committed, along
with an internationally recognized investment bank, to acquire from a major
European insurance company its portfolio of commercial Discounted and Non-
Discounted Loans and residential Discounted Loans in France for an aggregate
purchase price of approximately $150.5 million (for which the Company would be
responsible for half).
Foreign currencies have been translated based on exchange rates at September
30, 1997 in the United Kingdom at (Pounds)0.6156 and in France at 5.9312
French Francs to the U.S. Dollar, respectively.
68
<PAGE>
Mortgage-Backed Securities
The Company intends to sell to the Wilshire REIT a portion of its mortgage-
backed securities for approximately $98.1 million. In addition, the Company
intends to grant a right of first refusal to the Wilshire REIT with respect to
MBS Investments. As a consequence, the opportunity for the Company to invest
in MBS Investments would be limited to the extent the Wilshire REIT takes
advantage of such investment opportunities.
The Company has acquired mortgage-backed securities, consisting primarily of
subordinate interests in private-label securities backed by loans that were
originated by and are being serviced by unaffiliated third parties ("Private-
Label Securities"), as well as certain governmental agency and other
securities ("Government Securities") 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 the Wilshire
Private Companies and for which the Company is continuing to act as servicer
("Retained Securities"). The Company acquires mortgage-backed securities,
consisting primarily of Private-Label Securities and Government Securities
held for liquidity purposes. 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 Company's strategy is to invest in subordinate
classes of mortgage-backed securities which the Company believes are likely to
experience a ratings upgrade as a result of payment history, prepayment or
default experience or otherwise. The following table sets forth the Company's
holdings of mortgage-backed and other government securities at the dates
indicated:
MORTGAGE-BACKED SECURITIES AND GOVERNMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1997 1996 1995 1994
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Private-Label Securities............. $145,827(1)(2) $21,382 $ -- $ --
Retained Securities.................. 71,003(1)(3) 28,239 -- --
Government Securities................ 39,467 35,343 28,672 29,887
-------- ------- ------- -------
Total Securities................... $256,297 $84,964 $28,672 $29,887
======== ======= ======= =======
</TABLE>
- --------
(1) The Company intends to sell to the Wilshire REIT (i) certain Private-Label
Securities with a carrying value at September 30, 1997 of approximately
$47.2 million, (ii) and certain Retained Securities with a carrying value
at September 30, 1997 of approximately $30.2 million and (iii) certain
Private-Label Securities acquired for $18.4 million subsequent to
September 30, 1997.
(2) Includes $35.5 million of purchased IOs.
(3)Includes $3.3 million of purchased IOs.
The Company may invest in IOs, which are entitled to no (or only nominal)
payments of principal, but only to payments of interest. The holder of an IO
may be entitled to receive a stated rate of interest on a notional principal
balance equal to the principal balance of the mortgage collateral, that
portion that bears interest in excess of a certain rate on one or more classes
of mortgage-backed securities (such as where the mortgage collateral (or
portion thereof) carries an 8.5% interest rate after servicing costs, and the
holders of the other classes are entitled to receive 8.0% interest, leaving
0.5% for the holder of the IO). Alternatively, the holder of an IO may be
entitled to a variable rate of interest on a nominal principal balance that
adjusts based upon adjustment in the interest rate of the underlying mortgage
collateral.
The Company will seek to purchase IOs to hedge against maturity extension
risk in the Company's loan and securities portfolio in the event that the
Company encounters slower than anticipated prepayments while still
anticipating an acceptable return on the purchase of such IOs. Accordingly, if
the underlying mortgage collateral prepays (including prepayments as a result
of default and repurchases by the seller) at a rate faster than
69
<PAGE>
anticipated, the weighted average life of the IO will be reduced, and the
yield to maturity adversely affected. Conversely, if the underlying mortgage
collateral prepays at a rate slower than anticipated, the weighted average
life of the IO will be extended, with the consequent positive effect on the
anticipated yield to maturity.
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.
At September 30, 1997, the Company's two largest holdings of Private-Label
Securities were First Plus Home Loan Owner Trust, Series 1997-3 CL B2 and
Salomon Brothers Mortgage Securities VII Inc. Mortgage Pass Through
Certificates Series 1997-LB1 CE, which represented 15.6% and 12.9% of the
Company's portfolio. The following table sets forth the Company's holdings of
Private-Label Securities at September 30, 1997:
PRIVATE-LABEL SECURITIES
<TABLE>
<CAPTION>
PERCENT TO
NUMBER OF CARRYING BE SOLD TO
RATING CATEGORY(1) INVESTMENTS VALUE THE WILSHIRE REIT
- ------------------ ------------ ------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AAA/Aaa1 to A-/A3............ 1 $ 1,992 0.0%
BBB+/Baa1 to BBB-/Baa3....... 7 48,536 17.09
BB+/Ba1 to BB-/Ba3........... 18 44,864 39.28
B+/B1 to B-/B3............... 6 13,400 25.90
Unrated...................... 8 37,033 48.03
-------- -------------
Total........................ 40 $ 145,825(2)
======== =============
</TABLE>
- --------
(1) Rating by independent rating agency at September 30, 1997.
(2) The Company intends to sell to the Wilshire REIT (i) certain Private-Label
Securities with a carrying value at September 30, 1997 of approximately
$47.2 million and (ii) certain Private-Label Securities acquired for $18.4
million subsequent to September 30, 1997.
70
<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>
CARRYING VALUE
--------------------------
PERCENT TO
SEPTEMBER 30, BE SOLD TO
ISSUE NAME CLASS RATING COLLATERAL TYPE INITIAL 1997 THE WILSHIRE REIT
---------- ----- ------ --------------- ----------- -------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
WFC 1996-3 AIO AAA Residential Loans $ 2,697 $ 2,522 100.0%
WFC 1996-3 B1 BB Residential Loans 5,412 5,260 50.0
WFC 1996-3 B2 B Residential Loans 3,528 3,397 50.0
WFC 1996-3 B3 NR Residential Loans 4,563 4,302 50.0
WFC 1996-3 FIO AAA Residential Loans 1,119 782 100.0
Wilshire Cons. 95A B NR Miscellaneous Consumer 14,054 17,638 50.0
Wilshire Mtg 95A B NR Manufacturing Housing 5,115 3,905 100.0
Wilshire Mtg 95-MA1 B NR Home Equity 3,882 5,746 100.0
Wilshire Mtg 95-MF1 B NR Home Equity 1,526 2,259 100.0
Wilshire Mtg 1996-2 B NR Residential Loans 11,507 10,284 0.0
Wilshire Mtg 1996-4 B NR Residential Loans 585 1,274 0.0
Wilshire Mtg 1996-4 C NR Residential Loans 3,113 2,371 0.0
WFC 1997-1 B1 BB Residential Loans 8,783 8,849 0.0
WFC 1997-1 B2 B Residential Loans 1,048 1,063 0.0
WFC 1997-1 B3 NR Residential Loans 1,321 1,351 0.0
----------- -----------
Total $ 68,253 $ 71,003(1)
=========== ===========
</TABLE>
- --------
(1) The Company intends to sell certain Retained Securities to the Wilshire
REIT with a carrying value at September 30, 1997 of approximately $30.2
million.
MORTGAGE LOAN ORIGINATION
The Company, through the U.S. Servicer, operates a mortgage loan origination
program for the origination, through correspondents, of related first and
second lien mortgage loans and manufactured housing loans. The U.S. Servicer
originates residential mortgage loans in accordance with the Company's
guidelines through its correspondent relationships and transfers the newly
originated mortgage loans to the Company, which simultaneously provides the
funding for those loans. The U.S. Servicer is reimbursed for fees and expenses
incurred in connection with their origination activities but do not receive
any compensation. 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 nonconforming 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. The Company recently launched two new products: a 100% financed
mortgage loan, financing up to 100% of the appraised value of the related
property with mortgage insurance or loan pool insurance covering in excess of
67% of the appraised value; and a 95% financed, no-income verification
mortgage loan, financing up to 95% of the appraised value of the related
property with mortgage insurance or loan pool insurance covering in excess of
67% of the appraised value. To date, the Company has targeted higher credit
quality borrowers for its mortgage loan origination program. The Company's
borrowers generally conform to Federal Home Loan Mortgage Corporation
("Freddie Mac") credit underwriting guidelines.
The Company entered into a letter of intent to acquire certain assets of a
mortgage loan originator located in California for a purchase price of
approximately $2.8 million. The Company also entered into a letter of intent
71
<PAGE>
to acquire a manufactured housing loan originator located in California for a
purchase price of approximately $5.7 million. There can be no assurance as to
when or if such acquisitions will be completed.
All borrowers and collateral must meet the Company's credit underwriting
guidelines. The Company believes that the higher risk generally associated
with nonconforming 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 September 30, 1997, the U.S. Servicer had approximately 125 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 nonconforming
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 U.S. Servicer 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 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, which are similar to Freddie
Mac credit underwriting guidelines, 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.
From the commencement of its mortgage loan origination program through
September 30, 1997, the Company has purchased loans totaling approximately
$80.2 million in principal amount. At September 30, 1997, the unpaid principal
balance of the outstanding loans purchased by the Company under this program
was approximately $75.1 million and the weighted average interest rate and
maturity of those loans were 11.7% and 278 months, respectively. The weighted
average principal balance of those loans at origination was approximately
$47,347. Approximately 30.84%, 13.91%, 6.58%, 4.14% and 4.03% of the original
principal amount of those loans were originated in California, Oregon, Texas,
Washington and Virginia, respectively.
From the commencement of its mortgage loan origination program through
September 30, 1997, the Company has foreclosed on one property. The following
table sets forth, as of September 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 SEPTEMBER 30, 1997)
<TABLE>
<CAPTION>
NO. OF PRINCIPAL PERCENT OF
LOANS BALANCE PORTFOLIO
------ --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Period of Delinquency:
31-60 days...................................... 63 $1,578 2.10%
61-90 days...................................... 60 3,279 4.37
91 days or more................................. 46 2,686 3.58
--- ------ -----
Total......................................... 169 $7,543 10.05%
=== ====== =====
</TABLE>
72
<PAGE>
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 and MasterCard 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 of charge-
backs because the consumer is not physically present at the time of the credit
card transaction. The Company has no control over charge-backs as VISA and
MasterCard have absolute authority to decide if a charge-back will be allowed.
The Company attempts to minimize the effects of charge-backs through the
pricing of its services and managing merchant cash reserves. 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. Bankcard
revenues, net of processing expense have increased from approximately $0.4
million in 1994 to approximately $1.6 million in 1996 and totaled
approximately $1.6 million during the nine months ended September 30, 1997. A
substantial portion of such revenues are derived from four customers.
Management believes that there are opportunities to expand this business using
its existing infrastructure and through acquisitions of merchant portfolios
and other bankcard processors.
The Company's bankcard processing operations are regulated and subject to
examination by the OTS. To address regulatory concerns, First Bank submitted
to the OTS a Bankcard Plan which (i) established a method by which First Bank
will estimate the appropriate level of reserves for its bankcard operations;
(ii) established internal controls; (iii) created an overdraft policy that
requires timely recognition of overdraft losses and identifies employees with
authority to approve overdrafts; and (iv) ensures that First Bank will comply
with all applicable statutes and regulations. After each calendar quarter,
First Bank is required to report to the OTS in writing any variances to the
Bankcard Plan.
SERVICING
General
The U.S. Servicer has developed specialized procedures and proprietary
software designed to effectively service performing, non-performing, sub-
performing loans and foreclosed real estate. The U.S. Servicer designs a
servicing plan for each underlying loan and property in a pool of loans that
it has been requested to service and as part of the acquisition analysis on a
pool that is intended to maximize the cash flow from that loan or property.
Discounted Loans are generally resolved within one to two years 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 September 30, 1997, the U.S. Servicer was servicing approximately $2.6
billion of assets, including (i) approximately $1.2 billion aggregate
principal amount of loans for the Company; (ii) approximately $1.3 billion
aggregate principal amount of loans for third parties (including approximately
$645.2 million of loans previously securitized by the Company and its
affiliates); and (iii) approximately $93.5 million aggregate principal amount
of loans owned by the U.S. Servicer. The Company's management believes that
the U.S. Servicer'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 believes that the
U.S. Servicer will need to hire additional personnel and expand their computer
systems.
Servicing Agreements
The Company is party to a loan servicing agreement with the U.S. Servicer
pursuant to which the U.S. Servicer 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 the U.S. Servicer a servicing fee at or below prevailing market
rates for each pool of loans that the U.S. Servicer is servicing for the
Company. The Company has the option at any time after November 15, 1998 to
acquire the
73
<PAGE>
U.S. Servicer's servicing operations (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 the U.S. Servicer has no obligation to effect the
Servicing Transfer prior to November 15, 1998. The Servicing Transfer will
occur automatically on November 15, 1999, provided the foregoing conditions
are met. Upon the effectiveness of the Servicing Transfer, the Company will
service loans directly for its own account, as well as for the accounts of the
U.S. Servicer and unaffiliated third parties. The Company is considering
acquiring the Wilshire Private Companies prior to the Servicing Transfer but,
as at this time, no decision has been made to proceed with the potential
acquisition of the Wilshire Private Companies. See "--The U.S. Servicer."
Each of the Savings Banks is party to a loan servicing agreement with the
U.S. Servicer pursuant to which the U.S. Servicer 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 the U.S. Servicer 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.
The Company
In the fourth quarter of 1996, the Company established loan servicing
operations in the United Kingdom and France to service loans for itself and
third parties. The Company believes that there is demand in the European
market for U.S.-style loan servicing, with its automated systems and detailed
investor reporting and aggressive workout 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, management believes that 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
U.S. Servicer's servicing system, which has been adapted for servicing loans
in Western Europe.
The U.S. Servicer
The U.S. Servicer 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 September 30, 1997, the Wilshire Private
Companies had approximately 235 employees, principally engaged in servicing
operations. For the nine months ended September 30, 1997 the Wilshire Private
Companies had a net loss of approximately $7.6 million. At September 30, 1997,
the Wilshire Private Companies had total assets of approximately $144.3
million and had total liabilities of $213.7 million, including outstanding
indebtedness of approximately $124.3 million (approximately $105.6 million net
of securities pledged to secure its outstanding indebtedness). Loans made to
the U.S. Servicer prior to October 1, 1995 have maturities beginning in July
1998. Such loans can be extended at the U.S. Servicer's option for three
additional two-year periods and one additional one-year period. Loans made to
the U.S. Servicer between October 1, 1995 and May 15, 1996 have five year
terms and can be extended at the U.S. Servicer's option for one additional
five-year period. Loans made after May 15, 1996 have two year terms and can be
extended at the U.S. Servicer's option for four additional two-year periods.
Substantially all the Wilshire Private Companies' indebtedness is recourse
debt that is secured by pledges of its servicing rights and is personally
guaranteed by the Principal Shareholders. At September 30, 1997, the Wilshire
Private Companies had a negative net worth of approximately $69.4 million.
Substantially all of the Wilshire Private Companies' servicing rights have not
been capitalized and therefore are not reflected as assets nor included in the
net worth of the Wilshire Private Companies.
74
<PAGE>
The Company is considering acquiring the Wilshire Private Companies prior to
the Servicing Transfer but, at this time, no decision has been made to proceed
with the acquisition. The Company believes that the acquisition of the
Wilshire Private Companies would (i) integrate servicing operations and
eliminate servicing fees being paid to the Wilshire Private Companies, (ii)
increase fee based revenues through servicing for unaffiliated third parties
and the Wilshire REIT, (iii) reduce potential regulatory concerns regarding
the relationship between the Savings Banks and the Wilshire Private Companies,
(iv) eliminate conflicts of interest between the Company and the Wilshire
Private Companies, and (v) enable the Company to acquire assets of distressed
sub-prime mortgage lenders and other specialty finance companies where the
ability to perform specialty servicing is an important consideration in
realizing the value of such acquisitions.
In September 1997, the Company appointed a special committee composed of two
independent directors of the Company and engaged Prudential Securities
Incorporated to review the potential acquisition of the Wilshire Private
Companies and to furnish any required fairness opinion. There can be no
assurances as to when or if such acquisition will occur or the form such an
acquisition might take. In addition, the acquisition of the Wilshire Private
Companies would be subject to a number of conditions, including shareholder
approval, approval of the Company's Board of Directors and compliance with the
indentures relating to the Company's 13% Notes and Old Notes. The indentures,
among other things, contain restrictions on the incurrence of debt and
transactions with affiliates. If the Company acquires the Wilshire Private
Companies, it is likely that any such acquisition will reduce the Company's
net worth, given the significant negative net worth of the Wilshire Private
Companies at September 30, 1997.
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 January 1997 and privately sold its Old
Notes in August 1997. In certain limited circumstances, the Company has also
borrowed money from the Wilshire Private Companies in order to fund the
acquisition of loans. The Company repaid such borrowings with its PIK
Preferred Stock on July 31, 1997. 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,
SEPTEMBER 30, --------------------------
1997 1996 1995 1994
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances......................... $ -- $ -- $ -- $ 13,000
Deposits at the Savings Banks......... 407,768 501,614 303,524 196,289
Warehouse and Repurchase Agreements... 658,042 97,624 13,000 8,500
Notes Payable and Subordinated Debt... 184,245 75,000 11,000 --
---------- -------- -------- --------
Total............................... $1,250,055 $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
75
<PAGE>
each reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages were determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS
ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------------------
1997 1996 1996 1995 1994
-------- ------ --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average amount outstanding
during the period........... $ 641 $2,396 $ 2,420 $ 1,381 $ 5,916
Maximum month-end balance
outstanding during
the period.................. 8,000 11,000 11,000 8,000 13,000
Weighted average rate:
During the period.......... 5.62% 5.80% 6.88% 5.62% 3.85%
At end of period........... -- -- -- -- 4.33%
Warehouse and repurchase
agreements:
Average amount outstanding
during the period........... 503,016 35,721 51,316 4,122 4,757
Maximum month-end balance
outstanding during
the period.................. 790,882 97,000 154,000 14,950 11,377
Weighted average rate:
During the period.......... 7.56% 6.83% 6.88% 5.62% 4.46%
At end of period........... 7.41% -- 7.88% 6.70% 5.81%
</TABLE>
Warehouse Credit Facilities and Repurchase Agreements
The following table sets forth information with respect to the warehouse
credit facilities and repurchase agreements of the Company (excluding the
Savings Banks) at September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT
LENDER EXPIRATION DATES AVAILABLE UTILIZED
------ ---------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Committed Facilities:
Credit Suisse First Boston
Mortgage Capital LLC........ November 28, 1998 $ 350,000(1) $ 241,268(2)
Prudential Securities Credit
Corporation................. June 30, 1998 150,000 129,991(3)
Salomon Brothers Realty
Corp........................ May 15, 2000 34,978 34,978
Salomon Brothers Realty
Corp........................ May 15, 2000 57,809 57,809
----------- -----------
Total Committed Amounts.... 592,787 464,046
----------- -----------
Uncommitted Facilities:(4)
Bear, Stearns International
Limited..................... (5) 100,000 65,080
CS First Boston (Hong Kong)
Limited..................... (5) 100,000 68,463
Salomon Brothers Realty
Corp........................ (5) 100,000 49,436
Other repurchase agreements.... (5) 11,017 11,017
----------- -----------
Total Uncommitted Amounts.. 311,017 193,996
----------- -----------
Total Amount(6)............ $ 903,804 $ 658,042
=========== ===========
</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) In September 1997, the Company securitized approximately $146.0 million of
loans that had been acquired with funds drawn under the Credit Suisse
First Boston Mortgage Capital LLC facility. The Company repaid
approximately $133.8 million of the indebtedness under the facility with
the proceeds from the securitization.
(3) In December 1997, the Company securitized approximately $131 million of
loans that had been acquired with funds drawn under the Prudential
Securities Credit Corporation facility. The Company repaid approximately
$120.9 million of the indebtedness under the facility with the proceeds
from the securitization.
76
<PAGE>
(4) 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.
(5) Facility may be terminated at any time.
(6) 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, and may be a special purpose entity. The agreements
are generally guaranteed by WFSG and are secured by the pools of loans or
securities 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 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 97%.
Securitizations
At September 30, 1997, the Company and its affiliates had securitized
approximately $887.2 million of loans through five publicly offered and three
privately placed securitizations, including performing, non-performing and
sub-performing mortgage loans, manufactured housing loans, 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.
77
<PAGE>
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, solicit
funds from their customers for deposit with Girard. At September 30, 1997,
approximately $136.0 million, or 33.4%, of the Savings Banks' total deposits
were brokered and approximately $264.4 million, or 64.8%, were wholesale
deposits. Wholesale deposits generally are obtained on terms that are more
economically attractive 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 "Regulation--Recent Regulatory
Examinations." 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 generally have 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,
SEPTEMBER 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...... $ 5,189 0.00% $ 5,625 0.00% $ 5,111 0.00% $ 3,045 0.00%
NOW and money market
checking accounts...... 1,590 1.43 2,023 1.82 1,267 2.99 3,170 3.22
Saving accounts......... 563 2.43 480 2.15 304 2.38 215 2.25
Certificates of
deposit................ 400,426 6.03 493,486 5.92 296,842 6.15 189,859 5.48
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits......... $407,768 5.83% $501,614 5.84% $303,524 6.03% $196,289 5.35%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
78
<PAGE>
The following table sets forth, by various interest rate categories, the
Savings Banks' certificates of deposit at September 30, 1997:
INTEREST RATES FOR THE SAVINGS BANKS' CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less............................................ $ 938
3.51-4.50................................................ --
4.51-5.50................................................ 17,036
5.51-6.50................................................ 379,776
6.51-7.50................................................ 1,243
7.51-8.50................................................ 1,433
--------
Total.................................................. $400,426
========
</TABLE>
The following table sets forth the amount and maturities of the Savings
Banks' certificates of deposit as of September 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........... $65,958 $108,212 $ 149
Weighted Avg.................................. 5.98% 5.98% 7.89%
Balances Maturing in 4 to 12 Months............. $27,918 $166,017 $2,427
Weighted Avg.................................. 5.90% 6.09% 7.36%
Balances Maturing in 13 to 36 Months............ -- $ 27,378 $2,367
Weighted Avg.................................. -- 6.18% 5.97%
Balances Maturing in 37 or More Months.......... -- -- --
Weighted Avg.................................. -- -- --
</TABLE>
At September 30, 1997, the Savings Banks had outstanding an aggregate of
approximately $83.0 million of certificates of deposit in face amounts equal
to or greater than $100,000 maturing as follows: approximately $38.2 million
within three months; approximately $19.4 million over three months through six
months; approximately $20.6 million over six months through twelve months, and
approximately $4.8 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
agreements 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 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 there
are a range of maturities for the various programs.
79
<PAGE>
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. Management believes that the U.S. Servicer'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 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. 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,
SEPTEMBER 30, -------------------------
1997 1996 1995 1994
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential.......... $47,127 $37,383 $10,996 $ 5,554
Multi-family residential........... 2,929 2,002 270 1,471
Commercial real estate and land.... 18,215 6,760 910 4,207
Consumer and other loans........... 18,378 8,379 503 400
------- ------- ------- -------
Total............................ $86,649 $54,524 $12,679 $11,632
======= ======= ======= =======
Non-performing loans as a percentage
of:
Total Non-Discounted Loans(2)...... 16.82% 23.69% 4.46% 5.95%
Total assets....................... 6.33% 7.23% 3.71% 5.04%
Allowance for loan losses as a
percentage of:
Total Non-Discounted Loans(2)...... 10.96% 13.88% 3.60% 3.72%
Non-performing Non-Discounted
Loans............................. 65.19% 58.57% 80.74% 62.50%
Allowance for loan losses and
discount as a percentage of:
Non-performing Non-Discounted
Loans............................. 86.14% 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. See "Management's Discussion
and Analyses of Financial Condition and Results of Operations--Accounting
80
<PAGE>
Matters." 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 carries 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 reevaluated to ensure 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:
FORECLOSED REAL ESTATE BY LOAN TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1997 1996 1995 1994
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted Loans:
Single-family residential............ $ 92,277 $15,274 $ 3,226 $ --
Multifamily residential.............. 3,472 -- -- --
Commercial and other mortgage loans.. 7,522 200 66 --
-------- ------- ------- ------
Total.............................. 103,271 15,474 3,292 --
Non-Discounted Loans:
Single-family residential............ 5,567 2,773 1,676 613
Multifamily residential.............. -- 100 611 254
Commercial and other mortgage loans.. 2,623 124 578 464
-------- ------- ------- ------
Total.............................. 8,190 2,997 2,865 1,331
Foreclosed real estate purchased
directly:
Single-family residential............ 36,222 59,729 -- --
Allowance for total losses............. (1,219) -- (1,193) (123)
-------- ------- ------- ------
Foreclosed real estate, net.......... $146,464 $78,200 $ 4,964 $1,208
======== ======= ======= ======
</TABLE>
81
<PAGE>
The following table sets forth certain geographic information at September
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
RESIDENTIAL REAL ESTATE TOTAL
------------------------- ------------------------ ------------------------
NO. OF NO. OF NO. OF
AMOUNT PROPERTIES % AMOUNT PROPERTIES % AMOUNT PROPERTIES %
-------- ---------- ----- ------- ---------- ----- ------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New York................................. $ 55,895 566 41.7% $ 2,838 28 20.8% 58,733 594 39.8%
New Jersey............................... 24,480 265 18.3% 902 9 6.6% 25,382 274 17.2%
California............................... 10,810 93 8.1% 4,586 20 33.7% 15,396 113 10.4%
Connecticut.............................. 10,159 157 7.6% 1,614 24 11.9% 11,773 181 7.9%
Pennsylvania............................. 5,291 70 3.9% 6 1 0.0% 5,297 71 3.6%
Other.................................... 27,431 242 20.4% 3,671 61 27.0% 31,102 303 21.1%
-------- ----- ----- ------- --- ----- ------- ----- -----
Total.................................... $134,066 1,393 100.0% $13,617 143 100.0% 147,683 1,536 100.0%
======== ===== ===== ======= === ===== ======= ===== =====
</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, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
Excluding assets which have been classified loss and fully reserved by the
Savings Banks, the Savings Banks' classified assets as of September 30, 1997
consisted of approximately $253.7 million of assets classified as substandard
and approximately $0.4 million of assets classified as doubtful. The
substandard and doubtful asset classifications include approximately $132.8
million and approximately $0.3 million of Discounted Loans, respectively. In
addition, at the same date, approximately $39.1 million of assets were
designated as special mention.
Allowances for Losses
The Company maintains an allowance for loan losses at a level believed
adequate by management to absorb estimated incurred losses in the 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.
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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 Company's policy is to
evaluate smaller-balance, homogenous pools of loans for impairment on a pooled
basis. These are primarily single-family residential and automobile and other
consumer loans. All other loans are evaluated for impairment on a loan-by-loan
basis. All the Savings Banks' 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 for the Savings Banks' 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 Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by 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 in the statement of
operations; rather they decrease the amounts of the purchase discounts that
are accreted into the interest income over the lives of the loans. If, after
the initial allocation of the purchase discount to the allowance for loan
losses, management subsequently identifies the need for additional allowances
against Discounted Loans, the additional allowances are established through
charges 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.
There can be no assurance that the OTS will not require substantial reserves
following future examinations. It is likely that the nontraditional 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 following table sets forth information with respect to the Company's
allowances for losses by category of loan:
ALLOWANCES FOR LOSSES BY LOAN CATEGORY
<TABLE>
<CAPTION>
SEPTEMBER 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......... $49,800 54.9% $24,051 64.0% $ 9,830 38.3% $6,948 90.2%
Non-real estate..... 6,688 7.4 7,885 21.0 407 1.6 322 4.2
Discounted Loans.... 34,143 37.7 5,619 15.0 15,414 60.1 431 5.6
------- ----- ------- ----- ------- ----- ------ -----
Total Allowances.... $90,631 100.0% $37,555 100.0% $25,651 100.0% $7,701 100.0%
======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
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The following table sets forth the activity in the allowance for loan losses
during the periods indicated:
ACTIVITY IN THE ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------
1997 1996 1996 1995 1994
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period.. $ 37,555 $ 25,651 $ 25,651 $ 7,701 $ 4,314
Allocation of purchased loan
discount:
at acquisition.............. 92,751 15,972 10,751 19,007 2,809
at disposition.............. (36,245) (12,494) (17,218) (5,404) (1,666)
Recoveries.................... 982 1,424 1,822 81 71
Provision for loan losses..... 926 15,751 16,549 4,266 2,173
Allowance related to loans
sold......................... (5,338) -- -- -- --
-------- -------- -------- ------- -------
Balance, end of period........ $ 90,631 $ 46,304 $ 37,555 $25,651 $ 7,701
======== ======== ======== ======= =======
</TABLE>
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,
SEPTEMBER 30, ---------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT 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............ $ 18,302 3.6% $ 7,613 3.3% $ 3,726 1.3% $ 4,513 2.3%
61-90 days............ 21,300 4.1 7,204 3.1 3,037 1.1 2,202 1.1
91 days or
more(1)(2)........... 86,649 16.8 54,524 23.7 12,679 4.5 11,632 6.0
-------- ---- ------- ---- ------- --- ------- ---
Total loans
delinquent......... $126,251 24.5% $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 Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether the pool consists primarily of Discounted or Non-Discounted Loans
at the time of acquisition. For example, a pool of Non-Discounted Loans
may contain non-performing loans at the time of acquisition as long as the
non-performing loans were not the primary component of the pool at the
time. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Accounting Matters."
(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.
FEE-BASED INCOME
Management of the Wilshire REIT
In October 1997, the Company established the Wilshire REIT which intends to
qualify and will elect to be treated as a REIT. The Company formed the
Wilshire REIT in connection with its strategy of focusing acquisition
activities on domestic residential and domestic performing commercial mortgage
loans and expanding fee-based income. The Wilshire REIT will conduct certain
business activities that management believes are more efficiently operated in
a REIT tax advantaged format. The Wilshire REIT intends to concentrate on the
acquisition of U.S. Commercial Investments, MBS Investments and International
Investments.
WRSC intends to enter into a Management Agreement with the Wilshire REIT for
an initial term expiring on the second anniversary of the closing of the
proposed initial public offering of the Wilshire REIT. Thereafter, the
Management Agreement will automatically renew for successive one-year periods
unless either party delivers a notice of termination at
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least 120 days prior to the then current term. The Wilshire REIT may
terminate, or decline to extend the term of, the Management Agreement without
cause at any time after the first two years; provided that a termination fee,
equal to the sum of the base management fee and incentive management fee
earned during the twelve months preceding such termination, will be due. In
addition, the Wilshire REIT will have the right to terminate the Management
Agreement upon the occurrence of certain specified events, including a
material breach by WRSC of any provision contained in the Management
Agreement, without the payment of any termination fee.
Pursuant to the Management Agreement, WRSC, subject to the supervision of
the Wilshire REIT's board of directors, will formulate operating strategies
for the Wilshire REIT, arrange for the acquisition of assets by the Wilshire
REIT, arrange for various types of financing for the Wilshire REIT, including
repurchase agreements, secured term loans and warehouse lines of credit,
mortgage loans and the issuance of collateralized mortgage obligations,
monitor the performance of the Wilshire REIT's assets and provide certain
administrative and managerial services in connection with the operation of the
Wilshire REIT. For performing these services, WRSC will receive (i) a base
management fee in an amount equal to 1% per annum of the first $1.0 billion of
the average invested assets, 0.75% of the next $500.0 million of such average
invested assets and 0.50% of average invested assets above $1.5 billion which
is intended to cover WRSC's costs of providing management services to the
Wilshire REIT, and (ii) a quarterly incentive fee in an amount equal to the
product of (A) 25% of the dollar amount by which (1) (a) funds from operations
(before the incentive fee) of the Wilshire REIT per share of common stock of
the Wilshire REIT (based on the average number of shares outstanding) plus (b)
gains (or minus losses) from debt restructuring on sales of property per share
of common stock of the Wilshire REIT (based on the weighted average number of
shares outstanding), exceed (2) an amount equal to (a) the weighted average of
the price per share at initial offering and the prices per share at any
secondary offerings by the Wilshire REIT multiplied by (b) the ten-year U.S.
treasury rate plus five percent per annum multiplied by (B) the weighted
average number of shares of common stock of the Wilshire REIT outstanding
during such period. The Wilshire REIT's board of directors may adjust the base
management fee in the future if necessary to align the fee more closely with
the actual costs of such services.
In addition, because WRSC'S employees will perform certain due diligence
tasks that purchasers of real estate (including managers of REITs) typically
hire outside consultants to perform, WRSC will be reimbursed for (or charge
the Wilshire REIT directly for) its out-of-pocket costs for performing such
due diligence on assets purchased by the Wilshire REIT or considered for
purchase by the Wilshire REIT. The Wilshire REIT does not expect to maintain
an office or to employ full-time personnel. Instead, it expects to rely on the
facilities and resources of WRSC to conduct its operations.
The following table presents all compensation, fees and other benefits
(including reimbursement of out-of-pocket expenses) that WRSC may earn or
receive under the terms of the Management Agreement:
<TABLE>
<CAPTION>
FEE AMOUNT
- --- ------
<S> <C>
Base.................... Equal to 1% per annum of the first $1.0 billion of av-
erage invested assets, 0.75% of the next $500.0 million
of average invested assets and 0.50% of average in-
vested assets above $1.5 billion.
Incentive............... Twenty-five percent of the amount by which the Wilshire
REIT's funds from operations and certain gains (minus
certain losses) exceed the ten year U.S. Treasury rate
plus 5% per annum.
Expenses................ Reimbursement of due diligence costs and out-of-pocket
expenses.
</TABLE>
The Wilshire REIT intends to grant WRSC and certain of the Wilshire REIT's
directors options to purchase 2,000,000 shares of common stock of the Wilshire
REIT (2,300,000 shares if the underwriters for the Wilshire REIT's proposed
initial public offering exercise their over-allotment option in full) or, at
the option of the Wilshire REIT, at a price per share equal to the initial
offering price of the common stock of the Wilshire REIT. One quarter of WRSC's
options will be exercisable on each of the first four anniversaries of the
closing date of the Wilshire REIT's proposed initial public offering.
Unexercised options will terminate on the tenth anniversary of the closing
date of the Wilshire REIT's proposed initial public offering.
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<PAGE>
The Management Agreement will not limit or restrict the right of WRSC or any
of its officers, directors, employees or affiliates from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, assets that meet the
Wilshire REIT's policies and criteria. However, the Company intends to grant
the Wilshire REIT a right of first refusal with respect to U.S. Commercial
Investments, MBS Investments and International Investments.
Servicing
The Company recently established servicing operations in the United Kingdom
and France to service loans for itself and third parties. The Company 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
workout 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
U.S. Servicer's servicing system, which has been adapted for servicing loans
in Western Europe. The Wilshire REIT intends to enter into servicing
agreements with the European Servicers, pursuant to which the European
Servicers will act as servicers for the Wilshire REIT and provide loan and
real property management services in France and the United Kingdom. As the
Wilshire REIT acquires assets in other countries, the Wilshire REIT
anticipates entering into similar servicing arrangements with the Company in
such countries. Under the servicing agreements, the Wilshire REIT will pay the
European Servicers a servicing fee at market rates for each pool of loans or
real estate assets that they service for the Wilshire REIT and reimburse them
for certain out-of-pocket costs associated with servicing such assets.
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 Messrs. Wiederhorn and 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
sublease is year to year. Messrs. Wiederhorn and Mendelsohn have indicated
that they intend to sell the properties to the Wilshire REIT.
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, managing merchant cash reserves and increasing overall
profitability. In addition to standard industry software applications,
management has developed applications designed to provide decision support and
automation of portfolio tracking and reporting.
The Company has formed a "Year 2000 review team" to (i) assess the risks in
the Company's computer systems as the calendar rolls over into the next
century, (ii) develop a Company-wide Year 2000 plan and (iii) implement the
Company-wide Year 2000 plan. The Company estimates that its Year 2000 plan
will be completed by December 31, 1998 and estimates that the total cost for
implementation of the Year 2000 plan will be approximately $200,000.
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<PAGE>
EMPLOYEES
At September 30, 1997, the Company had 167 employees in the United States
and 38 employees in Europe. The employees are not party to a collective
bargaining agreement, and management believes that it has good relations with
its employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business, 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 cleanup 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 cleanup costs incurred by such parties in connection
with the contamination. To date, the Company has not been required to perform
any investigation or cleanup 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 and Non-Discounted Loans.
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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 are not insured by the FDIC.
The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-
affiliated parties, as defined. In general, these enforcement actions must be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief
summaries thereof as in effect on the date of this Prospectus. This discussion
is not intended to constitute and does not purport to be a complete statement
of all legal restrictions and requirements applicable to the Company and the
Savings Banks and all such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and other regulatory
pronouncements.
Recent Regulatory Examinations
Following examinations of the Savings Banks and WAC by the OTS in 1994,
1995, 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, and (vi) loan purchases; (b) enhance
recordkeeping; (c) develop requirements to ensure that the servicing of loans
by the Wilshire Private Companies 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 Cease and Desist Order issued to First Bank,
also effective October 31, 1996. The issuance of a cease and desist order
generally is evidence of an increased level of regulatory concern regarding
the subject institution. Effective October 28, 1997, the Savings Banks entered
into amended Cease and Desist Orders (the "Orders") with the OTS which
modified certain provisions of the original Cease and Desist Orders.
The Orders prohibit First Bank and Girard from increasing their total
assets, as measured at the end of each calendar quarter, above $145 million
and $408 million, respectively, unless such increase is an amount that
represents the total net interest credited on deposit liabilities earned
during that quarter plus any increase permitted under the Orders in prior
quarters. The Orders also prohibit the Savings Banks from purchasing (i) any
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<PAGE>
loans or real estate, without the approval of the OTS, until certain
acquisition and servicing delinquencies identified by the OTS have been
corrected, and (ii) any non-performing assets or foreclosed real estate until
such time as the Savings Banks are rated a composite "3" rating according to
the Uniform Financial Institutions Rating System with continued compliance
with required capital ratios.
The Orders require the Savings Banks to (i) maintain an effective Internal
Asset Review ("IAR") system that provides for adequate internal controls to
ensure that management timely reviews and classifies assets pursuant to their
IAR policies; (ii) fully comply with all policies and procedures submitted to
the OTS pursuant to the previous cease and desist orders; (iii) operate
pursuant to and comply with their business plans; and (iv) submit to the OTS,
by no later than November 30, 1997, the IRR Plan. The Orders also require the
Savings Banks to submit to the OTS, by November 30, 1997 and after each
calendar quarter, a report (i) detailing their progress in implementing their
Allowance for Loan and Lease Losses policies and the results of their reserve
analysis for the preceding calendar quarter; (ii) detailing any violations of
the policies and procedures submitted to the OTS that occurred during the
preceding quarter, together with an explanation as to what caused or
contributed to the act or practice constituting such violation, and what, if
any, corrective action has been undertaken; (iii) detailing any variances from
the business plan that occurred during the preceding quarter, showing actual
and planned results, and explaining any variances greater than 5 percent; (iv)
detailing their progress in implementing the IRR plan during the preceding
quarter; (v) review and analyze, by November 30, 1997, the terms of all
existing loan servicing or other agreements with affiliates, to confirm that
such agreements comply with the Orders and that there are formal written
agreements with respect to all transactions with affiliates and (vi) comparing
the results of its profitability model with the performance of its purchased
assets. Management believes that the Savings Banks have complied with those
provisions of the Orders that required the Savings Banks to complete certain
actions by November 30, 1997, with the exception of timely documentation of a
reduced loan service arrangement with an affiliate.
The Orders also require each of the Savings Banks to elect at least two
additional new outside directors with specific financial institution industry
experience. Such outside directors cannot have any association with affiliates
of the Savings Banks, their holding company or institution-affiliated parties,
except that such director can simultaneously serve as a director of each of
the Savings Banks. As of October 31, 1997, the Savings Banks had elected two
new directors.
To address regulatory concerns, First Bank submitted to the OTS, a Bankcard
Plan which (i) established a method by which First Bank will estimate the
appropriate level of reserves for its bankcard operations; (ii) established
internal controls; (iii) created an overdraft policy that requires timely
recognition of overdraft losses and identifies employees with authority to
approve overdrafts; and (iv) ensures that First Bank will comply with all
applicable statutes and regulations. After each calendar quarter, First Bank
is required to report to the OTS in writing any variances to the Bankcard
Plan.
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.
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 ("HOLA"). Pursuant to 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
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prospects of the holding company and the institution involved, and the
convenience and need of the community to be served.
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
Until the merger of First Bank and Girard, the Company was classified as a
multiple savings and loan holding company under applicable law as a result of
its ownership of First Bank and Girard. A holding company that owns two or
more financial institutions 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
investments 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 engaged in
securities underwriting or market making.
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
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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 Savings Association Insurance
Fund ("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 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. In making such determination,
the OTS can take into account a number of factors, including a bank's loan
portfolio quality, recent operating losses or anticipated losses, the
condition of its holdings company and whether the bank is receiving any
special supervisory attention. 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
would otherwise have qualified them as "well capitalized" under OTS regulatory
capital requirements. The OTS also indicated that the Savings Banks' current
capital requirements may not be appropriate given the deficiencies noted in
the examination. As a result, the Orders require First Bank and Girard to
maintain core capital and risk-based capital equal to the dollar amount of
capital at March 31, 1997 levels, as measured at the end of each calendar
quarter. Based upon the current level of assets at the Savings Banks, the
capital levels required by the Orders exceed the capital levels that would
enable the Savings Banks to qualify as "well-capitalized." The Orders provide
that in the event capital falls below the levels required by the Orders as a
result of any determination by the OTS or otherwise that adversely affects the
Savings Banks' financial condition, additional capital would have to be
infused into the Savings Banks.
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
4.0% of adjusted total assets (3% for associations classified as CAMEL 1
during their most recent examination) and total capital (a combination of core
and supplementary capital) equal to 8% of risk-weighted assets. For these
purposes, tangible capital is core capital less all intangibles other than
qualifying mortgage servicing rights. Since neither Savings Bank had
intangibles at September 30, 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,
certain non-withdrawable accounts and pledged deposits and remaining goodwill
from certain prior regulatory practices.
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
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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.
OTS regulations require that an interest-rate risk component be included in
the risk-based capital regulation. 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. At September 30, 1997, the
Savings Banks' capital ratios were not affected by the interest-rate risk
component regulations.
Insurance of Accounts
As an FDIC-insured institution, the Savings Banks are required to pay
deposit insurance premiums to the SAIF as administered by the FDIC. The SAIF
maintains a fund to insure deposits of savings institutions, including the
Savings Banks. The SAIF also maintains a fund to insure the deposits of
institutions, such as the Savings Banks, that were previously insured by the
Federal Savings and Loan Insurance Corporation ("FSLIC"). The SAIF
historically has had three major obligations: to fund losses associated with
the failure of institutions with SAIF-insured deposits; to increase the SAIF's
reserves to 1.25% of insured deposits; and to make interest payments on debt
incurred to provide funds to the FSLIC (the "FICO debt"). Under current FDIC
regulations, institutions are assigned to one of three capital groups based on
the level of an institution's capital, "well-capitalized," "adequately
capitalized," or "undercapitalized," which are defined in the same manner as
in the regulations establishing the prompt corrective action system, as
discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the 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 semiannual SAIF
assessments for savings institutions such as the Savings Banks. The reduced
assessment schedule would reduce rates to 0.0% for well capitalized with only
a few minor supervisory concerns to .27% for undercapitalized institutions
with substantial supervisory concerns. In addition, savings institutions such
as the Savings Banks will pay an additional amount to be determined from time
to time in semiannual 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
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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 the 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, 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 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 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
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 leverage capital ratio that is less than 3.0%, and
(v) "critically undercapitalized" if it has a ratio of tangible equity to
adjusted total assets that is equal to or less than 2.0%. The regulations also
permit the appropriate federal banking regulator to downgrade an institution
to the next lower category (provided that a significantly undercapitalized
institution may not be downgraded to critically undercapitalized) if the
regulator determines (i) after notice and opportunity for hearing or response,
that the institution is in an unsafe or unsound condition or (ii) that the
institution has received (and not corrected) a less-than-satisfactory rating
for any of the categories of asset quality, management, earnings or liquidity
in its most recent exam. As of September 30, 1997, the Savings Banks had
capital in excess of the amount of capital that would enable the Savings Banks
to be considered "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
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to issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rates that the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.
Brokered Deposits
Under applicable laws and regulations, an insured depository institution may
be restricted in obtaining, directly or indirectly, funds by or through any
"deposit broker," as defined, for deposit into one or more deposit accounts at
the institution. The term "deposit broker" generally includes any person
engaged in the business of placing deposits, or facilitating the placement of
deposits, of third parties with insured depository institutions or the
business of placing deposits with insured depository institutions for the
purpose of selling interests in those deposits to third parties. Under FDIC
regulations, well-capitalized institutions are not subject to any brokered
deposit limitations, while adequately capitalized institutions are able to
accept, renew or roll over brokered deposits only (i) with a waiver from the
FDIC and (ii) subject to the limitation that they do not pay an effective
yield on any such deposit which exceeds by more than (a) 75 basis points the
effective yield paid on deposits of comparable size and maturity in such
institution's normal market area for deposits accepted in its normal market
area or (b) by 120% for retail deposits and 130% for wholesale deposits,
respectively, of the current yield on comparable maturity U.S. treasury
obligations for deposits accepted outside the institution's normal market
area. Undercapitalized institutions are not permitted to accept brokered
deposits and may not solicit deposits by offering an effective yield that
exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market
area or in the market area in which such deposits are being solicited.
Restrictions on Capital Distributions
The OTS has promulgated a regulation governing capital distributions by
savings associations, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account of a savings association
as a capital distribution. The regulations establish a tiered system of
regulation with the greatest flexibility being afforded to well-capitalized
institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year, without prior
OTS approval, of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half its
"surplus capital ratio" at the beginning of the calendar year (the amount by
which the institution's actual capital exceeded its fully phased-in capital
requirement at that date) or (ii) 75% of its net income over the most recent
four-quarter period. An 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
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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 nonaffiliated companies. Savings associations are
required to make and retain detailed records of transactions with affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the FRB has determined to be permissible for bank
holding companies. Savings associations are prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally
executive officers, directors or 10% stockholders of the institution) or their
"related interests" be made on substantially the same terms (including
interest rates and collateral) as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with the general public and not involve more than the normal risk of repayment
or present other unfavorable features.
Qualified Thrift Lender Test
All savings associations are required to meet a QTL Test set forth in 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 September 30,
1997, the qualified thrift investments of the First Bank and Girard were
approximately 65.6% and 85.1%, 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.
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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.
At September 30, 1997, First Bank's and Girard's unimpaired capital and
surplus amounted to approximately $17.7 million and approximately $52.6
million, respectively, resulting in a general loans-to-one borrower limitation
of approximately $2.7 million and approximately $7.9 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, 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
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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 "satisfactory
record of meeting community credit needs" rating during their 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 at September 30, 1997:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Andrew A. Wiederhorn...... 31 Chairman of the Board, Chief Executive Officer,
Secretary and Treasurer of the Company
Lawrence A. Mendelsohn.... 36 President and Director of the Company
Sheryl Anne Morehead...... 45 Executive Vice President, S&L Group of the
Company and Chief Executive Officer and
President of the Savings Banks
Chris Tassos.............. 40 Executive Vice President and Chief Financial
Officer of the Company
Phillip D. Vincent........ 43 Executive Vice President, Loan Servicing of the
Company
Bo G. Aberg............... 49 Senior Vice President, Europe of the Company
Donald J. Berchtold....... 52 Senior Vice President, Administration of the
Company
Kenneth R. Kepp........... 42 Senior Vice President, Operations of the Company
Glenn J. Ohl.............. 43 Senior Vice President of the Company and Chief
Financial Officer of WFC
Peter O'Kane.............. 31 Senior Vice President, Loan Acquisitions of the
Company
Robert G. Rosen........... 31 Senior Vice President, Asset Securitization of
the Company
R. Scott Stevenson........ 40 Senior Vice President of the Company
Geoffrey B. Davis......... 55 Chief Information Officer of the Company
Don H. Coleman............ 59 Director of the Company
Philip G. Forte........... 33 Director of the Company
David Dale-Johnson........ 50 Director of the Company
</TABLE>
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded the Wilshire Private
Companies and continues to serve as the Chief Executive Officer, Treasurer,
Secretary and sole director of the Wilshire Private Companies. Mr. Wiederhorn
received his B.S. degree in Business Administration from the University of
Southern California.
Lawrence A. Mendelsohn is a director and the President of the Company. From
February 1993 until October 1996, Mr. Mendelsohn was the Executive Vice
President of the Wilshire Private Companies. From January 1992 until February
1993, Mr. Mendelsohn was Vice President, Principal and Head of Capital Markets
for Emerging Markets of Bankers Trust New York Corporation/BT Securities
Corporation. From August 1987 until January 1992, Mr. Mendelsohn was the Vice
President, Senior Options Principal and Head of Proprietary Trading for
Equities, Equity Options and Distressed Debt for J.P. Morgan and Co./J.P.
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 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 and President of the Savings Banks. Ms. Morehead
was Senior Vice President, S&L Group of the
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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. From August 1995 until October
1996 Mr. Tassos was the Executive Vice President of the Wilshire Private
Companies. From March 1992 until February 1995, he was the Chief Financial
Officer and/or Senior Vice President of Finance of Long Beach Mortgage Company
(formerly Long Beach Bank). Mr. Tassos received a B.A. degree from California
State University, Fullerton. From July 1979 until April 1984, and May 1985
until September, 1990 Mr. Tassos was an auditor for Deloitte & Touche LLP.
Phillip D. Vincent is 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 of the
Wilshire Private Companies. 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 Senior Vice President of the Wilshire Private
Companies. From June 1990 until November 1991, Mr. Kepp was the Managing
Director of Network Associates International, a consulting company to the
leasing industry. Mr. Kepp received a B.S. degree in Finance from Northern
Illinois University.
Glenn J. Ohl is Senior Vice President of the Company 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.
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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 the Wilshire Private Companies. From September 1992 until April 1994, Mr.
O'Kane was an Asset Manager, Investment Division of J.E. Robert Company, Inc.
From September 1991 until September 1992, Mr. O'Kane was a staff consultant
with Arthur Andersen & Company. From March 1990 until August 1991, Mr. O'Kane
was an analyst for GranCorp, Inc., a real estate investment company. Mr.
O'Kane received a B.A. degree from the University of Washington.
Robert G. Rosen is Senior Vice President, Asset Securitization of the
Company. Mr. Rosen was the Vice President of Securitization at BTM Capital
Corp., a wholly owned subsidiary of the Bank of Tokyo-Mitsubishi, Ltd. since
March 1997. From January 1995 until March 1997 Mr. Rosen was a Director of
Black Diamond Advisors, Inc., a firm specializing in securitization and
capital markets needs of finance companies. From January 1994 to January 1995
Mr. Rosen was with Kidder, Peabody and Co. in the Asset-Backed Securitization
Group. From 1991 to 1994 Mr. Rosen was the Assistant Vice President and
Manager of Securitization and Commercial Paper within the Corporate Trust
Department at Bankers Trust Company. Mr. Rosen received a B.A. and an M.B.A.
from Union College.
R. Scott Stevenson is Senior Vice President of the Company. Mr. Stevenson
was Vice President of the Company and President of Girard and First Bank from
October 1996 until September 1997. 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 Loan Officer. Mr. Stevenson received a
B.S. degree in Accounting and an M.S. degree in Taxation from Brigham Young
University.
Geoffrey B. Davis is Chief Information Officer of the Company. Since 1970
Mr. Davis has held various senior management positions with Bank of America in
Venezuela, Panama, Spain, Canada, Mexico and Brazil. Prior to 1970, Mr. Davis
spent four years in the Air Force Strategic Air Command. Mr. Davis received an
A.B. degree in International Relations from the University of North Carolina,
Chapel Hill and an M.B.A. degree from the University of California, Los
Angeles. Mr. Davis also completed the Executive Program for Information
Systems, Harvard University.
Don H. Coleman is a director of the Company. Since March 1994, Mr. Coleman
has been the President of International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone equipment
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. From 1984
to 1986, Mr. Coleman was President of Clarion Corporation of America, a major
supplier of automotive sound systems and electronics. Mr. Coleman is a
director of ICT Group, Inc., and Fabricated Metals, Inc., a materials handling
equipment manufacturer. Mr. Coleman received a B.A. degree in Economics and an
M.B.A. degree from Stanford University.
Philip G. Forte is a director of the Company. Mr. Forte has been the
President of Wilshire Cellular, Inc., a cellular phone leasing company, since
June 1994. Wilshire Cellular, Inc. is not 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 also is
Vice-Chairman and a director of Century Center for Economic Opportunity, Inc.,
a non-profit corporation. Mr. Dale-Johnson is also a consultant for several
public and private companies and government agencies. Mr. Dale-Johnson
received his B.A. degree in Art History from the University of British
Columbia, M. Sc. degree in Business Administration from the University of
British Columbia and a Ph.D. degree in Business Administration from the
University of California, Berkeley.
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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, Messrs. Wiederhorn's and
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 nonemployee 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. In addition,
nonemployee directors are eligible for annual grants of options.
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.
The Company leases office space for its corporate headquarters from a
corporation owned by Messrs. Wiederhorn and 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 sublease 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 sublease is year-to-year. Messrs. Wiederhorn and Mendelsohn have
indicated that they intend to sell the property to the Wilshire REIT.
In connection with the formation of WFSG, 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.
The Company is a party to a loan servicing agreement with the U.S. Servicer
pursuant to which the U.S. Servicer 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 the U.S. Servicer a servicing fee at or below the prevailing
market rates for each pool of loans that the U.S. Servicer is servicing for
the Company. The Company has the option at any time after November 15, 1998 to
acquire the U.S. Servicer's servicing operations, 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
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the Servicing Transfer occur on an earlier date, provided that the foregoing
conditions are met, but the U.S. Servicer has no obligation to effect the
Servicing Transfer prior to November 15, 1998. The Servicing Transfer will
occur automatically on November 15, 1999, provided the foregoing conditions
are met. Upon the effectiveness of the Servicing Transfer, the Company is
expected to terminate its servicing arrangement with the U.S. Servicer and
begin servicing loans, through its subsidiary, WSC, for its own account and
for the account of unaffiliated third parties. Since the U.S. Servicer has
pledged certain of the servicing rights owned by it to a third party creditor,
the transfer of the servicing of these loans to the Company on the
effectiveness of the Servicing Transfer may require approval of that creditor.
Each of the Savings Banks is a party to a loan servicing agreement with the
U.S. Servicer pursuant to which the U.S. Servicer provides loan portfolio
management services, including billing, portfolio administration and
collection services, for all loans owned, acquired or made by the Savings
Banks.
While the Company is in the process of obtaining the necessary licensing
approvals for its servicing operations, certain executive officers of the
Company, including Andrew Wiederhorn, Lawrence Mendelsohn, Kenneth Kepp,
Donald Berchtold, Chris Tassos and Phillip Vincent, are continuing to serve as
executive officers of the Wilshire Private Companies and receive minimal
compensation from the Wilshire Private Companies.
While the Company is obtaining necessary regulatory approvals, the U.S.
Servicer 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.
The Company and the Wilshire Private Companies are parties to an
Administrative Services Agreement pursuant to which the Wilshire Private
Companies 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.
In the first quarter of 1997, the U.S. Servicer 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 servicing fee of approximately $5.6 million, the recognition of
which is being deferred and amortized over the life of the Institutional
Portfolio.
From January 1, 1997 through March, 1997, the Company purchased $128.4
million aggregate principal amount of mortgage and other loans from the U.S.
Servicer. The indentures for the 13% Notes and Old Notes contain 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 indentures.
Effective July 31, 1997 the Company issued to the Wilshire Private Companies
27,500 shares of its PIK Preferred Stock having an aggregate liquidation value
of $27.5 million in exchange for the cancellation of certain accounts payable
to the Wilshire Private Companies aggregating approximately $27.1 million and
cash in the amount of approximately $400,000. The holders of the PIK Preferred
Stock have a preference with respect to payment of dividends and distributions
on liquidation. Dividends on the PIK Preferred Stock will be payable in
additional shares of PIK Preferred Stock rather than cash. The Company will
have the option, at any time, to call the PIK Preferred Stock at its
liquidation value subject to certain limitations contained in the indentures
relating to the 13% Notes and the Old Notes.
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The Company loaned Kenneth R. Kepp $295,000 which is secured by a mortgage
on Mr. Kepp's principal residence. The Company has a first priority lien on
$235,143.20 of such indebtedness which bears interest at 8.75% per annum and a
second lien on $57,467.34 of such indebtedness which bears interest at 10.0%
per annum.
The Company loaned David Dale-Johnson $75,000 to complete construction of
his principal residence. Such indebtedness bears interest at 10.5% per annum.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by the
Company for services rendered during the years ended December 31, 1995 and
1996 to the Chief Executive Officer of the Company, and to each of the other
executive officers of the Company (three in total) whose total cash
compensation for the year ended December 31, 1996 exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ----------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) 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 --
1995 51,932
Lawrence A. Mendelsohn
President............... 1996 73,494(1) -- 365,000 --
1995 68,293 -- -- --
David Spahlinger(2)
President, First Bank... 1996 260,401 -- -- --
R. Scott Stevenson
President, Savings
Banks(3)............... 1996 136,801 40,000(4) -- 81,370(5)
</TABLE>
- --------
(1) Represents amounts paid by the Wilshire Private Companies. Mr. Wiederhorn
and Mr. Mendelsohn elected in the past to receive minimal compensation
from the Wilshire Private Companies to maintain capital in the Wilshire
Private Companies and have received Shareholder Distributions from the
Wilshire Private Companies to fund the acquisition and growth of the
Savings Banks and certain other expenses.
(2) Mr. Spahlinger left the employment of First Bank in October 1996.
(3) Mr. Stevenson is currently Senior Vice President of the Company.
(4) Annual discretionary bonus paid by the Savings Banks. The amount of the
annual discretionary bonus was determined by the board of directors of the
Savings Banks.
(5) Includes relocation bonus and sick leave payout.
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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>
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS/SARS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERM(1)
OPTIONS/SARS YEAR ENDED BASE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) DECEMBER 31, 1996 ($/SH) DATE 5% 10%
- ---- ------------ ----------------- ----------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 730,000 67% 11.43 (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 Mr. Wiederhorn (as Chief Executive Officer)
and Mr. Mendelsohn (as President) (each individually, an "Executive" and
collectively, the "Executives"). Each agreement provides for an initial three-
year term which is automatically renewable for successive two-year terms (the
"Employment Term") unless either party gives written notice to the other at
least ninety days prior to the expiration of the then Employment Term. During
the Employment Term, each Executive will be obligated to devote a significant
portion of his business time, energy, skill and efforts to the performance of
his duties under the agreement and 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.
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. The Executives 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 the Executives 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.
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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 non-qualified pension plan, (v) three years of the
maximum Company contribution under any qualified or non-qualified 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 the Executive's death, the Company will pay
to the Executive (or his estate), an amount equal to (i) any earned but not
yet paid compensation, (ii) a prorated 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 the 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 the
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"), 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 of the Company.
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 Stock Plan. The Board of Directors of the Company has delegated
administration of the Stock Plan to a committee consisting of David Dale-
Johnson and Don Coleman, two of the Company's nonemployee 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, 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.
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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 the fair market value per
share of Common Stock on the date of grant. 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.
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
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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."
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table shows as of November 30, 1997 the beneficial ownership
of Common Stock (assuming the Underwriters' over-allotment option is not
exercised) with respect to (i) each person who was known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
that is currently an officer of the Company, (iv) the Selling Shareholders,
and (v) directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF BENEFICIAL
BENEFICIAL OWNER(1) OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
<S> <C> <C>
Andrew A. Wiederhorn..................... 4,352,131(2) 52.4%
Lawrence A. Mendelsohn................... 2,178,330(3) 27.5
Bo G. Aberg.............................. 15,000(4) *
Donald J. Berchtold...................... 16,417(5) *
Kenneth E. Kepp.......................... 9,245(6) *
Sheryl Anne Morehead..................... 15,000(4) *
Chris Tassos............................. 64,761(7) *
Phillip D. Vincent....................... 39,285(8) *
Glenn J. Ohl............................. 7,857(9) *
Peter O'Kane............................. 13,333(10) *
Robert G. Rosen.......................... 20,000(11) *
R. Scott Stevenson....................... 8,504(12) *
Don H. Coleman........................... 33,524(13) *
Philip G. Forte.......................... 11,019(14) *
David Dale-Johnson....................... 34,476(13) *
Wellington Management Company, LLP(16)... 801,000 10.6
All executive officers and directors as a
group (15 persons)...................... 6,818,882 76.7%
</TABLE>
- --------
(1) The address for each shareholder, 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 200,000 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 15,000 shares of Common Stock which may be acquired upon the
exercise of options.
(5) Includes 2,571 shares of Common Stock held by his spouse and 952 shares
of Common Stock 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 of Common Stock held jointly with his spouse and
60,000 shares of Common Stock which may be acquired upon the exercise of
options.
(8) Includes 3,333 shares of Common Stock held jointly with his spouse and
952 shares of Common Stock held by his minor children. Also includes
35,000 shares of Common Stock which may be acquired upon the exercise of
options.
(9) Includes 5,000 shares of Common Stock which may be acquired upon the
exercise of options.
(10) Includes 8,000 shares of Common Stock which may be acquired upon the
exercise of options.
(11) Includes 20,000 shares of Common Stock which may be acquired upon the
exercise of options.
(12) Includes 26 shares of Common Stock held by a trust controlled by Mr.
Stevenson and his spouse. Also includes 8,478 shares of Common Stock
which may be acquired upon the exercise of options.
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(13) Includes 22,302 shares of Common Stock which may be acquired upon the
exercise of options.
(14) Includes 10,067 shares of Common Stock which may be acquired upon the
exercise of options.
(15) 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.
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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.
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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 LAW, AS WELL AS THE TAX 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 its 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.
Exchange Offer
The exchange of the Old Notes for New 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
Old Notes for the New Notes pursuant to the Exchange Offer.
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
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<PAGE>
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.
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.
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.
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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 against such holder's U.S. federal income tax liability
(and may entitle such holder to a refund), 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 and (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.
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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.
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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.
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.
EXPERTS
The consolidated financial statements of the Company as of and for the nine
months ended September 30, 1997 included in this Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in this
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports. Such report contains
an explanatory paragraph relating to certain regulatory matters.
The consolidated financial statements of the Company at December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994, and the
nine months ended September 30, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, Independent Auditors, as stated in their
report appearing herein (which expresses an unqualified opinion and includes
an explanatory paragraph relating to certain subsidiaries of the Company
operating under regulatory agreements) and have been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
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
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subsidiaries with their regulatory improvement activities. These services
resulted in a significant portion of the fees paid to all public accounting
firms 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 13, 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.
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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-2
Independent Auditors' Report.............................................. F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--September 30, 1997 and
December 31, 1996 and 1995............................................. F-4
Consolidated Statements of Operations--Nine Months Ended September 30,
1997 and 1996 and Years Ended December 31, 1996, 1995 and 1994......... F-5
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1997 and 1996 and Years Ended December 31, 1996, 1995 and 1994......... F-6
Consolidated Statements of Stockholders' Equity--Nine Months Ended
September 30, 1997 and 1996 and Years ended December 31, 1996, 1995 and
1994................................................................... F-9
Notes to Consolidated Financial Statements.............................. F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wilshire Financial Services Group Inc. and Subsidiaries
We have audited the accompanying consolidated statement of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of September 30, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the nine-month period
then ended. 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 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.
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 include, among other things, limitations on asset
growth and asset acquisition activity, requirements to enhance the internal
control environment of the Banks and the maintenance of specific regulatory
capital requirements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wilshire Financial
Services Group Inc. and Subsidiaries as of September 30, 1997, and the results
of their operations and their cash flows for the nine-month period then ended
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
November 19, 1997
Los Angeles, California
F-2
<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 and the nine months ended September 30,
1996. These consolidated 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 consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Wilshire Financial
Services Group Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1996, 1995 and 1994 and the nine months ended September 30, 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiaries, First Bank of Beverly Hills F.S.B. and Girard Savings
Bank F.S.B., are operating under regulatory agreements with the Office of
Thrift Supervision that require them to meet certain prescribed requirements.
/s/ Deloitte & Touche LLP
March 14, 1997
Los Angeles, California
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 77,993 $152,298 $ 4,482
Mortgage-backed securities available
for sale, at fair value (amortized
cost: September 30, 1997, $202,248;
December 31, 1996, $31,367; December
31, 1995, $9,099)..................... 201,325 31,270 9,083
Mortgage-backed securities held to
maturity, at amortized cost
(fair values: September 30, 1997,
$19,082; December 31, 1996, $21,252;
December 31, 1995 $12,873)............ 19,367 21,724 13,119
Securities held to maturity, at
amortized cost (fair values:
September 30, 1997, $7,562; December
31, 1996, $7,518; December 31, 1995,
$6,488)............................... 7,442 7,429 6,470
Trading account securities............. 28,163 24,541 --
Loans, net............................. 173,524 176,026 258,827
Discounted loans, net.................. 350,460 206,740 13,347
Loans held for sale, net, at lower of
cost or market........................ 267,035 28,826 18,597
Stock in Federal Home Loan Bank of San
Francisco, at cost.................... 4,952 2,958 1,421
Real estate owned, net................. 146,464 78,200 4,964
Leasehold improvements and equipment,
net................................... 1,702 317 275
Due from affiliate..................... 47,359 5,051 3,755
Accrued interest receivable............ 6,382 3,517 3,042
Prepaid expenses and other assets...... 37,593 14,952 3,313
---------- -------- --------
TOTAL.............................. $1,369,761 $753,849 $340,695
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................. $ 407,768 $501,614 $303,524
Short-term borrowings................ 658,042 97,624 13,000
Notes payable........................ 184,245 75,000 11,000
Accounts payable and other liabili-
ties................................ 19,937 18,589 6,132
---------- -------- --------
Total liabilities.................. 1,269,992 692,827 333,656
---------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock--$.01 par value,
10,000,000 authorized,
27,500 outstanding (at September 30,
1997)............................... 27,500 -- --
Common stock--$.01 par value,
50,000,000 shares
authorized, 7,570,000 outstanding
(1997 and 1996),
1,300,836 outstanding (1995)........ 55,897 55,897 6,800
Retained earnings.................... 16,812 5,222 255
Unrealized loss on securities avail-
able for sale, net.................. (440) (97) (16)
---------- -------- --------
Total stockholders' equity......... 99,769 61,022 7,039
---------- -------- --------
TOTAL.............................. $1,369,761 $753,849 $340,695
========== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- -------------------------------
1997 1996 1996 1995 1994
---------- --------- ---------- ---------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans................. $ 59,950 $ 31,686 $ 44,294 $ 21,821 $ 7,923
Mortgage-backed
securities........... 12,484 1,280 1,797 1,359 1,361
Securities and federal
funds sold........... 3,022 1,171 2,331 1,201 285
5
---------- --------- ---------- ---------- -------
Total interest
income.............. 75,456 34,137 48,422 24,381 9,569
---------- --------- ---------- ---------- -------
INTEREST EXPENSE:
Deposits.............. 20,008 17,448 25,002 13,944 5,017
Borrowings............ 39,028 2,144 4,275 537 440
---------- --------- ---------- ---------- -------
Total interest
expense............ 59,036 19,592 29,277 14,481 5,457
---------- --------- ---------- ---------- -------
NET INTEREST INCOME..... 16,420 14,545 19,145 9,900 4,112
PROVISION FOR ESTIMATED
LOSSES ON LOANS........ 926 15,751 16,549 4,266 2,173
---------- --------- ---------- ---------- -------
NET INTEREST INCOME
(LOSS) AFTER PROVISION
FOR ESTIMATED LOSSES
ON LOANS............... 15,494 (1,206) 2,596 5,634 1,939
---------- --------- ---------- ---------- -------
OTHER INCOME (LOSS):
Bankcard income....... 4,998 5,078 6,790 4,694 635
Bankcard processing
expense.............. (3,419) (3,865) (5,124) (3,462) (274)
Gain on sales of
loans................ 31,252 1,983 11,538 642 --
Trading account--
unrealized gain...... 1,171 1,601 1,833 -- --
Real estate owned,
net.................. 4,574 (231) 556 (170) (241)
Servicing revenue..... 3,339 -- -- -- --
Gain on sale of
securities........... 3,053 -- -- -- --
Other, net............ 1,749 1,580 2,349 1,233 866
---------- --------- ---------- ---------- -------
Total other income.. 46,717 6,146 17,942 2,937 986
---------- --------- ---------- ---------- -------
OTHER EXPENSES:
Compensation and
employee benefits.... 11,274 2,955 4,464 2,516 1,922
FDIC insurance
premiums............. 791 2,066 2,381 721 261
Occupancy............. 727 218 339 385 319
Professional
services............. 2,104 572 700 1,028 507
Loan service fees and
expenses paid to
affiliate............ 19,423 3,522 5,176 1,958 242
Other general and
administrative
expenses............. 6,669 1,341 2,386 1,324 1,452
---------- --------- ---------- ---------- -------
Total other
expenses........... 40,988 10,674 15,446 7,932 4,703
---------- --------- ---------- ---------- -------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION
(BENEFIT).............. 21,223 (5,734) 5,092 639 (1,778)
INCOME TAX PROVISION
(BENEFIT).............. 8,981 (4,652) 125 47 (526)
---------- --------- ---------- ---------- -------
NET INCOME (LOSS) ...... $ 12,242 $ (1,082) $ 4,967 $ 592 $(1,252)
========== ========= ========== ========== =======
EARNINGS (LOSS) PER
SHARE
Primary............... $ 1.47 $ (0.22) $ 1.07 $ 0.46 $ (2.52)
Fully Diluted......... $ 1.41
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary............... 7,882,555 4,923,784 4,647,068 1,300,863 496,873
Fully Diluted......... 8,232,281
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- --------------------------
1997 1996 1996 1995 1994
--------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........... $ 12,242 $ (1,082) $ 4,967 $ 592 $(1,252)
Reconciliation of net income
(loss) to net cash (used
in) provided by operating
activities:
Provision for estimated
loan losses.............. 926 15,751 16,549 4,266 2,173
Provision for real estate
owned losses............. -- -- -- 598 100
Depreciation and
amortization............. 302 116 165 241 121
(Gain) loss on sale of
real estate owned........ (4,275) 164 (623) (97) 406
Purchase of loans held for
sale..................... (556,231) -- (28,826) -- --
Proceeds from sale of
loans held for sale...... 375,565 -- -- -- --
Gain on sale of loans..... (30,855) (1,983) (11,538) (642) --
Gain on sale of
securities............... (3,053) -- -- -- --
Amortization of discounts
and deferred fees........ (26,795) (2,126) (3,324) (1,246) (600)
Amortization of deferred
credits.................. (328) (346) (461) (460) (388)
FHLB stock dividend....... (161) (64) (111) (40) (39)
Change in:
Trading account
securities............... (3,622) (6,526) (24,541) -- 489
Accrued interest
receivable............... (2,865) (1,226) (475) (1,443) (238)
Prepaid expenses and other
assets................... (26,732) (1,435) (7,626) (1,094) 1,074
Due from affiliate........ (15,460) (2,316) (1,296) (345) (3,043)
Deferred tax asset........ 4,091 (4,561) (4,013) (419) 111
Accounts payable and other
liabilities.............. 1,348 3,227 13,474 1,846 (474)
Minority interest......... -- (323) (600) 26 --
Other..................... -- 43 -- (194) (54)
--------- -------- -------- ------- -------
Net cash (used in)
provided by operating
activities............. (275,903) (2,687) (48,279) 1,589 (1,614)
--------- -------- -------- ------- -------
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchase of loans and
discounted loans..... $(316,931) $(227,632) $(482,506) $(186,895) $(41,561)
Loan repayments, net
of originations...... 66,007 35,521 54,180 49,035 16,836
Proceeds from sale of
loans................ -- 26,335 312,949 16,673 --
Purchase of mortgage-
backed securities
available for sale... (184,393) -- (24,537) -- (10,655)
Repayments of
mortgage-backed
securities available
for sale............. 4,163 1,871 2,226 1,528 --
Proceeds from sale of
mortgage-backed
securities available
for sale............. 12,148 -- -- 2,150 3,452
Proceeds from maturity
of securities held to
maturity............. -- 5,000 5,654 1,000 --
Purchase of mortgage-
backed securities
held to maturity..... -- (11,182) (16,079) -- (4,198)
Repayments of
mortgage-backed
securities held to
maturity............. 3,036 1,820 1,820 824 643
Purchases of
securities and FHLB
stock................ (1,833) (7,344) (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.... 44,841 5,763 16,482 5,254 569
Purchases of leasehold
improvements and
equipment............ (1,194) (177) (195) (349) (184)
Other, net............ -- -- 81 (654) 165
--------- --------- --------- --------- --------
Net cash used in
investing
activities......... (374,156) (170,025) (199,716) (114,168) (35,038)
--------- --------- --------- --------- --------
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- -----------------------------
1997 1996 1996 1995 1994
---------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase
(decrease) in
deposits............. $ (93,845) $ 184,011 $ 198,090 $107,731 $ 26,181
Issuance of common
stock................ -- 17,750 38,097 -- 3,750
Issuance of
subordinated debt.... -- -- -- 9,000 --
Issuance of preferred
stock................ -- -- -- -- 1,000
Proceeds from short-
term borrowings...... 1,073,009 308,109 618,733 77,419 41,677
Repayments of short-
term borrowings...... (512,587) (321,109) (534,109) (85,919) (30,285)
Repayments of capital
lease obligations.... (68) -- -- -- --
Proceeds from notes
payable.............. 109,245 -- 75,000 -- --
---------- --------- --------- -------- --------
Net cash provided by
financing
activities......... 575,754 188,761 395,811 108,231 42,323
---------- --------- --------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (74,305) 16,049 147,816 (4,348) 5,671
CASH AND CASH
EQUIVALENTS:
Beginning of year..... 152,298 4,482 4,482 8,830 3,159
---------- --------- --------- -------- --------
End of period......... $ 77,993 $ 20,531 $ 152,298 $ 4,482 $ 8,830
========== ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION--Cash paid
during the year for:
Interest.............. $ 51,577 $ 18,772 $ 21,746 $ 13,833 $ 5,479
Income taxes.......... 6,350 216 216 365 110
NONCASH INVESTING
ACTIVITIES:
Additions to real
estate owned acquired
in settlement of
loans................ 108,831 4,377 21,751 9,878 3,122
Equipment acquired
through capital
lease................ 493 -- -- -- --
Loans to facilitate
the sale of real
estate owned......... -- -- -- 367 2,352
NONCASH FINANCING
ACTIVITIES:
Exchange of notes
payable for common
stock................ -- 11,000 11,000 -- --
Exchange of preferred
stock for notes
payable.............. -- -- -- 1,000 --
Paid in kind preferred
stock dividend....... 652 -- -- -- --
Preferred stock issued
in exchange for
cancellation of
accounts payable..... 27,500 -- -- -- --
</TABLE>
See notes to consolidated financial statements.
(Concluded)
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
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)
Net change in
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
Net change in
unrealized loss 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 loss............... (1,082) (1,082)
Net change in
unrealized loss on
available for sale
securities--net of
tax................... (153) (153)
Exchange of
subordinated debt for
common stock.......... 1,606,618 11,000 11,000
Issuance of common
stock................. 2,592,519 17,750 17,750
---------- ------- --------- -------- -------- ----- -------
BALANCE, September 31,
1996................... -- -- 5,500,000 35,550 (827) (169) 34,554
Net income............. 6,049 6,049
Net change in
unrealized loss on
available for sale
securities--net of
tax................... 72 72
Issuance of common
stock................. 2,070,000 20,347 20,347
---------- ------- --------- -------- -------- ----- -------
BALANCE, December 31,
1996................... -- -- 7,570,000 55,897 5,222 (97) 61,022
Net income............. 12,242 12,242
Issuance of preferred
stock................. 27,500 27,500 27,500
Preferred stock
dividend.............. (652) (652)
Net change in
unrealized loss on
available for sale
securities-net of
tax................... (343) (343)
---------- ------- --------- -------- -------- ----- -------
BALANCE, September 30,
1997................... 27,500 $27,500 7,570,000 $ 55,897 $ 16,812 $(440) $99,769
========== ======= ========= ======== ======== ===== =======
</TABLE>
See notes to consolidated financial statements.
F-9
<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 operations of Wilshire Financial Services Group
Inc. ("WFSG") and subsidiaries (collectively, the "Company") are conducted
primarily through a nonbank subsidiary, Wilshire Funding Corporation ("WFC")
and 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"). 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. The Company also has operations in
France, the United Kingdom and Ireland that are not material to the
consolidated statements of financial condition as of September 30, 1997.
Administrative headquarters of the Company, the Banks and WFC are located in
Portland, Oregon.
The Company's primary sources of revenue are from real estate and consumer
loans acquired in purchase transactions, mortgage-backed securities, loan sale
and securitization transactions, and, to a lesser extent, loan origination 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 a public
debt offering 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 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, the
determination of fair values of certain financial instruments for which there
is not an active market, the allocation of basis between assets sold and
retained and the selection of yields utilized to recognize interest income on
certain mortgage-backed securities.
CASH AND CASH EQUIVALENTS--For purposes of reporting financial condition and
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 debt 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
at their 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 include subordinated
securities and the residual interests in loan securitization transactions
initiated by the Company. Trading account
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
securities are carried at estimated fair value, with unrealized gains and
losses reported 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 with unrealized holding
gains and losses on securities reported, net of tax, as a separate component
of stockholders' equity. Realized gains and losses from the sales of
available-for-sale securities are reported separately in the consolidated
statements of operations and are calculated using the specific identification
method.
LOANS, DISCOUNTED LOANS, LOANS HELD FOR SALE AND ALLOWANCE FOR LOAN LOSSES--
The Company's principal business involves acquiring performing and non-
performing loan portfolios, for prices generally 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 an allowance for loan losses
established for those loans. Discounts are allocated into (a) valuation
allowances for estimated losses against face value 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 the
Office of Thrift Supervision ("OTS") regulations. The allocated specific and
general valuation allowances are included in the allowance for loan losses.
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 adjustment is accreted into income on generally a cash
basis.
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. Originated loans are carried net of unamortized deferred origination
fees and costs. Deferred fees and costs are recognized in interest income over
the terms of the loans using a method that approximates the interest method.
Certain loans and discounted loans are designated as loans held for sale
(including loans originated by the Company) and are presented at the lower of
cost or fair value. Cost is determined as described above. If fair value is
less than cost, a valuation allowance is established to reduce the carrying
value. Gains or losses on loans sold through securitization or other
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
loans' cost basis between the portions sold, subordinated interests and
servicing rights retained, if any, is based on their relative fair values.
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 at acquisition or through
provisions for losses, as described above, for impaired loans based on the
fair value of the underlying real estate collateral.
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company evaluates single-family real estate, consumer and other smaller
balance, homogeneous loans for impairment on a collective basis. Management
evaluates these loans for impairment by comparing management's estimate of
prospective net realizable value to the net carrying value of the portfolio.
All specific and general valuation allowances established for loans and
discounted loans are recorded in the allowance for loan losses. The allowance
is decreased by the amount of loans charged off and is increased by the
provision for loan losses and recoveries of previously charged-off loans. The
allowance is maintained at a level believed adequate by management to absorb
inherent 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. Actual losses may
differ from management's estimates.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES--The Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," on a prospective basis beginning January 1, 1997. The new
Statement establishes criteria based on legal control to determine whether a
transfer of a financial asset is a sale or a secured borrowing. A sale is
recognized when the Company relinquishes control over a financial asset and is
compensated for such asset. The difference between the net proceeds received
and the carrying amount of the financial asset(s) being sold or securitized is
recognized as a gain or loss on sale.
In general, the Company expects that transactions recorded as sales under
prior accounting standards would have continued to qualify for sales
accounting treatment under the new Statement. The adoption of the new
Statement did not have a material impact on the consolidated financial
position or financial results of the Company.
MORTGAGE SERVICING RIGHTS--The Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," on January 1, 1996. This Statement amended the
prior accounting rules by requiring originated mortgage servicing rights
retained to be capitalized where the mortgage loans are either sold or
securitized, based upon the allocation of the cost between the loans sold or
securitized and the servicing rights retained based on their relative fair
values. Servicing assets and liabilities are subsequently amortized in
proportion to and over the period of estimated net servicing income or loss.
The impairment of mortgage servicing rights is evaluated by comparing the
carrying amount to the estimate of fair value. SFAS No. 125 superseded SFAS
No. 122 and in general applies the accounting for mortgage servicing rights
under SFAS No. 122 to servicing rights of all assets.
INTEREST-RATE SWAPS--Interest-rate swap agreements used to manage interest-
rate risk are treated as hedges of specified assets or liabilities for
accounting and tax purposes 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
or expense derived from the hedged assets or liabilities.
INTEREST RATE FUTURES--Interest rate futures contracts are used as hedges
against future fluctuations in the market value of loans held for sale and
available for sale securities resulting from changes in interest rates.
Contracts are designated as a hedge of specific loans or a portfolio of
homogeneous loans and exhibit a high degree of correlation with the assets
being hedged. Changes in the market value of these instruments are deferred as
adjustments to the cost basis of the hedged loans and securities and thus are
amortized as an adjustment to the yield using a method approximating the
interest method or are recognized in connection with the ultimate sale of such
loans.
FOREIGN CURRENCY TRANSLATION--All assets and liabilities are translated at
current exchange rates. Translation adjustments, related hedging results and
applicable income taxes are included, when material, in
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
accumulated translation adjustment within stockholders' equity. At September
30, 1997, such adjustments were not material to the financial statements.
REAL ESTATE OWNED--Real estate acquired in settlement of loans or purchased
directly is originally recorded at the lower of fair value less estimated
costs to sell, or purchase price, respectively. The excess of net loan cost
basis over the fair value less estimated selling costs of real estate acquired
through foreclosure is charged to the allowance for loan losses. Any
subsequent operating expenses or income, reductions in estimated fair 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.
INCOME TAXES--The Company files consolidated federal income and applicable
state 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, and
considering the pay in kind Preferred Stock dividend in determining net income
available to common shareholders. For the years ended December 31, 1996, 1995
and 1994, there is not a significant difference between primary and fully
diluted earnings per share.
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share", which
simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion No. 15, "Earnings per Share". It replaces the
presentation of primary EPS with a presentation of basic EPS. The Company will
be required to present basic and diluted EPS on the face of the income
statement and to reconcile the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of all prior-period EPS
data presented. Management does not believe that the adoption of this
pronouncement will have a material effect on the presentation of the Company's
earnings per share.
NEW ACCOUNTING PRONOUNCEMENTS--The Financial Accounting Standards Board
recently issued SFAS No. 129, "Disclosure of Information about Capital
Structure," SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information". SFAS No.
129 applies to all entities that issue any securities other than ordinary
common stock and continues the existing
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
requirements to disclose the pertinent rights and privileges of all
securities. SFAS No. 130 provides guidance for reporting and display of
comprehensive income and its components in the financial statements and SFAS
No. 131 establishes standards for the way that public entities report
information about operating segments in annual financial statements and
requires that those entities report selected information about operating
segments in interim financial reports issued to shareholders. These Statements
are effective for fiscal years beginning after December 15, 1997. The Company
will incorporate these disclosures at the time these pronouncements are
adopted.
RECLASSIFICATIONS--Certain items in the consolidated financial statements
for 1996, 1995 and 1994 were reclassified to conform to the 1997 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 September 30, 1997 and
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
SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE
- ------------------ --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities.......................... $202,248 $4,614 $5,537 $201,325
======== ====== ====== ========
Held-to-maturity:
U.S. Treasury notes................ $ 7,442 $ 120 $ -- $ 7,562
Mortgage-backed securities......... 19,367 4 289 19,082
-------- ------ ------ --------
Total held-to-maturity........... $ 26,809 $ 124 $ 289 $ 26,644
======== ====== ====== ========
DECEMBER 31, 1996
- -----------------
Available-for-sale mortgage-backed
securities.......................... $ 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
======== ====== ====== ========
DECEMBER 31, 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-14
<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 September 30, 1997 and December 31,
1996 and 1995, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
1997 COST VALUE
---- --------- ------
<S> <C> <C>
Due in one to five years................................ $7,442 $7,562
====== ======
1996
----
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 September 30, 1997 and December 31, 1996, securities, including trading
account securities, with carrying values of $237,376 and $67,073,
respectively, and market values of approximately $240,569 and $66,909,
respectively, were pledged to secure merchant bankcard transactions, short-
term borrowings and lines of credit (see Note 7), and interest-rate swaps.
There were no securities pledged at December 31, 1995. Of the total securities
pledged, securities with fair values of approximately $254,682 and $59,391,
were held by a third-party custodian as of September 30, 1997 and December 31,
1996, respectively.
Gains from the sale of securities available for sale were $3,053 during the
nine months ended September 30, 1997, and there were no losses during the
period. There were no material gains or losses on sales of securities
available for sale during the nine months ended September 30, 1996 and the
years ended December 31, 1996, 1995 and 1994.
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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,
SEPTEMBER 30, -------------------
LOANS 1997 1996 1995
----- ------------- --------- --------
<S> <C> <C> <C>
Real estate loans:
One to four units..................... $ 48,069 $ 63,562 $138,547
Over four units....................... 64,231 68,897 71,239
Commercial............................ 69,134 54,013 50,749
Land.................................. 2,273 2,558 2,709
-------- --------- --------
Total loans secured by real estate.... 183,707 189,030 263,244
Other loans............................. 20,830 22,768 19,832
-------- --------- --------
204,537 211,798 283,076
Less:
Allowance for loan losses, deferred
fees, and discount on purchased
loans................................ (31,013) (35,772) (24,249)
-------- --------- --------
$173,524 $ 176,026 $258,827
======== ========= ========
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
DISCOUNTED LOANS 1997 1996 1995
---------------- ------------- --------- --------
<S> <C> <C> <C>
Real Estate loans:
One to four units..................... $397,177 $ 260,672 $ 18,380
Over four units....................... 12,876 -- --
Commercial............................ 48,575 935 863
Land.................................. 8,649 46 --
-------- --------- --------
Total loans secured by real estate.... 467,277 261,653 19,243
Other loans............................. 187,835 946 967
-------- --------- --------
655,112 262,599 20,210
Less:
Allowance for loan losses and discount
on purchased loans................... (304,652) (55,859) (6,863)
-------- --------- --------
$350,460 $ 206,740 $ 13,347
======== ========= ========
<CAPTION>
LOANS HELD FOR SALE
-------------------
<S> <C> <C> <C>
Real estate loans:
One to four units..................... $229,162 $ 27,420 $ 33,497
Over four units....................... 14,575 464 --
Commercial............................ 31,685 9,061 466
Land.................................. 5,322 1,680 194
-------- --------- --------
Total loans secured by real estate.... 280,744 38,625 34,157
Other loans............................. 29,917 445 12
-------- --------- --------
310,661 39,070 34,169
Less:
Allowance for loan losses, deferred
fees, and discount on purchased
loans................................ (43,626) (10,244) (15,572)
-------- --------- --------
$267,035 $ 28,826 $ 18,597
======== ========= ========
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of September 30, 1997 and December 31, 1996 and 1995, loans with
adjustable rates of interest were $268,313, $230,983 and $265,702,
respectively, and loans with fixed rates of interest were $902,007, $282,484
and $71,753, respectively. Adjustable-rate loans are generally indexed to U.S.
Treasury Bills, 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 September 30, 1997, December 31, 1996 and 1995, loans with unpaid
principal balances of approximately $808,538, $43,615 and $0, respectively,
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>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- --------------------------
1997 1996 1996 1995 1994
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period..................... $ 37,555 $25,651 $ 25,651 $ 7,701 $ 4,314
Allocations of purchased
loan discounts:
at acquisition............ 92,751 15,972 10,751 19,007 2,809
at disposition............ (36,245) (12,494) (17,218) (5,404) (1,666)
Recoveries.................. 982 1,424 1,822 81 71
Provision for loan losses... 926 15,751 16,549 4,266 2,173
Allowance related to loans
sold....................... (5,338) -- -- -- --
-------- ------- -------- ------- -------
$ 90,631 $46,304 $ 37,555 $25,651 $ 7,701
======== ======= ======== ======= =======
</TABLE>
At September 30, 1997 and December 31, 1996 and 1995, the Banks had impaired
loans totaling $24,925, $12,553 and $14,241, respectively, and had recorded
specific valuation allowances to measure the impairments of those loans
totaling $6,290, $4,173 and $4,155, respectively. The Banks had impaired loans
totaling $17,777, $13,711 and $9,593, respectively, with no recorded specific
valuation allowances. At September 30, 1997 and December 31, 1996, the nonbank
subsidiaries had impaired loans with unpaid principal balances of $62,019 and
$4,472, respectively, and a carrying value, net of purchase discount, of
$39,848 and $2,768, respectively, which is below fair value. The average
unpaid principal balances of impaired loans during the periods ended September
30, 1997 and December 31, 1996 and 1995 were $67,729, $25,049 and $24,204,
respectively. Interest income recognized on impaired loans during the same
periods was $3,014, $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.
The above amounts do not include impaired discounted loans. Management has
determined that generally all discounted loans meet the criteria for
impairment as defined by SFAS 114 and collectively evaluates these loans for
impairment.
The Company has a geographic concentration of mortgage loans in Southern
California 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.
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. These
estimates are inherently uncertain and depend on the outcome of future events.
Regulatory authorities have required substantial increases in the allowances
maintained by many banks in recognition of the inherent risk in the existing
economic environment. Although management believes the levels of the allowance
as of September 30, 1997 and 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 levels
of losses.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. REAL ESTATE OWNED
Real estate owned consists of property that was obtained through foreclosure
or was purchased directly. Activity in the valuation allowance on real estate
owned is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------- --------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C>
Valuation allowance for losses on real
estate owned, beginning of period....... $ -- $1,193 $1,193 $ 123 $ 55
Charge-offs.............................. -- (1,599) (3,322) (82) (32)
Allocation of purchase discount.......... -- 762 2,129 554 --
Provision for the year................... 1,219 -- -- 598 100
------ ------ ------ ------ ----
Valuation allowance for losses on real
estate owned, end of period.............. $1,219 $ 356 $ -- $1,193 $123
====== ====== ====== ====== ====
</TABLE>
Real estate owned purchased directly by WFC with a net carrying value of
$94,232 and $59,729 at September 30, 1997 and December 31, 1996, respectively,
collateralizes credit line borrowings (see Note 7). No real estate owned was
pledged as collateral at December 31, 1995.
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------
1997 1996 1995
------------- ------ ------
<S> <C> <C> <C>
Leasehold improvements.. $ 453 $ 319 $ 299
Furniture and
equipment............... 2,148 837 718
------ ------ ------
Total cost.............. 2,601 1,156 1,017
Accumulated depreciation
and amortization........ (899) (839) (742)
------ ------ ------
$1,702 $ 317 $ 275
====== ====== ======
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Passbook accounts......................... $ 563 $ 480 $ 304
Money market accounts..................... 1,590 2,023 1,267
NOW/checking.............................. 5,189 5,625 5,111
Time deposits:
Less than $100............................ 385,628 382,018 247,814
$100 or more.............................. 14,798 111,468 49,028
-------- -------- --------
Total deposits............................ $407,768 $501,614 $303,524
======== ======== ========
</TABLE>
A summary of time deposits, by maturity, at September 30, 1997 is as
follows:
<TABLE>
<S> <C>
1998............................................................. $370,386
1999............................................................. 30,040
--------
$400,426
========
</TABLE>
The interest rate characteristics of certain deposits have been changed
utilizing interest rate swaps. See Note 9 for the specific terms and rates on
instruments outstanding.
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. NOTES PAYABLE AND SHORT-TERM BORROWINGS
Notes payable at September 30, 1997 and December 31, 1996 are unsecured,
bear interest at 13% and mature in 2004. The interest rate characteristics of
a portion of these notes have been altered using an interest rate swap. The
terms of this swap are discussed in Note 9. Notes payable at December 31, 1995
are unsecured, bear interest at 14% and had no stated maturity. Short-term
borrowings at September 30, 1997 and 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. Following is
information about short-term borrowings:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- --------------------------
1997 1996 1996 1995 1994
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Average balance during the
period......................... $503,016 $35,721 $ 51,316 $ 4,122 $ 4,757
Highest amount outstanding
during the period............. 790,882 97,000 190,000 14,950 11,377
Average interest rate during
the period..................... 7.6% 6.8% 6.9% 5.6% 4.4%
Average interest rate--end of
period......................... 7.4% -- 7.8% 6.7% 5.8%
</TABLE>
As of September 30, 1997 and December 31, 1996, the Company had committed
lines of credit, including repurchase agreement lines, totaling $592,787 and
$350,000, respectively, and uncommitted lines totaling $521,017 and $360,000,
respectively. $658,042 and $97,624 was drawn on these lines and included in
short-term borrowings at September 30, 1997 and December 31, 1996,
respectively.
8. INCOME TAXES
The domestic and foreign components of income (loss) before domestic and
foreign income and other taxes were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER
SEPTEMBER 30, 31,
----------------- -------------------
1997 1996 1996 1995 1994
------- -------- ------ ---- -------
<S> <C> <C> <C> <C> <C>
Domestic................................. $22,434 $(5,734) $5,092 $639 $(1,778)
Foreign.................................. (1,211) -- -- -- --
------- -------- ------ ---- -------
Total.................................... $21,223 $(5,734) $5,092 $639 $(1,778)
======= ======== ====== ==== =======
</TABLE>
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER
ENDED SEPTEMBER 30, 31,
-------------------- ---------------------
1997 1996 1996 1995 1994
--------- ---------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Current tax provision (benefit):
Federal......................... $ 3,450 $ (93) $ 3,208 $ 434 $(656)
State........................... 1,013 2 930 32 19
Foreign......................... 92 -- -- -- --
--------- ---------- ------- ----- -----
4,555 (91) 4,138 466 (637)
--------- ---------- ------- ----- -----
Deferred tax provision (benefit):
Federal......................... 3,154 (3,081) (3,135) (250) 90
State........................... 1,272 (1,480) (878) (169) 21
Foreign......................... -- -- -- -- --
--------- ---------- ------- ----- -----
4,426 (4,561) (4,013) (419) 111
--------- ---------- ------- ----- -----
Total income tax provision
(benefit).................... $ 8,981 $ (4,652) $ 125 $ 47 $(526)
========= ========== ======= ===== =====
</TABLE>
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------
1997 1996 1996 1995 1994
------ ------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Federal income tax provision at
statutory rate........................ 35.0% (34.0)% 35.0% 35.0% (35.0)%
State taxes, net of federal tax
effect................................ 7.0 (11.1)% 8.5 4.0 --
Valuation allowance................... 0.0 (29.2)% (33.9) (25.1) 8.8
Change in prior period estimate....... 0.0 (5.2)% (4.7) (7.8) --
Other................................. 0.3 (1.6)% (2.4) 1.3 (3.4)
------ ------- ----- ----- -----
Effective income tax rate............. 42.3% (81.1)% 2.5% 7.4% (29.6)%
====== ======= ===== ===== =====
</TABLE>
Deferred income tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------
1997 1996 1995
------------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Purchase discounts......................... $ 10,187 $ 2,884 $ 1,349
Purchase accounting........................ 287 483 629
Unearned income............................ 2,545 -- --
Depreciation............................... 43 73 65
State taxes................................ 422 -- --
Provision for loan loss.................... -- 2,291 408
Unrealized loss on securities.............. 774 -- --
Pass through income........................ 1,754 -- --
Other...................................... 1,400 -- 180
-------- ------- -------
Gross deferred tax assets................ 17,412 5,731 2,631
-------- ------- -------
Deferred tax liabilities:
Deferred loan fees......................... (256) (217) (351)
FHLB stock dividends....................... (375) (268) (242)
State taxes................................ -- (42) --
Write off of loan basis.................... (16,462) -- --
Unrealized gains on securities............. -- (744) --
Other...................................... (227) (277) (142)
-------- ------- -------
Gross deferred tax liabilities........... (17,320) (1,548) (735)
-------- ------- -------
Total deferred tax asset................... 92 4,183 1,896
Valuation allowance........................ -- -- (1,726)
-------- ------- -------
Net deferred tax asset................... $ 92 $ 4,183 $ 170
======== ======= =======
</TABLE>
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries as it is the Company's intention to reinvest such earnings
permanently. The amount held for reinvestment in overseas operations amounted
to $427 at September 30, 1997. Additional U.S. income taxes may be due upon
remittance of those earnings (net of foreign tax credits).
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. The discretionary contribution for fiscal year
1997 had not been determined as of September 30, 1997.
LEASE COMMITMENTS--The following is a schedule by period of future minimum
rental payments under operating leases:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
------------
<S> <C>
1997........................................... $ 123
1998........................................... 466
1999........................................... 484
2000........................................... 413
2001........................................... 327
2002........................................... 39
------
Total......................................... $1,852
======
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $276 through 2001.
EMPLOYMENT AGREEMENTS--The Company has entered into substantially similar
employment agreements, effective November 1, 1996, with its Chief Executive
Officer and its President, who are also the principal shareholders of the
Company. Each agreement provides for an initial three-year term that is
automatically renewable for successive two-year periods unless either party
gives written notice to the other at least ninety days prior to the expiration
of the employment term. Each agreement provides for an annual base salary of
$300, which may be increased, but not decreased, by the Compensation Committee
of the Board of Directors, and an annual bonus. The bonuses may not exceed in
the aggregate 20% of the pre-tax profits of the Company.
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 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. At September 30, 1997 and December 31, 1996, the notional
amounts of interest rate swaps related to deposits were $214.4 million and
$234.3 million, respectively. The weighted average fixed payments and
floating-rate receipts of interest were 6.06% and 6.07% and 0.29% and 0.28%
over USD LIBOR, respectively.
The Company also utilizes interest rate swaps to convert certain fixed rate
borrowings to variable rate. The notional amounts of interest rate swaps
related to the 13% Series A Notes were $20.0 million and $0 at September 30,
1997 and December 31, 1996, respectively. The weighted average fixed receipts
and floating rate payments of interest were 13% and 1.25% over USD Libor,
respectively. At September 30, 1997 the Company also had open short positions
on 40 U.S. Treasury Bond, 500 10-year U.S. Treasury Note, 260 5-year U.S.
Treasury Note, and 450 French Franc futures contracts.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PURCHASE COMMITMENTS--From time to time, the Company enters into various
commitments and letters of intent relating to purchases of loans, foreclosed
real estate portfolios and discrete operating companies. There can be no
assurance that any of such transactions will ultimately be consummated. It is
the Company's policy to record such transactions in the financial statements
in the period in which such transactions are closed.
In September 1997, the Company entered into an agreement to acquire a
portfolio of loans from a European insurance company for a purchase price of
approximately $140 million. The Company expects to finance approximately 80%
of the purchase price with an unrelated third party. The Company has granted
the Wilshire REIT (see Note 17) an option to purchase all or a portion of the
Company's 50% interest in such assets.
The Company has entered into an agreement to purchase certain assets of an
unaffiliated mortgage originator for a purchase price of approximately $2.8
million in cash. The Company also entered into an agreement to purchase an
unaffiliated manufactured housing loan originator for a purchase price of
approximately $5.7 million in cash. The total assets which would be acquired
total approximately $50 million. There can be no assurance as to when or if
such transactions will be consummated.
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 results of
operations or financial position.
10. REGULATORY MATTERS
REGULATORY AGREEMENT--On October 28, 1997, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Orders superceded previously existing Cease and Desist orders between
FBBH and the OTS issued October 31, 1996.
The Orders prohibit FBBH and GSB 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. The Company does not expect to be able to grow the Banks until
and unless the Orders are lifted or modified. The Orders also prohibit the
Banks from purchasing (i) any loans or real estate, without the approval of
the OTS, until certain acquisition and servicing delinquencies identified by
the OTS have been corrected, and (ii) any non-performing assets or foreclosed
real estate until such time as the Banks are rated a composite "3" rating
according to the Uniform Financial Institutions Rating System.
The Orders require the Banks to (i) maintain an effective internal asset
review system that provides for adequate internal controls to ensure that
management timely reviews and classifies assets pursuant to their policies;
(ii) fully comply with all policies and procedures submitted to the OTS
pursuant to the previous Cease and Desist Orders; (iii) operate pursuant to
and comply with their business plans; and (iv) submit to the OTS, by no later
than November 30, 1997, a written plan to develop or obtain the internal
expertise and resources necessary to measure, monitor and model net interest
income and net portfolio value (the "IRR Plan"); (v) review and analyze, by
November 30, 1997, the terms of all existing loan servicing or other
agreements with affiliates, to confirm that such agreements comply with the
Orders and that there are formal written agreements with respect to all
transactions with affiliates; and (vi) compare the results of profitability
models with the performance of purchased assets. The Orders also require the
Banks to submit to the OTS, by November 30, 1997 and after each calendar
quarter, reports (i) detailing their progress in implementing their Allowance
for Loan Losses policies and the results of their reserve analysis for the
preceding calendar quarter; (ii) detailing any violations of the policies and
procedures submitted to the OTS that occurred during the preceding quarter,
together with an explanation as to what caused or contributed to the act or
practice constituting such violation,
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and what, if any, corrective action has been undertaken; (iii) detailing any
variances from the business plans that occurred during the preceding quarter,
showing actual and planned results, and explaining any variances greater than
5 percent; (iv) detailing the progress in implementing the IRR Plan during the
preceding quarter.
The Orders also require FBBH and GSB to elect at least two additional new
outside directors with specific financial institution industry experience.
Such outside directors cannot have any association with affiliates of the
Banks, the Company or institution-affiliated parties, except that such
directors can simultaneously serve as a director of each of the Banks.
To address regulatory concerns, FBBH also is required to submit to the OTS,
by November 30, 1997, a bankcard plan (the "Bankcard Plan") which shall (i)
establish a method by which FBBH will estimate the appropriate level of
reserves for its bankcard operations; (ii) establish internal controls; (iii)
create an overdraft policy that requires timely recognition of overdraft
losses and identifies employees with authority to approve overdrafts; and (iv)
ensure that FBBH complies with all applicable statutes and regulations. After
each calendar quarter, FBBH is required to report to the OTS, in writing, any
variances to the Bankcard Plan.
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.
Management believes the Banks are in substantial compliance with the Orders.
CAPITAL REQUIREMENTS
Federally-insured savings associations such as the 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 a case-by-case basis. Under the Orders, the 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 GSB was less than
satisfactory and the capital level of FBBH was not adequate in view of their
risk profiles, despite the fact that the Banks had capital levels that would
otherwise have qualified them as "well capitalized" under OTS regulatory
capital requirements. The OTS also has indicated that the Banks' current
capital requirements may not be appropriate given the deficiencies noted in
the examination. As a result, the Orders (as modified in October 1997) require
FBBH and GSB to maintain core capital and risk-based capital equal to the
dollar amount of capital at March 31, 1997, as measured at the end of each
calendar quarter. The Orders provide that in the event capital falls below the
levels required by the Orders as a result of any determination by the OTS or
otherwise, the Banks would have to raise additional capital. If the OTS were
to impose higher capital requirements on the Banks or additional capital were
required as a result of an adverse determination by the OTS or otherwise, the
Company might inject additional capital into the Banks, whether or not such
usage of capital is optimal for the Company.
F-23
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of September 30, 1997, the total core capital and total risk-based
capital amounts of the Banks, compared to the OTS requirements contained in
the Orders is as follows:
<TABLE>
<CAPTION>
GSB FBBH
-------------------------- --------------------------
OTS OTS
ACTUAL REQUIREMENT EXCESS ACTUAL REQUIREMENT EXCESS
------- ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Core Capital...... $34,617 $33,146 $1,417 $12,736 $11,872 $864
Total Risk-Based
Capital................ $38,475 $37,610 $ 865 $13,889 $13,179 $710
</TABLE>
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
"WELL
CAPITALIZED"
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES(1) PROVISIONS
------------- --------------------- --------------
SEPTEMBER 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------ ------- ----- ----------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets (Risk-
Based Capital):
FBBH..................... $13,889 15.7% $ 7,073 greater than $ 8,841 greater than
or equal to 8.0% or equal to 10.0%
GSB...................... 38,475 13.1% 23,555 greater than 29,444 greater than
or equal to 8.0% or equal to 10.0%
Tier 1 Capital to Risk-
Weighted Assets:
FBBH..................... 12,736 14.4% 3,536 greater than 5,305 greater than
or equal to 4.0% or equal to 6.0%
GSB...................... 34,617 11.8% 11,778 greater than 17,666 greater than
or equal to 4.0% or equal to 6.0%
Core Capital to Tangible
Assets:
FBBH..................... 12,736 11.5% 4,417 greater than 5,521 greater than
or equal to 4.0% or equal to 5.0%
GSB...................... 34,617 9.9% 13,925 greater than 17,406 greater than
or equal to 4.0% or equal to 5.0%
Tangible Capital to
Tangible Assets:
FBBH..................... 12,736 11.5% 1,656 greater than Not applicable
or equal to 1.5%
GSB...................... 34,617 9.9% 5,222 greater than Not applicable
or equal to 1.5%
<CAPTION>
DECEMBER 31, 1996
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets (Risk-
Based Capital):
FBBH..................... $12,835 11.9% $ 8,643 greater than $10,804 greater than
or equal to 8.0% or equal to 10.0%
GSB...................... 36,726 10.1% 29,081 greater than 36,351 greater than
or equal to 8.0% or equal to 10.0%
Tier 1 Capital to Risk-
Weighted Assets:
FBBH..................... 11,436 10.6% 4,322 greater than 6,482 greater than
or equal to 4.0% or equal to 6.0%
GSB...................... 32,136 8.8% 14,540 greater than 21,810 greater than
or equal to 4.0% or equal to 6.0%
Core Capital to Tangible
Assets:
FBBH..................... 11,436 8.0% 5,751 greater than 7,188 greater than
or equal to 4.0% or equal to 5.0%
GSB...................... 32,136 7.9% 16,271 greater than 20,338 greater than
or equal to 4.0% or equal to 5.0%
Tangible Capital to
Tangible Assets:
FBBH..................... 11,436 8.0% 2,156 greater than Not applicable
or equal to 1.5%
GSB...................... 32,136 7.9% 6,101 greater than Not applicable
or equal to 1.5%
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
"WELL CAPITALIZED"
UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES(1) ACTION PROVISIONS
------------ --------------------- -------------------
DECEMBER 31, 1995 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------- ------ ----- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets (Risk-
Based Capital):
FBBH.................. $9,820 9.8% $ 7,999 greater than $ 9,998 greater than
or equal to 8.0% or equal to 10.0%
GSB................... 15,523 10.4% 11,973 greater than 14,967 greater than
or equal to 8.0% or equal to 10.0%
Tier 1 Capital to Risk-
Weighted Assets:
FBBH.................. 8,549 8.6% 3,999 greater than 5,999 greater than
or equal to 4.0% or equal to 6.0%
GSB................... 13,852 9.3% 5,987 greater than 8,980 greater than
or equal to 4.0% or equal to 6.0%
Core Capital to Tangible
Assets:
FBBH.................. 8,549 6.2% 5,508 greater than 4,999 greater than
or equal to 4.0% or equal to 5.0%
GSB................... 13,852 6.8% 8,201 greater than 7,483 greater than
or equal to 4.0% or equal to 5.0%
Tangible Capital to
Tangible Assets:
FBBH.................. 8,549 6.2% 2,066 greater than Not applicable
or equal to 1.5%
GSB................... 13,852 6.8% 3,075 greater than Not applicable
or equal to 1.5%
</TABLE>
- --------
(1) These capital adequacy ratios represent the requirements for all savings
institutions. The Bank's minimum capital requirements are the ratios
specified in their Orders and those in the column containing the "well
capitalized" requirements as well as the capital amounts indicated in the
preceding table.
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 $1,413 for a special SAIF deposit insurance fund assessment
resulting from legislation enacted to recapitalize the SAIF fund.
BANK MERGER APPLICATION--In December 1997, the OTS approved an application
to merge the two Banks.
11. SIGNIFICANT TRANSACTIONS
In September 1997, the Company completed a securitization of approximately
$146 million of unpaid principal balance of loans resulting in a gain of
approximately $11.9 million. At the sale date, the Company allocated
approximately $1.7 million of original cost basis to retained servicing
rights. Such amount is included in other assets in the consolidated statement
of financial position as of September 30, 1997.
In June 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 basis to
retained servicing rights and other participation interests retained in the
loans, respectively, and such amounts are included in other assets, in the
consolidated statement of financial position as of September 30, 1997.
The Company also sold approximately $26.8 million of loans in September 1997
which resulted in a gain of approximately $8.1 million.
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In August 1997, the Company purchased a portfolio of loans through the
acquisition of the stock of a French bank for a purchase price of
approximately $45 million in cash. It is anticipated that a significant
portion of the acquisition will be financed.
On August 15, 1997, the Company issued $100.0 million aggregate principal
amount of its 13% Series A Notes due 2004.
12. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by Wilshire Credit Corporation ("WCC"),
pursuant to a servicing agreement. 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
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.
On July 31, 1997, the Company issued to an affiliate shares of 14%
cumulative, pay in kind preferred stock with an aggregate liquidation value of
$27.5 million in exchange for the cancellation of certain payables to that
affiliate aggregating approximately $27.1 million and $0.4 million in cash.
Loans with carrying values of $128,389 and mortgage-backed securities with
carrying values of $8,767 were transferred to WFSG from WCC during the nine
months ended September 30, 1997. These assets were transferred at a price
equal to their net book value at the date of transfer. Any gain or loss from
any sale or securitization of such assets by WSFG will be recorded in the
consolidated financial statements of WSFG when any such transaction is
consummated.
In November and December 1996, rights to servicing fees related to loans
held by WCC, including a profit participation element, were transferred to
WFSG at WCC's historical cost basis of $0.
13. STOCK OPTIONS
The Company adopted a new Stock Plan on October 28, 1996. Under the Stock
Plan, the Company may grant options and other awards not to exceed 1,825,000
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 110% 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 receive automatic nonstatutory
stock option grants.
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. 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.
F-26
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A summary of the Company's stock options as of September 30, 1997, December
31, 1996, and 1995 and changes during the periods then ended is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ---------------
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 period.............. 1,126,225 $11.39 31,225 $ 8.80 5,872 $14.90
Granted................. 119,337 18.71 1,095,000 11.46 25,353 7.39
--------- --------- ------
Outstanding at end of
period.................. 1,245,562 12.05 1,126,225 11.39 31,225 8.80
========= ========= ======
</TABLE>
Additional information regarding options outstanding as of September 30,
1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
PRICES SHARES LIFE PRICE
------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
$5.58.................................... 18,359 2.75 years $ 5.58
$10.50-$11.55............................. 730,000 9.22 10.55
$12.15-$13.13............................. 371,994 9.08 13.11
$14.90................................... 5,872 1.75 14.90
$17.88-$18.70............................. 119,086 9.40 18.69
$24.88................................... 251 10.00 24.88
---------
1,245,562
=========
</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 expense has been recognized for
grants under the Stock Plan. Had compensation expense 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 nine months ended September 30, 1997 and the year ended December 31,
1996 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Net income to common shareholders:
As reported......................... $11,590 $4,967
Pro forma........................... $10,946 $2,775
Net income per common and common
share equivalent:
Primary earnings per share:.......
As reported..................... $ 1.47 $ 1.07
Pro forma....................... $ 1.39 $ 0.60
Fully diluted earnings per share:
As reported..................... $ 1.41 $ 1.07
Pro forma....................... $ 1.33 $ 0.60
</TABLE>
There were no options granted in 1997 with exercise prices equivalent to the
market value of the stock at the grant date. The weighted average fair value
of options granted during 1997 was $644 for options with exercise prices
exceeding the market price of the stock at the grant date. Fair values were
estimated using the
F-27
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
14. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 77,993 $ 77,993
Mortgage-backed securities available for sale............. 201,325 201,325
Mortgage-backed securities held to maturity............... 19,367 19,082
Securities held to maturity............................... 7,442 7,562
Trading account securities................................ 28,163 28,163
Loans, discounted loans, and loans held for sale, net..... 791,019 819,686
Federal Home Loan Bank stock.............................. 4,952 4,952
Liabilities:
Deposits.................................................. 407,768 407,685
Short-term borrowings..................................... 658,042 658,042
Notes payable............................................. 184,245 186,087
Off-balance-sheet liabilities--Interest-rate swaps........ -- 447
- --Interest-rate futures..................................... 1,276 600
- --Foreign currency forwards................................. 2,174 1,024
<CAPTION>
DECEMBER 31, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $152,298 $152,298
Mortgage-backed securities available for sale............. 31,270 31,270
Mortgage-backed securities held to maturity............... 21,724 21,252
Securities held to maturity............................... 7,429 7,518
Trading account securities................................ 24,541 24,541
Loans, discounted loans, and loans held for sale, net..... 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>
F-28
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 3,382 $ 3,382
Federal funds sold........................................ 1,100 1,100
Mortgage-backed securities held to maturity............... 13,119 12,873
Mortgage-backed securities available-for-sale............. 9,083 9,083
Securities held to maturity............................... 6,470 6,488
Loans, discounted loans, and loans held for sale, net..... 290,771 295,747
Federal Home Loan Bank stock.............................. 1,421 1,421
Liabilities:
Deposits.................................................. 303,524 307,177
Borrowings................................................ 13,000 13,000
Notes payable............................................. 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 Cash Equivalents--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--The fair value of
discounted loans, which are predominately nonperforming loans, is more
difficult to estimate due to uncertainties as to the nature, timing and
extent to which the loans will be either collected according to original
terms, restructured, or foreclosed upon. Discounted loans fair values were
estimated using the Company's best judgement for these factors in
determining the estimated present value of future net cash flows discounted
at a risk-adjusted market rate of return. 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.
F-29
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 of notes payable is obtained from market
bids from independent securities dealers.
Off-Balance-Sheet Liabilities--The fair values of interest-rate swaps 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.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997
------------- -------- ---------
<S> <C> <C> <C>
Interest income.............................. $29,947 $27,892 $17,617
Interest expense............................. 24,345 20,717 13,974
Provision (recovery) for loan losses......... 2,350 445 (1,869)
------- ------- -------
Net interest income after provision
(recovery) for loan losses.................. 3,252 6,730 5,512
Noninterest income........................... 28,631 15,585 2,501
Noninterest expense.......................... 19,578 13,502 7,908
------- ------- -------
Income before income taxes................... 12,305 8,813 105
Income tax provision......................... 5,237 3,702 42
------- ------- -------
Net income................................... $ 7,068 $ 5,111 $ 63
======= ======= =======
</TABLE>
<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>
F-30
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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 loan losses....... 1,045 1,020 1,028 1,173
------- ------ ------ ------
Net interest income after
provision for loan losses ..... 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 (benefit) provision.. (21) 78 4 (14)
------- ------ ------ ------
Net (loss) income .............. $ (207) $ 910 $ 68 $ (179)
======= ====== ====== ======
<CAPTION>
QUARTERS ENDED
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income................. $ 3,861 $2,108 $1,669 $1,931
Interest expense................ 2,315 1,317 970 855
Provision for loan losses....... 2,173 -- -- --
------- ------ ------ ------
Net interest (loss) income after
provision for loan losses...... (627) 791 699 1,076
Non-interest income............. 641 336 78 172
Non-interest expense............ 1,929 1,255 1,017 743
------- ------ ------ ------
(Loss) income before income
taxes.......................... (1,915) (128) (240) 505
Income tax benefit (provision).. 566 38 71 (149)
------- ------ ------ ------
Net (loss) income............... $(1,349) $ (90) $ (169) $ 356
======= ====== ====== ======
</TABLE>
F-31
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------
1997 1996 1995
------------- -------- -------
<S> <C> <C> <C>
ASSETS
Cash........................................... $ 22,002 $ 65,207 $ 1
Mortgage-backed securities available for sale,
at fair value................................. 53,836 -- --
Intercompany receivable........................ 117,988 22,095 --
Due from affiliate............................. 50,802 -- --
Investment in subsidiaries..................... 64,723 48,065 18,777
Prepaid expenses and other assets.............. 20,707 4,665 153
-------- -------- -------
$330,058 $140,032 $18,931
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities......... $ 4,448 $ 4,010 $ 317
Due to affiliates.............................. -- -- 575
Short-term borrowings.......................... 41,596 -- --
Notes payable.................................. 184,245 75,000 11,000
-------- -------- -------
Total liabilities.......................... 230,289 79,010 11,892
Contributed and retained equity................ 99,769 61,022 7,039
-------- -------- -------
$330,058 $140,032 $18,931
======== ======== =======
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------------
1997 1996 1996 1995 1994
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Interest income.................... $ 3,853 $ 2 $ 45 $ 9 $ 24
Interest expense................... 11,418 67 421 243 31
------- ------- ------ ------ -------
Net interest expense............... (7,565) (65) (376) (234) (7)
Noninterest income................. -- 563 563 1,155 611
Noninterest expense................ 1,205 125 125 363 156
------- ------- ------ ------ -------
Income (loss) before equity in
earnings of subsidiaries and
income tax benefit................ (8,770) 373 62 558 448
Income tax benefit................. 4,011 -- 131 -- --
Equity in earnings (loss) of
subsidiaries...................... 17,001 (1,455) 4,774 34 (1,700)
------- ------- ------ ------ -------
Net income (loss).................. $12,242 $(1,082) $4,967 $ 592 $(1,252)
======= ======= ====== ====== =======
</TABLE>
F-32
<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>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------
1997 1996 1996 1995 1994
--------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........... $ 12,242 $ (1,082) $ 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... -- (783) (1,045) (1,045) (488)
Equity in (earnings) loss
of subsidiaries........... (17,782) 1,455 (4,774) (34) 1,700
Change in:
Prepaid expenses and
other assets............ (16,042) (562) (4,512) 51 495
Accounts payable and
other liabilities...... 438 447 4,657 90 (111)
Due from affiliates..... (23,954) -- -- (71) (29)
Due to affiliates....... -- 132 (575) -- --
Intercompany
receivables............. (95,893) -- (22,095) -- --
Other................... -- -- -- 33 --
--------- -------- -------- ------- -------
Net cash (used in)
provided by operating
activities........... (140,991) (393) (23,377) (384) 315
--------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES--
Purchase of Mortgage-backed
Securities available for
sale....................... (57,936) -- -- -- --
Principal repayment of
Mortgage-backed Securities
available for sale......... 3,757 -- -- -- --
Net investment in
subsidiaries................ 1,124 (17,358) (24,514) (9,000) (4,746)
--------- -------- -------- ------- -------
Net cash used in investing
activities................. (53,055) (17,358) (24,514) (9,000) (4,746)
--------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of notes payable... 109,245 -- 75,000 -- --
Proceeds from short term
borrowings.................. 44,177 -- -- -- --
Repayments of short term
borrowings.................. (2,581) -- -- -- --
Issuance of capital stock... -- 17,750 38,097 -- 4,750
Issuance of subordinated
debt........................ -- -- -- 9,000 --
Dividends from subsidiary... -- -- -- 65 --
--------- -------- -------- ------- -------
Net cash provided by
financing
activities........... 150,841 17,750 113,097 9,065 4,750
--------- -------- -------- ------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS.... (43,205) (1) 65,206 (319) 319
CASH:
Beginning of year........... 65,207 1 1 320 1
--------- -------- -------- ------- -------
End of year................. $ 22,002 -- $ 65,207 $ 1 $ 320
========= ======== ======== ======= =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock
to notes payable .......... -- -- -- $ 1,000
Exchange of note payable for
common stock................ -- $ 11,000 $ 11,000 --
Issuance of preferred stock
in exchange for
cancellation of certain
payables due to affiliate.. $ 27,500 -- -- --
Paid in kind preferred stock
dividend.................... $ 652 -- -- --
</TABLE>
F-33
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. SUBSEQUENT EVENTS
In October 1997, the Company established the Wilshire REIT, which intends to
qualify and will elect to be taxed as a Real Estate Investment Trust. The
Wilshire REIT has filed a registration statement with the Securities and
Exchange Commission in connection with a proposed underwritten public offering
of its common stock. The Company expects to retain a minority interest
(currently expected to be approximately 9.9%, with options to acquire an
additional 10%) in the Wilshire REIT following the Wilshire REIT's proposed
initial public offering. There can be no assurance as to when or if the
Wilshire REIT's proposed initial public offering will be completed.
In December 1997, WFSG filed a registration statement with the Securities &
Exchange Commission concerning the sale of 3,500,000 shares of its common
stock. The proceeds from this offering are expected to be used to redeem the
$27.5 million of PIK Preferred Stock, plus accrued dividends, and provide the
capital (or equity) portion of the Company's investment in future acquisitions
of pools of loans and other investments. Pending such uses, the Company
intends to reduce short-term debt. There can be no assurance that the
transactions described above will be consummated.
F-34
<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............................................................. 15
The Company.............................................................. 22
The Wilshire Reit........................................................ 23
Recent Developments...................................................... 26
Use of Proceeds.......................................................... 26
Capitalization........................................................... 27
Regulatory Capital Ratios of the Savings Banks........................... 27
The Exchange Offer....................................................... 28
Selected Historical Financial Information of the Company................. 38
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 42
Business................................................................. 61
Regulation............................................................... 88
Management............................................................... 98
Principal and Selling Shareholders....................................... 108
Certain Relationships and Related Transactions........................... 109
Description of Notes..................................................... 110
Exchange Offer; Registration Rights...................................... 131
Description of the 13% Notes............................................. 133
Certain Federal Income Tax Consequences.................................. 135
Plan of Distribution..................................................... 139
Legal Matters............................................................ 139
Experts.................................................................. 139
Available Information.................................................... 140
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------
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
-----------
February 2, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
----
<C> <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
Financial 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
reference 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
*12 Statement regarding the computation of the ratio of earnings
to fixed charges
16 Letter on Change in Certifying Accountant (Incorporated by
reference to the Company's Current Report on Form 8-K dated
April 17, 1997).
23.1 Consent of Proskauer Rose LLP (included in Exhibit 5.1)
**23.2 Consent of Deloitte & Touche LLP
**23.3 Consent of Arthur Andersen LLP
24 Power of Attorney (see page II-4)
*25 Form T-1
*27 Financial Data Schedule
</TABLE>
- --------
* Previously filed
** Filed herewith
II-1
<PAGE>
(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.
(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.
II-2
<PAGE>
(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.
(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, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THEIR CAPACITIES ON JANUARY 28, 1998.
SIGNATURE TITLE
Chairman of the Board, Chief
/s/ Andrew A. Wiederhorn* Executive Officer, Secretary
- ------------------------------------- and Treasurer (Principal
ANDREW A. WIEDERHORN Executive Officer)
/s/ Lawrence A. Mendelsohn President and Director
- -------------------------------------
LAWRENCE A. MENDELSOHN
Director
/s/ Donald H. Coleman*
- -------------------------------------
DONALD H. COLEMAN
Director
/s/ David Dale Johnson*
- -------------------------------------
DAVID DALE JOHNSON
Director
/s/ Philip G. Forte*
- -------------------------------------
PHILIP G. FORTE
Executive Vice President and
/s/ Chris Tassos* Chief Financial Officer
- ------------------------------------- (Principal Accounting and
CHRIS TASSOS Financial Officer)
*By Lawrence A. Mendelsohn as
attorney-in-fact
- -------------------------------------
LAWRENCE A. MENDELSOHN
II-4
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-37575 of Wilshire Financial Services Group Inc. (the "Company") of our
report dated March 14, 1997 (which expresses an unqualified opinion and
includes an explanatory paragraph referring to certain subsidiaries of the
Company operating under regulatory agreements), appearing in this Prospectus,
which is a part of such Registration Statement, and to the reference to us
under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
January 28, 1998
Los Angeles, California
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement. Such report contains an explanatory paragraph
regarding certain regulatory matters.
/s/ Arthur Andersen LLP
Los Angeles, California
January 28, 1998
